GWEN IFILL: Now a two-part look at plans to overhaul regulations governing the nation’s financial industry.
First, Ray Suarez on the push to rein in big lenders who fill the gaps left by big banks.
RAY SUAREZ: After the financial crisis, the debate over financial reform focused on big banks and the securities markets. Now concern is growing about the need for a new agency to regulate financial companies that deal directly with consumers, like the booming payday lending business.
The bill unveiled by Senator Chris Dodd yesterday would give a new consumer protection agency the authority to oversee those kinds of lenders and other smaller, but important actors in the financial system.
SEN. CHRISTOPHER DODD, D-Conn.: We not only want to be able to deal with the mortgages and the brokers and servicers that were at the root of so much of the problems we’re facing, but also to get into the non-banks, the larger entities as well, particularly. And we’re letting the — talking about large entities where these problems occurred, payday lenders and other operators that are big.
RAY SUAREZ: Those lenders offer small, short-term, high-interest loans, typically 400 percent on an annualized basis. The cash covers the borrower’s expenses until the next paycheck arrives.
Payday lending took off in the late 1990s. There are now over 22,000 storefronts nationwide. More than 19 million U.S. households have taken out payday loans worth more than $35 billion. Loans are also available online.
Carol Stewart is with Advance America, the biggest payday lender in the country. She acknowledges her industry is under scrutiny, but says it provides a valuable service.
CAROL STEWART, senior vice president, Advance America: Our consumers use this product because it is a bridge between paychecks for them. There will be something that comes up. Maybe they need a new tire for their car so they can get to work. Maybe a child needs medication to take care of them. Maybe they do need to pay that late fee. And, so, customers use it as a bridge, as a way to get from paycheck to paycheck, to be able to make ends meet.
RAY SUAREZ: But consumer advocates like Leslie Parrish of the Center for Responsible Lending, say the industry preys on customers who can least afford expensive loans.
LESLIE PARRISH, senior researcher, Center for Responsible Lending: Unfortunately, the way they’re structured really sets most borrowers up for failure. Basically, you are dealing with a family that is living paycheck to paycheck already, that has a financial shortfall, and you’re telling them that they need to pay their loan back, in full, in two weeks. And, for most families, that’s a very hard thing to do. What we do see, unfortunately, is the average borrower takes out nine payday loans a year, and those are generally taken on a back-to-back basis, because they really couldn’t pay that first loan off successfully.
RAY SUAREZ: There are variations in some states, but here’s how a payday loan typically works. A borrower writes a post-dated check to the lender for the amount of the loan, plus a fee, usually about $15 to $20 on a $100 loan. The lender agrees to wait until the client’s next payday before cashing the check. The borrower gets the cash immediately. On the maturity date, the borrower is expected to repay the loan. If they don’t, the lender cashes the check.
LESLIE PARRISH: So, you’re going to repay that loan one way or the other. And you have money that day to repay that loan, because you have just gotten paid. The problem is, a day or two later, when you’re buying groceries or paying for health care expenses, your money has run out.
RAY SUAREZ: But Carol Stewart says borrowers fully understand how these loans work.
CAROL STEWART: Our customers are educated about the decisions that they make. And, from my experience — I’m in the stores a lot, and I see customers — and they’re schoolteachers. They’re nurses. They’re civil service workers. They’re people that are making educated decisions about the credit options that they have out there.
RAY SUAREZ: Currently, states regulate the payday lending business. In fact, 15 states and the District of Columbia ban them outright. But many consumer advocates argue a federal regulator is essential.
Dodd’s bill would create a consumer protection agency to be housed under the Federal Reserve and could write rules and regulations for payday lenders. President Obama made the case for a new regulator during a weekly radio address this winter.
U.S. PRESIDENT BARACK OBAMA: This agency would have the authority to put an end to the misleading and dishonest practices by banks and the institutions that market financial products like credit cards and debit cards, mortgage and auto and payday loans.
RAY SUAREZ: The industry argues, that’s not necessary.
CAROL STEWART: We think what’s out there works. We really think that those 37 states that now highly regulate this industry is what works right now. And, because we’re highly regulated, we do play a large role as the government affairs side in ensuring that people are educated about us.
RAY SUAREZ: If a final bill is passed later this year, there’s a good chance payday lenders will have a new regulator, one way or another, since the House bill calls for similar measures.