Dean of Misericordia College of Business Publishes Predatory Lending Article in American Bar Association Magazine
James Pierson, J.D., CPA, Dean of the College of Business at Misericordia University, recently published the article, "Curbing Predatory Lending," in the American Bar Association's Human Rights Magazine, Vol. 48, No. 2.
In the article, Pierson defines the practice of predatory lending, the interest rate cap proposals and advancements that are happening throughout the country, and the integration of technology into offerings by financial service companies and the consumer protection challenges the new products may present.
According to the Merriam.com Legal Dictionary, predatory lending is defined as “the practice of lending money to a borrower by use of aggressive, deceptive, fraudulent or discriminatory means."
"Predatory lenders prey on our most vulnerable consumers. The harsh practices fall heavily on our most vulnerable consumers: communities of color, veterans, students, senior citizens and the working poor. It is nonpartisan in its impact on victims," he wrote. "Traditional predatory products are being heavily marketed, and harmful changes for consumers continue to be aggressively lobbied by state legislatures."
In the article, Pierson explains how easy it can be for consumers to fall prey to the payment offers made by payday and other predatory lenders. Unlike a traditional bank or credit union loan, the predatory lenders may have no requirement to evaluate if the consumer has the ability to pay the loan back.
"The Center for Responsible Lending (CRL) notes that payday lenders will often describe the cost of their loans based on terms of fees or simple interest rates. They avoid using an Annual Percentage Rate (APR) as required by the Truth in Lending Act (TILA). Term lengths of the loans are typically 14 days, but borrowers reborrow multiple times before their loans are paid in full, and payments are automatically deducted from borrowers’ bank accounts. The result is 75 percent of payday lending revenue comes from borrowers with 10 or more loans per year," wrote Pierson.
Seventeen states, including Pennsylvania, cap APR loan rates on payday lenders at 36% or lower. "Those are the good ones. Pennsylvania is favorable; it's a state that is very protective of consumers, so you cannot exceed rates beyond 36 percent (on closed-end installment loans by licensed non-bank lenders of $2,000 or less, for a period of a two-year maximum, or less)," he said.
Pierson notes that it's become easier than ever to obtain financing from these new, so call “fintech” lenders, thanks to technology. Consumers don't need to go to an office or store to apply for a loan; it can all be done quickly through an app on a smart phone. In the article, Pierson explains how technology is making it easier than ever to obtain a payday or other consumer loan.
"New products are rapidly emerging through fintech innovations, and the substance of these new transactions as credit is not clear to consumers. This is a challenge that legislators, regulators and consumer protection advocates must overcome to ensure a level playing field where transactions that are inherently credit are accurately defined and are held accountable with fair pricing, responsible underwriting, transparency and fair lending. It is a responsibility we must all share and undertake to advance economic justice through consumer protection," he wrote.
"Things have become more insidious. The consumer loans that may be predatory are more subtle, more sophisticated. It seems like it has all the protections of a normal loan, but consumers need to be careful and mindful to ensure they are protected so they don't get into this cycle of debt," advises Pierson.
Pierson encourages consumers to look for other ways to make purchases than Buy Now Pay Later programs and loans from payday lenders.
"Look instead for credit unions; they can be a good source of borrowing. Consumers could borrow funds from relatives but that has limited capability. Ultimately, consumers need to be cognizant of the ability to repay: are you going to have the ability to repay this loan without getting another loan? That's what happens with the payday lending. They may need to consider doing without or working with a reputable non-profit with respect to getting financial advice," he said.
In addition to his role at Misericordia, Pierson serves as a co-chairperson of the Economic Justice Committee, of the American Bar Association’s Civil Rights and Social Justice Section.