Payday Lenders Exempted in Financial Regulatory Legislation

August 16, 2010

It seems the payday lenders were exempted from federal legislation being drafted that would increase financial regulatory control. Control of the payday lenders became a political pawn in bi-partisan negotiations to create a new consumer protection agency.

The payday loan industry is big business in some states, and it just so happens that Tennessee is one of them. The bipartisan committee working on the creation of the consumer agency has representatives from both parties, Republicans and Democrats, and one of the Republicans is Bob Corker. Corker is a Republican and payday lender political contributions to his campaign fund have been significant.

The implication, of course, is that Corker is being influenced by the payday lending industry, but Democrat Christopher Dodd agreed to the exemption also. Now Dodd finds himself in a position of having to justify his support for the exemption after making so many public remarks about the need for strong regulatory control to be given to the new consumer agency.

Dodd said he agreed to the exemption because committee negotiations had broken down. In an effort to break gridlock, Dodd reluctantly agreed to significantly reducing the amount of control the new consumer agency would have over the payday lenders.

Payday lenders come under a lot of criticism from consumer advocates who believe their practices are predatory in many cases. People agree to pay exorbitant fees and interest rates on small loans secured by an expected paycheck. The consumers using these lenders are usually low income or have bad credit. Consumer advocates believe the federal government needs to regulate the industry to prevent financially desperate consumers from being trapped into a debt cycle.

Under the revised terms of control written into the legislation, the new consumer protection agency would be able to write new rules for all financial businesses and not just banks. The agency could only enforce the rules against nonbank firms though after petitioning a body of regulators yet to be established. On the other hand, as it stands now, the consumer agency could enforce rules that involved banks.

Payday fast cash lending generates billions in revenue each year and employs as many as 77,000 people. A crackdown on their practices would negatively impact their revenue and that is why the industry has diligently lobbied against new regulatory control. But consumer advocates say that if the new consumer protection agency is not able to enforce new rules then business will be “as usual”.

The payday lending industry has been quite vocal about the fact that banks are resisting new regulation while payday lenders are attacked. Yet it was risky behavior on the part of banks that caused the collapse of the global economy. Payday lenders do not want to be singled out just so the federal policymakers can claim they are protecting consumers while banks are spared tighter regulation.

Of course, consumer advocates say the people who are being forgotten are the very ones who need the increased regulation. Payday lenders serve consumers who often lack financial savvy and frequently do not understand the terms of the agreements they are signing. The committee is continuing negotiations even as the lobbyists continue putting pressure on the committee to reduce the ability of the consumer protection agency to enforce rules.