Payday Lenders Pay Off the System So They Can Keep Ripping Off Borrowers
“How do you spell your name?” asked the beltway woman staring at her laptop in the lobby of a lavish Southern California resort. Was she Googling me? I tried not to panic. Instead, playing up the jetlag, I quipped that I really did know my name by heart and gave her one of my business cards that said I was a consultant. Then I realized she was typing my name to put on my badge. Casually she handed me my lanyard, schedule and swag bag.
I was in!
Why are reporters barred from attending the Community Financial Services Association of America (CFSA) annual conference? Why all the secrecy? The organization says full disclosure and transparency are part of their best practices – but no media or streaming are allowed at its annual shindig. This is a $46 billion dollar industry based on subprime (they now call it nonprime) customers — what are their get-togethers like? Not long ago I went to the La Costa Resort and Spa in Carlsbad to investigate. Since I said I was a consultant, I told people I was here for “research.” My line was that I was taking the temperature of the industry.
There has to be a good reason they’re afraid of journalists.
The first day of panels I was scanning the breakfast buffet for members of congress before I crammed into a banquet hall. The crowd inside was part Jos. A. Bank two-for-one sale and part Herbalife educational seminar. All business.
After the national anthem there was a video featuring Missouri Congressman Blaine Luetkemeyer congratulating the CFSA on its 15th anniversary. (Luetkemeyer’s name appeared nowhere on the schedule, printed materials or the app. ) After peppering his address with the phrase “federal bureaucrats” and grumbling about who should be fired at the Department of Justice for its Operation Choke Point initiative, he closed with, “We want to work with you and make sure it’s not hurting you.”
The industry spent more than $13 million on lobbying and campaign contributions in the 2014 election cycle. In Washington, payday lenders are treated like a mistress you say you’ll leave your wife for – but won’t take out in public.
“Some call us bottom feeders, loan sharks and parasites, but we’re a lawful business!” This was the well-worn message to attendees from various participants. It was less informative than it was an exercise in cognitive dissonance. Group therapy for those cursed with a conscience.
Why are payday lenders hated? Mainly because they’ve managed to squeeze $46 billion annually out of an anemic class of underrepresented and marginalized human beings. All the world’s major religions agree on two things: The Golden Rule is right and usury is wrong. In the modern world we live (and die) on credit, but still are repulsed by predatory lending.
Payday lenders offer Faustian bargains to the desperate. You’ll pay some “legitimate businessman” $400 for that $100 repair to your mid-’90s Neon. With rollover options some borrowers have paid up to 1000 percent APR. We tend to dislike people who see abject crippling poverty and think, “How can I make money off that?” Because it’s not so much a cycle of debt, which is arguably a mortgage, for the lowest on the economic scale – it’s debt by a thousand cuts.
Only Congress or state legislatures can implement APR caps for loans. These lenders, who also call themselves “advancers” to skirt some state laws, have repeatedly and publicly cried out, “We can’t stay in business with a cap of 30 percent APR!” It’s literally saying that if they don’t rip people off, they will go out of business. In short, their business is ripping people off. They shriek “Persecution!” at any regulation, but tout their regulation-granted legal status as a badge of legitimacy.
What’s clear is that payday lenders want us to think of them as victims of Big Meanie Government. Operation Choke Point was a directive by the DOJ to banks to be wary of reputational risk from tobacco, ammunition and payday lenders. In a bizarre and tone-deaf campaign called the Faces of Operation Choke Point, owners of shuttered businesses have lamented and, in some instances, wept about their plight.
“I thought the promise of our country was about supporting all of us, small business especially, and the right to do things that are legal,” says Orange County payday lender Allison Deguisne in an online video.
In the panel on Operation Choke Point an attendee shook his fist, demanding that someone at the DOJ should lose their jobs: “Heads will roll!”
Then, privately over happy hour whiskies, one financial manager admitted to me that Operation Choke Point cleared out a lot of the bad actors when it was deployed two years ago. It improved the industry, he said. And this is a realm of some very shady practices. The Hydra Group, for example, in 2014 got busted doing cash-grab scams, according to one complaint. Hydra wired money into customers’ accounts and then extracted fees. “There are bad apples in every industry,” was the cocktail pivot to the next subject.
If the goal of CFSA is to legitimize payday lenders, then the DOJ apparently did a better job at weeding out the particularly egregious players. This admission was such a stunning reversal of everything said at the podium, I had to ask around and see if the financial manager wasn’t just a contrarian outlier. Yes, a lawyer for the industry confirmed, Operation Choke Point killed lenders that needed killing.
The other talking point is that there’s a genuine need for the lenders’ product. It’s estimated that there are 68 million Americans who don’t have a bank account. Payday lenders see themselves as the only thing standing between the desperate and the real criminals who’d take advantage of them.
“If you have a better idea, then show us! I’ll be the first to embrace it!” said CFSA president Dennis Shaul, in one of his many speeches at the conference.
Elizabeth Warren has floated the idea of the post office again offering short-term loans at a cap of 30 percent APR. In California, Governor Jerry Brown just signed a bill allowing nonprofits to make small no-interest loans up to $2,500 without onerous regulation. There are alternatives to bilking poor people. Like not bilking poor people.
My takeaway from breaking bread and bon mots with payday lenders for 72 hours is that this industry thrives in a bubble of poor-shaming (aka, “personal responsibility”) bromides and legal maneuvering. This has to be a fun place to be a lawyer, great to be a lender and depressing to be a customer.