As the Consumer Financial Protection Bureau embarks on a rule-making process that payday lenders estimate will put 70 percent of their industry out of business, a former Florida lawmaker who was instrumental in helping the Sunshine State pass one of toughest laws protecting consumers from predatory lending is warning that the federal proposal is too heavy-handed, strips states of their rights and deprives consumers of emergency lending options.
“People need access to small-dollar loans if they don’t have credit, let alone good credit, and we found it was important to allow them to have that access,” Kendrick Meek, a former Democratic congressman from Miami, told The Washington Times. “Our payday lending law in Florida has been successful because it maintains access to small-dollar loans and also protects the citizens of Florida.
“A federal rule preempting the Florida law would be a big mistake. When you see a law that is being effective, and preventing consumers from getting themselves into financial trouble, when you have something that has been proven and is working, it would be a big mistake to ignore that,” he said.
Yet the CFPB seems intent on doing so.
In April, the entire Florida delegation within the U.S. House of Representatives wrote a letter urging CFPB Director Richard Cordray to use Florida’s payday lending law as a model for national regulation. In a written response, Mr. Cordray said the intent of the federal agency’s actions would be to coexist with strict state laws and establish a federal floor. Mr. Cordray said he would look at the work in Florida, but he didn’t commit to using the state as a model.
Mr. Meek said the agency hasn’t contacted him to consult on the new rule-making process, and the CFPB has conducted no studies on what is working within states. Mr. Meek wrote a piece of payday legislation that failed during the 2000 session. A year later, with the backing of a few more lawmakers, Florida enacted its payday lending law.
The CFPB, which was created five years ago this month as a part of the Dodd-Frank financial reform bill, in March proposed rules to curb abuses within the payday loan industry. The agency aims to end what it calls “payday debt traps” by limiting the interest rates lenders can charge, by prohibiting borrowers from taking out more than one loan at a time, and by requiring lenders to assess borrowers’ ability to pay. About 12 million Americans take out payday loans each year, according to CFPB data.
Those who have experience writing payday lending bills, such as Mr. Meek, worry that the CFPB’s proposed rule would end up choking off a legal avenue to credit to those most in need.
A survey last year from the Federal Reserve found that two-thirds of Americans making less than $40,000 annually would have to sell something or borrow money to pay for a $400 emergency expense, making payday lending an attractive option.
“It’s important when we look at access to loans that are $500 and below, that we look at it in a way as a tool for individuals to be able to take care of their financial responsibilities legally,” Mr. Meek said. “There is a part of our society willing to provide loans illegally that will create more crime and corruption, not only in local communities but nationally. We don’t want to find ourselves in a situation promoting that.”
Florida’s payday lending law was enacted in 2001 after more than five years of state elected officials investigating the industry, talking with consumers who took out loans, payday businesses owners, and consumer advocates. In the end, they were able to negotiate one of the toughest payday lending laws on the books without stifling the industry or a consumer’s access to credit.
Florida’s law prohibits rollovers — that is a customer taking out a another payday loan to cover the original loan — and limits a borrower to a single advance of no more than $500. Payday lenders that operate in Florida cannot charge interest fees that exceed 10 percent of the original loan, and the terms of the loans can range from seven to 31 days. A statewide database, monitoring the industry and those who take out loans, also has been established.
Under Florida’s law, if borrowers can’t repay a loan, the bill provides for a 60-day grace period, provided they agree to take part in credit counseling and set up a repayment schedule.
“This [law] represents a compromise, because nobody really likes it,” Billy Webster, chief executive officer of Advance America, the Spartanburg, South Carolina, industry giant that operates more than 100 payday loan sites in Florida, told the Orlando Sentinel at the time. “The consumer groups didn’t get everything they wanted, and neither did we. But this will help weed out the bad operators.”
State Sen. Lee Constantine, the legislation’s lead author, said the rate of payday loan defaults has fallen from about 40 percent before the reforms to less than 5 percent.
“It has worked incredibly well,” Mr. Constantine, a Republican from Altamonte Springs, told the Sentinel. “Now we have a very regulated industry, where the vast majority of companies are responsible and compliant. What we have in Florida is far and away the toughest law in the nation.”
After the law went into effect, a five-year study of Florida payday loans showed that 34 percent of customers who took out at least one loan in the first year didn’t take out any loans in subsequent years. Also, a single loan in Florida is for about $395, and the fee is not greater than $39.50.
Nationwide, payday lenders typically charge $15 in fees for each $100 borrowed. After two weeks, those fees are charged each time the loan is rolled over, which is not the case in Florida because there are no rollovers.
Florida regulators fear that the CFPB will go too far and preempt their hard work in reforming payday lending.
“The current CFPB proposal would probably eliminate access to small loans and credit, and will force consumers to turn to more expensive and potentially unlicensed financial service providers, subjecting them to greater risks of financial fraud and identity theft,” Drew J. Breakspear, commissioner of the Florida Office of Financial Regulation, wrote in a June 1 letter to Mr. Cordray.
“The expectation is that the proposed regulatory regime would force many payday lenders to close. This would cause the loss of thousands of jobs across Florida. Many Floridians use the services provided by payday lenders. Lack of access would leave many destitute and desperate,” Mr. Breakspear wrote.
Mr. Meek agreed.
“The Florida delegation and the top consumer affairs commissioner in Florida have recommended to the CFPB that when they look at regulation at payday lending they adopt the Florida law. It’s 14 years old that’s been proven over the test of time and as a tool that has worked for the consumer and the industry,” Mr. Meek said.
“To have access to up to $500 is very, very important, especially for working families and single-parent households and young people. Not many American families have the ability to loan one another money to be able to make ends meet to the next paycheck. These loans are literally nonsecured risks on behalf of the lender but convenient for those that need it.” he said.
• Kelly Riddell can be reached at email@example.com.
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