BuckeyeBlog

The ban on payday lending is headed to the Governor for his signature. Yesterday the House accepted the Senate version of the bill. Soon payday lending will be gone from the state.

In the House debate on the final version of the bill, Representative Chris Widener made this ridiculous claim: “It’s a product that consumers in Ohio…cannot handle under any circumstances.” Of course, there are no facts to back up that statement. Many consumers in Ohio do handle payday lending responsibly. As the testimony of Dr. Tom Lehman illustrates, Rep. Widener simply does not know what he’s talking about. Furthermore, the attitude that the consumers of Ohio are too stupid to manage their own financial affairs is about as good an example of political paternalism as you can get.

In perhaps the most ironic comment of the day, House Speaker Jon Husted said, “Some people shouldn’t have access to credit because they’ve demonstrated they can’t handle it – like Congress.” Besides illlustrating the disdain with which Speaker Husted holds Ohioans’ financial decision-making abilities, this statement is pretty rich coming from a legislative leader in a state with one of the worst business climates in the nation.

The Coalition on Housing and Homelessness in Ohio (COHHIO) has been a big supporter of the push to ban short-term loans, aka payday lending. There’s nothing wrong with individuals banding together as an organization to lobby government. That’s the essence of the First Amendment. But is it proper for taxpayer-supported organizations to do so? Or, to put it another way, should organizations to which you, as a taxpayer, are forced to hand over your money be pursuing a political agenda?

COHHIO receives a significant portion of its funding from government grants. Now, according to its tax forms (available if you are a member of Guidestar), it spent almost $500,000 in 2006 on lobbying. That’s more than it spent on “training and technical assistance” to help the homeless. Now, I’m sure there are requirements that the money it gets from the government is kept separate from its lobbying money and that COHHIO has the proper firewalls between funding sources. I’m not accusing them of breaking any laws. I’m concerned about the wider issues here. The government funds, at the very minimum, support the overhead and salary of COHHIO officials. Without these funds, COHHIO would have a difficult time doing its work, whether that is lobbying or providing “training and technical assistance” on homelessness issues.

You have no choice but to support COHHIO’s work. Even if you disagree with them, they get your money. Is that right? Is it right that a group gets taxpayer dollars and that this group may be working against your interests before the General Assembly?

Perhaps looking to focus attention away from his impending impeachment, Attorney General Marc Dann hopped on the anti-payday lending bandwagon yesterday with this report. In it, he decries the “well-documented abuses” of payday lenders (did his press secretary really write that phrase without thinking someone would notice the irony?).

The document Dann put out is merely a collection of anecdotes from dissatisfied payday loan customers and representatives from interest groups opposed to the industry. Dann claims that these stories prove that payday lenders seek to trap people in debt, that borrowers don’t like these loans, and prove a variety of other “abuses.” Unfortunately, he doesn’t seem to realize that the plural of “anecdote” is not “data.” A collection of stories proves absolutely nothing about the payday lending industry as a whole or its customers.

In an attempt to actually introduce facts to this debate, the Buckeye Institute has twice brought an economist to address the legislature on this issue. You can find his testimony — based on data, not anecdotes — here.

So the Ohio House passed legislation effectively banning payday lending. Why? As Republican Rep. Chris Widener said, “As legislators, sometimes we got to step up and we’ve got to do something.” Ah, yes, the desire to “do something.” Let’s forget the fact that sometimes doing something is worse than doing nothing. Politicians often feel the desire to do something, regardless of its merits, just so they can appear compassionate.

The Dispatch says, “Support increased for an interest-rate cap as more lawmakers, including Speaker Jon Husted and Financial Institutions Committee Chairman Christopher R. Widener, became convinced that the two-week loan model trapped borrowers in a debt spiral.” Too bad there is no evidence to suppor this contention. As I’ve stated here before, it is certainly true that many people who take payday loans have financial problems. However, these financial problems are not caused by the loans. Instead, borrowers’ financial problems cause them to take the loans. Eliminating the loans will not eliminate these financial problems. But, hey, legislators need to look like they are “doing something,” right?

