You seem to have thought this through. I haven't, but I think your arguments aren't all great. Let's look at the risk being taken by the banks. Lending 300 dollars is fundamentally different from a mortgage situation. First of all the repayment happens not over a long period of time, but in just a few days. The sums involved are not of the same order of magnitude and as long as the interest isn't too high they stay that way even when the repayment doesn't happen at the proper date. Maybe I haven't understood anything about the mortgage crisis but I'm fairly convinced that it was the trade in sub-prime mortgages that created the bubble that eventually popped when the true value of the debt was revealed. When bubbles pop it rocks the market. When the market is rocked the companies that rely on a completely calm trading environment collapse. When too many fall, the whole thing breaks down. Now, I know I'm all over the place here, but we've finally come full circle to the risk for the banks, aswell as for your "grandma". It's just impossible for a bank to be stuck, at any one point in time, with a crippling amount of debt from providing small loans UNLESS the banks stubbornly keep providing these loans for months and months when they're not getting any of it back, but even then they'd pretty much have to get ripped off by every poor person in America. No risk to grandma whatsoever, k? This seems so obvious, I don't see how you could have missed this..

You say that there is an unpredictability when it comes to how much of the loans will be repaid, but that's just plain wrong if we're talking about short term loans. You, as the bank (or whatever FICO is), just run some pilot programs for a few months. Boom, done. This wasn't possible to do with mortgages. Huge difference. Another idea. How about starting small with your customers. The first time they take out a loan they are limitede to 100 dollars at a fairish interest rate. Next time 150 at thye same rate... If you cross acertain line you get black listed in all the banks. Mandatory building of trust in a buisiness relationship doesn't seem that communist to me..

You argue that in order for the practice to be profitable the banks have to charge the kind of amounts they are currently charging. To an extent that's circular reasoning (high rates -> unable to repay -> higher risk + debt collector -> high rates). Other than that I can't really argue against what you said there. I just don't know.

The payday lenders provide a service right? Exactly how essential the service is is hard for me to guage, but does the value of the service correspond to the rates the banks are charging? Is there perhaps a different for-profit or a non-profit solution that would create some financial flexibility for people with few finances to begin with? If what they really need is some financial education then perhaps it's better to not allow loans to these people. That way they'll learn to manage their finances. Or not.

If it's such a risky business, how come it's growing so fast?

The bottom line is these places do more harm than good. They produce nothing and drain money from poor people -- lots of money.

The government has a compelling interest in putting a stop to this. And the best way to do that would be to offer the same service at a fraction of the price. If anyone could walk into any post office and ask for a payday loan at something like $2+6%, these parasites would have no host. They're charging $15 per $100 for two weeks, and then they raise it from there. That's about 3500% EAR, which rises when repayment is late.

Microcredit should help, not harm the borrower.

And we should have real financial education in public schools beginning at a very young age.