Payday’s Day of Reckoning

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A House bill that could pare profits “to the bone” and perhaps decimate two-thirds of payday lenders nationwide is moving quickly through the House, roiling a controversial industry that to date has dodged major federal intervention into its business practices.

A House Democratic staffer said this week that proposed tweaks to the Truth in Lending Act recently introduced by Rep. Luis Gutierrez (D-Ill.) are lawmakers’ best chance yet of forcing many high-rate, nondepository lenders out of business.

“We may have hit the sweet spot here, which is what we’ve tried to do for several years,” the Democratic aide said. “Ideally, we’d get people to go to depository institutions, banks or credit unions — they’re better regulated.”

Gutierrez, who heads the Financial Services Subcommittee on Financial Institutions and Consumer Credit, introduced his legislation late last month and has scheduled an April 2 subcommittee hearing on the bill.

The legislation would essentially cap interest rates and fees for the short-term loans at a combined 15 percent and give borrowers liberal repayment terms, including in some circumstances canceling the loan after it is written.

Payday lenders, which operate nationwide, advance cash to borrowers against the promise that they will be repaid when the borrowers receives their next paycheck.

Operating under names like Advance America, Cash N Go and Check Into Cash, payday lenders typically operate out of retail stores but also originate loans online.

According to Advance America’s Web site, potential borrowers in Virginia must complete an application, prove employment and provide a personal check for the loan amount and fees, which is returned after the loan is paid.

For a $100 loan that is paid within two weeks, Advanced America charges $126.40 in principle, fees and interest through a complicated formula that results in a 688 percent annual interest rate, according to the company’s Web site.

A banking industry lobbyist said privately that Gutierrez is trying to call the industry’s bluff by forcing payday lenders nationwide to abide by rules that they claim to be adhering to in some areas, thereby stripping away their ability to run up steep profits in less-regulated markets.

“Gutierrez is basically saying, ‘I’m going to give you what you say you charge — which is $15 per $100 — but the fact is 24 states allow more than that,” the lobbyist said. “What [Gutierrez] said is, ‘I’m going to cut you to the bone.’”

“If Gutierrez’s bill passes, two-thirds of the payday lending businesses in America are going to go out of business,” the lobbyist added.

In a statement this week, the Land of Lincoln lawmaker did not say explicitly that his intention is to eliminate the industry, although that reality is nearly universally expected.

Gutierrez said that “in a perfect world, all of my constituents would have access to emergency lines of credit, but that's simply not the case, especially in this new environment of stricter lending standards.”

“The payday lending industry will lose some profits if my bill passes, but consumers in the 23 states with weak or no payday lending rules will get increased protections from some unscrupulous lending practices," Gutierrez said.

The payday lending lobby, represented by the Community Financial Services Association of America, has argued that lawmakers are applying a different set of standards to their industry than they do to more traditional lenders.

Banks and credit unions, payday lenders say, offer products that are the functional equivalent to their short-term loans.

“We’re aware of no other short-term credit product that has a national fee cap, certainly not bank and credit union [not sufficient funds] and overdraft protection fees or credit card late fees,” CFSA President D. Lynn DeVault said in a statement. “These are the costly products our customers use payday loans to avoid, yet, under this bill their costs would continue to increase, completely unregulated.”

In a statement Tuesday, a CFSA spokesman said that “the industry is currently making only modest profits” and “the Gutierrez bill will significantly cut into the industry’s profits, even jeopardizing the future of some companies.”

A banking industry lobbyist said making money on short-term loans, even at double-digit interest rates, is easier said than done. If it were easier, banks and other lending institutions would already be siphoning off their business.

“It costs a lot of money to originate a loan. That’s the reality,” the lobbyist said. “That dog doesn’t hunt — wishing doesn’t make it true.”

Likely complicating matters for payday lenders is the current inhospitable environment on the Hill for lenders, insurance companies and investment houses that are perceived to have caused the current financial crises.

And payday lenders — whose inherently high-rate loans create a perception of abusive lending tactics — inevitably are getting lumped in the heap with other lenders, while lawmakers strut their populist moxie.

“The payday lenders have done a horrible PR job,” a banking lobbyist said. “They’re getting crushed in newspapers in every state.”

Gutierrez’s bill, which had 12 co-sponsors earlier this week, also is one of a series of consumer protections recently introduced in both chambers.

At a March 3 hearing, Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) said “I pledge personally over the coming months that we will rebuild the nation's financial architecture from the bottom up and put the needs of regular consumers, investors and shareholders who own these firms not at the margins of our financial service system, but at its very center.”

Also in the Senate, Bernie Sanders (I-Vt.) and Majority Whip Dick Durbin (D-Ill.) introduced a bill last week that would set a “national consumer credit usury rate,” while Durbin alone proposed a bill in late February allowing “no creditor [to] make an extension of credit to a consumer with respect to which the fee and interest rate ... exceeds 36 percent” on an annual percentage rate.

Even though payday lenders claim their livelihoods are on the line, some consumer activists say Gutierrez’s legislation does not go far enough, preferring Durbin’s bill instead.

Lauren Bowne, a staff attorney at the Consumers Union, a national advocacy group that publishes Consumer Reports, said provisions of Gutierrez’s bill “will be easily evaded and they don’t get to the core of the problem, which is the interest rate itself, which can be triple digit APRs.”

“Overall we feel that these provisions won’t stop payday loans and the essence of these products from being a debt tax on borrowers,” she said.