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If history bears any indication of where this fight will wind up, New Yorks top bank regulator, Benjamin Lawsky, could be headed for a long, slow, expensive defeat.
October 7 -
At least nine lenders have halted operations in the three weeks since state regulators began pressuring banks to cut off their access to the payments system.
August 28
Utah's Department of Financial Institutions recently
What does this say about our nation's economy and access to credit among families in the lower-income quintiles? What does it suggest about how alternative lenders should be regulated?
The first two questions are easily answered. We live in an economic environment where equity among vast swaths of homeowners has been erased by the collapse of the mortgage market and related foreclosures. That meltdown brought stricter lending standards making qualification for loans more stringent than ever, including short-term, small-dollar amounts.
There is no question that these factors are major contributors to both the ever-greater demand for nontraditional loans, and to the natural market response reflected in Utah's statistics. Nationally, the same trend was clearly documented and reported by a
That leaves the third question: How should alternative lenders be regulated? That question, in turn, opens another can of variables. Nontraditional lenders include online lenders based overseas that are partially beyond regulatory reach; American tribal lenders asserting sovereign immunity in their web-based enterprises; a range of other online lenders and a growing multitude of storefront operations.
Regulatory authority is similarly splintered, with individual states, and a host of federal agencies each claiming a slice of the regulatory pie and the headlines that come with it. Today, anyone operating a nontraditional lending enterprise faces an ugly game. Let's call it Regulatory Roulette: Just spin the wheel! Losers face Benjamin Lawsky, New York State's chief financial regulator and his mission to shut down online lenders from across the country. Winners face New Mexico, where state law imposes no limit on interest rates.
Lost in the jurisdictional chaos is any qualitative distinction between lenders. Lawsky's effort in New York barrels forth with no bill of particulars, no articles of indictment. His cease-and-desist order was not accompanied by documentation showing that any particular lender was targeted for any evidence-based infraction. The same was true in a case lost by Colorado after a seven-year court battle against two sovereign Indian tribes with online lending operations. In short, Lawsky and other state regulators have given no indication of differentiating between online lenders that operate well and those that don't.
Yet the spectrum of alternative lending operations indicates that just such a distinction is needed.
There are predatory online and storefront lenders out there that need to be prevented from taking advantage of borrowers who have no resources to fight collections once they've been hooked into a sucker's deal. These are victims whose marginal credit goes from bad to worse as lenders enforce collections and file damaging cases with credit reporting agencies.
But the other end of that spectrum includes nontraditional operators of storefronts and web-based enterprises that spell out the terms and conditions in absolutely clear language, verbally and in writing. I examined such an operation, run by the Otoe-Missouria tribe in Oklahoma in person, where every phone operator is fully trained, and every conversation is recorded for quality control. The tribe owns its own servers, manages its own operations and takes specific measures to prevent growth of a boiler-room environment.
A line needs to be drawn defining acceptable industry short-term loan standards nationwide. It would protect both the ever-growing number of alternative borrowers and the lending enterprises providing an obviously essential need. That line could be drawn voluntarily by an association of alternative lenders themselves. It could be drawn by a joint committee of state regulators and industry representatives.
Or, it likely will be haggled out in court, state by state, guaranteeing a continuation of two certainties: No protection for borrowers, and no clear path to secure operations for lenders.
Just spin the wheel.
Jane Daugherty, former associate professor of mass communication at Florida International University, is a doctoral candidate at the University of Miami School of Communication in Coral Gables, Fla.
