NEW YORK ( TheStreet) -- Things have gotten harder this year, not just for cash-starved consumers, but also for a segment of the lending industry that has been yearning to provide them with credit, albeit at a high cost: The payday set.

State lawmakers have cracked down on payday lending and the prospect of more oversight in the form of a new consumer protection agency looms on the horizon.

At the end of 2008, 15 states had either tight restrictions or outright bans on payday loans, a term that typically refers to immediate cash advances on checks sought by people who don't have traditional bank accounts. So far this year Virginia and South Carolina have joined their ranks, while others, like Missouri, Wisconsin and Colorado, are considering such a move.

Other states have tightened restrictions, including Delaware -- the Disneyland of the banking world, known for its lax regulation -- which is forcing payday lenders to fund financial-education classes and advertising for low-cost, "community" lending programs.

The other whammy that could come hit the industry is federal regulatory reform. The consumer protection agency proposed by the Obama administration is working its way through Congress, and it's sure to take a hard look at payday lenders if it comes into being. Some proposals have suggested capping interest rates at 36%, just a sliver of a typical payday loan rate.

Payday lenders have already had to shutter operations in areas operating under new rules. For instance, Advance America ( AEA) closed 190 stores in 26 states and the United Kingdom, while QC Holdings ( QCCO) cited forcibly discontinued operations as a reason for lower revenue in its latest quarter. The payday sector isn't immune to the recession, either, facing higher credit costs just as surging unemployment has hindered borrowers' ability to repay debt, at any interest rate.

Dollar Financial ( DLLR) CEO Jeff Weiss recently noted that, while most of the company's customer base is employed in non-discretionary jobs, like "stocking shelves in grocery stores and supermarkets...with unemployment rates near 10% in all of our markets, a segment of our customer base has been moderately impacted by job losses, furloughs, and a reduction in working hours."

The regulatory crackdown and economic turmoil have fostered a few trends. First, payday lenders are shifting their focus to pawnshop operations, rather than outright loans. They are also expanding abroad -- particularly in Mexico -- with Washington making consumer protection a priority.

Another trend is charging higher fees in payday-friendly states until the federal regulation is passed, as well as boosting the cost of non-lending services, like pawning.

While QC Holdings deals with branch closures and higher credit costs, Chief Operating Officer Darrin Andersen says "maximizing profitability at each branch is a primary goal."

Payday lenders offer an assortment of services to those in need of quick cash. Customers can cash checks; get advances on paychecks that are coming in a week or two; receive title loans for cars; or pawn personal property. Some companies also have "rent-to-own" furniture programs.

Typical customers are "underbanked," meaning they do not have easy access to a bank account or credit card, are not well-educated about financial services or tend not to trust big corporate entities like Bank of America ( BAC), JPMorgan Chase ( JPM), Citigroup ( C) and Wells Fargo ( WFC). Often, they are low-income, minority or immigrant consumers, or some combination of the three.

As a result, the payday industry is vilified and praised almost equally in academic circles -- it's either providing a needed service to the community or leeching the blood from hapless and destitute customers. But in any case, it appears beloved by those it claims to serve.

At least 10 million U.S. households access payday services each year, according to research performed in 2006. There are anywhere from 20,000 to 25,000 payday lending centers -- far more locations in the U.S. than there are McDonald's ( MCD) restaurants, one consumer-advocacy group notes. An industry survey found that, while payday customers would prefer cheaper credit, they pay up for convenience, familiarity, simplicity and customer service.

In other words, the fees are high, but they're not hidden, and they're easy to understand.

The industry says it earns just $1.37 in pre-tax profit for every $100 extended to borrowers, due largely to the high cost of operations and bad debt. Still, it takes in $15.26 in revenue from each customer to reap that profit - yielding an average APR of roughly 390%.

Consumer advocacy groups paint an even more predatory picture, highlighting some statistics that the industry appears to ignore. For instance, many payday loans become revolving loans because the borrower has to take out a new one to repay the old one, while making ends meet. Americans for Fairness in Lending points out that, with 90% of revenue coming from customers who take out five or more loans per year, the typical payday customer ends up paying $793 for a $325 loan.

When examining the costs and benefits of payday lending on society as a whole, studies from regulators and academics have shown even more conflicting results.

Researchers for the New York Fed determined that states which banned or severely limited payday practices saw customers bounce checks, file complaints against lenders, and declare bankruptcy more frequently than peers in other states. On the other hand, borrowers in Hawaii benefitted from an easing of payday-loan restrictions.

Federal Deposit Insurance Corp. Chairwoman Sheila Bair has also studied the issue, and come to the opposite conclusion. She has pushed traditional lenders to offer lower-cost alternatives for the "underbanked" and said that payday lenders warrant "heightened vigilance." Her stance is supported by research from the Center for Community Capital at the University of North Carolina at Chapel Hill, which found that when payday loans were banned in its home state, "the vast majority of North Carolinians felt payday lending was a bad thing and don't miss it."

Whomever is correct in their assertions -- and it's probably a mixture of the two -- given consumer advocacy groups' recent successes and the tone of discourse in Washington, the future of U.S. payday lending appears bleak. Lenders had first tried to respond by shifting services online, but state lawmakers quickly cracked down and federal regulators will likely nip the practice in the bud. Instead, lenders are now looking beyond the U.S. border for growth, particularly in Mexico, as well as Canada and Europe.

While some have been hit hard by unexpected state laws, others, like World Acceptance Corp. ( WRLD) have benefited from a lucky U.S. footprint, and are actively seeking expansion opportunities abroad. And while the lending business has suffered, the pawn business has grown remarkably. For instance, while Cash America ( CSH) trimmed its cash-advance operations, it hiked pawn fees 28% and expanded the business through the acquisition of Prenda Fácil in Mexico.

First Cash Financial ( FCFS) recently beat earnings expectations and lifted its forecast for fiscal 2010 for similar reasons. Explaining the results, CEO Rick Wessel cited "significant opportunities for expansion into new, under-served markets in Mexico, which provides a clear pathway for continued short- and long-term expansion of our Mexico operations."

The performance of stocks in the group over the past year has been stellar, so investors seem to be taking a wait-and-see approach to the impact of any regulatory changes. Advance America has appreciated the most, rising more than 300% in the past 52 weeks, followed by Dollar Financial, up 275%; and World Acceptance, roughly 100% higher; over the same period. First Cash Financial, Cash America and QC Holdings are all up more than 40% in the past year, based on Thursday's close.

And even with those gains, price-to-earnings multiples for the group remain reasonable. For example, even with its run-up, Advance America is still trading at a forward P/E of less than eight times based on the current analyst estimates for fiscal 2010.

-- Written by Lauren Tara LaCapra in New York.