Why Georgia Outlawed Payday Lending
When Georgia’s legislators signed the Georgia Industrial Loan Act of 1955 into law, the regulation was designed to outlaw payday loan lending. It did this by requiring loan companies to obtain state licensing. The state also required them to register. With this law, Georgia even imposed austere usury limits for financial institutions that were in the business of making small loans.
Extending the Consequences
Even with the Industrial Loan Act in effect, the state was mainly unsuccessful in its attempts to shutter the industry until 2004. During that year’s legislative session, lawmakers made it a felony to loan money using payday lending techniques. The updated law began in May of 2004, and since then, it has remained in effect despite federal court challenges. The law is now called the Payday Lending Act of 2004, and with it in place, lawmakers can bring misdemeanor charges against violators in addition to fines that are as high as $5,000 for each violation. It also allows for a jail sentence of one year.
Those guilty of the crime face charges of racketeering, and it opens them up to potentially expensive class-action lawsuits. A few years ago, legal teams used the law to sue an Internet lender named Western Sky.
Why Did Georgia Make Payday Lending Illegal?
Georgia made payday lending illegal to protect borrowers. Often, these types of loans feature expensive fees and high interest rates. When borrowers have money struggles, they may wind up in a revolving debt situation. Those who are for tighter industry regulations state that payday loans infringe on the principles of fair and responsible lending.
The state is trying to protect people from fees of $20 on $100 loans as a fee of this amount comes out to an annual percentage rate of 650 percent. In October, the Pew Charitable Trusts researched these types of loans. The group found that one out of every three online payday loans features an annual percentage rate that is as high as 700 percent.
According to the industry’s financial records, business is booming. Pew determined that profits from online lending tripled from 2006 to 2013 with revenues growing from $1.4 billion to $4.1 billion. Fourteen states plus the District of Columbia have effectively banned payday lending. Along with this, the Consumer Financial Protection Bureau, or CFPB, may take additional steps to lessen people’s access to these types of loans.
Lost in Regulation
The industry points out that it is in the business of providing short-term loans to people who are facing financial emergencies. Because of this, payday loan lenders are taking a stand against increased regulation. According to the payday lending industry, consumer advocacy groups have a pre-planned agenda in place, and they are the organizations that are pushing for stricter rules against short-term loan lenders. This is causing the needs of the consumer to become lost in regulation.
According to some reports, many of those who borrow funds through a payday loan have an average household income of $57,000. Often, borrowers own a home and have at least one credit card. Today, the number of Americans who live paycheck-to-paycheck total in the millions. This means that more people need the services that payday loan lenders provide.
Research shows that most borrowers need urgent funds because of a family emergency, to deal with an unexpected cash shortfall or to manage their bills between paydays. To avoid hurting those who have the greatest need, regulators should not follow Georgia’s example by eliminating this credit supply nationwide.
To continue offering short-term payday loans in states with strict regulations, some lenders are creating partnerships with Indian tribes. Native American tribes are exempt from regulations established by states. For many tribes, this arrangement has provided economic relief. Lenders are even building call centers on reservations, so this is decreasing high levels of unemployment. Several reservations report unemployment rates at around 60 to 70 percent. The tribes are receiving partial ownership in lending businesses, so they are earning revenue from the arrangement. Some of them are using these profits to fund social welfare programs and construct health centers.
Instead of offering traditional payday loans, these financial institutions are set up to provide installment loans. With this type of loan, borrowers pay back the funds over a longer period than a single payday cycle. Most loans are set up for repayment in four months.
Pushing Back Against Legislation
With states like Georgia enacting laws that make payday lending a criminal act, consumers in need of quick money may suffer. Despite new regulations, the industry is pushing back against this legislation. For detailed information about Georgia’s law that makes payday lending illegal, visit the Personal Money Store website.