The increase in the number of households that are virtually shut out from taking bank loans correlates with the enormous growth in the private, non-banking loan business. As more consumers are taking out loans from private loan companies, regulations must be put in place to protect consumers from unfair and misleading business practices.
First, interest rates on consumer loans charged by lenders must be capped to reasonable levels. However, the interest rate ceiling should not broadly apply to all consumers loans in the industry. An alternative loan financing system administered by a public financial institution should be launched to provide consumer loans to low-income households so as to protect such households from turning to private loan companies.
Second, the business registration process for private loan companies needs to be revamped. Currently, individuals are not required to disclose the total financial and cash assets in their companies nor reveal the identities of controlling shareholders when applying for a private loan business license. In addition, individuals do not have to state the amount of shares they hold in the company in which they are applying for a license. The lack of such information makes it difficult to determine the identity of the actual individual or entity that is in charge of the private loan company.
Third, many TV commercials and printed advertisements that have been paid for by private loan companies to market their loans carry false and misleading information - some of which are illegal. Recently, private loan companies have diversified their marketing tactics beyond newspaper and TV ads by using mass e-mailings and ad banners to sell their loans. Current regulations must be revised to deal harsher punishment on private loan companies that are involved in illegal advertising practices.
Fourth, the current laws that restrict lending in amounts that exceed the individual's ability to pay back the loan need to be relaxed for low-income households.
Fifth, there is an effort to simply add more voluntary compliance clauses in the current self-regulatory environment for the private loan industry but it would not be as effective as enforcing the industry to comply to government regulations.