Sen. Kay Hagan (D-N.C.)

Hagan’s amendment — the Payday Lending Limitation Act of 2010, cosponsored by Sens. Dick Durbin (D-Ill.) and Charles Schumer (D-N.Y.) — capped the number of times a customer could get a payday loan to six per year. It also required payday lenders to offer borrowers extended repayment plans, letting them pay back their loans in smaller installments over longer periods of time. Payday loans are advertised as emergency stop-gap measures to help customers with sudden expenses. But the average payday loan rolls over between eight and 12 times. And more than 60 percent of payday loans go to borrowers that use them 12 times or more per year.

To illustrate how bad payday loans sometimes got, Hagan told the story of one of her constituents, Sandra Harris from Wilmington. “She had a job at Head Start and always paid her bills on time,” Hagan said on the Senate floor. “When her husband lost his job, Sandra got a $200 payday loan to pay the couple’s car insurance. When she went to repay the loan, she was told she could renew. Sandra ultimately found herself indebted to six different payday lenders, and paid some $8,000 in fees.”

Hagan’s amendment, without banning the financial service, would have stopped the industry’s worst practices — but also its most lucrative practices. Payday lenders make 90 percent of their business from repeat users. If payday loans were capped at six per customer per year, payday lenders could see their business fall by a third or half. Thus, the industry lobbied hard against Hagan’s proposal, as it had done against financial reform in both houses all year — spending $6.1 million on lobbying in 2009, more than double what it did in 2008.

The lobbying effort employed everyone from the grassroots — individual customers — to the highest-powered lawyers. David Lazarus of the Los Angeles Times reported that as Hagan’s amendment came up for a vote in Congress last week, one payday lender instructed his employees, “After a customer repays their loan, the customer then asks for a new loan. TELL YOUR CUSTOMER THAT YOU CAN’T LOAN TO THEM BECAUSE THE GOVERNMENT HAS PUT US OUT OF BUSINESS. That will get their attention. Then ask them to write letters or call their senator/congressman.” A flurry of letters written at check cashers or payday loan shops showed up in Congress.

On May 20, Hagan’s amendment came up in the Senate. Durbin stood up in support, calling payday lenders the “bottom feeders” of the financial industry. Then, as Dodd moved to proceed, Sen. Richard Shelby (R-Ala.) — who in 2009 received more campaign donations from payday lenders than any other Senator — blocked unanimous consent to vote on the popular provision. (Shelby’s office did not respond to repeated requests for comment.) It died on the floor.

Hagan’s was the last of many such payday-lender-specific provisions to come up in the regulatory reform process. And it was the last to fail. There are no interest-rate or rollover caps in the Senate bill. And there are none in the House either.

Durbin argued for capping the maximum annualized percentage rate of interest a payday lender could charge at 36 percent, for instance, a measure supported by the Center for Responsible Lending and other consumer groups. It never made it into the bill, nor did Rep. Jackie Speier’s (D-Calif.) version in the House. Rep. Luis Gutierrez (D-Ill.) — who has in the past advocated effectively banning payday lending — sponsored the Payday Loan Act of 2009, a series of reforms attached to the House bill. Consumer reform groups blasted the measures, which capped annualized percentage rates of interest at 391 percent. But even those very modest reforms did not make it in. And the most notable payday lender victory might have come from the work of Sen. Bob Corker (R-Tenn.), who reportedly lobbied for and won a loosening of the Consumer Financial Protection agency’s oversight over small payday lenders.

One might think this would have consumer advocates incensed about the House and Senate bills’ ability to stop the worst practices in the payday lending industry. But, in fact, they argue that payday lenders spent millions to win numerous battles before ultimately losing the war.

Why? Payday lenders in both bills still come entirely under the rule-making authority and oversight of the new Consumer Financial Protection Agency, which consumer advocates are confident will consider tamping down on annualized percentage rates of interest and establishing rollover limits. There has been considerable confusion over the Senate’s payday lending language and possible loopholes. It ensures the Consumer Financial Protection Agency has oversight and rule-making authority over all payday lenders, with the CFPA enforcing rules against bigger lenders and the Federal Trade Commission enforcing rules against smaller lenders, Kirstin Brost of the Senate Banking Committee said. And the House language, simply having the CFPA have total authority over all payday businesses, as supported by the White House and Treasury, is likely to win out.

“In the end, it doesn’t matter much that Congress didn’t specifically regulate payday lenders,” Ed Mierzwinski, the consumer program director at the U.S. Public Interest Research Group explains. “For the payday lenders to call the defeat of the Hagan a win for them is a Pyrrhic victory — because both both the House and Senate bills include a strong new consumer financial protection agency and it will regulate them.”

And Kathleen Day, the spokesperson for the Center for Responsible Lending, which worked with Senators on crafting payday lending restrictions and has fought a longtime and vocal fight against the businesses, concurs. “The [CFPA] will be able to enact strong consumer protections that would apply to payday lenders. As long as those protections are in there, that’s the name of the game,” she says. “There’s going to be people that say they want to be specific, they want to have specific provisions in this law about payday lending. But the great thing about having this agency is that it will have broad overview to write fair laws and to make sure laws are fair.

