Is There A “Third Way” For Pay Day Loans?

February 21, 2018 at 9:14 am Leave a comment

Political junkies know that Tony Blair came to prominence in British politics by championing a “third way” for his Labor Party in which he argued that it would be true to the ideals of labor while adjusting its policies to reflect modern realities. Fascinating Henry, you say but what does this have to do with the tea in China?

Well, when it comes to pay day loans, there are two competing camps. On one side are those who view these short-term loans with exorbitant interest rates as categorically evil. They see them as intrinsically exploitive and champion policies such as usury caps on the state level which make them illegal. In the other camp are those who argue that pay day loans reflect the individual choice of adults in a financial jam. The reality is that not everyone is in a position to put aside money for a rainy day.

Is a “third way” possible, which both recognizes the utility of pay day loans while ensuring that they don’t become debt traps for desperate consumers?

That is the goal of the Pew Center. It argues that in this brief, that it is possible to offer short-term loans that actually benefit consumers. The key, they argue, is to devise products which enable credit unions and banks to cost effectively provide short-term loans. “With most banks and credit unions either not offering small loans, or only offering them to people with relatively high credit scores, consumers with low or no credit scores looking to borrow small amounts of money often turn to alternative lenders in the nonbank market. Yet three-quarters of all households that use these alternative financial services already have accounts at banks or credit unions, and borrowers who take out payday loans in particular must have both an income and an active checking account to serve as collateral when their payments are due.”

Pew describes a model which it says can allow banks and credit unions to make a profit while still benefiting consumers. It is also urging regulators to take a more active role in providing guidance to traditional and financial institutions. The idea is to encourage main stream lenders to really begin to offer an alternative to the pay day lenders you seem to spot on every street corner of major cities in this country.

I’m not skilled enough to know whether Pew’s specific proposals can thread the ideological needle. What I like so much about it however, is that it recognizes the reality that there are always going to be people who are going to need short-term loans. Rather than vilify the practice, let’s see if we can at least give people a cheaper way to get the funds they need.

 

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Congratulations…I Guess Sticks And Stones Will Break My Bones But Letters Will Never Hurt Me

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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