The report shows that big banks are providing billions of dollars in loans to fringe financial outfits; in turn, those fringe financial outfits are offering billions of dollars in loans to customers, often at usurious rates. Some payday lenders, for instance, offer short-term, roll-over cash advances with APRs of over 480 percent. The report argues the voluminous Wall Street financing means the payday business will keep expanding through the recession, as cash-strapped customers seek unconventional and sometimes dangerous banking products.

But, of course, we’ve known for decades that payday lending and other fringe financial services are big, big business, and the ties between that storefront cash checker and Wall Street are closer than you might think. (For the most in-depth examination of this phenomenon, see Gary Rivlin’s great Broke USA.) Many Main Street banks are actually competing with payday lenders now, offering their own versions of the same products.

What this really militates for is strong regulations set for the benefit of consumers, not created under the influence of lobbyists. To that end, the new Consumer Financial Protection Bureau — which maybe, just maybe, will get its leader in soon — should do a lot to constrain the industry’s worst practices.

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.

Sen. Chris Dodd (D-Conn.) (EPA/ZUMApress.com)

Last week, the Senate passed a sweeping overhaul of the regulation of banks and financial institutions. The bill, authored by Sen. Chris Dodd (D-Conn.), does not just focus on Wall Street firms, changing leverage limits and capital requirements. It focuses on Main Street banks and lenders as well. The bill empowers a new oversight council to create and enforce rules specifically on behalf of regular consumers: the Consumer Financial Protection Agency, housed in the Federal Reserve in the Senate bill and an independent federal agency in the House bill, which now need to be merged.

[Economy1]By and large, consumer watchdogs — some of the bill’s fiercest critics and biggest supporters — were happy with the final Dodd legislation. “We are pleased the Senate has passed this momentous bill that will rein in big banks’ reckless behavior and bring transparency to our financial system and protect consumers,” Heather Booth, the consumer advocate and director of the Americans for Financial Reform, said in a statement. “[This bill] ensures the financial system operates to support needs of working families, promotes business growth and economic mobility rather than the interests of the speculators who view the economy as a huge casino.”

But as the Dodd bill heads to conference committee — where members of Congress will reconcile the Senate financial regulatory reform proposal with the House’s bill, passed last year — consumer advocates have identified loopholes and weak points where a merged bill could be watered down, leaving American workers and families overpaying for financial services or otherwise vulnerable. Consumer advocates primarily cite the purview of the CFPA — the companies it will be able to regulate, and the extent to which it will be able to enforce rules — as the primary yardstick of real reform.

Travis Plunkett, the legislative director of the Consumer Federation of America, points to investor protections as the “big hole” remaining in the bill. “The House legislation is stronger on making sure that financial professionals are responsible for the advice they give,” he says. But the CFA is also focusing on ensuring a strong, independent CFPA comes from the conference committee process. He named a loophole in the Senate bill regarding the CFPA’s ability to monitor small non-bank lenders, like payday lenders, as problematic. “We’d like to see the House language triumph there,” he said, noting that the difference would amount to millions for low-income Americans.

The Center for Responsible Lending, a nonpartisan research group, cites whether auto lenders are under the CFPA’s oversight as an issue to watch. The Center estimates that consumers spend $20 billion more a year on their car loans because they borrow through dealerships — whose contracts can be usurious and difficult to understand — rather than banks or credit unions. Kathleen Day, a spokesperson for the organization, notes that the House bill exempts auto lenders from CFPA regulation and that car companies are lobbying hard to keep it that way in the final legislation.

Sen. Sam Brownback (R-Kans.) attempted to push the same exemption into the Senate bill, but the Senate ultimately did not vote on his amendment. Today, the Senate plans to take a nonbinding “sense of Congress” vote on the measure. “It isn’t binding, but these things are taken into account in conference committee,” Day says. “Currently, the Senate bill is better than the House bill on that, so we don’t want to see a shift there.” Plus, it is a point of hard lobbying. Last year, Ford Motor Company alone made more than $1 billion through its financing arm.

Day also says the CRL hopes Congress removes a Senate provision allowing small non-bank companies to preview and comment on CFPA rules “before they see the light of day.” “That’s behind the scenes, and would lead to the kind of cozy relationships between regulated companies and regulators that led to this crisis in the first place.”

Consumer watchdogs also cite preemption — the ability of the federal government to quash strong local rules — as a major issue to watch as the bills are merged. “It [is] really in the weeds,” Day says, “and a hard one to tamper with, but important.”

