Profiting From Recession, Payday Lenders Spend Big to Fight Regulation

The influential $42 billion-a-year payday lending industry, thriving from a surge in emergency loans to people struggling through the recession, is pouring record sums into lobbying, campaign contributions, and public relations – and getting results.

As the Senate prepares to take up financial reform, lobbyists are working to exempt companies that make short-term cash loans from proposed new federal regulations and policing. In state capitals around the country, payday companies have been fighting some 100 pieces of legislation aimed at safeguarding borrowers from high interest rates and from falling into excessive debt.

Last year, as the U.S. House drew up a financial reform bill, some lawmakers who were courted by the companies and received campaign contributions from them helped crush amendments seeking to restrict payday practices, a review by the Huffington Post Investigative Fund has found.

The failed amendments would have capped payday interest rates – which reach triple digits on an annualized basis -- and would have limited the number of loans a lender could make to a customer. Working largely behind the scenes, the industry ended up dividing the Democratic majority on the 71-member House Financial Services Committee.

Lobbyists swayed not only conservative, free-market-minded “Blue Dogs” but liberals from poorer, urban districts where payday lenders are often most active. At least one of the liberals threatened to vote with Republicans against the financial reform bill if it restricted payday lenders.

“The payday lenders have done a lot of work,” House Financial Services Chairman Barney Frank (D-Mass.) said in an interview. “They’ve been very good at cultivating Democrats and minorities.”

Now the industry has turned its attention to the Senate and the reform bill being assembled by Senate Banking Chairman Christopher Dodd (D-Conn.), who is offering to abandon the quest for a new independent agency to protect consumers, instead giving the Federal Reserve new policing powers that could extend to payday companies.

Spokesmen for payday lenders say that attempts to rein in their business are misplaced. Short-term cash loans were not a cause of the financial crisis, they say, and as lenders of last resort they claim to provide a critically needed service in an economic downturn.

To convey their message, payday lenders have hired some of the lobbying industry’s top guns. Trade groups have financed studies to underscore the small profit margin on each loan. The groups also have created a database of more than a half-million customers who can be quickly mobilized to persuade specific politicians. The persuasion often takes the form of personal, handwritten accounts from constituents about how quick cash helped them during times of financial need.

Steven Schlein, a spokesman for an industry trade group, the Community Financial Services Association, said the industry’s victory in the House against the proposed amendments was hardly final.

“We were worried,” said Schlein. “But we worked it hard. We have lobbyists, and they made their point. The banks worked it hard, too. But we’re still in the middle of what could be a big fight.”

22,000 Storefronts

Payday loans got their name because many of the small, unsecured loans are made as advances on a borrower’s next paycheck. Operating from some 22,000 storefronts, the lenders specialize in instantly available short-term loans that typically require repayment within two weeks. While interest rates vary, typical fees are $15 to $25 for every $100 borrowed. In Virginia, someone who borrows $200 from one big lender, Advance America, must come up with $247.80 within 14 days; the fee is equivalent to a 623 percent annual rate.