Installment Loans – Let the States Decide
Called by different terms that include marketplace loans, nonbank loans, shorter term lending and Internet-based loans, installment loans work differently than most payday and short-term loans such as auto title loans. These loans allow consumers — and a significant number of small businesses — to borrow amounts that range from $200 up to $5,000 and repay them in equal installments over a longer repayment period, which is often six months.
Many lending companies that are experiencing stricter regulations of short-term, payday-type loans are offering installment loans to make up for shortfalls due to regulatory limitations of their business operations and full or partial bans in some states. Installments also satisfy borrowers who are better able to repay their loans over time instead of repaying them within a single pay period.
Many payday loan borrowers are forced to take out multiple loans because they can’t afford to repay the whole amount from their next paychecks despite industry warnings against the practice. This often leads some people to become trapped in a cycle of debt, which is a primary reason that industry critics give for opposing payday, auto title and short-term loans. Many of these payday lenders now offer installment loans to satisfy critics, consumer demand and losses of interest income due to payday lending restrictions. However, controversy continues to grow about whether federal regulators should have an expanded role in regulating these installment loans.
States Have the Inherent Right to Regulate Nonbanking Installment Loans Within Their Jurisdictions
Installment loans can be available in-store or online, and many states already regulate the amounts of these loans and cap interest rates, which are usually limited to 36 percent APR. States inherently understand their citizens, statewide economic conditions and people’s attitudes about short-term loans better than the federal government. Most states are already addressing payday loans, installment loans and other short-term lending practices, so it makes little sense for federal officials to second-guess their decisions and impose their own policies on states that have the right and fiduciary responsibility to regulate businesses within their borders.
An article on www.pewtrusts.org1 states that “payday and auto title lenders operate in 39 states” and that installment or marketplace loans are offered in 25 states in 2016, which are expected to expand. These loans already meet CFPB guidelines that require lenders to consider a borrower’s ability to repay a loan. The CFPB can’t legally limit interest rates, which is reserved to the states. It just doesn’t make sense to continue issuing regulations and guidelines from two government agencies when one will do. The states have these matters sufficiently covered.
CFPB Critics Are Already Nervous About the CFPB Exceeding Its Legislative Mandate
Critics of payday loans contend that installment loans are just the latest way that payday lenders are using to get around restrictions initiated by the Consumer Financial Protection Bureau or CFPB, an agency that has come under increasing political opposition for its unilateral decisions, overreach beyond its mandate and lack of accountability to Congress and the courts. An even larger coalition of payday lenders, politicians and the traditional financial establishment, however, are attacking excessive federal regulations, CFPB overreach and federal agencies riding roughshod over states’ rights.
An article that appears on the website blogs.morganlewis.com2 reports that the CFPB “has taken two notable steps that signal a new interest in regulating marketplace, or ‘peer-to-peer,’ lending.” The CFPB seems poised to exceed its mandate once again by attempting to regulate all types of installment loans instead of leaving these matters to the states where they belong.
Consumer Advocates and Political Opponents of Payday Lending Can’t Have It Both Ways
It becomes increasingly clear that the big banks, insurance companies and other major financial services providers will always oppose inroads by competitors into areas where they’ve long enjoyed financial monopolies such as lending money at huge profits. Major lenders can afford to offer lower interest rates because they finance loans over extended periods, deny credit to anyone without a high credit score and continuously offer their best customers credit to keep them paying interest throughout their lives.
Smaller finance companies or private Internet lenders who offer short-term loans are often targets of negative media campaigns that focus on their higher interest rates, but these companies need to charge higher rates to cover the administrative costs of short-term lending and higher default costs of offering credit to people who have lower credit ratings and no collateral to guarantee their loans.
It seems the more that payday lenders try to satisfy critics and political opposition, the quicker these opponents adopt new and stricter regulations. However, an increasing number of influential people are crying foul as the CFPB exceeds its authority and tries to regulate mainstream businesses and traditional lenders just as strictly as the payday lending industry.
Existing Regulations Already Cover Installment Loans at Federal and State Levels
Existing regulations of the CFPB, FTC and state governments already regulate the lending industry exhaustively, and further regulations promise to stifle business and slow economic growth and reduce tax revenue. State and local government agencies invariably understand their citizens’ needs and economic conditions better than federal agencies — especially one like the CFPB that has too much power and too little accountability.
A report on www.bloomberg.com3 finds that payday lenders are behaving responsibly and winning support for making installment loans available, and analyst John Hecht confirms that payday lenders are “diversifying the revenue sources while also shedding regulatory risk.” Common sense, free enterprise and states’ rights unanimously support leaving regulation of installment loans to the states instead of the federal government. If you want to find out more about installment loans and the regulation controversy, you can visit https://personalmoneystore.com/ for in-depth analyses and fair-minded coverage of these issues.