Progress Illinois

The last time a local congressperson tried to amend a bill creating a Consumer Financial Protection Agency (CFPA), the intent was to protect lenders against stricter regulations. Illinois' Luis Gutierrez is taking a different approach. According to Politico, Gutierrez may soon introduce a bill to help protect borrowers from some of the worst abuses of the payday loan industry. From an article today:

Illinois Rep. Luis Gutierrez, a longtime foe of the payday industry, is considering offering a payday-specific amendment to CFPA legislation when it reaches the House floor that would cap interest rates on payday loans at 48 percent — and also force lenders to provide a 90-day fee-free repayment plan if a borrower couldn’t meet the original terms.

“We think it’s important that we give the clearest, most specific guidelines and instructions to our new consumer protection agency as possible. And we think that if there is an actor in the nonbanking financial institutions arena ... it is the payday lenders. Some of the most egregious violations in the consumer section occur under their watch,” Gutierrez said.

We might quibble with calling Gutierrez a "longtime foe" of payday lenders. But regardless, this proposed amendment represents a dramatic -- and welcome -- shift for the congressman.

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Last week, the House Financial Services Committee Chair Barney Frank (D-Massachusetts) finally rolled out a draft proposal (H.R. 3126) to create a consumer protection agency that would be tasked with regulating the risky financial products -- subprime mortgages, credit cards, payday loans --  that have brought American consumers to their knees. Considering that entire city blocks are mired in foreclosure and thousands of households are buried in high-interest rate credit card debt, it's not surprising that there's overwhelming public support (PDF) for the federal government to provide oversight of the get-rich-quick instruments cooked up by Wall Street. But after months of deliberation, the proposed bill is weaker than many had hoped. Even so, banks are still unsatisfied, arguing that the reforms are too cumbersome.  And it appears that Illinois Rep. Melissa Bean (D) is lending them a hand by proposing to strip the Consumer Financial Protection Agency (CFPA) of even more regulatory power. Politico reports:

[M]oderates, who are members of the centrist New Democrat Coalition, are unhappy with proposed bill language that would force federally chartered firms to comply with state consumer protection laws. The moderates want to maintain the status quo, in which financial institutions that elect to have a national charter are exempt from additional state consumer protection laws.

Rep. Melissa Bean (D-Ill.), a lead negotiator for the New Democrats, told POLITICO on Tuesday that their position on pre-emption would most likely be offered as an amendment rather than changed by Frank in the existing bill, though talks are still ongoing.

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During her tenure as attorney general, Lisa Madigan has worked vigorously to protect Illinois residents abused by deceptive mortgage lending practices and "mortgage rescue" scams.  Now she is taking on one of the nation's largest lenders, Wells Fargo, for allegedly discriminating against black and Latino homeowners:

Attorney General Lisa Madigan filed the lawsuit against Wells Fargo & Co. Friday in Cook County Circuit Court.

The suit alleges that Wells Fargo sold the minorities high-cost subprime mortgage loans while white borrowers with similar incomes received lower-cost loans.

For some background on this issue, look no further than the recent Chicago Reporter series on Wells Fargo that we've previously highlighted. According to their data, 49 percent of loans received by Chicago African-Americans in 2007 were low-cost subprime mortgages. They were not distributed just to low-income borrowers either -- 34 percent of black borrowers earning $120,000 or more in annual income received subprime mortgages that year. By comparison, only 22 percent of white borrowers earning less than $40,000 annually received similar loans.

This isn't just an Illinois issue, either. In Baltimore, city officials filed a federal lawsuit claiming Wells Fargo dragged hundreds of Baltimore residents into foreclosure and cost the city tens of millions of dollars in taxes and city services.

The AP reports that Madigan will ask the court to rescind the contracts and grant "full restitution" to the exploited consumers.

