rssHow Payday Lenders Spent Millions to Win Every Battle – Only to Lose the War
Thursday, May 27, 2010 at 6:00 am
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Sen. Kay Hagan (D-N.C.)
By all accounts, Sen. Kay Hagan’s (D-N.C.) amendment to Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill was an excellent one. The first-term senator had a long-standing reputation in her home state for fighting payday lending, the $42 billion a year industry that offers easy-to-get short-term loans in exchange for hefty fees and annualized percentage rates of interest in the triple digits, as high as 650 percent in some states.
[Economy1]Hagan’s amendment — the Payday Lending Limitation Act of 2010, cosponsored by Sens. Dick Durbin (D-Ill.) and Charles Schumer (D-N.Y.) — capped the number of times a customer could get a payday loan to six per year. It also required payday lenders to offer borrowers extended repayment plans, letting them pay back their loans in smaller installments over longer periods of time. Payday loans are advertised as emergency stop-gap measures to help customers with sudden expenses. But the average payday loan rolls over between eight and 12 times. And more than 60 percent of payday loans go to borrowers that use them 12 times or more per year.
To illustrate how bad payday loans sometimes got, Hagan told the story of one of her constituents, Sandra Harris from Wilmington. “She had a job at Head Start and always paid her bills on time,” Hagan said on the Senate floor. “When her husband lost his job, Sandra got a $200 payday loan to pay the couple’s car insurance. When she went to repay the loan, she was told she could renew. Sandra ultimately found herself indebted to six different payday lenders, and paid some $8,000 in fees.”
Hagan’s amendment, without banning the financial service, would have stopped the industry’s worst practices — but also its most lucrative practices. Payday lenders make 90 percent of their business from repeat users. If payday loans were capped at six per customer per year, payday lenders could see their business fall by a third or half. Thus, the industry lobbied hard against Hagan’s proposal, as it had done against financial reform in both houses all year — spending $6.1 million on lobbying in 2009, more than double what it did in 2008.
The lobbying effort employed everyone from the grassroots — individual customers — to the highest-powered lawyers. David Lazarus of the Los Angeles Times reported that as Hagan’s amendment came up for a vote in Congress last week, one payday lender instructed his employees, “After a customer repays their loan, the customer then asks for a new loan. TELL YOUR CUSTOMER THAT YOU CAN’T LOAN TO THEM BECAUSE THE GOVERNMENT HAS PUT US OUT OF BUSINESS. That will get their attention. Then ask them to write letters or call their senator/congressman.” A flurry of letters written at check cashers or payday loan shops showed up in Congress.
On May 20, Hagan’s amendment came up in the Senate. Durbin stood up in support, calling payday lenders the “bottom feeders” of the financial industry. Then, as Dodd moved to proceed, Sen. Richard Shelby (R-Ala.) — who in 2009 received more campaign donations from payday lenders than any other Senator — blocked unanimous consent to vote on the popular provision. (Shelby’s office did not respond to repeated requests for comment.) It died on the floor.
Hagan’s was the last of many such payday-lender-specific provisions to come up in the regulatory reform process. And it was the last to fail. There are no interest-rate or rollover caps in the Senate bill. And there are none in the House either.
Durbin argued for capping the maximum annualized percentage rate of interest a payday lender could charge at 36 percent, for instance, a measure supported by the Center for Responsible Lending and other consumer groups. It never made it into the bill, nor did Rep. Jackie Speier’s (D-Calif.) version in the House. Rep. Luis Gutierrez (D-Ill.) — who has in the past advocated effectively banning payday lending — sponsored the Payday Loan Act of 2009, a series of reforms attached to the House bill. Consumer reform groups blasted the measures, which capped annualized percentage rates of interest at 391 percent. But even those very modest reforms did not make it in. And the most notable payday lender victory might have come from the work of Sen. Bob Corker (R-Tenn.), who reportedly lobbied for and won a loosening of the Consumer Financial Protection agency’s oversight over small payday lenders.
One might think this would have consumer advocates incensed about the House and Senate bills’ ability to stop the worst practices in the payday lending industry. But, in fact, they argue that payday lenders spent millions to win numerous battles before ultimately losing the war.
Why? Payday lenders in both bills still come entirely under the rule-making authority and oversight of the new Consumer Financial Protection Agency, which consumer advocates are confident will consider tamping down on annualized percentage rates of interest and establishing rollover limits. There has been considerable confusion over the Senate’s payday lending language and possible loopholes. It ensures the Consumer Financial Protection Agency has oversight and rule-making authority over all payday lenders, with the CFPA enforcing rules against bigger lenders and the Federal Trade Commission enforcing rules against smaller lenders, Kirstin Brost of the Senate Banking Committee said. And the House language, simply having the CFPA have total authority over all payday businesses, as supported by the White House and Treasury, is likely to win out.
“In the end, it doesn’t matter much that Congress didn’t specifically regulate payday lenders,” Ed Mierzwinski, the consumer program director at the U.S. Public Interest Research Group explains. “For the payday lenders to call the defeat of the Hagan a win for them is a Pyrrhic victory — because both both the House and Senate bills include a strong new consumer financial protection agency and it will regulate them.”
