The consumer protection agency, which was set up by President Obama, had its first hearing in the public domain earlier this month about payday lending. This industry currently brings in approximately $7 billion in fees per year. The session was held in Birmingham, Alabama, and the Consumer Financial Protection Bureau said that testimony from this hearing would help them decide on regulations to the industry in the future.
According to the Bureau’s Director, Richard Cordray, short-term cash loans are perfectly okay as long as the lender is helping and not harming the borrower. This is the first time that the Federal Government will be examining payday lending as it was up to each individual state to run the rule over instant cash loans before now.
An estimated 20 million Americans are availing of payday loans. Lenders defended their practice by saying that interest rates are actually quite low and that the application procedure was also extremely easy. Many members of the crowd at the public hearing have successfully used emergency cash loans and were delighted with the service received. Yet these stories cut little ice with Stephen Hoyt, member of the Birmingham City Council, who said that payday loans have excessively high interest rates attached.
The Bureau itself hit the headlines because of severe Republican opposition to its formation. The Republicans are also unhappy that Cordray was appointed as Director. Bill Armistead, chairman of the Alabama GOP, is also unhappy at the formation of the Bureau, which he feels could make decisions that hurt an economy that is already fragile.
Short-term cash loans have often been criticized by defenders of the poor who state that such industries take advantage of people on low incomes. Payday loan companies in Alabama often open in the place of closed convenience stores and fast-food restaurants. It is interesting to note that the average user of short-term loans in the United States earns around $900 a week, hardly belonging in the low-income bracket.
Instant cash loans are now legal in 32 states, each of which has their own individual rules. For example, lenders in Alabama are not allowed lend more than $500 with a maximum interest rate of 17.5%. It should be noted that this is total interest on the loan, not APR, which can be as high as 456%. However, a $100 loan over 14 days will result in a maximum of $17.50 interest being repaid. This can hardly be seen as extortion and residents of Alabama clearly agree as 20% of households in the state utilize payday loans.
Ted Saunders, CEO of Community Choice Financial Inc. in Ohio is outraged at statements, which say that the short-term cash loan industry chews people up and spits them out. He said that payday lending is well regulated and that states should look for companies that break the rules rather than making sweeping changes in the industry. According to Republican politician Oliver Robinson who represents Birmingham, new regulations could damage the lives of people in his area. Mr. Robinson also said that people often can’t get a loan from banks and that emergency lenders offer an important service.