Payday Lenders Pay Off the System So They Can Keep Ripping Off Borrowers

Yves here. We believe that anyone who has had working in or lobbied for payday lenders, unless they have become a whistleblower, has no business ever being in public service. The public needs to reject anyone with that background. They need to pay a price for preying on the desperate and poor.

By Tina Dupuy, whose columns are published in over 100 newspapers. Follow her on Twitter at @tinadupuy. Originally published at Capital and Main

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.

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.

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  1. Just Ice

    Elizabeth Warren has floated the idea of the post office again offering short-term loans at a cap of 30 percent APR.

    Why not grants (actually partial restitution) to the poor so they cease being poor? Or at least so poor?

    And does not Liz realize that 30% is usury in anyone’s book? Even Calvin thought interest should be limited to 5%.

    Is Liz just another would-be-savior of the banks from themselves?

    1. Vatch

      The credit card companies often charge interest in the neighborhood of 30%, so I suspect that Sen. Warren just wants to bring the payday loan industry into the same range of interest that is used elsewhere in the financial world. Since payday loan fees are typically equivalent to annual interest rates well over 100%, I think that a limit of 30% is a huge improvement.

      Yes, 30% is usurious, but sometimes we have to take baby steps.

        1. Vatch

          No sarcasm. Look at the Wikipedia entry on “Payday loan”, and you’ll see just how bad things currently are. A maximum annual interest rate of 30% would be an enormous improvement. A postal bank offering such a service would drive the parasitic payday loan companies out of business. That seems like a win to me.

          1. Just Ice

            “A postal bank offering such a service would drive the parasitic payday loan companies out of business.”

            No, it would drive them to 29% APR.

            I reckon quite a few could survive at 29%.

            More parasitism on the poor is not the answer or is Liz clueless about how government-subsidized private credit creation both robs and now disemployees the poor?

              1. Just Ice

                Government should not be in the usury business. If the poor need help then GIVE it to them or at least loan it to them at 0%. It’s the rich who should pay the highest interest rates when the banks are a government-subsidized cartel, not the lowest.

                Of course, banks should not be subsidized to begin with. Then the poor and other non so-called creditworthy might be able to save in real terms even if they can’t get credit.

          1. Lambert Strether

            I think it would be simpler with a chip embedded under the skin. After all, you can’t lose that, like you can a cell phone. Or drop it. I smell unicorn!

            Adding, you could get the chip embedded for free, in exchange for a keen corporate tattoo.

    2. David

      That caught my eye as well.

      In the Huff post op-ed that Sen. Warren authored, that most seem to reference, I can’t find anything about a 30 percent cap. Maybe the Senator is being misattributed.

      Also, why isn’t Gov. Moonbeam (Brown) running for President?

      1. Vatch

        The source for the 30% rate may be a Postal Service Inspector General report in which the proposed rate is actually 28%. I don’t have the URL for the report, but here’s an article:

        A report by the Postal Service inspector general suggested the government agency could allow consumers to borrow up to 50 percent of their paycheck at an annual interest rate equivalent to 28 percent, a fraction of the triple-digit rates common in payday loans.

        1. David


          Here’s the report. After a quick scan, the rate is discussed as part of an example.

          If the Postal Service charged a $25 upfront loan fee and a 25 percent interest rate, the borrower would pay off the loan in 5 ½ months, paying a total of $48 in interest and fees across the life of the loan. That is less than a tenth of the fees charged for a typical payday loan of the same size…

          And the public-private partnership,

          …To be clear, the Postal Service should not aim to take customers away from mainstream banks and credit unions. To the contrary, the mainstream financial services community would be a beneficiary of a successful suite of postal financial services and products for three key reasons: partnerships, payments, and new customers.

          …The Postal Service would rely on the financial sector to provide the backend
          for some of these services, including providing Postal Cards, setting up and
          managing web and mobile access, servicing the accounts and loans, and possibly
          funding and holding the loans on their balance sheets. This could add up to substantial
          new revenue for the Postal Service’s financial institution partners.