Mike Konczal, a fellow at the Roosevelt Institute and specialist in banking regulation, explains that reformers want states to retain the ability to create and enforce strong consumer-protection standards within their borders — and had to fight for the provision in both the House and Senate. “The New Democrats [in the House] could have probably killed the CFPA or at least turned it into a toothless panel,” he says. “But they let it go and then pushed hard [for] pre-emption, which would allow the Office of the Comptroller of Currency” — a primary government banking regulator — “to break state consumer protection laws.”

Therefore, preserving the ability to police consumer protection at the local level remains a priority for advocacy groups in Washington.

But the proliferation of banks in poor neighborhoods has done little to keep the unbanked from opting for “fringe banking services” — check cashing services, payday lenders, and the like. Those institutions charge onerous fees of their own, but unlike the big banks, their fees are explicitly outlined. Customers may cough up $12 for the privilege of cashing your $300 check, but it makes more economic sense than being stuck with miscellaneous surcharges over the course of several weeks for not maintaining a minimum balance, withdrawing money from an ATM, writing a check, or overdrafting your account — penalties that can accrue much more easily and be much more disastrous when your life is inherently unstable.

Although market research indicates the alternative-to-banking industry as a whole earns about $27 billion in profits a year, banks made $20 billion on debit card overdraft charges alone in 2009 — which means they’re undoubtedly pulling in more than $27 billion in profits from ATM fees, minimum balance fees, check writing fees, bounced check and overdraft charges. Who is it that is screwing over Americans with banking fees again? Because it seems more and more like the answer is “everyone.”

A customer applies for a payday loan in Sacramento. (The Sacramento Bee/ZUMA Press)

When states from New Mexico to Illinois passed payday reform laws over the past few years, it seemed as if the movement to curb short-term loans with interest rates that sometimes reached 400 percent or more was gaining steam. In Ohio and Arizona, voters even took to the polls to approve the rate caps on payday lenders, regardless of threats that the industry would close its doors if it had to lend money at 36 percent interest or less.

But instead of shutting down, payday lenders in some of the same states that passed reforms continue making payday loans – and sometimes at higher rates than before the laws were enacted, according to public policy experts and consumer advocates who follow the payday industry. Most major payday lenders still are in business, using loopholes in existing small loan laws or circumventing new laws entirely to continue charging triple-digit annual interest rates, in some cases as high as nearly 700 percent, advocates contend. Lenders issue loans in the form of a check, then charge the borrower to cash it. They roll into the loan a $10 credit investigation fee — then never do a credit check. Or they simply change lending licenses and transform themselves into car title companies, or small installment loan firms, while still making payday loans.

[Economy1]“In Ohio, New Mexico, Illinois and Virginia, every major payday lender is violating the intent of the law,” said Uriah King, senior policy associate with the Center for Responsible Lending. “I’ve been involved in public policy issues for a long time, and I’ve never seen anything like this.”

“It is kind of astonishing. The more I look into it, the more brazen the practices are. Payday lenders, as a trade association, have consistently circumvented the intent of legislative efforts to address their practices.”

Payday lenders strongly refute that contention. Steven Schlein, a spokesman for the Community Financial Services Association of America, a payday lending trade group, said it’s simply untrue that payday lenders are circumventing the law in Ohio, or in any other state. “That argument is untenable,” he said. “It just shows you that our critics are really just anti-business.”

The dispute over Ohio’s payday lending practices began after voters upheld a 28 percent interest rate cap on payday loans in November of 2008, and many payday lenders began operating under several small loan laws already on the books. The legislature approved the cap in the spring of 2008, and payday lenders fought back with the voter referendum, but failed.

The small loan laws, which have been in existence for decades, are intended to govern installment loans, not single-payment, two-week payday loans. Payday lending opponents say the lenders are exploiting those laws to avoid the 28 percent rate cap. Lenders contend they are legitimately licensed by the state to make the small loans.

Some 800 of the Ohio’s 1,600 payday lending stores have shut down since rates were capped – and the rest are “trying to make a go of it” by adhering to the small loan laws, said Ted Saunders, CEO of CheckSmart Financial Co., a national payday lender with more than 200 stores in 10 states. “We’re lending money for far less than we did when all this started,” he said. “This is not business as usual. The activists just want to put us out of business entirely.”

Those activists are pushing the Ohio legislature to move once again, to close the loopholes in the loan laws by placing them all under the 28 percent cap. More than 1,000 payday lenders already have gotten licenses to make short-term loans under the old small loan laws, which allow for high origination fees and other charges, according to a report by the Housing Research & Advocacy Center in Cleveland.

