Unfortunately, the program has become another way for lenders to target the disadvantaged. I know what you may be thinking if you are familiar with Show-Me Institute’s work. “Wait, I thought you liked privatization?” Yes, I do. But this PACE program really is a combination of the worst of all options. The PACE program:

• Is a government program of questionable need in the first place. Is it really the government’s job to facilitate personal loans for new appliances?
• Was outsourced to the private sector with basically no oversight at all,
• Authorizes private lenders to use government taxing authority to collect on loans. PACE bills can be placed on your tax bill, and if you don’t pay the PACE bills, tax authorities can take your home on behalf of the lenders.

We learned about all of this through terrific reporting by investigators at Pro Publica. Jeremy Kohler and Haru Coryne documented how private lenders were making loans above the value of someone’s entire house at relatively high interest rates to people with risky credit histories. They were targeting these people and doing this precisely because they had greatly reduced risk. If the homeowners didn’t pay, the loan amounts would be put on the tax bills and the lenders would be able to take the homes eventually. Here are examples from the Pro Publica report:

But in St. Louis, an elderly widow said she had no idea she had taken on thousands of dollars in PACE debt, though she saw her property taxes rise sharply. A disabled couple in the Kansas City suburb of Raytown said they weren’t told of the impact on their property taxes; now they’re two years behind on their property taxes.

A Vietnam veteran and his wife in Kansas City are struggling to pay off a $21,658 loan for a solar panel array despite being enrolled in an energy assistance program; they said they just wanted to do something good for the environment.

A PACE loan is NOT a mortgage. Even with a mortgage, the private lender has to go through a civil process with their own lawyers to enforce the loan on the home. With a PACE loan, the county collector is required to do it for them. That is wrong. This situation is like taking out a loan for a new car, and then losing your house if you can’t make the payments. If the PACE private lenders were assuming more risk themselves, they would have been much more careful about their loans.

I have defended the title and payday loan industries in the past. Those companies loan very small amounts compared to what PACE programs will lend you—at admittedly extreme interest rates. But at least when you miss payments to the payday loan company, you don’t lose your home. (My understanding of title loans is they just work with vehicle title.) Those companies take some risk.

PACE lenders basically take on very little risk. Sure, if they loan more than the value of the house and don’t get any money back, you can say they are taking some risk. But how often will the recipient make no payments at all? Between the comparatively high interest rates cited in the articles and the availability of seizure for non-payment, the PACE lenders are incentivized to make large loans to people who might not normally justify the risk.

The St. Louis Business-Journal also has a very good story on this issue this week. There have been bills introduced to reform PACE in Missouri, and reforms are much needed. Some of the true heroes of this fight have been local county collectors who have pushed back against the involvement of their counties in this harmful program.

In my opinion, we should probably get rid of the entire program, but at the very least the ability of lenders to put the loan on your tax bill and take your home if you miss payments must be eliminated.

The post PACE Loans Are Out of Line appeared first on Show-Me Institute.

Just two weeks ago, Moody’s Investor Services, one of the nation’s premier credit rating services, revised Kansas City’s credit outlook to “negative.”

The negative outlook reflects the growth of the city’s pension obligation and, when coupled with the elevated debt burden, the increase of fixed costs outpacing revenue growth. Continued leveraging of the tax base or unabated expansion of the pension obligation will place downward pressure on the rating.

This comes as Kansas City leaders are asking voters to approve another round of debt, backed by an increase in property taxes, to pay for the sort of maintenance that the city should be paying for with our already-high property, sales and income taxes.

The problem is that city leaders keep throwing money at things like subsidies for downtown development and large consulting contracts instead of dedicating funds to basic services. Frequent borrowing and an increasing debt load mean lower credit ratings and higher borrowing costs—the city seems locked in a payday loan–like cycle. Moody’s seems to recognize this even if policymakers don’t, and citizens may have to take matters into their own hands if this cycle is to be broken.

The post Moody’s Issues Negative Outlook for Kansas CIty appeared first on Show-Me Institute.

Kansas City borrows a lot, too. We spend more per capita on servicing our debt than every peer city we examined except St. Louis (the other peer cities we looked at were Tulsa, Oklahoma City, Omaha, Indianapolis, Denver, and Louisville). Because cities with higher incomes are better able to handle debt, we also looked at the city income-to-debt ratio. The results weren’t flattering. Kansas Citians earn $5.28 in income for every $1 of debt the city carries. Louisville and Tulsa had much better ratios, ($35.92 and $17.66 for every $1 of city debt, respectively).

