Regulation, Access to and Costs of Financial Services, and the Payday Lending Example

by Jeff Sovern

Critics of consumer protection regulation routinely assert that such regulation reduces access to credit and increases consumer costs.  For example, here is what Todd Zywicki wrote in his recent testimony before the Senate Banking Committee (footnote omitted):

By imposing a regulatory regime that substitutes the judgment of bureaucrats for consumer decisions, Dodd-Frank has raised prices and cut off access to mortgages, credit cards, and bank accounts, harming millions of American families that use credit to improve their lives and depressing economic growth.

 This critique also surfaces during discussions of payday lending.  Quoting again from Zywicki's testimony:

Choking off access to payday loans, auto title loans, and other similar products without ensuring the availability of reasonable alternatives could impose substantial harm on many consumers, resulting in bounced checks, eviction, termination of utilities, or even reliance on illegal loan sharks.

Curiously, on this point Zywicki cited to a 1968 congressional writing on loan sharks rather than more recent scholarship casting doubt on the so-called loan shark thesis.  See Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Washington & Lee Law Review 807 (2012). But Zywicki often refers to loan sharks in general and Anthony "Fat Tony" Salerno in particular, even though Salerno has been dead for more than twenty years. 

Despite Zywicki's critique, sometimes the absence of consumer protection regulation might impose precisely the harm on consumers that Zywicki warns it causes.  Allison posted a link last week to a new CFPB Report about the effects of online payday lending. Among the findings:

Half of all accounts have at least one payment request that results in overdraft or failure due to NSF during the 18 month observation period. These accounts are charged an average of $185 in overdraft and NSF fees by their institution on attempted payment requests from online lenders during the 18 months.

In other words, appropriate payday lending could prevent the bounced checks that Zywicki suggests payday regulation will cause. And now, look at the report's findings about access to financial service:

Accounts of borrowers who use loans from online lenders are more likely to be closed by the end of the sample period than accounts generally (23% versus 6%, respectively). Accounts with any online payday loan payment request that fails are particularly likely to be closed, with 42% of such accounts closing by the end of the sample period.

To be sure, correlation is not causation. Maybe the accounts were heading for closure anyway.  But pending additional investigation, we now have more reason to believe that payday lending reduces access to financial services than that it contributes to loan-sharking. And just to be clear, regulation that reduces access to some financial services can be a good thing.  Think of the millions of consumers who lost their homes in the mortgage meltdown because of predatory loans.  Wouldn't they have been better off if they had never entered into those loans?

I wonder if Zywicki will now call for payday lending regulation, or if he will continue to rely on the loan shark boogeyman.


0 thoughts on “Regulation, Access to and Costs of Financial Services, and the Payday Lending Example

  1. Matthew Bruckner says:

    I’ve heard Zywicki suggest the possibility of loan sharks as an alternative to payday lending. He never notes that some people who go to payday lenders are unlikely to go to a loan shark for a bunch of reasons, including the following three. First, some people (maybe not homo economicus) would likely be put off by the illegality of loan sharks or at least factor that into their calculus. Second, some people may not know any loan sharks (i.e. there are transaction costs to identifying a possible illicit lender). Third, some people may value their joints above their credit ratings, and would be willing to risk the latter but not the former.
    In any case, love the phrase “loan shark boogeyman.”

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