Pallavi Gogoi at Daily Finance, who watched payday lender regulations die in the U.S. Senate, asked payday lenders how they liked the rules under which they are forced to operate for military personnel. Under those rules, members of the military cannot be charged more than 36 percent interest on any loan. She heard the most remarkable thing in response.

“We can’t make a profit on 36 percent loans,” says Steven Schlein, a spokesman for the payday lending trade group, the Community Financial Services Association.

Leaving aside the somewhat hilarious moniker for a club of payday lenders and check cashers, the group insists that companies can’t make money charging people a 36 percent interest rate plus fees. With savings and most money market accounts paying less than 1 percent interest, stock market returns iffy and credit card companies making billions a year charging about 20 percent interest to its customers, either payday lenders are exceedingly stupid business people or their trade group thinks Americans are.

At least in terms of Congress, they’re right: Further payday lending regulation seems to be off the table after the group’s successful lobbying campaign against it.

In Iowa payday lenders were also successful. Despite support from liberal groups like Iowa Citizens for Community Improvement and conservative groups like Iowa Christian Alliance, legislation that would have given payday lenders the option of capping rates and fees at 36 percent or capping the number of loans per borrower died in a state House subcommittee. ]]> http://iowaindependent.com/29827/payday-lenders-only-ones-who-cant-make-money-on-36-percent-interest-rates/feed 3 http://iowaindependent.com/27574/time-running-out-on-payday-lending-bill http://iowaindependent.com/27574/time-running-out-on-payday-lending-bill#comments Wed, 10 Feb 2010 18:35:52 +0000 Jason Hancock http://iowaindependent.com/?p=27574 A diverse coalition of groups is attempting to make a final push for approval of tougher regulations on payday lenders with only two days before a legislative deadline passes and the bill is dead for another year.

Sixty members of Iowa Citizens for Community Improvement protest outside of ACE Cash Express on the corner of Carpenter and 19th St in Des Moines last month (photo courtesy of Iowa CCI).

Groups like the Iowa Christian Alliance, Iowa Citizens for Community Improvement and the Iowa Child & Family Policy Center are asking lawmakers to pass House File 2127, a bill that gives payday lenders the option of capping rates and fees at 36 percent or capping the number of loans per borrower at six. They contend that current regulations put low-income people at risk of financial ruin.

But Friday marks the self-imposed legislative “funnel week” deadline for bills to clear committee to stay eligible for consideration this year. The payday-lending bill is currently stuck in a subcommittee, one vote shy of moving on.

“I wish I had better news,” said Janet Petersen, D-Des Moines, one of the bills 34 sponsors. “It needs three signatures to pass out of subcommittee and only two members have agreed to sign off on the bill.”

Matthew Covington, an organizer for Iowa CCI, said Democratic state Rep. Michael Reasoner of Creston is the holdout, as the panel’s two other Democrats have said they support the measure and two Republicans have indicated they oppose it.

Reasoner did not respond to repeated requests for comment, and Covington said his organization has been unable to speak with him on this issue.

Norm Pawlewski, a lobbyist with Iowa Christian Alliance, said his organization’s Biblical worldview is what motivated their support of tougher regulations on payday lending.

“The way this industry is run amounts to usury,” Pawlewski said. “It puts people in a situation where they get into a hole they can’t dig out of.”

In general, a payday loan is a low, single payment loan customers repay when they receive their next paychecks. Payday loan amounts typically range from $100 to $500, with interest rates routinely between 390 and 700 percent, according to a recent study from the George Washington University School of Business.

At more than 250 outlets in Iowa, consumers can get a quick loan, for a fee, by writing a personal check with a future date on it or by authorizing a direct withdrawal at a future date from their checking account.

Critics contend that even though the expectation with a payday loan is that it will be repaid on the borrower’s next pay day, for many borrowers this means that most of their paycheck must go toward paying the loan, leaving them with little to nothing to cover remaining expenses. This situation forces borrowers to either get a new payday loan to cover their remaining expenses, or get a second loan from another company to cover the first payday loan.

“People are faced with a difficult situation – they get laid off, get a huge repair bill on their car, get a big medical bill – and they turn to payday lenders,” Pawlewski said. “If they can’t pay it back right away they get stuck in an endless cycle.“

The average borrower takes out 12 loans over the course of a year, Pawlewski said.