The City borrows money for lots of things. For example, a few years ago the city borrowed $10 million from the airport just to cover the costs of TIF commitments. Kansas City issued bonds to help pay down its debts for the Power & Light District; this reduced annual payments in the short term, but increased the total amount of the debt. As a result of existing debt, the city cannot pay for basic services such as tearing down dangerous homes—and so it must borrow again to generate the $10 million needed.

Despite lofty city rhetoric against payday loans, we seem to be managing city funds using a similar model. Even the Mayor’s own Citizen’s Commission on Municipal Revenue reported in 2012 that the city’s debt ratios, among other things, “raise red flags.” Their report found that Kansas City has debt levels higher than all the peer cities it considered.

Right before Detroit declared bankruptcy it was borrowing money to cover employee bonuses. Kansas City hasn’t gotten to that point yet, but things are not looking up. Is this any way to run a city?

The post Kansas City Deep in Debt appeared first on Show-Me Institute.

Take for example the provisions of HB 1942, which would limit the annual interest on a payday loan to 36%. That may sound like a high limit to many, but remember that payday loans are not secured, meaning they are not backed by a car or a house or something else the lender can repossess if the person who takes the loan doesn’t pay up. They’re like personal loans from banks, which don’t come cheap. According to the Federal Reserve, the average personal loan interest rate is around 10%. For those without good credit, the rate approaches 30%.

Capping interest rates might sound like a good idea—sticking it to lenders and helping out regular people. But the people who take out payday loans are often those who would not qualify for a loan at 36% interest. Thus, a bill like HB 1942 would protect these people from high interest rates by cutting off their access to credit entirely. If someone’s car breaks down or they have a medical emergency and they need cash fast, telling them they should have saved more or joined a credit union six months ago will be cold comfort.

See former policy analyst David Stokes talk about payday lending in this Show-Me Institute video.

The post Missouri Legislature Looks to Further Regulate Payday Loans appeared first on Show-Me Institute.

At its peak Corinthian Colleges had over 100 colleges throughout the United States and Canada, including Everest College campuses in Earth City, Kansas City, and Springfield. Last month Corinthian Colleges, Inc., a large for-profit post-secondary education company, announced it would cease operations in all remaining U.S. locations effective April 27, 2015. The closure of Corinthian has left 16,000 students in quite the predicament. Many have taken on burdensome student loans, and now their school is closed.

In response, the Department of Education (DOE) announced a plan to wipe the debt slate clean for all students that attended these schools, a move that potentially could cost taxpayers $3.6 billion. Secretary of Education Arne Duncan defended the plan saying, “You’d have to be made of stone not to feel for these students.”

While I agree wholeheartedly that it is more than a minor inconvenience to have your school close, this is the wrong course of action. Indeed, this plan is wrongheaded and will simply encourage more of the behavior that created this crisis in the first place.

First, there is no need to forgive loans for courses students have already completed. They did not spend their time at Corinthian schools in vain. These students are still eligible to transfer their credits to other schools and continue their educations. Countless universities have made it clear that they want to help and are willing to open their arms to students who take the initiative to transfer credits and continue their pathway toward a better life. Long Beach City College President Eloy Oakley summed it up perfectly back in April: “They have options and no matter what, at the end of the day, we want them to finish their education, stay in the community and become economic assets to the community.”

Unfortunately, one of the catches of the DOE’s plan is that closed-school debt relief is only available to students who have not transferred their credits to another university. This bailout encourages students to throw away the years they have dedicated to attaining a degree and bettering themselves.

Second, this is potentially the largest debt relief program the government has ever offered students, and it sets a bad precedent. Taxpayers should not be held accountable for the billions of dollars students borrow in full knowledge of the consequences. Most of these students never would have attended a Corinthian College if it were not for the government’s subsidization of college loans. This bailout essentially means students bear no risk when making college selections; they can easily obtain college loans, and the government will forgive them if things go badly.

The students of the now-defunct Corinthian Colleges certainly got a raw deal, but that is no reason to enact measures that will encourage the same type of behavior in the future.

The post Corinthian College Crisis appeared first on Show-Me Institute.

