Irresistible Force, Meet Immovable Object
The battle for payday loans in Ohio has been a difficult one for consumers. The recession hit the Ohio workforce harder than most, and the need for emergency short term loans is greater than ever before. Yet the state legislature in their infinite wisdom decided that what their constituents needed was nanny state regulation. Rates were capped at 28 percent APR, which effectively crippled the industry in Ohio and sent credit- and liquid asset-constrained consumers scrambling toward more expensive options. That rate is more stringent that the federal rate of 36 percent APR set for lending to active military, and we know that even at that level, the business model in unsustainable.
Payday Lending is Now
Consumers desire the flexibility to choose what is best for their financial situation. The Columbus Dispatch, rather than turning away from this point in order to blow with the political wind, recently produced an article that was pleasantly even-handed. For some, it’s true: payday loans are “the only way to get by.” ( See: http://www.dispatchpolitics.com/live/content/local_news/stories/2009/11/09/copy/More_Payday.ART_ART_11-09-09_A1_6QFK8AH.html?adsec=politics&sid=101) While no reputable lender would advocate payday loan dependency, it’s been proven not only in customer surveys but in studies conducted by the Federal Reserve and institutions of higher learning that payday loan can be an invaluable tool for smoothing out financial shocks.
Choice is Good
CheckSmart CEO Ted Saunders pointed out to the Dispatch that “There is a bank right there,” in reference to a traditional institution just a football field away from one of his stores. “They could go right there if they wanted to.”
Competition fosters choice. It also tends to help regulate prices, both of which are benefits to the consumer. But activists like Bill Faith of the Coalition on Homelessness and Housing in Ohio (COOHIO), who appears to be a firm believer in the nanny state, reminds that “People at one point also were excited about high-interest subprime mortgage loans that helped ruin the housing market.” Yet Faith makes an apples-to-oranges comparison. Wall Street shenanigans and impotent governmental policy that allowed it to go on are what destroyed the economy. Payday loans aren’t even in the same ballpark. In fact, studies like those by Dartmouth College’s Jonathan Zinman suggest that capping payday loan rates and otherwise restricting the industry harms consumers’ financial welfare.
Don’t Believe? Ask Somebody Who Has Used Payday Loans
The Dispatch interviewed Amie, a 47-year-old mother of six. Recessionary times have been tough for her budget, and her low earnings make getting ahead almost impossible. Even though she’s found herself jumping from one payday loan to another, she said “I can’t complain. At least they’re helping me,” referring to CheckSmart in Ohio.
That’s ammunition that payday loan critics would use to say that companies like CheckSmart are pulling Amie into an endless cycle of debt. But what we truly have here is a financial landscape where banks, credit unions and even employers have for the most part failed to serve the populace. Requirements to apply for consumer loans through old-school channels often exclude those who need the most help. As wages have not kept pace with the rise of inflation, too many consumers like Amie find themselves in a large hole.
Legislation: Like an Ant Lion’s Hole
Legislators who fight for 28 percent APR and other such unreasonable restrictions upon businesses without the deep pockets of the financial mainstream are creating a nanny state scenario where consumers with nowhere else to turn will have to depend upon the “alms” of the government and their banking tentacles. Freedom of choice sinks beneath the waves. Or, if the government does not assert total control and credit-restricted consumers are left to fend for themselves, regulating payday loan companies out of the market most frequently leaves consumers with even more expensive options, from loan sharks to overdraft fees. At least payday lenders make their costs clear up front. That’s something a bank never does with overdraft fees. If you’re skirting the red, using an ATM card becomes a deadly game, as every infraction can incur a fee of $25 or more, even if you overdraw your account by as little as one penny. But that’s OK, says banks. It’s all in the micro-fine print!
“Banks and other lending institutions aren’t doing their jobs,” says Koziura
That’s what House Financial Institutions Committee chair Rep. Joseph F. Koziura of Lorain, Ohio told the Dispatch. “The system is built on making money on fees now instead of the old-fashioned loaning money and putting money in the system. That’s 90 percent of the reason we’re screwed up.”
What happened when half of Ohio’s 1,600 payday lending outlets closed down after approval of a 28 percent APR rate cap? Lots of people hopped into the unemployment line, for one. Consumers kowtowed to the voice of government and made life more difficult for those who can ill afford such windmill chasing. There were certainly some payday lenders who were unscrupulous in their dealings with customers, but it was not a majority. Payday lending is a regulated industry with a keen eye toward consumer relations. Groups like the Community Financial Services Association and the Online Lenders Alliance are there to ensure that consumers can safely enjoy the use of payday loans.
But Payday Lenders Aren’t Being Allowed to Run Legitimate Business
Charging $15 per $100 loaned is common for a payday loan. For a two-week loan, paying 15 percent interest is reasonable for an emergency service that can expose the lender to a great deal of financial risk. But Ohio legislators managed to convince consumers (lead the lemmings?) into laws that prevent payday lenders from even doing that. According to the Dispatch, CheckSmart charges up to that rate, but it’s broken down into numerous fees in order to circumvent faulty legislation. It gets around the 28 percent APR rate cap as it currently exists. And CheckSmart makes each of the individual fees clear to its customers, who continue to use their services. The truth is what consumers want, not horror stories that leave you thinking, “Yeah, that really doesn’t happen to most people.” No hook hands scraping the door at midnight, no dolls that move on their own and no payday loan debt traps… that’s story time, kids.
Legislators Still Aren’t Satisfied
Ohio legislators are continuing to drive for a 28 percent APR rate cap that applies to any payday loan and closes the loopholes. “The latest bill up for debate in a House committee,” writes the Dispatch, “would cap interest at 28 percent for all loans of up to $1,000 made for a term of three months or less.” That would kill payday lending in Ohio. A vote is set for early December.
Payday Lending: A Tool to Be Used with Healthy Caution
Payday lending is not a magic ATM. It isn’t money to fulfill your wildest cash desires at a moment’s notice. Such unbridled use can easily lead to dependency, when what a consumer’s finances need is sound budgeting. But regulating payday lending out of business in Ohio because a minority of consumers use the payday loan product in ways it was not intended to be used is no answer. If people fear the nanny state when it comes to bailouts and healthcare, shouldn’t they also fear it in this avenue of consumer finance?
Speaking of government, there’s an invention called Social Security. While it has been a cash lifeline for some, many others worry that it may be a financial scam, a Ponzi scheme that is costing the modern workforce millions each year. Yet legislators make no earnest attempt to reform that system. They consider payday loans a more desirable target, perhaps? There might just be more of a campaign war chest in that field, thanks to the banking industry. Vote as the dollars go; isn’t that the way?