The States are Already Capping Payday Loan Fees – Is Federal Oversight Necessary?
Federal oversight of banking laws and lending practices has become redundant and unnecessary because many states are already capping payday loan fees and interest rates. The federal government’s high-profile campaign against the payday lending industry, which has been spearheaded by the Consumer Financial Protection Bureau, amounts to overkill according to many critics of the agency. Consumers find value in payday loans and support the industry, and the states are already regulating the industry based on local attitudes, loan popularity with consumers and legitimate efforts to reduce predatory lending and debt traps.
Since the states already regulate the payday loan industry, many people find the federal government’s efforts to crack down on the industry an unnecessary exercise in grandstanding. Critics point out that the CFPB routinely exceeds its mandate and isn’t subject to the government’s traditional system of checks and balances. States, however, pass laws based on local attitudes, legitimate business interests and local accountability.
Heavily Regulated by the States, the Payday Loan Industry Doesn’t Need Increased Federal Regulation
The argument between supporters of a strong, centralized federal government and those who prefer that state and local government handle most political issues has existed since the United States was founded. Federalists and Antifederalists have argued over these issues since the Constitutional Convention, but the federal government has amassed increased regulatory powers during the last century that would have shocked the nation’s founding fathers. The Consumer Financial Protection Bureau operates independently of government funding and oversight, and the agency’s critics deplore what they view as usurpation of the states’ rights to regulate commerce within each district’s borders.
States bear the constitutional responsibility of regulating commerce and passing laws that affect banking and lending. Synonym.com defines the three major responsibilities that states were granted by the U.S. Constitution: proposing amendments, electing members of Congress and maintaining a militia. Founding father James Madison assured state legislators who were skeptical of federal power that federal mandates were “few and defined” while the states would retain all powers that weren’t specifically granted to the federal government. The 10th amendment codified this view as the unambiguous law of the land.
Governing.com reports that voters in key states throughout the country are voting for rate caps on payday loan merchants. South Dakota voters recently approved a 36-percent rate cap by a 3-to-1 margin at the polls. The payday lending industry supported an alternative measure that would have capped interest rates at 18 percent but allowed borrowers the option of voluntarily agreeing to accept higher interest rates. The rate cap approved by voters has forced many lenders to close, so it’s possible that voters will rescind the law to keep popular short-term loans as viable financial options for South Dakota citizens. That’s how state laws work–they provide greater accountability and are easier to amend if they generate unexpected consequences.
Federal regulations would amount to overkill according to many supporters of the payday loan industry. Federal regulations would prevent loan churning–or borrowing money to repay old cash payday loans. Loan churning results in two-thirds of payday lending revenue according to a report from the Center for Responsible Lending, a North Carolina consumer-rights advocacy group.
Fees and Interest Rates of Payday Loans Are Already Capped in 14 States
14 states already limit interest rates for payday loans according to Responsiblelending.org. These states include Arkansas, Arizona, Montana, South Dakota, Georgia, North Carolina, West Virginia, Pennsylvania, Maryland, New Jersey, New York, Connecticut, Massachusetts, Rhode Island, New Hampshire and Vermont. Many other states–including Maine, Virginia, Colorado, Washington, Oregon, and Rhode Island–offer some protection against predatory lending practices and debt traps.
Bad Credit Payday Loans Offer Consumers Some Protection Against the Worst Lending Excesses
Many politicians–including most Republicans and some Democrats–support the free enterprise system, state authority to regulate commerce and carefully regulated bad credit payday loans. The fringe lending industry, which includes bad credit payday loans, online installment loans and auto-title lending, provides easier credit approvals and quick cash to strapped families when they face emergencies. Many families eventually default on these loans, but unlike organized crime, tribal lenders and predatory loan companies, the payday loan industry is legal and legitimate. Borrowers don’t need to worry about the collection excesses of loan sharks and unregulated predatory lenders.
The states are the best arbiters of what is acceptable within their borders. Unlike some predatory lenders, most bad credit payday loans only generate interest for short periods of time. Most borrowers repay their loans, and those who can’t repay their obligations don’t face physical injuries or unscrupulous collection efforts. The payday loan industry provides a resource for families that helps them avoid late fees, interest rate hikes, bounced check fees and reconnection charges for utility services.
Loopholes, Predatory Lending and Fees from Traditional Creditors
Although predatory lending almost certainly creates debt traps and damages the national economy, the payday lending industry is not the only group that’s guilty of “imposing unfair and abusive loan terms on borrowers.” Americanprogress.org repoorts that storefront payday lending companies earned $29.8 billion in 2012, but lots of companies impose fees, penalties and higher interest rates when consumers can’t pay their legal obligations.
Credit card companies immediately hike interest rates when consumers miss payments or pay their bills late. Banks, credit card providers, utility companies and department stores impose strict fees, late charges, bounced check fees, legal collection fees, higher interest rates and other charges when consumers can’t pay their bills.
States understand the pressures that its citizens face. Legislators know when the local economy is suffering and people need a resource for obtaining cash in emergencies. Many states prefer to take a laissez-faire attitude because payday lending is so popular among their residents. The federal government already has many laws that regulate lending and commerce. Congress passed the National Defense Reauthorization Act of 2007 to cap interest rates for active-duty military families. Many analysts believe that the current laws are sufficient to prevent the worst cases of predatory lending.
Publicintegrity.org reports that an astonishing six separate investigations of payday lending are now active at the federal level, which involve six different agencies. Payday lenders charge that legislators are using the industry as a scapegoat for traditional lending companies. The excesses of the banking industry and Wall Street led to unprecedented financial losses for American consumers during the 2008 mortgage crisis.
Instead of attacking the companies that were responsible for this breach of trust, the government bailed them out with financial support. Many of these companies earned huge profits according to a report posted at Nationalpayday.com. Check cashers, payday loan companies and other short-term lenders had nothing to do with the losses generated by the malfeasance of traditional financial institutions and Wall Street crooks.
Regulating banks and commerce are critical government responsibilities given the nature of predatory lenders and proven excesses of traditional lenders. Unconventional lenders weren’t responsible for the mortgage crisis, but they’re being targeted in high-profile actions to regulate payday lending while legislators ignore those traditional financial services that could crash the national economy if they fail.
State legislation is already tough, up-to-date and subject to control by stakeholders who understand their constituents, local politics and business realities. Higher interest rates are essential for payday loans if lending companies want to make a profit from risky, short-term loans for small-dollar amounts. Consumers in many states who have no savings and poor credit ratings need a resource for obtaining cash in emergencies. Local legislators understand these realities, so they should make the decisions about which laws to pass. Find out more about states that are capping interest rates and regulating short-term loans responsibly at the Personal Money Store.