Why payday lenders in state can charge interest of 460%
It’s a question I get asked a lot: If California’s usury law says a personal loan can’t have an annual interest rate of more than 10%, how do payday lenders get away with interest rates topping 400%?
A number of readers came at me with that headscratcher after I wrote Tuesday about a provision of Republican lawmakers’ Financial Choice Act that would eliminate federal oversight of payday and car-title lenders.
I discovered the onesentence measure buried on Page 403 of the 589-page bill, which is expected to come up for a vote by the House of Representatives next week.
And get this: If you plow even deeper, to Page 474, you’ll find an even sneakier provision regarding disclosure of CEO pay. More on that in a moment.
Usury, or profiting unfairly from a loan, has been frowned upon since biblical times. As Exodus 22:25 states: “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.”
Leviticus 25:36 makes God’s feelings about exorbitant interest even plainer: “Take thou no usury of him.”
Contemporary lawmakers similarly have tried to make clear that usury by lenders is unacceptable. But, as with most wellintended laws, loopholes followed.
According to the California attorney general’s office, the state’s usury law doesn’t apply to “most lending institutions,” including “banks, credit unions, finance companies, pawn brokers, etc.”
In fact, Article 15 of the California Constitution specifies that the usury law’s rate cap isn’t applicable to “loans made by ... any bank created and operating under and pursuant to any laws of this state or of the United States of America.”
Basically, if a company is a licensed lender in California, it’s exempt from the usury law — which is pretty remarkable when you consider that a usury law, by definition, applies primarily to lenders.
Payday loans (known officially as deferred deposit transactions) are overseen by the California Department of Business Oversight. It allows the maximum payday loan amount to be $300, with a fee of 15% charged by the lender.
What that means in practice, though, is that the borrower faces an annual interest rate of 460% for a twoweek loan. If the loan can’t be paid off in time — and many can’t — the debt can be rolled over into a new loan with new fees.
“Payday lenders’ reason for being is to trap people in an endless cycle of debt,” said Jose Alcoff of the advocacy group Americans for Financial Reform.
According to the Consumer Financial Protection Bureau, more than 19 million U.S. households resort to payday loans. Of that number, almost 70% of borrowers have to take out a second loan to cover the first, and 20% end up saddled with 10 or more loans, one after the other.
The Pew Research Center estimates that the typical payday-loan borrower has an income of $30,000 and ends up in debt for almost half the year. More than $7 billion in fees are paid annually to payday loan firms.
The CFPB has proposed rules requiring payday lenders to make sure in advance that a borrower can repay the loan and still meet basic living expenses, and to make it harder for lenders to roll over the same loan again and again.
Section 733 of the Financial Choice Act would prevent that. It declares that federal authorities “may not exercise any rulemaking, enforcement or other authority with respect to payday loans, vehicle title loans or other similar loans.”
The legislation was written by Rep. Jeb Hensarling of Texas, the Republican chairman of the House Financial Services Committee. According to Americans for Financial Reform, Hensarling received $210,500 from payday loan companies in 2014, making him the largest individual recipient of industry cash.
He’s also received more than $4 million from banks and other financial firms since he first ran for Congress in 2003, according to the Center for Responsive Politics.
It seems safe to say that Hensarling knows a chief executive or three, so perhaps that’s why his bill also includes an Easter egg for those in the corner office.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a new rule took effect in January requiring annual disclosure of the ratio of CEO pay to that of the company’s typical worker.
That’s a stat sure to cause embarrassment because CEO pay has steadily risen while that of rank-and-file workers in most industries has barely budged.
A report last week found that the typical big-company CEO pocketed $11.5 million last year in total compensation, up 8.5% from a year earlier.
On Page 474 of the Financial Choice Act, it says that the bill would repeal “subsection (b) of section 953” of Dodd-Frank.
What it doesn’t say is that DoddFrank’s subsection (b) of section 953 is where the CEO-pay disclosure rule lives.
In other words, the Financial Choice Act quietly does away with the reporting requirement.
“If you didn’t know what you were looking at, you’d never know what it really means,” said Sarah Anderson, global economy project director for the Institute for Policy Studies.
Sarah Rozier, a spokeswoman for the Financial Services Committee, declined to comment on the rationale for the CEO-pay provision. She pointed me instead toward a 147-page summary of the legislation.
On Page 130, it describes the DoddFrank rule as “misguided” and goes on to say it will “impose significant costs and burdens on U.S. companies already laboring under a record-breaking amount of government red tape.”
The summary concludes that requiring companies to disclose how much the boss makes relative to what ordinary workers make is a “costly, burdensome, special interest, nameand-shame provision.”
Anderson countered that there’s nothing costly or burdensome about the requirement. “If they can’t figure out how much they pay workers, that should be a red flag for investors,” she said.
Special interest? Only if you consider millions of American workers a special interest. They’ve experienced no meaningful wage growth since before the 2008 financial crisis. As for name and shame — well, duh. That’s the whole point.