The concern: Would the governor veto “Right to Try” this year, much like he vetoed the Volunteer Health Services Act last year?

The answer: Nope. He just signed it.

The Governor signed two health-related bills, which will provide Missourians in specific situations with additional options for medical treatment of illness and disease. House Bill 1685 allows drug manufacturers to make available investigational drugs, biological products, or devices to certain eligible terminally ill patients. House Bill 2238 allows the use of hemp extract to treat some individuals with epilepsy and also allows the Department of Agriculture to issue licenses to grow industrial hemp strictly for research purposes. House Bill 2238 contains an emergency clause.

I talked about this bill a lot in the last few months. This was, to me, an obvious opportunity to empower people to make each other’s lives better. The government should open doors for people to care for one another, not erect and maintain barriers to helping each other. “Right to Try’s” enactment is not only a victory of reform-minded policy, but more importantly, it is a victory for Missourians in need.

Congratulations to the Missouri House and Senate for sending the bill to the governor, to the legislators who sponsored the bill and powered this important conversation, and to the governor for making the right decision by adding his support to the unanimous votes of the legislature. Well done.

The post ‘Right To Try’ Law Gets Gov. Nixon’s Signature appeared first on Show-Me Institute.

At their core, the solutions so often pushed ahead for both issues — like capping loan interest rates and raising the wage floor — share a common problem of policy. First, payday lending exists in large part because its customers cannot get credit anyplace else; payday loans are very, very expensive, but if the alternative is having your gas or electric flipped off for lack of money, it is an option many of the working poor would want to remain available. Cap payday interest rates, which are basically set to account for the risk of default, and you will have fewer payday loans, which leads to other, potentially more difficult, problems for the lenders’ former customers. One way or another, those bills have to get paid. Payday loans serve that need and risk, for a price.

Raising the minimum wage presents a similar problem. By raising the floor for what workers must get paid, employers are incentivized to hire only the most skilled labor. In fact, studies show that raising the minimum wage harms the very people it is supposed to help — those on the bottom rung of the pay scale. As David Neumark wrote for the Show-Me Institute in 2006:

When a minimum wage goes up, the higher wages don’t always go to the workers who need them most. Minimum wage laws create winners and losers — the winners see their wages and incomes rise, while the losers are unable to find jobs or to work as many hours as they would like. If the winners were mostly unskilled workers in poor families, a minimum wage increase might be worthwhile. Unfortunately, this doesn’t seem to be the case.

Put more succinctly, raising the minimum wage makes it more difficult for low-skilled workers to find employment. While raising the wage sounds on the surface like compassion, in practice, it oftentimes means anything but.

These are serious issues that deserve serious debate from both sides of the issue. For now anyway, it appears public votes will have to wait.

The post It’s Official: Payday Lending, Minimum Wage Initiatives Off November Ballot appeared first on Show-Me Institute.

The issue is not going away forever. The supporters are continuing their effort to cap interest rates. I admire the desire to protect borrowers from abusive lending, but there is a better way than capping interest rates.

Interest rate caps at this rate will not only prevent high interest rates; they will eliminate payday loan shops in the state. Consequently, payday borrowers will probably not be able to acquire credit.  A better way to help borrowers is to make cheaper credit available. Do something similar to what this group is doing, and donate money to banks to offset losses from high-risk, short-term loans — thereby bringing down the interest rate.

For an excellent, succinct analysis of payday loan shops and regulations, click here. For more detailed commentary on the topic, see here and here.

The post Short-Term Lending Regulations Can Do More Harm Than Good appeared first on Show-Me Institute.

Central Bank has agreed to make old-fashioned signature loans (that means no collateral from the borrower) of $300 to $2,500. That’s also what payday and installment lenders do. Except Fair Community Credit will lend money for slightly longer durations and at a double-digit interest rate, not a triple-digit one. That way borrowers will have a better shot at paying off their loans, rather than defaulting.

What makes that possible is Fair Community Credit’s promise to cover any loan losses from a $200,000-plus loan guarantee pool donated by foundations and individual donors.

The market is creating relatively cheap short-term credit alternatives to payday loan shops. It is incredible to watch society tackle perceived problems through voluntary interaction without the forceful hand of the state. It will be intriguing to see the results of this venture.

A hat tip to John Combest for the link.

The post Can The Market Provide Cheaper Short-Term Loans? appeared first on Show-Me Institute.

