Installment lenders in today’s Kansas City Star rightly point out that a proposed ballot initiative in the state amounts to an all-out assault on consumer credit that would impact banks, credit unions, and others. We seen this before — righteous, but misguided efforts to help borrowers actually drive them to more expensive and credit-damaging alternatives…

“Removing installment loans as an option for borrowers will force them to look to black market sources or unregulated Internet lenders for the money they need. This must not happen. If Missouri must deal with payday lenders, it must do so in a significantly more targeted way.”

KC Star editors apparently don’t understand that a 36 percent APR cap would eliminate short-term loans in Missouri. Still, some readers understand the provision would deny credit to those who need it most, and that the costs of payday loans are reasonable compared to short-term alternatives…

Yesterday, a debate hosted by the Federal Reserve of Kansas City concerning the merits of payday lending spurned some interesting conversation about the industry and its regulation. Much of the discussion was centered on the Fed’s senior research  economist, Kelly Edmiston’s recent study, “Could Restrictions on Payday Lending Hurt Consumers?“. Here’s a taste of what Edmiston concluded from his research:

Edmiston’s study “suggested” that low-income consumers had less access to credit and all consumers generally had poorer credit where payday lending was banned. It may be they have no alternatives or are making costlier choices such as bouncing checks, exceeding credit-card limits or turning to loan sharks.

 

From the Kansas City Star: 

Missouri regulators are being asked to impose new rules on how utility bills are paid, including restrictions on allowing payday-loan stores accepting the payments.

Utilities over the years have largely eliminated offices that will accept payments in person. Instead, there’s been growth in places such as grocery stores and payday loan businesses that accept the payments, which are forwarded to the utility.

If it ain’t broke, don’t fix it.

Very interesting column in the Kansas City Star: 

My favorite text on behavioral finance is Why Smart People Make Big Money Mistakes. The authors write that credit/debit cards are mental accounts. There is no pain of loss when one pulls out the plastic. Two MIT marketing professors (Prelec and Simester) did a study several years ago to determine how behaviors change when cash is used to settle accounts as opposed to credit/debit cards. They asked students to bid competitively for tickets to a Boston Celtics game.

One group of students was told the tickets required cash purchase. The other group was allowed to bid with credit cards. The study then averaged all the submitted bids. The folks who used credit cards were willing to pay twice as much as the folks who had to part with cash. The seat the folks bought with credit was no closer to the action and the game was no more entertaining than for the folks who paid cash. This is the dangerous part of behavior.

Oops, never mind.   If city councils in the area keep meddling in free enterprise, the Payday Pundit won’t feel very welcome.  This story is about the city council in North Kansas CIty:

The moratorium applies to Burlington Street between 10th and 32nd Avenue and will be in place while the city does a comprehensive study of the Burlington corridor.

It also restricts payday loan shops, industrial businesses, any parking lot with frontage on Burlington, pawn shops, car title lenders, check-cashing lender operations and any motor vehicle repair or service shop.

First of all, only 30 banks, generally small local ones at that, have signed up for the program.  Second, when customers find out all the strings attached to getting a short-term loan from one of these banks–application fees, minimum balances in a savings accounts, complicated fee structures–they will decide that a payday loan is a better deal.  In any case, the market will decide.

This Kansas City Star story has more.