Payday Lenders Shriek Away From Reform
MICHEL MARTIN, host:
I'm Michel Martin and this is TELL ME MORE from NPR News.
Just ahead, it's the 40th anniversary of Earth Day. And we're going to bring you a couple of stories about some new paths for the green movement. We'll tell you about efforts to get better-quality food, raised in a sustainable way, into urban neighborhoods that often have very little fresh food. And we'll also look at how the singles ministry at one Atlanta church decided to shift their focus from just getting together to living greener. That's in just a few minutes.
But first, another type of green story, as in money. President Barack Obama went to New York today as part of a final push on behalf of a package of proposed new regulations for financial services. He had tough words for an audience that included many Wall Street players.
President BARACK OBAMA: I believe in the power of the free market. I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings. That's part of what has made America what it is. But a free market was never meant to be a free license to take whatever you can get, however you can get it.
MARTIN: Obviously, the affected industries want to have a say in how this goes forward. But one group is fighting especially hard to get themselves exempt from the new proposed regulations. That's the payday loan industry.
You've probably seen ads for them. They offer short-term loans for people who need cash. These lenders say they're offering an important service to people who really need it, whom other financial industries have ignored. But critics say they prey on poor people with interest rates that can run into the triple digits.
We wanted to talk more about this, so we've called Gerri Guzman. She's the executive director of the Consumer Rights Coalition. She says it's an organization that advocates for all Americans to have access to credit. It's funded by the payday lending industry. Also with us is Bill Cunningham. He's the chief executive officer of Creative Investment Research. That's an organization that keeps track of minority-owned and minority-serving banks. Welcome to you both. Thanks for joining us.
Mr. BILL CUNNINGHAM (Chief Executive Officer, Creative Investment Research): Thank you very much.
Ms. GERRI GUZMAN (Executive Director, Consumer Rights Coalition): Thank you for having me.
MARTIN: I think we should begin with some disclosures. Gerri, your organization, as I understand it, is primarily funded by payday lenders. That's correct?
Ms. GUZMAN: We receive support both from individuals who are concerned about consumer issues, as well from the financial service firms and industry.
MARTIN: And, Bill, are you funded by the banks?
Mr. CUNNINGHAM: No, we're not. We're a fully independent investment research and management firm.
MARTIN: Okay. And, Gerri, you have a unique perspective on this issue because not only are you representing the industry, but you say that you actually have used payday loans. In fact, you wrote about this for the daily congressional newspaper The Hill. And you say that - I once had very few financial options. And in my case, a payday loan saved me from losing my home. And that you were aware of the cost and decided that this was the best and least expensive option at the time. Could you just tell us a little bit more about that? You really had no other options?
Ms. GUZMAN: Not that were as simple and short-term. Short-term access to credit is a real issue when you're strapped or in an emergency situation, as was my case then. Now, I'm a homeowner. And at the time I had taken a leave of absence from my full-time job to be my mother's primary caretaker prior to her death. So I was on a fixed budget and the unexpected happened.
And I was given the choice of possibly losing the tenants I had rented my home to while I was caring for my mother or paying a bounce fee charge or ruining my credit by entering into another option of overextending my credit cards. So, a payday loan actually was the most simple, transparent service that was available to me.
MARTIN: And I understand that you feel that these services are valuable. The question I have for you is, why shouldn't these industries be regulated just like other financial service industries are regulated? The issue before us is not whether these lenders can operate at all, but whether there will be some federal oversight. So why shouldn't there be?
Ms. GUZMAN: Oh, no, we fully support all industries that deal with finance and credit, the regulation on them. What we're asking for, we want them to be regulated, we want them to be transparent and simple and fair, which we find -my consumers find the payday lending industry or cash advance industry is in most cases. Now, there will be some shady practices that aren't regulated and always go undetected, but that's the society that we live in. But the mainstream loan industry...
MARTIN: But you say in your piece that people will suffer - you say in your piece the people who will suffer most if Congress passes financial reform legislation that would create a massive new federal government agency to regulate consumer financial products. So, again, I'm asking you why shouldn't the government provide oversight for these financial institutions?
Ms. GUZMAN: I believe that we - my consumers welcome the oversight and we certainly encourage it. We support the Consumer Financial Protection Agency. The problem is when there are unrealistic regulations that put them out of business, therefore eliminating the credit options for hard-working Americans.
MARTIN: And, Bill, what's your take on that?
