The Payday Pundit think that overdraft protection that consumers opt in to is a useful credit product.   That’s why I’m a litte surprised about the extraordinary criticism in the newspapers these days.  From today’s Washington Post personal finance columnist:

But government has every right to rein in an industry practice that in many cases has become predatory by design, allowing customers to overdraw their accounts.

No matter which side you think is right or wrong on this issue, I must point out a troubling trend that just won’t die: The financial industry continues to greatly profit from consumers’ love affair with plastic.

Many of the overdraft penalties come from debit card transactions. In less than 15 years, debit card transactions in the United States have grown from 1 percent of noncash transactions to more than 50 percent, according to new research from TowerGroup.

As access to credit tightened and people pulled back from using credit cards, they used their debit cards more.

Because debit cards are linked to individuals’ banking accounts, customers supposedly are forced to spend only what they have in their accounts. The financial institutions have actually convinced some people that using a debit card is the same as using cash.

It’s not.

That’s what will happen if payday loans are restricted according to today’s must read of the day. A new article in Reason Magazine:

What happens when a rate cap is imposed statewide? Dartmouth economist Jonathan Zinman looked at the payday lending industry in Oregon, where in 2007 an effective cap of $10 per $100 borrowed was imposed along with a minimum borrowing term of 31 days. (In neighboring Washington, by contrast, the standard is $15 per $100 and there is no minimum term.) Oregon’s Consumer and Business Services Department reported 346 licensed payday lending outlets at the end of 2006, six months before the cap kicked in. Seven months after the cap took effect, that number had fallen to 105. In September 2008 it was 82. In a December 2008 working paper, Zinman concluded that former payday customers in Oregon ended up using less desirable alternatives such as overdrafts and utility shutdowns, and that “restricting access caused deterioration in the overall financial condition of the Oregon households.” In summary, “restricting access to expensive credit harms consumers.”

The Leader Telegram (WI) has a great guest piece today:

Hintz’s proposed interest-rate cap would eliminate financial options valued by thousands of Wisconsin families, while doing nothing to address the state’s real problems of unemployment and economic recession.

The behind-the-scenes activist group pushing for the ban, a North Carolina-based outfit called the Center for Responsible Lending, publishes hysteric reports about the dangers of payday loans – but these reports are written by the activists themselves, not by impartial academics. They routinely contradict themselves – one recent CRL report says payday borrowers paid an average of 16 percent in interest on their loans, their Web site says the typical borrower pays 166 percent, and now their spokespeople are telling Wisconsin reporters that payday loans have an interest rate of 400 percent. Which is it?

She says she doesn’t take the potential loss of 1300 payday lending jobs  in the state lightly.  That’s a real comfort:

Payday lobbyists have visited my office to say that if the industry is too tightly regulated it would fold, leading to the loss of 1,300 jobs around the state. I do not take job loss lightly, but we must also consider the true cost of those jobs. For every Wisconsinite employed in the predatory loan industry, there are 130 consumers hurt by the industry.

Where did she get that?  Seem made up at of thin air.

The latest at the Consumer Rights Coalition:

With the current state of the economy, there is no way that a bank will loan money to me (or tens of thousands of other, hard working Americans) unless I have A++ credit. If it wasn’t for payday advances I would’ve been homeless, without food, without gas to get to work, and without electricity. These loans have saved me so many times and the government is trying to take that away from me? America’s working class is already in a tough spot and this law will make us even worse off. It is my right as a U.S. citizen to decide where I get my money from, not the government’s right. After all, this is the country that states, “The Land of the Free” in the national anthem right? Let me make my own decisions!

This makes the Payday Pundit sad.   Lenny Dykstra, former Met and Philly, became a high flying investment manager after baseball.  Last year’s stock market crash hit him hard.    It’s come to this:

Not quite sure how to put into words how bizarre this is, but there’s a news segment on tv-tokyo.co.jp that appears to be about the recession’s effects on the wealthy in the U.S.: There are shots of empty stores for lease on Rodeo Drive, a behind-the-scenes report on how pawn shops work, and then, 3:00 in, out of the blue, you see Lenny Frakking Dykstra, looking like some kind of high-class hobo, pawning his World Series and All Star rings.

It’s like they discovered gold or something.  The Payday Pundit has been pointing out the high cost of overdraft for two years.  Just a sampling of today’s stories:

Philadelphia Daily News

St. Louis Post Dispatch

News Tribune

Minneapolis Star Tribune

Fort Worth Star Tribune

Inevitable.

From the story:

“We have no argument that regulation failed. Consumer protection is just one of the many areas where it fell down,” said David Hirschmann, the president of the U.S. Chamber of Commerce’s Center for Capital Markets, which opposes the panel. “It just simply adds a new layer of regulation without fixing … our outdated, broken regulatory structure that was a contributing factor in our crisis.”

The Chamber said it’s spending about $2 million on ads, educational efforts and a grassroots campaign to kill the agency. It said that the grassroots effort has led to more than 23,000 letters sent to Congress to date.

And it steps of the toes of states who traditionally regulate small lenders.

The tone of this editorial annoys me:

Meantime, it makes sense for Columbia to do what it can to protect citizens. It won’t stop lenders from preying on borrowers, but it could limit where they locate, preserve neighborhood decorum and – who knows? – perhaps save some from unnecessary debt.

Why don’t they “protect” their citizens fall all debt?  Take away their credit cards, car loans, mortgages.   See what life is like then.