Monthly Archives: February 2012

Payday Loan Industry and Changing Government Regulations

Payday loans and cash advances are a lucrative industry which makes more than $7 billion each year, due to its concept of disbursing cash as loan based on simple parameters which include being a citizen of the country and employment. However, there has been a change in government regulation considering payday loans, considering how some scrupulous lenders have manipulated the system by subjecting gullible lenders to high interest rates.

Director Richard Cordray of the Consumer Financial Protection Bureau recognized the need for short-term loans but said that lending should help the consumer’s and not harm them
. With the new change in the regulation, the Federal government will be keeping a close watch on payday lenders. Previously it was just the state regulators responsibility to examine payday lenders and see if they complied with state laws.

Though more than 19 million households in the US take payday loans, the Bureau pointed that most people do not know about the interest implications of the loan. People take payday loans and cash advances to tide over their short-term financial exigency which can be anything between financing a home improvement task to funding money for travel or celebrations. Most people are able to pay the money back by the next pay date but in case, they fail to pay; they end up with a huge amount to repay thanks to the high interest rate.

The Republicans have been opposite the move of the Obama Administration giving his nod to the Federal interest in the process and appointing of Consumer Financial Protection Bureau to check if consumer interest was being harmed. The Republicans have even said that Cordray’s decisions if undertaken can have disastrous effects to an already fragile American economy. Putting more regulations to a progressive lending system can only harm the progress of the overall economy, according to the views presented by the Republicans.

To be on the safe side, payday lenders insist on a check amount beforehand from the borrower which they deposit late. For instance, a borrower may issue a check for $117 and get $100 as loan. The lender holds on to the check for a short-time before depositing it.

Payday lenders have strongly opposed the move and called it unnecessary. The industry also has regulations in the form of federal disclosure laws, licensing requirements and state regulation. Some of the lenders are of the opinions that the state should focus on removing the bad players out of the business rather than impose another federal regulation.

Our view- We think that payday loans are very important because they have given a lease of hope and help to several thousands of people who do not have good credit or easy access to loans. For instance, there are many low income bracket people who do not get loan easily from a back. In some places like districts and villages, there is not much choice and payday loans certainly are a boon. The federal regulation should just oversee the process and hold accountable any payday loan provider who works in an unfair manner, as reported by state law agencies.