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Regulating consumer loans: An unjust assault on payday loan industry

July 7, 2006 - Salem, Oregon

With its two most recent articles ("High title loan costs unchecked" and "Payday lenders look for ways around cap," July 2), The Oregonian continues its one-sided and unjust assault on both providers and users of short-term loans.

The articles cite anecdotes about the plights of selected borrowers who apparently had nowhere to turn but short-term lenders and were victimized by the transactions they entered into. The articles empathize with the situations giving rise to the need for credit, but they attack the lenders who supplied solutions for people in very difficult circumstances -- and without providing any alternative solutions. The articles seem to suggest that all consumers should have a right to borrow money when they need it and that somebody ought to be there to loan it.

The consumer loan industry agrees. However, certain loan products are much more costly to provide than others. Legislating maximum fees and interest at a level that is below lenders' costs of providing targeted short-term loan solutions will cause those loans to disappear. Unless it is amended, the recent statute passed by the Oregon Legislature has placed limits on payday lenders that will cut their revenues by more than 70 percent. No business can survive such a reduction. Unless the statute can be significantly changed, it will quite effectively abolish payday loans. And if the Legislature extends those same limitations to all sub-prime consumer loans, then all short-term sub-prime loans will be eradicated. Eliminating the sources of emergency short-term cash would effectively end the right of some consumers to borrow money.

Payday loan customers have average household incomes only slightly lower than the general population. Lenders do not seek out or prey on the poor, as they have been accused of doing by consumer and religious groups. Payday lenders loan money on the promise and expectation that the borrower has the intent and ability to repay. According to the statistics gathered in 2004 by the Oregon Department of Consumer and Business Services, payday lenders write off for default only 3.5 percent of their loans, compared to 6.5 percent for traditional installment consumer loans. That means that 96.5 percent of payday loans are made to people who borrow responsibly and repay their loans as agreed. A small percentage of the 3.5 percent who default either knowingly borrow more than they can repay or suffer unforeseen circumstances that get them into serious trouble. That small percentage supplies consumer and religious groups with the anecdotal examples of consumer distress that has given rise to political overreaction.

Consumers who choose payday loans for short-term or emergency needs make informed choices. Fees and interest rates are clearly disclosed on all loan documents. In most cases, payday loans are these consumers' low-cost option, compared to the alternatives of high per-check bank overdraft charges, late rent penalties, utility shutoffs or other available borrowing options. Others are simply willing to pay a premium for the convenience of getting cash now, for whatever personal purpose.

It was consumers' need for short-term borrowing that gave birth to the payday loan industry and its resultant growth. If short-term lending is abolished, that need will not disappear. Those who fulfill that need have been demonized with terms like "buying licenses," "seeking loopholes" and "skirting the law." But if the critics have their way, it is consumers who will lose the freedom and choice to make their best decisions.

Steve Hanson is president of Oak Brook Financial, the largest network of payday loan stores in Oregon.

News Source

The Oregonian, Steve Hanson, Letter to The Oregonian

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