Under those laws, for a 14-day loan of $100, lenders can charge an origination fee of $15, interest charges of $1.10, and a $10 credit investigation fee, for a total amount of $126.10, or a 680 percent annual interest rate.

David Rothstein, a researcher with Policy Matters Ohio, an advocacy group that pushed for payday lending limits, said testers for his group found that lenders sometimes told borrowers certain loan amounts, such as $400, were not allowed. But they could borrow $505. Loans over $500, according to the small loan laws, allow lenders to double origination fees to $30. Lenders also often issued the check for the loan from an out of state bank, but said borrowers could cash it immediately if they did so at their store – for another fee, often 3 to 6 percent of the loan total. Testers contended employees at some of the stores laughed as they explained the procedures, saying they were only trying to get around the new law.

In other cases, lenders directed borrowers to go get payday loans online, where rates can be higher.

“The General Assembly, in a bipartisan manner, passed a strong law on these loans and the governor signed it,” Rothstein said. “Then, the industry took it directly to the voters, who reaffirmed support for the law by some 60% despite the millions of dollars spent by the industry to overturn the law. This is a slap in the face. They are absolutely disregarding the spirit of the law that was passed.”

Saunders, however, said consumer advocacy groups promised that low-cost payday lending alternatives would pop up once the law was passed – but that hasn’t happened. Instead, there’s been an increasing demand for payday lending services by strapped consumers. “Should we be further eliminating access to credit in a bad economy?” Saunders asked. “We exist because we’re still the least expensive option for a lot of people.”

People hit by high overdraft fees from banks or faced with late charges on multiple bills sometimes decide that taking out a payday loan can be a cheaper alternative, he said.

Based on those kinds of arguments, the debate in Ohio now has shifted from how to best enforce the new law to arguing again over the merits of payday lending. Payday lenders are contending that curbing payday lending in a recession hurts low-income borrowers, and results in job losses. Lawmakers have yet to move on the latest bill to end the loopholes. King, of the Center for Responsible Lending, said that while payday reform advocates have fought in the past to make sure new laws were followed, Ohio marks the first time where the payday lending debate seems to have started over entirely.

“I haven’t seen that elsewhere,” he said. “Ohio is something new. I think there is some degree of frustration as to why we are redeliberating every aspect of this issue. It’s made a tough issue even tougher.”

Ohio isn’t alone in dealing with pushback from payday lenders, even after laws are passed.

In Virginia, payday lenders responded to laws passed last year to limit their fees by reinventing themselves as car title lenders, while still essentially making payday loans, said Jean Ann Fox, director of financial services for the Consumer Federation of America. Car title loans are high-rate loans usually secured by the borrower’s car.

State officials ordered payday lenders in December to stop making car title loans to borrowers who already had a car title loan outstanding, and to start filing liens on borrowers’ vehicles, as is the usual practice with car title loans.

In New Mexico, the state attorney general sued two small installment lenders, contending they used a legal loophole to continue charging extremely high rates on short term loans – in some cases, more than 1,000 percent. In both New Mexico and Illinois, the payday lending lobby supported reform laws, but then began using the small loan laws once the new limits took effect, CRL’s King said.

For other states, such as North Carolina, Pennsylvania, Georgia, and Oregon, state lawmakers or the attorney general had to go back and tighten laws or ramp up enforcement after initial payday reform legislation failed to rein in high fees. In Arkansas, an effort to end payday lending wound up involving the state Supreme Court and an aggressive campaign by the attorney general.

In Ohio, Saunders said payday lenders will be gone entirely if lawmakers move to limit their use of the small loan laws. The additional fees allowed by those laws, he said, are “the cost of doing business,” and companies like his can’t realistically operate without them. His solution is to launch a statewide financial literacy campaign, in which CheckSmart will provide an expert to train nonprofit groups and churches and provide them with a variety of resources to help consumers with budgeting and saving issues. The campaign won’t involve marketing payday loans or pushing any products. Saunders said he took on the idea after several lawmakers during the 2008 debate told him his firm needed to have a higher community profile. Providing financial literacy help, he said, will highlight CheckSmart’s good corporate citizenship.

“In 2010, financial literacy is a big part of what we’ll do going forward,” he said. “It’s not a conflict of interest. We’re going to be giving good, sound financial advice for free. I have nothing to hide. Look, no amount of financial literacy would solve every person’s financial shortfalls. If consumers were being served by other sectors, we wouldn’t be here. This is a way of saying, ‘We’re the good guys.’”

