Regulatory Overkill

Published July 21, 2008

It is more difficult to get a loan today than at any time in recent memory. Financial institutions, including major lenders, have become increasingly risk-averse, raising their loan requirements and essentially preventing thousands of borrowers from obtaining a loan. It seems ill-timed to cut off the few alternatives available to many borrowers.

Protecting citizens from fraud is an important and justified role of government, but U.S. Senator Dick Durbin’s proposed interest rate cap of 36 percent (“Durbin rate cap could close payday loan loopholes,” July 19) ignores the benefits of non-traditional consumer loan services and their role in the lending market. These loans emerged to meet consumer demand when other sources of financing were unavailable. They are risky but clearly more desirable than the alternative, bounced checks and late fees, which only further damage a blemished credit history.

In a study conducted by the Federal Reserve Bank of New York, researchers found that states with bans on payday lending experience an increase in bounced checks, higher rates of bankruptcy, and more complaints related to collections. An expansion of existing regulations in Illinois would serve only to further erode the ability of consumers to choose for themselves which lending services are the most appropriate for their needs.

If a lending practice proves fraudulent or exploitive, the market will quickly force out those products. The decision as to whether short-term loans are acceptable should lie in the hands of consumers, not state officials.

Matthew Glans ([email protected]) is a legislative specialist for The Heartland Institute.