Gutierrez Proposes Weak Reform of Payday Lenders

Image has not been found. URL: /wp-content/uploads/2009/04/gutierrez.jpgRep. 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.”