Mr. CUNNINGHAM: My take is that the payday lending industry really does not need to exist in the United States of America. The average payday borrower pays $800 to borrow $325. Payday lending is illegal in 14 states. So, what does that tell you? The U.S. military in 2006 issued a warning to every member of the military about payday lending practices. They've issued regulations that would block the proximity of payday lenders to military bases. So, that tells you that this is a bad, bad practice.
What we propose is that regular mainline financial institutions get involved in this market and develop products that are fair, safe and equitable, that approach this sector.
MARTIN: Well, Gerri makes a point, though, that a lot of these institutions could operate in these communities now and don't and that these payday lenders are filling a void that exists. So, what about that?
Mr. CUNNINGHAM: Well, you know, any, in any free market there are bad actors who will come in to fill a gap. That does not necessarily justify the existence of those bad actors. What that suggests is that society needs to take a step back and take a look at the needs that are being generated in that space and develop fair and equitable solutions to meet those needs.
So, these are just - she's absolutely right. They stepped into a space, a void that was left by mainstream financial institutions. It does not mean that they are the best solution for that void.
MARTIN: So, would it be fair to say that you, as I mentioned, you do research on financial institutions and you're not an advocate or a lobbyist, per se, but would you argue then from your vantage point that this kind of oversight that is proposed is needed for this industry?
Mr. CUNNINGHAM: Oh, absolutely. Absolutely. It's part and parcel of a decline in ethical standards that we've seen in the financial services industry. When I talk about institutions filling a gap, that's one of the gaps. One of the gaps is a decline in ethical standards that leads people to create financial products that are so predatory that they in some cases, you know, you have 400 percent interest rates. This decline in ethical standards leads institutions to create those types of products, where, say, 20, 30, 40 years ago, when ethical standards were a little higher, they would not have dared to create these types of financial products.
MARTIN: Well, Gerri, what about that?
Ms. GUZMAN: I can tell you that it would be hopeful at best to expect the mainstream financial institutions to do business with my consumers because they don't. They merely cherry-pick who they want to do business with. The FDIC I've heard say many times they are asking and encouraging mainstream Wall Street to do business with my consumers, or to hardworking Americans who are struggling. It's not happening.
Therefore, there aren't the options. What will happen in the case of - like the case of the military, if people even have the option of a credit card, they will get further in debt, further in over their head with their credit cards. And at some point their credit will be cut off. They'll have their utilities turned off.
MARTIN: I take your point. I take your point about the negative effects of people not having access to credit, but what I still don't understand is why you oppose the kind of oversight for your industry that is proposed for other institutions that serve consumers. And you say in your piece that you do. So that's what I don't understand is, why shouldn't people have some entity to oversee whether the paperwork is transparent, whether the terms are fair and whether there's appropriate redress if there is a conflict? Why shouldn't that be the case in your industry as it is envisioned for others?
Ms. GUZMAN: Michel, I think the key word you use is fair. I think we welcome the regulations. We need the regulations on all consumer products. The problem is, the regulations on the payday lending industry sometimes are not fair. They're comparing apples to oranges. We're talking about a fee for a short-term loan per hundred dollars loaned, not an APR.
MARTIN: Okay. But your industry is - your industry is lobbying to be opted out of regulation by this entity entirely. That is the stated position of the leaders of your industry and that's what you say in your piece.
Ms. GUZMAN: No. My industry? I'm a consumer industry. We want regulation. We just don't want the services we choose to be regulated to the point where they can't be available to us as an option.
MARTIN: Okay. Bill Cunningham, I'm going to give you the final word. I gave Gerri the first word, I'm going to give you the last word. What do you think should happen now, as we see the final compromise adopted by the Senate or that is envisioned in the Senate does not - allows the - this anticipated entity to write rules for the industry, but not to enforce them without petitioning to enforce them.
Mr. CUNNINGHAM: Certainly, you know, we oppose the inclusion of the Consumer Financial Protection Agency as part of the Federal Reserve. We think that it should be a fully freestanding entity that can write regulations and impose them. This industry is crying out for regulation and for, basically - the consumers need to be protected. There's no question about it.
MARTIN: Bill Cunningham is chief executive officer for Creative Investment Research. That's an organization that does research on minority owned and minority serving banks. As he told us, he does not accept a funding from the banking industry. He joined us in our Washington, D.C. studio. Gerri Guzman is the executive director of the Consumer Rights Coalition. She says that's an organization that works to give all consumers access to credit. As she told you, it is in part funded by the payday lending industry and she joined us from NPR West in Culver City, California. We'll have a link to the piece that Gerri wrote for The Hill blog so that you can read it for yourself. Just go to NPR.org, click on Programs, then on TELL ME MORE.
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