And Kathleen Day, the spokesperson for the Center for Responsible Lending, which worked with Senators on crafting payday lending restrictions and has fought a longtime and vocal fight against the businesses, concurs. “The [CFPA] will be able to enact strong consumer protections that would apply to payday lenders. As long as those protections are in there, that’s the name of the game,” she says. “There’s going to be people that say they want to be specific, they want to have specific provisions in this law about payday lending. But the great thing about having this agency is that it will have broad overview to write fair laws and to make sure laws are fair.
“Of course, we’d love to have a 36 percent [annualized percentage rate of interest] cap. But that’s unlikely. And sometimes regulations can be too specific. We are confident [the CFPA] will be able to react to the market in a flexible, consumer-focused way.”
Indeed, behind the scenes, payday lenders — much like auto dealers who make car loans — fought hardest for an exemption from CFPA authority. That battle, they spent millions to lose. And it means that consumers might win down the road.
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70 Comments
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Comment posted May 27, 2010 @ 8:25 pm
Nonsense. Consumers lose with the CFPA. Choice is lost, and nothing is being put in place to compete with the demand for short term credit. COMPETE with the product, run it out of business with alternatives BUT OUTLAWING it is purely based on politics or low intellectual acumen.
There are 100% at will loans, and the fees are lower than MANY penalty fees out there and MUCH MUCH cheaper than having your credit further damaged.
I have not heard a single cogent argument as to why people should not have the free choice to borrow money other than 'we think we are smarter than the borrower and must protect them'…such foolishness…
Comment posted May 27, 2010 @ 8:36 pm
“we’d love to have a 36 percent [annualized percentage rate of interest”
This would eliminate short term credit completely. These people are like religious zealots that made it into the mainstream somehow – they do not see past their dogma to see that REAL people use these products for REAL reasons, and that is a CHOICE.
These people should work on:
1. Creating a competing product
2. Create better macro economic policies for wage growth
3. Promote better education, both financial and otherwise
and then let people have a CHOICE – say unlike living under the Taliban, communist China, or Cuba which are regimes where people in power also believe they know what is best for everyone…so sad these folks have become legitimate.
Comment posted May 27, 2010 @ 9:02 pm
I'd just like to point out that under the payday lending industry's Best Practices, customers who cannot pay back their loans when they're due already have the option of entering into an extended payment plan that is provided to customers for any reason and at no additional cost.
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Comment posted May 27, 2010 @ 9:49 pm
Payday loans are for two-weeks not an entire year, and comparing them to ANNUAL interests rates is misleading.
At 36 percent APR, the total fee charged on a $100, two-week advance, would be $1.38. Payday advance lenders could not cover the cost of originating the loan, let alone meeting employee payroll and benefits and other fixed business expenses, like rent.
Such a rate cap would virtually eliminate payday lenders, but not the need for short-term credit. Instead it forces consumers to choose between more expensive alternatives, such as fees for bounced checks, overdraft protection, late bill payments, reconnection fees for a utility discontinued for lack of payment or even unregulated off-shore Internet lenders.
I work in the industry, and working adults are best served when given a variety of options and trusted to make financial decisions based on what’s best for them and their families.
My company charges $15 for every $100 borrowed for two weeks.
Comment posted May 27, 2010 @ 10:10 pm
Consumers have a choice and an option and that is what payday lending is about. I work in the field and help people everyday who struggle to make ends meet. We have requirements to ensure if the borrower is responsible, they will not “go into dept” from using our services. We also offer extended payment plans for those who can not repay as planned. Eliminating payday lending may drive consumers to unregulated options or more expensive alternatives.
Comment posted May 27, 2010 @ 10:14 pm
Way to live up to your name wellsaid, that was very well said. There is no possible way any payday loan company could turn a profit charging 36 percent interest. The answer is to provide people with more choices, not restrict everyone's choices based on the follies of the few.
Comment posted May 27, 2010 @ 10:38 pm
Payday loans are an option that needs to be protected for the consumer. It is many times the best and sometimes the only option available to a cunsumer in a time of need . When used as designed it is a viable way to meet short term financial needs. It is also in the best interest of the loaner to help the consumer to pay off the loan in a timely manner. It is just a fact that building a rapport with a customer so that they can and will return when the need once again arises is good business.
Comment posted May 27, 2010 @ 10:40 pm
I am an employee of the industry and I think that the government should look at the big picture. We do not give annual loans and if you do want to look at it that way with a 300% APR then you should do that for all different types of financial solutions, such as a bounced check or NSF fee at a bank (up to 1,250%), a late or reconnection utility fee (up to 1,300%), or a ond day late fee on your credit card (as much as 10,000%)! Regulate the industry…Don't shut it down!
Comment posted May 28, 2010 @ 12:38 am
An interest rate limit is a good idea.
But limiting borrowers to six times per year could hurt those who need more than six loans in a year.
