The effort to replace the payday lending industry with a government-sponsored alternative
You see them as you drive through many of the rougher parts of cities across America. Sitting among pawn shops, auto title loan stores, and coin-operated laundry facilities in strip malls, storefront payday loan stores are often more prevalent than banks, McDonald’s, and gasoline stations in urban communities.
These stores attract customers with their flashing neon lights and offer short-term loans to customers who need up to $500 before their next paycheck. These are America’s payday lenders, and they may not be around for long.
In 2013, I began looking into what appeared to be a coordinated effort by the Obama administration to get rid of the payday loan industry. I did not expect to find a well-oiled campaign complete with collusion between anti-industry lobbyists and federal regulators, the manipulation of government agencies’ missions to advance this campaign, and the use of taxpayer money for the purpose of destroying a legal, free-market industry.
There are three aspects to this campaign, and while it is complex and may seem like a storyline out of “House of Cards,” the individual aspects of the campaign are all well-documented and very public.
The campaign is designed to destroy the existing private industry, develop a network of service providers to offer taxpayer-subsidized loans to previous payday lending customers, and distribute taxpayer funds to the new network of service providers to enable them to offer loans at a lower rate than the private market.
The effort to destroy the private industry that currently offers short-term loans is, like the other components of the campaign, a multifaceted approach. In this case the campaign comprises regulatory rulemaking, the development of a covert program to undermine the ability for businesses to access vital services, and an unrivaled grassroots network of activists at the local and state level.
CONSUMER FINANCIAL PROTECTION BUREAU
Recently, the Consumer Financial Protection Bureau rolled out a slew of long anticipated rules to govern the payday lending industry. Dennis Shaul, president of the Community Financial Services Association, the payday lending trade association, said the CFPB was tasked to “regulate payday, not annihilate it — and so much of what they are proposing represents an annihilation.”
From anti-payday lending activists and industry advocates alike, there is consensus that these rules will make it almost impossible to continue doing business with the same business models they have been using. Modifying their business models to comply with the new federal regulations will drive up compliance costs, which will ultimately increase costs for the consumer.
The government either (1) hopes this increase in cost will make payday loan products unappealing to borrowers (ignorant of the market forces that govern borrowing behavior), or (2) expects these compliance requirements will make it too costly for lenders to continue operating and thus close their doors, taking away a valuable resource to communities that have been abandoned by traditional banks.
Either way, the CFPB, as an agent of its collaborators and creators at the Center for Responsible Lending, is working aggressively to destroy the private lending industry.
OPERATION CHOKE POINT
This covert program initiated by the Department of Justice and the Federal Deposit Insurance Corp. was uncovered by my team at Wise Public Affairs in Spring 2013. While looking into the CFPB, it was discovered that unusual pressure was being placed on banks and payment processors to end relationships with certain industries. Those industries included gun dealers, ammunition sellers, tobacco retailers, and short-term lenders.
This program intimidated banks, payment processors and other service providers into ending business relationships with these businesses or face additional scrutiny and regulatory enforcement action. Eventually, the public spotlight on this program forced the administration and the FDIC to distance itself.
Congressional oversight hearings headed by Rep. Sean Duffy, R-Wis., gave an opportunity for Democrats and Republicans alike to air concerns over the lack of due process and the abuse of executive authority that were the basis for this program. The program, under a different name, is now believed to be administered by the CFPB, outside of congressional oversight.
THE AFR NETWORK
In states throughout the country, local and state grassroots activist groups have been developed over the last 15 years to replace the Association of Community Organizations for Reform Now network that previously existed. This new network of progressives is led by the group Americans for Financial Reform and Sen. Elizabeth Warren, D-Mass. The goal of this network is to advance progressive issues at the local level, especially those that deal with income inequality, minimum wage and corporate welfare.
Supported by labor unions and progressive donors, this network works to rally support for legislative changes to prohibit short-term lenders from operating in their communities. Over the years, these organizations have signed onto numerous joint coalition letters supporting Operation Choke Point and the CFPB, attended rallies and field hearings to support local legislation, and worked tirelessly to oppose elected officials who support the industry.
The influence of this network is underestimated by the payday lending and banking industries and their influence can be seen in a recent assault against Democratic National Committee Chair Debbie Wasserman-Schultz in Florida. A simple letter stating her opposition to the new payday lending regulations at the CFPB triggered an attack from this network that included running a progressive candidate against her in a primary, hundreds of thousands of dollars invested to unseat her, and an aggressive and hostile campaign to label her as “Debt-Trap Debbie.”
The power and influence of this network, which has been developing behind the scenes for decades, cannot be understated and resembles a progressive version of the Tea Party — an unexpected insurgency that pushes the party platform to the extreme and challenges the power of party leaders.
When looking at this issue from a political perspective, it doesn’t make sense that the administration would target an industry and a product that is predominantly used by its core demographic of voters. Why would it take away a product that so many of the voters who elected its members depend on in times of emergency?
In this instance, either the administration and its allies believed they could effectively convince American consumers that they were trying to protect them from “big, bad, greedy payday lenders” (a strategy unlikely to work since most of the borrowers know the employees of their local storefronts and have personal relationships with them), knew the industry was so disjointed and uncoordinated that there would never be an effective effort to call attention to the practice, or had an alternative product that they would force payday lending customers into. All three are correct.
