Stop Playing Regulatory Roulette With Payday Lenders

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Utah's Department of Financial Institutions recently released statistics showing an explosive growth in the number of storefront lenders. With 565 statewide, Utah claims more nontraditional lending stores than it does McDonald's, Burger King, Wendy's and Subway stores combined.

What does this say about our nation's economy and access to credit among families in the lower-income quintiles? What does it suggest about how alternative lenders should be regulated?

The first two questions are easily answered. We live in an economic environment where equity among vast swaths of homeowners has been erased by the collapse of the mortgage market and related foreclosures. That meltdown brought stricter lending standards making qualification for loans more stringent than ever, including short-term, small-dollar amounts.

There is no question that these factors are major contributors to both the ever-greater demand for nontraditional loans, and to the natural market response reflected in Utah's statistics. Nationally, the same trend was clearly documented and reported by a joint survey of the Federal Deposit Insurance Corp. and the U.S. Census Bureau.

That leaves the third question: How should alternative lenders be regulated? That question, in turn, opens another can of variables. Nontraditional lenders include online lenders based overseas that are partially beyond regulatory reach; American tribal lenders asserting sovereign immunity in their web-based enterprises; a range of other online lenders and a growing multitude of storefront operations.

Regulatory authority is similarly splintered, with individual states, and a host of federal agencies each claiming a slice of the regulatory pie and the headlines that come with it. Today, anyone operating a nontraditional lending enterprise faces an ugly game. Let's call it Regulatory Roulette: Just spin the wheel! Losers face Benjamin Lawsky, New York State's chief financial regulator and his mission to shut down online lenders from across the country. Winners face New Mexico, where state law imposes no limit on interest rates.

Lost in the jurisdictional chaos is any qualitative distinction between lenders. Lawsky's effort in New York barrels forth with no bill of particulars, no articles of indictment. His cease-and-desist order was not accompanied by documentation showing that any particular lender was targeted for any evidence-based infraction. The same was true in a case lost by Colorado after a seven-year court battle against two sovereign Indian tribes with online lending operations. In short, Lawsky and other state regulators have given no indication of differentiating between online lenders that operate well and those that don't.

Yet the spectrum of alternative lending operations indicates that just such a distinction is needed.

There are predatory online and storefront lenders out there that need to be prevented from taking advantage of borrowers who have no resources to fight collections once they've been hooked into a sucker's deal. These are victims whose marginal credit goes from bad to worse as lenders enforce collections and file damaging cases with credit reporting agencies.

But the other end of that spectrum includes nontraditional operators of storefronts and web-based enterprises that spell out the terms and conditions in absolutely clear language, verbally and in writing. I examined such an operation, run by the Otoe-Missouria tribe in Oklahoma in person, where every phone operator is fully trained, and every conversation is recorded for quality control. The tribe owns its own servers, manages its own operations and takes specific measures to prevent growth of a boiler-room environment.

A line needs to be drawn defining acceptable industry short-term loan standards nationwide. It would protect both the ever-growing number of alternative borrowers and the lending enterprises providing an obviously essential need. That line could be drawn voluntarily by an association of alternative lenders themselves. It could be drawn by a joint committee of state regulators and industry representatives.

Or, it likely will be haggled out in court, state by state, guaranteeing a continuation of two certainties: No protection for borrowers, and no clear path to secure operations for lenders.

Just spin the wheel.

Jane Daugherty, former associate professor of mass communication at Florida International University, is a doctoral candidate at the University of Miami School of Communication in Coral Gables, Fla.


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An interesting article that continues the focus on "payday lending" yet is appears to be stating that there are solutions that could be implemented to allow payday lenders to be considered as "good". That may be wishful thinking but it is a "Bank Think" piece. For that I thank her.
As the author is in the South, she may want to review Southern history after the Civil War to see what happened when morally bankrupt people attempt to use exploitation packaged in a political bought wrapper to appear to be "good". Payday lenders are like the Civil War "carpet baggers" suggesting opportunism and exploitation by the outsiders. They are said to have politically manipulated and controlled former Confederate states for varying periods for their own financial and power gains. In sum, carpetbaggers were seen as insidious Northern outsiders with questionable objectives meddling in local politics, buying up plantations at fire-sale prices and taking advantage of Southerners. Southerners considered them ready to loot and plunder the defeated South. (Partially Paraphrased from Wikipedia).

The problem with payday lenders is "The Interest Rate" and the exploitation of the public. Gangsters used to collect $1 for $10 for a week or until payday if sooner. Financial gangsters have replaced organized crime with a slightly lesser "vigorish". But it is still vigorish. There is nothing good about a product that keeps people in debt bondage just as Carpetbaggers did 150 years ago!

As the author is looking for a solution, I will provide one. Have a State create a board of financial professionals - people with professional financial designations after their names to certify that the terms, interest rates, default rates, collection expenses, collateral documents (if any) are "good". These people would not be politicians or subject to lobbying and they would be required to review and make transparent the approach to financial analysis and calculations by the lender to assure that the borrower is not being lured into a debt trap. If a product is "good": it will not be doing that. And the lenders also need to certify that a source of repayment is not coming from other taxpayers via entitlements, SNAP cards, etc. because it would be wrong to ask other taxpayers to contribute to exploitation.

I know that banks could provide such a product if they wanted to do so. If they did, then the market for internet lenders would dry up. And, losses from the most desperate borrowers might extinguish the appeal for internet lenders. Additionally, consumer advocates are making progress on reversing state laws allowing payday lending. Perhaps Utah needs some advocacy help assuming that the Utah locals are not the owners or lessors of those store fronts.
Posted by frankarauscher | Tuesday, December 10 2013 at 4:16PM ET
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