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The battle over payday lending in Washington – who’s winning?

May 27, 2010

States have been attempting to better regulate payday lending and crackdown on the worst abuses within in the industry, and in Kentucky, that debate’s been going on over the last several years.

This year, a proposal backed by Gov. Steve Beshear and supported by the Kentucky Coalition for Responsible Lending, would have capped annualized interest rates on these short-term loans (usually due within two weeks) at 36 percent, instead of the current rates that can run as high as 400 percent.

Instead, the interest rate-cap bill never got a hearing in the House, with leading lawmakers saying they prefer to rely on a newly established database of payday loans. The idea behind the database is that it would better track the number of loans a person has out at one time and prevent customers and businesses from “rolling over” loans repeatedly. The practice generates repeat fees for the businesses, but can quickly have the customer paying far more in interest than their initial loan amount.

It was a step, but a small one.

With Congress taking up a financial regulation bill, payday lending abuses made their way to the national stage, with several senators pushing for more regulation of payday lenders.

As the Washington Independent reports today, Sen. Kay Hagan, a North Carolina Democrat, offered a proposal to cap the number of loans a person could have per year at six and would have required lenders of offer extended repayment plans. As the Independent notes, those would have cut deeply into the profits of payday lenders, and elicited a multi-million-dollar lobbying effort from the industry.

From the article

The lobbying effort employed everyone from the grassroots — individual customers — to the highest-powered lawyers. David Lazarus of the Los Angeles Times reported that as Hagan’s amendment came up for a vote in Congress last week, one payday lender instructed his employees, “After a customer repays their loan, the customer then asks for a new loan. TELL YOUR CUSTOMER THAT YOU CAN’T LOAN TO THEM BECAUSE THE GOVERNMENT HAS PUT US OUT OF BUSINESS. That will get their attention. Then ask them to write letters or call their senator/congressman.” A flurry of letters written at check cashers or payday loan shops showed up in Congress.

But the article finds that these efforts, though successful in defeating Hagan’s amendment, might have provided only narrow victories for the industry which will ultimately lose the battle.

From the article –

One might think this would have consumer advocates incensed about the House and Senate bills’ ability to stop the worst practices in the payday lending industry. But, in fact, they argue that payday lenders spent millions to win numerous battles before ultimately losing the war.

Why? Payday lenders in both bills still come entirely under the rule-making authority and oversight of the new Consumer Financial Protection Agency, which consumer advocates are confident will consider tamping down on annualized percentage rates of interest and establishing rollover limits. There has been considerable confusion over the Senate’s payday lending language and possible loopholes. It ensures the Consumer Financial Protection Agency has oversight and rule-making authority over all payday lenders, with the CFPA enforcing rules against bigger lenders and the Federal Trade Commission enforcing rules against smaller lenders, Kirstin Brost of the Senate Banking Committee said. And the House language, simply having the CFPA have total authority over all payday businesses, as supported by the White House and Treasury, is likely to win out.

“In the end, it doesn’t matter much that Congress didn’t specifically regulate payday lenders,” Ed Mierzwinski, the consumer program director at the U.S. Public Interest Research Group explains. “For the payday lenders to call the defeat of the Hagan a win for them is a Pyrrhic victory — because both the House and Senate bills include a strong new consumer financial protection agency and it will regulate them.”

That’s reason for encouragement here in Kentucky, where repeated attempts to curb these abuses have been turned back. Hopefully Kentucky won’t sit back and wait for federal action alone.

In the meantime, efforts likely the recently announced Bank On Owensboro initiative seek to get unbanked households more familiar with the banking system and less reliant on alternative services like payday lenders and check cashing businesses. Such efforts provide these households the hope for more stable financial future, and less susceptible to predatory lending practices.

Be sure to read the article to find out more about what’s been going on at the federal level.


One Comment
  1. June 24, 2010 4:35 pm

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