Over the last seven years, the administration has taken a program within the Department of Treasury, the Community Development Financial Institutions Fund (CDFI Fund) that historically helped communities with housing loans, and has transformed the CDFI network of more than 1,000 organizations into a network of payday lenders.
Originally trying to tie into an existing program called Bank On California, started by then-San Francisco Mayor Gavin Newsome and bank executives, the program worked to get consumers into the mainstream banking system and out of alternative products like payday loans. With support from organizations like the Corporation for Enterprise Development and Americans for Financial Reform, the program was given the name Bank On 2.0.
President Obama’s plan was to nationalize this as a federal program, and he called it Bank On USA. He requested more than $50 million in his 2011 budget proposal to make it a reality. Unfortunately (or fortunately for consumers and taxpayers), due to budget gridlock on Capitol Hill, Bank on USA was never funded. Instead, President Obama chose to use existing CDFI funds to provide the grants necessary to enable the program to move forward.
The CDFI program is simple. The government certifies non-profit organizations (some of which are the same organizations in the Americans for Financial Reform
Network) as Community Development Financial Institutions (CDFIs). The Department of Treasury, through the CDFI Fund, distributes grants to those organizations to provide short-term, small-dollar loans. The government grants provide the capital for the loans and pay for the marketing and overhead of providing the loans.
This program has been initiated in communities throughout the country, and is frequently touted in legislative hearings and city council meetings as the best alternative to payday loans. What is not disclosed is that many of the requirements for getting a loan through a CDFI are cumbersome and require the borrower to give employees of the nonprofit lender — and by extension the U.S. government — access to their bank accounts and financial documents so the lender can provide oversight and “guidance” on smart financial spending.
Important to note, the largest recipients of CDFI grant money since President Obama took office are organizations created and run by Martin Eakes, CEO of Self-Help Enterprises. They have received well in excess of $123 million since 2009, according to the self-reporting by the CDFI Fund. Eakes was also the driving force behind the creation of the CFPB in the Dodd-Frank Act, is the co-founder and CEO of the Center for Responsible Lending, and is a frequent collaborator with the CFPB on rules and regulations that adversely impact his chief competition: the alternative financial services industries.
Sen. Elizabeth Warren, one of the chief architects of this campaign to destroy the payday lending industry, threw Washington for a curve in 2014 by suggesting that the U.S. Postal Service get into the business of banking and providing short-term (payday) loans. The introduction of the USPS banking proposal was in response to the inability to get congressional approval for the Bank on USA program in 2009 and 2010.
By running the loan program through the USPS, it would become another Government Sponsored Enterprise and would be easier to get passed through Congress if she could persuade her colleagues on Capitol Hill to support it. She couldn’t.
Democrats and Republicans alike saw this as an ill-conceived idea, saddling a struggling agency with another service that would not be profitable, would require more staffing, training and infrastructure, and ultimately lead to an even bigger financial burden for the Postal Service. Warren occasionally brings up the idea and has recruited fellow Sen. Bernie Sanders, D-Vt., to the cause.
The CDFI Fund is already distributing any and all taxpayer money that the administration can allocate to the CDFI Small Dollar loan program. This program, which is basically what the administration intended the Bank on USA program to be, is openly described as the answer to higher-interest private payday loans. It can be expected that the program will expand as we near the end of the Obama administration.
CFPB PENALTY FUND
Part of the unchecked authority of the CFPB is to act as a law enforcement authority against fraud in the financial services marketplace. It has taken this authority seriously. So seriously, in fact, that it has seemingly made it its sole mission, despite the legislative mandate in Dodd-Frank to educate consumers about financial services products. Through coercion and corporate intimidation, the CFPB has extracted hundreds of millions of dollars from banks, short-term lenders, debt collectors, trade schools and the service providers that support these businesses.
Some of the enforcement actions are surely legitimate, but very few have ever been litigated. The fear among those industries under the thumb of the CFPB is too great and their power to discipline a business so uncontrollable that these corporations rarely fight back.
When the corporations pay their pizzo, the money gets put into the Civil Penalty Fund, supposedly to be returned to defrauded consumers. But Congress has had a very difficult time getting an accounting from Director Richard Cordray or the CFPB as to where that money goes and how much has been returned. By statute, part of the money is allowed to be used for “public education campaigns” such as those run by Martin Eakes, the Center for Responsible Lending, and Americans for Financial Reform.
Payday loans are not popular with anyone other than the consumers who use them, and most consumers of the product would obviously rather not be in a financial situation to have to use them. I certainly don’t advocate anyone use them, but I also believe consumers are smart enough to make those decisions for themselves. That decision should not be made in Director Cordray’s very expensive ivory tower next to the White House.
The open market has allowed other safer, more consumer-friendly products to emerge through the natural process of innovation spurred by demand. Whether or not payday loans are popular is not the question. The collusion between the government and anti-industry activists to destroy a legal industry and subsequently bilk the American taxpayer out of what could amount to billions of dollars is unconstitutional and a clear abuse of power.
The Dodd-Frank Act and its creation of the CFPB have only enabled and supported this campaign and the leaders of this effort, including Martin Eakes who stands to benefit financially from this campaign and must be amazed at the lack of push back they are getting from the payday lending industry and its supporters. Now there are new stakeholders —the taxpayers — who will end up footing the bill when this administration achieves its goal.