Cash Loan Lenders and States Battle in the House

Fighting businessmen
Cash loan lenders are boosting their political contributions and lobbying efforts in order to get Congress to transfer oversight of their industry from individual states to the U.S. Office of the Comptroller of the Currency (OCC). A House committee heard the proposal on July 24, 2012, despite opposition from the OCC.

The aim of the bill, which is called the Consumer Credit Access, Innovation and Modernization Act, or, more formally, HR6139, focuses on equality, in a manner of speaking. The bill, if passed into law, would give the OCC the power to designate lenders as National Consumer Credit Corporations. Surprisingly, it would also require the OCC to treat cash loan lenders who operate out of physical locations the same as cash loan lenders who only operate online.

A Closer Look at the Rules

Thanks to the Dodd-Frank Act, the OCC is supposed to have the authority to overrule state laws. The industry is claiming that the bill would help Americans who have difficulty obtaining loans by allowing the industry to compete with Native American and foreign cash loan lenders.

“On the internet you have a tremendous amount of competition that does not play by the rules that we do,” said Mary Jackson, senior vice president at Cash America, in a Business Week interview. She also added that state regulations were “a competitive noose.”

Smelling something suspicious, state regulators view the bill as an attempt to dilute the industry.

“This is an inherently local business with very local effects,” said John Ryan, the head of the Conference of State Banking Supervisors. “There needs to be local accountability and oversight.”

Delegates from the Conference of State Banking Supervisors, as well as cash loan lenders and finance companies, testified at the House hearing.

Roughly 35 percent of the $32 billion cash loan industry profits from the year 2010 were originated online. By 2016 it is predicted that share will nearly double to 62 percent according to a Jan. 9 report by John Hecht, a former JMP Securities analyst.

Currently, states have authority over cash loan lenders inside their borders. The Dodd-Frank Act also has the authority to regulate non-banking financial companies, including the payday industry. The bill that is before the House Committee will give some oversight authority to the OCC.

“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,” said Grovetta Gardineer, the deputy comptroller of the currency for compliance policy, according to Bloomberg.

If passed, this new bill would not apply to loans that are for a term of less than 30 days. The industry has rather boldly presented the argument that since most payday loans are for two weeks, the legislation does not concern payday loans.

“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,” said Jean Ann Fox, director of financial services for the Consumer Federation of America. “That is no problem for the industry.”

The bill would also exempt loans with terms of less than a year from the Truth in Lending Act (TIL). The TIL requires lenders to reveal to customers the annual percentage rate (APR) that borrowers pay. Lenders would then be able to simply state the cost of cash loans as finance charges.

According to the Consumer Financial Protection Bureau, APRs on cash advance loans can reach a whopping 521 percent.

New Name Same Business

In an unsurprising marketing move, the $11 billion online loan industry has begun to re-label itself, at least for the purposes of the bill. Lending organizations have begun to rebrand themselves by using alternative names for payday loans. Names such as “direct deposit advances” and “checking account advances” have begun to increase in popularity.

According to a memo by Peter Barden, the spokesman for the Online Lenders Alliance, lobbyists are advised to stray from use of the word “payday” and instead use “short-term, small-dollar lending.”

Charging ahead with this marketing revamp is the political action committee for Cash America which aims to double its yearly campaign contributions from $200,000 in 2007.