The Case Against New Restrictions on Payday Lending

In the wake of the financial crisis, Congress and federal regulators have moved aggressively to impose new regulations on a variety of consumer credit products. Thus far, Congress has focused on mortgages and credit cards, which have seen record high default rates in recent months. However, Congress is also considering new regulations on non-traditional lending—although there is no evidence that such products were related in any way to the financial crisis. The principal legislation is H.R. 1214 (the Payday Loan Reform Act of 2009), which, if enacted, will impose heavy restrictions. Economic theory and empirical evidence strongly suggest that these paternalistic regulations would make consumers worse off, stifle competition, and do little to protect consumers from concerns of overindebtedness and high-cost lending. This paper will show how these unintended consequences may occur as a result of heavy restrictions on payday lenders.