In 2006 and 2007 the Oregon legislature passed two bills which significantly curtailed the ability of traditional “brick and mortar” payday lenders to operate within the state. Senate Bill 1105 (2006) and House Bill 2203 (2007) capped interest rates greater than 36%, limited origination fees to 10%, established a waiting period between payday loans, and required a minimum 31-day maturity. The goal was to protect Oregon consumers from “predatory” lending practices.
Prior to the legislation, there were 346 licensed payday lenders in Oregon. As of 2008 that number had dropped to 82, according to data from Oregon’s Consumer and Business Services Department. On paper the crackdown looks good: “In terms of achieving what the legislation set out to do, it is a complete success story for consumers,” says Dave Rosenfeld, executive director for Oregon State Public Interest Research Group (OSPIRG). However, the reality goes beyond what is on paper.
History shows that when significant demand exists for a good or service, and people are denied access, they will find other methods to satisfy the need, including circumventing the law altogether. Alcohol and drug prohibitions are two notable examples. There is no question that demand for payday loans is, in fact, significant. In Oregon it was a $334 million business and $40 billion nationally.
The biggest proponent of the payday lending legislation was U.S. Senator Jeff Merkley, during his time in the Oregon legislature. Merkley’s website explains the reasoning behind his support: “Many Americans are being forced to turn to short term payday loans just to deal with day to day expenses…causing financial burdens that are practically impossible for families to escape.” This implies that those who seek most payday loans are families who have fallen on hard times. Academic research shows otherwise.
In October 2008, a researcher at Dartmouth University published a study on the Oregon payday loan rate cap. The purpose was to determine its effect on borrowers and also who those people were. “The results suggest that restricting access to expensive credit harms consumers on average,” the study says. This may come as a shock, but when given the facts it makes sense. All people surveyed for the study were payday loan customers. Less than 50% of respondents were married (with an average of 1.1 dependents), and only 12% were unemployed. 66% said they used the loan to pay for emergency expenses (such as car repairs and medical) as well as bills (such as utilities). 70% said if a payday loan hadn’t been available, they would have had no other option or did not know where they would get the money. Finally, 76% expected their financial situation to improve after receiving the loan. The study shows payday borrowers are primarily employed individuals with unexpected expenses. If they are unable to pay for these expenses, their financial situation will be worse in the long run.
Legislators have jumped the gun in banning traditional payday lending in Oregon. They aren’t protecting vulnerable consumers as much as denying a necessary service. Furthermore, there has not been a major push to provide consumers with a convenient, viable alternative.
Senator Merkley’s office could not be reached for further comment, but it appears legislators used the issue for political gain without doing significant research. Responsible advocates should have, at the very least, devised a new business model to provide quick cash at low interest rates to these high-risk borrowers. So far nothing has materialized, leaving former customers worse off than they were before.
Payday lending may seem negative because of high interest rates, but in any industry there will be a premium for last-minute transactions. If you book an airline ticket the day before a flight, the price usually will be much higher than if the ticket had been purchased six weeks in advance. The same principle applies to lenders, especially when the borrowers have poor credit and there is a relatively high risk of default.
Washington State also enacted payday lending restrictions, but some legislators there are already considering relaxing them. Oregon should consider doing so as well. According to the Portland Business Journal (February 11, 2011), there already has been a rise in complaints against out-of-state online payday lenders conducting fraudulent and illegal business practices. These are the real risk to consumers because the Oregon Attorney General’s office has little control over them. If legislators had looked deeper into the facts before enacting legislation from a politically favorable standpoint, this situation could have been avoided.
Christopher Robinson is a research associate at Cascade Policy Institute, Oregon’s free market public policy research organization.