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.
Comments
Jon Schultz (not verified) on Mon, 04/06/2009 - 12:46
Your focus on the APR is in fact erroneous. While it may be true that the average payday borrower requires more than one period to pay back the loan, approximately no borrowers take out back-to-back loans for a full year, and thus actually pay 400% or more interest on the loan. Yet that is how the Center for Responsible Lending came up with the figure you quote, of the typical borrower paying back $793 for a $325 loan. Due to their narrow focus on the *annual* percentage rate, they grossly consider all loans taken out within a year's time to be one loan, even if two loans were taken out eleven months apart for completely different purposes.
They used statistics supplied by Veritec, Inc., which subsequently issued a "White Paper Analysis" criticizing their interpretation of the data. That analysis - which can be seen at http://www.veritecs.com/CRL_Whitepaper_Analysis_R1.pdf
The main point is that consumer protection should primarily be about curbing dishonesty in business, NOT telling independent merchants and service providers how much they can charge for their products and services. That is trampling on basic freedoms, leading us towards a 1984 state where all activities are controlled by politicians and those who bribe them. Regulate loans by requiring that all details be presented very clearly, so people understand exactly what they are getting into. Apart from that, let the free market determine prices and let consumers decide for themselves whether they think a loan offering is good for them. Anything less than that is paternalistic authoritarianism, and theocratic paternalistic authoritarianism when you start quoting scripture.
Respecting freedom of commerce does not stop the government from helping the poor through direct assistance funded by taxation. There is no need to trample on what should be considered basic human rights.
Josh Kalven on Mon, 04/06/2009 - 15:03
Jon -
I abridged your comment. If you want to write 600-word responses, you should just start your own blog and do it there.
I'll have a look at the document you link to.
As for your claim that efforts to place limits on interest rates lead us towards "a 1984 state," I'd argue they would actually return us to a "1979 state." That's the year before Congress passed legislation eliminating longstanding interest rate caps and paving the way for subprime lending. In the age of credit cards with 20% or 30% interest, people forget that -- before the caps came off -- the ceiling in most states was 9%.
Since shedding those reasonable limits, we've gradually moved away from responsible lending (premised on the idea that borrowers should have the ability to repay) and towards predatory lending (premised on targeting those in desperate financial situations and profiting when they fail to repay).
Jon Schultz (not verified) on Tue, 04/07/2009 - 12:34
Josh,
If you guys don't want comprehensive responses to your posts, then don't express strong opinions on issues which you don't understand. Those issues affect peoples' lives.
If the loans offered by North Side Federal Credit Unions were a viable profitable alternative to short-term loans for people with bad credit, then many banks and financing companies would already be making them and taking most of the small-loan business away from payday lenders. These types of programs are mostly implemented for charitable or public relations purposes, and cannot be done on a large scale. Plus, the requirement to "take financial education classes" is insulting, time-consuming and stressful for the customer; I wouldn't be surprised if some people who are aware of this program choose a payday loan instead.
If lenders should be responsible to ensure that borrowers can afford the loans, then why shouldn't other merchants and service providers be similarly responsible? If your philosophy has its way then before long every business will be required to check the income and bank balance of every customer to make sure they can afford what they are buying. Again, 1984.
By contrast what we need is responsible consumer protection, premised on the idea that basic civil liberties should not be infringed.
Scott Jenkins (not verified) on Mon, 04/06/2009 - 15:34
I cannot understand how Rep. Luis Gutierrez thinks that legalizing a 391% APR rate is an improvement over no restrictions on payday loans. Is anyone taking out loans at 391% or higher? How is that calculated? Who takes loans like this? Perhaps it can be passed because it doesn't do anything.
As for free market fundamentalists like Jon Schultz, the question is, "Are pay day loans a free market?" I would suggest that anyone taking a loan for $100 for 2 weeks and paying a $20 fee for the priviledge is working in a decidely unfree market. Soldiers without access to a bank, for instance, would take this kind of deal.
This suggests that there are restraints on the borrower that compel them to take these loans and pay the high fee expense. Anyone in such a circumstance is less free, and it is the appropriate role of government to restrain this freedom of the businesses to exploit people - just as government does with armed robbers or other criminals. While the point where lending turns into usury is open to debate, the fact that when you go north of 30% you are committing a criminal act of usury is not.
Additionally, if you are going to cite a source, it would be helpful if you didn't cite someone whose business depends on their involvement in enforcing pay day laws and regulations. One could easily see that laws like this one might materially impact Veritec's business, so we need to take anything they say with that fact in mind.
geb (not verified) on Mon, 04/06/2009 - 16:11
1. You're reading of the Old Testament (if you've bothered) is wrong. It bans all interest charged by one Hebrew to another. Gentiles aren't covered. It's either 0% or anything goes depending on which group you fall into.
2. Instead of banning loans and then implementing alternatives - wouldn't it make sense to put the alternatives in place FIRST! Duh! The consumer can then choose the best alternative for themselves (or is this not really about the consumer?)
peter (not verified) on Tue, 04/07/2009 - 19:00
evryone talks about a 391% interest rate, which is misleading. Unlike ALL other lenders, the payday loan industry has a 30% default rate. A large % of the defaults are bankruptcies. The remaining defaults are not collectable because it makes no economic sense to hire a lawyer to enforce a $100 or $200 loan which is uncollectible in 90% of the cases. These are borrowers of the last resort. Unforetunately, but a fact, the non-defaulting borrowers bear the cost of the defaulting borrowers.
To give any credence to the premise that if payday lenders are shut down that the banks or credit unions will meet the needs of America's "unborrowable" is absurd. The banking reps will tell you flatly that they are not able to make small, short term signature loans to ANYONE, let alone the noncreditworthy.
It is telling that a major pocket of opposition to the altruist efforts of people sharing Ms. Fox's idealistic goals are inner city reps who know that if these loans are banned, their citizens will suffer the consequences, not the Ms. Foxes of the world.
If you want to correct something, prohibit 82,000% interest rates on bank overdraft charges; coverage provided only when the bank's computers confirm that the customer's elctronic paycheck deposit is due in a few days.
bad credit loans (not verified) on Mon, 07/06/2009 - 17:39
Payday loans are the absolute worst. If you are in the position where you need a loan that bad your last alternative should be a payday loan.
Jim T. (not verified) on Thu, 08/13/2009 - 13:49
I am enjoying the spirited conversation but agree that it will be tough to find traditional lenders willing or able to make loans comparable to payday lenders. Especially if we see new interest rate caps go into effect. It just won't make sense given the risk.
faxless loans (not verified) on Mon, 11/16/2009 - 08:19
1. You're reading of the Old Testament (if you've bothered) is wrong. It bans all interest charged by one Hebrew to another. Gentiles aren't covered. It's either 0% or anything goes depending on which group you fall into.
2. Instead of banning loans and then implementing alternatives - wouldn't it make sense to put the alternatives in place FIRST! Duh! The consumer can then choose the best alternative for themselves (or is this not really about the consumer?)
Akan (not verified) on Thu, 11/19/2009 - 20:24
Well i believe that the financial sectors of the United Kingdom and the United States are already feeling the brunt of the credit crunch. It has become so difficult to get any credit today that many individuals have to bank on emergency options like Financial Spread Betting/ payday loans to survive. Then again, if it becomes difficult to get even a payday loan approved, then crisis seems to be worse than it originally appeared to be. Once an individual encounters a financial downturn, it will be difficult for him or her to maintain a clean credit record in his or her bank statements. In such situations, a payday loan without a bank statement required is an excellent solution for those in dire need for credit
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