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Lenders sought out in witch hunt?

Aug 11, 2013 Philip Burgess

Numerous business professionals and consumers alike are aware that the often negative stigma attached to the short term lending industry is unwarranted. As in every other sector, there are a few bad apples that can negatively affect the reputation of the majority, but sometimes it seems as if lawmakers and other authorities are taking the situation too far.

Many within the alternative finance industry think that this has been the case recently in New York, where it appears as if some leaders almost have a vendetta of sorts against short term lenders, despite the fact that these types of companies have been known to provide financial relief to consumers in times of trouble, - especially when banks or other more traditional businesses shut their doors to people in need.

These lines of credit were unavailable to many not too long ago - the years during the Great Recession, for instance.

What many leaders don't realize is that much more often than not, consumers know what they're getting into. At reputable short term lending companies, employees are trained to educate clients about the the terms and conditions that accompany borrowing. When people have no other way to make ends meet, small dollar loans can be just the thing they need to get back on their feet.

The situation in New York is disheartening to all in the sector, as administrators seem to be taking a hard line on companies operating legitimately. However, if these actions aren't curbed or short term lenders and their clients don't get involved, this scenario could cause the forced closure of hundreds of companies and send many individuals' personal finances into a tailspin.

Eliminating the power of the Internet
According to The New York Daily News, in New York, it's illegal for short term lenders to attach more than a 25-percent interest rate to loans. This has already greatly restricted the ability of such companies to operate in the state. Administrators don't think of it this way - that interest goes toward things like overhead costs within the business, other expenses and payroll used to keep workers employed.

Nonetheless, Governor Andrew Cuomo's administration is now trying to forbid lenders operating over the Internet to provide New Yorkers with loans if they seek them out. While it might be a bit of a gray area, this practice is certainly legal, The Wall Street Journal noted, and Cuomo's actions could have long-lasting repercussions on not only this industry, but companies in other sectors that operate over the Internet as well.

New York Financial Services Superintendent Benjamin Lawsky wrote a strongly-worded letter to 35 online lenders, the newspaper reported, telling them to cease and desist, and calling the loans illegal. This also has a strong effect on the debt collection industry, because Lawsky wrote additional memos to leading corporations saying that collecting on short term loans is against the law as well.

Cuomo's solution won't hold water
The New York Daily News reported that Cuomo has set up projects with local banks and credit unions so that consumers will still have access to credit when they run into financial issues.

But that's a problem in itself, according to The Wall Street Journal. The news provider reported that the Department of Justice (DOJ) is subpoenaing banks and other traditional institutions that offer short term loans. The news source indicated that the government entity is intervening in legitimate practices.

Where does this leave consumers, especially those in New York? The unnecessary investigations launched by the DOJ and Cuomo could potentially eliminate all short term loans previously available to enable people to make ends meet. This means that leaders in the industry - and their clients - need to take a harder stance on the situation.

Luckily for all, The Wall Street Journal noted that the Consumer Financial Protection Bureau is doing this by suggesting industry-wide regulations all can abide by. But it's going to take some extra effort to make sure these legitimate companies don't get shut out by the witch hunts occurring in their backyards.