Flickr: Stallio

The payday lending industry, stung by losses in states that either refused to authorize their high-rate, short-term loans or moved to limit finance charges, isn’t giving up without a fight.

Payday lenders are out in full force in Wisconsin, where a legislative battle is underway over efforts to impose a 36 percent rate cap on payday loans, a move the industry claims will put it out of business. The next big battleground state will be Colorado, where payday lenders already are making financial contributions to minority groups to win favor, in anticipation of an upcoming legislative fight over payday reform. And in Washington, D.C., payday lenders have sharply increased their Capitol Hill spending and profile at a time when other types of political fundraising is on the decline, hoping to dissuade Congress from imposing any additional federal limits on the industry. Payday lenders also wary of a new Consumer Financial Protection Agency, which would have oversight of mortgages and other financial instruments, even though proposals don’t specifically single out payday lending.

Illustration by: Matt Mahurin

“Obviously, the industry has gotten its hat handed to it at the state level, and it appears to be spending a lot of time and money trying to win friends and influence people on the Hill,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Not a single state has authorized payday lending since Michigan did so in 2005, Fox said. The last payday lender shut down and left Arkansas in August, not long after a crackdown by the state Attorney General. Voters in Arizona and Ohio last year approved rate caps on payday loans, despite aggressive opposition from the industry. In 2007, the District of Columbia approved a 36 percent rate cap, after a heated fight. The decisions have shifted the momentum in the payday lending battle, given that prior to the financial crisis, the industry regularly won victories at the state level to authorize their lending with no limits.

But payday lenders are gearing up for an alternative strategy. The industry believes it has found new support in arguing that payday loans, with annual interest rates that can reach 400 percent, are a cheaper alternative to overdraft charges. The industry is citing a recent USA Today analysis based on data from Moebs Services, an economic research firm. According to the analysis, consumers pay an overdraft fee of $26.68 every time they overdraw their account. So if consumers overdraw by $100, they’d pay an annual percentage rate (APR) of 696%, if the credit is paid back in two weeks – compared with an APR of 450% on a $100 payday loan with an average fee of $17.25, according to USA Today.

“The focus on overdraft protection on the Hill has helped legislators to understand that payday lending can be looked at as a cheaper alternative to overdraft charges,” said Steven Schlein, a spokesman for the Community Financial Services Association, the trade group for payday lenders.

Consumer advocates say that’s not necessarily true – and that neither of those high-cost options is a good one. Regardless, the industry has the money to get its message and arguments out in Washington. It doubled its lobbying expenditures in the last two years years to more than $4 million, according to the Center for Responsibility and Ethics in Washington. Top recipients of payday lending money in the 2008 campaign cycle include such influential lawmakers as Sen. Tim Johnson (D-S.D.), Rep. Luis Gutierrez (D-Ill.), who reversed his support for a payday lending ban and sponsored much weaker reforms after accepting substantial contributions from the industry, and Sen. Richard Shelby (R-Ala.).

“It’s not that many dollars, especially compared to other groups, but what’s striking is how much more the payday lending industry is spending than it used to,” said Naomi Seligman, a CREW spokesperson.

D. Lynn DeVault, board chair of the Community Financial Services Association, recently told Checklist, a trade publication for check cashing stores and payday lenders, that the industry is pouring its resources into Capitol Hill, increasing its federal lobbying budget by four times this year alone to fight off more than 14 bills in the House and Senate that affect payday lending. The group strongly opposes a measure that would cap rates on all consumer loans at 36 percent, co-sponsored by Sen. Richard Durbin, D-Ill. It even still dislikes the weaker bill sponsored by Gutierrez, who said in July that he would no longer accept industry contributions. Schlein said payday lenders will oppose in principle any payday reforms coming from Washington, contending that states should handle the issue.

DeVault said the group’s increased lobbying spending represents some 60 percent of its total budget, forcing it to cut back on consumer education and community outreach programs.

“We’re cutting back everywhere so we can put our resources behind this federal effort,” she told Checklist.

