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Payday loans in review

Along one of the main streets of our nearst commercial center, McMinnville, there’s a yellow-front storefront offering payday loans. It has been quietly going about its business for some years, after a big batch of others folded tent a few years back, in the wake of a new Oregon law limiting how much such lenders could charge for their loans.

A state fact sheet from 2006 said that “In Oregon, the number of locations increased from 184 in 2001, when the “short-term personal loan license” was created, to 323 as of Dec. 31, 2004, and 360 as of Dec. 31, 2005. The dollar volume of payday loans in Oregon increased from $63.8 million in 1999 to $250 million in 2004. The number of Oregon payday loans extended annually increased from approximately 285,000 in 1999 to 747,542 in 2004. Charges or fees for these loans, when expressed as an Annual Percentage Rate (APR), can often exceed 500 percent.” It said that of 1,221 borrowers examined, 59% took out five or more payday loans in the previous year – were using the service repeatedly.

That was shortly before the legislature passed the law limiting how much the payday loan businesses could charge. The law limited the annual interest rate from 528% to 156% and drew out minimum loan duration from 14 to 31 days, along with some other changes. After the limits, most of the businesses left Oregon – an indicator of how much they were charging – though some remain, and evidently thrive.

All this was before the massive economic turndown, and you might expect a call for more laxity in payday loan regulation. But there hasn’t been much, save for an August 31 blog post by the Cascade Policy Institute.

Ready, Fire, Aim for Oregon’s Payday Lending Policy” make the argument that “Legislators have jumped the gun in banning traditional payday lending in Oregon. They aren’t protecting vulnerable consumers as much as denying a necessary service. Furthermore, there has not been a major push to provide consumers with a convenient, viable alternative.”

This seems worthy of note, because of the economic environment, on several grounds.

First, the service isn’t being denied – payday loan operations are active businesses in locations around Oregon (as elsewhere); they evidently can function under the current limitations. More could set up shop if they chose; but evidently few have chosen. That may speak too to demand for the service.

There are other peculiarities. Angela Martin, executive director of Economic
Fairness Oregon
, noted one: When the lending rates at these shop dropped per the state law, the norms of supply and demand would suggest a spike in the demand to take advantage of the lower numbers. The spike never happened. Martin suggested that some of the activity in payday lending represented a “false demand” of consumers borrowing from one payday lender to pay off a loan from another, and similar activity.

In any event, even in the wake of the bum economy, “they can’t point to any evidence that usage has gone up.”

The Cascade post also pointed to an October 2008 Dartmouth University study on the Oregon loan rate cap, and said “The results suggest that restricting access to expensive credit harms consumers on average.” The study, commissioned and paid for by the industry (a red flag), surveyed comments made by customers of payday loan operations (from lists provided by lenders), but there wasn’t much look-behind – and such customers are naturally likely to rationalize their choices.

A January 2009 University of Washington critique of the study (which seemed to be longer than the Dartmouth study itself) said that “relies on a single, small-sample survey fraught with methodological flaws. Moreover, survey results do not support the claim that Oregon borrowers fared worse than Washington borrowers on any variable that can be plausibly attributed to Oregon’s 2007 payday-loan (PL) interest-rate cap legislation. In short, Zinman’s claim is baseless. In fact, Oregon respondents fared better than Washington respondents on two key variables: on-time bill payment rate and avoiding phone-line disconnects. On all other relevant variables they fared similarly to Washington respondents.”

There are also out of state lenders, and Cascade does note a news report saying “there already has been a rise in complaints against out-of-state online payday lenders conducting fraudulent and illegal business practices.” But does that suggest in-state operations would be better?

The ironic concern about the out of staters Cascade expressed was that “These are the real risk to consumers because the Oregon Attorney General’s office has little control over them.” Actually, the state has been going after them. The state Department of Consumer and Business Services said on July 13 that it had “issued a cease-and-desist order against online lender Global Payday Loan LLC and fined the company $90,000 for violating Oregon’s payday lending laws. The unlicensed Utah company loaned seven Oregon consumers between $100 and $500 each through its website, The company then charged the consumers interest rates between 353 percent and 2,737 percent.” In March, it “issued a cease-and-desist order against online lender E-Payday-Loan and fined the company $10,000 for violating Oregon’s payday lending laws. The unlicensed Utah company loaned an Oregon consumer $350 through its website and then charged the consumer approximately 842.31 percent interest on that loan over a 52-day period.”

Not a real ringing endorsement for deregulation, in this arena at least.

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