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Payday Lenders Fight Regulation « The Washington Independent

Image has not been found. URL: http://www.washingtonindependent.com/wp-content/uploads/2008/09/cashland.jpgPayday 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.

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Debt-150x150_6118.jpg

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.

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