For that reason, Fox, of the Consumer Federation of America, doesn’t consider the payday lending fight anywhere near over, despite recent successes, including the 36 percent rate cap on payday loans to military personnel imposed by Congress in 2006.

“It’s always a concern,” she said. “Families burned by payday lenders don’t have the same Gucci Gulch ability to take on Congress.”

The industry’s efforts to fend off pending regulation in Washington are a twist on the tactics of financial services firms during the subprime boom. After lobbying from the lending industry, the Office of the Comptroller of the Currency in 2004 exempted banks and mortgage companies from tough state anti-predatory lending laws.

In states still facing payday reform fights, intense battles are underway.

In  Wisconsin, payday lenders have recruited 29 lobbyists for various payday reform proposals – the most lobbyists hired for a single issue in recent memory, said Gordon Hintz, D-Oshkosh, sponsor of the bill to impose a rate cap. Payday lenders also were the No. 1 campaign contributor during the first reporting period of this year, he said. Along with Hintz’s bill, other measures are being proposed in Wisconsin that would benefit payday lenders with lesser reforms, and have the industry’s support. Wisconsin is one of the last states without an interest rate limit on payday loans.

“It’s a gold mine here right now,” Hintz said, noting that even campaign consultants who helped get him elected have been lured to the opposition’s side. “I had no idea I’d be getting into something like this.”

As a result, it’s the “Mother Teresa coalition” of groups like the Catholic Conference and other nonprofits that support payday limits, up against the money and clout of payday lenders, Hintz said. “There is no interest group for people who were taken advantage of by payday lenders,” he said.

Hintz also said it was his understanding that payday lenders were tired of losing in other states, and as a result planned a major campaign in Wisconsin. Lawmakers are expected to consider payday lending reform proposals before the end of the year, he said.

In Colorado, the payday lending industry has been busy raising its profile and contributing to minority groups and events, said Matt Sundeen, senior policy analyst and general counsel with The Bell Policy Center, a nonprofit, nonpartisan research group.

Last month, former Denver Bronco Willie Green, director of corporate development and community outreach for the payday lender Advance America, presented the Urban League of Metropolitan Denver with a $10,000 contribution on behalf of his employer. Payday lender Moneytree for the first time sponsored the annual El Grito 5k run/walk, a major event for the Hispanic community.

Despite the industry’s financial clout, Sundeen said consumer advocates in Colorado are encouraged by the defeat of payday lenders in other states, where the industry far outspent opponents.”Clearly, they are very active in our state as well,” Sundeen said. “But we hope in 2010 we’ll be able to take care of payday legislation.”

It may not be that simple. In Ohio, where voters approved a 28 percent rate cap on payday loans last year, payday lenders are working to circumvent the law by continuing to make payday loans under two older consumer loan laws still on the books, said David Rothstein, a researcher with nonpartisan Policy Matters Ohio. “Those laws were never meant for payday loans,” he said. “The payday lenders are certainly doing everything they can” to continue making loans, he said.

Schlein, the industry spokesman, said payday lenders are keeping up the fight in Ohio, and will keep spending money in states where payday reforms are being considered. They also will work in Washington to prevent lawmakers from trying to put any limits on payday loans. “We always are going to fight hard,” he said.

Which means the battle over high-rate, short-term loans to people in financial distress won’t be over anytime soon.

But that hasn’t ended the matter, according to The Journal:

The discovery that Countrywide Financial Corp. recorded phone conversations with borrowers in a controversial mortgage program that included public officials — and that those recordings have been destroyed — has prompted new congressional calls for more information about the program.

Rep. Darrell Issa of California, the ranking Republican on the House Oversight and Government Reform Committee, is trying to subpoena the remaining records of Countrywide’s VIP loan program.

If Countywide destroyed some records crucial to this case, it’s worth probing further. But it also raises the question — where are all the other investigations into the scandals of the subprime boom?

As Gillian Tett of the Financial Times pointed out recently, more than 1,000 savings and loan executives went to jail following that scandal in the late 1980s and 1990s. So far, convicted Ponzi schemer Bernard Madoff is the only high-profile fraudster behind bars, but that seems to be about it.

