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Why government officials need to back off legitimate lenders

Nov 04, 2013 Sean Albert

From time to time, it seems like government leaders, law enforcement officers and other officials tend to focus their time and effort on a particular cause célèbre. For instance, around the 4th of July holiday, many departments across the nation vow to crack down on drunk driving during the week surrounding the celebrations, more so than they already do.

For numerous national and state leaders, the current topic of the moment seems to have to do with short term lenders. While many regions of the United States allow consumers to borrow money when they're in dire straits and need help without curbing their wishes too much, a number of other areas place heavy restrictions on the practice, which can often be misleading and confusing.

In fact, this practice is overall mind-boggling, as the sector has long been seen as very helpful for individuals who need financial help. In fact, it was one of the only means of accessing alternative credit during the Great Recession, when traditional lenders and banks all but shut their doors in the faces of everyone who had less than perfect consumer credit scores.

The reason these companies were able to be the exception is that they could afford to approve applications on more flexible standards. For instance, many lenders take Payment Reporting Builds Credit scores into account. This ranking system allows small dollar lending companies to consider an individual's penchant for paying utility bills on time, rather than just taking the negatives into account - like traditional scores, among other financial data points.

And despite all the help these businesses gave consumers during the multiple years of the recession, they're now being largely targeted by government leaders in a very public way.

Benjamin Lawsky continues to pursue a vendetta against the sector
For the past few months, New York's Superintendent of Financial Services Benjamin Lawsky has been very vocal about his opposition to the short term lending sector. In late August, he sent out cease and desist letters to 36 short term lenders, saying that they were violating New York state laws. The main issue is the fact that the Empire State will not allow storefront small dollar lenders to operate.

That being said, the majority of these businesses doled out the loans online, making Lawsky's request a gray area. Moreover, 15 of the companies in question are based on Native American reservations, which are sovereign nations and therefore do not have to abide by state laws.

This led to a large, nationwide controversy that concerned the constitutionality of levying laws against tribes, as well as the role of the Internet in the lending industry.

The saga still continues on, according to Town Hall. The source explained that the U.S. District Court recently made a ruling that mandated Lawsky does have a right to tell the companies to stop operating in the state, despite the fact that it goes directly against the precedent set by the Supreme Court in the past.

However, there are numerous issues with this, the news provider noted. For instance, there's the fact that the state of New York is a separate governmental entity than Native American reservations, so neither should have any jurisdiction over the other. Moreover, Town Hall reported that this ruling will likely not hold up over the course of time.

FTC sues short term lending businesses
Another instance of federal groups taking rash courses of action against businesses in the small dollar lending sector recently occurred when the Federal Trade Commission (FTC) sued a group of lenders. However, according to The Times Free Press, there may have been a legitimate reason to do so.

The news source said that the companies in question were operating in Atlanta and Cleveland, and representatives were allegedly harassing borrowers and telling them misleading information when it came to methods of repayment on debts they didn't owe. However, as the news source points out, there is a question about whether or not these operations can be considered short term lenders, and the information used to contact borrowers may have been stolen.

"We are confident they were not contingency collectors," FTC Senior Staff Attorney Gregory Ash told the newspaper. "Based on our interviews with consumers, we don't believe they were legitimate holders of the debt."

However, this brings up a whole other point. Not only does The Times Free Press initially refer to these businesses as lenders, but it suggests that the government body has done the same. Sentiments like this - both form the media and government leaders - could do a lot to sway the public's opinion away from the sector and turn people against legitimate companies. While the FTC allegedly did the right thing and probably helped shore up real lenders' reputations by taking bad apples out of the picture, they should be asked to make a statement assuring that these aren't real representatives of the sector as a whole.