By Phillip Lee
Payday lenders are facing a tidal wave of impending legislative action at the federal level. And it’s not just a matter of dealing with one issue – the industry is battling a rate cap as well as the formation of a new regulating body. As payday lenders must fight multiple battles on several different fronts, the challenges are beginning to take their toll.
According to D. Lynn DeVault, board chair of the Community Financial Services Association of America, the payday lending industry is pouring a tremendous amount of resources into its battle on Capitol Hill against unfavorable payday lending legislation.
“We have increased our federal budget by four times this year,” DeVault says. “It is an incredible financial burden. It represents about 60 percent of our total budget. It means we really have to cut back on consumer education, on our community outreach programs. We’re cutting back everywhere so we can to put our resources behind this federal effort.”
There are no less than 14 different bills in the House and Senate which directly affect payday lending.
“To the best of my knowledge, that’s way above any prior record that we’ve ever seen,” DeVault says.
“We’ve had the military bill restricting payday lending to soldiers. We’ve had the threat of high interest rate loans being kicked out of bankruptcy. Periodically, we’ve had two or three things that we were following, but to have 14 bills that are out there, it’s a huge risk.”
Most of the legislation revolves around various rate caps. In both the Senate and the House, there are bills that cap rates at 36 percent — not just payday loans, but loans of all types — introduced by Sen. Richard Durbin and by Rep. Jackie Speier.
“I’d like to think that those bills have a snowball’s chance just because there are a lot of other lenders who are very opposed to that,” DeVault says.
“Credit card lenders, small installment loan lenders and banks are opposed to a federal usury cap that is that restrictive.”
Gutierrez Bill Major Threat
However, one piece of legislation seems to be gathering steam: that introduced by Rep. Luis Gutierrez. The Illinois Democrat bill also sets a rate cap, but a more palatable 15 cents on the dollar.
That does not mean the legislation, H.R. 1214, is acceptable to CFSA. It would force payday lenders in states where the rate was higher than the cap to lower them to at least the 15 cents per dollar loans. States that have lower rates than the limit or a 36 percent cap would not be forced to raise their rates.
DeVault acknowledges that Gutierrez’s bill is better than some of the other legislation, but still finds it unacceptable.
“We don’t support the bill because it needs to be fixed, but there are a lot of things in the bill that come from our best practices. We’re happy to see all those consumer protections and we want to have those (kept in the bill),” she says.
In addition, DeVault notes that Gutierrez now wants to regulate the industry, while two or three years ago he wanted to eliminate it.
According to DeVault, his change in position is a positive step — a recognition that the industry deserves to exist in the marketplace, that the industry is a useful financial tool and that consumers should have choice.
“(However,) Mr. Gutierrez’s bill has a 15 cents per 100 rate cap in it, which is lower than that in 24 states. If it’s lower than 24 states and it reduces rates in those states to that level, that by definition means other rates are at 15 percent or below,” she points out. “Even the largest company cannot operate at that level.”
DeVault says that the average rate is $17.65 on every $100. The Gutierrez rate would hurt the industry and cripple many of the smaller companies, she says.
“If you were to go to Yahoo Finance and pull up Advance America or QC (Holdings), you’ll see that their pre-tax profit margins are about 10 percent,” DeVault says. “If the average rate is 17.65 and you bring that down to 15, you’re reducing revenue by more than 10 percent. What do you think happens to profits? It eliminates profits.
“While the bill is not intended to eliminate payday lending, it severely restricts a company’s operations and severely diminishes profitability,” she contends.
“People will say ‘Is it worth it to go through a year of dislocation and have so many people going out of business and that the large efficient companies could in fact build their business back when all the small lenders being gone?’ That’s not necessarily a good situation.”
Adds More Payment Time
Another point of contention with the Gutierrez bill is the number of payment plans allowed.
CFSA and its members have implemented an extended interest-free payment plan, which provides to its customers, on a one-time basis, an extra 60 days to pay off the loan.
The Gutierrez bill would allow for two extensions, and each period would be for 90 days. DeVault believes one extension is reasonable, but a second would be financially detrimental.
