Maybe "payday loans" aren't so bad after all, according to a new staff report by the Federal Reserve Bank of New York.

It says that after Georgia and North Carolina banned all such high-interest loans, former patrons tended to migrate to even costlier alternatives, such as bouncing checks — and paying expensive bank charges to cover them — or filing for bankruptcy. The former patrons also report being hounded more by debt collectors.

"Our findings raise obvious policy questions," authors Donald P. Morgan and Michael R. Strain wrote. "Progressives may call for something better than either payday credit and (check) bounce protection. We are all for that, but banning payday loans is not the way to motivate competitors to lower prices or invent new products."

Debate over payday lenders has been growing in Utah, which is seen as one of the states with the fewest rules and oversight for the payday industry. However, a growing number of Utah cities have restricted the number of such businesses they allow in their borders.

A working group of the Utah Legislature is preparing legislation to require collecting more information from the industry here, including how many of its loans are really paid on time, how many are extended, what interest rates are charged, how many loans are made overall, and where loans are being made.

Ed Leary, commissioner of the Utah Department of Financial Institutions, told the Legislature in October that "additional data collection is probably warranted so we can better understand the industry." Now, the industry and its critics often wage a he-said, she-said battle over whether it is harmful or helpful to the poor.

Payday loans are usually given for two weeks. A Deseret Morning News study in 2005 found that median annual interest on them in Utah was a whopping 521 percent, or $20 for a two-week $100 loan. Critics contend that the needy often cannot pay them off on time and must take out more loans to cover them — creating a spiral of debt.

The industry itself says the loans help the needy avoid even costlier forms of financial help. The new preliminary report by the Federal Reserve Bank of New York agrees, after studying what happened when Georgia and North Carolina recently totally banned payday loans.

The report said, "Georgians and North Carolinians do not seem better off since their states outlawed payday credit: They have bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 ('no asset') bankruptcy at a higher rate."

The reserve bank added that its findings are consistent with industry arguments "that payday credit is cheaper than the bounce 'protection' that earns millions for credit unions and banks. Forcing households to replace costly credit with even costlier credit is bound to make them worse off."

Not surprisingly, the payday-loan industry hailed the new study.

Darrin Andersen, president of the Community Financial Services Association of America, said the study and experience from industry customers show "that people need access to short-term, low-denomination loans, and deprived of these, they are forced into other less desirable alternatives."


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