Stop Payday Loan Restrictions Now — Let the Free Market be Free

In recent years, the payday loan industry has come under increasing scrutiny and criticism. Terms such as “predatory” and “abusive” have been hurled by opponents of payday lenders to describe these companies’ lending practices. Defenders of the payday loan industry feel that the government is overstepping its powers by attempting to regulate the free market. Although payday lenders should certainly adhere to general policies — do not commit fraud, inform consumers of all terms related to their loans and similar practices — the types of regulations proposed go far beyond basic consumer protection. Here is why the proposed regulations can do more harm than good.

Government Intervention Often Results in Undesired Consequences

Many times, well-intentioned plans fail to work as predicted. One example of poor prior planning is the savings and loan fiasco of the 1980s. The Library of Economics and Liberty provides an excellent timeline of this crisis. The industry was highly regulated for almost 50 years, then deregulated and finally subjected to additional regulations. Although the issues causing the collapse of many of the nation’s savings and loan institutions are complex, what is relevant is that the initial regulations were part of the government’s recovery plan for the Great Depression. The Consumer Finance Protection Bureau, or CFPB, which seems bent on destroying the payday loan industry, was formed as a result of the 2008 economic crisis. In other words, events that had little or nothing to do with these organizations resulted in them being caught up in an ever-increasing tangle of regulations.

Proposed Regulations Insult the Intelligence of Consumers

Payday lenders do not base loans on the borrower’s credit history. It’s possible to get a payday loan with less than perfect credit. However, they do require borrowers to have a steady source of income, be of legal age, have proof of identity and have control of an active bank account. Some lenders require that borrowers have been on the job or had an open bank account for a minimum length of time. What proposed regulations are saying is that American adults who are responsible enough to hold down a job and maintain a bank account are not capable of deciding for themselves whether a payday loan is suitable for their needs. Should the government also regulate the number of credit cards a consumer can have, where consumers should bank or how many checks an individual should write in a month? Perhaps the government should start treating adults as adults.

Payday Lenders Fill a Void

Support for the payday loan industry has come from an unexpected source: William Isaac, who once chaired the Federal Deposit Insurance Corporation. In an article for American Banker Isaac states that payday lenders provide a financial lifeline for millions of consumers who live “paycheck to paycheck.” Even if banks were interested in making small-dollar loans, many of the borrowers patronizing payday lenders would not be considered “creditworthy enough” to obtain such a loan. For many, payday lenders provide the funds needed to repair a vehicle needed to keep a job, ensure that an ill family member receives medical attention or repair a roof leak before more damage results.

The Economy is in Enough Trouble

In November 2014, NBC News reported that there were over 20,000 payday loan locations in America. For comparison, McDonald’s had fewer than 15,000 locations. If payday lenders are regulated out of business, there will be a lot more unemployed people in the nation. However, this is only part of the problem. An article in Forbes notes that many payday lenders have borrowed heavily to fund expansion and/or acquisitions. Forcing payday lenders into bankruptcy is not going to strengthen the economy.

CFPB Lacks Pertinent Data

Writing in Forbes, Norbert Michel cites a study conducted by Ronald Mann of Columbia University. The study found that approximately 57 percent paid off their payday loans within two weeks of their predicted payoff date. The remaining 43 percent did not, but half of this group missed the date by more than one week. The study also found that most borrowers clearly understood the terms of their loans, expected that they might need to renew the loan at least once and considered a payday loan as the best option available.

The Free Market Takes Care of Itself

In a free market, consumers decide which businesses to patronize. A restaurant may be required to meet the local health code, but it is not required to serve food that is considered tasty by all diners. If it does not please enough customers, the restaurant goes out of business. The same thing will happen if a grocery store charges outrageous prices. Similarly, if payday lenders are free to compete for customers through better rates, borrowers will be the ones deciding on which lenders remain in business.

The payday lending industry is being challenged on many fronts. The issues are far less straightforward than critics acknowledge. If you would like to explore these issues further, you can find more information at