Payday loan industry officials argue the service provides valuable credit to cash-strapped customers in unexpected, difficult financial situations. They contend that tougher regulations would drive them out of business and take away one of the only lines of credit available to certain segments of the population.

However, in states where interest rate caps on payday lending have been implemented, banks, credit unions, local governments and nonprofit agencies have stepped up to fill the void with small-dollar loans at reasonable interest rates, Covington said.

The issue of payday lending has been around for many years, but Covington said this year there is more momentum than he’s ever seen. Despite this, and Covington’s optimism, without quick action the legislation will fail to meet the legislative deadline and be finished for 2010.

“I’m still hopeful that it can get through committee,” Covington said. “We’re pushing hard to get action on this.”

State Rep. Bob Kressig, D-Cedar Falls, said the future of the legislation is unclear.

“Not sure on the fate of the bill,” said Kressig, who also sits on the subcommittee looking at the measure. But he personally will support it because “pay day loans don’t help people who are already living paycheck to paycheck.”

Pawlewski said many legislators may have a philosphical problem with the bill, since it enacts tough regulations on a specific industry.

“But this bill really isn’t as onerous as it is portrayed by some,” he said. “Limiting interest rates to 36 percent or limiting loans to six a year isn’t going to kill the industry. It will allow the businesses to continue to operate.”

(Source: Wikipedia)

But instead of shutting down, payday lenders in some of the same states that passed reforms continue making payday loans – and sometimes at higher rates than before the laws were enacted, according to public policy experts and consumer advocates who follow the payday industry.

As Iowa lawmakers consider going down a similar path — legislation that gives payday lenders the option of capping rates and fees at 36 percent or capping the number of loans per borrower at six — advocates say the fear of loopholes should not derail tougher payday regulation.

“This legislation would go far in cracking down on many of the predatory practices by these lenders, and should a loophole be found, not all will go to the effort to exploit it,” said Matthew Covington, an organizer for Iowa Citizens for Community Improvement. “And then the legislature could see the true vicious nature of the worst of them, and act to close any loopholes that may exist.”

Skirting tougher regulation

Despite promises that tougher payday lending laws would kill the industry, most major payday lenders in states that did pass new laws are still are in business, using loopholes in existing small loan laws or circumventing new laws entirely to continue charging triple digit annual interest rates, in some cases as high as nearly 700 percent, advocates contend.  Lenders issue loans in the form of a check, then charge the borrower to cash it. They roll into the loan a $10 credit investigation fee – then never do a credit check. Or they simply change lending licenses and transform themselves into car title companies, or small installment loan firms, while still making payday loans.

“In Ohio, New Mexico, Illinois and Virginia, every major payday lender is violating the intent of the law,” said Uriah King, senior policy associate with the Center for Responsible Lending. “I’ve been involved in public policy issues for a long time, and I’ve never seen anything like this.”

“It is kind of astonishing. The more I look into it, the more brazen the practices are. Payday lenders, as a trade association, have consistently circumvented the intent of legislative efforts to address their practices.”

Payday lenders strongly refute that contention. Steven Schlein, a spokesman for the Community Financial Services Association of America, a payday lending trade group, said it’s simply untrue that payday lenders are circumventing the law in Ohio, or in any other state. “That argument is untenable,” he said. “It just shows you that our critics are really just anti-business.”

The dispute over Ohio’s payday lending practices began after voters upheld a 28 percent interest rate cap on payday loans in November of 2008, and many payday lenders began operating under several small loan laws already on the books.  The legislature approved the cap in the spring of 2008, and payday lenders fought back with the voter referendum, but failed.

The small loan laws, which have been in existence for decades, are intended to govern installment loans, not single-payment, two-week payday loans. Payday lending opponents say the lenders are exploiting those laws to avoid the 28 percent rate cap. Lenders contend they are legitimately licensed by the state to make the small loans.

Some 800 of the Ohio’s 1,600 payday lending stores have shut down since rates were capped – and the rest are “trying to make a go of it” by adhering to the small loan laws, said Ted Saunders, CEO of CheckSmart Financial Co., a national payday lender with more than 200 stores in 10 states. “We’re lending money for far less than we did when all this started,” he said. “This is not business as usual. The activists just want to put us out of business entirely.”