One reason why the Madoff drama has grabbed so much attention and already sparked a slew of books this month, is precisely because there are precious few other financiers behind bars, or facing momentous fines. Compared to the S&L days, the level of retribution so far seems almost non existent.

Here’s hoping the Republican lawmakers so zealous about their pursuit of the Countrywide VIP scandal apply that same enthusiasm to the rest of the financial mess. It’s something that, so far, just hasn’t happened.

First some background: The vanilla option means a consumer gets presented with the most basic financial product first, then can choose to add on or buy into something more complex. With the vanilla option, a borrower would first be offered a standard, 30-year fixed loan. If the borrower wanted something more exotic, like an adjustable rate mortgage with a balloon payment, he or she would deliberately choose to go that route. The idea is to avoid all the confusion that surrounds some financial products, from add-on insurance on credit cards and checking accounts to mortgages so complicated the borrower isn’t entirely sure of the terms of his own loan.

From Rortybomb:

I was at a dinner party with some friends a few weeks ago, and the topic of credit cards came up. One friend talked about how she had just realized she had been paying for “credit card insurance.” What is that? If she died, her balance would be paid off. She is a 24 year old law student, who doesn’t carry a balance and has no dependents – it didn’t seem like it was a great value for her. She had to jump through some paperwork to get it turned off, and ultimately did, but for a few months there her credit card company was earning fees off something their customers didn’t want.

The funny and sad part is that we all had these stories (what are yours?). I had “unemployment insurance” on my checking account, where I’d get like two months salary if I was laid off – or something, the terms seemed so off for what I wanted (I was 22), I also shut it off after a few months of paying fees for it. The table was a collection of very well educated people who work in new economy jobs and lead upper-middle class with no families, so we could chuckle at the fact that the companies that provide us financial services were able to “get us” for maybe a couple hundred bucks, and felt a pang of sadness and guilt about what that difference would mean if we lived paycheck to paycheck. The question we asked ourselves was, what do you do about it?

The answer is obvious: you create a baseline, a vanilla option, and then let consumers decide what extra options they want to have in addition to it. Credit card insurance and unemployment insurance is probably valuable for someone, and that person would be excited to pay extra fees to have it. As Daniel Davies famously said, good ideas do not need lots of lies told about them in order to gain public acceptance. A corollary for innovation would be that you shouldn’t need to trick people into signing up for something that is genuinely innovative. Nobody was tricked into the internet.

Despite that obvious answer, the vanilla option seems to have bitten the dust – and it really didn’t have to end this way:

I don’t think it was ever explained very well by anyone in the administration, and perhaps I should have done a better job trying to explain how it is less adversarial than it looked on first examination. It is adversarial to the current way things are done, with massive profits coming from providing services consumers don’t want; and it is my fear that those profits contribute so much to the “safety and soundness” of large banks, the Fed’s first responsibility, that the Fed will have zero interest in breaking this terrible equilibrium financial services have gotten themselves into.

R.I.P., vanilla option. One more win for the banks, and another defeat for consumers.

Be sure to check the fine print on all your credit card and banking statements. No one else will be looking out for you.

The bank has denied all the charges, and has said it will strongly fight the lawsuits.

There’s a lot for the bank to answer to. Here’s a bit more from the suit by Illinois Attorney General Lisa Madigan, regarding the bank’s marketing tactics:

As part of Wells Fargo Home Mortgage’s marketing plan, Wells Fargo Home Mortgage utilized a computer function that purportedly permitted employees to customize Wells Fargo marketing materials to target African Americans by choosing “African American” in a pull down menu of “language” options.

If that’s true, it’s certainly a creative use of language options by the Wells’ marketing people.

And the end result of all these efforts, according to Madigan?