While consumer advocates may not see it that way, attempts in Ohio to limit charges on short-term loans also have been hampered by confusion over who should take the lead – the governor, lawmakers, the attorney general, or state agencies, Rothstein said. As that fight goes on, the question of how much people in financial peril should have to pay for a short-term loan remains as unresolved as ever, in Ohio and in many other states.

Flickr: Stallio

As a credit squeeze continues, calls to beef up financial literacy among America’s consumers are taking on a new urgency.

In Massachusetts, Democratic Senate candidate Stephen Pagliuca is pushing for a national financial literacy campaign, saying it would help avoid a repeat of the financial system collapse last fall. In Miami, which recently introduced citywide financial literacy programs, a top official called financial literacy “the new civil-rights problem of our century.” In the blogosphere, basketball superstar Magic Johnson is under fire for doing national commercials for Rent-A-Center, a leading firm in the costly rent to own business, and Jackson Hewitt, which offers high-rate tax refund anticipation loans. Critics contend Johnson is endorsing products that exploit a lack of financial sophistication among some low-income consumers.

[Economy1]Those consumers have much greater need these days for financial literacy, given that credit is becoming harder and more expensive to get. The Wall Street Journal last month declared the end of the “democratization of credit” that occurred over the last decade, detailing the woes of a low-income 28-year-old woman drowning in $36,000 worth of credit card and student loan debt, with little access to the easy credit she once tapped in recent years.

But despite that obvious need, most of the nation’s financial literacy efforts aren’t exactly up to the job. As credit expanded in past years, corporations threw money at financial literacy programs even as they continued marketing higher-rate credit cards and loans. Consumer credit and debt counseling agencies expanded into a $7 billion industry that now includes everything from legitimate organizations that help a consumer fix his finances to flim-flam outfits that charge high frees and leave a borrower in worse shape than before. Subprime lenders created “consumer advocacy” organizations and offered financial literacy advice.

The situation has become so troubled that some credit experts no longer believe many financial literacy efforts are even effective. Between complicated credit card agreements that trip up even law students to payday lenders providing financial education, they say, most of the attempts to educate consumers on their finances are either hopelessly tainted or simply don’t make a difference.

“If you’re a consumer in financial distress, there’s really no trustworthy guide for pointing you to the right solution – almost everyone has a stake in the game,” said Adam Levitin, a Georgetown University law school professor who specializes in bankruptcy and credit. “The problem goes deeper, though, as all sorts of consumer credit counseling organizations are funded indirectly by various credit industry players. I’m frankly more comfortable with openly for-profit debt settlement agencies (they negotiate debt reductions in exchange for taking a percentage for themselves) than with the faux not-for-profit players.”

Irene Leech, former president of the Consumer Federation of America and a Virginia Tech University professor who focuses on consumer issues, agreed.

“All education offered by the businesses that sell the product they’re educating on is subject to bias,” she said. “These companies don’t dare hit the points that need to be hit hard enough – or they’d lose business – so their efforts are at best disingenuous and at worst, fraud.”

As TWI has reported, the nation’s leading financial literacy effort, the JumpStart Coalition for Personal Financial Literacy, includes as one of its corporate partners CompuCredit, a subprime lender that offers high-rate credit cards and payday loans. Last year, CompuCredit reached a $114 million settlement with the Federal Deposit Insurance Corporation and the Federal Trade Commission, which had charged CompuCredit and two partner banks with deceiving hundreds of thousands of customers by failing to properly disclose upfront fees and credit limits on their cards.

In addition, JumpStart’s Southeast Regional Director, William Cheeks, a paid consultant, also does consulting work for CompuCredit.

JumpStart Executive Director Laura Levine told TWI that no one had previously brought these issues to JumpStart’s attention, and that the organization’s staff would investigate them. Last week, Levine said the organization plans to introduce a conflict of interest policy for staff and for consultants, in the wake of the story. The coalition’s governance committee also “is going to look further into CompuCredit in particular,” she said, and “we’re going to continue to deal with issues regarding the suitability of partners on a case by case basis.”

Like CompuCredit, other subprime lenders also aligned themselves in recent years with financial literacy efforts, or moved to portray themselves as good corporate citizens, by donating to local minority groups or sponsoring events in minority communities. In a campaign that particularly irked Leech, payday lenders ran an advertising campaign on Washington metro system, touting payday loans as a sound financial alternative.

