Predatory Loans or Free Market?

Last week, Oklahoma State Senator David Holt announced on Twitter that he was pulling Senate Bill 1314 after public opinion came out strongly against the bill, saying he did not feel it would pass.  The proposed bill would have allowed companies in Oklahoma to lend up to $3,000 with interest capped at twenty percent per month, which would be $600.  Senator Holt indicated he thinks such a loan would be bad for those borrowing but that it should be legal anyway.

Oklahoma Watch – The lending program, known as a flex loan, is similar to payday loans and critics say it can lead to the same results – an endless cycle of debt.

Holt said members of the payday lending industry approached him about writing the bill, SB 1314, in order to avoid pending federal regulations from the Consumer Financial Protection Bureau.

The industry requests align with his goal of less government regulation of private industry, Holt said.

Holt agreed the loans are a raw deal for residents, but added the government’s job is not to stop people from making bad decisions.“I guess one man’s predatory lending is another man’s free market,” Holt said. “If it’s a bad product, it will not succeed.

“I don’t think people should use these products. I certainly won’t use these products.”

Ezekiel Gorrocino, a government relations and policy associate with the Center for Responsible Lending, said it’s telling that the payday loan industry is already looking for a way to avoid federal regulations.

A key part of those regulations requires that lenders check to ensure customers can make the loan payments before giving them money, Gorrocino said. While traditional car loans and mortgages do that, payday loans do not.

Those regulations may be finalized and released by the end of the year.

“The ability to pay is the something you should check before you issue a loan,” Gorrocino said. “The fact they are trying to get out of common sense rules before they are issued shows they want to continue to trap borrowers in a cycle of debt.”

On Monday, Holt said no one forces Oklahomans to take out payday loans, and allowing flex loans ensures they have options when new federal regulations kick in.The interest on either loan is exorbitant, but residents need to take responsibility for their own choices, Holt said.

Gorrocino, though, said allowing flex loans does not improve the options for those living in poverty.

“It’s a false sense of choice,” Gorrocino said. “That’s not throwing them a lifesaver. You’re sinking them deeper.”

Some religious leaders here in Oklahoma came out against the bill before it was pulled, saying payday loans are “an evil practice.”

KFOR – “We are to bring good news to the poor.  Payday lending is not good news to the poor.  It is the worst news possible,” said Pastor Mitch Randall, with New Haven Church in Norman.

Pastor Randall is part of a group of religious leaders who have come out against SB 1314.

The bill would allow payday loan companies to loan up to $3,000 at a time, instead of just $500.

“They are making money on the backs of the poorest citizens of our state and that is immoral.  It’s wrong and they need to be out of business,” said Randall.

“Predatory lending, it is a debt trap.  It is, they seek out those who are most vulnerable,” said Jill Hatcher, whose husband is a pastor at First Baptist Church in Norman.

The Oklahoma Policy Institute has also come out against the bill, saying it would allow lenders to charge up to 20% monthly interest.

On a $3,000 loan, that would be $600 every month in interest and fees.

“That’s crazy.  I wouldn’t take out a loan at 240% APR, would you?” said Hatcher.

Sen. David Holt authored the bill.

“I’m not sure government’s the place to protect people from themselves.  I think that may be more of a role for the churches,” said Sen. Holt.

Holt says while he doesn’t necessarily think pay-day loans are a great option, he believes in the free market and offering consumers different options; as long as there are adequate disclosures.

“If it’s a really bad financial product for people, I would like to think they won’t pursue it.  And we as government don’t have to tell them that.  That they will just go elsewhere,” said Holt.

Opponents say they will work to defeat the bill, possibly replacing it with one that would drive these businesses out of our state.

“This is an evil practice,” said Pastor Randall.

Jamie Fulmer, Senior Vice President of Public Affairs for Advance America, Cash Advance Center, Inc. sent us this statement.

“Hardworking Oklahomans value the flexibility, simplicity and reliability of regulated short-term credit products, which enjoy high customer satisfaction. Consumers are best served when they have access to a wide variety of choices, and when their local leaders foster a well-regulated, transparent marketplace. Senate Bill 1314 would do just that, offering borrowers affordable, accessible credit tailored to their needs.”

loanSenator Holt is completely correct.  It is not government’s place to protect people from themselves.  People should be able to make decisions for their own lives and to suffer the consequences for bad decisions.  Here in Oklahoma it has been pretty evident that many people want payday loans to be available.  As of 2012, Oklahoma was the number one state in the nation for the percentage of population using short-term loans.  Lenders loaned out $399 million to 163,610 Oklahomans that year.  It is not beyond the realm of thinking to see that many people do want access to payday loans.  If it’s a legal product, all disclosure are made and a person signs the loan agreement of his own free will then government should stay out of it.

I’ve no doubt that Pastor Randall and others meant well in their efforts to kill this bill, but really all they did was ensure that the free market in Oklahoma was a little less free and that Oklahomans have fewer options when making personal choices about their private finances.  When you start going down the road of thinking that government should save people from themselves you are opening up Pandora’s box.  Do people really want the government making decisions about what is best for their lives?  Do Pastor Randall and others want the government to begin dictating to people what to eat?  What products to buy?  What housing to purchase?  How much television to watch?  Suppose the government decided that it’s best for everyone to join a gym and an hour of exercise every day is mandated under threat of prison?  Remember all the hoopla when New York City Mayor Bloomberg tried to ban large soft drinks?  Thinking that government should save people from themselves could involve a whole host of things and not just whether or not to take out a payday loan. 

No, it’s already too much that some people in suits in D.C. have decided that they should have the power to tell us how much water our toilets can flush or what kind of light bulbs we put in our homes.  When you let the government dictate what kind of products are and are not available to you, you’re giving the government your liberty and your freedom to make choices for your own life.  Elected officials should never have the power to tell people what is good and what is bad for our lives.  Such power is totalitarian.

I also agree with Senator Holt that payday loans are something to avoid and, like him, I would never use such a product.  Payday loans are financially irresponsible.  That said, people should have the freedom to be financially irresponsible.  If more legislators in the Oklahoma legislature shared Senator Holt’s views on liberty the bill would have easily passed, had he not pulled it.

Senator Holt has mentioned the mission of the Cato Institute recently and it’s clear he believes it and legislates accordingly:  “The mission of the Cato Institute is to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace.”

True liberty means having the freedom to fail.   If you truly understand liberty then you realize that losing the freedom to fail also means losing the freedom to succeed.  There are plenty of people in this country who are quite fine with government being their mommy and daddy and making decisions for them about their lives.  If you want to be like that, be prepared for government to begin making other choices for you, whether you want it to or not.

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