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Legislators reevaluate short term lending laws

Dec 12, 2018 Quinn Thomas

Though short term lenders provide those in need with feasible financial assistance, lawmakers throughout the United States have implemented laws designed to hinder their capabilities. Some legislatures prevent them from loaning to people with particular credit scores, while others prohibit these organizations from charging particular interests rates on the original loan amount. However, these necessary companies are continuing to solidify themselves as important participants in the U.S. economy.

On the state level
According to the Miami Herald, Louisiana legislators are looking to restrict individuals from obtaining 10 interim loans a year, a revision proposed by state Sen. Danny Martiny. Originally, the bill called for a cap in fees short term lending companies would be obligated to follow, restricting them from charging an annual interest rate of 36 percent or more. As the industry employs more people than many would think, Martiny claimed that the restriction would put some storefront lenders out of business, thereby bereaving disenfranchised individuals from obtaining immediate help when they need it.

Such laws are often introduced as the result of the few bad apples partaking in short term lending practices. Although the majority of these institutions remain morally sound - exercising reasonable interest rates and carefully evaluating the financial situations of their customers - the bad actions of one organization can tarnish the reputations of others. Professionals partaking in the industry recognize the fact that the people approaching them likely have nowhere else to go for assistance, as their consumer credit data has been damaged due to poor fiscal decisions they made in the past or circumstances beyond their control.

Providing full disclosure
However, there's a particular approach short term lenders are taking in order to ensure public authorities that their practices are both socially valuable and conducted with integrity. Michael Moebs, a contributor to American Banker, claimed that using an annual percentage rate to report the pricing of small loans or overdrafts is inefficient, providing legislators with inaccurate, somewhat irrelevant data that misrepresents the business. In contrast, if interim loan companies disclose their fees to provide lawmakers with a better picture of out-of-pocket expenses sustained by the customer, legislators will have more confidence in their practices.

"Transparency and clarity along with speed of communication are essential in the small-cash market, no matter who the lender is," noted Moebs.

According to the Federal Deposit Insurance Corporation, the Truth in Lending Act of 1968 obligates monetary organizations to submit consumer credit reports to public organizations. Also known as Regulation Z, the mandate has been difficult for small, mom-and-pop lenders to abide by, primarily due to the fact that standardized forms provided by the Federal Reserve or FDIC are unwieldy. On the other hand, many are looking to implement electronic solutions capable of streamlining the divulgence of these records.

At the end of the day, if state or federal governments made a united effort to disband or prohibit short term lenders, Moebs claimed that nearly 22 million U.S. citizens would be forced to look for assistance from banks, credit unions or other organizations that are either incapable of or unwilling to provide such a service.