Other high-rate lenders also are using similar tactics.
Ray Forgue, a retired University of Kentucky professor who taught personal finance, and who has written personal finance books and a textbook, now lives in South Carolina. Car title lenders “are everywhere,” he said, featuring advertisements that show consumers being allegedly financially savvy by taking out car title loans to pay for dental care. Car title lenders make loans using a borrower’s car as collateral, with interest rates that can approach 400 percent. Borrowers who can’t keep up with the high payments lose their cars, and then, in many cases, their jobs as well.

These kinds of tactics present a huge challenge for financial literacy efforts, Forgue said. Any financial literacy program has to both battle the saturation of subprime products that have made their way into the mainstream, and help consumers understand newer and more complex financial issues, from insurance to retirement planning.

“The products are far more complicated, both on the consumer credit and the investment side,” Forgue said. “Financial literacy definitely is much more important than it ever has been before.”

Leech, for her part, said the problem with financial literacy in recent years has been that funding for unbiased, professional counselors has been replaced by corporate dollars. One fix might be for the government to reinvest in the nation’s Cooperative Extension System, a national educational network supported by the U.S. Department of Agriculture that provides consumers with experts and research on many topics, including financial literacy. The cooperative system was created by Congress in 1914, and uses the resources of land grant colleges and universities to offer its non-formal, non-credit programs to the public. The system has offices in every state and a website with financial research and information, from budgeting during lean times to an “ask an expert” feature, with questions like how much allowance a child should get at a certain age.

Leech also supports the America Saves campaign, a nationwide effort run by the Consumer Federation of America to encourage low and moderate income households to change their financial behaviors, build up savings, and pay down debt. The campaign, the nation’s largest savings initiative, also sponsors an annual “America Saves Week” that encourages people to review their finances and improve their savings habits.

And the human resources departments of corporations and businesses are increasingly getting involved in financial literacy efforts, Leech added, since employees with financial troubles can be distracted or forced to miss work due to legal battles over debts.

But any financial literacy attempt faces an uphill fight. The attorneys general of 40 states recently asked the Federal Trade Commission to tighten regulation of companies offering debt relief services to consumers, saying the firms require customers to pay thousands of dollars in upfront fees, and then fail to renegotiate payments with creditors. The FTC will hear testimony this week on proposals for reform, as the battle over consumers and their money decisions continues, and the credit squeeze tightens further.

Of the 21 individuals who donated more than $21,000 to the Illinois Democrat in the first quarter of this year, 15 represent the pawnshop industry, according to documents filed with the Federal Election Commission. Total donations from those 15 donors was $10,500.

That’s not a ton of cash, all things considered, but it is symbolic of Washington’s scratch-your-back mentality, in which industries dump thousands of dollars into the coffers of lawmakers who are in positions to help those businesses legislatively. (Gutierrez is chairman of the House Financial Services subpanel on consumer credit.)

Indeed, the political action committee for the National Pawnbrokers Association, which dropped a cool $1,000 on Gutierrez this year, didn’t give him a dime in years past when he supported efforts to eliminate payday lenders altogether.

Until this move by Gutierrez, whose top contributor to his 2008 campaign was a payday lender, consumer advocates fighting the industry were on a roll. They were regularly convincing state legislators that had once bent over backward for the industry  to change course, limiting the interest rates payday lenders could charge and banning some of the industry’s more abusive practices. The change of heart came about as states like Ohio found themselves inundated with payday lending stores on every block, and as the economic downturn put a focus on the plight of borrowers with payday loans. During a hotly contested battle in Ohio to limit payday lending, it even turned out that some lawmakers from hard-hit rural areas had themselves resorted to payday loans, experiencing the industry’s abusive practices first hand. Not surprisingly, the payday lenders lost that battle.

It’s hard to argue in favor of any industry that charges almost 400 percent interest and traps consumers with additional fees and repeated loans. But you can always count on the payday lending industry to offer outrages even beyond that, which makes the dishonesty of sudden apologists like Gutierrez even more breathtaking.

For example, The Wall Street Journal reported last year on how payday lenders specifically seek out customers among society’s most vulnerable: the elderly and disabled.

(Payday) lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veteran’s benefits. “These people always get paid, rain or shine,” says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries “will always have money, every 30 days.”

The law bars the government from sending a recipient’s benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.

As a result, these lenders, which pitch loans with effective annual interest as high as 400% or more, can gain almost total control over Social Security recipients’ finances.

