Conservative Viewpoints

"Government is not the solution…it is the problem" -Ronald Reagan

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A Conservative approach to payday lenders

Posted by Stephen on December 30, 2008

EDITORIAL: Many reasons to pause on ending payday lenders

The Virginian-Pilot
© December 16, 2008

Predatory lenders are living on borrowed time, but should President-elect Barack Obama jump in to pump the final bullet into this discredited industry?

Obama promised as a candidate to cap all payday loans at a 36 percent annual interest rate. His motivation is understandable. Payday lenders offer short-term loans of up to $500, charging fees equivalent to an outrageous 390 percent yearly interest rate.

But even at a time when bankers, insurers and automakers are lined up out the door of the U.S. Capitol seeking billions of dollars in federal bailouts, it’s worth pausing for a moment to question whether the president and Congress should cavalierly wipe out an entire industry, no matter how loathsome.

The action would not come totally out of the blue. Congress has already adopted a 36 percent cap to protect members of the military. The Federal Deposit Insurance Corporation established guidelines that caused federally insured banks to break off affiliations with payday lenders. New FDIC curbs on abusive credit card practices are the latest step in federal regulators’ efforts to bolster consumer protections in the financial sector.

For now, regulation of payday lenders remains in the hands of the 50 states. More than a dozen have adopted tough restrictions or bans, and momentum is on the side of reformers. Voters in Arizona and Ohio voted last month to reject measures overturning legal limits on the industry. Washington, D.C., capped interest rates at 24 percent.

Virginia’s efforts have been disappointing. Modest protections passed by state lawmakers this year limit consumers to one loan at a time, but they allow individuals to take up to 10 loans annually and preserve the exorbitant fees.

Leaving payday lenders and consumer advocates to battle it out in 50 states is a cumbersome way to achieve reform, but that’s not a good reason for the federal government to intervene. However, there may yet be cause for Obama to make good on his promise. Many advocates and regulators fear that as states beef up laws against payday lenders, the lenders will continue to prey on desperate people through the Internet, out of states’ reach.

Obama and Congress should determine whether that fear is becoming reality. If it is, they are justified in using federal resources to stamp out such abuses.

In the meantime, federal leaders should encourage banks, credit unions and other lenders to provide small, short-term loans. Experiences in some states have shown that without such alternatives, payday restrictions can lead to increases in bankruptcies and bounced check fees.

Credit unions, most of which are limited to 18 percent annual interest under federal charters, are already responding across the country with expanded loan offerings and improved outreach.

Banks have been less enthusiastic converts to the cause. Thirty-one banks, none of them in Virginia, are participating in an FDIC small-dollar loan pilot program.

The best way to rid the nation of predatory lenders is to squeeze them out of the market. That’s a proper first step for the new Obama administration.


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