          …The Postal Service could create a “win-win” situation by partnering with banks and other
          organizations to provide financial products and services to new customers. Postal
          financial services could complement the current offerings from banks by helping banks
          reach customers in new geographic areas, by offering products to customers who were
          not previously a main focus of banks, and by helping some customers transition to
          traditional savings or checking accounts. Moreover, a partnership would highlight what
          each partner brings to the table. The Postal Service offers trust, a vast physical network,
          and other critical assets. Banks offer reliability, expertise, and competence when it
          comes to financial transactions. They also could provide valuable knowledge that could
          help the Postal Service structure new offerings. The end results could be new services
          for customers, more revenue for banks, and an easier way for the Postal Service to
          expand its presence in the financial services market. In addition, the right partners could
          bring much needed startup cash to the table as part of the deal, overcoming the Postal
          Service’s current funding limitations…

          …One important note of caution: the Postal Service should be very mindful to ensure that no partnership damages its reputation. The level of trust the Postal Service has earned from the public is an unmatched asset, and one that should not be jeopardized.

          Could this be a way for the big banks to get access to lower income/higher fee customers while putting the risk on the backs of the taxpayers?

          1. Yves Smith Post author

            The credit card business is so concentrated that smaller banks have to use the infrastructures of the biggest providers.

            I hate to tell you, but in the modern environment, absent a Sanders presidency and a big change in Congress, there is no way you will see a consumer lending product that undercuts credit card rates (the 24% and up) to weak borrowers. The best you can do is put payday lenders (300% to 400% a year) out of business.

            The unbanked are charged absolutely rapacious fees on EBT-type products. Undercutting the banks on that would be a big benefit to poor customers, even though the rates still look high. Plus I am not sure whether the plan you looked at is the original, or a competing, more bank friendly one.

    3. Sam

      What is considered a high interest rate? IS 10% too high? Is 15%?
      I like the idea of grants, but if they are not gainfully employed, a person who is poor may need it regularly. Would you tie that grant to gain technical education? To get out of high cost debt? To pay for healthcare?

      My concern with Liz’s proposal is 1) Post offices are not geared to differentiate between who needs the money and who doesn’t – even though 30% is high, it is 2X better than your payday lender – some relief being better than none
      2) Post offices need to be funded by tax payers – Republicans wouldn’t agree – how do you fund it? Higher taxes? Esp. when education, infrastructure is already hurting for gap funding? You can forget about military cuts, tax breaks to hedge funds and wasteful govt. expenditure
      3) Post offices are not geared for collections – what happens when someone is late or cannot pay? Do they have to declare bankruptcy for this debt to be forgiven?

      Giving someone money for relief is fair, but that doesn’t solve the problem of gainful employment. The adage about teaching someone to fish rather than giving them a fish couldn’t be more true. Empower rather than money power.

      1. cwaltz

        Many of the poor are gainfully employed. The idea is to lend money to those with a paycheck(or some form of income.) Those without some form of revenue coming in would need to be sent to social services.

        I’m guessing you’ve never needed a payday loan. Addressing your points 1) Payday lenders are hardly equipped to differentiate between who needs money and who doesn’t either. You essentially bring an id, a paystub, and a bank statement. They don’t care if you want it to replace tires or buy beer. 2) part of the point of this is to create another service and as a result another revenue stream. 3) If the US postal service were to go into banking they could potentially tie it into the IRS to recoup money lent that isn’t returned as promised. The VA system does this if you can’t pay your bill. The money is taken out of any money you’d be refunded.

  2. diptherio

    Chiming in from Nepal, where it’s actually a decent hour ;-)

    Title loans are another slimy industry the operates similarly to payday lenders…only they take your car if you’re late making a payment on their 300%+ APR loan. It’s amazing to me that people can do this stuff and still look at themselves in the mirror.

    I’ll add that credit unions are another good option for us poor folk. Mine, for example, only requires $5 to open an savings account and another $5 for checking. They provide an automatic $200 line of credit for every checking account with a 12% APR. Most everyone should have at least one CU that they are eligible for. I assume the Post Office will never make loans again, as that would make far too much sense, so CUs will probably be the best bet for most people.

  3. Mike

    I don’t think there should be caps on rates. It’s not taking of advantage of poor people, it’s people that are just too stupid to pay high rates. People have no problem buying alcohol before food or getting their bodies plastered with tatoos instead of paying bills and buying groceries or buying an i phone and big screen tv. You can’t have legislation to prevent stupidity. You can’t help those that can’t help themselves. And you can’t save everybody…. Let the laws of nature prevail. The pareto principle is everywhere folks.