Despite this, the industry lives to fight another day, as the Gutierrez about-face attests. It really is about the money, after all, and payday lenders always have been extremely generous with their largess. Watch the clip Mike refers to in his story, showing Gutierrez posturing in front of Jean Ann Fox, a longtime and well-respected consumer advocate who closely follows the payday lending industry. Gutierrez tries to put on a show of “reforming” the industry with his bill — but don’t believe a word of it. That’s an old tactic payday lenders use in the states as well, proposing measures they tout as “reforms” that are so filled with loopholes as to be meaningless. Their reforms are intended to draw support away from measures to limit them to charging 36 percent interest, which payday lenders contend would put them out of business.

Gutierrez should of course be ashamed of himself, but this isn’t just about him. If an industry that sinks as low as some payday lenders regularly have can gain enough respect in Congress to have Gutierrez spout such nonsense, imagine the fate of other reforms of the financial services world. Treasury Secretary Timothy Geithner talks a tough game when he envisions a sweeping expansion of the regulatory system. But as the Gutierrez debacle shows, even the bottom feeders of the financial industry still have enough sway to sometimes get lawmakers on their side. The disappointing comeback of payday lenders only proves that when it comes to cleaning up abusive and predatory lending, it’s far too early to get your hopes up for something real.

Rep. Luis Gutierrez (D-Ill.) (Associated Press)

As congressional Democrats work to solidify finance industry reforms, a growing push to rein in payday lenders is running smack into a formidable barrier: the rising influence of the lenders themselves.

Not only has the industry stepped up its lobbying and political contributions in recent years, but it’s convinced at least one powerful Democrat — who just two years ago supported an outright ban on payday loans — that eliminating the practice is politically impossible.

Illustration by: Matt Mahurin

As a result, Rep. Luis Gutierrez (D-Ill.), who heads the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, is pushing a loophole-riddled bill that would allow payday lenders to charge annual interest rates of nearly 400 percent — a proposal widely condemned by consumer advocates and some liberal Democrats, who want to put payday lenders out of business altogether.

Gutierrez wasn’t always so kind to the industry. In 2006, he supported the successful effort that effectively banned payday loans to members of the military by capping interest rates for those borrowers at 36 percent. (The cap was requested by the Defense Department, which called the loans predatory.) A year later, Gutierrez was a lead sponsor of the Payday Loan Reform Act, which would have prohibited the loans outright.

Gutierrez’s office did not respond to requests for comment. But in an interview with The Associated Press last week, the Illinois Democrat conceded that the growing influence of the payday lending industry contributed to his change of heart.

“While they may not be JP Morgan Chase or Bank of America, they’re very powerful,” Gutierrez said. “Their influence should not be underestimated.”

Gutierrez should know. The top contributor to his 2008 campaign was payday lender QC Holdings, which donated $10,100, according to the Center for Responsive Politics. Another payday powerhouse, the Online Lenders Alliance, contributed an additional $4,600.

The episode presents a familiar dilemma for Democratic leaders hoping this year to pass a wide array of consumer-friendly finance reforms, including new anti-predatory lending and credit card protections: On one hand, party leaders agree that consumers need better protections from these industries; on the other, the industries’ influence creates enormous conflicts over how to do it. Caught in the middle are the 19 million Americans estimated to take out payday loans each year, many of whom become trapped in cycles of long-term debt.

Payday loans are generally small, short-term, high-interest loans designed to cover emergency expenses until the borrower’s next payday. Supporters of the industry maintain the loans are a vital resource, particularly for low-income Americans who wouldn’t be eligible for loans through banks that examine credit histories more closely. But critics argue that the usurious rates associated with the loans, which can approach 1,000 percent in some states, ultimately do the borrower more harm than good. Many hope to see the industry disappear altogether.

The Gutierrez bill attempts to strike a compromise between those positions, capping biweekly interest rates at 15 cents on every $1 borrowed — a rate equivalent to 391 percent annually. The proposal would also create a system allowing borrowers to pay back their loans in installments, rather than in lump sums. And it aims to prevent lenders from refinancing loans at higher rates when borrowers aren’t able to pay on time.

At a hearing on the bill last Thursday, Gutierrez said his proposal, while “not a cure-all,” goes a long way to protect consumers from abusive lending practices. “The current state of affairs for these consumers is unacceptable,” he said, “and Congress would be derelict in its duties if we allowed them to remain unprotected from abusive and predatory lending.”

Yet consumer advocates, one of whom testified before the panel, maintain that Gutierrez’s bill is worse than doing nothing. Not only is it punched full of loopholes, they argue, but it effectively embraces a lending system in which triple-digit interest rates are deemed business as usual. Currently, regulation of the payday lending industry is almost exclusively up to states.

