New UF Law Professor’s Book Sounds Alarm
GAINESVILLE, Fla. - Failure of policy makers to effectively use new regulatory techniques and technologies to inform consumers of all aspects of the Truth-In-Lending Act is damaging the net worth of the least wealthy 40 percent of American households, and resulting in “an interest rate fever for which a growing number of working-class and lower-middle-class Americans have scant resistance.”
That is one of the charges made in a new book, “Taming the Sharks: Towards a Cure for the High Cost Credit Market,” written by University of Florida Levin College of Law Assistant Professor Christopher Peterson and released nationally this week by University of Akron Press.
Peterson, who prior to joining the UF law faculty in 2003 was consumer attorney and lead lobbyist on predatory lending reform for the U.S. Public Interest Research Group, contends “the contemporary American market for credit shows troubling signs of distress relative to the explosive growth of the high-cost consumer debt industry.”
“Fringe lenders are using dramatic changes in computer technology to penetrate into a market of struggling middle and working class families,” Peterson says. “We must find ways to use these same technologies to level the playing field for consumers.”
Peterson argues that “personal finance patterns of millions of Americans” are being transformed by payday loan outlet chains, automobile title loan companies, rent-to-own furnishing stores, pawnshops and some home mortgage lenders.
He notes the essential difference between mainstream creditors and “alternative finance lenders” is relatively expensive prices, increasingly referred to in federal and state laws as “high cost” loans – a concept that includes both interest and non-interest charges such as fees for origination, brokerage, processing and application; refinancing charges; penalties for late and early payments, and
“dozens of other creditor inventions which tend to obscure the true cost of a loan.”
“Taking advantage of established psychological tendencies of consumers, these lenders encourage individuals to borrow more than they want and at higher prices,” Peterson said. “High cost lenders target those consumers seeking an easy solution to tough financial problems, and then seal them into loans that cannot be paid off without great difficulty. High cost lenders also know that high cost loans can be habit forming.”
Hard hit by Peterson’s examples in the book are payday lenders, which the author notes can be charging an annual percentage rate for a transaction of more than 400 percent. Peterson claims that a 456 percent APR loan is not unusual, but that because the federal government does not collect data on payday lender interest rates, there are no firm nationwide statistics revealing payday loan prices.
Among regional evidence cited by Peterson:
- Indiana Department of Financial Institutions’ survey found the average Indiana payday loan interest rate was 498.75 percent, with one company offering a $100 loan at a $20 charge per day — or an annual percentage rate of 7,300 percent.
- North Carolina consumers purchase more than 60 percent of their payday loans at annual interest rates between 406 and 805 percent.
- Payday lenders in Salt Lake City charge an average rate of 528.49 percent.
- According to a survey by a consumer advocate coalition of lenders in 19 states and the District of Columbia, average payday loan interest rate is 474 percent.
“Fortunately there is a growing national debate over how to temper the harmful social consequences of fringe creditors,” Peterson said, “and a growing realization that the primary reason for the 1968 federal Truth in Lending Act – price disclosure – is being thwarted by reliance on information communication technologies invented no later than the mid-1950s. Policy makers have not transplanted into consumer credit law important regulatory techniques and technologies which subsequently have been developed, not the least of which is the ultimate contemporary communication device: the Internet.”
Peterson also points out that “harmful consequences of high cost indebtedness spill over onto people and institutions other than the borrower, who now may not be able to pay rent, utility bills, buy groceries, pay for day care, and in some cases seeking government relief due to insolvency. In effect, we all subsidize high cost lenders by absorbing the high cost loan consequences.”
Assistant Professor Christopher Peterson (352.392.9351 / eMail: petersonC@law.ufl.edu)
Peterson earned his B.S. in political science, B.A. in honors philosophy – both cum laude – and his J.D. at the University of Utah. He is Phi Beta Kappa, and member of the Order of the Coif legal honor society. His UF law school courses include consumer law, secured transactions and creditor/debtor relations.