The problem with payday loans isn’t the fees or the high interest rates, according to an article published on a blog maintained by the Federal Reserve Bank of New York. The problem is consumers who roll over one payday loan into the next. And before anyone should talk about reforming the payday lending industry, there should be some research and studies done to assess how limiting rollovers impacts payday loan borrowers.
The call for more research flies in the face of an announcement earlier this year by the Consumer Financial Protection Bureau that it is considering a rule that would further regulate and attempt to reform the payday lending industry. The CFPB went as far as to call some payday loans “debt traps” and suggested a number of ways that the loans could be regulated to protect consumers, including: ensuring that the lender affirms the borrower’s ability to repay a loan, require borrowers to adhere to a “cooling off” period between taking out payday loans, and capping the number of times a borrower could rollover a payday loan.
Today’s blog post links to a number of studies and research papers on the payday lending dilemma, but calls for more research before moving forward with rules or regulation.
A delicate welfare calculus should also precede reform: while rollover caps might benefit the minority of borrowers prone to behavioral problems, what will it cost the majority of “classical” borrowers who fully expected to rollover their loans but can’t because of a cap? Without answering that question, we can’t be sure that reform will do more good than harm.
Economists are not even able to come to a consensus as to whether payday loans are good or bad. Of the half-dozen studies that have been published, the post notes, the results are mixed about the pros and cons of payday loans.
