The Payday Lenders Confront Their Mortality

There aren't many industries that might be wiped away in a few strokes of a pen but then the country's payday lenders -- those in the business of giving a person $100 today and hoping they pay back $115, if not more, in two weeks -- are hardly your average interest group.

Forget the gun manufacturers and cigarette makers, Steven Schlein, payday's gruff and pugilistic front man, told me when I visited with him in Washington, D.C. "Those people are loved compared to us," Schlein said.

It was in the dining room of the Mayflower Hotel, a regal beauty that sits a few blocks from the White House, that Schlein articulated for me his greatest fear for the $40-billiion-a-year industry he is handsomely paid to represent and defend. Barack Obama had just been elected president and Schlein was imagining that day when the U.S. Congress addressed financial reform.

"Everyone will be talking about the big banks and what to do about Wall Street," Schlein said - and then, at the last minute, someone will slip in an amendment that puts them out of business.

Needless to say, Schlein and the people he represents are feeling particularly nervous right about now. As the Senate debate winds down to its inevitable end, the payday lenders still have their eyes trained on several lurking amendments. There's also the possibility that their death sentence is negotiated behind closed doors. "It all depends on what Dodd and Shelby agree to if there's a deal," Schlein wrote in a recent email exchange, "and what Dodd and Reid agree to if there's no deal." Chris Dodd (D- Conn.) and Richard Shelby (R-Ala.), of course, are the ranking members of Senate Banking Committee and Harry Reid (D-Nev.) is the Senate majority leader.

The Congress is unlikely to declare payday lending illegal. Instead the industry's demise would most likely come through legislation that greatly reduces the horrifically high, triple digit rates they charge for their money -- to the point where they couldn't make a profit given store overhead and the losses they invariably rack up loaning money to people so desperate for cash they're willing to pay a fee that works out to a 391 percent annual interest rate, if not higher in select states. Missouri, for instance, where the payday lenders can charge an APR of 652 percent .

The payday lenders and their close cousins, the check cashers (pretty much every big check casher is into payday, and these days payday lenders are increasingly getting into check cashing), have been feeling jittery for a few years now. I joined the check cashers for their annual meeting in Las Vegas in October, 2008, where the group's top Washington lobbyist, Bill Sellery, warned the assembled about the gathering dark clouds. Sen. Dick Durbin (D-Ill.) had introduced legislation imposing a 36 percent cap on the rates a payday lender could charge. That meant by law they would be able to charge no more than $1.38 for every $100 a customer borrows for two weeks rather than $15 or more. Others in both the House and Senate had proposed similar rate caps. Barack Obama, early in the Democratic primaries, had come out four-square in favor of a rate cap. The putative next president might not have brought up the issue again on the campaign trail but, as another speaker said during a break-out session in Las Vegas, "just seeing it there on his web site is scary."

Durbin reintroduced a rate cap in 2009 but, with a global economic crisis and health care, his bill didn't go anywhere. The Durbin rate cap "has not been heard from in committee and is not offered as an amendment to the Senate financial reform bill," according to Jean Ann Fox, who has been monitoring the payday industry for the Consumer Federation of America since the mid-1990s. In the current debate, Durbin, now the Senate majority whip, has been championing the causes of those paying high fees on debit cards and those poor souls facing both foreclosure and bankruptcy .

Yet Dubin has hardly removed himself entirely from the payday fight. Sen. Kay Hagan (D-NC) lists him as a co-sponsor (along with Chuck Shumer, D-NY) on a payday lending amendment that demonstrates that there's more than one way to reign in the lending practices on the economic fringes. Hagan's amendment leaves alone the rates a payday lender can charge but limits borrowers to six loans a year. That would reduce revenues at the typical payday lender, according to Rick Steier over at The Motley Fool, in a column titled "Storm Clouds Brewing for Payday Lenders ," by between 33 and 40 percent.

There's a certain brilliance to the Hagan proposal. I've spent time with more than a dozen payday lenders over the past couple of years and almost to a person they talk about the single mom who needs $300 to fix her busted car to get to work or the warehouse worker with a sick kid but no cash to cover the deductible. Hagan's amendment is clever in that it takes the payday lenders at their word: that theirs is an essential product that those on the bottom of the economic pyramid need in case of an emergency.

Any more than six payday loans in a year seems no longer an emergency product but a financially destructive way of balancing the monthly checkbook.

Last week, Hagan's office released a press release declaring the Senator "confident the amendment will get a hearing," but with Harry Reid eager to deliver a bill that the President might be able to sign by Memorial Day or thereabouts, time is running out for any new amendments.

Yet that's not to say the payday lenders might escape victorious. Both the House financial reform package approved last December and the Senate bill now seemingly on the verge of passing include a consumer financial protection agency. That's the last thing the payday lenders want -- a new national bureau that would monitor financial products sold to consumers. Another Durbin amendment - co-sponsored with Jack Reed (D-R.I.) -- would expressly give this new agency the authority to cap the rates that payday lenders and others (pawnbrokers, those in the instant tax loan business) could charge.

A final issue that needs to be hammered out: the size of those businesses that would be monitored. As written, this new watchdog agency can bring enforcement actions only against large non-bank financial service companies, with no definition of what "large" means. Chuck Shumer has an amendment that would give a consumer financial protection agency authority over all non-bank lenders, including payday lenders, regardless of size.