Rep. Luis Gutierrez chaired a hearing last Thursday on the Payday Loan Reform Act of 2009 (HR 1214), a bill he introduced in February to mixed reviews from consumer advocates. One of them, Jean Ann Fox of the Consumer Federation of America, was the first witness to testify at ...
Rep. Luis Gutierrez chaired a hearing last Thursday on the Payday Loan Reform Act of 2009 (HR 1214), a bill he introduced in February to mixed reviews from consumer advocates. One of them, Jean Ann Fox of the Consumer Federation of America, was the first witness to testify at the Washington hearing. While she told Gutierrez (PDF) that she appreciated his interest in protecting consumers, her organization could not support a bill that approved triple-digit annual interest rates and instituted regulations proven ineffectual at the state level.
During his five minutes of questioning, Gutierrez shot back at Fox, defending his legislation as both sufficiently protective and legislatively viable. A 391 percent APR rate is an improvement for 23 states that have no restrictions on payday loans, he argued. And banning the practice at the federal level by implementing 36 percent cap on all consumer credit transactions is "not possible." Watch it here:
As his comments make clear, Gutierrez' position that a lower cap is "not possible" has nothing to do with the merits of payday loans. Rather, it reflects the industry's clout in Washington. Gutierrez told the AP as much in an interview on Friday:
Rep. Luis Gutierrez, D-Ill., says his bill does have crucial protections for borrowers and represents the best deal he can manage in the face of the industry's aggressive lobbying. [...]
"While they may not be JP Morgan Chase or Bank of America, they've very powerful. Their influence should not be underestimated," Gutierrez, the top Democrat on the Financial Services subcommittee in charge of consumer credit issues, said in an interview this week.
To be sure, the payday lending industry has deployed its funds liberally. The trade association has spent more than $1 million annually for each of the last four years lobbying Congress, including $1.4 million last year. A dozen payday loan lobbyists now wander the halls of Capitol Hill. And the industry formed a political action committee that had contributed more than $200,000 in 2007 and 2008, much of it to lawmakers who serve on the Senate Banking and House Financial Services committees.
This same pattern is taking place in state capitols across the country, including in Illinois. Between 1999 and 2006, the payday and title loan industry had poured over $2.5 million into campaign coffers in the Prairie State. It's no surprise then that legislators haven't acted to plug the loopholes in the Payday Loan Reform Act of 2005, which implemented a rate structure in Illinois very similar to the one Gutierrez and his 28 co-sponsors support now. Indeed, Fox made clear later in the hearing that HR 1214 would not affect payday lending in Illinois (considered by some to be the "wild west" because of the industry's growth). She also laid out how the bill's loopholes could be closed:
Two years ago, Gutierrez co-sponsored a separate Payday Loan Reform Act (along with Rep. Jan Schakowsky and two others) that formally prohibited these financial products, but it never saw the light of day. So now, he's trying to reach a compromise, which might be a sensible approach. But if he thinks a 391 percent rate fee adequately protects the nation's vulnerable borrowers, even those who currently live in states with no laws, he's sorely mistaken.
While payday loan advocates object to it, we use the annual percentage rate for a reason. While the industry likes to frame these loans as fee-based products intended for one-time use in a financial emergency, the majority of their customers simply don't use them that way. A 2009 study by the Center for Responsible Lending found that 12 of the 19 million payday loan borrowers are caught in a cycle of five or more high-cost payday transactions a year. This is by design: 90 percent of payday lending revenues come from those trapped in long-term debt cycles (according to the report, the typical borrow pays $793 for a $325 loan).
What's a better policy? Implement a firm anti-usury law like the one proposed by Sen. Dick Durbin and upheld since the Old Testament. To fill the void left by the payday lenders who leave the business, provide the unbankable with affordable installment loan products like six Chicago credit unions now dispense:
Currently the North Side Federal Credit Unions offers a $500 six-month loan to members at 10.5 percent -- about $26, in addition to a $30 application fee. Applicants with low credit scores are required to take financial education classes.
"We have the old-fashioned belief that you should make loans that customers will be able to pay back, rather than loans they'll have to refinance out of," said North Side manager Ed Jacobs.
That's one belief that should never have gone out of fashion.
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