The lawsuit also follows a recent Chicago Reporter analysis of mortgage data submitted by Wells Fargo to the federal government. That study found that, in 2007, Wells Fargo sold high-cost, subprime loans more often to its highest-earning African-American borrowers in Chicago than to its lowest-earning white borrowers. According to the study, in 2007, about 34 percent of African Americans earning $120,000 or more received high cost mortgages from Wells Fargo in the Chicago metro area, while less than 22 percent of white borrowers earning less than $40,000 received high-cost mortgages from the lender.

So … a black borrower making more than $100,000 could be more likely than a white borrower earning, say, $35,000 to get a subprime loan? No wonder the lawsuits against Wells are flying.

The point about the suit in Illinois, and a similar suit filed by the city of Baltimore against Wells, is that all these subprime loans took a huge toll on minority neighborhoods, and devastated the cities themselves. These are dramatic, even unprecedented charges — that a major U.S. lender, a recipient of $25 billion in government  bailout money, caused lasting damage to some major American cities by deliberately targeting minority neighborhoods for risky high-cost loans. The cities are suing Wells to recover money to fix the mess that remains in neighborhoods wrecked by foreclosures.

Now Smiley has distanced himself from Wells, and teaming up with the bank for “Wealth Building” seminars won’t be on his agenda again.

But what about the rest of it? If the bank’s lending practices were fair and beyond reproach, as the bank maintains, then what happened? Why are black and Hispanic communities in some cities crumbling under the weight of so many subprime foreclosures?

Smiley may have left the stage. But that still hasn’t answered all the questions regarding Wells Fargo, subprime loans and the broken neighborhoods left behind.

Sens. John Ensign (R-Nev.) and Ben Cardin (D-Md.) have also signed on to the proposal.

“This bipartisan plan is a proven model that incentivizes potential buyers while targeting the serious problem of excess inventory in the housing sector,” Reid said in a statement.

It’s no coincidence that both of Nevada’s senators are supporting the measure. The state had foreclosure filings on nearly 18,000 residences in August — or one in every 62 — the highest rate in the country, according to RealtyTrac, an online foreclosure database.

Homeowners who were hoping for lower payments are discovering to their dismay that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That is one reason that many reworked mortgages are sliding back into default.

Yep. There’s a big difference between writing down the loan balance on a house, and merely setting up an “extend and pretend” repayment plan. If you can’t afford the house now, you’re probably not going to be able to afford it later, especially with all the new fees added on.

The problem is the same one that has plagued loan modifications from the start: Lenders don’t want to write down loan balances. There’s no cramdown provision in bankruptcy court to force them to do so, thanks to opposition in Congress and inaction by the Obama administration.

Yet, as loan modifications fail to stem the foreclosure crisis, the government continues to offer financial incentives to servicers and calls them to Washington occasionally to give them a hard time about not doing more loan mods.

And in the end, here’s what we’re left with, according to USA Today:

“Payments have gone up …. (and) the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind. He has studied the subprime mortgage situation for 10 years. “(The lenders) focus on today and not on the future.” Even under the Obama plan, they don’t focus on permanent debt reduction, White says.

The majority of borrowers who’ve gotten mortgage modifications have seen their overall principal balance go up, according to an analysis by CreditSights and ICP of about 660,000 mortgages modified this year. In about 90% of the modifications, the principal balance after a modification was larger, CreditSights said.

If you’ve ever wondered why the foreclosure crisis doesn’t seem to be easing, despite the government’s vow to help homeowners, loan mods that actually increase a borrower’s monthly payment are an obvious reason why.

A Wells Fargo executive who oversees foreclosed properties hosted parties and spent long summer weekends in a $12 million Malibu beach house, moving into the home just after it had been surrendered to Wells Fargo to satisfy debts, neighbors told The Associated Press.

It seems that Cheronda Guyton, a senior vice president responsible for foreclosed commercial properties at Wells Fargo, moved into the home in May after the previous owners lost their shirts in the Bernie Madoff scheme.

On Wednesday, another Wells executive, Mary Coffin, told House lawmakers that the banking giant, though a big corporation, “operate[s] with the conscience of a company determined to do what is right for our customers, our investors, and for all American taxpayers.”

