The Obama administration has targeted a number of unpopular industries, such as gun shops and small-dollar lenders, for excessive restrictive regulations designed to put them out of business. While it is popular to hate small-dollar lenders, who offer title and payday loans to consumers who are unable to access other forms of credit, the growing number of such lenders in most towns and cities prove customer demand for their services.
About 12 million mostly lower-income Americans have the need to use payday loans to meet their financial needs, yet the administration and some liberal politicians in Congress want to eliminate entirely access to these credit services.
Draconian regulations proposed by the Consumer Financial Protection Bureau, a new almost unaccountable federal agency created under the Dodd-Frank financial regulations law in 2010, would put most if not all payday lenders out of business. The regulations would impose on lenders a strict credit analysis of consumers applying for payday loans, would limit the loans to no more than two extensions, and would also add countless other restrictions. The burdensome regulations would make the business of small-dollar lending almost entirely unprofitable, and cause most payday lenders to close their businesses.
While many politicians think they are saving consumers from themselves by eliminating their access to services like payday loans, a George Washington University School of Business survey finds that 89 percent of payday loan consumers are “very satisfied” or “somewhat satisfied” with their last loan, and 86 percent see payday loans as a useful service. In many states, nanny state liberal politicians have heavily regulated, and in some instances banned, payday loans.
Critics of payday loans claim consumers get themselves into a “debt trap” by taking out such a loan, which typically involve about $15 paid every two weeks per hundred dollars borrowed, by continuing to extend the loan paying only the interest every two weeks for several months. But in Georgia and North Carolina, where payday loans were banned, the situation for payday loan consumers grew worse. A 2007 study by the Federal Reserve Bank of New York found those consumers bounced checks more often, filed more complaints with the Federal Trade Commission about lenders and debt collectors, and more filed Chapter 7 bankruptcy cases.
While the interest rate on a payday loan calculates to about 400 percent annual rate, the comparable rates of the alternatives are worse. According to Consumer Reports in May 2005, the APR on checking account overdraft protection offered by most banks is between 600 to nearly 800 percent, while the APR for bounced check fees is about 480 percent to 730 percent. Paying late fees and/or reconnect fees on utility services can even be worse.
Liberal politicians, who think they know better than all of us how to run our individual lives, think we would all be better off if we did not have access to payday loans. While there are some who get themselves in trouble by irresponsibly using payday loans, there are many who use them quite responsibly to cover temporary short-term financial needs and soon after pay the loans off entirely.
No one will be better served by shutting down payday lenders, certainly not the tens of millions of lower-income Americans who need them. In the end, it will only be the self-serving politicians, who make themselves feel better while telling voters they did something about the financial problems of Americans, who will benefit.
Paydays lenders aren’t the predators here, the government that seeks to put them out of business is the problem.
