The CFPB or Consumer Financial Protection Bureau has imposed several restrictions on the operations of payday loan companies. Yes, we want the industry to be monitored closely – this will weed out the illegal loan lenders. However, many people are of the opinion that these restrictions are too severe. In fact, it has even been pointed out that much of the payday loan operations could be put under immense pressure because of these limitations.
Kendrick Meek, a former Democratic congressman from Miami, now says that the United States must pass new legislation as the restrictions in place currently are simply too heavy-handed. The US can learn from the Sunshine State’s payday loan regulations and its experiences over the years.
Meek feels that the current laws are depriving people of important lending options in an emergency. Incidentally, the US state of Florida has one of the toughest laws to protect consumers from predatory lenders. But it does not deprive the payday loan companies.
While speaking to The Washington Times, Kendrick recently stated that he believes small dollar loans or payday lending is essential to those who do not have credit or good credit. He says that it’s important that we allow these people the money they need.
He further states that the law for payday lending in Florida provides access to loans without being too harsh for the industry, and it also protects consumers. This is just the perfect balance, because we want the consumers to be protected, but also want them to get the money they need quickly from a legal source in an emergency.
Payday loan regulation cannot be too heavy-handed, Meek says. So, any federal law that preempts this Florida law will be a huge mistake. He feels that a law that is working in one state, protecting consumers and safeguarding the interest of the industry, needs to be considered to be implemented nationally.
Florida Writes to the CFPB
But it now seems that the Consumer Financial Protection Bureau isn’t listening.
A few months back, the Florida delegation in the U.S. House of Representatives sent a letter to Richard Cordray, Director of the CFPB, urging the Bureau to implement the Florida payday regulation model across the United States. In response, Cordray said that he would take a look at the Florida model. He was however non-committal about using this state model across the country.
It seems that the agency has fallen a bit behind since the regulations first came into effect a few years back. For instance, no studies have been carried out by the CFPB yet to find out what’s working and what’s not in the states since the laws were enacted in the states. This is not correct. We feel whenever a law has been implemented, it should be closely monitored. Studies should be done to know whether the law actually benefited the consumer, if yes fine, if no it should be changed. It is time that such a study is carried out so that modifications to the existing laws can be made to make it more balanced for all parties.
You Cannot Choke Off Legal Credit Avenues
Kendrick Meek is a worried man. He feels that excessively stringent payday lending laws might choke off legal credit avenues for people who need the cash. We agree too. In states where payday lending is illegal, it is a known fact that consumers turn to loan sharks for cash. This is counterproductive to banning payday lending where at least, the loans comes at a cost that can be managed. Illegal loans are offered at exuberant rates, taking the consumer into a permanent debt cycle.
Meek is not alone in this. There are many others who are of the same opinion.
According to the findings of a Federal Reserve survey, many Americans who make less than $40,000 a year, often have to sell off their assets to pay for emergency expenses that are as little as $400. Payday lending is an attractive choice for them. With this money, they can keep their assets while they meet their financial obligations. So you cannot deny them this option.
Individuals should be allowed to get loans of $500 or less so that they can carry out their financial responsibilities legally. Kendrick worries that many of them will go for illegal loans if they cannot get the money from legal sources. This will only lead to more corruption and crime. That is certainly not a good situation. The state should take steps to prevent this.
The Law in Florida
The Sunshine State prohibits any rollovers. Consumers cannot take another loan to repay the original one. Borrowers are limited to just one loan of $500 at a time. Payday loan companies are not allowed to charge fees more than 10% of the original loan. The total term ranges between 7 and 31 days. If a borrower cannot repay the loan, then the person can get a grace period of 60 days, provided he or she agrees to credit counseling that helps create a logical repayment schedule.
Payday loan business has too many defaulters, i.e. people who take loans and never return. That is the reason why the rates on payday loans are slightly higher – to make up with the loss. Fact is that 10% on a loan for 30 days is not very attractive. You will therefore find a few lenders in Florida, but not as many as you would find in states where payday lending is legal.
The Approach of Good Payday Companies
Good payday loan companies don’t want their consumers to fall into a debt trap. They want to make investments, and want to make it easy for their consumers to pay it back so that the money can be back in circulation to help others. If people aren’t able to pay back because of steep interest and fees, then the loan companies are going to suffer as well. It doesn’t help anybody.
We therefore are not against regulators. We in fact need them to help us kick out the loan sharks or illegal loans entering the marketplace. So there should certainly be regulations and monitoring in place. The authorities should weed out bad operators that are ruining the reputation of the business.
Florida Regulations Working Well
The balanced payday loan approach in the state is working well. Lead author of the state legislation, Senator Lee Constantine, says that the rate of default has come down from 40% to less than 5% since the new laws were made effective.
So this approach is clearly working, and the CFPB should thus consider it for national implementation. However we have a problem with the 10% restriction. If that can be increased to 15% all lenders should be fine.
A 5-year study carried out in Florida reveals that a high percentage of consumers don’t have to seek a second loan now. The fees for one single loan in Florida of $395 comes to $39.50 or less. Nationwide however, individuals are charged $15 for a $100 loan. Thus for $400, it would come to about $60, which is higher than Florida. Plus, the fees are going to be charged for each roll-over as well. There aren’t any rollovers in the state however. This provides relief to consumers.
Lee Constantine says that the industry is regulated now in Florida. Most payday companies are responsible entities and are complying with the laws. We are too. 🙂
The Florida model could certainly work across the country. After all, this balanced approached has worked in the state for 14 long years. It’s time the Consumer Financial Protection Bureau took a closer look at it.
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