Guyton’s actions suggest a different reality. And though it might be an isolated case, Mary this week pointed to a more systemic (and egregious) practice allegedly adopted by a Wells office in California: an alleged policy of lending discrimination in minority neighborhoods.

Wells stock might be on the rise, but its public image is quickly sinking.

Update: Thanks to reader M.A.M. for sending on a link to amazing photos of the actual house.

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Waters: When you bought the loan from this mortgage company, you had to look at it to see what you were buying, right?

Coffin: Not loan by loan.

Waters: Not loan by loan. You got packages?

Coffin: [Nods in agreement.]

It’s a curious response. You wouldn’t buy a car without taking a test drive, wouldn’t buy a house without a walk-through. Yet here were servicers snatching up mortgages with such urgency and nonchalance that they didn’t even care to investigate their soundness.

Waters says she has constituents who have been victims of mortgage fraud, their incomes falsified by mortgage originators to justify the terms and to make the loans look less risky than they were to entice the servicers vying to buy them up — situations that proved disastrous to all parties when the housing market tanked and home prices went underwater.

Complicating the issue, Coffin said, “many of the companies who originated those loans are out of business.”

Try squeezing the accountable party out of that mess.

Sen. Richard Durbin (D-Ill.) (WDCpix)

The White House program designed to prevent foreclosures by paying banks to alter loans voluntarily isn’t doing nearly enough to keep struggling borrowers in their homes, several powerful Democrats charged Wednesday. Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, and Richard Durbin (Ill.), the Senate’s No. 2 Democrat, are threatening to renew the push to empower homeowners to escape foreclosure through bankruptcy — a proposal that’s anathema to the banks and their congressional defenders.

Illustration by: Matt Mahurin

In March, the Obama administration launched a program providing $75 billion in carrots to banks that make mortgages more affordable. While administration officials say the program is right on track, the number of modifications lags far behind new foreclosure filings. Indeed, the Treasury Department released figures Wednesday revealing that the voluntary initiative has encouraged roughly 360,000 trial modifications since the program began. Meanwhile, foreclosure filings topped 360,000 in July alone, according to RealtyTrac, an online foreclosure tracker. The figures, many lawmakers and consumer groups contend, are indication that leaving the modifications to the fancy of the banks won’t stem the foreclosure crisis, which was at the root of the past year’s financial meltdown and threatens to prolong it.

“Waiting for banks to ‘volunteer’ to end this foreclosure crisis is a waste of time,” Durbin said in a statement Wednesday. “Treasury’s latest report show[s] this approach has failed miserably.”

Durbin is calling on Treasury Secretary Tim Geithner “to sit down with congressional leadership and work to end this blight on our economic future.”

The comments come at a time when foreclosures continue to skyrocket, even as some other indicators suggest that the economy is on a slow rebound. Indeed, July’s 360,149 foreclosure filings represent a 7 percent jump from the month before, RealtyTrac reported. And the trend is expected to worsen as the leading cause of foreclosures shifts further from the risky subprime loans that collapsed so spectacularly in recent years to today’s rising unemployment, which is approaching 10 percent. Even the most affordable modifications, experts point out, will likely be unaffordable to folks without incomes.

“A payment of zero will never be attractive to a lender,” Paul Willen, senior economist at Boston’s Federal Reserve, said Wednesday during a hearing of the Financial Services housing subcommittee.

Michael Barr, the Treasury Department’s assistant secretary for financial institutions, told lawmakers that the administration’s anti-foreclosure program — designed to modify between 3 million and 4 million mortgage loans over the next several years — is on pace to meet that goal. The 45 servicers who are participating, Barr testified, have offered 570,000 trial modifications, with 360,000 of those underway. Under the trial system, if homeowners meet their payment obligations for three straight months, then the new mortgage terms become permanent.

Still, Barr conceded that there’s plenty of room for more bank cooperation. “We think that all the servicers can do more than they’re doing now,” he said.

Administration officials, who called representatives of the major servicers to Washington in July to urge them to do more to help struggling borrowers stay in their homes, have planned a similar meeting for Thursday.

