Payday lenders may avoid U.S. oversight

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Payday lenders didn’t cause the economic crisis, but consumer advocates hoped their sky-high interest rates on loans would be reined in as part of a sweeping regulatory overhaul to prevent a repeat of the financial fiasco.

However, key senators feverishly working to craft a bipartisan bill want to make payday lenders -- companies that offer short-term loans to tide people over until their next paycheck -- largely exempt from oversight by a new consumer financial protection agency.

Consumer advocates said that exemption would keep payday lenders in California and 34 other states mostly under state controls, which have allowed the lenders to prey on low-income people with loan fees that translate to interest rates of as much as 460% a year.


“They are a debt trap for consumers who struggle to make ends meet,” said Jean Ann Fox, director of financial services for the Consumer Federation of America.

Consumer advocates had hoped a new agency would severely restrict, or even outlaw, payday loans. They are pushing back against the financial regulatory proposal being drafted by Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and Sen. Bob Corker (R-Tenn.), adding to the difficulties of getting legislation passed this year.

A draft proposal from Dodd for a Bureau of Financial Protection, to be part of an existing federal regulatory agency, would scale back the broad powers of an independent consumer agency proposed by President Obama and included in a House regulatory bill that passed in December.

Backers of the agency have said that consumer protection needed to be extended beyond the banking industry to companies such as mortgage brokers and payday lenders that offer such high-interest-rate products as subprime mortgages that take advantage of unsuspecting customers.

Under the draft proposal, which could become final in days, the new consumer bureau would be part of the Federal Reserve and would be able to write rules for any financial product, even if it is not offered by a bank.

But the bureau would be able to enforce those non-bank rules only against mortgage companies. Payday lenders would not be covered unless the bureau petitioned a council of federal banking regulators to give it that enforcement authority based on consumer complaints.


Without enforcement power, the new consumer agency would be unable to stop abuses, Fox said.

Corker’s state is home to the nation’s third-largest payday lender, Check Into Cash Inc. The company’s chief executive, W. Allan Jones, and his wife have contributed $12,300 to Corker’s Senate campaigns since 2004, $1,000 to Dodd and about $500,000 to federal and state political candidates overall since 1999, the nonpartisan Center for Responsive Politics said.

In addition, Check Into Cash is a member of the Community Financial Services Assn. of America, a trade group for storefront payday lenders. The group formed a political action committee in 2007 that contributed $168,000 to members of Congress during the 2008 election cycle, including $1,000 apiece to Corker and Dodd.

Calling suggestions that he has been influenced by campaign contributions “a cheap shot,” Corker said the proposal would allow the consumer agency to enact the first national rules governing payday lenders. But Corker and other Republicans want enforcement of agency rules to remain with existing regulators.

Kirstin Brost, a spokeswoman for Dodd, said he had “never allowed campaign contributions to affect his decisions.” Dodd was one of four co-sponsors last year of legislation, opposed by the industry, to limit the annualized interest rate on payday loans to 36%.

The payday lenders trade group said it opposed any new regulations.

“We’re a small consumer loan industry and we had nothing to do with the economic meltdown, and we won’t have anything to do with any future economic meltdown,” said spokesman Steven Schlein, noting the industry lends about $40 billion a year, with an average payday loan of $354. “Consumer loans have been regulated by the states, and the states are doing a good job.”


California limits payday loans to $300 and a fee of 15%. The loan can’t last more than 31 days, and a borrower can’t roll the loan over to a new one or have more than one loan at a time.

The California Department of Corporations, which oversees payday lenders in the state, said the fee on what was typically a two-week loan was the equivalent of an annual percentage rate of 460%. Recipients often become trapped in a cycle of needing to take out a new loan as soon as they pay off the old one.

The average customer takes out nine such loans a year, Fox said. “This is not your one-time emergency cash-flow management tool,” she said. “This is perpetual borrowing at triple-digit interest rates.”

Some states have limits on annualized interest rates on any loans, and federal law enacted in 2006 puts a cap of 36% on loans to members of the military. But attempts in Congress to extend that cap to the broader population have failed.

The California Legislature has considered a bill in the last two years to expand the maximum payday loan size to $500 and create a database of lenders. The California Public Interest Research Group opposes the legislation, saying it would cause customers to fall deeper into debt, said Pedro Morillas, the group’s consumer advocate.

Morillas said he supported a new federal consumer agency with enforcement power over payday lenders as the best solution.


“Payday lenders are fighting so hard . . . because they’re afraid that the agency will confirm what consumer groups have been saying for years, which is payday loans are bad for consumers,” he said.