You have to wade all the way to Page 403 of the 589-page Financial Choice Act to find a one-sentence provision that obliterates current efforts to bring fairness and responsibility to payday lenders and similar merchants of never-ending debt.
Section 733 of the bill, which could come up for a vote by the full House of Representatives as soon as this week, declares that federal authorities “may not exercise any rulemaking, enforcement or other authority with respect to payday loans, vehicle title loans or other similar loans.”
With that one line, Republican lawmakers have declared their willingness to allow people facing financial difficulties to be at the mercy of predatory lending practices that typically involve annual interest rates approaching 400%.
“They’re trying to sneak in that provision,” Diane Standaert, executive vice president of the Center for Responsible Lending, told me. “It seems like they hoped no one would notice.”
She called the provision “a free pass for payday and title lenders to not be subject to efforts to rein in their abusive practices.”
Payday loans are intended to serve as short-term fixes for financial troubles. In practice, however, borrowers frequently are unable to repay the original loan and become trapped in ongoing cycles of debt.
The Consumer Financial Protection Bureau has found that over 19 million U.S. households resort to payday loans. Of that number, almost 70% of borrowers have to take out a second loan to cover the first, and 20% end up saddled with 10 or more loans, one after the other.
Title loans are similar except the borrower’s vehicle is put up as collateral. Not only do title loans come with crazy-high interest rates, but if you fall behind on payments, you can lose your wheels.
Payday and title loan companies have been in a tizzy since the Consumer Financial Protection Bureau proposed rules last year aimed at making the industry more trustworthy and consumer-friendly.
The rules would require lenders to determine in advance that a borrower will be capable of making payments while still meeting basic living expenses. The rules also would make it harder for lenders to keep issuing new loans to the same people.
As former President Obama said when the CFPB’s proposed rules were unveiled, a company’s profits shouldn’t be based primarily on bleeding customers dry. “If you're making that profit by trapping hard-working Americans into a vicious cycle of debt, you've got to find a new business model," he said.
Standaert said payday and title lenders have been lobbying furiously to protect their livelihoods, regardless of the cost or danger to customers.
Enter, stage right, Rep. Jeb Hensarling of Texas, Republican chairman of the House Financial Services Committee and author of the Financial Choice Act.
I’ve already reported that since he first ran for Congress in 2003, Hensarling, has received $1.3 million in political donations from commercial banks, $1.4 million from securities and investment firms, $1.4 million from insurers, and $703,304 from finance and credit companies, according to the Center for Responsive Politics.
This helps explain why his legislation would weaken the CFPB to the point where it would be a consumer watchdog in name only. Hensarling’s decision to single out payday and title lenders for special favors appears to be similarly motivated.
According to the advocacy group Americans for Financial Reform, payday and title lenders spent more than $15 million on campaign contributions during the 2014 election cycle. The top recipient, with nearly $224,000 in donations from the industry, was the National Republican Congressional Committee.
The largest individual recipient, with $210,500 in payday and title loan cash, was — you guessed it — Hensarling.
Upping the ante, the American Bankers Assn. submitted a report to Treasury Secretary Steve Mnuchin last month calling for an end to the CFPB’s proposed payday-lending rules and seeking regulatory changes that would allow banks to issue their own payday loans.
Since entering Congress, Hensarling has received $85,300 from the banking group, according to the Center for Responsive Politics.
Sarah Rozier, a spokeswoman for the Financial Services Committee, said the contributions from banks and payday lenders had no influence on Hensarling’s legislation.
She said state officials are better suited to oversee payday and title lenders than “a one-size-fits-all mandate from Washington.” She also said “all Americans should find it chilling” that the director of the CFPB would seek to impose his will on these companies.
“The thousands of elected representatives in states around the country are simply in a better position to know what is best for their constituents than one single bureaucrat passing judgement from on high in D.C.,” Rozier said.
A spokesman for the CFPB declined to comment.
Payday lenders are fond of depicting their industry, estimated to be worth $46 billion, as serving a vital social purpose. Funds are being made available to people who might have no other way of getting out of a financial hole, they say.
Dennis Shaul, chief executive of the Community Financial Services Assn. of America, a payday-loan industry group, said the CFPB has put forward “a draconian proposal that’ll restrict access to credit for millions of consumers.”
The reality is the bureau’s proposed rules are neither draconian nor a one-size-fits-all mandate. They’d establish a reasonable baseline for how payday and title lenders should conduct themselves. States would still be able to enact additional regulations if desired.
According to the Pew Charitable Trusts, the typical payday loan borrower is in debt for five months of the year, paying an average $520 in fees to service a $375 loan. More than $7 billion in total fees are shelled out annually. The average borrower’s income is about $30,000.
Let’s call this what it is: Loan sharking.
And let’s also be honest about what Republican lawmakers are doing at the behest of this bottom-feeding (yet politically generous) business: Pandering.
It’s all there in black and white.
On Page 403.
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