Consumer Protection from What?
The payday lending interest rate cap passed by the Oregon legislature has reduced gross revenues on a typical loan by 70%, causing the closure of 102 stores. As a result, the Oregonians these regulations were meant to protect have less access to credit than they did before.
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With much fanfare, the 2007 Oregon State Legislature, supported by citizen advocate groups, passed payday lending regulations and declared a victory for Oregon’s consumers. They even brought out a cake decorated to show that 500% annual percentage rates have been eliminated. Now the cake is gone, and a comprehensive look at the impacts of this regulation on Oregon’s payday lending industry and its customers is in order.
The impact on lenders and their employees is clear. As of July 31, at least 102 payday lenders had surrendered their licenses and left the business. Store closings mean lost jobs, vacant commercial spaces, and decreased business for suppliers of payday loan businesses. Before the regulation, “I had seven full time employees with an annual payroll of $178,000 plus full medical and dental benefits,” says Luanne Stoltz, former operator of two now-closed payday lending stores. Three to four employees per store is typical for payday lenders. 102 closed stores means that the legislature’s attempt to protect consumers cost more than 300 Oregonians their jobs.
Of course, legislators and consumer advocates never claimed that their regulation would help payday lenders. They did claim, frequently and colorfully, that it would help the more than 73,000 Oregonians (2.7% of Oregonians over 18 years old) who took payday loans in the last year. “These families will have a lot more money” as a result of fee caps, says Angela Martin of the progressive advocacy group Our Oregon.
In a world free from the law of supply and demand, this might be true. But in the real world, it is hard for a business to continue to operate when regulation reduces gross revenues on a typical loan by 70%. Price caps on loans have led to reduced supply of loans. As a result, the Oregonians these regulations were meant to protect have less access to credit.
Payday lenders “won’t all close,” hopes a spokesman for State Speaker of the House Jeff Merkley (D-Portland), a vocal advocate of payday lending regulation. President of Oak Grove Financial Steve Hanson hopes closing some of Oak Grove’s 41 stores will concentrate business and keep the remaining stores viable. Store closings outside the Portland metro area have an especially large impact on access to credit because Oregonians outside the metro area used payday lenders at much higher rates than Portlanders (3.8% versus 1.4%). Rural closures mean that customers may have to drive many miles or go without credit.
As payday lenders close, both Merkley’s spokesman and Martin hope that credit unions will provide more short-term loans to Oregonians. However, neither could point to state or advocacy group actions to encourage credit unions to expand supply of short-term loans. Without encouragement, (read, subsidies to make costcapped loans profitable) credit unions are unlikely to fill the gap in supply.
Martin asserts that payday lending closures are acceptable because fewer than 10% of payday lending customers use the loan to avoid a financial emergency. Even in an emergency, she says that consumers are better off without taking a payday loan because the loan just “delays the inevitable crash.” This shows that legislators and advocates think they know best how Oregonians should spend their money.
However, a survey of payday loan customers in California shows that 70% took payday loans to meet unexpected expenses or to offset temporary reductions in income, exposing the error in the elitist view of payday loans. Even if Oregonians’ borrowing habits are different from Californians’ and they are borrowing to spend frivolously, as Martin asserts, shutting down payday lenders will not magically make these borrowers develop wiser spending habits. Instead, they will bounce checks or seek pawnshops and loan sharks to continue to spend unwisely at greater cost.
Given the apparent paternalism from supporters of payday lending regulation, these supporters might be expected to support better financial education to reduce demand for payday loans. Martin supports better financial education but could not point to any functional programs. Merkley’s spokesman could not identify any projects supported by the legislature to reduce demand for payday loans.
What did legislators think would happen when they passed these regulations? While it is impossible to know, three plausible outcomes present themselves. First, legislators may have thought the market somehow would adapt to the regulation— and lenders could continue to provide enough loans at the reduced cost—or that regulation would eliminate demand for payday loans. This thinking shows the same ignorance of how markets work that led to similar failed policies like prohibition on alcohol. Second, legislators may have thought that regulations would close down payday lenders and consumers would be better off because of it. The idea that legislatures know best how consumers should spend their money is pure elitism. Third, legislators may not have thought about outcomes at all. They may have been too busy writing press releases about “protecting consumers” and getting a great photo opportunity in front of a cake.
No matter what legislators thought would happen when they regulated payday lenders, what actually happened is clear: Payday lenders have closed, consumers have reduced access to credit, and those responsible for the regulation have no plan to deal with the consequences of their actions.
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