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Financial Reform Bill Will Exempt Payday Loans

March 10, 2010 - by Donny Shaw

Some of the most absurd lending and borrowing happens in the payday loan industry. According to the Center for Responsible Lending (.pdf), the average payday loan borrower pays $800 for each $325 they borrow. That’s an absolutely absurd interest rate, but according to the New York Times, the senators who are designing financial reform legislation are going to include a special carve-out so the industry can keep on dealing in these abusive loans:

Under the proposal agreed to by Mr. Dodd and Mr. Corker, the new consumer agency could write rules for nonbank financial companies like payday lenders. It could enforce such rules against nonbank mortgage companies, mainly loan originators or servicers, but it would have to petition a body of regulators for authority over payday lenders and other nonbank financial companies.

Consumer advocates said that writing rules without the inherent power to enforce them would leave the agency toothless.

I’d say that’s pretty much the definition of toothless. They can make the rules, but they can’t enforce them.

The House version of financial reform legislation (H.R. 4173) contained no such carve-out — payday lenders, and other nonbank financial companies, like pawn shops, would be subject to the same consumer protection regulations as other businesses in the financial sector.

Why are these most usurious of lenders getting away so easily in financial reform legislation? Two reasons:

1) They are the only companies that will lend to people with bad credit histories. Since they hold peoples’ assets and future income as collateral, credit scores don’t matter to them. Without the service they provide, some people would have virtually no way of getting emergency loans.

2) They have been lobbying hard. Last Spring, the AP reported that the payday load industry has “deployed well-connected lobbyists and hefty sums of campaign cash to key lawmakers to save themselves”:

The payday lending industry’s trade association has spent more than $1 million annually for each of the last four years lobbying Congress, including $1.4 million last year, according to disclosures filed with Congress. It has beefed up its team of Washington hired guns to a dozen, including well-connected financial services lobbyists Tim Rupli and Wright Andrews, who each have firms bearing their names.

It also has stepped up its campaign giving in recent years, forming a political action committee that contributed more than $200,000 in 2007 and 2008, much of that to lawmakers who serve on the Senate Banking and House Financial Services committees, according to Federal Election Commission filings compiled by the Center for Responsive Politics. Those committees have jurisdiction over the industry.

Individual payday lending companies including Cash America Inc. and Advance America Cash Advance, have also stepped up their political activities.

“As the Hill has become more interested in our industry, we have stepped up our efforts,” in Washington said Steven Schlein of the Community Financial Services Association, the trade group for payday lenders.

“Congress is beginning to realize that there aren’t other alternatives,” to payday lending, Schlein said.

A newer player representing Internet payday lenders — a growing segment of the market — also ramped up its lobbying and political giving efforts. The Online Lenders Alliance, formed in 2005, nearly quintupled, to $480,000, its lobbying expenditures from 2007 and 2008. It contributed $108,400 to candidates in advance of the 2008 elections compared to about $2,000 in the 2006 contests. Gutierrez was among the top House recipients, getting $4,600, while the top Senate recipient was Sen. Tim Johnson, D-S.D., a Banking Committee member who got $6,900.

The group has also helped host several fundraisers for lawmakers with say over what happens to the industry, according to invitations collected by the Sunlight Foundation, which tracks political parties. Those included a fundraiser last year for Rep. Joe Baca, D-Calif., a Financial Services committee member. Dinner and a reception at the fundraiser at a Capitol Hill townhouse cost at least $1,000.

Image from Thomas Hawk used under a Creative Commons license.

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