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Consumer education, not regulation, should be the focus of short term lending legislation

Aug 26, 2013 Sean Albert

The negative reputation that many financial industry leaders and consumers have regarding the short term lending industry is largely misplaced. The sector has been targeted by lawmakers across the country for years, as they attempt to regulate small dollar companies into oblivion. It's an aggressive tactic that has been adopted by many legislators, largely a result of poor information about the industry operations.

The most recent case of short term loan regulatory attempts that have taken place in New York have put the spotlight on the industry. Earlier this month, officials with the New York Department of Financial Services (DFS), led by Benjamin Lawsky​, ordered a number of online short term lenders to cease operations in the state. In fact, Lawsky went so far as to send letters to financial firms that provide payment processing tools to the lenders, asking them to stop allowing the loan companies to access their portals.

It was an unprecedented move that has led to a coalition of Native American tribes - many of which were targeted by Lawsky - to file complaints with the United States District Court Southern District of New York, according to the Native American Financial Service Association (NAFSA). The organization noted that the group requested an injunction be filed against the actions taken by Lawsky and the DFS. Many leaders believe that the move by Lawsky undermines the sovereignty of Indian nations and may even violate the U.S. Constitution.

"His actions are a flagrant denial of our rights as sovereign entities, and today, we are fighting back to defend these rights," said Barry Brandon of NAFSA. "We have enjoyed these sovereign rights for centuries predating even the United States. They have been established and reinforced by Constitutional law, federal legislation, and a long history of legal rulings."

Although NAFSA officials noted that they wanted to avoid legal action, they felt that Lawsky's actions left them with no other choice but to take their grievances to New York's courts. They appear to have a strong case, however, which should be beneficial for their interests. In fact, The Wall Street Journal recently reported that the head of the Consumer Financial Protection Bureau (CFPB), Richard Cordray​, stated that even his agency, a federally mandated enterprise, would find it difficult to regulate online lending practices.

Lending practices help native groups
Data cited by NAFSA indicated that online small dollar businesses are extremely lucrative sources for tribal groups and help support social programs. The source stated that it's not uncommon for such companies to account for more than 25 percent of a native group's entire funding. Revenue from these enterprise help support health care programs, social services and education for many Native American tribes.

Misleading information
One of the main reasons why financial and consumer groups want to regulate the industry is because there is a significant amount of erroneous or misleading information about the sector that short term detractors constantly harp on.

Earlier this year, the Center for Responsible Lending (CRL) released a report that painted a negative view of the industry. However, the Center for Consumer Freedom (CCF) was quick to criticize the release for its misleading narrative. One of the main complaints CCF officials had about the report was the statement that many short term products have a 400 percent interest rate.

"It is intellectually dishonest to call a $15 fee on a $100 loan 400% interest," said Tim Miller of the CCF. "It is even more brazen to make that claim when the legislation CRL references would make it illegal for borrowers to roll loans over enough times to even approach that percentage. What CRL doesn't tell you is that their own 2007 study shows that short term... lenders received 16.4% interest on their loans."

Instead of attempting to further regulate the industry, perhaps legislators and financial groups should focus on providing consumers with the facts so they can make more informed financial decisions.