Nov 02, 2013 Sean Albert
Online short term lending has been a topic of much debate in the last few months. In late August, New York state Superintendent of Financial Services Benjamin Lawsky launched a war against the alternative finance sector when he sent a cease and desist letter to 36 lenders operating online, claiming that they needed to stop extending funds to New York citizens because physical storefronts are heavily restricted in the state.
The main issue with his communications, however, was the fact that 15 of these companies operated out of Native American reservations. Ever since a Supreme Court decision made in the mid-19th century, it's been written in law books that these tribes are considered sovereign nations and have no obligation to follow state laws, only federal regulations.
Despite this, a number of consumer and civil rights groups recently asserted that the industry was taking advantage of borrowers in a letter sent to federal regulation groups and other government leaders. This also flies in the face of the fact that numerous individuals across the United States have been able to keep their heads above water in troubling financial times solely because of this industry. Consider the Great Recession alone - traditional banks and lenders shut their doors to everyone who was anything less than a sure thing in regard to their consumer credit scores. Alternative lenders, however, were able to be more flexible.
In this letter sent to the lawmakers of the U.S., the groups make numerous accusations that are both unfounded and questionable. What were these statements and what should consumers and other entities associated with the industry believe as truth?
What was the letter all about?
Various important entities got together to pen the letter, from individuals at the U.S. Public Interest Research Group to members of the National Association for the Advancement of Colored People and the Consumers for Auto Reliability and Safety. They addressed the six-page letter to numerous government leaders. Some of those who received the communication were Chairman of the Board of Governors of the Federal Reserve System Ben Bernanke, Consumer Financial Protection Bureau Director Richard Cordray and U.S Attorney General Eric Holder, among many others.
The message started off thanking these individuals for their hard work as representatives and advocates for the people, and then proceeded to request that they look to create legislation that would either heavily restrict or abolish short term lending as the industry stands now.
The letter then took a seemingly odd turn, discussing Internet fraud and making a link between ceasing online lending and stopping hackers in their tracks.
Looking at the facts of the matter
While this letter was passionate and persuasive, the fact is that not everything said was completely true. For instance, it's dishonest to suggest that there's a link between Internet-based short term lenders and cyberattacks. Consumers should know that when they're dealing with legitimate companies, their safety is always assured - something they can verify for themselves by checking to see if there's a lock symbol near the address bar.
Then there are the assertions that online small dollar lending is illegal, especially where Native American tribes are involved. Consumer Federation of America Director of Financial Services Tom Feltner made a statement calling on banks to stop processing such fiscal transactions, lumping them all together and referring to the loans as "illegal." While he might have been talking about a specific subset that disobeys the laws, the sentence could be misconstrued, and consumers need to know that largely, these actions are not illegal.
While there are bad apples in every sector, the majority of small dollar lenders follow the letter of the law and would not put both their operations and their clients in jeopardy by taking questionable actions.
Other government leaders want to build up, not break down, the sector
Despite the latest news coming out of the sector, there are also a number of national leaders who recognize the need for such financial options, because traditional alternatives don't always work out. These are the types of people who try to find the best of both worlds - situations where both consumers and companies can benefit. This might involve placing more regulations on the industry, but as long as lawmakers are willing to play ball, these actions could work out well.
This is the case in Evanston, Illinois, where local leaders aren't attempting to put cracks in the facade of the sector - they're literally trying to fix them. According to Evanston Now, short term lenders in the Midwestern city are seeking a grant to improve the look and structural accouterments of the buildings out of which they operate. The decision will be put to a vote within the Evanston Economic Development Committee at the end of October.