19 Dec Columbia considers regulations on payday loan companies

The city of Columbia in Missouri is weighing the possibility of placing new restrictions on the business practices of payday lending companies. Payday loans are a specific type of financial service that typically caters to people who have low incomes and irregular pay. The state of Missouri has fewer limits on payday lenders than other states. In response to that, some cities and towns in the state have imposed their own regulations on payday lenders. Columbia’s proposed regulations would involve requiring the companies to post the annualized interest rate of their loans and all fees in bold, 24-point font inside the establishment.

Payday loans tend to be short-term transactions of small amounts of money. Generally, they involve people borrowing a few hundred dollars for a few weeks to last them until their next paycheck. The interest rates on these loans tend to be quite high on a per-year basis, but most borrowers only intend to need the money until their next check. However, it is not uncommon for the borrowers to them need to borrow more for the next pay period, or even take out a bigger loan before they fully pay back the original loan. Often, these loans are structured to have a lower interest rate at first, but that rate then climbs for repeated borrowers. That is why the Columbia regulations specify the annual interest rate that the company will charge after 6 rollovers.

The fees are another matter. Late fees and other types of fees can be significant, and borrowers might not know about them in advance. They simply do not expect to have to pay any fees, and if they do, it can be a surprise. These tend to be comparatively small amounts of money, in the tens or hundreds, but for a low-income family that is a disruptive amount.

Payday loan companies often face criticism for their high fees and interest rates. They appear to be charging more for people who have no other choice. In some cases, the borrowers face not just low salaries, but also unpredictable pay. For example, payday loan offices tend to appear around military bases because the US military frequently encounters problems with their payroll system that delay paychecks, leaving soldiers forced to turn to payday loans. They justify their pricing by stating that they need to charge as much as they do to cover administrative costs as well as the risk of the borrower not giving the money back.

The goal of the new Columbia legislation is to improve transparency. It is possible that at least some of the payday loan borrowers do not actually understand how the loans work or are missing some information about fees, interest, or another matter. The lender has little incentive to make that information clear, especially in areas without relevant legislation.

The main concern is striking a balance between making this financial instrument available to people and allowing predatory practices like hiding interest rates and fees. When it comes to something as delicate as personal finances, transparency is key because without it, consumers will have no trust in banks and lenders, and they risk encountering costs that they had not foreseen. Of course, without payday lenders these people might need to turn to other resources like state benefits.

Depending on the success or failure of these regulations, Columbia may decide to attempt more of them. At the same time, the changes in the national mood could lead to a change in power at the state level. That would open the door to state-wide regulation as with most other states. Some controls are quite tight, dictating the rates that these companies can charge, while others are looser. Just like credit cards, insurance, and other financial tools, the state government regulates and oversees the industry.

The bottom line is that Columbia is taking new steps to regulate payday lenders in the absence of direction from the state government. Right now, the regulation only affects transparency to the customer, but in the future it could also include rate and fee limits or other approaches.