Quick cash loans under Federal scrutiny

A Federal agency, the Federal Deposit Insurance Corporation, is looking into the payday loan industry. The agency, which insures deposits for consumers in banks, is examining the entire process of short term lending and is making some recommendations to banks as to how these loans should be handled.

Payday loans are short term loans that have a life of two weeks. Lenders, which are generally free standing stores, rather than banks or credit unions, lend the money in sums that usually range from $100-500. They also charge fees that range from $10-30 per $100 borrowed. Borrowers take out the loan by writing a postdated check for the loan amount and the fee. The lender cashes the check in two weeks’ time. These short term loans, also known as quick cash loans, are intended to help tide borrowers over until their next payday.

But the industry has a dark side, and that is the fact that many of these loans cannot be repaid on time. That leads to a “rolling over” of the loan, where the consumer pays the fee a second time to keep the loan for another two weeks. These “rollovers are really the bread and butter of the industry; they keep cash coming in without any additional cash going out. The stories of loans of a few hundred dollars that eventually blossomed into debts of thousands of dollars are the bane of the industry, which is now under fire for usurious lending.

The FDIC is aware of this, and wants to reign in these loans. Participating banks are often located in states such as Delaware, South Dakota, or Utah, which tend to have lax banking regulation and high interest rates. Stores in other states which do business with these banks consider the loans to take place in the state in which the bank is located. Thus, a loan offered in a Texas cash advance store which uses a Delaware bank can be considered to have been issued in Delaware, thus circumventing Texas banking laws.

Among other guidelines, the FDIC has asked certain participating banks not to issue loans to customers who have had such loans outstanding for more than three months during the previous year. So far, at least two banks, including the First Bank of Delaware, have decided to stop offering such loans. Furthermore, Ace Cash Express, Inc., as indicated that it will stop offering loans in Texas as a result.

Lenders and banks which handle such loans maintain that they are offering a valuable and needed service to customers who understand the terms of the deal. The point out, correctly, that few alternatives exist, as few banks or credit unions offer alternatives to payday loans. On the other hand, these products do have a tendency to get out of hand, and the stories of people who have run up mountains of debt while juggling two, three or four such loans are also true. In time, the FDIC will probably attempt to further regulate the industry.

Copyright © 2005-2007 by Retro Marketing. All rights reserved.