In their quest to continue one-upping Democrats in taking away your freedom, Republicans in the General Assembly introduced legislation yesterday to effectively ban payday lending in Ohio. Based on the notion that some people are too stupid to make their own financial choices, this legislation should illustrate how far the supposed party of the free market has embraced the fatal conceit that the government should dictate your financial choices.

House Speaker Jon Husted makes this clear with his assertion that “While a lot of people would prefer that we minimize some of the regulations regarding borrowing, clearly as a nation and as consumers we cannot handle it very well.” Yes, some people cannot manage their own economic lives well. However, some others cannot manage the state budget very well. Has Mr. Husted forgotten about the financial difficulties facing the state? Perhaps when legislators solve those problems — and also find a way to stimulate growth in Ohio’s economy — they can lecture the rest of us on how we “cannot handle borrowing very well.”

The Cleveland Plain Dealer had an editorial today that advocated in favor of legislation by Representatives Batchelder and Hagan which would effectively ban payday lending. Unfortunately it does not appear that the editorial went through any fact-check process. While it is not a news story, I would hope that editorial writers would at least try to maintain some semblance of accuracy.

For instance, the editorial claims that “A 36 percent APR would amply compensate payday lenders for repayment risks.” That is simply untrue. A 36% annual percentage rate (APR) means that on a two-week loan (which is the term of a payday loan) a lender could only charge $1.50 per $100 borrowed. Considering the high default rate and high rate of overhead payday lenders incur, this would not even cover their costs. Make no mistake, a 36% APR is designed to drive payday lenders out of business. Opponents of payday lending should stop pretending otherwise.
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A bipartisan group of state Senators has introduced legislation to ban payday lending.

I’ve discussed the concept of banning payday lending and the faulty thinking behind such a ban here, here, and here. The paternalistic notion that some people are too stupid to make their own financial choices and flawed economic reasoning is animating the anti-lending forces.

It’s unfortunate that these tendencies seem to be so widespread among Ohio’s legislators.

In light of Attorney General Marc Dann’s payday lending hearings scheduled for today, it may be useful to discuss the organization that is largely responsible for trying to ban these loans in Ohio: the Center for Responsible Lending (CRL). This organization attacks certain lending practices for allegedly exploiting borrowers. However, there is research indicating that CRL is being funded by organizations that have business practices are not much different than those being used by payday lenders. While CRL’s research should be examined on its own merits (and it has been found lacking when examined by many economists, such as Dr. Tom Lehman), media members and legislators should question the consistency of CRL accepting funding from organizations that use the very practices it decries.

CRL is largely funded by the Center for Community Self-Help, which encompasses a variety of organizations, such as a venture capital firm and a credit union. These organizations cater to low-income Americans but often use the same tactics that CRL attacks when others do it. The Consumers Rights League recently completed a report that outlines some of the actions taken by organizations under the banner of the Center for Community Self-Help that are attacked by CRL when done by other organizations:

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In an effort to capitalize on the news surrounding housing issues, anti-payday loan folks are trying to blame these loans for foreclosures. There is no evidence to support the notion that “more people are turning to short-term loans with sky-high interest rates just to get by,” though.

Unfortunately, the biased reporter responsible for this piece fails to let the fact that “figures are hard to come by” dissuade him from quoting a variety of biased “experts” to support his unfounded thesis. Of course, these “experts” fail to educate the reporter on basic facts, such as that the interest rate on these loans (in Ohio at least) is 15%, not 800% as he claims.

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The Dayton Daily News story on payday lending illustrates a few important points about this issue:

Payday lending is popular. There are a fairly high number of stores throughout the Columbus area and the rest of Ohio. These stores can only be opened if there is a demand for their service. While payday lending may not be popular with some in the state, it is certainly popular with many people who use these businesses every day.
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