    1. David

      80% of the world’s problems seem to be coming from 20% of the population. If we are going to punish people for their stupidity, let’s start at the top.

    2. cwaltz

      Let me guess you’re an “expert” on poverty. It’s swell how you think lenders should be allowed to take advantage of people with addiction issues(and let me be clear anyone who is spending money on booze instead of food has an alcohol PROBLEM. But hey let’s compassionately compound those problems by charging them up the backside for having the audacity to be sick.)

      By the way there are poor people out there that fall behind because their $300 paycheck barely covers those bills you blithely insist they don’t pay. They end up borrowing money because they need new tires for their cars to pass inspection or because they had to miss a day at work because their kid was sick and they don’t get paid sick days. They’re always one disaster away from falling down. They aren’t stupid, they’re labor is undervalued. The only law of nature being applied is the law of greed by those that have no problem paying them poverty level wages and others like you who wouldn’t know empathy if it bit you in the butt and say hey “it’s not really taking advantage of people to make them pay 300% interest rates because Fox News says these folks deserve it.”

      1. abynormal

        Bravo cwaltz!

        Dear “I don’t think” Mike, two letters will resolve your conditioning… I F

        “if… says: ‘Do not be greedy, be generous’, you may inwardly interpret this in such a manner that you will develop a greed for generosity”
        Idries Shah, Learning How to Learn: Psychology and Spirituality in the Sufi Way

  4. Adam Eran

    I’m told the Anglicans have put payday lenders out of business in the U.K.

    Meanwhile, local religious alternatives to payday lenders are timidly exploring making such loans. Ordinary banks do fractional reserve lending (lend more than they have on deposit), but these guys will only lend what they have on deposit.

  5. FluffytheObeseCat

    Nice try. Here’s my policy recommendation: Fuck the “law of nature”.

    It is not in our best interest as a nation to have a weak legal/regulatory system that promotes sharp dealing. The vicious consumer financial “innovations” of the past 2 decades ( i.e. obtuse contracts for services that are choked with “fine print” favoring the more powerful party) are nothing new in the modern world; similar crap was characteristic of “capitalist” business practice in the 19th century.

    I’m well above average when it comes to economic self-protection. I can manage in a world in which all major purchases* are fraught with peril. I do it by consuming not just prudently, but consuming far less of many things than I would otherwise choose to. I drop subscription services rapidly, and buy them rarely. I rarely purchase electronics or household appliances, and do so in as pinch-penny a manner as possible (second hand is my friend). If fair dealing between large producers, service providers and their customers had remained at the level that prevailed in my parents’ day, I’d buy more of many things, and I’d buy them new. I would enter more contracts for services, and stay with them longer.

    I’m one of hundreds of thousands of Americans who already do less “consuming” overall, not just because of poverty, but because it’s no longer worth the risk of loss without recourse. Our retreat from the formal economy is more your loss than ours. (No doubt of this; those of us who protect ourselves vigorously from the formal consumer economy usually do so silently. Only soon-to-be broke airheads are out in public, touting the virtues of unfettered “capitalism”.)

    We have contract law and financial regulatory frameworks — developed over the past 4 centuries — for a reason. Without these legal constructs, you would know the rule of “nature” far better than you do now, & better than you could ever wish to.

    *(either goods or services)

    1. Carla

      Oh, I’m all for “the law of nature” as long it dispatches Mike, post haste.

      (Have you noticed how people who invoke “the law of nature” somehow never think it applies to them?)

  6. McWatt

    A way back in the 70’s all states had usury laws. They varied from state to state but not by huge amounts.
    As I remember the company charging the highest rates at the time was Sears. An almost usurious 21%.
    Now main stream credit card companies have rates as high as 33%. Also, interest on credit cards was tax
    deductible at this time and credit was limited by the companies themselves who refused to take on deadbeats.

    1. Carla

      IIRC, the interest limit in Ohio in the ’60s was 8 percent; anything above that was usurious, and usury was illegal.

    2. Yves Smith Post author

      Yes, it was all undone by a Supreme Court decision that basically allowed credit card providers to offer products across state lines, making state usury laws irrelevant. States started competing to increase permissible rates so as to attract card operations centers. That is why Citigroup has big credit card operations in South Dakota to this day. They were the most permissive early on.

  7. Jamie Boarman

    “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.

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