Payday Loan Friends and Foes Debate Federal Legislation
"CFSA has a long-standing record of advocating for responsible regulation of the payday advance industry and strong consumer protections for our customers," said D. Lynn DeVault, president of the Community Financial Services Association, in a prepared statement against H.R. 1214, a payday lending reform act. CFSA is the largest payday lending trade group.
"But this bill goes too far, most notably in establishing a national fee cap for payday loans, one small segment of the short-term credit market. We're aware of no other short-term credit product that has a national fee cap, certainly not bank and credit union NSF and overdraft protection fees or credit card late fees," said DeVault.
H.R. 1214 would cap the interest and fees on the low-dollar, short-term, high-interest loans at 15%. It also would mandate a lengthy list of disclosures and procedures for the loans.
Rep. Luis Gutierrez (D-Ill.) authored the bill, which has garnered the support of 28 other lawmakers and been referred to the House Financial Services Committee.
As the author of the bill and a member of the committee, Gutierrez took up a defense of it during a hearing earlier in April, acknowledging the measure would not be a complete ban on the loans but arguing that it would protect consumers in states without interest caps on these loans or rates much higher than 15%.
Gutierrez sought to make his point by referring to a chart outlining the various state laws concerning payday lending and interest caps.
"As we can see from this chart that separates the states into three classes, those that have banned payday lending, those that cap interest rates for payday loans at 15% (or 391% APR) and those that either have no cap at all or have a cap in place that exceeds 391%," Gutierrez said.
"The goal of my bill is to move all 23 of the states in the far right column, over to the middle column. Then the consumer groups will have a realistic opportunity to work their magic and move as many states as possible over to the far left column. By the way, that column on the far right represents almost 113 million Americans that would be helped by my bill."
"I recognize that my bill is not a cure-all for this issue," Gutierrez added. "My intent with H.R. 1214 is to give the efforts to protect consumer rights a boost by creating a minimum level of protection that all consumers will enjoy. This legislation would lower the APR cap for nearly 113 million Americans immediately upon its enactment. Despite complaints from the industry that the bill sets rate caps too low and assertions from consumers that the bill does not go far enough, I think that improving protections for 113 million consumers is a significant step in the right direction."
Some of the complaints about the bill not going far enough came in a editorial in The New York Times. The Times called the Gutierrez bill "ersatz" and suggested that it would not go far enough to solve the problems critics charge payday lending brings with it.
"Payday loans-advances that are to be repaid on payday-are so burdensome and so pernicious that in 2006 Congress effectively banned them for military families," the Times noted. "Given all the problems workers face right now, Congress should extend this protection to everybody. Unfortunately, some members are pushing an ersatz reform that would allow payday operators to charge what amounts to an annual percentage rate of 391%."
"A better option is already in place in some states and for the military-keeping short-term or small loans under a 36% annual interest rate, which is high enough," the paper said. "Representative Maxine Waters, a Democrat from California, assessed the Gutierrez bill correctly when she said: We've got to resist any attempt to make it look as if we are cracking down, when in fact we are opening the door to more abuse."