In November, I wrote about how the payday loan industry is being regulated out of business as government know-it-alls determined they were bad for consumers. Regulating the industry took an option away from consumers in need, but as it turns out, the Dodd-Frank credit card reform legislation – effecting more traditional financial institutions – makes it even worse for those who need a few dollars.
The November post discussed the morality issue along with the traditional conservative verses liberal view point of payday loans. States around the country were making it impossible for these companies to make a profit. Low-income families who needed a few hundred dollars for a couple of weeks were out of luck.
Sure, the interest rates seem extreme, but when providing short term loans – generally one to three weeks – the fees needed to be higher since the costs were higher. The industry in general made a profit margin of about 10 percent, not at all unreasonable. The issue is media reports keep referencing the yearly interest rates for these loans instead of concentrating on the short term aspect of this financial option.
So, with payday businesses leaving the market, the option for those who need short-term funds is limited. The obvious choice is to use a credit card which can provide a short window at an interest rate that is considered ‘more reasonable’ by the know-it-alls.
There are problems of course. Because of the financial regulations effective this week – the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act sponsored by retiring Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D- Mass.), and signed by President Obama – consumers will soon experience higher interest rates on all cards, fewer credit cards being made available to low-income earners, and lower credit limits on the cards they do issue.
From The Wall Street Journal.
[I]n the wake of new federal limits on how credit-card issuers can price risk and adjust interest rates, more Americans had to go to payday lenders, pawn shops and local loan sharks in order to get credit. It’s simply the latest installment in the old story of regulators thinking they can wish away the unintended consequences of consumer credit regulation.
But as noted back in November, the government is regulating payday operations out of business across the country.
Put the regulation on payday lenders together with the CARD Act and we’ve got low-income earners heading to pawn shops and loan sharks for short term loans. Of course the government congress-critters and bureaucrats specifically introduced these additional regulatory steps to help solve a problem for consumers … and all they have done is made it worse.
Update: I should have noted the author of the opinion piece in the WSJ, Todd Zywicki also writes for our favorite legal blog, Volokh Conspiracy.