The Ohio legislature, like many governing bodies across the country, apparently believes it is a better economic steward than the market. Legislators are considering new laws that would limit the ability of consumers to choose what lending services are right for them. By placing an interest rate cap on short-term or payday loans, the state is essentially dooming these businesses to failure. The end result of the ban will be lost jobs and a lost outlet for emergency financing for those who are now hurting the most.

In a study conducted by the Federal Reserve Bank of New York, researchers found that states with bans on payday lending experience an increase in bounced checks, higher rates of bankruptcy and more complaints related to collections. Payday loans are admittedly risky and can be misused, but the inherent risk the borrowers create necessitates a fee to use these loans. The market works to determine what these rates and fees will be; if they are overly burdensome, the customers will not use the service.

Legislators need to be careful not to stifle consumer choice in the name of consumer protection.

A staff report of the Federal Reserve Bank of New York concluded that consumers in Georgia and North Carolina have more debt and bankruptcies since those states banned payday loans.

The much wiser course is for government and the private sector to help consumers help themselves become economically literate. We need to educate, not overregulate.

The Payday Pundit applauds the State newspaper for giving space to Mr. Wilson. 

One consequence of payday lending restrictions is that they force would-be borrowers into alternatives that are far more costly. Georgia, for example, has outlawed the practice – mistakenly, as a Federal Reserve Bank of New York study indicates.

The study found that bounced-check fees grew by $36 million and Chapter 7 bankruptcy filings rose by almost 9 percent in Georgia after payday lending was banned. What’s worse: Bouncing checks and wrecking your credit rating, or paying a lender $15 for a $100 advance on your paycheck?

Given these facts, it’s clear that those guilty of exploitation are not the short-term lenders, but politicians who are trotting out the poor to score a political victory.

The whole piece is well worth the read.  

Money quote: ”Morgan also questioned the validity of the research from the Center for Responsible Lending saying the Center ‘overstated the number of problem borrowers.’ He noted that banning payday loans actually leads to more people bouncing checks, filing for bankruptcy and fighting with collectors. After payday loans in Georgia were banned in 2004, Morgan found, “bounced checks in the Fed processing center in Atlanta jumped by 1.2 million, a 13% increase.”

As states look at consumer credit issues it’s important that they look at the facts and carefully examine the real impacts of legislation.    The Federal Reserve staff study does just that and finds that one of the unintended effects of such legislation, which we see in states like Georgia and North Carolina, are increased credit problems for consumers.

To ignore what is already happening to individuals in states without payday lending and to continue on an assault on an industry which provides a better option for many in a short-term credit crunch is foolish and damaging to consumers.  Legislating payday loans into fee structures which are impossible to operate under extinguishes consumer choice.  We already see that individuals are forced to turn to more costly credit options when payday loans aren’t available.

The Open Markets Blog of the Competitive Enterprise Institute took note of this and posts on the report.  Kudos for highlighting this important piece of research. 

Jamie Fulner with payday advance company Advance America summed up the risk to consumers by pointing out how the new restrictions could force working families into more costly personal finance alternatives:

“If (consumers) decide that in a 180 day period that they need a sixth payday loan to help them bridge the gap between paychecks and that option is not available to them any longer then they may be force to turn to more expensive options such as bouncing a check or paying their overdraft protection fees or paying their bills late.”

The Federal Reserve Bank of New York has already conducted an in-depth study of the problems consumers face when payday advances are banned in certain states, and it’s not known how much pain the new restrictions will cause borrowers in Virginia.  But one thing’s for sure – the words of Judge Gideon J. Tucker never rang truer when, in 1866, he observed:

“No man’s life, liberty or property are safe while the legislature is in session.”

Amen to that, your honor.