The National Defense Authorization Act (NDAA) is being debated in Congress, which naturally means that members are offering amendments entirely unrelated to our nation’s defense in hopes of advancing policies that probably wouldn’t win support if they were publicly debated and considered.
One such amendment, introduced by Representative Katie Porter (D-CA), seeks to limit the ability of servicemembers, veterans, and surviving spouses to access small-dollar, high-interest loans, typically referred to as payday loans.
Putting aside the merits of the policy itself, the amendment is an attempt to short-circuit a review and legal process that is well underway. According to the Federal Register, the Bureau of Consumer Financial Protection issued a rule in October 2017 to restrict how high-cost, short-term financial products, including payday loans, can be offered. The rule took effect in January 2018, but had a compliance date of August 19, 2019. The rule was challenged in federal court, and in June 2018, the federal court issued a stay, postponing the August 19, 2019 compliance date for fifteen months to give time for further federal review and clarification.
Rep. Porter’s proposed amendment to the NDAA resurrects the August 19th deadline, which means that some (not all) provisions in the rule would go into effect in a little more than a month. Compliance in this short a time frame would be effectively impossible.
Yet, it isn’t just the method of creating this policy that’s problematic. The policy itself is also misguided paternalism. It falls in the category of so many government rules: It sounds good, but in reality, it’s not.
Certainly, it sounds like a worthy goal to prevent people from making what seem like very poor financial decisions. Everyone would prefer that people plan ahead, build up an emergency fund that can be drawn upon when needed, and avoid bouncing checks and incurring fees, or borrowing at high interest rates. But the reality is that sometimes people end up in a financial jam with no good options.
What do people with limited resources and urgent financial needs do when small-dollar, high-interest loans are outlawed?
A study by the New York Federal Reserve found that Georgia and North Carolina’s bans on small-dollar loans created new problems, rather than solving them. As IWF’s Charlotte Hays explained: “consumers bouncedmore checks, filed for Chapter 7 bankruptcy protection at a higher rate, and complained more to the Federal Trade Commission about lenders and debt collectors.” Those extra bounced-check fees added up to an additional $36 million in Atlanta in the year following their ban on small-dollar loans.
Washington, D.C. elites may cringe at the idea of loans with interest rates well into the double digits, but the people who make use of these loan products, know that sometimes they make sense. So do financial industry leaders. BankingExchange.com, an industry information website, highlighted research by the economic research firm Moebs Services, showing how banks have increased overdraft fees on checking accounts, driving people into the payday loan market:
The average price of a $100 payday loan is $18, the same price a typical overdraft charge was in 2000. But since then, banks have raised the median price of an overdraft charge to $30— increasing the price of a service that has not increased in value.
“So the consumer says, ‘I’m not going to put up with that’,” says Moebs, “and who’s standing there to provide help? The payday lender.”
Regulations restricting how much payday loans can charge and be structured will mean that providers will stop offering loans to customers with the worst credit histories. Those are people who are the least likely to have other options, meaning they will end up paying higher fees to traditional banks or even turn to a black market.
This new regulation should be fully analyzed and vetted, not wedged into a bill where it doesn’t belong.