Is deregulation the answer?
March 19, 2010 | alternatives, federal legislation, industry, positive media coverage, research | Comments (1)Extremely interesting post at modelbehavior.com:
A recent paper from Robert DeYoung and Ronnie Phillips at the Kansas City Fed provides some cautionary results about potential negative side effects of increasing regulation, and suggests possible positive impacts of deregulation. What they find is that more competition among payday lenders can decrease the exorbitant interest rates on payday loans. Increasing competition decreases prices; this is not so surprising.
The authors even go so far as to suggest increasing competition by removing regulations that limit the ability of local banks, thrifts, and credit unions to offer payday loans. This makes sense, since reputation is probably more important to local banks, thrifts, and credit unions than it is to payday lenders, they would be more likely to offer actuarily fairly priced payday loans and less likely to try and manipulate borrowers with confusing contracts, etc. In fact, DeYoung and Phillips provide evidence that payday lenders with large franchises are less likely than mom-and-pop stores to engage in exploitative pricing behaviors. Getting banks and other financial institutions into payday lending could help prevent a “race to the bottom” in lending standards that might otherwise result from increasing competition.
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