Obama's Birmingham speech to push for more govt. regulations on consumer finance industry

President Barack Obama (Photo: Christopher Dilts)

BIRMINGHAM, Ala. — President Barack Obama will visit Birmingham, Alabama on Thursday and plans to deliver remarks aimed at ratcheting up regulations on the short-term loan industry, according to U.S. Rep. Terri Sewell.

Sewell said the president’s remarks will address “the urgent need for stronger consumer protections and increased transparency.”

“The economy is slowly recovering, and many of my constituents rely on payday loans to help make ends meet,” Sewell said in a statement. “I recognize the need for emergency credit, but we must also ensure that these products help consumers, rather than trap them to a perpetual cycle of debt.”

How exactly does the payday loan industry work? Dr. Peter G. Klein, a Research Fellow at the Alabama-based Mises Institute, explains:

Payday lending, sometimes known as a “payday advance” or a “deferred deposit” loan, is a short-term two- to four-week loan backed by a postdated personal check that a borrower agrees to cover with sufficient funds out of his or her next paycheck. In effect, the borrower issues a postdated check to the payday lender in exchange for immediate cash, usually in the amount of $100 or $200.

The typical fee for this service is $15 or $20 per $100 borrowed, so the postdated check is written for an amount equal to the sum of the desired loan plus the related fees. The payday lender holds the check until the agreed-upon date, at which point it is cashed and (hopefully) covered by the borrower’s payday deposit.

Critics of the short-term loan industry argue that it exploits lower-income customers and leads them to borrow money at high interest rates.

In 2013, Alabama Gov. Robert Bentley took proactive steps to curtail predatory lending practices in the state. In an effort to enforce the $500 cap on payday loans, the governor created a centralized database to keep track of consumers’ short-term loan debt in real time.

“If someone has several loans at the same time, and they all carry high interest rates, it’s easy for that person to get trapped in debt,” said Bentley. “This database can help people avoid that.”

Some companies have filed suit to block the implementation of the database, but most of the major payday loan companies support it.

But while the governor and other well-meaning consumer advocates have tried to put commonsense safeguards in place, many liberal groups — including Alabama Arise here in the Yellowhammer State — have pushed for policies that companies in the payday loan industry say would shut them down entirely. President Obama has joined their push to cap interest rates at a level far lower than they are currently set.

However, short-term loan industry proponents say their companies are simply filling a need in the marketplace. They also note several differences between the products they offer and the products being offered by credit card companies, banks and credit unions, most notably their willingness to make unusually high-risk loans. In other words, the payday loan interest rates reflect the risk the companies are taking by making the loans in the first place.

Dr. Klein of the staunchly free-market Mises Institute said he believes short-term loans are “a legitimate means of extending credit to poor and low-income households who may not otherwise be able to obtain loans due to poor credit histories.”

He also expressed concerns with further government intervention in the marketplace, for which President Obama is expected to continue advocating in his upcoming Birmingham speech.

“Further government intervention is not the answer,” he said. “Indeed, it is previous government regulation in the consumer finance industry that has, in part, led to the rapid growth of the very payday lending practices so reviled by critics. As always, the law of unintended consequences prevails, leading to outcomes that are directly opposite those sought by government regulators.”