Calls to Regulate Cash Advance Industry Continue

Calls to regulate the cash advance industry seem to focus primarily on rollovers and a borrower’s ability to repay a loan. When repayment in full of a loan does not occur before the end of the term, a borrower needs an extension or renewal that initiates a new transaction. The industry can impose limits on the number of rollovers that a borrower may obtain. However, critics complain that the process can create an endless cycle of debt.

Understanding the Cash Advance Business

Short-term lenders make small amounts of cash available to borrowers who need it quickly without the entanglements that traditional lending institutions usually require. By avoiding credit checks and eligibility guidelines, cash advance lenders take risks on borrowers that traditional lenders avoid. Customers can get funds to meet financial needs without the delay that can occur at banks and credit unions. Consequently, cash advance lenders may charge fees and interest that is higher than average rates.

Borrowing at a Traditional Lending Institution

When the need for cash is immediate, traditional lenders usually have constraints in place that make them unsuitable. Most banks or credit unions run a check on a borrower’s credit history, and a score of at least 650 points on FICA provides the assurance that they prefer when considering lending money. Forbes reminds borrowers that loan officers pursue an exacting protocol for approving loans that can take as long as a few weeks.

Considering the Critics’ Point of View

In the aftermath of the financial meltdown, congressional legislation established the Consumer Financial Protection Bureau (CFPB) to ensure fairness in the financial marketplace. The cash advance industry faces examination for certain practices, and governmental recommendations may result in changes. CFPB looks for unlawful practices that disadvantage borrowers.

• False Threats
The Fair Debt Collection Practices Act makes it illegal for bill collectors to threaten to arrest a borrower for failing to repay a payday loan. The law also prevents collectors from making harassing telephone calls.

• Undisclosed Fees
The CFPB provides protections to make sure that military service members have full knowledge of hidden fees that some payday loans may carry.

• Debt Collection Lawsuits
Using deceptive practices to generate court documents that have a robo-signature to initiate lawsuits is illegal.

Understanding Proposed Changes

Rules that the CFPB proposes may require lenders to make sure that borrowers have the wherewithal to pay back their loans. A restriction on lenders’ ability to access customers’ bank accounts may prevent excessive fees that result from costly withdrawal attempts. One of the proposals requires lenders to give borrowers a three-day notification before attempting a withdrawal.

The practice of providing affordable credit to borrowers supplies cash when it matters, but refinancing or rolling over loans can make debt accumulate. CFPB’s proposals aim at requiring lenders to respect a borrower’s ability to repay a loan without undue penalties. The effect of rollovers tends to turn a short-term loan into one that takes an extended period to repay in full. The Huffington Post reports comments by a payday loan expert confirming that the typical borrower fails to repay a loan when it is due.

Serving a Reliable Customer Base

The Consumer Financial Services Association (CFSA), a payday industries group, confirms that the “welfare of the customer is important.” Statistics show that the typical borrower is middle-income and middle-educated. More than half have a degree or some college credits, and 90 percent hold a high school diploma. Most customers are married and more than half have children living in the home. Salaries range between $25,000 and $50,000, and 32 percent of clients own homes. All customers have a bank account and a steady income, standard indicators of responsible citizens.

The head of CFSA noted that payday loans often offer the only available source of credit for millions of responsible citizens. The spokesman cautions that the loans fill a crucial need for rapid access to funds that is typically unavailable from other sources. Further comments remind regulators that any new rules may decrease access to credit that many consumers need. The industry’s recommendation to regulators favors designing new rules that rely on rigorous research instead of conjecture or anecdote. Estimates indicate that 19 million households rely on short-term payday loans each year. For more information on this topic, visit us at the Personal Money Store.