Don’t limit credit options for struggling families
The Roanoke Times
February 2, 2009
by: Tim Miller
Miller is the communications director at the Center for Consumer Freedom, a 501(c)3 nonprofit organization dedicated to promoting consumer choices.
The credit crunch has made getting a loan more difficult than ever, which is bad news for struggling businesses and individuals trying to make ends meet. As if that weren't bad enough, legislators who are being pressured by anti-credit activists have filed legislation to further limit the financial options of borrowers who need them most. There is a new push in the Virginia General Assembly to tighten access to short-term credit, on top of the restrictions introduced last year.
Some Virginians, now more than ever, depend on short-term lenders to offer them a new line of credit, as approved by the State Corporation Commission. But the activist-backed legislation would impose new rules to limit the already heavily regulated short-term loan products and eliminate this new credit option entirely.
Arbitrarily restricting borrowing options is exactly the wrong way to weather a recession. Even for workers who have managed to stay employed, mandatory furloughs and pay cuts are putting pressure on family budgets across the state.
Missing a paycheck can force parents into tough decisions, like whether to pay the heating bill or the pediatrician. And while gas prices are down from their highs last year, filling up the tank to get to work is still an expensive (and non-negotiable) proposition. Loans aren't perfect, but in difficult times they can, and do, help families stay afloat.
The ultimate irony is that while some loan options are coming under assault, policymakers have stood idly by while young Americans have begun overdrawing their bank accounts at an alarming rate -- a "borrowing" habit that actually costs more than any other conceivable short-term loan. According to a recent study from the Federal Deposit Insurance Corp., a two-week, $1 overdraft at many banks can result in a $37 fee, a staggering 96,200 percent APR.
Overdraft fees don't compare favorably to other, more traditional borrowing options. With a short-term loan, on the other hand, a borrower typically gets a $100 loan to cover expenses and agrees to return the money two weeks later with a $15 fee attached. But those who believe these loans are unfair are determined to "rescue" borrowers from the easy-to-demonize, short-term payday loans and short-term lines of credit. Their game plan? Regulate these borrowing options into oblivion.
These anti-loan activists are dead-set on destroying an industry -- even if it means depriving borrowers of a valued credit option at the same time. It's no secret that financial success depends on having a full financial toolbox. And sure enough, researchers from George Mason University and Colby College have found that access to short-term payday loans provides options that substantially improve a borrower's ability to financially survive.
So what's behind this policy of capping interest rates? In short, politics -- not economics. One high-profile lobbying group, the Center for Responsible Lending, supports the new Virginia law. One of its founders, Martin Eakes, also heads a credit union and loan operation that actually charges overdraft and bounced check fees that exceed those of typical payday loans.
Co-founders of CRL, Herbert and Marion Sandler, were recently parodied on "Saturday Night Live" as "people who should be shot" due to their involvement with the subprime mortgage meltdown. The Sandlers made billions offering "Pick-a-Pay" mortgages with low introductory payments that lured many homebuyers into debt that they couldn't afford.
No one pretends any borrowing is a cost-free solution to economic difficulties. But Virginians should be wary of allowing radical interest groups to pressure state legislators to further restrict short-term credit options.
Both scientific evidence and recent history make clear that eliminating these loans will do nothing to reduce debt. It will, however, give struggling Virginians yet another challenge to overcome.
