Ed's Blog

Payday lenders seek "get out of regulation free" card

By Ed Mierzwinski
Consumer Program Director

At least one of the biggest triple-digit APR payday lenders is spending some of its massive profits on a bad legislative proposal, HR 1909, to eliminate any oversight by either state governments or the Consumer Financial Protection Bureau and move them into the arms of the industry-friendly federal bank regulator known as the OCC. Being regulated by the OCC has been a "get out of regulation free" card for the banks, so why not join them? Other high-cost financial services providers, including auto title pawn lenders, installment lenders, check cashers and many others could also use the "get out of regulation free" card the bill creates.

Payday lenders make high-cost small dollar loans to consumers. Typically a consumer writes a check for $120 to borrow $100 "until payday." The lender holds the uncashed check as collateral. If payday is in two weeks, the annual interest rate on the $20 finance charge is approximately 520% APR. Consumers who don't have $120 in two weeks might pay another $20 to "roll over" the loan. Where rollovers might be strictly regulated (it's hard to stop them, though), consumers simply take out another payday loan somewhere else to pay off the first.

Payday lending is based on an unsustainable debt trap for the vast majority of its customers.  Consequently, payday practices have been heavily criticized and many states, with varying degrees of success, have banned or strictly regulated their activities, as explained at the excellent Consumer Federation of America website paydayloaninfo.org.

However, despite yeoman efforts by many states, the industry has grown dramatically. Studies have even shown that there are more payday lenders than McDonald's, although the majority of recent growth has been online. Revelations that the industry and other fringe lenders were clustered around military bases helped Congress pass the 2007 Military Lending Act, which included reinstatement of a federal usury ceiling (36% APR) for servicemembers (but not other consumers). But the payday industry has restructured some of its practices to avoid the MLA and moved some of its operations to the Internet or Indian reservations in efforts to hide from state regulation.

So the problem needed more solving. In 2010, when Congress enacted the Consumer Financial Protection Bureau, it gave the bureau authority to write regulations covering the entire financial industry. It also directly gave the bureau additional full supervisory and examination authority over four types of firms: big banks and any mortgage lender, private student lender or, recognizing the size of the problem, any payday lender. (The bureau has authority to supervise other "larger marketplace participants," and is expected to soon finalize a rule allowing it to supervise big credit bureaus and big debt collectors but the CFPB has express authority, without a rule, to supervise ANY payday lender.)

Now, however, the promise of CFPB regulation and supervision of payday lenders providing needed relief and buttressing strong state efforts in many states is being threatened by a legislative proposal, HR 1909, the so-called FFSCC Charter Act. It is designed to preempt all state authority over payday lenders (who choose a new federal charter) and also, although the bill's supporters may pretend otherwise, to eliminate CFPB supervision over them in favor of supervision by the Office of the Comptroller of the Currency. The OCC is the chief national bank regulator. It has no experience with non-bank consumer regulation. Much, much worse, OCC is also burdened with a long history of antipathy, aversion and repugnance toward both consumer regulation and state regulation. Many experts believe that OCC's sweeping preemption of state attorney general authority over mortgage loans and other activities of national banks and its own failure to supervise national bank compliance with consumer laws contributed greatly to all the major financial problems of the last decade, from the growth of unfair overdraft programs and credit card fees to the spectacular mortgage market failure that led to implosion of the economy in 2008.

U.S. PIRG has joined the Center for Responsible Lending and the Consumer Federation of America in a strong letter of opposition to HR 1909 and expected similar bills. The letter includes additional explanations of the problems the bill would create.

Are you sitting out there thinking "how could such a completely self-serving, special interest proposal that rejects all the lessons that led to establishment of the CFPB possibly pass the Congress?" Then, follow the money. The leading payday lender, Cash America, is dropping big bucks into campaign contributions and lobbying expenses to push the bill, which already has 20 bi-partisan sponsors. The chart at right showing Cash America political contribution increases over the last few cycles is from opensecrets.org. In the 2012 cycle, so far, Cash America has invested over $633,000 on PAC campaign donations. Opensecrets.org also describes its lobbying expenses on the bill. Cash America has hired four outside firms to buttress its own lobbying efforts, which total $280,000 so far this year. Expect these numbers to go way up at the end of June when new reports are filed. Interestingly, the pawnbrokers are on our side against the bill.

The CFPB was established to fight financial abuses and establish a level playing field in the financial marketplace. As our letter to Congress explains, giving predatory financial firms a "get out of regulation free" card is the wrong way to go, especially while hard-working consumers are still weathering the financial storm caused by a lack of regulation. Only in Washington.

Excerpt from letter from CFA, CRL and U.S. PIRG to Congress: "H.R. 1909 and similar bills would allow consumer financial companies to bypass the oversight of the CFPB and state law, and instead choose to be regulated by OCC. They would create a new federal charter under the OCC for a broad range of consumer financial products and services, including payday lenders, installment lenders, car-title lenders, prepaid-card issuers, check cashers, money-order/wire-transfer/remittance providers, and more. The OCC would become the primary regulator for these financial services companies and their products. This shift exposes consumers and the financial services marketplace to the very dangers that contributed to the economic crisis. The CFPB was created for the sole purpose of protecting consumers through oversight, rulemaking and enforcement of the rules for the very consumer financial products marketed and sold by the companies covered in this legislation. In contrast, the OCC’s primary mission is to protect financial companies, not protect consumers from deceptive or abusive lending practices."

Comments

I agree with you on this issue Ed. This is crazy. It's yet another attempt to undo what limited regulation there is. It would seem that leaders would look at the data about what happens with these products and listen to the people who've been dragged into that debt spiral. This is one of the major tasks for the CFPB. No way it shoudl be moved!

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HR 1909 only seeks preemption from state licensing laws. The patchwork of state licensing laws is one of the reasons for the high operating costs of lending to high-risk borrowers. The CFPB is responsible for supervision over all payday lenders for compliance with the federal consumer financial laws, irrespective of how the lender is licensed (i.e., state or federal license).

OCC regulation in no way eliminates oversight by the CFPB. The CFPB has oversight over all OCC regulated banks. It looks to me that this adds a regulator, does not replace one. Could be an insurance policy if Dodd-Frank were to be repealed or amended.

Ed, important article, but I believe you missed the target slightly. A cursory reading of HB 1909 shows that two-week payday loans as you describe them would not be eligible for the OCC charter at all. Cash America is the biggest pawn lender in the country, not the biggest payday lender. Pawn loans are typically require monthly payments and would be covered by HB 1909. It seems to me that Cash America sees the CFPB coming after pawn lending next and are trying to head it off by getting a different and more friendly regulator. The reason that the pawn association is against it is the federal regulator will likely only grant federal charters to large multi-state pawn lenders (like Cash America) to the detriment of the smaller companies. This has been the OCCs history with the banks.

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