Frank said Wednesday that he’s “disappointed at the pace” of the White House initiative. Considering the reluctance of mortgage servicers to modify loans voluntarily, he added, mortgage bankruptcy reform “has become relevant.”

“The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of getting mortgages modified,” Frank said.

Under the Democrats’ reform proposal, bankruptcy judges could reduce, or “cramdown,” the terms of mortgages, including interest rates and principal balances, to make the loans more affordable for struggling homeowners — a power judges currently have over loans for vacation homes, boats and other material assets, but not over primary mortgages.

Consumer advocates say such reform would provide an important stick nudging the banks in the direction of modifications rather than foreclosures. Alys Cohen, attorney with the National Consumer Law Center, an advocacy group, told lawmakers Wednesday that servicers, aiming to maximize their profits, have been all too quick to choose the latter.

“As with all businesses,” Cohen said, “servicers add more to their bottom line to the extent that they can cut costs.”

Willen, of the Boston Fed, pointed out another reason that carrots alone won’t ensure the success of Washington’s anti-foreclosure strategy: There’s nothing, he said, preventing the banks from choosing to modify only those loans that are likely safest to begin with. “A program that offers monetary incentives to do as many modifications as possible and to minimize the probability that modified loans redefault may not in fact prevent many foreclosures,” Willen said.
Frank spokesman Steven Adamske said that, if the servicers don’t make “significant progress” on loan modifications in the coming months, the Financial Services chairman will add the cramdown provision to a larger package of finance reforms that House Democrats plan to take up later in the year.

They have a tough road. Although House lawmakers already passed mortgage bankruptcy reform legislation this year, the proposal hit a wall of bipartisan opposition in the Senate, after the Obama White House abandoned its previous support for the proposal. On top of that, the finance industry, despite its remarkable collapse, remains a powerhouse of influence on Capitol Hill, giving hundreds of millions of dollars to lawmakers each election cycle.

And Republicans, who have sided with the banks in opposing mortgage bankruptcy reform, didn’t stray from that position this week. Rep. Spencer Bachus (Ala.), senior Republican on the Financial Services panel, said the only way to reverse the rising tide of foreclosures is to curb the rising rate of unemployment. The best way to tackle unemployment, Bachus added, is to get the government out of the way and “allow the private sector to create these jobs.”

“That’s how you save these homes,” Bachus said.

Mortgage servicers, for their part, maintain that they’ve bent over backward to comply with the administration’s loan modification program in order to help homeowners. Jack Schakett, executive in charge of credit loss at Bank of America, the country’s largest mortgage servicer, told lawmakers Wednesday that BoA intends to transition 125,000 trouble loans into the trial modification phase before Nov. 1.

“Threat of bankruptcy,” Schakett said, “would not change our policies of modification.”

Yet such responses, many lawmakers say, are just further indication that, if Congress hopes to rein in foreclosures, mortgage modification decisions shouldn’t be left solely in the hands of the banks. “The servicers are not going to change,” Rep. Al Green (D-Texas) said during Wednesday’s hearing. “So if we know that [they aren't going to change], then we have to do something different.”

Sen. Richard Durbin (D-Ill.) is hardly impressed.

The upper-chamber’s second-ranking Democrat issued a statement just hours later pointing out that almost precisely the same number of homeowners had foreclosure filings on their residences in July alone. Durbin said the figures are indication that Congress needs to step in to protect struggling homeowners.

Waiting for banks to ‘volunteer’ to end this foreclosure crisis is a waste of time. Treasury’s latest report show this approach has failed miserably.

It’s time for the Treasury Secretary to sit down with Congressional leadership and work to end this blight on our economic future.

Although the statement doesn’t mention mortgage bankruptcy reform, Durbin has been among the loudest cheerleaders for that proposal, which would empower homeowners to escape foreclosure through the courts.

Although House lawmakers passed mortgage bankruptcy reform legislation earlier in the year, Senate lawmakers killed the proposal after the Obama administration abandoned its support for the measure.