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Payday Loan Industry Uses Anti-Bank Sentiment to Fight Regulation

May 3, 2010 - by Donny Shaw

For being such a relatively small and unpopular industry, payday loan companies have had a good deal of success convincing members of Congress to go easy on them as they take up financial regulatory reform. Earlier this year, House Democrats proposed legislation that would have capped payday loan interest rates at an outrageous 390% for the average consumer. And a special carve-out in the consumer protections portion of the financial reform bill has been at the heart of negotiations over striking a bipartisan agreement on that portion of the bill.

Under the financial reform bill that the Senate is currently debating (the Restoring Financial Stability Act of 2010), payday lenders would be subject to new regulations promulgated by the proposed Consumer Financial Protection Bureau to ensure that their services are “fair, transparent, and competitive.” Depending on how aggressive the Bureau ends up being, the rules could severely limit the terms under which payday lends could do business.

But while the underlying bill isn’t good for the payday loan industry, an amendment being proposed to it from Sen. Kay Hagan [D, NC], and being co-sponsored by Sen. Dick Durbin [D, IL] and Sen. Charles Schumer [D, NY], could be more damaging. It would ban payday lenders from giving out new loans to customers who have already taken out six payday loans or have been under loan obligations for more than 90 days in the past year. According to consumer advocacy groups, the average payday loan borrowers takes out 9 loans per year.

As we have seen, the payday loan industry is surprisingly savvy in politics. Their campaign to fight the Hagan amendment is no exception. According to Congress Daily ($), instead of defending their own industry, they are using the smart and timely tactic of labeling the amendment as an attempt to benefit the big banks:

The industry claims that while Hagan’s amendment would reduce their business, it would not benefit their customers because they would have to rely on more expensive overdraft fees offered by commercial banks to cover expenses when they are strapped for cash.

“You have loan limitations when you have banks that can make four overdraft protections a day,” said Steven Schlein, spokesman for the Consumer Financial Services Association, which represents 150 providers. The association has spent $550,000 in lobbying this year and is slated to air a TV ad against the Hagan amendment in the D.C. market. “All this going to do is help banks get more in overdraft protection fees,” Schlein said.

Payday lenders note that they charge $15 for every $100 borrowed on a typical two-week payday loan, but that overdraft fees on a bounced check or overextended debit card can be much more, with an average of nearly $30, bringing in $43.8 billion to banks last year.

If payday lending were to be eliminated, banks and credit unions would stand to gain more than $13 billion if customers choose to opt-in for overdraft coverage, given the dearth of short-term lending options, according to Michael Flores of Bretton Woods Inc., an economic consulting firm.

“In a financial lifespan of a consumer, this fills a segment. This isn’t a lifelong financial consumer use versus a checking account,” said Flores, who has done consulting work for the industry. “Nothing good happens by bouncing a check.”

The industry also is privately hinting that Hagan is doing the bidding for banks that stand to profit from the change, especially Charlotte, N.C.-based Bank of America, where Hagan worked as executive for its predecessor NationsBank. “It’s no surprise Hagan introduced this bogus consumer protection bill, which manipulates national banking law to help megabank buddies reap billions in profits,” said one source.

Hagan aides laughed off the criticism and said the attacks show more desperation for an industry that cannot bear the scrutiny of its practices. Hagan has tangled with the industry before. As a state senator, she helped change state law making it unfeasible for payday lenders to operate in the Tar Heel State, one of 16 states where the industry has no presence because of tight regulations, such as interest rate caps.

“I am working on including an amendment in Wall Street reform that will prevent the payday lending industry from continuing to gouge people who are struggling to make ends meet. The industry is, of course, attempting to kill this commonsense amendment for consumers,” she said in a statement.

“The industry’s goal is to continue to prey on people who have suffered in this economy with loan upon loan at 400 percent interest. My goal is to ensure this predatory industry has reasonable limits so that American families no longer sink into a spiral of debt.”

It’s a smart tactic, but it doesn’t make much sense. First of all, most people using payday loan services don’t have bank accounts. Secondly, the Federal Reserve recently promulgated new rules requiring banks to give their customers a choice to opt-in to overdraft protection or not. If you haven’t received an opt-in letter from your bank yet, expect one soon. And thirdly, the financial reform bill contains a provision establishing a grant for a new Community Development Financial Institutions, which would be specifically designed under the bill to be “low-cost alternative to payday loans.”

You can see the Hagan amendment, which has also been introduced as a stand-alone bill, right here — S.3245 – Payday Lending Limitation Act of 2010.

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  • Moderated Comment

  • mflores404 05/07/2010 4:53am

    Since I was quoted in this article, I need to correct some factual errors.

    1. Payday customers MUST have a checking account – that is the source of repayment.

    2. CDFI affordable loans are a good idea but the fact that the number of CDFI outlets are small and therefore, the reach to the consumer will be limited.

    3. Overdrafts are the most likely replacement because checks are NOT included the new Reg E. Also, the consumer cannot control if the bank decides to pay or return the check.

    4. Finally, according to the FDIC study in 2008, the average amount of a check overdraft is $66. In order to replace the average payday loan advance of $376, the customer would incur 5.7 overdrafts at a cost of $35 each for a total cost to the consumer of $199.39. The payday loan cost for a $376 loan is $56.40. The consumer will end up paying $142.99 more in fees for the same amount of credit.

  • Comm_reply
    Chris51 06/30/2010 6:59am

    • It’s the Republican party who is busy watching out for Wall Street/Corporations.
    Shame on Congress for not coming up with a solution for ALL its’ displaced hard working Americans.
    • 9.7% unemployed = 1.2 million Americans, and 55% of the workforce have taken reduced work hours, pay-cuts, unpaid leave, forced to switch to part-time. The BP Oil Corporation’s irresponsibleness is adding to lost jobs and lost lives.

    Yesterday, President Obama’s discussed what was happening with corporations, the economy, and the need to help the displaced unemployed. Watch his entire interview on CSPAN. He gets it.

    CNN and FOX only report on self-interested, with their main story and topics cycling 24 hours. Go to CSPAN

  • yourvote 05/11/2010 7:13am

    Congress is going to the mat over payday lending, in the most rancorous partisan environment probably since the Civil War, so the American people can kiss any meaningful reform goodbye. While all the usual suspects in both parties recycle the same tired arguments they used to water down healthcare reform, Wall Street is back to business as usual.

  • Thercee3 05/10/2011 5:33am

    Credit card companies seems to be suffering from our economy nowadays, but other loan lending agencies with services such as payday and short term loans apparently continues to thrive. The largest payday cash advance firms are thriving in stock trading, despite increasingly hostile and ever changing regulatory conditions. Several domestic loan firms are expanding overseas and diversifying their product line ups. Perhaps that’s also due to the difficulty the people experience in owning a credit card. You can read more here: Payday lenders thriving despite regulatory climate

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