Congress is finally poised to crack down on the legal loansharking known as payday lending - but only if legislators resist the siren call of special-interest money.
A disturbing number of politicians who normally side with consumers - including prominent New York Reps. Gregory Meeks, Edolphus Towns and Jose Serrano - are supporting a lame "reform" bill that would leave the industry's worst practices intact.
In payday lending, a borrower signs over his or her next paycheck in advance, either a forward-dated physical check or an authorization to debit a checking account.
That gives the lender first dibs when payday arrives. The balance goes to the borrower.
But what sounds like a handy loan for a person caught between paychecks - "15 cents per dollar" is typical - always turns out to be a lousy deal.
At 15 cents on the dollar, a two-week, $300 loan costs $345 to repay, an eye-popping 391% annual interest rate. Some companies charge 782% or more.
By way of comparison: Rates charged on illegal mob loans usually run around 500%.
The damage to consumers is vast. An estimated 19 million borrowers - mostly young, from low-income families - take $51 billion from the legal loansharks and cough up nearly $9 billion a year in fees, according to the Consumer Federation of America.
The lenders typically let the borrower roll over the total to the next paycheck (and the next, and the next).
While 15 states (including New York) and the District of Columbia put a 36% limit on payday loans, 34 states allow triple-digit loans, which are usually granted by loan stores, pawnshops, check-cashing outlets and rent-to-own chains. Many companies in states with lax laws market the loans through the Internet.
As I noted in a 2006 column, so many payday lenders have targeted military families that the Pentagon launched an inquiry. It turned out that more than 5,400 service members buried in payday loans lost their security clearance in a single year: Soldiers on the brink of financial ruin are considered too risky to perform many military functions.
Congress responded with a law that caps payday loans to military families at 36%. Pro-consumer groups support a law that would apply the 36% limit across the board to all small-scale, short-term credit.
But a funny thing happened on the way to the crackdown. This year, Rep. Luis Gutierrez of Illinois, who is chairman of the financial institutions and consumer credit subcommittee, introduced a competing bill, H.R. 1214, that purports to reform payday lending but instead allows the worst abuses to continue.
Instead of banning loan rollovers, the Gutierrez bill leaves open a giant loophole for lenders to simply change the paperwork so that the loan is "open-ended," leaving borrowers in the same old debt trap.
Gutierrez also defines payday lenders so narrowly that a few changes in structure could allow the sharks to do business as usual through affiliated "third party" companies. And the bill doesn't allow borrowers to dispute or revoke a lender's ability to debit their accounts electronically.
The weakness of H.R. 1214 is no accident. Payday lenders spend an estimated $1 million a year lobbying Congress, and gave Gutierrez at least $29,900 in contributions during the last election cycle, according to Chicago Public Radio.
Under fire, the congressman recently announced he won't take any more money from the industry he's supposed to regulate.
The flap has other congressmen giving H.R. 1214 a second look. Towns promised me he will push for pro-consumer changes to the legislation, and Serrano is said to be considering dropping his support for the flawed bill.
That's a good start. Even better would be to scrap the Gutierrez bill and commit to putting financial predators out of business for good.
A disturbing number of politicians who normally side with consumers - including prominent New York Reps. Gregory Meeks, Edolphus Towns and Jose Serrano - are supporting a lame "reform" bill that would leave the industry's worst practices intact.
In payday lending, a borrower signs over his or her next paycheck in advance, either a forward-dated physical check or an authorization to debit a checking account.
That gives the lender first dibs when payday arrives. The balance goes to the borrower.
But what sounds like a handy loan for a person caught between paychecks - "15 cents per dollar" is typical - always turns out to be a lousy deal.
At 15 cents on the dollar, a two-week, $300 loan costs $345 to repay, an eye-popping 391% annual interest rate. Some companies charge 782% or more.
By way of comparison: Rates charged on illegal mob loans usually run around 500%.
The damage to consumers is vast. An estimated 19 million borrowers - mostly young, from low-income families - take $51 billion from the legal loansharks and cough up nearly $9 billion a year in fees, according to the Consumer Federation of America.
The lenders typically let the borrower roll over the total to the next paycheck (and the next, and the next).
While 15 states (including New York) and the District of Columbia put a 36% limit on payday loans, 34 states allow triple-digit loans, which are usually granted by loan stores, pawnshops, check-cashing outlets and rent-to-own chains. Many companies in states with lax laws market the loans through the Internet.
As I noted in a 2006 column, so many payday lenders have targeted military families that the Pentagon launched an inquiry. It turned out that more than 5,400 service members buried in payday loans lost their security clearance in a single year: Soldiers on the brink of financial ruin are considered too risky to perform many military functions.
Congress responded with a law that caps payday loans to military families at 36%. Pro-consumer groups support a law that would apply the 36% limit across the board to all small-scale, short-term credit.
But a funny thing happened on the way to the crackdown. This year, Rep. Luis Gutierrez of Illinois, who is chairman of the financial institutions and consumer credit subcommittee, introduced a competing bill, H.R. 1214, that purports to reform payday lending but instead allows the worst abuses to continue.
Instead of banning loan rollovers, the Gutierrez bill leaves open a giant loophole for lenders to simply change the paperwork so that the loan is "open-ended," leaving borrowers in the same old debt trap.
Gutierrez also defines payday lenders so narrowly that a few changes in structure could allow the sharks to do business as usual through affiliated "third party" companies. And the bill doesn't allow borrowers to dispute or revoke a lender's ability to debit their accounts electronically.
The weakness of H.R. 1214 is no accident. Payday lenders spend an estimated $1 million a year lobbying Congress, and gave Gutierrez at least $29,900 in contributions during the last election cycle, according to Chicago Public Radio.
Under fire, the congressman recently announced he won't take any more money from the industry he's supposed to regulate.
The flap has other congressmen giving H.R. 1214 a second look. Towns promised me he will push for pro-consumer changes to the legislation, and Serrano is said to be considering dropping his support for the flawed bill.
That's a good start. Even better would be to scrap the Gutierrez bill and commit to putting financial predators out of business for good.
