Don't limit consumers' loan options

[cashlenders]

Federal Reserve Chair Ben Bernanke seems stressed - and so does the rest of the country. During less-than-optimistic testimony before Congress in July, Bernanke ran through a laundry list of our economic woes, concluding that "the economy continues to face numerous difficulties."

On the same day, an ABC News/Washington Post poll revealed that two-thirds of Americans are "stressed" about their financial situations, including one in four feeling "major stress." That's no surprise, considering that credit options for debt-ridden Americans seem to be vanishing by the day. These Americans are watching nervously as the country's biggest lenders, Fannie Mae and Freddie Mac, are thrust into turmoil. So consumers who are wracked by upside-down mortgages and hassled by bill collectors watch this Freddie/Fannie story and wonder how the troubled lenders' situation will affect them.
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Detroit Free Press columnist Susan Tompor has a common-sense answer: "Don't expect to find easy money."

That warning seems pretty savvy. Even consumers with good credit are having a harder time getting loans. The plight is substantial for small-business owners as well. According to the U.S. Small Business Administration, about 10 percent fewer 7(a) loans - its most popular - were issued than in the same period in 2007.

So it shouldn't take a doctorate in economics to see why further whittling Americans' debt-management options isn't going to alleviate anyone's financial anxiety.

The political battles over the short-term "payday" loan industry are a good example. Payday lenders are already being chased out of Ohio, Virginia and New Hampshire. They're downright blacklisted in Arkansas (where the attorney general's office said recently that its goal is to stamp out the industry). In Iowa, the Legislature capped interest rates on car-title loans and introduced but did not pass measures to restrict payday lending.

Who gets hurt by these laws?

Studies show that creditworthiness (or a lack of it) is the strongest predictor of whether consumers will use payday loan services. And eliminating the option, especially in these stressful times, does nothing to help the less-than-creditworthy.

The paternalistic mentality driving anti-payday lending legislation is deeply misguided and will hurt borrowers without strong lines of credit. Former Sen. George McGovern explained in the Wall Street Journal earlier this year that after a ban on payday loans, "the consumer has the same amount of debt, but fewer ways to manage it." And a study by economists with the Federal Reserve Bank of New York reinforces his argument. It found that after a ban on payday lending in North Carolina and Georgia, residents turned to more expensive options, including bounced-checks, overdrafts and bankruptcy filings.

So what if the payday loan business isn't the most popular or the prettiest niche of the financial-services industry. For millions of customers, its availability means that the car gets an urgent repair, a critical check doesn't bounce or the electric bill gets paid.

Considering the borrowing alternatives, a $15 flat fee for a $100 two-week cash advance doesn't seem like such a bad deal.

Eliminating a major short-term credit option for financially stressed adults is hardly an act of mercy. We should be helping Americans find more debt-management options - not taking them off the table.