And why 2,500 feet? Who came up with that number? This article sites the possibility of crime and lower property values around clusters of these businesses, but half a mile seems a little excessive. I would hardly call it a cluster if the businesses located just one block from each other, but even one block is an arbitrary number.

As you may recall from the mantra “location, location, location,” the location of a business can drastically affect profitability. The proposed legislation may make it impossible for more than one loan shop to take advantage of a good location. Since when is that reasonable? Businesses locate in a particular area for a reason – and unfortunately for the affected businesses, the reason they locate to a particular area may be the county’s legislation dictating the available options.

Additionally, why is the government singling out pawnbrokers and short-term loan shops? What next? The proximity of ATMs? When will the regulations stop?

For more Show-Me Institute payday loan material, check out this and this, as well as this awesome video.

The post Musings On Payday Loans And Pawn Shops In Jackson County appeared first on Show-Me Institute.

The post Show-Me Institute Free-Market Field Trip No. 2: Payday Loans appeared first on Show-Me Institute.

Eight million Americans cut up their credit cards this year, according to new data out from credit bureau TransUnion. Some of those plastic deserters were folks who faced scary economic conditions and decided to voluntarily cut back on debt spending. But for others, it wasn’t a matter of choice.

Millions of customers found themselves unceremoniously ejected from the ranks of the card-worthy thanks to last year’s Credit Card Accountability, Responsibility, and Disclosure Act, or Credit CARD Act. The new rules were supposed to “protect American credit card holders” by stopping “unfair rate increases.” Instead, credit card companies prepared for their new straitened circumstances by booting customers who would no longer be profitable (read: poor people and other risky borrowers), and hiking interest rates for others. American Express even offered $300 bonuses to customers willing to pay off their cards and close their accounts—a deal designed to entice the kind of cash-strapped customers AmEx was soon to find less lucrative.

But as the new rules make it less appealing for credit card companies to offer their services to certain segments of the population, most of those people don’t revert to a cash-only state of nature. The appetite for credit doesn’t vanish when credit cards are harder to get. Instead, customers turn to options like installment plans, layaway, and payday lending for quick credit—and the fees they pay for those options are as high or higher than the credit card costs Congress and the White House found so objectionable. And in an economy that runs on plastic, debit cards replace credit cards for everyday purchases.

Congress has destroyed credit card access for many low income individuals, but many states have already eliminated second- and third-best options like payday loans, and there is pressure for Missouri or its localities to follow suit. For instance, in this editorial from the Springfield News-Leader, Pastor Roger Ray argues that Springfield should ban payday loans because “on a per capita basis, no state takes such reprehensible advantage of the desperate poor, fueling drug and alcohol addiction and gambling addiction with easy-to-get but hard-to-pay-back loans.” The rest of the editorial is packed with evidence-free assertions, overblown rhetoric, and enough fallacies that it would take a book to refute them all, so I will confine myself to the consequences that would follow from such a ban.

As I showed in my op-ed about this subject earlier this year, restricting payday loans leads to more bounced checks, complaints to the Federal Trade Commission about lenders and debt collectors, utility shutdowns, and higher rates of bankruptcy. Payday loans are far from the best form of credit, but, in some cases, they are the best available to people. If Pastor Ray wants to eliminate payday loans in his community, I would encourage him and his congregation to start a fund to lend to low-income individuals at lower interest rates (or for free). If enough people share his sentiment, the payday loan industry can be eliminated without the force of law because very few people will opt for a more expensive loan over a cheaper one.

However, if the city government eliminates the loans by law, debtors will be forced to turn to even worse alternatives. I’m relatively certain Ray believes that a ban on payday loans would improve the lot of the poor, but that is an empirical question that most studies of the issue have answered with a resounding “no.” So, in the famous words of Oliver Cromwell, “I beseech you, in the bowels of Christ, think it possible you may be mistaken.”

The post Helping the Poor by Denying Them Access to Money appeared first on Show-Me Institute.

While the Chicago Outfit may have been a bit heavy-handed in its debt-collection practices, the interest rate the crew charged for a loan was a bargain. A bargain, that is, compared to the fees charged by the numerous payday loan outfits in Sacramento and throughout the state.

Carlisi and company extended short-term credit, or “juice loans,” for fees that pencil out to an annual interest rate of 260 percent. The Outfit may be disappointed to learn that they were working for chump change. Had they waited a few years, and then come out West, they could have become payday lenders and made some real money.

