Small Loans Come Under Heavy Fire in Alabama
Small loans and their relatively high interest rates have recently come under attack by Alabama legislators according to a report posted at Jdsupra.com.
45 members of the Alabama House of Representatives recently proposed amending the Alabama Constitution to cap loan rates for any loan product including a “consumer loan, line of credit or other financial product. The proposal, which will be known as House Bill 321, directly challenges existing state legislation that regulates small-value loans because it limits all loan products to 36 percent interest. Alabama’s Small Loans Act already regulates most financial products and caps interest rates for certain loans, but legislators allow lenders of small loans for bad credit to charge higher rates so that they can make enough profit to stay in business.
Lenders are already regulated and monitored by the state by the Small Loans Act and Deferred Presentment Services Act. Alabama Senate Bill 284, which is being considered by the Alabama Senate, would impose interest caps on loans over $2,000, which are currently unregulated as long as they’re not deemed “unconscionable.” The bill would ban Auto Title Loans completely and further regulate small loans by limiting them to a single 30-day loan per person each 12-month period. These loans would automatically qualify for a three-month repayment extension for borrowers who are unable to repay the loan as agreed.
Alabama Considers Legislation to Regulate Popular Small Loans
Smalls loans online, payday lenders and small loans for bad credit have flourished in the state according to a report posted at www.cw.ua.edu. These loans have grown so popular and addictive that advocacy groups have begun referring to payday loans, auto title loans, small loans online and small loans for bad credit as “Alabama’s Toxic Lending Problem.” Although Republicans generally support deregulation nationwide, 30 Republican joined 15 Democrats in the proposal for the Constitutional amendment.
Some of the reasons for proposing the bill were supplied by the Alabama State Banking Department, which hired Veritec Solutions to gather data on the financial industry. In only 11 months, Alabama consumers took out 2,040,948 loans by only 238,797 Alabamians, or 5 percent of the state’s population. Loan volume for the period was $668 million and advance fees totaled $116 million.
Small Loans for Bad Credit Are Exempt from Alabama’s Rate Cap
The Smalls Loans Act of Alabama went into effect in 1959 according to Banking.alabama.gov. The law capped interest rates for all loans to prevent usury. The bill recognized that small loans for bad credit–including those under $749–couldn’t be made profitably at single-digit interest rates. Since it was impractical for these loans to be banned by law, the state decided to make a regulatory exception for these lenders.
The state’s lawmakers felt that borrowers would always need small loans, and banning them would only make consumers turn to riskier finance schemes such as borrowing from unscrupulous lenders and organized criminals. The state now permits these lenders to make reasonable profits by charging higher interest rates “to allow lenders who meet the conditions of this chapter a rate of charge sufficiently high to permit a business profit.”
Small Loans Online Come Under Increasing Regulatory Scrutiny
All financial products have come under intensified scrutiny by the states now that President Trump is challenging the Consumer Financial Protection Bureau and its recent regulatory reforms. Trump believes passionately in the free enterprise system and feels that charging more interest than the market can bear is unsustainable. There will always be alternatives for borrowers who don’t want to pay high interest rates to get small loans online or small loans for bad credit.
Recent trends tend to support Trump’s views. Alternative lending platforms are increasing, and everyday investors can finance small loans through marketplace websites. These lenders recently sparked an upturn for all kinds of loans. Led by peer-to-peer lending, these sites offer financing for business or personal loans, and approvals are easier to get than bank loans. Community service groups and activists from around the nation are also organizing more affordable loans through community lending centers.
An Austin, Texas, community lender recently launched a small-dollar lending program designed to serve the Austin community according to an article at Mystatesman.com. The loan project, which was sponsored by Raquel Valdez and BCL of Texas, had expected to break even in two years, but the company is running behind projections.
These community lending centers are popular in Texas and might offer a solution to Alabama’s concerns. Some of the centers quickly became profitable in Houston, Dallas and other cities. The first center began in Brownsville when a group of Rio Grande’s banks came together to offer housing assistance to area residents. Ann Baddour, director of the Fair Financial Services Project at Texas Appleseed, advised the original lending center in Brownsville, which experienced growing pains and the realities of high administrative costs.
Baddour’s advice included involving employees in all aspects of the business to empower them to make better lending decisions. The high costs of software and loan processing equipment challenged the organization’s ability to make a profit. Baddour commented, “None of the off-the-shelf software and loan processing systems met the cost needs. [The employees] developed their own Web-based platform to streamline and cut costs for operating the program … so they can offer it affordably.”
Trump Administration’s About-Face Causes Democrats to Pursue Expanded State Legislation
The Trump Administration’s decision to change sides in the lawsuit over the status of the CFPB is likely to generate increased wrangling over financial regulation. President Trump favors free enterprise and financial deregulation to stimulate the economy. Trump is strongly opposed to the CFPB and considers its structure unconstitutional because the agency has few limits to its power and minimal oversight.
A federal court found the agency’s structure unconstitutional, but the D.C. Circuit Court’s decision was immediately appealed by the CFPB. Trump has switched sides, and his administration now argues that the agency is unconstitutional, which was the opposite opinion of the Justice Department during Obama’s presidency according to a report at Forbes.com.
The infighting over federal regulations has inspired many Democratic state legislators to take actions in support of the CFPB by implementing its rules in a flurry of state legislation. The CFPB recommended limiting the interest rates of small loans online to 36 percent, which is what some Alabama legislators are supporting. Critics argue forcefully that the state’s original arguments in passing the Small Loans Act remain as valid today as they did in 1959. People need smaller loans under $500 and will seek out alternative sources for financing, so state legislatures should regulate the industry with some leeway in what lenders charge for interest.
Battles in Many States Loom in the Future as the CFPB’s Status Remains Unclear
The battle over whether to regulate all types of personal loans, which include loans under $500 that are the target of legislators in Alabama, continues to be intense, and politicians argue over issues such as the Dodd-Frank Act and the CFPB. Some experts conclude that accepting higher interest rates for small loans is the only way forward given that the industry serves a big need. Many Republicans now support deregulation and/or scrapping the CFPB or limiting its power.
The arguments include different points–such as whether the federal government has the right to regulate matters that belong to the states. Another issue is what constitutes a fair rate of interest that allows lenders to earn a reasonable profit. Find out more about small loans online coming under increased scrutiny by state legislators at the Personal Money Store.