Rep. Judy Biggert has made it crystal clear that she'd rather protect the interests of the banking sector than those of Illinois consumers. The Hinsdale Republican's alternative to the the creation of the Consumer Financial Product Agency (CFPA) is to keep consumer protection under the jurisdiction of the current regulatory bodies. But Rep. Luis Gutierrez thinks that's exactly the problem. Talking to Politico, the chairman of the House Committee on Financial Services says existing regulators did little to stop the lending abuses that precipitated the current economic crisis and will continue their current behavior unless a new independent agency to safeguard borrowers from harmful financial products is established:

The seven banking regulators that have consumer protection power have “fallen asleep at the wheel,” said Rep. Luis Gutierrez (D-Ill.), who chairs the financial services subcommittee with jurisdiction over the issue.

Under the status quo the banks are fighting for, “it takes the Fed 14 years to use its legislative powers to stop predatory mortgage practices that have already destroyed our economy. That’s how long it took.”

As of yesterday, Rep. Barney Frank (D-Mass.) is pushing back the mark-up of the House bill that houses the CPFA proposal. But members of his party aren't letting the issue die.

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Earlier this week, we highlighted efforts by the Woodstock Institute to drum up support for the creation of an independent Financial Product Safety Commission tasked with regulating unsafe financial products -- an idea championed by Sen. Dick Durbin. The banking industry is up in arms about the proposed legislation, which they falsely argue would restrict what types of mortgages, loans, or economic services Americans "can and can't buy." And they are being aided in their efforts by Illinois' own Rep. Judy Biggert and her fellow Republicans on the House Financial Services Committee, whose alternative to the Democratic plan would keep consumer protection under the jurisdiction of the current regulatory bodies. The Wonk Room's Pat Garafalo offers his critique:

If the financial meltdown taught us anything, it’s that existing bank regulators are simply too far removed from the action on the ground to adequately police consumers and giant, complicated financial institutions simultaneously (which is also why individual states need to be allowed to go beyond federal regulation). Consolidation of the bank regulators is fine, but it won’t make them focus any more of their time on consumers. A new agency, focused solely on consumer protection, will hopefully address that imbalance. The banks, though, want to preserve the status quo and the Republicans have thus far been willing accomplices to achieving that goal.

Using footage from a July 14 hearing, the Wonk Room team also compiled the following clip, which illustrates how Biggert's language closely mirrors that of the banking industry officials testifying in favor of the status quo:

Determined to curtail the financial industry's stranglehold on American consumers, Sen. Dick Durbin began pressing months ago for the creation of an independent agency that would protect consumers from predatory practices. Reining in the banks' extraordinary political power on Capitol Hill hasn't been easy. In what seemed like a sign of progress, legislation to create a Consumer Financial Protection Agency (CFPA) surfaced in the House last week. But consumer watchdog groups such as Illinois' own Woodstock Institute (WI) aren't ready to cheer yet.

The reason? Since the proposal was initially floated by the White House, a key safeguard has been stripped from Massachusetts Democratic Rep. Barney Frank's bill (HR 3126). The provision in question would have left the modernization of the Community Reinvestment Act (CRA) in the hands of the newly-created watchdog agency -- rather than the financial services industry. Letting Wall Street-interests control the rewrite, WI argues, would weaken the expansion of loans to borrowers and communities of color. And they say allowing federal banking regulators to continue to enforce the CRA would have the equally negative effect of stifling development in impoverished communities.

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Defenders of the payday loan industry often suggest that their products are valuable because they reach a population systemically overlooked by the banking sector. In other words, they fulfill the surging demand for short-term loans in low-income communities. But as the legislative fight over payday loan reform advances in Washington and Springfield, it's worth remembering one crucial aspect of the payday loan business model: The industry creates demand for its own products by ensnaring borrowers in unmanageable debt. A new study released this week by the Center for Responsible Lending (CRL) sheds some necessary light on the topic.

According to their research, the fees required to take out an initial high-interest loan "virtually guarantees" that low-income customers will experience a shortfall before their next paycheck. Of course, that necessitates more short-term credit, which means consumers routinely take out additional loans to cover their first. In fact, the authors found that three-quarters of industry's loan volume is generated by "re-borrows." And a staggering 94 percent of customers take out new loans within 30 days of covering their initial expenditure.