Those activists are pushing the Ohio legislature to move once again, to close the loopholes in the loan laws by placing them all under the 28 percent cap. More than 1,000 payday lenders already have gotten licenses to make short-term loans under the old small loan laws, which allow for high origination fees and other charges, according to a report by the Housing Research & Advocacy Center in Cleveland.

Under those laws, for a 14-day loan of $100, lenders can charge an origination fee of $15, interest charges of $1.10, and a  $10 credit investigation fee, for a total amount of $126.10, or a 680 percent annual interest rate.

Disregarding the spirit of the law

David Rothstein, a researcher with Policy Matters Ohio, an advocacy group that pushed for payday lending limits, said testers for his group found that lenders sometimes told borrowers certain loan amounts, such as $400, were not allowed. But they could borrow $505. Loans over $500, according to the small loan laws, allow lenders to double origination fees to $30. Lenders also often issued the check for the loan from an out of state bank, but said borrowers could cash it immediately if they did so at their store – for another fee, often 3 to 6 percent of the loan total. Testers contended employees at some of the stores laughed as they explained the procedures, saying they were only trying to get around the new law.

In other cases, lenders directed borrowers to go get payday loans online, where rates can be higher.

“The General Assembly, in a bipartisan manner, passed a strong law on these loans and the governor signed it,” Rothstein said. “Then, the industry took it directly to the voters, who reaffirmed support for the law by some 60 percent despite the millions of dollars spent by the industry to overturn the law. This is a slap in the face. They are absolutely disregarding the spirit of the law that was passed.”

Saunders, however, said consumer advocacy groups promised that low-cost payday lending alternatives would pop up once the law was passed – but that hasn’t happened. Instead, there’s been an increasing demand for payday lending services by strapped consumers.

“Should we be further eliminating access to credit in a bad economy?” Saunders asked. “We exist because we’re still the least expensive option for a lot of people.”

People hit by high overdraft fees from banks or faced with late charges on multiple bills sometimes decide that taking out a payday loan can be a cheaper alternative, he said.

Based on those kinds of arguments, the debate in Ohio now has shifted from how to best enforce the new law to arguing again over the merits of payday lending. Payday lenders are contending that curbing payday lending in a recession hurts low-income borrowers, and results in job losses. Lawmakers have yet to move on the latest bill to end the loopholes. King, of the Center for Responsible Lending, said that while payday reform advocates have fought in the past to make sure new laws were followed, Ohio marks the first time where the payday lending debate seems to have started over entirely.

“I haven’t seen that elsewhere,” he said. “Ohio is something new. I think there is some degree of frustration as to why we are redeliberating every aspect of this issue. It’s made a tough issue even tougher.”

The industry fights back

Ohio isn’t alone in dealing with pushback from payday lenders, even after laws are passed.

In Virginia, payday lenders responded to laws passed last year to limit their fees by reinventing themselves as car title lenders, while still essentially making payday loans, said Jean Ann Fox, director of financial services for the Consumer Federation of America. Car title loans are high-rate loans usually secured by the borrower’s car.

State officials ordered payday lenders in December to stop making car title loans to borrowers who already had a car title loan outstanding, and to start filing liens on borrowers’ vehicles, as is the usual practice with car title loans.

In New Mexico, the state attorney general sued two small installment lenders, contending they used a legal loophole to continue charging extremely high rates on short term loans – in some cases, more than 1,000 percent. In both New Mexico and Illinois, the payday lending lobby supported reform laws, but then began using the small loan laws once the new limits took effect, CRL’s King said.

For other states, such as North Carolina, Pennsylvania, Georgia, and Oregon, state lawmakers or the attorney general had to go back and tighten laws or ramp up enforcement after initial payday reform legislation failed to rein in high fees. In Arkansas, an effort to end payday lending would up involving the state Supreme Court and an aggressive campaign by the attorney general.

In Ohio, Saunders said payday lenders will be gone entirely if lawmakers move to limit their use of the small loan laws. The additional fees allowed by those laws, he said, are “the cost of doing business,” and companies like his can’t realistically operate without them. His solution is to launch a state wide financial literacy campaign, in which CheckSmart will provide an expert to train nonprofit groups and churches and provide them with a variety of resources to help consumers with budgeting and saving issues. The campaign won’t involve marketing payday loans or pushing any products. Saunders said he took on the idea after several lawmakers during the 2008 debate told him his firm needed to have a higher community profile. Providing financial literacy help, he said, will highlight CheckSmart’s good corporate citizenship.

