As if high-rate, short-term loans don’t mess with enough household budgets, the financial services industry has come up with a new way to mess with even more.
According to a recent Wall Street Journal article, a growing number of nonbank consumer-lending institutions have been busy signing up legions of new borrowers in the most obvious, smack-your-head, why-didn’t-I-come-up-with-that-idea places—where they work.
Think about it. The lenders gain extraordinarily efficient access to scores of eager borrower-wannabes in a single setting while at the same time, significantly diminish the risk of loss because that point of access also happens to be the borrowers’ source of income.
Employers also stand to gain from this arrangement. Not only are they in a position to more easily deflect the often awkward request for a payroll advance, but the employee now has yet another reason to value the job he or she has.
Whether they’re called payday, account advance or bill-pay loans, short-term financing comes at a very high price—often several hundred percent APR. And because consumers are, in effect, trading next week’s paycheck for this week’s cash-in-hand, they’re also likely to re-borrow the same amount (if not more) time and again.
Unfortunately, the demand for this product is strong these days, no doubt because roughly three-quarters of U.S. wage earners are living paycheck to paycheck. All the more reason for federal regulators to tighten the rules governing a burgeoning industry sub-segment that’s enjoying strong support from the investment community. Here are my suggestions for regulating these types of loans.
Setting APR-Based Usury Limits
Lenders often devise rate and fee schemes that vary from state to state because usury limits and their underlying calculation methodologies also vary among jurisdictions. This can add to the confusion for borrowers. How about setting a national usury limit that’s expressed as an annual percentage rate? APRs mathematically combine interest rates and fees into a metric that’s easy for consumers to understand and shop.
Choice of Law
Lenders also compare and contrast differing states’ laws and the agencies that would oversee their operations as they go about deciding where to put down roots—even when the business is conducted across state lines. How about designating a set of laws that are universally applied and overseen by a single regulator?
The Consumer Financial Protection Bureau has taken the lead in this regard. One of its most recent actions involves several online financial services companies that, according to the CFPB, are engaged in “unfair, deceptive and abusive” lending practices. Should the bureau successfully prove its case, the implications for these firms would be catastrophic. Not only would the firms be required to pay substantial monetary damages, but the underlying loan contracts would also be voided. That means the borrowers would no longer be obligated to repay those particular debts.
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Last, given this latest innovation—the direct involvement of employers in personal financial matters—how about beefing up the disclosure requirements so that employees can know whether their employers are financially benefitting from the referrals they make and the extent to which their personal financial circumstances are being shared?
No different from any other business, lenders have their own profitability targets to hit. So it stands to reason that any incremental costs—referral fees, in this instance—are likely to be passed on to borrowers in the form of even higher rates than these loan products already fetch.
Finally, as for the matter of sharing confidential financial information, ask yourself this: Do I really want my boss to know that my personal circumstances are such that I’m willing to pay loan shark rates for a quick cash hit?
More on Managing Debt:
- The Credit.com Debt Management Learning Center
- How to Pay Off Credit Card Debt
- 5 Tips for Consolidating Credit Card Debt
- Understanding Your Debt Collection Rights
- The Best Way to Loan Money to Friends & Family
- Top 10 Debt Collection Rights
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.