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State needs help to curb predatory lenders
The fight to stomp out predatory lending has always been difficult -- the minute lawmakers target one form of usury, another springs up to take its place. Florida is learning that lesson well: The state has already taken on abusive practices tied to the title-lending industry, which writes loans at triple-digit interest rates secured by borrowers' vehicles. Payday loan companies that also charge huge interest rates are also proliferating, despite state attempts to regulate them. An increasing number of elderly and disabled people isfalling into sticky traps of debt.
Payday lenders work this way: A customer signs an agreement that sets out the amount borrowed, plus fees and interest, and then writes the lender a check for that amount. The lender holds the check for a pre-arranged period of time then submits it to the borrower's bank. By state law, interest rates for these loans are supposed to be capped (but the capped rate can still translate into an annual percentage rate of 300 percent or more) plus a "verification" fee. Increasingly, says the Florida Public Interest Research Group, lenders are ducking these regulations by taking out national charters as banks (or striking deals to piggyback on charters owned by banks.)
A bill pending in the Legislature would give the state slightly more leverage against predatory lenders. But it's becoming increasingly clear that state legislatures can't tackle this problem alone. National reform is needed.
Across the nation, regulators are seeing disturbing trends. Employees of some national chains are targeting elderly people who have their Social Security checks direct-deposited into checking accounts, making loans in mid-month then sweeping the (significantly higher) repayment amount from the bank account as soon as the benefits check clears. Advocates for the disabled say their clients often fall victim to lenders who convince them to take out multiple loans -- a practice Florida law prohibits, but other states permit.
To craft national protections, Congress should look first to Florida and other states that have attempted to regulate usury. Capping interest rates to rational levels would still allow short-term lenders to make a profit -- in fact, Florida is still one of the top states in the nation for payday lenders despite its relatively consumer-friendly regulation. Stopping rollover loans (where a customer delays repayment but incurs additional, high fees) would be another important step. Finally, caps on the number of short-term loans one person can take out would keep borrowers from digging holes they can't climb out of.
Congress should also consider the factors that drive so many people to predatory lenders -- though it's a considerably tougher problem to solve. For many Americans with poor credit ratings, payday or title lenders offer their only access to credit in an emergency. Working with banks to establish small-loan programs could help ease their plight, while still maintaining rational consumer protections and caps on fees.
It should be clear, however, that predatory lending offers little help to the growing number of people in financial straits. For too many, these loans are little more than a means to dig themselves deeper in debt -- and there's little public benefit to that.
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