“In 2010, financial literacy is a big part of what we’ll do going forward,” he said. “It’s not a conflict of interest. We’re going to be giving good, sound financial advice for free. I have nothing to hide. Look, no amount of financial literacy would solve every person’s financial shortfalls. If consumers were being served by other sectors, we wouldn’t be here. This is a way of saying, “We’re the good guys.’”

While consumer advocates may not see it that way, attempts in Ohio to limit charges on short-term loans also have been hampered by confusion over who should take the lead — the governor, lawmakers, the attorney general, or state agencies, Rothstein said. As that fight goes on, the question of how much people in financial peril should have to pay for a short-term loan remains as unresolved as ever, in Ohio and in many other states.

Iowa CCI’s Covington said when legislation passed in 2007 toughening restrictions on car title loans, many of those businesses began doing payday loans instead.

“Here in Iowa, we’ll have to look at lenders maybe going to offer lines of open ended credit, but I don’t know how much of an issue that will be, given that they will no longer have a personal check to hang over one’s head,” he said.

The bill, which has 34 co-sponsors in the Iowa House, is currently in a Commerce subcommittee made up of Democratic state Reps. Andrew Wenthe of Hawkeye, , Bob Kressig of Cedar Falls and Michael Reasoner of Creston, and Republican state Reps. Thomas Sands of Wappello and Erik Helland of Grimes. A coalition of group’s is pushing for passage, including the Iowa Catholic Conference, the Child and Family Policy Center and the Attorney General’s office.

“From what I know and have seen, this is the most momentum this issue has had in many years and a great coalition pushing for its passage,” Covington said. ” I am optimistic, but know we’ve got to keep pushing”

Those fees work out to a much higher annualized interest rate than payday loans, the industry argues, and they face significantly less government regulation.

From a press release sent January 6:

Payday advances are highly regulated

• State laws heavily regulate all aspects of payday lending, including limiting the number of loan transactions, placing caps on loan transaction amounts and the fees that can be charged.  Payday loans are also subject to a number of federal laws that protect consumer credit borrowers, including full disclosure of the fees expressed both as a dollar amount and an annual percentage rate.
• Bank and credit union overdraft transactions have no such regulations.

Payday advances can be a less costly alternative to overdrawing a bank account

• Payday lenders typically charge a flat fee of $15 per $100 borrowed, or 391% if quoted as an annual percentage rate.
• FDIC reports that the average bank customer pays $27 (median overdraft fee) to cover a transaction of $36 (median transaction size), with annual percentage rates ranging from 1067% to 3520%.

A report (pdf) on banking practices prepared by the consulting firm Bretton Woods for the payday lending industry was released Friday, indicating that Iowans pay over $321 million annually in overdraft fees.  That works out to more than $300 per household in the Hawkeye state, which seems high, but it is below the national average.  The Bretton Woods report also claims that banks and credit unions employ strategies to maximize the overdraft fees they charge their customers by reordering debits and withdrawals.

Some quick research indicated that state governments probably don’t have the power to regulate bank overdraft fees — at least not those assessed by big, national banks — in the same ways that they can regulate payday loans, which further complicates things for the state legislature.

Back in August, intern (and now Truman and Mitchell scholar) Alec Schierenbeck examined all sides of the payday lending industry in Iowa, painting perhaps the fullest picture of the issue available locally. In light of news that key legislators plan to move forward on a cap on payday loan interest rates, I’d recommend giving the story another read.

A few facts about payday lending that are important to keep in mind:

• 400 percent interest is very, very high — perhaps beyond the point of what should be legal — but the payday lending industry claims that capping interest rates at 36 percent (as the legislators tentatively proposed) would end the practice of payday lending in Iowa altogether.
• Consumers who avail themselves of payday loans frequently may end up losing large amounts of money each year, but they often do not feel taken advantage of. At least one frequent recipient of the loans says they have saved her life.
• Supporters of a ban on payday lending (or a cap in interest rates, which would likely have the same effect) say that without the availability of high-interest loans, consumers who are in trouble will start asking family and friends for money instead. This, they argue, is how it used to be, and it is only the social stigma attached to asking friends for money that keeps payday lenders in business.

It’s a tremendously complicated issue, and while there are plenty of folks in the lending industry who are out to take advantage of those who are already struggling, there are compelling arguments to be made on both sides. I’d encourage you to read on for more.