Research has found that bans on payday lending leave consumers in greater financial distress. Three studies have looked at what happened to consumers in states where payday lending was eliminated and discovered the true cost to consumers of this misguided approach.

Read more about the research.

Niger Innis of the Congress on Racial Equality (CORE) testified today before the Ohio Senate Committee on Finance and Financial Institutions.   Here’s a news release CORE sent out.  Key passage:

Today, Innis told Senators, “It seems unfortunate to me that the people of Ohio are in danger of losing the choice of a viable financial tool. A tool, which when lost in other states such as Georgia and North Carolina, has hurt consumers.”

So says Larry Wilson in the State Newspaper of South Carolina.   We don’t normally see much wisdom from the editorial page of this paper, but this is a guest columnist, not one of their regular writers.   Wilson, the chairman of the South Carolina Council on Education, says: 

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. 

Tim Miller of Center for Consumer Freedom has a very sensible opinion piece today in the Christian Science Monitor.  From the piece:

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.  

Terry Kibbe of the Consumers Rights League weighs in.    From her piece in today’s Los Angeles Times:

“The Center for Responsible Lending and other so-called consumer advocacy groups rely on shoddy research in stirring gender, racial and class sensitivities to make the case against payday loans, as they did during their successful crusades in Georgia and North Carolina to run payday shops out of business. Though they claimed that the elimination of payday loans saved Georgia residents approximately $154 million per year, that claim was refuted by a Federal Reserve report (pdf) indicating that consumers ended up paying more through overdraft bank charges and late fees. Critics of payday loans are content to ignore that the mass of payday borrowers are middle-income, educated consumers.”

Terri goes on to oppose “big brother” restrictions on payday lending. 

Terry Kibbe of the Consumers Rights League has a guest piece today in the Denver Post that picks up on recent research by Don Morgan of the NY Federal Reserve. 

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.”

The report from staff researchers at the Federal Reserve Bank of New York is continuing to pick up steam. 

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.