The industry of payday cash advance has been tagged with the term predatory lending for several years. Lenders of payday cash advances have been accused of charging very high fees for their loan and have been putting consumers in a cycle of debt without an escape.
Many times, the terms predatory lending and sub-prime lending have been used interchangeably but they are not synonymous. Payday cash advances have been considered to be sub-prime lending since they are unsecured loans. Sub-prime or unsecured payday cash advances may have high fees but these can be attributed to their short loan terms. So, referring payday cash advances as predatory lending, in general, is unwarranted.
Predatory lending is best defined as a harmful form of sub-prime lending. This means that predatory lending is practiced when consumers of payday cash advances are forced to take loans they don’t necessarily need or may put valuable assets at risk. However, it is clear that not all lenders who offer payday cash advances are predatory.
The CFSA or Community Financial Services Association of America, the national association of lenders of payday cash advances, has set guidelines to prevent predatory lending. These guidelines, known as the Lenders Best Practices, have been implemented by all of the members to assure consumer protection and preserve the reputation of responsible lenders.
The CFSA also reiterated that predatory lending must not be associated with all lenders in general. There are a lot of lenders who practice responsible lending practices. This has been supported by Federal Reserve Governor Edward Gramlich who said in his address at the Texas Association of Bank Counsel in South Padre Island, Texas last October 9, 2003 that predatory lending involves at least one or all of the following elements:
· Creating loans that are unaffordable and based on the assets of the borrower rather than on the borrowers ability to repay.
· Forcing a borrower to refinance a loan repeatedly to be able to charge high fees.
· Applying fraudulent or deceptive strategies to hide the true nature of the loan.
According to Gramlich, those lenders who practice this type of lending can be referred as predatory. In contrast, responsible lenders lend money according to the borrowers steady income and ability to repay. In terms of refinancing loans, most state laws regulate or even prohibit such practices. Even the CFSA encourages their members (payday cash advance lenders) to limit rollovers to 4 or depending on the imposed limits of the state.
In addition, responsible lenders carefully disclose all information (costs of the loan, interest, additional fees) to their consumers. Even the CFSA has required their members to disclose the cost of the loan in their signage and provide educational brochures to consumers regarding the responsible use of the loan. The CFSA has imposed the following Best Practices to prevent predatory lending among their members:
· Customers have the right to rescind any transaction (within 24 hours and must be without charge)
· Rollovers are limited to 4, or depending on the state limits
· Full disclosure of loan terms
· Fair and Appropriate collection practices
· Non-filing of criminal action against defaulting customers
· Strict compliance with state and federal regulations on lending practices
· Responsible lending and Truthful advertising
Predatory lending should not be generalized to all lenders of payday cash advances. There are a lot of lenders who uphold responsible and consumer-friendly lending practices.