By Mike Lissis
April 8, 2009
As congressional Democrats work to solidify finance industry reforms, a
growing push to rein in payday lenders is running smack into a
formidable barrier: the rising influence of the lenders themselves.

Not only has the industry stepped up its lobbying and political
contributions in recent years, but it’s convinced at least one powerful
Democrat — who just two years ago supported an outright ban on payday
loans — that eliminating the practice is politically impossible.

As a result, Rep. Luis Gutierrez (D-Ill.), who heads the House
Financial Services Subcommittee on Financial Institutions and Consumer
Credit, is pushing a loophole-riddled bill that would allow payday
lenders to charge annual interest rates of nearly 400 percent — a
proposal widely condemned by consumer advocates and some liberal
Democrats, who want to put payday lenders out of business altogether.

Gutierrez wasn’t always so kind to the industry. In 2006, he
supported the successful effort that effectively banned payday loans to
members of the military by capping interest rates for those borrowers
at 36 percent. (The cap was requested by the Defense Department, which
called the loans predatory.) A year later, Gutierrez was a lead sponsor
of the Payday Loan Reform Act, which would have prohibited the loans

Gutierrez’s office did not respond to requests for comment. But in
an interview with The Associated Press last week, the Illinois Democrat
conceded that the growing influence of the payday lending industry
contributed to his change of heart.

“While they may not be JP Morgan Chase or Bank of America, they’re
very powerful,” Gutierrez said. “Their influence should not be

Gutierrez should know. The top contributor to his 2008 campaign was
payday lender QC Holdings, which donated $10,100, according to the
Center for Responsive Politics. Another payday powerhouse, the Online
Lenders Alliance, contributed an additional $4,600.

The episode presents a familiar dilemma for Democratic leaders
hoping this year to pass a wide array of consumer-friendly finance
reforms, including new anti-predatory lending and credit card
protections: On one hand, party leaders agree that consumers need
better protections from these industries; on the other, the industries’
influence creates enormous conflicts over how to do it. Caught in the
middle are the 19 million Americans estimated to take out payday loans
each year, many of whom become trapped in cycles of long-term debt.

Payday loans are generally small, short-term, high-interest loans
designed to cover emergency expenses until the borrower’s next payday.
Supporters of the industry maintain the loans are a vital resource,
particularly for low-income Americans who wouldn’t be eligible for
loans through banks that examine credit histories more closely. But
critics argue that the usurious rates associated with the loans, which
can approach 1,000 percent in some states, ultimately do the borrower
more harm than good. Many hope to see the industry disappear

The Gutierrez bill attempts to strike a compromise between those
positions, capping biweekly interest rates at 15 cents on every $1
borrowed — a rate equivalent to 391 percent annually. The proposal
would also create a system allowing borrowers to pay back their loans
in installments, rather than in lump sums. And it aims to prevent
lenders from refinancing loans at higher rates when borrowers aren’t
able to pay on time.

At a hearing on the bill last Thursday, Gutierrez said his
proposal, while “not a cure-all,” goes a long way to protect consumers
from abusive lending practices. “The current state of affairs for these
consumers is unacceptable,” he said, “and Congress would be derelict in
its duties if we allowed them to remain unprotected from abusive and
predatory lending.”

Yet consumer advocates, one of whom testified before the panel,
maintain that Gutierrez’s bill is worse than doing nothing. Not only is
it punched full of loopholes, they argue, but it effectively embraces a
lending system in which triple-digit interest rates are deemed business
as usual. Currently, regulation of the payday lending industry is
almost exclusively up to states.

“This would essentially provide congressional approval and
endorsement of payday loans,” said Jim Campen, executive director of
Americans for Fairness in Lending. “It legitimizes the business and
slows down states’ efforts to outlaw the practice.”

Consumer advocates also claim that the bill creates an enormous
loophole around the refinancing ban, allowing lenders to close out
existing loans and offer new ones in the same visit — a practice in
which consumers effectively borrow the same money they just repaid,
often at higher rates.

“You pay it, and then they hand it right back out in the same few
minutes that you’re there,” said Carol Hammerstein, spokeswoman for the
Center for Responsible Lending. “That whole business model is not
helpful to borrowers.”

Hammerstein said that of the 19 million Americans who take out
payday loans, CRL estimates that 12 million are caught in “a repeat
cycle” in which they’re taking out at least five separate loans a year.

In yet another loophole, the Gutierrez bill applies only to loans
with durations of 91 days or less. In response to similar windows
adopted by states, advocates warn, payday lenders have simply extended
the loans beyond the stated time frame. “They’re getting around it by
offering longer-term loans,” said Tom Feltner, policy and
communications director at the Woodstock Institute, a community
reinvestment group. “And they’re keeping the same high interest rates.”

Consumer groups instead are rallying behind another payday loan
bill that would cap annual interest rates at 36 percent. That bill —
sponsored by Sen. Richard Durbin (D-Ill.) in the upper chamber and Rep.
Jackie Speier (D-Calif.) in the House — would effectively kill the
industry, which says it can’t manage the loans profitably at that

Indeed, that’s the point, said Speier spokesman Mike Larsen. “They
will certainly cease to exist as they currently operate,” Larsen said.
“[Speier] makes no bones about that.”

The industry, for its part, opposes both bills. “Predatory lending
applies only to the mortgage business,” Troy McCullen, president of the
Louisiana Cash Advance Association told House lawmakers last week. “It
has nothing to do with rates or fees or APR.”

Gutierrez maintains that the Durbin-Speier bill is a recipe for
failure. In an animated exchange with a consumer advocate testifying
before his panel Thursday, he argued that an outright ban is
politically impossible.

“You don’t like the payday [model]. I don’t like the payday
[model],” Gutierrez said to Jean Ann Fox, director of financial
services at the Consumer Federation of America. “You wish to eliminate
it. You wish to ban it. That’s not possible. That’s not possible.”

But that’s not the sentiment in the upper chamber, where an aide
said Tuesday that the Durbin bill “is likely to move” this year as part
of a larger finance reform package being assembled by Senate Banking
Committee Chairman Chris Dodd (D-Conn.). Dodd’s office did not respond
to a call seeking comment.

Speaking Tuesday at a street-corner press conference in Chicago —
staged, not coincidentally, in front of a payday lending business —
Durbin said the time is right for Congress to act on his proposal to
reform the industry.

“I think the situation is totally out of hand,” Durbin said,
according to local reports. “Whether you’re talking about credit card
accounts, whether you’re talking about these payday loan operations,
the interest rates they’re charging now are nothing short of

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