Consumer Advocates Decry Consumer Protection Bill
Rep. Luis Gutierrez, chairman of the Financial Institutions and Consumer Credit subcommittee, portrays himself in press releases as a staunch protector of the common man in the face of fierce lobbying by big business. The Illinois Democrat announced on May 11 that despite "industry pressure to reduce consumer protections," he'd "redoubled his efforts to enact legislation that would restrict unscrupulous payday lending practices."
Gutierrez's Payday Loan Reform Act would toughen consumer protections in 23 states, "much to the frustration of the payday lending industry." A proposed interest and fee cap would improve those laws "despite bitter complaints from the payday industry that the proposed caps are too low."
For good measure, appended to Gutierrez's May 6 pronouncement of consumer advocacy is a statement from Lynn DeVault, president of the Community Financial Services Association, an industry trade group, declining to support the legislation.
So if the payday lending industry hates it so much, why do consumer advocates refer to Gutierrez's bill as the "Payday Lender Protection Act"?
On March 25, no fewer than ten consumer advocacy groups sent a letter (PDF) to the full House decrying the bill. Their missive notes that while this legislation shares the title of a failed measure Gutierrez had championed in the previous Congress, the groups could not support the new version because "by contrast, [it] essentially condones the predatory payday loan business model and will stall or stop the significant progress that has been made at the state level to curb usurious lending."
The bill, advocates say, "provides Congressional approval to payday loans at rates of 390 percent APR for two weeks or 780 percent APR for one week." The bill's cap of fifteen cents per dollar loaned authorizes lenders to charge $60 for a typical $400 loan, the letter says. "This means that, for the typical borrower with nine loans per year, [the bill] authorizes lenders
to collect $540 in finance charges for a $400 loan taken out over an 18-week period."
Jean Ann Fox, director of financial services for the Consumer Federation of America, tells the Huffington Post that advocates want a bill that provides three things: a 36 percent interest rate cap on payday lending, longer terms for repaying the loans, and a requirement that lenders perform credit checks on borrowers. Fox notes that President Obama has long advocated extending to all Americans a 36 percent rate cap on loans to military personnel borrowers.
Via a spokeswoman, Gutierrez sent a statement to the Huffington Post expressing bafflement at the consumer groups' opposition to his bill.
"I cannot imagine that any advocate of consumer protections is comfortable with the status quo," the congressman writes. "[I]n 23 states, borrowers have no protections from abusive payday lenders. That is simply unacceptable, and my bill is the only bill on the table that combats this crisis in a way that is, at the same time, realistic and prohibitive of unscrupulous lending practices."
Ed Mierzwinksi, consumer program director at the U.S. Public Interest Research Group (U.S. PIRG), says Gutierrez seems to be trying to split the difference between an ideal bill and a passable bill.
"I think he wanted to get a bill that he could pass," says Mierzwinski, who expects U.S. PIRG will have a positive relationship with Gutierrez down the road. But for now, "we want to make it clear to him that it does not have our support."
Gutierrez says the 36 percent rate cap of an ideal bill is indeed out of reach.
"[T]he fact is that we don't have the votes to pass a 36% rate cap now for all of the consumers who deserve it," the congressman writes. "As it stands, the payday lending industry will in fact lose substantial profits if my bill passes, but consumers in the 23 states with weak or no payday lending rules will be shielded from entering a spiral of debt, simply for seeking the money they need in an emergency."
The subcommittee will hold a hearing on the bill on April 2.
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First Posted: 03-27-09 01:50 PM | Updated: 04-27-09 05:12 AM