Payday lenders fearing modest federal regulations will cut into their vast profit margins have a new, high-profile ally in Washington: The chairwoman of the Democratic Party.
Rep. Debbie Wasserman Schultz (D-FL) is co-sponsoring legislation to delay and permanently muffle pending Consumer Financial Protection Bureau (CFPB) rules to rein in small-dollar lenders that are currently able to levy triple-digit annual interest rates on the nation’s poorest, the Huffington Post reports.
The bill would force a two-year delay of the CFPB’s rules, which are still being drafted. Last spring, the agency set out a framework for its rulemaking process that indicates it is taking a more modest approach than industry critics would prefer. But the bill Wasserman Schultz signed onto would both delay those rules further, and permanently block them in any state that enacts the sort of ineffectual, industry-crafted regulatory sham that Florida adopted in 2001.
That bill featured “compromise language heavily influenced by industry players,” the Florida Alliance for Consumer Protection notes. Rather than a model for robust oversight that still allows low-income people to access emergency credit when they need it, the group describes the Florida approach as a series of “well-disguised loopholes” that preserve the industry’s abusive patterns.
Those patterns are indisputable. While concerns about how current payday lending customers will meet emergency financial needs under the CFPB rules are sensible enough — no one can be certain how the financial industry will respond to restrictions on the current model, though advocates for the CFPB’s modest approach are confident lenders will still issue such loans at a healthy profit — there is no disputing the data motivating the agency to act.
The industry often notes that a slim majority of all borrowers repay their debt on time, an indicator that many customers are taking an expensive deal and getting back on their feet quickly. But those people aren’t where lenders make money. A full 80 percent of all payday loans are renewals or rollovers of a previous loan. And the real cash comes from customers who get trapped in the near-endless “debt trap” reborrowing cycles. While only 22 percent of borrowers end up rolling their loan over seven or more times, loans in such misery cycles account for 62 percent of the industry’s business. Trapping people in lengthy repay cycles is literally the primary source of industry income.
The Florida regime hasn’t reshaped the industry’s model of leeching most of its profit from the least-secure fraction of its customers. Indeed, in some ways the numbers from Florida are worse than the comprehensive CFPB figures. About 76 percent of all Florida payday borrowing is rollover loans within two weeks of a previous loan, and 85 percent of all loans are part of a reborrowing sequence of seven or more straight high-interest loans. The typical borrower there pays 300 percent annual interest, as Americans for Financial Reform noted in a December letter urging lawmakers to oppose the bill Wasserman Schultz now co-sponsors.
The measure would in effect take the Florida law, which a spokesman noted she helped to write, and supplant the CFPB’s years-long regulatory effort. The bill says that the agency’s expertise, unprecedented data analysis of actual borrower outcomes, and years of regulatory workshopping are an inferior solution to something elected officials ginned up with the help of the very industry its meant to regulate. Florida lawmakers worked closely with the industry in 2000 to craft legislation that ultimately failed, but which helped shape the 2001 law Wasserman Schultz is now touting as a national model.
Meanwhile, the approach the CFPB is taking looks much closer to Colorado’s payday lending law. Rates there remain over 100 percent APR, but are dramatically down from the pre-regulation days.
The agency does not intend to propose a hard cap on annual interest rates, the closest thing to a killswitch for payday lending that any of the states that have sought to regulate the industry has found. Instead it aims to enforce stricter underwriting standards for lenders before they take someone’s business — a major change for an industry that currently relies on people being too optimistic about their ability to repay — and prevent customers from getting trapped in endless re-borrowing cycles through cooling-off periods and annual loan limits. Its framework has some loopholes of its own at present, and the initial proposal appeared to err on the side of keeping lenders in business.
CFPB’s moderacy hasn’t calmed the lenders, though. The industry continues to spend campaign money to influence lawmakers and buy up crooked academic research to whitewash their business model’s well-demonstrated abuses.
They now have the head of the Democratic Party in their corner. Wasserman Schultz’s Florida colleagues have been reliable supporters of the industry’s needs in recent years, including several of the delegation’s Democrats. Six of the 10 Florida Dems in the House have signed on to this measure including the DNC chair, meaning there are more Republican holdouts from the Florida group than there are Democratic resistors.
Progressive Democrats, by contrast, have lined up behind a very different proposal for ensuring small-dollar credit remains available where banks fear to tread. Sen. Elizabeth Warren (D-MA), presidential hopeful Bernie Sanders (D-VT), and others support the idea of postal banking, in which the U.S. Postal Service would begin offering a variety of basic financial services including microcredit equivalents of payday loans, all at prices that these customers can actually afford. That way, even if payday lenders really do go Galt in response to the CFPB’s market-oriented rules, their customers will be in safe hands.