Gutierrez' Questionable Payday Loan Reform
Last week, we applauded
Rep. Luis Gutierrez’ work as chairman of the U.S. House Financial
Institutions Subcommittee, specifically a hearing he held to beat back
the right-wing myth that the Community Reinvestment Act caused the
nation’s mortgage crisis by putting pressure ...
Last week, we applauded
Rep. Luis Gutierrez’ work as chairman of the U.S. House Financial
Institutions Subcommittee, specifically a hearing he held to beat back
the right-wing myth that the Community Reinvestment Act caused the
nation’s mortgage crisis by putting pressure on banks to extend risky
mortgages to low-income borrowers. But consumer advocates aren’t as
pleased with another of his priorities atop the subcommittee:
introducing a payday loan bill that is anything but helpful to
borrowers.
In late February, Gutierrez and four co-sponsors introduced the Payday Loan Reform Act of 2009, a bill he says “outlines solid consumer protections for 23 states that have weak or even nonexistent consumer protections from abusive lenders.”
Jean Ann Fox at the Consumer Federation of America disagrees. Calling it “a bad piece of legislation and it will be harmful to consumers in the small loan market,” Fox takes umbrage with the Section 2 d, which makes it unlawful for a payday lender “to require a consumer to pay interest and fees that, combined, total more than 15 cents for every dollar loaned in connection with a payday loan.” Typically, state laws are quoted as dollars per hundred, so the language is a bit unorthodox. But when multiplied out, $15 worth of interest for an $100 advance equals about 390 percent annual interest for a two-week loan, which is the typical fee structure in the industry. In other words, Gutierrez’ legislation ostensibly legitimizes the existing product. “This is business as usual for payday lending,” Fox adds.
Industry groups publicly oppose the measure, in part because the bill does not preempt any lower rate caps implemented at the state level. But passing a federal law institutionalizing the practice sends the wrong message, especially because state officials across the country are consistently attempting to pass more stringent reforms. “The industry, which is really on its heels these days,” says Fox, “would think that federal legislation that recognizes their product as legitimate would give them a fresh lease on life.”
Strangely enough, Gutierrez introduced a bill by the same name two years ago that was much more amenable to consumer advocates. (Fox herself penned a letter (PDF) in support of the measure.) Asked about the change of heart, Fox says Gutierrez’ staff did not ask any her organization for input this year, even though they were involved in the process before. A Gutierrez spokesperson emailed that he and his staff have always worked with consumer groups before and they've discussed the bill's details with advocates over the past several weeks.
A better alternative, according to 100 advocacy groups (PDF), is Sen. Dick Durbin’s payday loan reform bill, which would impose a federal cap of 36 percent on all consumer credit transactions. This would also fulfill a campaign promise by President Obama, who agreed to extend a 36 percent interest cap to all Americans, not just military families.
The House bill, on the other, just doesn’t seem to go far enough. “You’d think we’d have learned a lesson,” says Fox, “from extending mortgage credit to people without determining ability to repay.”
Comments
I think Durbin's proposal is acceptable ONLY if it applies accross the board to all credit equally-this would include bank Overdraft fees-which, if figured on an annual basis like they propose for payday loans, can reach interest rates in the 10s of thousands of percent. In fact, it is utter nonsense and pandering that politicians attack payday lending, (which is a much cheaper alternative than bouncing a check in most cases), based on annual rates of interest on what is usually a two week loan.
Is a hotel a "predatory hotel" because it charges $154 per night? That's $4,620 per month, or $56,210 per year! You can rent an apartment for about $500 per month. So, using the same price cap proposed for short-term loans, the $154 room rate should be set at a maximum of $16 per night.
What's more, much of the attacks on the industry have been undertaken by the Citizens for Responsible Lending-a lobbying organization is funded by Herb and Marion Sandler, billionaire financiers who made their fortune offering the worst kinds of subprime, adjustable-rate mortgages-those with NEGATIVE AMORTIZATION!
As always-follow the money-not the moralizing indignation out of one side of the politicians mouth while he trying to pick the pockets of consumers in need of tools to manage their finances more economically.
Neither the House nor the Senate should be trying to regulate people’s personal financial activities in such a wholesale manner. Whenever they do, the end result is loaded with loopholes that help no one. Legislative bodies can not and should not dictate interest rates. That’s why Congress does not set interest rates—the federal reserve banks do that. The Legislature needs to stick to what they do best… making sausage.
The hotel analogy doesn't exactly fit because people who rent a hotel for a few nights only want to stay a few nights, whereas people who borrow money from payday lenders in many cases would prefer to have more than two weeks to pay it back. The problem is that payday lenders will lend without doing a credit check, to people who only have a minimum income and a bank account, and if they gave such people more than one pay period to pay the loan back, their default rate would rise and they would then have to charge more for each loan.
If payday lenders weren't operating, by and large, under such a narrow exemption to ridiculous state usury laws, they could also offer installment payday loans for people who know from the start that they are not going to be able to repay the entire loan on their next payday, and who would qualify for such due to their length of employment and/or sufficient income. Instead of leaving one check with the lender they would leave a few, and the loan would be paid off over several paydays instead of one. The lenders could make installment payday loans at a lower APR than a regular payday loan refinanced several times because they wouldn't incur the cost of processing each individual rollover, where rollovers are allowed (and where they aren't, people go to one payday loan store to get money to pay back another, and critics get upset about the cluster of payday-loan stores in the neighborhood).
Usury laws are an authoritarian tradition which should have been abandoned along with the tradition of slavery. They are a form of theocracy, based on the religious idea of usury which originally meant the sin of charging any interest whatsoever on a loan. Today's moralists define it as charging excessive interest, but the fact is that "excessive interest" cannot be reasonably defined or determined in terms of an annual percentage rate. Small-dollar short-term loans - the only type of loan which many people can qualify for - must carry an APR of at least 250 or 300 percent just for the lender to break even on the transaction, because the cost of issuing a loan is not insubstantial and the lender is only collecting interest for a short period of time, not a whole year. Even the nonprofit "payday-loan alternative" offered by Goodwill Industries carries a 252% APR - see GoodMoneyStore.com.
People who support usury laws have no faith in a free-market economic system and they have no faith in the capacity of adults to make their own decisions. Yes, loans need to be regulated so that they are transparent, so that people are not lied to or deceived in any way. But the price of loans should be regulated by the free market and not Big Brother, secular or religious, wanting to control everything. If the government can tell a lender how much he or she can charge, then it can also tell every doctor, lawyer and free-lance maid how much he or she can charge as well. And if the government can remove payday loans from the marketplace because some people cannot resist the temptation to take out too many, then it can also remove high-fat and high-sugar foods from the marketplace because some people can't resist the temptation to overeat them and become fat. Obesity is causing far more suffering in America today than people overextended on payday loans. But people need the freedom to make their own mistakes and learn from them, as long as what they are doing does not directly harm anyone else, without interference from those who want to be seen as the ones who know what's best for us all.
Lastly, I think most critics of payday lending are dishonest on this issue, as they try to get the public to support APR rate caps without letting on that such caps will virtually eliminate loan products from the marketplace, products which many people use to good effect and which choice they do not want taken away from them. Don't tell people they will be able to borrow money at cheaper rates once the rates caps are in effect, because the fact is that people who use payday loans, cause they don't qualify for any cheaper form of credit, simply won't be able to borrow money at all.
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