In today's rough economy, many people are turning to payday loan companies to help with their financial troubles. The mortgage banking industry has reason to be concerned about this situation.
No, the payday lenders are not trying to muscle in on the residential home loan market. In fact, this sector of the financial services industry is absent from many markets – 15 states will not allow payday lenders to set up retail operations within their borders. But in the other 35 states, they operate a total of 25,000 retail offices – and the number of offices could easily grow as the banking industry continues to downsize. There are also plenty of Internet-based payday lenders, too, but no one has been able to keep track of who's online.
So what's the problem? It is simple and scary: Payday lenders have the unchecked capacity to ruin the credit histories of many Americans. They don't lend large amounts of money, but they charge ridiculously high interest rates – sometimes well into the three-digit range. For those who are not able to pay back the loans, the killer interest and fees connected to the original transaction creates an increased level of indebtedness. It is not unusual for many people to see their credit wrecked by payday lending – even to the point of filing for bankruptcy.
This is hardly a new development. Back in October 2006, I wrote an E-Feature for Secondary Marketing Executive that detailed how the U.S. Department of Defense was aggressively trying to halt payday lending activities concentrated around military bases. The military had reason to be concerned, since one of its internal reports at that time discovered an estimated 80% of naval security clearance revocations and denials were due solely to individual financial issues.
In the past few years, payday lenders have made many enemies. Attempts have been made by consumer advocacy groups and state legislators to bring some degree of transparency and control to this unregulated industry. The media have also paid attention – last week's Associated Press newswire featured a disturbing article about this industry. But be careful in doing a Google News search for ‘payday loans,’ because the search engine is clogged with entries from a dubious blog that has nothing but cheery praise for the subject.
In today's recession, with thousands of people losing their jobs each week and thousands more struggling to get by, payday lenders are being seen by many as a last resort for quick cash. With credit tightening to the strangulation point, these loans are sometimes seen as the only source for extra cash. While this may be a quick-term solution to some, it will ultimately create problems down the road if borrowers are unable to repay their loans and the triple-digit interest that accompanies such transactions.
The mortgage banking industry needs to be cognizant of the damage created by payday lenders. When the economy improves – which will probably be later rather than sooner – residential mortgage lenders will not be able to enjoy a brisk return to normalcy if there is a wide wave of people who wind up with ruined credit due to their recession-period reliance on payday loans. Many of tomorrow's mortgage customers will not exist if they fall victim to payday lending today.
While there are plenty of issues and concerns that require the industry's attention today, I believe it is vital to keep an eye on payday lenders. I would strongly recommend that the industry's various state and national trade groups formulate a clear and cogent policy regarding payday lending and what these operations mean to the future of consumer credit.
This is not to say payday lenders should be put out of business. In concept, the idea behind this sector is feasible, provided that proper regulatory loans and sane interest rates are the operating norm. But in their current mode of operation, payday lenders are wreaking havoc that will resonate for years to come. Attention needs to be paid now, in order to prevent major problems in the near future.
What's your opinion on this issue? Please contact me and let's discuss this further.
– Phil Hall, editor, Secondary Marketing Executive.
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
