THE PAYDAY LENDER’S SCAM
There are
22,000 payday lenders storefronts in the United States.
The influential $42 billion-a-year payday
lending industry, thriving from a surge in emergency loans to people struggling
through the recession, is pouring record sums into lobbying, campaign
contributions, and public relations and is getting results.
As the Senate prepares to take up financial
reform, lobbyists are working to exempt companies that make short-term cash
loans from proposed new federal regulations and policing. In state capitals
around the country, payday companies have been fighting some 100 pieces of
legislation aimed at safeguarding borrowers from high interest rates and from
falling into excessive debt.
Last year,(2019) as the U.S. House drew up a
financial reform bill, some lawmakers who were courted by the companies and
received campaign contributions from them helped crush amendments seeking to
restrict payday practices, a review by the Huffington Post Investigative Fund
has found.
The failed amendments would have capped
payday interest rates – which reach triple digits on an annualized basis -- and
would have limited the number of loans a lender could make to a customer.
Working largely behind the scenes, the industry ended up dividing the
Democratic majority on the 71-member House Financial Services Committee.
Lobbyists swayed not only conservative,
free-market-minded “Blue Dogs” but liberals from poorer, urban districts where
payday lenders are often most active. At least one of the liberals threatened
to vote with Republicans against the financial reform bill if it restricted
payday lenders.
“The payday lenders have done a lot of work,”
House Financial Services Chairman Barney Frank (D-Mass.) said in an interview.
“They’ve been very good at cultivating Democrats and minorities.”
Now the industry has turned its attention to
the Senate and the reform bill being assembled by Senate Banking Chairman
Christopher Dodd (D-Conn.), who is offering to abandon the quest for a new
independent agency to protect consumers, instead giving the Federal Reserve new
policing powers that could extend to payday companies.
Spokesmen for payday lenders say that
attempts to rein in their business are misplaced. Short-term cash loans were
not a cause of the financial crisis, they say, and as lenders of last resort
they claim to provide a critically needed service in an economic downturn.
To convey their message, payday lenders have
hired some of the lobbying industry’s top guns. Trade groups have financed
studies to underscore the small profit margin on each loan. The groups also
have created a database of more than a half-million customers who can be
quickly mobilized to persuade specific politicians. The persuasion often takes
the form of personal, handwritten accounts from constituents about how quick
cash helped them during times of financial need.
Steven Schlein, a spokesman for an industry
trade group, the Community Financial Services Association, said the
industry’s victory in the House against the proposed amendments was hardly
final.
“We were worried,” said Schlein. “But we
worked it hard. We have lobbyists, and they made their point. The banks worked
it hard, too. But we’re still in the middle of what could be a big fight.”
Payday loans got their name because many of
the small, unsecured loans are made as advances on a borrower’s next paycheck.
Operating from some 22,000 storefronts, the lenders specialize in instantly
available short-term loans that typically require repayment within two weeks.
While interest rates vary, typical fees are $15 to $25 for every $100 borrowed.
In Virginia, someone who borrows $200 from one big lender, Advance America,
must come up with $247.80 within 14 days; the fee is equivalent to a 623
percent annual rate.
Lenders range from small bodegas in
Albuquerque or Miami to the chain stores of publicly traded corporations such
as Cash America International Inc. and Advance America Cash Advance Centers
Inc. The financial crisis has been good for their bottom lines. Advance America,
for example, reported $54 million in net income in 2009, a 41 percent increase
over the previous year.
Most families who took out payday loans in
the years leading up the financial crisis used them to cope with emergencies or
to pay for rent, utilities and food, according to a February 2009 study by the
Federal Reserve Board.
Customers taking out multiple loans can face
a cascading series of fees. “Some people borrow $500 and end up owing $3,000,”
said Jan Zavislan, a deputy attorney general in Colorado, which placed some
limits on payday lenders in 2000. “Without our state regulation of this
industry, payday lending would be usurious.”
The financial reform bill passed by the U.S.
House would create an independent Consumer Financial Protection Agency to
oversee mortgages, credit cards and loans by almost all banks, savings and
loans, credit unions and payday lenders. For the Senate version, Dodd and
Republicans now appear close to an agreement that would jettison the notion of
a stand-alone agency, which Republicans and moderate Democrats argued was
unnecessary.
The activity in Congress led the industry to
spend $6.1 million lobbying Washington last year, more than twice what it spent
a year earlier, according to an Investigative Fund analysis of lobbying
reports. The total is about equal to what JPMorgan Chase &Co. spent on
lobbying in 2009. The Community Financial Services Association alone increased
its spending by 74 percent, to $2.56 million.
Industry representatives say they are
tracking 178 different pieces of legislation around the country – 101 of which
they oppose. In response, in 34 states and the nation’s capital, the industry
and its companies have 40 of their own in-house lobbyists, while paying another
75 outside lobbyists.
