Payday loan regulations designed to wipe out industry, limit consumer choice

Victor Joecks

Federal regulators are on the verge of imposing crushing new rules on the much-maligned payday loan industry. These rules would have devastating consequences here in Nevada. Despite the prevailing caricature, payday loans benefit thousands of locals. Regulators must scrap this proposal.

Earlier this year, the Consumer Financial Protection Bureau — a new agency created by President Barack Obama in the wake of the financial crisis — put forward a proposal that would make it much harder for people to take out payday loans.

Today, about half of all payday borrowers take out just one or two loans annually and pay those loans back on time. The CFPB proposal would cap the number of loans a borrower could take at two. So no matter the circumstances, borrowers would be prohibited from taking additional loans.

The CFPB proposal would also require lenders to verify a potential customer's income and credit history. That's a costly and time-consuming process that many can't afford. And this proposal caps loan interest rates, which lenders use to offset default risk. The CFPB estimates that its proposal will eliminate up to 80 percent of the payday loan market.

The industry is an easy target. Critics have successfully portrayed its work as predatory. They say lenders exploit people in desperate financial straits and charge obscenely high interest rates. But the data don't support this portrayal. Just one half of 1 percent of all complaints filed to the Consumer Financial Protection Bureau concern payday loans. And payday lenders consistently score high in customer satisfaction. One survey from George Washington University found that less than 6 percent of payday borrowers were "very dissatisfied" with the service. Over half were "very satisfied."

Traditional banks don't fare nearly as well. According to a recent Gallup study, nearly two-thirds of their customers aren't satisfied.

The truth is, payday loans provide a valuable service.

People with bad credit and inconsistent incomes usually can't get loans from traditional banks. But they still have bills to pay. A payday loan can help fill that gap, giving people the quick cash they need to, say, pay this month's electric bill or fill up the tank so they can drive their kids to school.

Many people find themselves in tough situations like these. The Federal Reserve recently reported that two in three Americans making under $40,000 a year couldn't pay $400 in a squeeze. Payday loans pick up the slack.

Certainly, payday loans don't make sense for long-term financing. But in tough times, they can be a godsend. Banning payday loans will force low-income folks to rely on much worse ways to get cash.

For example, some who need cash will bounce a check or overdraw on a bank account — both of which incur hefty penalties. In fact, overdraft fees are often much higher than payday loan rates.

The CFPB has confirmed this. The agency recently concluded that a person who overdraws on a checking account by $24 but pays it back within three days would face a median fee of $34. That's the equivalent of a loan with an annual interest rate of 17,000 percent. By comparison, the typical payday loans charges around 400 percent.

The CFPB's new payday loan proposal wouldn't just deprive millions of people of a valuable source of financing. It would also be a condescending intrusion into personal choice.

Adults should be allowed to control their finances however they please. No one is forced to take out a payday loan — just as no one is forced to take out a new credit card or home mortgage. These are products freely chosen on the open market.

American citizens shouldn't be treated like children. If the Consumer Protection Financial Bureau actually wants to help people, it should scrap its proposal to limit payday lending.

This article was orignially published in the Las Vegas Review-Journal.

Victor Joecks is the executive vice president of the Nevada Policy Research Institute, a private nonprofit, free-market and limited-government policy research organization based in Las Vegas