|
|
|
 |
|
 |
|
| Payday lenders need to be reined in |
| 15 April, 2007 |
The crash of the subprime home mortgage market may have been a surprise to some, but all the warning signs were there. A business model where people are given loans that are likely to go into default, due to teaser rates and increasing payments over time, is bound to fail.
Rising home values in much of the country kept the subprime loan industry afloat for a while, but now the weaknesses of the system are painfully clear. A system where an important part of the profit is based on closing loans — and not on the likelihood of the loans actually being repaid — is bound to crumble under the weight of the many brokers and lenders trying, in the short-term, to maximize the cash in their pockets.
There's not much that can be done to remedy the past poor judgments and predatory lending practices in the subprime home mortgage market. However, Texas has a chance to stop the proliferation of payday lending that targets the same customers — those with weak credit scores and not quite enough money to make ends meet.
Payday lenders charge, on average, 400 percent APR for two-week loans, and they are virtually unregulated in Texas. They can charge whatever they want because they are exploiting a loophole in a law designed to protect consumers against fraudulent credit repair businesses. Sadly, they have found a way to turn consumer protections into a means to avoid state interest rate limits and state regulation.
Payday loans are quite different from subprime home mortgage loans, but they share two crucial features: They charge exorbitant interest rates, and they are loans that are designed to fail.
Payday lenders maximize their profits when borrowers cannot pay back loans and need to roll them over time after time, until they end up with a debt many times the amount borrowed. A recent study showed payday lenders get 90 percent of their revenue from borrowers who are unable to pay back their loans in time.
The industry recently launched an ad campaign, pledging high market standards and warning that consumers should take out loans only in an emergency. That may sound convincing at first blush, but it hides an agenda to legitimize a kind of lending that lures people into easy credit and ends up costing them many times the amount of the initial loan — creating what is often termed a "debt trap."
The federal government decided last fall that payday loans are so dangerous to military families that they should be limited in their interest rate charges to 36 percent. However, payday lenders want new laws in Texas that make charging an effective annual interest rate of 400 percent on a two-week loan a state-sanctioned practice.
And they don't want to stop there. They want an "out" built into their own legislation in case they decide to charge more. The proposed legislation maintains the loophole in Texas law that payday lenders have used to avoid all state interest rate limits and to side step federal banking guidelines related to payday lending.
We have a chance now to save Texas from falling into the same trap with payday loans as the country encountered with subprime mortgages:
First, Texas must close the loophole that payday lenders are using to make loans at exorbitant interest rates.
Second, payday lenders must be required to submit information about the loans they make in Texas to state regulators. This way, the state will have concrete information that can be used for clear policy making based on fact and not industry assertions of acceptable profitability.
Resource: http://www.mysanantonio.com
|
|
|
|
News || Resoureces || Services || Privacy Policy || Terms & Conditions || Sitemap