Sep 05, 2013 Quinn Thomas
New York's financial regulator Benjamin Lawsky has been aggressively attempting to regulate the short term lending in the state, perhaps with too heavy a hand.
Recently, he sent letters to 35 online small dollar outlets, ordering them to stop offering loans to New York residents. However, many of these enterprises are Native American outlets that have sovereign status backed up by legal precedents set by the U.S. Supreme Court as far back as the 1830s.
Despite that fact, Lawsky believes he has the right to regulate these outlets, a controversial claim to say the least. It's on par with Lawsky's record as New York's Superintendent of the Department of Financial Services. The Daily Caller reported that both supporters and critics of Lawsky's policies admit that he takes pride in "collecting scalps" from notable financial firms by using aggressive tactics, which may indicate that he is more focused on creating a reputation based on fear rather than calculated actions that benefit consumers.
At the center of the rhetoric Lawsky has used against the short term industry are statements regarding high annual interest rates on small dollar products. However, what Lawsky has decided not to divulge in his briefs about short term lending is that they are not structured to encompass year-long payment periods. Surely, if Lawsky wants to offer serious regulatory policies, he should gather all applicable facts before instituting changes that could hurt a useful financial source for millions of Americans.
High regulation and short lengths
A small dollar lending expert recently outlined the truth about the industry in The Baltimore Sun.
He indicated that the negative perception some consumers hold regarding the industry is a result of misinformation given about by overzealous critics such as Lawsky. The misleading discourse they champion does little more than provide American consumers with erroneous facts about financial resources, which is a harmful tactic.
The source noted that the industry is highly regulated at state and federal levels. In fact, the financial practice is legal in just 35 states, largely a result of regulatory efforts based on inaccurate information passed out by lawmakers and financial officials.
Annualized rate does not apply
Using an annual percentage rate (APR) to analyze the interest on a short term product is hardly an honest approach to take, The Baltimore Sun hinted.
Short term loans only typically encompass a two-week or four-week payment period that comes with a flat fee depending on how much has been borrowed. Usually, the standard fee is $15 per $100 borrowed, the industry expert noted in the news source. Therefore, analyzing short term rates based on APR is hardly effective and truthful.
Many financial experts have weighed in on Lawsky's actions, heavily criticizing his rulings. John Berlau of the Competitive Enterprise Institute noted that applying APR analysis to short term products is akin to using it to determine the cost of hotel rooms and other common consumer expenses that only span a few days or weeks.
"When you say [these loans have a] 1,000 percent interest rate, that's annual interest," he told The Daily Caller. "If a hotel room is $100 a day, you could say the annual rate for the hotel could be five figures. Ironically, a short term loan can be of lower cost often than overdraft fees."
The practical use of short term loans simply can not be denied. As Peter Barden indicated to the source, they offer a valuable financial resource for many consumers that are unable to access credit due to tighter regulations by traditional banking institutions.
Also, he noted that short term lending is a great way for Americans to quickly obtain the funding they may need to recover from disasters such as hurricanes and tornadoes that can damage property. Standard bank loans may take weeks to be approved, while short term products can take just days or hours to process.
Why Lawsky has decided to ignore these facts is a mystery.