Short-term credit can work here
By Jamie Fulmer, senior vice president of public affairs for Advance America
November 20, 2014
Albany Times Union
In August 2013, state Superintendent of Financial Services Benjamin Lawsky announced a major crackdown on Internet payday lenders operating illegally in New York. The superintendent’s pursuit of illegal operators should be commended. But perhaps most notable about the announcement was his acknowledgment that enforcement alone will not help those who turn to unlicensed lenders, because of the void that exists in the regulated marketplace.
“The more aggressive we are in trying to enforce New York laws, which make payday lending illegal,” Lawsky said, “the more aggressive we also need to be in coming up with and incentivizing financial products that those with lesser credit can still have access to. You can’t do one without the other; you must be focused on both.”
New research from the Federal Deposit Insurance Corporation revealed that 20 percent of U.S. households are underbanked, meaning that, while they have a bank account, they also choose to use non-bank financial services such as payday loans to make ends meet.
Some lawmakers prefer to take that choice away from consumers entirely, as they have in New York state, which has no licensed lending. But what happens when consumers don’t have access to regulated short-term credit?
The answer often comes as a surprise to policymakers, but it shouldn’t. In states that have banned or severely limited access to short-term credit, such policies did not solve the financial challenges that lead people to seek small-dollar loans. Rather, consumers in need were generally forced to turn to credit that was more expensive (such as overdraft protection) and carried fewer consumer protections (such as unlicensed lenders), or to deal with the consequences of not paying their bills at all.
For instance, researchers from the Federal Reserve Bank of New York found that residents of Georgia and North Carolina “bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 (‘no asset’) bankruptcy at a higher rate” after short-term lending was effectively eliminated there.
Montana, Oregon and Washington state have all reported significant increases in online lending and related complaints since implementing restrictions on short-term lending.
Unfortunately, since New York also has no state-licensed short-term lending, consumers seek unlicensed lenders online in order to get through a financial challenge. Nine in 10 payday loan complaints to the Better Business Bureau are made against online lenders, although online loans account for only about one-third of the market.
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