Although the gratification of physically collecting a loan isn’t allowed, in California it’s perfectly legal for a state licensed payday lender to charge up to 5,474 percent annual interest in this rapidly expanding niche lending business.

I’ve been meaning to comment on this for a while, because this is really fascinating data. Readers who peruse the article from which this excerpt is lifted will note that the author uses this statistic to argue that payday rates are excessive and exploitative. Well, perhaps, but this data doesn’t render that claim obvious. The fact that payday loan rates are higher than loan shark rates could simply suggest either that payday lenders face higher costs of enforcement, higher default rates, higher transaction costs, lower-quality information, or some combination of these factors.

It’s easy to see how a legitimate, white-market business would have higher overhead costs than a black market loan scheme, if for no other reason than that a white-market business must handle contractual disputes with tools furnished by the legal environment. No such encumbrances burden black market creditors. As former Show-Me Institute Policy Analyst Justin Hauke put it in an op-ed: “At least with a payday lender, default is settled in court. In the black market, it usually involves a crowbar.” In this sense, the higher prices of payday loans likely reflect the premium that consumers are willing to pay for safety.

The post Payday Loans vs. Loan Sharks appeared first on Show-Me Institute.

Hyperbole aside, the piece does make some good points about the lack of transparency in the hearing. Only representatives of the industry were allowed to speak, and the chairman of the committee does own a payday lending business — a clear conflict of interest. Although I happen to agree with the industry in this instance, the political process should be an open one. In the long run, legislative stalling and one-sided presentations will not preserve a healthy democracy or the free market. (It is worth pointing out, however, that town hall meetings on the issue also presented only the opposing side of the debate. Admittedly, those were not official government hearings, but the principle remains the same.) An open market produces better outcomes than a monopoly, and I believe that rule applies just as much to ideas as to physical goods and services.

Finally, I think this phrase shows a misunderstanding of my argument: “Mr. Payne’s point that usury today is not as bad as it was in Shakespeare’s time provides little comfort to the working poor and to those trapped in a spiral of debt.” My point is that if payday lending is regulated out of existence, people who currently rely on those loans for short-term credit will be forced to seek out loan sharks every bit as brutal as Shylock, who will demand a pound of flesh from those who cannot pay up.

The post In Which I Am Compared to the Devil appeared first on Show-Me Institute.

Tightening restrictions in Missouri gives an automatic boost to the strip club industries along Missouri’s borders, which in some cases may be even more unsavory. Closing the Missouri clubs earlier than in other states will also unwittingly create more post-midnight (including cross-river) traffic — a public safety concern that effects more people than the clubs’ patrons.

Well-intentioned measures frequently have unintended consequences.

Consider Springfield’s proposal to ban smoking in workplaces. Most workplaces are smoke-free by choice, but some businesses — like cigar bars and hookah lounges — are built around smoking customers. Although it’s likely that the ordinance will make some exceptions, those exceptions themselves create a tilted playing field for competition.

If you don’t like strip clubs and smoking (and I certainly do not), the simplest solution is not to smoke and not to patronize strip clubs or smoky bars. This an example of how the over-regulation of an industry potentially creates conditions favorable to further problems — while solving none of those it was intended to solve — and, in the process, harming the livelihoods of people who have elected to work in affected industries (after all, erotic dancers need to eat, too).

The fairest (and most effective) way to kill an unsavory business remains not to patronize it.

The post The Smoke-Free Cigar Bar and the Fully Clothed Revue appeared first on Show-Me Institute.

Accompanied by my trusty colleauges, John Payne and Josh Smith, I decided that if we were going to write about the payday loan industry we should know exactly what the process involves. I think John summed it up best in the video when he pointed out that it took him less time to buy cars than it took me to get $50 from a payday lender.

The post David Stokes Takes Out a Payday Loan appeared first on Show-Me Institute.

For starters, basic economic intuition would suggest that the payday lenders operate in a competitive marketplace. Fairly low barriers to entry (both legal and financial) into the market and the vast number of storefronts implies that individual stores face strong incentives to underprice their competitors. The result, barring collusion or market distortion, would be that prices are efficient, and not exorbitant.

