Montana, Cap Payday Loans and Hurt Your Population

Financial Resources Over-Regulated

Despite the fact that payday loans have been a boon to cash-strapped consumers who need a little help between paychecks, bank-controlled government acts in the best interests of their campaign supporters, rather than in the best interests of the people. Some take this path, while others recognize their value. Unfortunately with the former, it is overregulation at its finest.

Trying to keep the people’s choice down

A Congress-imposed 36 percent annual percentage rate cap on no fax payday loans to military personnel exists, and some states have banned payday lending. Even president-elect Obama supports such legislation, which will effectively put the lenders out of business. Thirty-six percent APR is not a supportable business model for loan-only companies. Families with less-than-perfect credit who need quick cash support are left out in the cold when payday loans are not available.

The Center for Responsible Lending (CRL) claims that 90 percent of payday-lending revenues “are based on fees stripped from trapped borrowers.” However, numerous independent studies, including this one by researchers from Chapman University, Colby College and the University of Virginia find that “payday loans help the subjects to absorb expenditure shocks and, therefore, survive.”

Supporters of faxless payday loans come from all walks of life

U.S. Sen. George McGovern, who once vied for the presidency, is a supporter of no fax payday loans. In an opinion piece he wrote for the Wall Street Journal, McGovern objected to those who sought to ban the consumer loan product. In particular he noted that the costs for payday loans are:

Reasonable when all your other options, such as bounced checks or skipped credit-card payments, are obviously more expensive and play havoc with your credit rating.

Regarding Federal Reserve findings, McGovern went on to say that

Payday lending bans simply push low-income borrowers into less pleasant options, including increased rates of bankruptcy. Net result: After a lending ban, the consumer has the same amount of debt but fewer ways to manage it. Why do we think we are helping adult consumers by taking away their options?

The Federal Reserve study found that patterns of bounced checks, complaints against lenders and debt collectors, and federal bankruptcy filings increased in Georgia and North Carolina after those states banned payday lending.

How does the Center for Responsible Lending counter?

They questioned the methodology and conclusions drawn by the Fed, but in the revised version of the Fed’s report, the authors respond in detail to each objection raised by CRL. Their response can be seen at the link above.

Capping rates hurts consumers; just look at Oregon

In still another study, Dartmouth College economist Jonathan Zinman looked at what happened in Oregon after it capped interest at 36 percent but also allowed lenders to charge “origination fees” of up to $30. That means the highest possible effective annual interest rate charged in Oregon by payday lenders is now just less than 154 percent.

Zinman said the immediate effect of the rate cap was to reduce the number of payday lenders in Oregon from 346 on Dec. 31, 2006, to 82 outlets in September 2008. He compared Oregon with the neighboring state of Washington, where an existing payday loan industry underwent no changes in the same period. According to Zinman:

Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

Now Montana wants to try 36 percent

Keep in mind that at 36 percent, payday lenders could charge only $1.38 on a two-week loan for $100, which now brings in $15 at some establishments. Factor in state licenses, annual examination fees, rent, lights, salaries, benefits and other incidentals and you can see that loan volume would have to be beyond massive. It simply isn’t a good business model.

Montana Banking Commissioner Annie Goodwin is quoted in this Billings Gazette story as saying that the 36 percent cap “would most likely shut down the payday lending industry, based on what has happened in other states. During the 2007 Legislature, my division opposed legislation that would have capped interest rates at 36 percent.”

Why do payday loan opponents persist?

They know that people want payday loans to be an option when they need quick cash in an emergency between paychecks. They also know that if payday lenders can be regulated out of business with unreasonable rate requirements, there will be a customer base that will come running to the next best thing. Exercise your right to choose, tell your Congressmen, Representatives and governmental officials what you think about having the freedom to choose payday loans.