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Costlier credit seen as an effect of loan ban |
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December 16, 2007
After years of mounting criticism, payday lending was finally shut down in North Carolina in 2005.
Problem solved, right? Not so fast, says new research on the consequences of that ban.
A report by Don Morgan, a research officer at the Federal Reserve Bank of New York, and Michael Strain, a graduate student at Cornell University, says that far from reducing debt problems for households, the ban on payday lending led to an increase.
A contradictory view
Payday loans - small, short-term loans with high interest rates - evolved from check cashing in the early 1990s, and the industry still flourishes in many states. There’s always been strong demand for the loans, but opponents say that they are a predatory debt trap for low-income customers, many of whom become serial borrowers.
The analysis by Morgan and Strain through the second quarter of this year shows that compared with other states, households in North Carolina and Georgia, which banned payday lending in 2004, do not seem better off since the bans; they have bounced more checks, complained more to the Federal Trade Commission about lenders, and filed for Chapter 7 bankruptcy protection more often.
“Ancillary tests suggest that the extra problems associated with payday-credit bans are not just temporary ‘withdrawal’ effects,” they said.
Take the case of Hawaii: Debt problems declined - and became less chronic - in Hawaii after the state doubled the maximum legal limit for payday credit in 2003 to $600. “If the increased problems following a payday-credit ban are just withdrawal symptoms, injections of payday credit should eventually lead to greater problems, once the rush ends,” they said.
Their findings, they said, reinforced and extended other recent research on the consumer benefits of payday credit.
The report acknowledges that payday loans may be less than ideal, but concludes that they are cheaper and preferable to commonly used substitutes such as bounced-check protection sold by banks and credit unions or loans from pawnshops.
“Forcing households to replace costly credit with even costlier credit is bound to make them worse off,” it said.
The researchers posited the question: Should states that banned payday lending reconsider?
“Progressives may call for something better than either payday credit or bounce protection. We are all for that, but banning payday loans is not the way to motivate competitors to lower prices or invent new products,” the report concluded.
Critics hit back
Not surprisingly, the report didn’t sit well with two of the biggest supporters of North Carolina’s ban, Attorney General Roy Cooper and the Center for Responsible Lending. Both say that the report is based on incorrect analysis.
“We just think this a flawed study,” Cooper told me last week.
Cooper didn’t dispute the actual data that the researchers used but took issue with their extrapolation. Yes, there had been an increase in the number of complaints to the FTC during the research period, but that had more to do with a rise in identity theft, he said by way of example.
Still, poor financial behavior does not change overnight, and steering struggling consumers to credit counselors can only help so far. Cooper concedes that there is room for other, fairer loan products to serve this market (mainstream banks don’t seem to be stepping up to the plate), and he’s willing to work with the legislature on finding alternatives.
One thing seems clear, though, Cooper would never support a return to payday lending.
Source :- ( http://www.journalnow.com/ )
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