The empirical evidence bears out this claim. A paper released by the FDIC Center for Financial Research used panel data from a large vendor to demonstrate that, despite the high interest rates on payday loans, the profitability of payday lenders does not statistically differ from the profitably of other financial intermediaries, like “reputable” banks. This should appeal to intuition: Payday lenders cater to risky populations that are vulnerable to financial stressors and prone to defaults. Risky customers warrant high rates to compensate for high default rates. This understanding regarding the level of market competitiveness and the condition of interest rate efficiency is crucial to understanding the policy effects of regulation in the payday loan market.

Last week, in a conversation with state Sen. Mary Still — one of Missouri’s most vocal critics of the payday lending industry and author of regulatory legislation in the General Assembly — I hoped to identify her latitude of acceptance for various payday lending policies (including deregulating the market further). I discovered that the two policy tools that are most likely to hear debate in the General Assembly are interest rate caps and providing incentives for banks to become “legitimate” vendors of payday loans. In some important ways, these approaches are troubling. If the market is already competitive and interest rates are efficient, an interest rate cap will choke the market and force lenders out — and banks shouldn’t have the ability to offer significantly cheaper rates on similar products. At any rate, revealed preferences would suggest that there is a reason banks aren’t willing to offer payday loans without incentives.

As I’ve discussed earlier, payday loans have the potential to be both helpful and harmful. Imposing interest rate caps on the market will stifle the ability of payday loans to help consumers, and incentivizing banks to offer such loans will do little to shield consumers from harm.

The post Payday Policymaking appeared first on Show-Me Institute.

From the editorial:

The big losers are the vulnerable Missourians who are being ripped off with impunity by payday lenders. Republicans have let the public down. Gov. Jay Nixon, a Democrat, hasn’t been much help either.

The highly charged language of this paragraph ignores that payday loans are consensual agreements made by individuals. Payday loan customers are not forced to take these loans, but rather take them out voluntarily for any number of personal reasons.

People who apply for payday loans usually have a high risk of default, or need money immediately — otherwise, a bank would be willing and able to offer a longer-term loan at a much lower interest rate. When payday loan stores lend out money, they have to take into account the risk of that loan remaining unpaid. Because these loans are made to people who are less likely to pay them back, that higher risk is counterbalanced by a higher interest rate. If rates are lowered by force of law, many higher-risk borrowers will find themselves entirely without access to legitimate forms of credit.

(For those who read Show-Me Daily often, you know that payday loans have been a regular discussion topic for the past two years. The previous posts are well worth reading.)

The Post-Dispatch also includes an AP photo of a group of payday loan stores, which well illustrates the abundance of stores in the market. This image illustrates an important free-market principle: competition. The close proximity of the stores means that payday loan lenders need to compete for customers. If one store is charging a higher rate than warranted by customer risk factors, accounting for an individual’s ability to pay back the loan, then another lender will be willing to undercut their competitor by offering that loan at a lower rate (an ongoing process, until the “market rate” is reached). Any worry about people being “ripped off” should be abated when one factors in the idea of marketplace competition: Each store sets rates to vie for customers while balancing the risk of repayment.

The Post-Dispatch ignores the fact that some people who really need loans cannot always get those loans from a bank, but that the necessity of the money immediately outweighs the longer-term potential cost of a payday loan. Setting any sort of regulations on payday loan operations means that some people will not be able to get loans legally. That does not mean they won’t get loans at all, but they will have to use underground or black market means to obtain them. This puts high-risk borrowers in an even worse situation, because if someone can’t pay back a payday loan or a bank loan, there are legal methods to handle the situation, like bankruptcy. If someone doesn’t pay back a loan, on the other hand, the lender has little recourse other than black market violence.

Deciding to increase payday loan regulations amounts to misguided paternalism. People at the margin will still take out loans they cannot afford to pay back — but that will happen whether they get them from a payday lender or, as the present mortgage crisis has shown us, from a traditional bank. In an attempt to save consumers from themselves, such loan regulations push desperate borrowers to illegal sources. Payday loan rates should be left to market competition, not government officials.

The post Post-Dispatch Prefers Broken Legs Over Court Dates! appeared first on Show-Me Institute.

No, wait … not interesting. What’s that other word? Oh yeah: tedious. I spent three hours in a hearing room with most of the time taken up by an abstruse discussion of appraiser regulation. The only people in the room who seemed to be actually animated by the subject were the interested appraisers and representatives of appraisal management companies. Most of the representatives seemed to idle the time away browsing the Internet on their laptops and phones. The rest sat there, supporting their heads with their hands and wearing the painfully bored looks of people firmly convinced they are meant for something better in life than this.

