Inform consumers, don’t limit their options
In response to the recent problems in the home mortgage market, the Oregon legislature is considering several bills aimed at protecting consumers from unscrupulous or fraudulent business practices.
On Wednesday February 6th I testfied before the Senate Commerce and Labor Committee and the House Consumer Protection Committee regarding three bills, SB 1064, SB 1090 and HB 3630. Below is the written testimony I submitted to both committees. In each case, my testimony resulted in good questions from committee members and helped focus the debate on how to provide full disclosure to consumers, rather than shut down choices consumer have in the marketplace.
Testimony on Mortgage Loan and Foreclosure Consultant bills in the February Special Session of the Oregon Legislature
My name is Steve Buckstein. I’m Senior Policy Analyst and founder of Cascade Policy Institute, a Portland-based think tank that promotes individual liberty, personal responsibility and economic opportunity in Oregon.
Before you pass new laws attempting to protect home loan borrowers, I hope you’ll take a step back and think about how such laws can backfire.
The 2007 Oregon legislature capped interest rates on payday loans, effectively putting the lenders out of business. What happens now to the people who relied on those loans? While it’s too early to know for sure in Oregon, we do have some data about what happened in two other states that banned such loans in 2004 and 2005. The preliminary conclusions strengthen my concern that such laws can do more harm than good.
Let me read you the abstract of a report* by the Federal Reserve Bank of New York:
Payday loans are widely condemned as a “predatory debt trap.” We test that claim by researching how households in Georgia and North Carolina have fared since those states banned payday loans in May 2004 and December 2005. Compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check “protection” sold by credit unions and banks or loans from pawnshops.
It appears that banning these borrowing opportunities, even if they appeared to be bad opportunities to lawmakers, ended up hurting the very consumers the bans were meant to help.
I have little problem with bills that require full disclosure and reporting of loan and foreclosure activities. But I urge you to resist substituting your judgment for that of borrowers, lenders and consultants when it comes to the actual terms of such transactions. Chances are you’ll make things worse, not better, for those you’re trying to help.
* Payday Holiday: How Households Fare after Payday Credit Bans, Federal Reserve Bank of New York Staff Report no. 309, Donald P. Morgan and Michael R. Strain, November 2007
Audio of the both hearings are here:
Senate Commerce and Labor My testimony begins at 31:12.
House Consumer Protection My testimony begins at 1:38:55.