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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Mar 14, 2012

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Jeff Merkley, a Senator for the state of Oregon, announced a piece of federal legislation he hopes to propose to congress that would greatly limit the practice of payday lending throughout the country. Merkley sent a letter to the Consumer Financial Protection Bureau’s (CFPB’s) director, Richard Cordray, for support in his quest to limit payday loans in the United States.

“Millions of Americans are affected by the abusive and deceptive payday lending practices across our country and over the internet,” the senator said in a press release. “While Oregon is lucky to have state legislation in place to stop the worse [sic] practices, there are still loopholes and offshore websites that are dragging Oregon families into black holes of debt. We have to bring order to the Wild West of the lending market.”

A New Sheriff’s in Town

Merkley’s argument that online payday loan lenders are exploiting his state’s citizens isn’t an exaggeration. Online and offshore payday lenders have been preying on citizens across the nation, charging exorbitant interest rates and late fees, even when certain states already have laws protecting their residents from such practices. Since the online lenders can operate anonymously or from a location that bars legal repercussion, they continue to volley their offers to the unsuspecting, leaving legislatures fuming and frustrated at the inability to prevent such actions.

In the senator’s three-step proposal, he hopes to tackle the issue of disclosures, loopholes, and oversight.

According to the Merkley’s press release, lack of disclosure helps online payday loan offers mask the true identity of the lenders, making it hard for both consumers and law enforcement to accurately identify who is behind the website. When these anonymous lenders’ identities are hidden, they often provide debt collectors with private consumer information. In turn, that can lead to collectors defrauding consumers into paying debts that they don’t owe.

If the senator’s legislation is passed, he hopes to close all loopholes that currently allow offshore payday lenders to operate and even garnish the wages of unsuspecting borrowers in the United States. The power offshore lenders have is so immense that some legal lenders located in the country are now trying to structure the operations to make themselves appear offshore.

Finally, the legislation hopes to hold banks to a higher standard and force them to support healthy banking practices. This is particularly important since an increasing number of traditional lending institutions are now beginning to offer payday loans, or similar variants.

In support of this three-pronged attack on the payday loan industry, Angela Martin, the executive director of the non-profit Economic Fairness Oregon, said “It’s an unfortunate truth that each time we find a way to help people on to more of their money, there’s a new tactic or scam aimed to strip them of it. This is why it is so important for us to have strong and vigilant leadership on issues of consumer protection.”

Current Leadership on Consumer Protection

The current head of consumer protection is the CFPB, a new agency that was formed under the Obama administration. Headed by Mr. Cordray, the CFPB has begun its extensive campaign against unscrupulous activity taking place throughout the entire financing industry. From mortgage and auto loans to student and payday loans, the CFPB is attempting to leave no stone unturned.

In his letter to Director Cordray, Merkley claims that over 75 percent of payday loans are originated to cover the principal of an existing payday loan. Additionally, around 12 million borrowers are caught in long-term debt from financing opportunities marketed as short-term solutions.

To stop such predatory practices, the senator hopes the CFPB will “act quickly” and “establish strong national rules to stop unfair, deceptive, and abusive practices.”

The letter was not only signed by Merkley, but also by Sen. Daniel Akaka (D-Hawaii).

Will the Wild West be Tamed?

While Merkley attempts to bring order to a wild and chaotic industry, his broad sweep is far too general and all-encompassing to be implemented—at least in the current, albeit early, form of this proposal.

Regulating illegal payday lenders, offshore online lenders, and atrocious interest rates are fine; few would disagree with that. But the letter addressed to the CFPB is filled with flowery language, lack of citations, and sensationalist claims. Not all lead generating sites act as shady intermediaries, selling users information on the black market. Consumers in need of short-term financing are not “likely” to find themselves worse off than if they never used a payday loan. And payday loans don’t inherently impoverish many American families (they certainly can prove to be a means to that end, but such an end is often achieved by irresponsible borrowing as well).

That being said, Merkley’s proposal is interesting, and it’s nice to see some state representatives getting behind meaningful and needed financial reform. It will be exciting to see how this proposal evolves as it readies to become actual legislation.