Even for all the hearing’s spectacular boredom, however, I did learn a thing or two. First, appraisal regulation is a subject far more complicated than anyone should ever want to know. The big change under discussion that night was the move to a greater reliance on appraisal management companies (AMCs) over the old-fashioned kind of appraisers. This shift has been ongoing for some time but received a big boost when the Home Valuation Code of Conduct (HVCC) essentially became the law of the land. I will spare you most of the further details (if you really must know, I recommend this article) except to say that although it does appear the HVCC is kind of a disaster, the new bill being used to rectify the problems looks like it just benefits the appraisers at the expense of AMCs and consumers.

Now, I fully admit that I am no expert in the field, but when every appraiser testifying for the bill complains that AMCs do less expensive work than appraisers, it sets off my Rent-Seeking Alarm. It sure seems to me that the appraisers are using the problems in the HVCC as a way to limit their competition and raise rates. But I could be wrong. Given the massive complexity of the regulatory code surrounding appraisals, it probably isn’t possible to know how the bill would change the system ex ante, and this presents a massive problem for regulators.

Writing about Democratic members of Congress who did not understand how tax changes in the health care bill would affect large companies, Glenn Reynolds describes this same problem:

The United States Code — containing federal statutory law — is more than 50,000 pages long and comprises 40 volumes. The Code of Federal Regulations, which indexes administrative rules, is 161,117pages long and composes226volumes.

No one on Earth understands them all, and the potential interaction among all the different rules would choke a supercomputer. This means, of course, that when Congress changes the law, it not only can’t be aware of all the real-world complications it’s producing, it can’t even understand the legal and regulatory implications of what it’s doing.

There’s good news and bad news in that. The bad news is obvious: We’re governed not just by people who do screw up constantly, but by people who can’t help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or “better” rules will do any good: Incompetence is built into the system.

The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don’t know what they’re doing.

And that’s assuming the legislators actually take the time to try and understand the legislation. What’s more likely is what I witnessed last Wednesday: disinterested representatives killing time until the end of the session by checking their email and text messages. If a regulation is so complex that the regulators can’t even be bothered to understand it, it is likely to be ineffectual at best and counterproductive at worst. In regulation, less is often more.

The post Mr. Payne Goes to Jefferson City appeared first on Show-Me Institute.

Good bit:

The FDIC found that payday loan fees were justified by the costs and risks associated with offering such loans. The FDIC also found competitive products like bounced checks carrying APRs of up to 3,500 percent.That APR calculation – designed to compare competing, long-term forms of credit – is why a 36 percent APR cap, as proposed in current Missouri legislation, would ban short- term loans in the state.

If imposed, a 36 percent rate cap would mean lenders could only charge about $1.38 per $100 borrowed. At such a low rate, lenders simply can’t cover their costs – such as rent, employee salaries and benefits.

As I’ve written before, I’m opposed to payday loan regulation because:

1. I view payday loan transactions as legitimate, consensual business interactions between relatively rational actors.
2. The empirical evidence suggests that payday loans constitute a useful service. I look, for example, to Donald Morgan and Michael Strain, who show that increased access to payday loans reduces the volume of bounced checks. I also look to Edward Lawrence and Gregory Elliehausen, who find that payday loans “satisfy a real financial need within a certain segment of the population.” As I cite these authors, I’m fully willing to concede that there is literature out there that disagrees with their claims. The reading list I composed earlier lists some of those papers. In a future blog post, I will attempt a more detailed comparison of the methodologies employed in the different studies.
3. If payday loans are useful, then limiting or eliminating the payday loan market will drive consumers to underground or black markets. This is not favorable, for reasons that should be self-evident.
4. I think the most legitimate critique of payday loans is that it disadvantages the politically weak who have, for example, little access to legal recourse. If that’s the case, the better solution would be to reform the political/legal apparatus, rather than the payday loan market. Opponents can argue that this is less feasible, and they would be correct, but if the market is driven underground, then these people would have no legal recourse anyway.

My main concern now is the third. Those who seek to regulate payday loans toe a narrow line between tempering the market and hobbling it. Unfortunately, it looks as though the proposed reforms are poised to do the latter.

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