Earlier this month, we questioned whether Rep. Luis Gutierrez really had consumers' best interest in mind when he introduced the Payday Loan Reform Act of 2009.
Although the Chicago Democrat penned a similarly-named bill two years
prior that consumer advocates praised, some of those same individuals told us that the latest version ostensibly legitimizes the payday loan
industry's existing fee structure under federal law, possibly undercutting more stringent reforms emerging at the state level.
On Wednesday, 10 consumer advocacy groups made their complaints formal, sending a letter (PDF) to the U.S. House decrying the measure for "condon[ing] the predatory payday loan business model." At issue is Section 2d of the bill:
It shall be 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.
A $15 fee on $100 loan doesn't sound terrible at first glance, until you realize that the typical payday lender applies that fee over the course of a single pay period. And as the consumer groups note in their letter, the typical payday loan consumer will pay such a fee nine times during a given year. That adds up, which is exactly what the lenders are counting on.
More from their letter:
H.R. 1214 provides Congressional approval to payday loans at rates of 390 percent APR for two weeks or 780 percent APR for one week. The loan cap of fifteen cents per dollar loaned in HR 1214 authorizes lenders to charge $60 for a typical $400 loan, which is due in one pay cycle. This means that, for the typical borrower with nine loans per year, H.R. 1214 authorizes lenders to collect $540 in finance charges for a $400 loan taken out over an 18-week period. [...]
Although the bill does not preempt stronger state rate caps, it would send a message approving usurious lending at triple-digit rates. The practical impact of Congressional passage of this bill will be to stop the progress of reform in the states.
Gutierrez's defense is that Sen. Dick Durbin's bill to cap interest rates at 36 percent -- legislation favored by consumer advocacy groups -- does not have broad enough support. Here's what he told the Huffington Post on Friday:
"[T]he fact is that we don't have the votes to pass a 36% rate cap now for all of the consumers who deserve it," the congressman writes. "As it stands, the payday lending industry will in fact lose substantial profits if my bill passes, but consumers in the 23 states with weak or no payday lending rules will be shielded from entering a spiral of debt, simply for seeking the money they need in an emergency."
While lenders operating in the 23 states with no laws on the books will likely lose some profits, it's just not the case that authorizing lenders to charge these rates will protect borrowers from "a spiral of debt." In trying to placate both the consumer rights and lending communities, Gutierrez seems to have missed the mark.
David Leibowitz (not verified) on Mon, 03/30/2009 - 06:25
All too often, statutes which look like they regulate an industry actually enable it. We don't know Rep. Gutierrez' intentions. But we can be clear that the outcome of this statute would be to allow the proliferation of pay-day loans. Some academic types think that pay-day loans serve a legitimate purpose. But having put too many people through bankruptcy because they were attached to pay-day loan companies with unbreakable shackles and post-dated checks far in to the future, I can tell you that the reality is the contrary. Pay-day loan companies prey on people's immediate needs and economic weakness. They serve little social interest.