Rhetoric Heats Up over Payday Lending Bill
by Steve Cypher on Friday, April 10th, 2009HR 1214 has sparked a heated debate between the Center for Responsible Lending and the Center for Consumer Freedom as each look to challenge aspects of the bill.
Payday loans
Here at Auto Credit Express, we have followed, with interest, the debate between the Center for Responsible Lending and the Center for Consumer Freedom as each vies to be heard regarding the payday lending bill that is currently before the House Committee on Financial Services.
The purpose of the bill is explained in its title: “To amend the Truth in Lending Act to establish additional payday loan disclosure requirements and other protections for consumers, and for other purposes.” CCF represents the payday industry, while the CRL represents those interests that would like to see a 36% cap on payday loans.
Here is the exchange of press releases beginning with the CRL release on April 9th:
Rollover Bans Don’t Stop Payday Trap
Payday industry’s support of false reform has preserved its predatory business model in state after state
WASHINGTON – The federal debate on payday lending practices is heating up. A bill in the House, H.R. 1214, features measures intended to reform abusive payday lending but that have failed at the state level to curb loan flipping practices that trap the financially vulnerable. By contrast, Illinois Sen. Dick Durbin (S. 500) and California Rep. Jackie Speier (H.R. 1608) have introduced common-sense bills that would restore consumer protections by placing a 36 percent annual interest-rate cap on consumer loans. The Center for Responsible Lending supports S. 500 and H.R. 1608.
CRL’s research shows that rollover bans fail to stop payday lenders from trapping borrowers into back-to-back loans, which are simply rollovers by another name.
“When rollovers are banned, industry simply replaces them with back-to-back loan flips that continue to ensnare people in long-term debt carrying an annual percentage rate of 400 percent,” said CRL senior researcher Leslie Parrish. “Payday lenders know this and that’s why they support rollover bans.”
Veritec Solutions LLC, a company that sells enforcement tracking services to states that ban rollovers, yesterday challenged CRL’s assertion that such bans have been ineffective in reforming payday lending abuses. Veritec’s assertion that rollover bans stop loan extensions is beside the point, because back-to-back transactions allow payday lenders to practice the very same abuses.
A double-digit cap on annual interest rates, such as the 36 percent cap Sen. Durbin and Rep. Speier favor, is the only measure that has effectively stopped abusive payday loan flipping. Fifteen states plus the District of Columbia have stopped it by imposing a cap in the 36-percent range, and Congress applied the cap in 2006 to protect military families nationally. A new CRL survey finds that over 70 percent of Americans support a cap of 36 percent or lower.
How do payday lenders get around rollover bans?
Payday lenders evade rollover bans by making another loan to the same borrower in a short period of time, often just as the borrower pays off his initial loan and before he’s left the payday store. A series of rollovers or a series of back-to-back loans is a legal distinction without a difference, except in name, for borrowers.
Many states have banned rollovers, a practice that nets payday lenders repeated interest payments of about $50 on a $300 loan, without ever reducing the principal the customer owes. But the average borrower ends up paying about $500 in interest on top of the original $300, whether or not rollovers are banned.
Veritec cites data showing borrowers pay off their loans within two days of the due date as evidence that states’ attempts to ban rollovers work. But, for the vast majority of Oklahoma borrowers who take out multiple loans a year, over half of subsequent payday transactions happen as soon as the previous loan is repaid, and 88 percent of these are originated before the typical borrower receives the next paycheck two weeks later. Data from Florida show a similar pattern. Veritec’s own data, obtained by CRL through a public-records request from state regulators in Florida and Oklahoma, show this to be the case.
Industry does not oppose rollover bans; they don’t slow loan flipping
The only provision in H.R. 1214 that the payday industry’s lobbying group, the Community Financial Services Association of America (CFSA), publicly opposes is one that would impose an interest-rate cap of 391 percent on the typical two-week loan. CFSA opposes any interest-rate cap.
The futility of rollover bans is epitomized by a North Carolina payday borrower interviewed by CRL, who was flipped into new loans for five years by Advance America, one of the nation’s largest payday lenders and a CFSA member. Advance America did not use rollovers; instead it closed out the loan and re-opened it with new documents on the day that the loan was due. The borrower was in payday debt for years without any rollovers at all.
Ninety percent of payday lending business is generated by borrowers with five or more loans per year. Nineteen states ban rollovers. Some other states limit rollovers to between one and six. But data from five of the states that limit rollovers–Colorado, Florida, Michigan, Oklahoma, and Washington–show no reduction in the payday lending industry’s dependence on repeat loans. Even in states with cooling-off periods between loans, like Florida and Oklahoma, which Veritec cites as places where rollover bans work, most repeat loans are made within a few days of the old loan, showing borrowers can’t make it to the next payday without re-borrowing.
