Financial reform bill contains stealth regulation of payday loans

Payday lenders and their customers escaped regulation during the latest round of financial reform in Congress. But the pay day as a financial reform issue is not going to go away. Language directly regulating the paydayloans industry was left out of the bill. But a provision creating a consumer protection agency did. The payday loans industry will likely be regulated by this agency.

Resource for this article: Convenient quick unsecured loans remain a target of financial reform By Personal Money Store

Regulation of paycheck loans imminent

Personal loan company and customers should be concerned about what may happen when the financial reform bill is ultimately passed. The Consumer Financial Protection Agency (CFPA) is involved within the bill to make rules governing oversight of payday loans. The CFPA may decide to make rules intended to make doing business difficult and sharply limit consumer access to convenient short term credit. The Michigan Messenger reports that language in both the House and Senate versions of the bill ensure that the CFPA has oversight and rule-making authority over all payday lenders.

Payday interest rates misconstrued

No rate of interest or rollover caps for online pay day loan with instant approval are present in either the Senate or House versions of the financial reform bill. However, the CFPA could end up considering a provision promoted by Illinois Democratic Senator Dick Durbin for capping the maximum annualized percentage rate of interest a loan company could charge on no credit check loans at 36 percent. For an autoloans or mortgage spanning many years, 36 percent interest seems like way too much, but it’s not enough to make it worthwhile for payday loans direct lender.

Cheap paycheck loans endangered

By offering 36 percent APR, direct payday lenders would soon be unable to provide credit to their borrowers. The Richmond Times Dispatch reports that at 36 percent APR, the total fee charged on a $100, two-week cash today would be $1.38. Payday loan companies would not be able to cover the cost of originating instant payroll loans at that rate, or take care of general business expenditures either, like payroll, benefits and rent.

Payday loan alternatives are scarce

Borrowers who have to take care of unexpected expenses with instant online personal loan could be left high and dry if payday lending were forced out of business by rules like the 36 percent APR limit. Payday loans are still be a better deal than making the very same arrangement with a bank. In fact, a study by Victor Stango, Ph.D., Associate Professor of Management at University of California, Davis, shows that credit unions cannot offer paydayloans alternatives any a lot more cheaply than payday loan companies. This is true according to a study by Victor Stango, Ph.D., Associate Professor of Management at University of California, Davis, that proves credit unions don’t offer better payday loans no faxing alternatives payday loans companies.

Credit unions can't compete, Credit unions don’t cut it, Credit union limitations

The fees and convenience of credit union short-term loans and paycheck loans went head to head in Stango’s study. Results using data from the National Credit Union Administration, credit unions and payday loan customers found that rates offered by credit unions either equal or exceed those offered by pay day companies. Short-term loans from credit unions were also a lot less convenient that payday loans. Payday lenders had a clear edge over credit unions in critical areas, like business hours and protection of a borrower’s credit score in case of default.

An essential consumer credit option

Consumer access to convenient short-term credit could possibly be in question without payday loan companies. Stango's study said fewer than 6 percent of credit unions offer pay day loan because most see little chance to make money on a competitively priced easy cash loans advance product. That could possibly be a moot point, considering that fee and interest charges on credit union short-term loans sometimes total more than the cost of a payday loan.

Citations

michiganmessenger.com
timesdispatch.com
marketwire.com