Meanwhile, an analysis of federal elections
records shows payday-linked political contributions are streaming into the
campaigns of members of Congress. At the current rate -- $1.3 million since the
start of last year -- the amount of money spent before the 2010 midterm
elections could easily surpass the industry’s spending during the 2007-2008
presidential campaign season.
Some of the industry’s biggest lobbyists in
Washington have experience resisting regulation of riskier forms of
lending.
Wright Andrews, whose lobbying shop Butera
& Andrews earned $4 million in fees for coordinating the subprime
industry’s lobbying between 2002 and 2006, now represents the payday industry.
Records show his firm earned $240,000 from the Community Financial Services Association
in 2009.
Another lobbyist hired by the trade group,
Timothy Rupli, is one of the best-known and most prolific hosts of fundraisers
on Capitol Hill. He has sponsored at least 94 since 2008, according to
invitations tracked by the Sunlight Foundation, a Washington-based nonpartisan
group. Politicians and donors gather at Rupli’s townhouse on New Jersey Avenue
only two or three blocks from the offices of members of Congress. Beneficiaries
of the fundraisers have included members of the House Financial Services
Committee.
Since 2005, Rupli and his wife, Linda, have
contributed $220,349 directly to lawmakers in Washington. During that time,
Rupli earned $4.9 million in lobbying fees from the financial services
association, according to lobbying disclosure reports.
Payday lenders also contribute millions to
candidates in state elections, making them among the dozen or so top donors
when figures for state and federal campaign contributions are added together.
That puts them in the same influential ballpark, for instance, as unions, the
gaming industry and real estate interests.
In Wisconsin alone, efforts to establish an
interest rate ceiling of 36 percent mobilized at least 27 registered lobbyists
against it. On Feb. 16, Wisconsin lawmakers adopted a bill that could lead to
regulation of payday lenders for the first time, but not before rejecting the
interest rate limit. The debate garnered more than the usual public attention
when the state assembly’s speaker acknowledged having a romantic relationship
with a payday industry lobbyist.
In Arizona and Ohio, the industry spent $30
million in 2008 campaigning for ballot initiatives that would have wiped out
laws curtailing payday lending operations. By contrast, reform groups reported
spending only $475,000.
Although the industry doesn’t always win,
“there’s no way you can outspend them,” said Jennifer J. Johnson, senior
legislative counsel to the Center for Responsible Lending, a prime nemesis of
the payday lenders.
The industry argues that more oversight -- especially
from Washington -- isn’t necessary. Among the most active trade groups making
the case is Hackensack, N.J.-based Financial Service Centers of America, or
FiSCA. “Financial service centers had absolutely no role in the nation’s
financial crisis,” said Joe Coleman, chairman of the group, which represents
half of the nation’s purveyors of check cashing, money transfers, money orders,
bill payments and small dollar, short-term loans.
In fact, payday lenders contend their
services are needed now more than ever. “Who’s going to make that kind of
credit available to working people besides us?” asked Schlein, the spokesman
for the other major trade group, the Community Financial Services Association.
The industry’s critics, who include several
state attorneys general, say that the industry buries too many people in debt.
Meaningful restrictions and policing of the industry are long overdue, they
argue.
“Payday lending is like needing a life
preserver and being in front of an anvil,” said North Carolina attorney general
Roy Cooper, a former legislator who worked to eliminate major payday lenders
from the state and succeeded in 2006.
Even in states that have successfully imposed
limits on payday lenders, the companies sometimes find inventive ways around the
rules. State and federal agencies often lack clear and consistent authority; in
some states, lenders have responded to tougher regulations by moving operations
to tribal lands or onto the Internet.
After Virginia’s legislature tried to
restrict fees in 2009, lenders switched to making car-title loans, with
automobiles as collateral. In Ohio, payday lenders are working around a new 28
percent rate cap by invoking two older laws governing installment loans that
appear to permit higher rates. In Colorado, some lenders have skirted limits on
the number of consecutive loans they can make to a customer by adding five-day
periods between loans.
Last October, (2019) Colorado was the site of
an industry conference aimed at mobilizing hundreds of companies specializing
in providing rapid access to money through payday loans and other services. The
meeting at the luxurious Broadmoor Hotel, sitting on 3,000 acres of golf
courses and rolling forest at the foot of the Rockies, was sponsored by the
trade group FiSCA.
PowerPoint presentations, handouts, and interviews with participants
suggest an industry that is growing more anxious and methodical in countering
threats to its business model. Featured presentations included topics such as,
“Organizing a Grassroots Effort.” One PowerPoint underscored the broader range
of tactics needed to defeat the industry’s enemies. Stated the slide: “The days
of just lobbying are forever gone.”
