WASHINGTON — When Richard Cordray convenes his first field hearing Thursday in Birmingham, Ala., as the director of the new Consumer Financial Protection Bureau, the site, setting and subject matter couldn't be more appropriate.
In the city that witnessed some of the bloodiest confrontations of the civil rights era, Cordray will hear testimony on the payday loan industry, which has acquired a reputation as one of the bad boys of the commercial credit world.
Assailed by some for enticing low-income customers into a cycle of repeat borrowing at high interest rates, payday lenders have drawn the ire of state regulators nationwide. Their penchant for setting up shop in poor minority neighborhoods has made their business model a target for civil rights activists as well.
Industry supporters say payday lenders provide much-needed short-term credit to consumers who are largely underserved by banks and who can't borrow cash from friends and family.
When compared with alternatives such as bouncing checks or paying re-connection fees on utilities, they argue, short-term payday loans — which often demand repayment within weeks — are a good deal, despite interest rates that can run upward of $15 to $20 for every $100 borrowed.
Years of attacks by consumer advocates, unfavorable court decisions, tighter state regulations and the recession have taken a toll on the industry. After reaching a high of more than 24,000 in 2006, the number of payday loan stores fell to roughly 19,600 in 2010, according to reports by industry analysts.
Seventeen states and the District of Columbia have outlawed high-interest payday loans, which allow cash-strapped workers to borrow against their next paychecks.
In Missouri, community, religious and civil rights groups are trying to collect 92,000 signatures to force a statewide ballot initiative that would cap interest on payday loans at a 36 percent annual percentage rate.
"This is a Missouri issue that our Legislature has not been able to solve," said David Gerth, the executive director of Metropolitan Congregations United in St. Louis. "We know that voters want it, so we're taking it to the ballot."
In Alabama, which has more than four payday lenders for every McDonald's restaurant, the industry faces no major statewide attack, thanks to a powerful lobbying presence in the Legislature, said Stephen Stetson, a policy analyst with the Arise Citizens' Policy Project, an anti-poverty organization in Montgomery, Ala.
"We're the Wild, Wild West for lending products down here," Stetson said of his home state. "It's really anything goes."
Ninety-three of Alabama's 1,105 payday loan stores are in Birmingham, a city still reeling from a declining tax base and the loss of thousands of steel-industry jobs. Last month, Birmingham city council member Lashunda Scales convinced her colleagues to impose a six-month moratorium on new payday loan stores.
With the momentum from Thursday's field hearing, Alabama may well be tugging at the welcome mat the industry has long enjoyed.
"We're very excited about the possibility of the federal government exercising some regulatory control on these dangerous products," Stetson said.
Industry representatives say such criticisms are unwarranted. In fact, most customers are satisfied with the product, said Jamie Fulmer, vice president of Spartanburg, S.C.-based Advance America, the nation's largest non-bank provider of cash advance services, with 2,600 stores in 29 states.
Among providers of short-term credit — such as car-title lenders and pawnshops — state-regulated payday lenders provide the most transparent, easy-to-understand terms and conditions, Fullmer said.
"I would challenge you to find a more fully disclosed product in the marketplace," he said.
Used mainly by people who don't have credit cards, payday loans are small, short-term loans, usually for a few hundred dollars, that are guaranteed by borrowers' upcoming paychecks.
A customer who seeks a $500 payday loan would get the money only after writing a check for that amount plus finance charges, which the lender would hold — typically for about two weeks — until the borrower's paycheck comes through.
The lender then cashes the check to pay off the loan and interest. If the borrower's paycheck isn't enough to pay back the loan and the fees when due, the lender usually extends the loan or "rolls it over" by simply having the borrower pay the interest charges.
But doing so means the fees keep accumulating, making the final payoff even more expensive.
"You end up getting on a debt treadmill," Stetson said. "It's sort of like quicksand. You get pulled in and you can't get out."
Fulmer said capping interest rates on payday loans was a bad idea because lenders couldn't be profitable at the 36 percent annualized rate that many states have adopted. That would force lenders out of business and drive borrowers to unregulated Internet payday lenders with much higher rates.
Fulmer plans to attend the Birmingham hearing. He said he was encouraged that regulators, consumers and industry representatives would have a forum to discuss the importance of credit access for low-income workers and how best to provide it.
Under terms of the 2010 Dodd-Frank financial legislation, the consumer bureau couldn't regulate the payday loan industry and other non-bank entities that provide financial products until its director was in place. As Republican senators were blocking Cordray's confirmation, President Barack Obama used a recess appointment to install him last month.
Cordray's first order of business was to launch the bureau's non-bank supervision program, from which Thursday's hearing springs.
Consumer advocates hope that the bureau will use its authority to scrutinize industry loan records and marketing materials and gauge their compliance with federal truth-in-lending laws. They also want the bureau to develop new rules for industry practices deemed unfair, deceptive and abusive, said Jean Ann Fox, the director of financial services for the Consumer Federation of America.
Unlike with other non-bank businesses, such as mortgage lenders and debt collectors, Congress gave the consumer bureau the authority to supervise payday lenders regardless of the size of the company.
"We take that as a sign that Congress meant this to be a priority supervisory focus of the agency," Fox said.
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