CRL put out a video press release explaining their research, which was based (PDF) on the number of days between successive loans made to individual borrowers in Florida and Oklahoma, two states that have databases in which each payday loan transaction is entered. Watch it here:

Rep. Luis Gutierrez has spoken at length about the clout the payday loan industry wields on Capitol Hill. In fact, during a hearing before the House Committee on Financial Services (which he chairs), the Chicago Democrat admitted that implementing a 36 percent cap on all consumer credit transactions is "not possible" because of the industry's lobbying power. He further told the AP, "While they may not be JP Morgan Chase or Bank of America, they've very powerful. Their influence should not be underestimated."  The New York Times and Stephen Colbert, among others, took Gutierrez to task; after all, it was he who ushered a neutered payday loan reform bill through his committee while simultaneously accepting at least $29,900 from the payday loan industry last election cycle.

Gutierrez' position frustrated us as well. In April, we wrote that he should reject funds from payday lobbyists as he tries to reform their practices:

If Gutierrez really believes that payday loans should be banned (as he himself said in the committee hearing on this bill), then he should lead by example.  Maybe then other legislators would be emboldened to stand up and, gradually, the industry's influence might wane.

Now, according to Chicago Public Radio's Chip Mitchell (who has done some solid reporting on the issue), the congressman has agreed to do just that.

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Last month, we wrote about the defeat of State Rep. Julie Hamos' bill to regulate the use here in Illinois of consumer installment loans -- a longer-term, high-interest financial product that caught fire among certain payday lenders after the passage of a 2005 bill aimed at their shorter-term loans.  As we noted, Hamos' measure was steered to an unfriendly committee and ultimately defeated after eight of the 11 committee members voted "present."  Today, Crain's Greg Hinz devotes his column to the matter and provides some more detail on the political connections of the payday loan industry's Springfield lobbyists:

Like Victor Reyes, a former top political aide to Mayor Richard M. Daley who now lobbies for payday lenders. Four of the six Dems who didn't vote are Hispanic, and Mr. Reyes ran the legendary Hispanic Democratic Organization.

Like Rob Uhe, who lobbies for a Dallas-based payday lender and happens to be a former counsel to Mr. Madigan, who could have put the Hamos bill in another committee but let it go to a panel where its fate was clear from the beginning.

Like former Democratic state Rep. Bob Molaro, another payday loan lobbyist. Or, my personal favorite, Kim Morreale, who is married to state Rep. Michael McAuliffe, R-Chicago, and lobbies for payday lender AmeriCash. (One GOP source notes that Ms. Morreale was in the lobbying biz before she got hitched, but it must be nice to review the roll call with someone a pillow away.)

Oh, did I mention that groups opposed to the Hamos bill have donated more than $540,000 to Illinois pols since 2000? The biggest recipient (appropriately): Rod Blagojevich. The second-highest, former state Rep. Brent Hassert, R-Romeoville, now lobbies for — you guessed it — a payday loan group.

Read the whole thing.

Efforts to rein in the payday lending industry may have stalled in Springfield last month, but the battle in Washington is just heating up. After holding a hearing in April, Rep. Luis Gutierrez will likely bring his Payday Loan Reform Act of 2009 up for a committee vote this session. And there are rumors that Sen. Dick Durbin's more comprehensive anti-usury bill might be moved as part of a larger finance reform package being assembled by Senate Banking Committee Chairman Chris Dodd (D-Conn.).

To be sure, both lenders and consumer advocates are gearing up for a lobbying push. As we noted last week, representatives from the online payday lending industry are already leaning on legislators to reject any interest rate caps on the short-term loans. As a counterweight, the Center for Responsible Lending has unveiled a new campaign titled "400 Faces," which aims to show "the media, lawmakers, and the general public how this so-called service is nothing but a scam." The organization is collecting stories from those who have been caught in a payday lending debt trap and posting short documentaries on YouTube. Here is their first:

Activists opposed to Gutierrez' bill, which Stephen Colbert lampooned on his Comedy Central show in April, have also created a Facebook group "Stop H.R. 1214." That can be reached here.