As the US credit crisis continues to tighten, the overly liberal lending practices of many mainstream credit providers continues to be further exposed and scrutinized.  The latest exposé is that of credit card issuers who recently met in the White House with President Obama and his economic advisers.  Even while credit card defaults are running at record highs the U.S. Congress is proposing tighter rules for card issuers that could greatly reduce their ability to collect fees and adjust interest rates on their products.

Keeping in mind that this sort of government scrutiny is generally welcomed by credit hungry consumers it remains to be seen if the White House and Capitol Hill can actually create and implement a “Credit Card Holders’ Bill of Rights” without making mainstream consumer credit even more difficult for the average borrower to obtain. 

This trick can be compared to threading a needle in the dark when you consider the average US household with credit cards has more than $10,000 in credit card debt.  While the US government crackdown on questionable consumer credit lending practices is laudable and long overdue, the timing of such reform is problematic considering the conditions of the consumer credit industry in the US.

Yet, the broad brush approach of placing limits on all US consumer credit transactions by imposing a federal APR rate cap is even more problematic.  This broad brush approach could end up exempting noncredit card holding consumers from any form of short-term credit. 

By including the pawnbroking industry, the oldest form of consumer credit, in the proposed federal APR rate cap, the only source of credit for these noncredit card holding consumers could literally disappear overnight.  This would prove to be an incredible hardship for millions of US consumers who will never be affected by a credit card holders bill of rights.

Looking at history you will find this is nothing new for the pawnbroking industry.  Over its thousands of years in existence the industry has been controlled by governments, religious leaders, groups of the elitists, and even royalty.  This type of control in the past has proved to fragment or even temporarily shut down these lenders of last resort. 

Much like Chairman Mao who completely took over all financial and business institutions in China.  Pawnbroking was a vital part of the Chinese culture until Mao and communism took root, causing the Chinese pawnbroking industry to cease existence.  But as China moved towards a free market economy pawnbrokers were again allowed to open in 1987.

Now the growing Chinese economy uses pawnshops as funding sources for many entrepreneurs with flexible collateral requirements, as well as being the main source for short-term credit again with Yen strapped Chinese consumers.  Could history repeat itself for the pawnbroking industry and its customers in the US? 

Could a federal APR rate cap temporarily eliminate the world’s second oldest profession from the US consumer credit industry?  It could if this industry is included in the broad brush approach of the federal APR rate cap now in Congress.  But even if it were to be temporarily eliminated, I can guarantee you one thing.  The need for the services the industry provides can never be replaced and will never be eliminated. 

I doubt the pawnbroking industry will ever be given the courtesy of a meeting with the White House economic advisers.  Will our legislators listen to their millions of constituents who rely on pawnshop loans for financial emergencies?  This remains to be seen.  Maybe the pawnbroking industry will get lucky and discover that many of our legislators had to seek out the services of a pawnbroker in leaner times getting through law school.

Tags: consumer credit, economic crisis, pawnbroker, pawnshop