Today, the CCF responded with its own press release:
Front Group For Financial Conglomerate Continues To Unfairly Malign Competitors
WASHINGTON – Yesterday, the Center for Responsible Lending (CRL) issued a misleading press release on short-term payday lending practices that failed to acknowledge the pitfalls of proposed legislation to cap consumer loans at 36%. Reports from researchers at the Federal Reserve of New York, current FDIC chairwoman Sheila Bair, and economists at major universities show that this proposed cap would leave low-income borrowers with fewer and less desirable options when in need of emergency cash.
“Here we go again. The Center for Responsible Lending uses scary voodoo numbers like 400% interest that have no basis in reality to try and score a cheap political point,” said Tim Miller, communications director at the Center for Consumer Freedom. “It is intellectually dishonest to call a $15 fee on a $100 loan 400% interest. It is even more brazen to make that claim when the legislation CRL references would make it illegal for borrowers to roll loans over enough times to even approach that percentage. What CRL doesn’t tell you is that their own 2007 study shows that short-term payday lenders received 16.4% interest on their loans.”
“This shouldn’t be surprising from an organization that was founded by subprime lending billionaires who invented so-called “Pick-a-Payment” adjustable rate mortgages. CRL is currently the advocacy arm of a billion-dollar financial network that is a direct competitor of the short-term loan industry, and which charges its customers fees for services that cost more than short-term payday loans.”
How CRL Uses Misleading Statistics About Short-Term Payday Loans:
CRL claims that short-term payday loans have 400 percent interest rates. The CRL continues to claim that short-term payday loans carry annualized percentage rates of 400%. The typical fee on a two-week short-term payday loan is $15 for every $100 borrowed, or 15%. A borrower would have to roll their loan over 26 times to actually owe 400% interest, something which would be impossible under federal legislation that CRL hypocritically opposes.
Data in CRL’s own report disproves misleading statistic. A report released by CRL exposes the fallacy of 400% interest. In its 2007 report titled “Springing The Debt Trap,” CRL said, “in 2005, short-term payday lenders made over $28 billion in loans and collected approximately $4.6 billion in fees from borrowers.” Simple math shows that short-term payday lenders’ fees totaled 16.4% of the loans they extended, nowhere close to the exaggerated 400% figure CRL repeats elsewhere.
Proposed 36% cap will cut off a critical financial option. The CRL is also mistaken in its claim that consumers will benefit from Illinois Sen. Dick Durbin and California Rep. Jackie Speier’s bills to cap short-term payday loans at 36% APR. Such a cap may seem reasonable for a loan of 12 to 36 months. But for short-term loans, a 36% annual cap equals a $1.38 fee on a two-week $100 loan. This is an unsustainable business model that will drive short-term lenders out of business, eliminating a vital financial option for Americans struggling to get by. A staff report from the Federal Reserve Bank of New York found that banning short-term payday loans left borrowers worse off, forced to choose from more expensive options.
CRL Is A Front For Self Help, A Financial Network Of Credit Unions And Lending Groups And A Direct Competitor To Short-Term Payday Lenders:
CRL functions as a front for Self Help, a financial network that charge fees for services that can cost far more than a short-term payday loan. Although the CRL bills itself as a “nonprofit, nonpartisan research and policy organization,” the center functions as the lobbying arm of the billion-dollar Self Help financial network. CRL claims that short-term payday lenders charge excessive fees, even though Self Help lenders charge their low-income customers fees for services that can cost far more than a short-term payday loan.
A 2007 New York Federal Reserve staff report found that short-term payday lending was actually better for consumers than large fees charged by groups like Self Help. In November 2007, economists at the Federal Reserve Bank of New York released an analysis of the effect of North Carolina’s short-term payday loan ban; their findings show the ban significantly harmed consumers. The research also found that short-term payday loans were a better option for consumers than the expensive overdraft and non-sufficient funds fees charged by banks and credit unions such as Self Help, CRL’s primary sponsor.
CRL’s founders made billions from subprime lending that contributed to the current economic crisis. CRL’s founders and most prominent funders, Herb and Marion Sandler, made their fortune at subprime lender Golden West Financial. The duo pioneered one of the worst types of subprime loans, known as “Pick-a-Payment” or option-ARM loans. The Sandlers pocketed $2.3 billion when they sold their company to Wachovia in 2006. Golden West’s toxic loan portfolio collapsed two years later, causing an estimated $36 billion in losses for Wachovia. The U.S. Department of Justice and the Securities and Exchange Commission are currently investigating Golden West Financial for predatory lending and fraudulent representation to investors.
The Bottom Line
While the CCF makes some valid points regarding CRL’s motives, it should also be pointed out that independent consumer groups with no ties to the industry, such as Yonkers, New York-based Consumers Union, is on record as being opposed to all forms of predatory lending including payday loans and refund anticipation loans as well as the exorbitant overdraft fees charged by banks and credit unions.
