Should Online Payday Lending Be More Closely Regulated?
Payday loans generate lots of controversy because they’re offered to people who have bad credit or limited credit histories, which makes them high-risk borrowers. Traditional lenders seldom approve loans for these types of borrowers and never quickly enough when a cash emergency occurs. Unfortunately, many of these same people don’t use payday loans as intended — as short-term emergency loans just until their next paydays — so they become trapped in a cycle of debt. Well-meaning consumer activists, politically motivated legislators and establishment figures from the traditional banking industry band together to push for reforms to regulate payday and other short-term loans more closely.
Both sides of the controversy make some valid points, according to an LA Times article. Some short-term lenders do use deceptive advertising and target financially unsophisticated borrowers to trap them in debt cycles where interest rates average annual percentage rates of 400 percent or more. Of course, traditional lenders also target people who have the best credit and offer them introductory deals on credit cards. Check any middle-class group in the United States, and the chances are that most of these families juggle a mountain of debt for mortgages, credit cards, car loans and student educational loans. Even though these loans carry lower interest rates, they can be just as crushing because the loan amounts are higher and financed over many years.
Proposed Regulations to Limit Payday Lending
Opponents of payday loans have proposed regulations and changes to the law through the auspices of the Consumer Financial Protection Bureau or CFPB. Proposed changes include the following regulations:
- Proposals vary from preventing short-term loan renewals at the outset to requiring lenders to monitor loan activity among different lenders.
- Some critics call for an end to payday loans, short-term loans and vehicle loans.
- One option is for lenders to assess each borrower’s ability to repay a given loan.
- Another proposal calls for limiting loans to 90 days every 12 months.
- Proposals to cap interest on installment loans are also being considered.
- Lenders might also be required to determine if people can repay a loan each time a person applies for a loan or a renewal.
- Restrictions on intrusive collection procedures are also being considered.
Fairness and Free Enterprise
Although many of these changes seem reasonable, they could force many payday lenders to close because their core customers are people who don’t qualify for traditional loans or have financial resources at the disposal, so they often default on repaying their obligations. If regulatory change is truly fair, it would also target late fees, bank charges to cash checks, overdraft penalties, long-term, low-interest rate loans and high-interest credit cards that most families can’t really afford but have become essential in the modern environment of online payments, rampant consumerism and peer pressure to buy high-tech gadgets. Buying a car that’s fully equipped can generate monthly payments that rival or exceed a home mortgage payment or monthly rent.
Obama Weighs-In on Regulatory Change
President Obama, while speaking at an Alabama college, weighed-in on regulatory change, “As Americans, we believe there’s nothing wrong with making a profit, but if you’re making that profit by trapping hardworking Americans in a vicious cycle of debt, then you need to find a new way of doing business.” Responsible lenders of all types need to look hard at that statement and consider their own guilt on this issue.
Praise and Challenges to Proposed Regulations
Regardless of the changes, consumers can expect protracted negotiations on the details and extended court battles between supporters and critics of regulatory changes. Critics of payday lending reform point out that the Federal Trade Commission already enforces many existing laws and regulations. These laws already protect consumers from unfair advertising, deceptive business practices, wage assignment, abusive collection practices and pre-authorizing electronic loans. Supporters point out that the regulations will limit a person’s ability to get trapped in a cycle of legal debt, but this doesn’t take into account that people might employ creative strategies when they need emergency cash such as finding illegal loans, gambling, pawning treasured possessions and engaging in other high-risk activities to get cash.
The Personal Money Store Supports Fairness and Even-Handed Reforms
Although the Personal Money Store offers short-term and payday loans, the company follows a different mandate by discussing the issues intelligently, seeing both sides of arguments and offering emergency loans to people who need them even if they have less-than-perfect credit. People need a lifeboat, and the company never targets people to trap them in cycles of debt. Short-term loans remain popular with U.S. citizens, and they should have be allowed to make their own choices. Any new regulations should also target traditional banking interests or face judicial review. Find out more about payday loans and proposed new financial regulations to limit them by visiting the Personal Money Store.