Millions of hard-working Americans will soon be facing some drastic changes to their already limited finance options soon if a new proposed financial reform bill is passed.  Although many hard working families already find it tough to find finance when they are in a bind, the new financial protection bill is already being criticized for potentially eliminating jobs and consumer credit options during our economic crisis.

Senator Chris Dodd’s proposed financial reform bill is the government’s response to the recent subprime mortgage crash and the following economic crisis, but some argue that the aim of the bill misses the mark entirely.  It seems that financial giants such as Freddie Mac and Fannie Mae who are allegedly responsible for creating our economic situation have escaped any reforms at all, while those offering small consumer loans and finance options will apparently be paying penance for an economic situation which they did nothing to create.

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A payday loan is generally defined as a short-term loan that is usually paid back on the borrowers next payday. These short-term loans (also commonly referred to as a payday advance loan) are offered at a higher APR which helps to offset the operating costs of providing a loan, usually to those with bad credit which leads to higher default rates when compared to traditional lending institutions. And although the payday lending industry argues that these higher APR are necessary to cover the operating and licensing costs associated with running a successful short-term lending business, the media often criticizes direct payday lenders for pushing so-called “predatory” lending rates, and many State regulations have already “capped” APR’s offered by these lenders to as low as 36% APR.

Recently some financial analysts from a payday loan resource have begun to criticize the effects of the APR caps in certain States that have already enacted an APR cap or have flat out banned these types of loans. A study of payday lending in Colorado has shown that shortly after an APR cap was put into action there was still a wide range of APR’s and loan products offered within the State regulatory laws, while a few years later 95% of Payday Lenders were offering the loans at only the “maximum” APR. Some are reading these figures as a sign that stricter regulation and ceilings on APR’s are in fact eliminating competition between lenders, so that they can all charge the same maximum finance rates. After all, when competition is eliminated it is usually the consumer who bears the burden of higher prices.

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One of the most frequent objections to the payday lending industry from opponents is that the APR’s (Annual Percentage Rate) are “too-high“. Those who stand so strongly against the payday loan industry have usually never taken out a payday advance, and do not understand how to calculate an APR. Some will claim that they do not need to know how to calculate an APR, and that “everyone knows” APR’s of 400% and up are just “wrong” or “evil”.

Let’s take a look for ourselves!

APR stands for “Annual Percentage Rate”. It helps to understand a bit about how these numbers can fluctuate greatly depending on how long the loan is given; especially when these “Annual” ratings are applies to short-term loans. You can use an online payday loan calculator or you can calculate it yourself.

The basic formula to calculate an APR on a Payday Loan is:

APR = ((Interest Rate/Amount Borrowed) * (Days in a Year/Days in term of contract)) * 100

For example, if you borrowed $100 with $15 charged, for two weeks the calculation would look like…

First, we have to calculate $15/$100, which is .15

Then, we calculate 365/14, which is 26.071 (cutting out several digits to simplify)

Now, multiply .15 * 26.071, which comes to 3.91065 and rounds up to 3.9107

Multiply that by 100 to get the actual percentage of 391.07%, or as the formula would look….

(($15/$100) * (365 days/14 days))*100 = APR of 391.07%

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Currently our Senators are debating the creation of a stand-alone government agency to protect American consumers from the aftermath of another subprime mortgage collapse. This proposed agency (CFPA) would be regulating and overseeing a vast breadth of financial agencies, most of which have no ties to our economic crisis. Because of this it seems that companies that had absolutely nothing to do with the subprime mortgage collapse would be “penalized” for the alleged actions of Goldman Sachs by facing new regulations which many fear would lead to new business and legal costs forcing some businesses to close their doors.

Opponents of the CFPA claim that not only are they being punished and regulated for a situation that they did not help create, but that the new regulations will actually worsen our economic situation in many ways. A recent study by Joshua Wright (George Mason University Professor) estimates that the creation of the CFPA will reduce job creation by 4.3 percent or approximately 60,000 fewer jobs every year. Because the CFPA would oversee car dealers that offer loans, payday advance lenders and payday stores, many existing industries are lobbying against the implementation of new regulations. Also, entities such as Payday Lenders are already regulated by strict State laws, sometimes limiting APR’s to as low as 36% (or a mere $1.38 charge per $100 borrowed) which arguably puts them out of business.

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In the wake of the subprime mortgage collapse, and amidst the proposed consumer financial protection bill, it seems that small businesses are finding it tougher and tougher to get access to small business credit. This seems to be one of many unfortunate “side-effects” of both our current economic crisis, and the proposed regulations that small businesses and others may soon be facing. And many smaller lenders and including payday lender Pay1day.com, are already planning and preparing for these possible changes in federal regulation that may soon cast new restrictions on how they currently do business.

Many small businesses will not be able to cope with changes to their financing options or afford the legal council to draft changes to their contracts, leading many to simply abandon their current financing options. Unfortunately, these financing options many times are a driving force in their business providing simple finance options for working-class Americans who otherwise would not be able afford the purchase, and without the ability to provide financing options to their customers many businesses may not be able to survive losing sales due to lack of financing.

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Recently the media has begun to criticize those involved in writing the consumer protection language for the proposed financial reform legislation, or Consumer Financial Protection Agency (CFPA). Although coverage has begun to gain steam in the last few weeks, possibly due to the fact that our Senate is currently attempting to strike a bipartisan agreement on key features of the sweeping bill, we are still not seeing this issue on the radar of mainstream media quite as much as Obama’s recently Healthcare reform bill. It seems that Democrats may have learned from this recent experience and are attempting to keep this issue quite, and slightly out of the view of the public. After all, whereas most American’s are very concerned about Healthcare reform for various reasons, a Financial Protection bill which will oversee regulation of not only big banks like Wells Fargo but even Payday Lenders such as Pay1Day.com is not of much interest or concern to the majority of American’s. Perhaps it should be, given who is writing the actual language behind the proposed bill.

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Consumer Financial Protection Agency: an overview,” the creation of the Consumer Financial Protection Agency (CFPA) was marketed as a precautionary step to protect consumers from “predatory” lending practices, and to help avoid another economic meltdown, reports Pay1Day.com. Protecting working class Americans after all, would be the primary function of this stand-alone agency so there wasn’t much opposition to the proposed CFPA other than a few small business and alternative lenders, such as direct payday lenders, who feared the seemingly un-restricted power of a new regulatory body. But now the opposition toward the creation of a stand-alone regulatory body seems to be gaining momentum every day as more and more details of the CFPA come under scrutiny of the media and other organizations.

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Due in part to looming and uncertain regulations this year big banks are starting to look to new products and services in an attempt to minimize potential losses in the wake of these upcoming regulatory changes. Whether or not these changes will be profitable remains to be seen, but actions are already being taken to stop big banks like Wells Fargo and U.S. Bank from offering loans similar to those offered by the Payday Loan Industry. A recent report from the Center For Responsible Lending states:
“Wells Fargo, which recently acquired Wachovia, has offered its Direct Deposit Advance
product since 1994.….. This growing trend may soon accelerate”

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According to a Press Release from the United States Federal Reserve Board, big banks are in for some big changes this summer. Regulation E, in summary, is a new regulation that will go into effect July 1st, 2010. This regulation prohibits banking institutions from charging “Overdraft” or “NSF” fees to a customer without receiving consent from the customer to “Opt-In” to the bank’s “Overdraft Services”.

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