Why the Federal Government Should Regulate Payday Loans


Editorial: Even though voters have banned payday loans in Arizona, there is a good Conservative argument to be made for federal involvement.

The goal of strengthening families and communities can be surprisingly controversial.

When it comes to payday loans and other high interest short term loans, the value of protecting families from predatory practices is evident. But so does the controversy in a conservative state as the Federal Bureau of Consumer Financial Protection proposes to regulate these lenders.

Why is this government business? Why shouldn’t individuals fail because of their own financial decisions?

When does the business need regulatory control?

Difficult questions. But it’s not just an academic or philosophical discussion because some businesses thrive on the failure of individuals, and there are kids who call these individuals mum and dad.

A conservative argument in favor of regulation

Arizona residents recognized this in 2008, when voters banned payday loans which were seen as predatory loan traps that put families on a downward spiral.

Lawmakers recognized this in the last legislative session when they rejected a proposal to allow a new triple-digit interest loan product in Arizona. These so-called flexible loans have been decried as debt traps by charities that work with the poor and called disguised payday loans by consumer advocates.

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The rejection of this product was a 100% pro-family and conservative position. The same goes for the Arizona ban on payday loans. Yes, both limit free enterprise as well as consumer choice, as proponents of the short-term loan industry point out.

But the larger goal of helping families avoid a financial trap is in the best interests of local communities and the state. In the long run, family stability is good for business, as financially healthy families support local businesses in their businesses.

This cannot happen if a family’s income is spent on the interest and costs of an abusive loan.

Why involve the federal government? here’s why

The Consumer Financial Protection Bureau, an independent federal body with rule-making power, raises philosophical questions among those troubled by federal regulations. It’s no surprise, then, that some conservatives are bristling at the idea that the CFPB is imposing rules on lenders.

But the dangers for families are real. CFPB research shows that payday loans cost an average of 391% of APR, and the typical customer earns $ 26,197 per year. Eighty percent of these loans are transferred into another loan because the borrower cannot make the payment.

The cycle is becoming unavoidable for low-income families.

The CFPB is seeking public comments on a proposed rule to protect families from this trap.

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This is a “historic step,” according to a new report from the Arizona Public Interest Research Group, because it would require high-interest, short-term lenders to determine whether their customers can afford to repay. the loan.

Such a requirement seems to go without saying. The fact that it should be imposed by federal regulation – rather than pre-existing as part of good business practice – lends credence to the argument that these are predatory lending.

However, the proposed rule grants an exemption from the repayment capacity requirement for a maximum of six loans per year per client. There is no good reason for this exemption.

Consumer advocates say it’s critically important that the final rule is tough and focused on protecting borrowers. CFPB accepts public comments on the proposed rule. Consumer advocates will argue for tenacity, even as short-term lenders argue for more lax regulation.

How the rules could affect Arizona

So why is this important in Arizona where payday loans are banned?

The rules proposed by the CFPB could be used in Arizona’s next legislative session by supporters of the short-term, high-interest lending industry to argue that federal regulations amount to Uncle’s Seal of Approval Sam on these loans. Those who support the expansion of high interest loans in Arizona might argue that our state should reconsider the possibility of allowing them.

This is a good reason to ensure that these rules are clearly a floor, not a ceiling. States must be able to go further to protect consumers. Arizona is one of 14 states that have effectively banned payday loans.

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Additionally, the rules will also apply to auto title loans, which are available in Arizona.

The rules must be strict to protect Arizona’s progress in protecting individuals and families from predatory loans, and to help prevent future loan products from circumventing protections put in place by voters in the United States. Arizona.

On a superficial level, this may seem like a case of federal regulation versus industry. But the goal is to protect families, and this is of greater benefit to the communities and businesses they support.


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