The people that provide short term loans to Americans who are poor, cash strapped and have no other alternative do provide a service. And in some cases that service may be vital and necessary. But that service comes with a cost.
About 35 percent of the $32 billion in small-dollar loans made in 2010 originated online and that share will grow to 62 percent by 2016, according to a Jan. 9 report by John Hecht, then an analyst with JMP Securities, a San Francisco-based investment bank.
Interest rates, measured as an annual percentage rate, can reach 521 percent, according to the Consumer Financial Protection Bureau. Consumer advocates have long argued that the business can trap poorer borrowers in a cycle of debt as they take out new loans to cover old ones.
So what the industry wants to do is to move regulation of their business away from the states and to the Federal government. Why? Well when any regulated industry suggests changes in regulations and regulatory authority, its purpose is going to be to help the industry. In this case one goal is for the industry to avoid disclosing the rate of interest it is charging.
Under the current regulatory system, states have jurisdiction over consumer loans made within their borders. The Dodd-Frank law gives the new Consumer Financial Protection Bureau the ability to supervise, regulate and enforce rules on non-bank financial companies. The bill introduced in Congress this month would in effect give the OCC some joint authority with the bureau.
The ‘OCC’ is the Office of the Comptroller of the Currency, one the many bank regulators in the federal system of regulations. Anybody have any idea of how effective bank regulation has been in the last decade or so?
One feature of the change is this.
The bill also would exempt loans with terms under a year from the Truth in Lending Act, which requires lenders to post the annualized percentage rate consumers are paying. Instead, lenders would be able to post the dollar cost of a loan as a finance charge.
So now we all know how you get people to pay an interest rate of 50% or more. If you are the mob, you threaten to break their kneecaps. If you are the legitimate lenders you just don’t tell them.