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Losing Ground in States, Payday Lenders Take Fight to Congress

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Payday1.jpg

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.

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Debt.jpg

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.

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