“I have 2 percent of all of my customers in these payment plans, well you say that’s not very many, but that’s at any given time at least $2 million of free loans,” DeVault says, regarding the impact of an additional extended period.
“Now I still have to document those loans. I still have to service those loans. I still have to collect those loans. I still have to hand out the money for those loans. You figure out what the annual revenue loss is on those loans and it’s pretty significant.
“So if you were to go to two of those plans, would you assume that you would have 4 percent of your customers in those loans? You don’t really know what to expect.”
DeVault contends that the additional 30 days for each would be period would be “burdensome” and “expensive” for the lenders, adding that a loan could be out for seven months for only 15 cents on every dollar.
Threat of New Agency
But rate cap legislation is not the only issue hanging over payday lenders.
The other is the formation of a new regulatory body — the Consumer Financial Protection Agency, which would cover all financial institutions and alternative financial services.
Regulating bodies such as the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration would all fall under this new agency.
“(The CFPA is a major concern because) their duties are very broad, not very well defined — they pretty much have unlimited powers to impose arbitrary requirements and they’re all appointed bureaucrats,” DeVault says.
“Their mandate is to write some rules if they see any gaps in legislation. You’re subject to all types of partisan politics on whether (certain) consumers are in or are out.”
Says State Laws Work
DeVault adds that the regulation of the payday industry has been through legislation at the state level, and it should stay that way.
“Writing a law is Congress’ job,” she says. “It’s either the state’s job, which is how we’ve always been regulated, or if Congress wants to take this on, it is a legislative responsibility. They should not be abdicating their responsibility to a bunch of bureaucrats.”
DeVault points out that CFSA would not automatically oppose a federal regulator, but questioned the need for one.
“I’m not saying that we wouldn’t necessarily be supportive of having a federal regulator,” she says. “I’d just say we march to the laws of the state in which we operate, so what would a federal regulator do?
“Even under the Gutierrez bill, we don’t really need a federal regulator,” DeVault adds. “It’s really more legislative history. We began to be regulated in the states. We have 35 states that do regulate us — many through the banking departments, some through consumer financial departments — but we already have regulators so if you put an additional federal regulator in place, A, it’s costly, and B, it’s duplicative — why do you need it?”
Interestingly, one way to protect the industry from the CFPA could be to have more specifics and details written into payday legislation.
“(The CFPA) has unlimited ability to write any rule it wants,” DeVault says. “So maybe the Gutierrez vehicle ought to be utilized for other terms and conditions we have, like in the states.”
Action on the CPSA and the Gutierrez bills was shelved for the summer recess, but hearings and mark-ups were expected to begin when Congress reconvenes in September.
Need for More Backing
But in any battle, resources begin to dwindle and need to be replenished. This legislative fight is no different for CFSA. It is actively seeking more support from not only its membership, but also vendors as well.
“The support for our lobbying effort doesn’t have to come strictly from payday lenders,” DeVault says. “(It can come from) the service providers to the industry. I hope that there is an awareness from (vendors) of what we are doing. If the industry is damaged, then their business is clearly damaged.”
DeVault is not blind to the tough economic times, but believes everyone needs to pitch in.
“I think, unfortunately, when business is down the small companies figure, ‘Oh heck, I’m just going to leave it to the big guys. They’re going to do it with or without me,'” DeVault says.
“Our membership numbers have been stable, we lose some when the economy is bad or a company is sold, then we pick up some new ones — we’re pretty active at seeking new members. But I would say that even though they are aware (of the situation facing the industry), they’re looking at their own personal circumstances and they may not be reaching as deep into their pocket as we need them to.”
But if help isn’t on the way and resources dry up, the future for the payday loan industry is bleak.
“We’re actively engaged on the industry’s behalf in Washington,” DeVault pitches.
“We’ve increased our budget by 400 percent. We’ve increased from two lobbyists to a dozen lobbyists. The future of the industry is directly dependent on how successful we are in getting improvements in this Gutierrez bill and how we manage to protect our industry under the CFPA. And if we fail, payday lenders are going to be harmed and will likely not be able to stay in business.”