“Of course, we’d love to have a 36 percent [annualized percentage rate of interest] cap. But that’s unlikely. And sometimes regulations can be too specific. We are confident [the CFPA] will be able to react to the market in a flexible, consumer-focused way.”

Indeed, behind the scenes, payday lenders — much like auto dealers who make car loans — fought hardest for an exemption from CFPA authority. That battle, they spent millions to lose. And it means that consumers might win down the road.

But instead of shutting down, payday lenders in some of the same states that passed reforms continue making payday loans – and sometimes at higher rates than before the laws were enacted, according to public policy experts and consumer advocates who follow the payday industry. Most major payday lenders still are in business, using loopholes in existing small loan laws or circumventing new laws entirely to continue charging triple-digit annual interest rates, in some cases as high as nearly 700 percent, advocates contend. Lenders issue loans in the form of a check, then charge the borrower to cash it. They roll into the loan a $10 credit investigation fee — then never do a credit check. Or they simply change lending licenses and transform themselves into car title companies, or small installment loan firms, while still making payday loans.

Flickr: Stallio

“It is kind of astonishing. The more I look into it, the more brazen the practices are. Payday lenders, as a trade association, have consistently circumvented the intent of legislative efforts to address their practices.”

Payday lenders strongly refute that contention. Steven Schlein, a spokesman for the Community Financial Services Association of America, a payday lending trade group, said it’s simply untrue that payday lenders are circumventing the law in Ohio, or in any other state. “That argument is untenable,” he said. “It just shows you that our critics are really just anti-business.”

The dispute over Ohio’s payday lending practices began after voters upheld a 28 percent interest rate cap on payday loans in November of 2008, and many payday lenders began operating under several small loan laws already on the books. The legislature approved the cap in the spring of 2008, and payday lenders fought back with the voter referendum, but failed.

The small loan laws, which have been in existence for decades, are intended to govern installment loans, not single-payment, two-week payday loans. Payday lending opponents say the lenders are exploiting those laws to avoid the 28 percent rate cap. Lenders contend they are legitimately licensed by the state to make the small loans.

Some 800 of the Ohio’s 1,600 payday lending stores have shut down since rates were capped – and the rest are “trying to make a go of it” by adhering to the small loan laws, said Ted Saunders, CEO of CheckSmart Financial Co., a national payday lender with more than 200 stores in 10 states. “We’re lending money for far less than we did when all this started,” he said. “This is not business as usual. The activists just want to put us out of business entirely.”

Those activists are pushing the Ohio legislature to move once again, to close the loopholes in the loan laws by placing them all under the 28 percent cap. More than 1,000 payday lenders already have gotten licenses to make short-term loans under the old small loan laws, which allow for high origination fees and other charges, according to a report by the Housing Research & Advocacy Center in Cleveland.

Under those laws, for a 14-day loan of $100, lenders can charge an origination fee of $15, interest charges of $1.10, and a $10 credit investigation fee, for a total amount of $126.10, or a 680 percent annual interest rate.

David Rothstein, a researcher with Policy Matters Ohio, an advocacy group that pushed for payday lending limits, said testers for his group found that lenders sometimes told borrowers certain loan amounts, such as $400, were not allowed. But they could borrow $505. Loans over $500, according to the small loan laws, allow lenders to double origination fees to $30. Lenders also often issued the check for the loan from an out of state bank, but said borrowers could cash it immediately if they did so at their store – for another fee, often 3 to 6 percent of the loan total. Testers contended employees at some of the stores laughed as they explained the procedures, saying they were only trying to get around the new law.

In other cases, lenders directed borrowers to go get payday loans online, where rates can be higher.

“The General Assembly, in a bipartisan manner, passed a strong law on these loans and the governor signed it,” Rothstein said. “Then, the industry took it directly to the voters, who reaffirmed support for the law by some 60% despite the millions of dollars spent by the industry to overturn the law. This is a slap in the face. They are absolutely disregarding the spirit of the law that was passed.”

Saunders, however, said consumer advocacy groups promised that low-cost payday lending alternatives would pop up once the law was passed – but that hasn’t happened. Instead, there’s been an increasing demand for payday lending services by strapped consumers. “Should we be further eliminating access to credit in a bad economy?” Saunders asked. “We exist because we’re still the least expensive option for a lot of people.”

People hit by high overdraft fees from banks or faced with late charges on multiple bills sometimes decide that taking out a payday loan can be a cheaper alternative, he said.

Based on those kinds of arguments, the debate in Ohio now has shifted from how to best enforce the new law to arguing again over the merits of payday lending. Payday lenders are contending that curbing payday lending in a recession hurts low-income borrowers, and results in job losses. Lawmakers have yet to move on the latest bill to end the loopholes. King, of the Center for Responsible Lending, said that while payday reform advocates have fought in the past to make sure new laws were followed, Ohio marks the first time where the payday lending debate seems to have started over entirely.

