It’s hard to imagine that anyone outside of organized crime or banking would see check cashing as a legitimate business model. Nevertheless, their lobbying efforts have secured them protection from the new bureau designed to save consumers from businesses like theirs.
One of the most interesting ideas to arrive with our national effort at finance reform is the Consumer Financial Protection Bureau. Intended to be an organization that protects the public from predatory loans, the idea is not free from controversy.
As initially conceived the Consumer Financial Protection Bureau would regulate every business “engaged significantly in offering or providing consumer financial products or services,” but a lot of these businesses don’t want consumer protection and it turns out they’re willing to fight it by any means necessary. To be sure, “significantly engaged” does not include the butchers and florists that some have used as fear-inducing examples, but it does include an industry largely ignored at the national level: payday lenders.
Payday lenders offer “payday loans”, stopgap loans that in name are supposed to help consumers survive until payday. According to the Center for Responsible Lending, however, these loans not only target the poor but are actually designed to be difficult to pay off.
Here’s how they work: a borrower goes into a payday lending establishment and writes a post-dated check for the amount borrowed plus fees. Payday loans are usually between $300 and $500, offered as a short-term advance on a borrower’s paycheck. For this service, the payday lender usually charges the maximum rate allowed by state law, usually around 15% or $15 for every $100 borrowed. This means that a $300 loan carries a fee of $45, and borrowers have a two-week period to pay off their debt, at the end of which the payday lender has promised to cash that post-dated check.
The problem is that for anyone who wants to borrow $300, two weeks is an awfully short period of time to pay off their loan. Thus, at the end of the two-week payoff period, payday lenders are often more than happy to offer their borrowers a “rollover”, where they simply renew the loan and collect a new fee. Some states outlaw this practice, and in these states, there are no legal restrictions on the same payday lender offering our hypothetical borrower yet another $300 loan (to pay off the first), while this new loan also draws another $45 fee.
It seems straightforward enough, and for their part, payday lenders claim their services are just like any other consumer good, but the problem is that once you’ve started this cycle of renewing a loan, it can take quite a long time to pay it off and all this adds up to a lot of bimonthly $45 fees.
Further, many payday lenders oppose legislating their industry at all, arguing that their loans cannot be measured in terms of APR (a yearly yardstick) because they offer only short-term loans. However, this turns out to be contrary to how most borrowers experience the loans. For instance, if our hypothetical borrower manages to stretch out his $300 loan for a full year, he will have paid $1170 in fees alone ($45 every two weeks) in addition to the principle he owes ($300), all of which amounts to a 400% interest rate.
Indeed, for most customers of payday lenders, this is exactly the problem: a temporary, short-term loan turns into a crippling long-term burden. In a 2007 report titled “Springing the Debt Trap,” the Center for Responsible Lending demonstrated that:
- Over 60 percent of these loans go to borrowers with 12 or more transactions per year;
- 24 percent of these loans go to borrowers with 21 or more transactions per year; and
- Nearly 90 percent of repeat payday loans are made shortly after a previous loan was paid off.
Furthermore, even in states where rollover lending is banned, the Center for Responsible Lending found that 90% of the payday lending business is generated by borrowers with “five or more loans per year.”
Ostensibly, the Consumer Financial Protection Bureau would rein in such ballooning interest rates and predatory practices, and this is why the payday lending industry has lobbied heavily against being included in the bill’s scope.
As stated in a Washington Post article earlier this month,
During the “Hill Blitz” organized by the Financial Service Centers of America, a trade group, about 40 industry executives pushed to exempt check cashing from the purview of a proposed bureau that would oversee consumer financial products.
“There is a sense of urgency to get something done,” said Eric Norrington, head of government affairs for Ace Cash Express. “We’re sort of asking the question: Why are we even a part of this?”
To anyone familiar with their business practices, it’s obvious why the payday lenders are part of this bill. Nevertheless, they have managed to score a “carve-out” along with the auto dealers (the second biggest lending industry in the country behind mortgage dealers) and this should exempt them from the proposed bureau’s purview.
In other words, the initial concept has been turned into a squabbling mess. It’s hard to imagine that anyone outside of organized crime or banking would see check cashing as a legitimate business model. Nevertheless, their lobbying efforts have secured them protection from the new bureau designed to save consumers from businesses like theirs.
Earlier this week, Rolling Stone published a lengthy diatribe by Matt Taibbi revealing this and other bad news from the fight over financial reform. Taibbi works himself into a lather over the finance industry’s attempt to wholly water down all efforts at oversight and reform, but his ire stems from a citizen’s helplessness in the face of money and power being used to craft irrational public policy. It’s almost cliche at this point to complain about the power of lobbyists, but he’s right.
Taibbi writes:
The financial-services industry has reportedly flooded the Capitol with more than 2,000 paid lobbyists; even veteran members are stunned by the intensity of the blitz.”They’re trying everything,” says Sen. Sherrod Brown, a Democrat from Ohio. Wall Street’s army is especially imposing given that the main (really, the only) progressive coalition working the other side of the aisle, Americans for Financial Reform, has been in existence less than a year – and has just 60 unpaid “volunteer” lobbyists working the Senate halls.
The contrast here is clear, but Taibbi moves on (somewhat dramatically) to analogize our efforts at financial reform to world war, describing the “four main fronts” of this battle, one of which is the Consumer Financial Protection Bureau. In each case, according to Taibbi, the momentum is there for sound public policy, but finance industry lobbyists fighting tooth and nail have scored surprise victories that have significantly weakened or outright crippled true financial reform.
It’s no wonder then that only 22% of our citizens trust our government and that most have similar distrust for banks, financial institutions, and corporations. Of course, while these same poll respondents say they do not necessarily want more governmental oversight in the economy, 61% do say they want corporations to be subject to more regulation.
In other words, citizens’ distrust is in the right place, but, as the payday lender’s story illustrates, as long as lobbyists backed by powerful corporations have this kind of influence, no reasonable reform can be expected.
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