Monday, Sept. 10, 2018 | 2 a.m.
Nevada needs to do more to protect its citizens from financial exploitation and abuse.
By many measures, Nevada’s population may be particularly vulnerable to exploitative financial contracts. One recent ranking placed Nevada at 39th nationally in terms of financial literacy. Prosperity Now, a non-profit focused on issues facing low-income Americans, ranked Nevada even lower, at 48th.
One thing is clear: Nevada cannot rely on Washington to set policy and protect Nevada’s population. Mick Mulvaney, the Trump-appointed head of the Consumer Financial Protection Bureau, has shown little interest in policing predatory lending practices. Instead, he announced that the CFPB would focus instead on “identifying and addressing outdated, unnecessary, or unduly burdensome regulations.”
Although over-regulation may be a problem in some states, Nevada does not suffer from this problem. In contrast to other states that cap the amount of interest a payday lender can charge, Nevada places no limit on the rates a payday lender can extract. In practice, the Center for Responsible Lending found that Nevada averages an eye-popping annual interest rate of 652 percent. To protect our soldiers from abusive lending, federal law forbids loans to service members at rates in excess of 36 percent. This means that the average cash-strapped Nevadan pays nearly 20 times more than the highest permissible rate to lend to a service member.
Nevada could use more law and more effective law enforcement. At present, many payday lenders seemingly disregard the limited regulations Nevada has in place. A performance audit of the Nevada regulator charged with overseeing payday lending found that about a third of payday lenders received a “less-than-satisfactory” rating over the last five years.
Importantly, Nevada needs to regulate because the payday lending market will not police itself. There is no reason to believe that competition between rival payday lenders will drive prices down for consumers. Payday lenders have financially strapped Nevadans over a barrel already. No rational person would borrow money at a rate of over 600 percent per year if they had other options and the leisure time to find a better deal.
At the least, the Nevada Legislature should grab the low-hanging fruit and give state regulators the resources they need to oversee the industry effectively. The state’s own performance audit strongly recommended that the Legislature authorize and fund a centralized loan database to track payday lending in the state. Many other states already have databases in place, giving their state governments the information and tools needed to oversee their markets.
A database would consolidate scattered information and protect consumers and the industry. Borrowers already disclose information that regulators see during their examinations. A database putting that information together offers significant efficiency gains. By tracking all of the loans in the state, state regulators could more quickly identify and respond to the most exploitative practices.
Lenders would also benefit from additional transparency because they could identify overextended borrowers and refuse to lend additional funds to consumers that do not qualify for loans and will not be able to repay them.
A database also would yield important informational benefits for the state Legislature. The information collected would inform future legislative decisions about regulating the payday lending industry, and would help Nevada legislators see precisely how much Nevadans pay out in interest each year.
The money lost to high-interest loans often leaves the state to flow into the pockets of wealthy stockholders situated elsewhere. The vast bulk of money spent keeping up with exorbitant interest rates will not circulate in the local economy and stimulate economic growth in Nevada’s communities.
To be sure, some people have had positive experiences with payday lending. Access to quick funds can, in theory, help someone out of a short-term bind.
Yet the danger is that a person’s sudden, short-term needs can turn into an interest-rate trap.
If a Nevadan cannot repay the loan and the interest begins to accumulate, interest costs may take away his or her ability to put food on the table.
The Nevada Legislature should summon its courage and do its job this coming session and work to protect Nevadans from financial exploitation.
They should have the hard conversations with the industry’s well-connected and well-funded lobbyists.
With the industry’s ever-expanding presence in Nevada, it must accept some reasonable oversight.
Benjamin P. Edwards is an associate professor of law at the William S. Boyd School of Law at UNLV.