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How Would Personal Loans Be Affected by Proposed Consumer Lending Regulations?

[Dec 8, 2009.]


Congressman Barney Frank of Massachusetts is leading the charge toward increased federal regulation of consumer loan products, including credit cards, personal loans, and even pawnshop loans. Basically, the new legislation being proposed would create a new Consumer Financial Protection Agency.

As the name implies, the idea behind the new legislation is to protect unwitting consumers from being lured into loans they cannot afford, as has happened with astonishing frequency over the past ten years, with credit cards and subprime mortgages being the two main forms of "predatory lending."

However, as highlighted in a report from the National Center for Policy Analysis, the new consumer credit regulations could have the unintended effect of lessening the availability of credit to small businesses, which are a major job creation engine for the U.S. economy.

Unsecured Personal Loans: Are They Already Regulated?

Particularly with respect to unsecured personal loans such as online personal loans, it may be helpful to begin the discussion with an overview of how, and how much, unsecured personal loans are regulated.

Or, in this case, are not regulated.

In fact unsecured personal loans are among the least regulated consumer financial products available today. Payday loans and credit cards loans are already regulated by the Feds, but personal loans are largely free from regulation at this point.

Notably, the reality that personal loans are largely unregulated creates an interesting dynamic in the sense that neither borrowers nor lenders have much protection against default on the terms of the loan. This reality makes personal loans one of the last forms of finance out there that is truly reliant on mutual trust.

More Paperwork, More Cost

One thing you can be sure of if the new legislation passes is that the paperwork required of lenders will increase substantially. That is just the way government works.

Increased paperwork has always meant increased cost. More cost related to corresponding with government agencies, more cost for government-mandated record keeping requirements, more cost for various bonds and insurance that may or may not be required by the new regulations.

Today, borrowers can go online, fill out a simple personal loan application, and either be approved or not approved within 15 minutes, and then, if approved, get a personal loan wired right into a bank account.

That brand of simplicity would almost certainly vanish if the new financial regulations are imposed.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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