We told you so – payday loan bans backfire

The 2007 Oregon legislature capped interest rates on payday loans, effectively putting the lenders out of business. What happens now to those who relied on those loans? While it’s too early to know for sure in Oregon, The Federal Reserve Bank of New York recently released a study about two other states that banned such loans in 2004 and 2005. The conclusions, although preliminary, are just another example of how paternalistic laws aimed at helping the poor often do just the opposite.

Oregon legislators ignored advice and research offered by Cascade Policy Institute and others to the effect that high-interest payday loans often represent the best of some not-so-good alternatives for many people.

Instead, lawmakers seemed to agree with those “advocates for the poor” who argued that payday lenders were like birds of prey, swooping down on hapless borrowers and sucking them into cycles of debt and dependency.

The new 44-page
report
by the Federal Reserve Bank of New York makes for interesting reading. Here is the abstract:

Payday loans are widely condemned as a “predatory debt trap.” We test that claim by researching how households in Georgia and North Carolina have fared since those states banned payday loans in May 2004 and December 2005. Compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same.

This negative correlation””reduced payday credit supply, increased credit problems””contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check “protection” sold by credit unions and banks or loans from pawnshops.

So, we now know how other states fared when “advocates for the poor” had their economically unenlightened way. It’s not that satisfying to say “we told you so,” but it seems likely that this will also be the outcome in Oregon.

How sad, that in our zeal to “help the poor” we end up hurting them even more.


Steve Buckstein is Senior Policy Analyst and founder of Cascade Policy Institute, a Portland-based think tank.

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Posted by at 05:55 | Posted in Measure 37 | 10 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    These foolish legislators remind me of another time do-gooders stepped up to help the poor. They gave them their own shopping carts! What a great idea.
    When will people ever realize the truth…that Dems DO NOT CARE about the poor.
    They simply don’t and this silly measure is just one more case in point.
    If the Dems keep advocating for the poor this well, we won’t have any left to worry about.

  • John Fairplay

    Thank you, Chuck Sheketoff.

  • Captain_Anon

    Interestingly enough, there was an article in the paper within the last week detailing how credit unions and banks are now offering similar short term loans but with substantially lower rates. so the market is working with the ban. preditory lenders are going bye bye, responsible lenders are stepping in. so the payday loan places CAN work under the rules, they just are choosing not to.

    • Steve Buckstein

      Captain,

      It is my understanding that the reason the payday loan industry developed in the first place is that banks, credit unions and consumer loan companies choose not to offer short term, small loans because the costs were too high.

      It remains to be seen whether banks really can make money on such loans, especially when they offer them to new customers (higher risk) as opposed to existing ones.

      It is doubtful that payday loan companies would simply choose to not operate under the new rules if they could still do so profitably. More likely, they made the determination that collecting much less than a $20 fee on a two-week $100 loan was simply not doable. That $20 fee annualizes to a several hundred percent APR, but it is still just $20. Ask yourself it you would loan a perfect stranger $100 with no collateral, and do it for much less than $20?

      In any case, if traditional institutions can profitably offer such loans now, why didn’t they offer them before legislation banned or restricted payday loans? Of course consumers will prefer lower fees to higher fees, but as the New York Fed study shows, removing that choice harms the very people who already have the fewest options.

      • dean

        Steve…how about we tackle the problem of poverty instead, making legal “juice” loans unecessary. Or would you say: FUGGEDABBOUDDITT?

        • Steve Buckstein

          Dean, of course reducing poverty would be a better outcome than simply preserving the ability of poor people to borrow high-cost money. Cascade has been advocating poverty reduction ideas for years, and we’ve talked with legislators about suggested approaches. But when they don’t act on those suggestions, and go on to make the problem worse by limiting choices the poor have, then we speak up.

        • Jerry

          Maybe we could reduce poverty by having the poor people get jobs.

          • dean

            Jerry…the unemployment rate is about 4.5% and the poverty rate is about 18%. Do the math.

          • Steve Buckstein

            Dean, you make a good point that simply having a job does not mean one is above the poverty line, but perhaps more important for this discussion is the fact that Oregon’s unemployment rate has remained stubbornly above the national average for years, as shown by this Oregon Employment Department chart:

            http://www.qualityinfo.org/olmisj/ChartView?startyear=1996&area=4101000000y&area2=0000000000y&area3=&graph=unemp

            Payday loans, as the very name implies, were primarily available to people who had jobs but needed cash until their next pay day. Based on the Fed study in this post, closing this option is likely to worsen the credit problems of Oregon’s working poor.

  • Why didn’t we limit the interest rate and fees on the business side,
    rather than putting the pressure on the people who need the money?
    Seems bass-ackwards to me…

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