“I haven’t seen that elsewhere,” he said. “Ohio is something new. I think there is some degree of frustration as to why we are redeliberating every aspect of this issue. It’s made a tough issue even tougher.”

Ohio isn’t alone in dealing with pushback from payday lenders, even after laws are passed.

In Virginia, payday lenders responded to laws passed last year to limit their fees by reinventing themselves as car title lenders, while still essentially making payday loans, said Jean Ann Fox, director of financial services for the Consumer Federation of America. Car title loans are high-rate loans usually secured by the borrower’s car.

State officials ordered payday lenders in December to stop making car title loans to borrowers who already had a car title loan outstanding, and to start filing liens on borrowers’ vehicles, as is the usual practice with car title loans.

In New Mexico, the state attorney general sued two small installment lenders, contending they used a legal loophole to continue charging extremely high rates on short term loans – in some cases, more than 1,000 percent. In both New Mexico and Illinois, the payday lending lobby supported reform laws, but then began using the small loan laws once the new limits took effect, CRL’s King said.

For other states, such as North Carolina, Pennsylvania, Georgia, and Oregon, state lawmakers or the attorney general had to go back and tighten laws or ramp up enforcement after initial payday reform legislation failed to rein in high fees. In Arkansas, an effort to end payday lending wound up involving the state Supreme Court and an aggressive campaign by the attorney general.

In Ohio, Saunders said payday lenders will be gone entirely if lawmakers move to limit their use of the small loan laws. The additional fees allowed by those laws, he said, are “the cost of doing business,” and companies like his can’t realistically operate without them. His solution is to launch a statewide financial literacy campaign, in which CheckSmart will provide an expert to train nonprofit groups and churches and provide them with a variety of resources to help consumers with budgeting and saving issues. The campaign won’t involve marketing payday loans or pushing any products. Saunders said he took on the idea after several lawmakers during the 2008 debate told him his firm needed to have a higher community profile. Providing financial literacy help, he said, will highlight CheckSmart’s good corporate citizenship.

“In 2010, financial literacy is a big part of what we’ll do going forward,” he said. “It’s not a conflict of interest. We’re going to be giving good, sound financial advice for free. I have nothing to hide. Look, no amount of financial literacy would solve every person’s financial shortfalls. If consumers were being served by other sectors, we wouldn’t be here. This is a way of saying, ‘We’re the good guys.’”

While consumer advocates may not see it that way, attempts in Ohio to limit charges on short-term loans also have been hampered by confusion over who should take the lead – the governor, lawmakers, the attorney general, or state agencies, Rothstein said. As that fight goes on, the question of how much people in financial peril should have to pay for a short-term loan remains as unresolved as ever, in Ohio and in many other states.

Some of the statistics in the report are alarming. On the amount of wealth lost to foreclosure:

Michigan Lost Wealth

U.S. lost home equity wealth due to nearby foreclosures, 2009-2012: $1.9 trillion

Michigan lost home equity wealth due to nearby foreclosures, 2009-2012: $20,337.9 million

Michigan number of homes experiencing foreclosure-related decline: 3,227,395

Michigan average loss per home affected: $6,302

And on the extent of payday lending in the state:

Michigan Payday Lending Experience

Number of payday lending stores in Michigan: 781

Annual payday loans per store: 2,980

Average payday loan size: $402

Maximum APR of two-week $100 payday loan: 391%

Total payday loan volume: $935.8 million

Total payday loan volume from churning: $711.2 million

Total payday lending fees paid annually: $122.7 million

Flickr: Stallio

Payday lenders are out in full force in Wisconsin, where a legislative battle is underway over efforts to impose a 36 percent rate cap on payday loans, a move the industry claims will put it out of business. The next big battleground state will be Colorado, where payday lenders already are making financial contributions to minority groups to win favor, in anticipation of an upcoming legislative fight over payday reform. And in Washington, D.C., payday lenders have sharply increased their Capitol Hill spending and profile at a time when other types of political fundraising is on the decline, hoping to dissuade Congress from imposing any additional federal limits on the industry. Payday lenders also wary of a new Consumer Financial Protection Agency, which would have oversight of mortgages and other financial instruments, even though proposals don’t specifically single out payday lending.

“Obviously, the industry has gotten its hat handed to it at the state level, and it appears to be spending a lot of time and money trying to win friends and influence people on the Hill,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Not a single state has authorized payday lending since Michigan did so in 2005, Fox said. The last payday lender shut down and left Arkansas in August, not long after a crackdown by the state Attorney General. Voters in Arizona and Ohio last year approved rate caps on payday loans, despite aggressive opposition from the industry. In 2007, the District of Columbia approved a 36 percent rate cap, after a heated fight. The decisions have shifted the momentum in the payday lending battle, given that prior to the financial crisis, the industry regularly won victories at the state level to authorize their lending with no limits.

Read more at Michigan Messenger’s sister site the Washington Independent