Sep 28, 2013 Quinn Thomas
In recent months in the United States, the area that has most been focused on with regards to government involvement in the short term lending industry is New York. Governor Andrew Cuomo launched a witch hunt against the sector, claiming that online lenders allowing citizens to borrow money when they're in dire financial straits were doing so illegally, because of a state law banning brick-and-mortar companies from doing the same. However, he was on shaky legal ground, because most of these operations were run by Native American tribes, which only have to abide by federal laws.
Although much of the focus has been on the Empire State, another area is emerging as threatening the vitality of the sector, albeit for different reasons. An Alabama government department has begun issuing guidance on who can and cannot seek out the services of alternative financial companies, based on a borrowing cap.
However, a number of local small dollar loan companies are speaking out about this situation, claiming that they provide a necessary service and are being discriminated against. All lenders will want to keep apprised of this situation, as it could greatly affect their business and potentially influence similar movements elsewhere in the nation.
Government database emerges
According to The Montgomery Advertiser, the Alabama Department of Banking recently began creating a loan database that flags the names of individuals who have borrowed $500 from short term lenders, requiring that they comply with a statewide limit. Governor Robert Bentley explained that this is necessary, because there is no way to ensure compliance with this regulation.
However, companies Cash Mart, Rapid Cash and Quick Cash filed suit against the government leaders, claiming that they do not have the right to create such a resource. The news source reported that these organizations maintain that the bill that would have prompted the creation of the database actually died in the state legislature in the spring.
Moreover, the Advertiser explained that this can be seen as a discriminatory act. After all, the resource created by the Department of Banking only takes into account individuals who take out short term loans from storefronts. It doesn't apply to amounts borrowed from banks or even online small dollar lenders.
The lawsuit filed by the three businesses isn't only targeting the government sector because of the database, the news outlet pointed out. The source stated that alongside this database, state leaders have also begun levying a fee on short term lenders who access the repository of names, the source said, which is necessary to record the amounts individuals have borrowed.
WRBL-TV reported that Bentley has made public statements explaining that he implemented these measures in order to keep citizens safe and aware of their financial decisions. However, he said that this database was also designed to protect lending companies themselves.
Bentley reasoned that people might take out several loans at once, burying themselves in debt, which would likely result in the business not being paid back.
However, the fact is that small dollar loans are nothing new to Americans, especially in a post-global recession world. People in the U.S. had to look to alternative sources during this time, because banks and other traditional lenders shut their doors to almost anyone who wasn't a sure thing with near perfect credit - a rarity during the financial crisis.
Short term lenders have more flexibility and were able to extend funding to people in need. Many looked at different consumer credit scores, like the Payment Reporting Builds Credit model, which takes into account an individual's proclivity to make utilities payments on time, among other factors. As such, it might be better for Alabama authorities to work with lenders and borrowers, who might already be comfortable with the current industry regulations and not need extra assistance.