By: Carter Doughtery
July 24, 2012
Payday lenders seek U.S. Oversight to avoid state rules
The Internet's "don't-call-us- payday" lenders are making a bid for more respect in Washington and less control from state regulators.
Firms offering short-term online loans, including Fort Worth, Texas-based Cash America International Inc. (CSH), are ramping up political contributions, hiring lobbyists and asking Congress to largely transfer oversight from states to the U.S. Office of the Comptroller of the Currency. A House committee today will hold a hearing on the proposal, which the OCC itself opposes.
As the $11 billion online loan industry bulks up in Washington, it also aims to shed the "payday lenders" label, according to talking points drafted by Peter Barden, a spokesman for the Online Lenders Alliance.
The memo advised lenders making lobbying visits to Capitol Hill this summer to "avoid using the term 'payday.' Talk about short-term, small-dollar lending."
Behind it all is more spending. The political action committee for Cash America is on pace to double its annual campaign contributions from the $200,000 it gave in 2007, according to federal election records, and the lender is bankrolling a new coalition to push for the legislation.
The core of the bill, sponsored by Representatives Blaine Luetkemeyer, a Missouri Republican, and Joe Baca, a California Democrat, would give the OCC authority to designate lenders as National Consumer Credit Corporations and require the regulator to treat storefront and online lenders equally.
The OCC would be able to preempt state rules based on a legal standard previously introduced by the Dodd-Frank regulatory overhaul. The lending bill, introduced July 18, also would loosen the rules for how short-term lenders disclose the total cost of the loans to consumers.
Lenders are touting the proposal as a way to promote businesses that serve so-called underbanked Americans, who may not be able to get small loans from traditional banks. The firms say the changes would help them compete against Native American tribes and overseas lenders offering loans online.
"On the Internet you have a tremendous amount of competition that does not play by the rules that we do," Mary Jackson, a senior vice president at Cash America, said in an interview. State regulations are "a competitive noose," she said.
For their part, state regulators see the bill as designed to dilute oversight of the industry, said John Ryan, head of the Conference of State Banking Supervisors.
"This is an inherently local business with very local effects," Ryan said in an e-mail. "There needs to be local accountability and oversight."
Representatives from Ryan's group, which includes overseers of banks as well as non-banks like payday lenders and finance companies, are set to testify at the House hearing.
Payday lending refers to small short-term loans originally meant to tide someone over until their next paycheck. At a brick-and-mortar lender, the loans typically are secured by a post-dated check. Online borrowers instead furnish a bank account number for direct debits.
About 35 percent of the $32 billion in small-dollar loans made in 2010 originated online and that share will grow to 62 percent by 2016, according to a Jan. 9 report by John Hecht, then an analyst with JMP Securities, a San Francisco-based investment bank.
Interest rates, measured as an annual percentage rate, can reach 521 percent, according to the Consumer Financial Protection Bureau. Consumer advocates have long argued that the business can trap poorer borrowers in a cycle of debt as they take out new loans to cover old ones.
Criticism of payday lending has prompted some firms to avoid the term. The trade group representing brick-and-mortar payday lenders calls itself the Community Financial Services Association, and in one state is organized as the Kentucky Deferred Deposit Association. Banks including Wells Fargo & Co. (WFC) and U.S. Bancorp (USB), which offer similar products, refer to them as "direct deposit advances" and "checking account advances."
Under the current regulatory system, states have jurisdiction over consumer loans made within their borders. The Dodd-Frank law gives the new Consumer Financial Protection Bureau the ability to supervise, regulate and enforce rules on non-bank financial companies. The bill introduced in Congress this month would in effect give the OCC some joint authority with the bureau.
In testimony prepared for today's hearing by a panel of the House Financial Services Committee, Grovetta Gardineer, the deputy comptroller of the currency for compliance policy, said the bill would "hurt the very population of consumers it seeks to address." The small-dollar loans and other products that would be offered under the new charter are "most prone to abuse" and often targeted at minority populations, she said in the statement.
"These are products and services that the OCC has largely extinguished from the national banking system, and we would not support, license, nor charter an institution concentrating in these services today," Gardineer said.
The legislation wouldn't apply to loans with a term of less than 30 days. Since typical payday loans are for two weeks, the industry maintains that the legislation isn't a payday loan bill.
Cash America's Jackson said that while the industry opposed the exemption, Baca wouldn't otherwise support the bill. Baca spokesman John Lowery did not respond to an e-mail seeking comment.
The bill also would exempt loans with terms under a year from the Truth in Lending Act, which requires lenders to post the annualized percentage rate consumers are paying. Instead, lenders would be able to post the dollar cost of a loan as a finance charge.
Jean Ann Fox, director of financial services for the Consumer Federation of America, said moving away from disclosing the annual interest rate would deprive consumers of a "standard price tag for credit" that has worked well for over 40 years. She called the carve-out for loans less than 30 days "a distinction without a difference."
"To make extremely expensive small-dollar loans with a federal charter, all the lender would have to do is set the term for 31 days," Fox said in an e-mail. "That is no problem for the industry."
Cash America, which reported net income of $135 million on revenues of $1.54 billion in 2011, has been expanding its online presence. An initial public offering of its Internet lending subsidiary, Enova International Inc., is pending.
Jackson said that Cash America wants to "operate on a bigger platform" by lending nationwide. Right now, it only operates in states where it is licensed and its products are legal under state law. She said competitors operating on Native American reservations aren't following state laws and that state regulators have been unsuccessful in lawsuits to gain oversight.
Hecht, now a managing director with Stephens Inc., a Little Rock, Arkansas-based investment bank, said Cash America would benefit from a market expansion because competition is restraining growth in its online business.
"The slowdown reflects maturation and saturation in the market for online lending in the United States," Hecht said in an interview.
Besides increasing its political donations, Cash America has retained Wright Andrews as a lobbyist, according to official disclosures.
Andrews, now with the Washington firm Andrews & Andrews PLLC, previously represented the now-defunct Coalition for Fair and Affordable Lending, an association of subprime mortgage lenders that fought against tighter underwriting standards before the 2008 financial crisis. He did not respond to requests for comment.
Cash America is also one of two companies behind the creation of the Financial Services Innovation Coalition, a lobby group that registered with the Senate on April 1. It was formed to push for the bill, Barden, the online lenders spokesman who is a public relations consultant at Mercury/Clark & Weinstock, said in an e-mail.
The alliance, of which Cash America is a member, has also stepped up its lobbying, and worked to expand the size of the association, according to records and interviews.
It has offered cheaper memberships to newer firms as a way of expanding the group's size, Jer Ayler, president of Trihouse Inc., a Las Vegas-based payday lending consultancy, said in an interview.
The alliance's founder, Mark Curry, the head of Mission, Kansas-based Geneva-Roth Ventures Inc., in 2007 bought a red- brick townhouse near the U.S. Capitol. The alliance and other groups use it for fundraisers, according to invitations published by the Washington-based Sunlight Foundation.
"Some of the politicians react to us," Ayler said. "Some don't want much attention over the fact that we're supporting them."