Comment posted May 28, 2010 @ 3:44 am
“Instead it forces consumers to choose between more expensive alternatives, such as fees for bounced checks, overdraft protection, late bill payments, reconnection fees for a utility discontinued for lack of payment”
Except that these are not all necessarily more expensive alternatives. And by using APR you can compare them on a common basis. Charging $15 on a $100 dollar two week loan is a 3900% APR. It is entirely possible that a bounced check or overdraft fee is cheaper. In fact, according to someone who works in the payday loan industry (AngelaR, a few comments above), a late utility fee or a bounced check may be a _lot_ cheaper.
Comment posted May 28, 2010 @ 3:52 am
I tend to believe people are too stupid to do the math correctly on payday loans and therefore have to be protected from themselves. I admit that this is not based on any specific research, just my own personal experience with various relatives. I assume you agree, following your comment above: “3. Promote better education, both financial and otherwise”. I do not see how you can argue that it is foolish to suggest stupid people need protecting when you concede that an acceptable government alternative to CFPA would be to educate stupid consumers.
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Comment posted May 28, 2010 @ 5:27 pm
Let me re-phrase, you believe you are smarter than others and should be put in a position to make decisions for them.
My point is that basically any public school in a major city in the US is total junk, and anyone with means sends their kids to private school. That for example, seems like an issue to focus more attention on that at will loans for people that actually want them…
Pingback posted May 28, 2010 @ 9:34 pm
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Comment posted May 29, 2010 @ 12:16 pm
Correct me if I am wrong. But, if real folks with real short-term financial short-falls are unable to borrow $100 or $200 to pay an insurance bill, electric bill, water, gas, or repair the car to go to work, aren’t we in affect crippling not just the person with the short-fall of immediate cash but, everyone that is being paid with this short-term cash?
It seems that these short-term loans are what is keeping the local economy going, from the small business owner at the repair shop to the utility companies and everyone else who is paid from these loans. I doubt many people are borrowing the money to go out to dinner. However, even if they are it is keeping the local businesses going. They make a conscious decision to borrow, no one drags them in kicking and screaming…they walk in make a decision and determine if it makes sense.
These folks (Politicians) that are adamantly against the payday business are the folks who don’t have to live paycheck to paycheck. I would bet they have investments in the financial industry.
Are we all so ignorant that we need to have the government tell us what we can do and not do…these are the same people who pass laws to borrow and spend money we don’t have for things we don’t need. Great examples…do as your told not as I do!
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Comment posted May 30, 2010 @ 5:08 am
$15 on a $100 two week loan is a 391% APR, not 3900%. So if you want to use APRs for comparative purposes, these payday loans are actually a lot cheaper than the normal bank overdraft fee which will generally calculate to above 1000%.
Comment posted May 30, 2010 @ 5:22 am
Whether the govt should be trying to protect people from themselves is a pretty big political philosophy question. But I would say that these types of loans are simpler and more straight forward than most. I once paid about $50 to borrow $500 for a week. It did seem like a lot, but the alternative was 6 separate overdraft fees at $39 a pop plus continuous daily fees. That math was pretty simple. I guess, in all this discussion, I'd like to point out that there probably are people that abuse this service as there are people that abuse pretty much every service, but these loans really are a valuable resource for a lot of people and are definitely cheaper than most alternatives.
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Comment posted May 31, 2010 @ 2:28 am
Speaking of “behind the scenes” and “cozy relationships”, the Center for Responsible Lending has been one of those very groups trying to steer reform away from the key contributors of the crisis.
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Comment posted June 1, 2010 @ 4:55 pm
I am in the industry and the demand is real. Customers need this service in order to make ends meet. The point made earlier is entirely correct about these services helping the economy. Nothing anyone who want to do away with the service addresses the demand for the product. It makes you wonder if they really care about the consumers.
Comment posted June 1, 2010 @ 5:53 pm
They don't.
This is a power trip on all sides, from dictating actions of consumers, to dictating the actions in a free market, and refuting data & studies that suggest short term credit as it exists is a net positive.
They are zealots.
Comment posted June 1, 2010 @ 5:56 pm
And FYI, I do support regulation, but with all parties at the table so this can remain profitable for lenders, available to consumers, and be completely transparent in terms of protection for consumers.
Pingback posted June 1, 2010 @ 9:11 pm
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Comment posted June 1, 2010 @ 10:07 pm
Only lobby groups like the Center for Responsible Lending can be pleased with the CFPA because they have an agency which they can influence for their own interests: a network of credit unions, which view payday lenders as competitors. All consumers get out of this is another bureaucracy.
Pingback posted June 2, 2010 @ 1:25 am
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Comment posted June 2, 2010 @ 3:27 pm
“Type your comment here.There is no possible way any payday loan company could turn a profit charging 36 percent interest.”
Nonsense. If credit card companies can turn a profit with interest rates capped at less than 36% so can Payday Lending joints
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Comment posted June 8, 2010 @ 12:28 pm
Let me re-phrase, you believe you are smarter than others and should be put in a position to make decisions for them.
Comment posted July 29, 2010 @ 2:02 pm
Are we all so ignorant that we need to have the government tell us what we can do and not do…these are the same people who pass laws to borrow and spend money we don’t have for things we don’t need. Great examples…do as your told not as I do!
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