BLOG VIEW: I am not a fan of payday loan operations. These unregulated financial service providers offer quickie loans that include an absurdly high interest rate – sometimes stretching into the three-digit range – plus ridiculously small payback terms that can often be as brief as two weeks. There are many horror stories of unsuspecting borrowers being driven to bankruptcy because of their inability to pay back the loans, and the reputation of this sector is so negative that 15 states will not allow payday lenders to set up retail operations.
Nobody goes to a payday lender for a mortgage, of course, but people who get trapped in the absurdly high interest rates connected to those loans can easily suffer serious damage to their credit ratings. At a time when the mortgage banking industry is trying to encourage people to take out home loans, a payday loan-based blot on a credit rating can easily disqualify a potential borrower from gaining a mortgage. Based on this consideration, the industry needs to be concerned.
San Francisco's city government is cognizant of the credit damage created by these loans, which is why it is now offering a program called Payday Plus SF. The program is being coordinated as an alternative to small-dollar payday loans, and 13 credit unions are participating in the effort. The maximum interest rate on these loans is a highly manageable 18% annual percentage rate – a far cry from the payday loans that have been known to reach up to 400%.
I am calling attention to Payday Plus SF for two reasons. First, I would love to see mortgage-originating depository institutions around the country – credit unions, thrifts and commercial banks – working in unison to create similar programs in their markets.
The public's faith in the financial services industry has been sorely tested in the past couple of years, and many people are turning away from well-established and well-insured institutions in favor of the payday loan operators. New programs that mirror Payday Plus SF will serve to re-establish the state of goodwill that has frayed during this recession.
Second, I am renewing a call for the mortgage banking industry to join in the effort to put payday lenders under the level of federal regulatory supervision in which home-loan providers are currently operating. From a regulatory standpoint, payday lenders continue to operate in a hazy fringe – some states have addressed the matter via legislation, but others don't appear to care.
The Department of the Treasury hasn't voiced a hue and cry over this segment, and payday lending has not been a key issue in the still-gestating congressional legislation on financial services reform. However, that is not to say that the federal government has completely ignored the issue.
Back in 2006, the Department of Defense began to call these companies into question when too many military personnel were having their security clearances denied or revoked due to financial difficulties stemming, in large part, to the payday lenders who set up shop in the towns surrounding domestic military bases. Obviously, an issue only gets attention when it hits home.
Consumer advocacy groups have been hostile to the chaos brought by reckless payday lenders. If our industry could team up with the consumer advocates for this common cause, we would be able to create a new partnership with consumer advocates that will ultimately benefit mortgage banking. After all, these same advocates have not been singing the praises of mortgage banking. But if they can show that we share many of the same goals, we can gain more by working together.
In all fairness, it should be noted that there are responsible payday lending operations, and this segment of the financial services world has the potential to fill a small but vital niche. But absent of proper regulation and in view of the abuse that has taken place, this segment needs to be reined in. Payday Plus SF is a great start, and the challenge is to build and expand on that encouraging development.
– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]
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