Why It’s so Hard to Regulate Payday Loan Companies

In an attempt to protect people from themselves and the payday loan industry, the Consumer Financial Protection Bureau, or CFPB, intends to implement a new set of rules. Why is it so hard to regulate payday loan companies? The answer to this can be found in Georgia’s past, which is rife with attempted legislation involving usury limits.

Georgia Discovered that Regulating Payday Loan Companies is a Challenging Endeavor

The New Yorker tackled the history of payday loan regulation in a recent article. In the publication, the news source reminded readers that James Oglethorpe founded Georgia to give those who were locked away in debtor’s prisons a second chance by sending them to an overseas settlement.

This new settlement featured laws that strived to get rid of class distinctions to create an economic utopia while banning slavery and alcohol. The region abided by the laws for about 20 years before residents broke them by drinking rum and purchasing slaves. Despite not becoming the haven that Oglethorpe imagined, Georgia didn’t do away with his principles entirely. The state has long been aggressive in its moneylending regulations. In 1759, Georgia established strict usury limits.

Decades before lenders started challenging the rules and looking for ways to evade financial regulations, the custom of “wage buying” materialized with creditors approving loans in exchange for a portion of a borrower’s future earnings. This evolved into the payday loan industry of today.

Throughout its history, the state of Georgia has stayed at the forefront of attempts to curb the most abusive practices of creditors. Despite the state’s best efforts, the industry has developed new ways to bypass regulations.

The Payday Loan Industry’s Evasion Tactics

The Atlantic recently reminded its readers that people have long believed that there should be a limit on interest rates. In fact, this train of thought goes back to the start of civilization. Before humankind invented money, Babylonians established a limit for the amount of grain that a person could pay in interest.

In June, when the CFPB announced new regulations to protect consumers from manipulative lenders, industry insiders started looking into evasive maneuvers. The rules intend to tighten up on the kind of lending practices that go after people with low incomes and entangle them in a continuous borrowing cycle that features inflated rates.

Twelve years ago, Georgia passed strict laws that were designed to ban payday loan lending. The state’s laws established interest rate caps and charged high fines. Despite the laws, the short-term loan industry found ways to adapt. In Georgia, people are more likely to take out an installment loan or an auto title loan.

Regulation Attempts March On

MarketWatch reports that the CFPB is alert to industry concerns about strict regulations and how these limitations may make it impossible for consumers to get emergency funds when they need them. Because of these concerns, the agency attempted to create balance by keeping a few short-term lending options open.

Liz Coyle, an administrator of the consumer advocacy group Georgia Watch, confirmed that the CFPB’s regulations are unlikely to impact the state’s installment and title loan companies. The regulations will still allow lenders to charge high interest rates and fees. These lenders will also be able to continue to access a borrower’s bank account.

Richard Hunt, the CEO of the Consumer Bankers Association, said, “The Bureau continues to miss the mark for millions of Americans struggling to make ends meet and effectively forces most banks to stay on the sidelines due to greater compliance burdens.”

Inviting Bad Actors to Dodge Regulations

In areas where short-term loan lenders are able to operate with little to no supervision, the CFPB’s proposed regulations will raise the bar. It’s unclear whether the laws will bring about change in states where tight regulations are already on the books.

Lobbyists who work for lenders in states that have caps on interest rates may use the less strict regulations to undermine or displace current laws. Coyle said, “This rule invites bad actors to go around it.” She along with other advocates are asking the agency to close several loopholes that have been identified. They also want the CFPB to make a commitment to support states that already have powerful consumer protection laws in place.

Taking a Simple Approach to Regulating the Payday Loan Industry

If the government is serious about regulating the payday loan industry, the simplest way to do so is to establish an interest rate cap on every small-dollar loan issued. However, the CFPB is unable to take this step because the agency isn’t permitted to regulate interest rates. To read more about why it’s so tough for government agencies to regulate the payday loan industry, visit the PersonalMoneyStore.