“This would essentially provide congressional approval and endorsement of payday loans,” said Jim Campen, executive director of Americans for Fairness in Lending. “It legitimizes the business and slows down states’ efforts to outlaw the practice.”

Consumer advocates also claim that the bill creates an enormous loophole around the refinancing ban, allowing lenders to close out existing loans and offer new ones in the same visit — a practice in which consumers effectively borrow the same money they just repaid, often at higher rates.

“You pay it, and then they hand it right back out in the same few minutes that you’re there,” said Carol Hammerstein, spokeswoman for the Center for Responsible Lending. “That whole business model is not helpful to borrowers.”

Hammerstein said that of the 19 million Americans who take out payday loans, CRL estimates that 12 million are caught in “a repeat cycle” in which they’re taking out at least five separate loans a year.

In yet another loophole, the Gutierrez bill applies only to loans with durations of 91 days or less. In response to similar windows adopted by states, advocates warn, payday lenders have simply extended the loans beyond the stated time frame. “They’re getting around it by offering longer-term loans,” said Tom Feltner, policy and communications director at the Woodstock Institute, a community reinvestment group. “And they’re keeping the same high interest rates.”

Consumer groups instead are rallying behind another payday loan bill that would cap annual interest rates at 36 percent. That bill — sponsored by Sen. Richard Durbin (D-Ill.) in the upper chamber and Rep. Jackie Speier (D-Calif.) in the House — would effectively kill the industry, which says it can’t manage the loans profitably at that level.

Indeed, that’s the point, said Speier spokesman Mike Larsen. “They will certainly cease to exist as they currently operate,” Larsen said. “[Speier] makes no bones about that.”

The industry, for its part, opposes both bills. “Predatory lending applies only to the mortgage business,” Troy McCullen, president of the Louisiana Cash Advance Association told House lawmakers last week. “It has nothing to do with rates or fees or APR.”

Gutierrez maintains that the Durbin-Speier bill is a recipe for failure. In an animated exchange with a consumer advocate testifying before his panel Thursday, he argued that an outright ban is politically impossible.

“You don’t like the payday [model]. I don’t like the payday [model],” Gutierrez said to Jean Ann Fox, director of financial services at the Consumer Federation of America. “You wish to eliminate it. You wish to ban it. That’s not possible. That’s not possible.”

But that’s not the sentiment in the upper chamber, where an aide said Tuesday that the Durbin bill “is likely to move” this year as part of a larger finance reform package being assembled by Senate Banking Committee Chairman Chris Dodd (D-Conn.). Dodd’s office did not respond to a call seeking comment.

Speaking Tuesday at a street-corner press conference in Chicago — staged, not coincidentally, in front of a payday lending business — Durbin said the time is right for Congress to act on his proposal to reform the industry.

“I think the situation is totally out of hand,” Durbin said, according to local reports. “Whether you’re talking about credit card accounts, whether you’re talking about these payday loan operations, the interest rates they’re charging now are nothing short of outrageous.”

Payday Lender, Detroit (Flickr: ellievanhoutte)

As the presidential campaign turns nastier by the minute, soaking up most of the public’s attention, it’s easy to overlook the other battle out there: the waning days of a long fight by payday lenders to bring respect to an industry that charges people in desperate circumstances 400 percent interest on short-term loans.

As The New York Times pointed out this week, states are standing up to payday lenders and imposing caps on what they can charge for lending people money until their next paycheck comes around. Imagine the gall!

Payday lenders say they’ll go out of business if they’re forced to adhere to rate caps of 36 percent or so, though interest rates on credit cards currently range from 11 to 13 percent, and rates on 30-year fixed rate mortgages are less than 6 percent. But that’s the nature of the payday lending business, and it always has been — despite an industry’s intense campaign to paint itself as just another mainstream consumer financial service.
That campaign almost worked. As payday lending exploded during the 1990s and the early part of this decade, it rode the wave of enthusiasm for deregulating the markets and setting them free.

Suddenly, an industry best known for operating out of storefronts in shady neighborhoods expanded into suburbia — settling in at the strip mall right next to Chili’s. Wall Street took notice as payday lending companies began, for the first time, to go public. By mid-2000, according to the Wall Street Journal, the payday lending industry had generated about $8.6 billion in revenue.

Illustration by: Matt Mahurin

The industry also worked hard to clean up its image, creating groups with names that seemed so consumer friendly, like the Community Financial Services Assn. It ran TV commercials with soft-focus images of happy families, helped by their high-rate loans.

