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Confusion over new legislation shows lack of short term lending understanding

Sep 27, 2013 Philip Burgess

Over the last several years, lawmakers across the United States have been aggressively regulating the short term lending industry. Many elected officials have attempted to paint a negative picture of the loan sector, inaccurately labeling small dollar lenders as enterprises that offer few benefits to consumers.

However, the perception that many hold against these credit providers is due to a lack of understanding about short term loans. Recent developments in Missouri show just how confused some lawmakers are about short term products.

The Associate Press reported that the Missouri legislature recently overrode a veto by Governor Jay Nixon on a bill that increased the fees associated with several loan products.

The source noted that Gov. Nixon vetoed the law because he believed it would allow short term lenders to take in more money. However, the bill was not intended to address small dollar loans. Rather, the drafted legislation applied to installment loans that run longer than 30 days. Missouri law limits short term loans to between 14 and 31 days, according to the AP.

Several lobbyists for the short term industry told the AP that they were confused by Nixon's veto message that cited short term loans. In fact, Harry Gallagher of the Missouri Financial Services Association - who the source indicated was the lobbyist behind the bill - stated that the legislation has nothing to do with short term products.

Moving online
This is just one example of how lawmakers across the U.S. have started to crack down on small dollar lenders due to misinformation. The development has forced the industry to shift operations in order to survive. According to The Charlotte Observer, many short term lenders are now embracing online formats because there are less restrictions in place.

However, this move is likely to result in lengthy court cases that will do little for lenders and consumers alike. For example, the source speculated that recent legal battles between New York financial regulators and a number of online Native American lenders is likely to be costly for both parties. As a result, it could limit the credit extension capabilities of the loan outlets, while also costing New York citizens who fund the financial services department, which looks set to embark on an expensive legal journey.

The institutional lack of knowledge showcased among many regulatory and government bodies regarding short term loans will only hurt consumers and legitimate lending businesses. If lawmakers were to focus on educating themselves on how the industry works, they may be able to create more constructive policies to support the sector.