Yesterday, Google announced in a blog post that it was changing the terms of its advertising service to ban payday-loan ads. Their reasoning was that payday loans are harmful:
We will no longer allow ads for loans where repayment is due within 60 days of the date of issue. In the U.S., we are also banning ads for loans with an APR of 36% or higher. When reviewing our policies, research has shown that these loans can result in unaffordable payment and high default rates for users so we will be updating our policies globally to reflect that.
The post further suggested that the loans are “deceptive or harmful” and even “predatory.”
The first thing we have to understand here is that this will lower the information available to people who are already in pretty bad straits. Payday-loan customers tend to have very low credit ratings, and have exhausted all other options, like loans from friends or family, credit cards, or bank loans. They view payday loans as the least bad of other options, such as incurring a late fee, having the lights turned off, or making a visit to a loan shark.
There are a few customers who have an unrealistic assessment of what they can afford, but research shows that most customers have a realistic expectation of what it will cost and how long it will take them to repay the loan. Vast numbers of people who use payday loans do so without being deceived or preyed on.
What about the harm? Again, the academic literature shows that payday loans are not harmful and may even have a slight general-welfare benefit, as you might expect from something that provides a better option than the certain harms listed above. Indeed the most recent of those papers shows that the supposed “rollover trap” that the Consumer Financial Protection Bureau relies on as its main justification for regulating payday loans at the federal level is not really a trap at all. Most customers recognize that it will take more than the initial period to get out of their problem, and the lenders will only lend again to them if they have shown an ability to repay.
So I don’t know where Google was doing its research — perhaps it failed to take advantage of its own search engine? The academic (as opposed to advocacy) literature consistently fails to find evidence of deception, harm, or predation among licensed, state-regulated payday lenders. If Google was restricting its policy to offshore or illegal lenders, it might have a point, but it is instead imposing a blanket ban.
Payday lending, of course, is the #1 target of the unconstitutional Operation Choke Point, which does not even try to bother with a justification, but was presumably motivated by the idea of Obamaloans that I drew attention to here a couple of years ago. A bill to help rein in Choke Point passed the House earlier this year. Now Ted Cruz is back at work in the Senate, he will be pushing the Senate companion bill, along with Senator Mike Lee.
The bill will do two things:
- It will prohibit any federal banking agency from ordering banks to terminate customer accounts unless the regulator has a material reason other than “reputational risk,” the term used by the Obama administration to identify and target “high risk” businesses like firearms and ammunition sellers, pawnshops, and short-term lenders.
- The bill also includes a section that amends the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which federal agencies have manipulated to implement Operation Choke Point. The change ensures that the original intent of the law is preserved, so that fraud against or by financial institutions can be penalized.
It may be that actions like those of Senators Cruz and Lee are threatening Choke Point so much that Obamaloan advocates have turned to lobbying private companies instead. We should hope that Google’s competitors aren’t so easily misled.
Originally posted at National Review.