Another slide, from a presentation by Kevin
B. Kimble, a vice president of Cash America, the nation’s largest supplier of
pawn loans, and William Sellery Jr., a top FiSCA lobbyist,
warned: “Payday lending now in play.” They characterized the industry’s
strategic response as an “aggressive, multi-pronged defense” of payday lending,
including not just traditional means of influence but creation of organizations
such a “Coalition for Financial Choice” to counter the image of payday lenders
as debt traps. The group’s Web site, www.coalitionforfinancialchoice.org [2],
describes financial services as a “fundamental right” and urges supporters to
refer to themselves as “pro consumer choice.”
The industry has reached out to seemingly
unlikely allies. A luncheon speaker at the conference was Marc Morial, chief
executive of the National Urban League, one of the nation’s oldest civil rights
organizations. Morial, a former mayor of New Orleans, has been among
participants in a so-called “Small Dollar Loan Dialogue Program.”
The program involves inviting civic leaders and consumer advocates to
unpublicized FiSCA-sponsored gatherings in hotel conference rooms to hash out
differences over regulatory proposals.
As part of its congressional strategy, FiSCA commissioned
a study last year that concluded that payday customers fare better and lenders
fare worse than is commonly thought. According to the report, prepared for the
trade group by the accounting firm Ernst & Young, a payday lender earns
a average fee of $15.26 on a $100 loan and keeps only $1.37 as profit because
of high costs and the need to absorb bad debts.
Last fall, as Congress began debating
financial reform, the Ernst & Young study was being distributed along
with fact sheets to a number of Capitol Hill aides. Two of them acknowledged
privately to the Investigative Fund, on condition that neither they nor their
bosses were identified, that the report changed their perceptions of the
industry.
During discussions about consumer protections
within the reform bill, key members of the financial services and rules
committees of the House also received scores of handwritten letters from
customers who were listed in the industry’s database. Some got calls from
managers of payday lending locations in their districts, according to interviews
with congressional aides and industry representatives.
The tactics helped, said William P. Murray, a
key industry strategist hired by FiSCA. “They absolutely opened
eyes and turned heads on the Hill,” said Murray. “Many customers don’t feel
empowered. To a large degree, what we’ve created has empowered them.”
In the House Financial Services
Committee, the industry’s efforts bore fruit. Rep. Jackie Speier
(D-Calif.), offered an amendment to limit payday interest rates to the annual
equivalent of 36 percent. It never got traction.
Rep. Luis Gutierrez (D-Ill.), chairman of the
subcommittee with authority over consumer credit issues, had once advocated
extending to all Americans an effective ban on payday lending for military
personnel that Congress passed in 2006. By last year he had scaled back, urging
an amendment that would have limited to six the number of loans a borrower
could receive in a year.
Gutierrez’ less-restrictive amendment died
when Democrats including Rep. Alcee Hastings (D-Fla.), threatened to vote
against the entire consumer protection act if the payday provision was
included. It also faced opposition from Rep. Joe Baca (D-Calif.), who countered
Gutierrez with an amendment the industry regarded as favorable because it had
the potential to open payday lending to new markets. Baca said in a statement
last year that while "fly by night lenders" should be banned, he
wanted to “ensure that students, blue collar workers, teachers, police officers
and others have access to legitimate payday advance loans if needed."
All of the lawmakers – as well as many of
their colleagues on the House Financial Services Committee –
have received campaign contributions from the industry, its executives,
employees and lobbyists. Since 2006, Gutierrez has received $38,550, Baca
$16,250 and Hastings $13,500. Almost all of Baca’s contributions were reported
during the last half of 2009, as the financial reform bill took shape. Chairman
Frank has received $12,300 from the industry’s political action committees
since 2006, and last year even Speier received some donations from the payday
industry’s Schlein, the payday trade group spokesman, said what really made a
difference with some members of Congress was the letters from customers and
data underscoring the industry’s small profit margin on each loan.
I have always said that politicians run for
office so that they can get bribes from certain organizations.
Schlein, “I wouldn’t say we brought Baca
aboard, but he understands now,” “He doesn’t come out against the industry with
unfounded vitriol. The reason is we showed him, and he did the math.”
So did committee chairman Frank, who tallied
more support for Baca than for Gutierrez. He quickly nixed any payday
amendments at all. “I felt if we went to votes on the floor, we’d be likely to
get a bad amendment rather than a good one,” Frank said in the interview.
Following their victory in the House, payday
industry lobbyists have joined dozens of others paid by the financial industry
to make sure the Senate does not vote to create an independent Consumer
Financial Protection Agency.
Selected senators have already received
handwritten letters. One woman wrote to Sen. Lindsey Graham (R-S.C.) to explain
how she’d been out of work for two weeks when her daughter fell ill with pneumonia.
Rapidly, “bills fell behind, and I still had a family to feed,” she wrote. A
quick cash loan “helped me through some difficult times.”
For the payday industry, an end to difficult
times in Washington could be in sight: Without an independent agency, the
companies may be more likely to escape national policing. None of the existing
agencies that oversee financial institutions have jurisdiction over them. That
is an unfortunate shame on the part of the politicians who except the pay day
lender’s bribes.
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