Bad Bounce

Payday lending bans


A new report finds that banning payday lending—small, short-term, high-interest loans available from companies like Cash Advance and Check 'n Go—makes customers worse off.

The study, released in November by the Federal Reserve Bank of New York, looked at two states where payday lending has been banned: Georgia and North Carolina. Authors Donald P. Morgan of the Federal Reserve and Michael R. Strain of Cornell University found that the citizens of those states bounced more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy more often. The correlation between reduced payday lending and increased credit problems, they write, "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."

Industry critics charge that the $15 fee that payday lenders charge for a two-week $100 loan is exorbitant, amounting to 391 percent annually if the loan is rolled over for a year, accruing $15 every two weeks. The Community Financial Services Association of America, an industry group, did the math on the rates incurred with other options, and finds that a $100 bounced check garners a $54 fee, which comes out to an annual percentage rate of 1,409, and a $37 late fee on a $100 credit card balance amounts to an annual percentage rate of 965 percent. The study's authors confirm this pattern: "Forcing households to replace costly credit with even costlier credit is bound to make them worse off."

In a dozen other states, including New Mexico, payday lending is already highly regulated or banned. Several states, including Ohio and Virginia, are currently debating curbs or bans on payday lending.