Oversight for Thriving Payday Lending Unclear in Financial Reform

BY Carolyn O'Hara  March 10, 2010 at 10:49 AM EDT

Sen. Bob Corker, R-Tenn., is denying that payday lenders will receive an exemption in financial reform legislation being crafted in the Senate, refuting reports that he has been pressing the Senate Banking Committee to “scale back substantially” proposed oversight of the industry. The New York Times reports Wednesday that under Corker’s proposal, a new consumer agency would be allowed to write rules for the $42 billion a year payday lending industry, but the agency would lack the teeth to enforce those rules. The agency instead would petition other regulators to enforce compliance among payday lenders.

Consumer advocates are crying foul, saying payday lenders are guilty of some of the most predatory financial practices. An estimated 19 million people took out payday loans from some 22,000 outlets last year, generally paying 400 percent or more interest on small, short-term loans. An analysis last year by the Center for American Progress showed that these borrowers tend have less income than those who haven’t taken out the loans and tend to be minorities and single women.

Steven Schlein, a spokesman for payday lending industry’s trade association, told The New York Times that the industry is being unfairly targeted. “The banks caused the financial meltdown, and they’re spending millions and millions to spare themselves from tighter regulation while throwing the consumer lending industry under the bus,” he said. “They’re trying to divert attention to us.” The industry has often said in the past that they provide an essential service for people in need.

A payday loan typically works like this:

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Borrowers, in need of cash to make ends meet before a paycheck or because of an emergency, give payday lenders a postdated check for the amount of the loan plus fees. The loans are typically small — in the hundreds of dollars. “For example, with a $350 payday loan, a borrower pays an average of about $60 in fees and so gets about $290 in cash,” according to the nonpartisan consumer advocacy group Center for Responsible Lending.

The loan usually comes due in a week or two. If the borrower can’t pay, they may get slammed with overdraft fees from their bank, and needing more money to both cover the loan and get them through to the next paycheck, take out yet another payday loan. A report last year by the Center for Responsible Lending showed that a whopping 76 percent of payday loans are so-called churned loans — taken out by repeat borrowers who need more cash to make it through the monthly cycle.

Payday lenders have also reportedly entered a lucrative new field: advances on unemployment checks. A recent Los Angeles Times report suggests that more out-of-work Californians are going to payday lenders and paying steep fees to get unemployment benefits before their checks arrive.

As payday loans have grown in volume, so too have lobbying expenditures by the industry. A recent analysis by the Huffington Post Investigative Fund shows that money spent lobbying Congress by payday lenders has soared this decade. The industry was particularly spooked by legislation that took effect, with the Pentagon’s support, in 2007, capping interest rates that can be charged to military personnel at 36 percent.

Payday lending regulations vary by state. In about a dozen states, including Arkansas, Georgia, New Jersey and New York, it is either banned or unfeasible because of laws governing interest rates.