- What is the situation and why is it important?
The American society has been plunged into debts arising from high interest rates and penalty fees charged by the credit card companies and banks. This market which is currently unregulated, has enabled the lenders to use tricks and traps in charging high interests rates and penalty fees. The banks and other lenders yield more lobbying power over the government and legislators making it difficult to pass laws that can help regulate this market. Even where the law exists, the banks and lenders have always crafted ways of navigating the law in order to make more profits. Although the legislature has tried to come up with ways of regulating this market, it meets a lot of opposition from the lenders who as well as other players who argue that measures such as capping interest rates may interfere with the free economy. This makes this situation important in ensuring that borrowers continue to enjoy credit while at the same time, the borrowers are relieved off the risk of default.
- What are the major influences and to what extent, if at all, could these influences have been better controlled?
One of the major influences for the current situation is the need to for credit for the unbanked population. Banks and other lenders such as payday lenders have identified the gap in lending to low income earners who are mostly driven by consumption needs. Since this population is risky as compared to the wealthy population, the lenders end up charging higher interests rates that are above the market rates. Lack of laws regulating this market also greatly contributes to this situation by allowing the lenders to charge exorbitant interest rates on overdrafts as well as credit. Lack of truth in lending has also contributed to this scenario with the lenders using tricks to trap borrowers. For example, many borrowers are unaware of the terms of advanced overdrafts as well as procedures of debiting cash such as the high low method. Whereas some of these influences can be controlled others such as the need for credit cannot. Through regulation, the lenders can be compelled to provide the borrowers with complete information on the amount borrowed as well as what they are expected to pay. [“Write my essay for me?” Get help here.]
- Who are the major players and how could their behavior have been more productive?
Banks, other lenders and legislators are the major players in this situation. Through the profits accumulated from the gaps in lending practices, the banks and lenders have been able to lobby for deregulation of this market. As noted, the lenders are the largest donors to legislators’ campaigns thus being able to control the outcomes of such laws that would curtail their profits. However, the behavior of these players could be productive in ensuring that the interest rates charged on credit and overdrafts, reflects with the current lending rates. Additionally, banks can also ensure that the borrowers are provided with accurate information on the terms of credit and other loan facilities. The legislature on the other hand can help arrest the situation by making laws that are inclusive of the situation and that which does not leave room for manipulation.
- How does the situation affect financial and/or other important risk considerations?
The high rates of interests for the risky borrowers’ act as a cushion for the lenders against defaults. The borrowers are often deterred form defaulting payments due to the heavy fines as well as reduction of their credit line. Regulating this industry may therefore impact negatively on lenders due to the high rates of defaults. This may therefore lead to the unbanked and low income earners who are considered risky without credit.[Need an essay writing service? Find help here.]
- What are the concerns for financial markets?
Regulation of the banking industry through means such as capping of interests is likely to interfere with existence of a free economy. Government involvement through setting up of a separate body such as a consumer regulatory authority will dissuade the financial markets from lending to the poor. This will make this group to turn into other means of credit such as payday loans that charge higher interest rates. [Click Essay Writer to order your essay]
- How would you have handled this situation?
One of the ways that I would have this situation handled is through intervention and persuasion on the part of the financial markets to lower the rates of interests towards the rate set by the central bank other than regulation through capping of interest rates. Additionally, there is need for adherence laws such as Truth in Lending Act so as to protect borrowers from undisclosed terms at the time of borrowing.