My favorite was a commercial that ran when states began to try limiting the number of loans a consumer could take out to four or five a year. In the spot, a nice young man said he needed more payday loans to pay his heating bills — what if he couldn’t get them? You wanted to shake him, and say “Stop! Put on a sweater and turn down the heat! For God’s sake don’t get another loan!”

Because that was always the problem. Everyone knew — consumer groups, people who sought the loans, and, in fact, the industry itself — that people didn’t take out just one loan and stop. They always came back for more.

If you don’t have the money to pay for something in the first place, and you take out a loan you can’t afford, you really haven’t solved your problem. Former employees turned whistleblowers revealed that luring repeat customers was a key part of the industry’s business practice, thanks to the fees they generated; the Center for Responsible Lending found that 99 percent of payday loans went to repeat customers.

The Times story detailed yet another heartbreaking account of the damage done: Tracey Minda, a single mother who needed cash to pay for her 6-year-old son’s clothes and school supplies, took out a $400 payday loan. Within nine months, she’d taken out 18 loans, nearly lost her house and car, and was paying $120 a month in fees to the payday lender.

Despite all this, the industry thrived for much of the past decade, lobbying state legislatures to repeal usury laws so they could charge their triple-digit rates; and opening so many new businesses that states like Ohio wound up with more payday lending storefronts than fast-food outlets — more than all the McDonald’s, Burger Kings and Wendy’s combined.

All of the sudden, it seemed, they were everywhere. And that’s when their troubles began.

The first crackdown came from an unlikely source — the Pentagon. Lenders clustered around military bases and pushed their services to the point that the Pentagon grew tired of dealing with problems from military personnel or the wives of soldiers overseas struggling with payday loans. Finally, at its urging, Congress imposed a 36 percent rate cap on loans to military personnel that took effect almost a year ago.

The move seemed to encourage lawmakers in about a dozen states as well, who began moving to impose similar caps. At the same time, the subprime mortgage meltdown began. It became a little less fashionable to be in the business of making a lot of money from people who weren’t particularly financially sophisticated.

The loan shark label — the one the industry fought so hard to shed — seemed somehow fitting again. Even Lou Dobbs weighed in with a rant:

“You’re probably asking, what is the difference between, well, payday loans and loan sharking. And if you look at those rates, you’ll find there’s not much difference in point of fact in interest rates,” said Dobbs on his May 16, 2008 show on CNN. “But for some reason, the United States Congress and this administration think it makes perfectly good sense to do what is being done to these unfortunate people left to payday loans. It’s inexcusable in my opinion. Absolutely inexcusable. American business, perhaps the US Chamber of Commerce, ought to step into this and do the right thing.”

At this point, it might be reasonable to call the battle over, hold the door open for payday lenders to creep back into the shadows again.

But this is the season for unexpected twists and turns in hard-fought contests with unpredictable outcomes. Defeated in Ohio, where the legislature imposed a 28 percent rate cap, the industry is trying to force a November vote on a ballot issue to overturn the new law. It got caught offering illiterate homeless people $1 for their signatures.

In Arizona, the industry created a front group called the “Consumer Rights League,” to convince voters in November to permanently legalize 400 percent interest rates on payday loans.
But in states like Oregon, that capped rates, payday stores are closing up shop, and the industry threatens to do the same elsewhere. So as long as states keep moving ahead with limits, lenders will keep going away.

They’re not faring much better on Wall Street, which always gets nervous about regulation. It is beginning to figure out those big profit margins aren’t going to go on forever.

And lower-cost alternatives are starting to emerge. The Federal Deposit Insurance Corp. is experimenting with a pilot program in which banks around the country make small consumer loans at moderate rates.
The industry contends it’s getting picked on as a way for lawmakers to show they’re doing something about the housing crisis. That may be partially true, but there’s more to it. Once the payday lenders packed every corner, people could see for themselves what they really were.

I once spoke to a community activist in Utah, who said cities and towns there had begun using zoning laws to limit the number of new stores, because their presence had become out of hand. No one wanted one in their neighborhood.

The dilemma for the payday lenders — the thing they could never overcome, even with all their lobbying, and fake consumer group fronts and dubious testimonials — can be summed up in that that immortal 1997 movie “My Best Friend’s Wedding.”

Julia Roberts’ character, a food writer, explains that some people are Jell-O, and some are creme brulee. As the payday lending industry slithers away, keep that in mind. It never could really find a respectable place for itself on Main Street — because no matter how hard it tried, it never became something better than what it really was. It was never creme brulee.