Payday Loans: How All Those ‘Theories’ Really Work

In schools across the country, students are taught about American democracy. Phrases like “separation of powers” accompany charts showing how ultimate power in our country rests with “the people.” It’s a wonderful system.

But democracy is a theory. Here’s how things really work.

In every city in the US, storefront businesses offer “Same Day Cash” or “Easy Credit”. The so-called payday loan industry makes millions of short-term loans every year. The typical cost for a payday loan is 15% for a two-week loan, an annual rate of 390%. In Illinois, most borrowers of payday loans with a term of 6 months have an annual income of less than $30,000. The average amount borrowed was $614, but the total fees were $640, meaning a yearly rate of 234%. A similar type of loan is called a title loan, in which the borrower offers title to a car as security: if the loan is not paid back, the company confiscates the car. These loans typically carry about 300% interest.

The results are predictable, as shown in a report earlier this month about 12 million loans across the US. Only 15% of borrowers were able to repay their loan without borrowing again. Most payday borrowers ended up paying more in fees than the original loan amount.

In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. That was a political response to the financial crisis caused by the reckless behavior of banks and other financial institutions. An important provision of the Dodd-Frank bill was to empower a new Consumer Financial Protection Bureau (CFPB) to oversee payday lenders by enforcing new consumer protection rules. In the House, 92% of Democrats voted for the bill and 98% of Republicans voted against it. In the Senate, one Democrat voted against the bill because he thought it wasn’t strong enough, and only 3 Republicans voted for it.

Senate Republicans then mounted an effort to prevent the newly created CFPB from ever functioning: they vowed not to confirm any nominee to head the Bureau. Richard Cordray was not confirmed as director until 2013.

The CFPB gave the Attorneys General of the 50 states powers to regulate payday lenders. In Utah, Republican John Swallow, chief deputy to the Attorney General, decided to run for that office when his boss retired. Swallow had once been a lobbyist for Check City, a giant payday lender. Swallow wrote an email to payday executives, saying, “This industry will be a focus of the CFPB unless a group of AG’s goes to bat for the industry.” Now he mounted a campaign funded with hundreds of thousands of dollars from Check City and other payday lenders. But that money was hidden behind a series of political action committees and “non-profit” corporations. Republican power brokers in Utah helped Swallow raise these funds and camouflage their purposes.

Not all Republicans lined up behind the payday industry. Three Republican Senators had voted for Dodd-Frank. In Utah, a state legislator had supported legislation barring payday lenders from making loans to people who already had big debts. Swallow’s opponent for Attorney General also wanted to crack down on the payday lending industry. The organizations that funneled money into Swallow’s campaign used negative advertising against both of them. Behind all that unregulated money, Swallow won the race for Attorney General.

The greatly increased use of vast sums of unregulated money to influence political campaigns is a result of the decision of the Supreme Court in the Citizens United case in 2010, which reversed Congressional restrictions on funding on political campaigns and has since allowed unlimited contributions from individuals, corporations and unions collected by “super PACs”. That decision was made by a 5-4 majority of the most conservative Supreme Court justices.

After Swallow’s victory, the IRS began to suspect that some of the support for Swallow came from illegal political campaigning by “social welfare organizations” created by payday lenders’ money. But the IRS became engulfed in controversy when Congressional Republicans accused it of targeting conservative organizations. We have since learned that many types of organizations, not only conservative ones, had been targeted by IRS investigations into whether they were illegally engaging in political activities. With the IRS hobbled by Congressional inquiries, Swallow and his helpers thought they were safe. But Utah legislators began to follow up, and found enough documents to reveal the duplicity behind Swallow’s election. In November Swallow resigned.

 A happy ending? Not yet. Republican-controlled state legislatures in swing states are increasing their efforts to make it harder to vote. In Ohio, Wisconsin, North Carolina and other states, Republicans are reducing the days that polls are open for early voting, especially on weekends, eliminating same-day registration, making absentee voting more difficult, or demanding proof of citizenship, such as a passport. All of these measures have disproportionate effects on the poor, who tend to vote Democratic.

steve hochstadtAdd it all up. Republican legislators try to prevent the government from protecting citizens from payday vultures, use payday money to tilt elections so they can eviscerate any possible regulations, while making it more difficult for the poor and minorities to vote.

Maybe that’s what they mean when they say you can’t trust government.

Steve Hochstadt
Taking Back Our Lives

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Comments

  1. Yomama says

    How about a story about Joe Baca who is running for Congress in California? He has also recently taken a job as a lobbyist for Pay Day. How’s that for conflict of interest?! I’m a Democrat, but this is not the Democrat that I want to see in Congress.

  2. llozano says

    I have friends who fell prey to these predatory lenders. A number of factors contributed to this including having a low paying job; proximity to these lenders and bill collectors harassing them for payment and easy access to other forms of credit. In the end they were able to get out of debt but ended up paying 300 to 500% more than they borrowed.

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