Fourteen pieces of legislation have been filed this session that would restrict, inhibit, or even collapse segments of the short-term credit market. No doubt these bills are motivated by genuine concerns for consumer protection. However, it may be prudent to look at some of the unintended consequences that could occur from banning small, short-term lending practices.

Many people, regardless of their income level, find themselves in need of short-term cash liquidity. For people with limited incomes or credit, there is often little recourse at traditional banks or credit unions. People with humble means of collateral often find it beneficial to enter into a smaller, short-term loan collateralized by a personal, post-dated check; or a motor vehicle title loan collateralized by a personal vehicle.

Legislation that restricts consumer choice in the short-term lending market will ultimately do more harm than good. According to a study conducted by the New York Federal Reserve Bank, Chapter 7 bankruptcies and bounced check rates went up after state legislatures in Georgia and North Carolina passed legislation that limited consumer options in the short-term lending market.

The reality is that the demand for short-term loans won’t stop just because certain short-term lenders are put out of business. By shrinking this market, policymakers run the risk of driving borrowers into risky or illegal arrangements with underground lenders or loan sharks. The unintended consequences that have resulted in other states from restricting lending options can help us understand what is best for Texas consumers.

– Chris Robertson