Federal regs are needed to rein in payday lenders

A funny thing happened on the way to the 21st century. In much of America, usury became acceptable.

Back as far as when the nation was founded, the charging of unconscionably high interest rates on borrowed money was intolerable. In the early days of independence, every state of the Union had a usury law, and in most states, the limit on interest was 6 percent.

Today, most states and the federal government have consumer-protection laws that ostensibly set limits on the amount of interest a consumer can be charged, but the laws set the minimums far above 6 percent. On top of that, they have so many loopholes and are so haphazardly enforced as to be meaningless.

In 2008, Ohio legislators passed the Short-Term Loan Act that set a maximum annual interest rate of 28 percent on payday loans. That legislation was upheld in a referendum vote that was approved by more than 63 percent of Ohio voters. But payday lenders quickly found a work-around, by writing their loans under state laws covering second mortgages or by calling themselves credit-service organizations. In 2014, the Ohio Supreme Court unanimously upheld their ability to do so.

Critics of payday lending thought they saw a light at the end of the tunnel when the Dodd-Frank financial reform bill was passed in 2010. Among other things, it established the Consumer Financial Protection Bureau. The CFPB was the brainchild of a Harvard law professor, Elizabeth Warren, now a Democratic senator from Massachusetts. Her appointment as director of the agency was blocked by Republicans in the Senate, as was that of Richard Cordray, a former Ohio state treasurer and attorney general. Eventually, President Barack Obama named Cordray director as a recess appointment, and he was confirmed by the Senate in July 2013.

Thousands of lenders

That helps explain why it has taken nearly six years for the CFPB to come up with regulations for some 16,000 lenders that operate online or out of small strip plazas. There are today more payday lending storefronts in the United States than there are McDonald’s restaurants. And while industry spokesmen stress the service that these outlets provide to people facing a financial crisis and who don’t have a relationship with a regular bank, the billions of dollars that payday lenders make do not come from isolated loans.

“The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates,” says Cordray.

The big money comes from rolling over an initial two-week or one-month loan into yet another loan – and another and another. One typical $500 loan after another is written, with interest and financing charges of as much as $75 each. Entrapped borrowers find themselves another two weeks older and deeper in debt, to paraphrase the old folk song about the hardships faced by a Kentucky coal miner.

Those who have long been bothered by the predatory nature of payday lending and the financial burden it puts on, primarily, the working poor or an overextended working middle class, were heartened by the CFPB’s announcement of its proposed regulations. Lenders would have to conduct a “full-payment test” to determine if borrowers were in a financial position to make payment when the loan became due in two weeks or a month. There also would be restrictions on the number of times a loan could be rolled over.

This is important because a study by the Pew Charitable Trusts showed that an average payday borrower took out eight loans of $375 each in a year, spending $520 on interest. That’s a high price to pay – especially for someone who is already, obviously, financially strapped.

Anyone celebrating this long-overdue regulation, however, celebrated too soon. Within days of the CFPB’s announcement, Rep. Steve Palazzo, R-Miss., a member of the House Appropriations Committee, moved to block CFPB action. The committee voted 30-18 along party lines to require the CFPB to submit reports to Congress before the rules could take effect and to identify products that could replace payday loans.

Payday lenders have a strong grip on the people to whom they lend money. But no stronger, apparently, than the grip industry lobbyists have on the lawmakers to whom they give campaign donations.