A Democratic senator is leading the way to allow payday lenders to escape basic consumer protections. In a rare bipartisan effort in July, Sen. Mark Warner, a former venture capital executive representing Virginia, introduced the Protecting Consumers' Access to Credit Act of 2017 (S.1642) with three cosponsors: two Republicans and one Democrat. The bill would allow lenders to ignore state interest-rate caps by partnering with a national bank. Most states have interest rate caps of 36 percent, but 15 states have none at all, and the bill could mean that millions of Americans would face rates of 350 percent or more.

In addition to traditional payday lenders, newer financial technology companies want to become bigger players in the high-interest loan business, the Huffington Post reported Tuesday. Warner is an outspoken proponent of fintech, and should his bill become law, these companies will be able to partner with major banks, evade interest rate caps and profit off of low-income borrowers facing soaring interest rates. Companies such as LendingClub, Prosper and LendUp will be able to expand their high-interest lending operations.

According to the Consumer Financial Protection Bureau (CFPB) — which was established under the Dodd-Frank Act in 2010 to help defend consumers against the fraudulent practices of financial firms that led to the global financial crisis of 2008 — over 19 million American households use payday loans, which include an initial fee of around $15 to $20 per $100 borrowed. After two weeks, 70 percent of these borrowers have to then take out a second loan to cover the first. In many cases, that loan gets “rolled over” into still more loans, and borrowers can get saddled with effective interest rates of over 350 percent on the original.

Since last year, payday lenders have been concerned about a new rule that was under consideration by the CFPB requiring lenders to assess whether a potential borrower can afford to pay back a loan within 30 days, thus avoiding “payday death traps,” among other measures. The rule, which would seriously disrupt the payday lending business model, was finalized in October but won’t go into effect until mid-2019. Warner and some cosponsors say they support this CFPB rule. In May, as the CFPB was considering these rules, House lawmakers inserted a provision in its Financial Choice Act — which repeals parts of Dodd-Frank — that would hobble the CFPB’s ability to enforce its rules on payday lenders. The bill passed the House but sits in the Senate Committee on Banking, Housing, and Urban Affairs, of which Warner and cosponsor Pat Toomey (R-PA) are members.

Now, President Donald Trump is expected to appoint current Office of Management and Budget Director Mick Mulvaney as interim director of the CFPB, leaving the agency in the hands of someone who wants to do away with it.

On Thursday, Sen. Elizabeth Warren (D-MA), who originally proposed the formation of the CFPB, expressed her fury on Twitter.

Mick Mulvaney thinks the @CFPB shouldn’t exist. A member of the GOP anarchy gang has no business running the agency. This is a giant middle finger to consumers. https://t.co/rDJ3BR2siO — Elizabeth Warren (@SenWarren) November 17, 2017

A Deep Divide Over How To Protect Consumers’ Credit

In September, 152 state and national organizations, including the Center for Responsible Lending, the National Consumer Law Center and the NAACP, wrote a letter to Congress urging members to vote against the Protecting Consumers' Access to Credit Act. “This bill could open the floodgates to a wide range of predatory actors to make loans at 300% annual interest or higher,” wrote the groups. “Fintech lenders also should not be allowed to make loans that exceed state interest rate caps… The bill wipes away the strongest available tool against predatory lending practices.”

Diane Standaert, director of state policy and executive vice president at the Center for Responsible Lending, told International Business Times, “What’s at stake is pretty simple: either allowing 300 percent interest loans or not. Siding with consumers or not. You have to look at the more than 150 groups opposing this versus who’s pushing the bill. There’s a clear the line in the sand about what’s at stake and who really benefits.”

On Oct. 5, a group of business associations wrote a letter to four of the House and Senate sponsors, thanking them for introducing the legislation and agreeing that without the bill, creditors risk their loans being invalidated once they are sold to secondary buyers, making banks lend less frequently and at higher interest rates. The groups signing the letter include Financial Services Roundtable, Independent Community Bankers of America, American Bankers Association and the U.S. Chamber of Commerce.

Rep. Gregory Meeks (D-NY), a cosponsor of the House’s companion bill — which passed in the House Financial Services Committee on Thursday with nine Democrats voting for it — explained how he thinks the bill will help low-income borrowers: “The bill corrects a court case, Madden v. Midland , that closed doors to affordable credit for New Yorkers.” In 2015, the Second Circuit Court of Appeals ruled that non-bank entities, like payday lenders, that assign debt originally issued by a national bank must adhere to the interest rate caps of the state where the borrower lives. “A joint study by law professors from Stanford, Fordham, and Columbia found that since Madden upended over 200 years of settled law, access to loans facilitated through bank partnerships with fintech firms disappeared for individuals with credit scores of 644 or less in the Second Circuit,” Meeks said. “A recent Philadelphia Fed study found that loans facilitated through bank-fintech partnerships made available better priced credit for underserved markets. My bill preserves those opportunities for individuals who need them most.”

Steve Kelly, press secretary for Toomey, told IBT, "The bill has nothing whatsoever to do with payday lending. Further, payday lenders do not use the bank partnership model, as confirmed by Acting Comptroller General Noreika, and a recent New York Times report. This bill also does not affect the CFPB’s recent rules relating to small dollar lending, nor does it affect [the Office of the Comptroller of Currency] and [the Federal Deposit Insurance Corporation] guidance on bank relationships with payday lenders."

But the contrast between those who support and oppose the bill is stark, with consumer advocates assailing it and financial groups lauding it. The Center for Community Capital at the University of North Carolina at Chapel Hill put out a 2007 study after the state legally ended payday lending. Most of the study’s respondents were “completely unaffected by the ban.” Two-thirds of the study’s low- and middle-class respondents for whom the absence of payday lending had an impact said that this absence had a positive effect on their households, as they had “an array of options they use to manage financial shortfalls.”

However, “There was broad agreement that there is a need for short-term consumer credit that is more affordable and manageable than a payday loan.”

Payday Lenders, FinTech Firms Donated To Bill’s Sponsors

The payday lending industry donates to many House and Senate candidates each election cycle. From 2015 to 2016, companies, corporate political action committees and individuals in the industry gave over $2.8 million to campaigns and independent political groups, 82 percent of which went to Republicans. So far this year, the industry has reported nearly $840,000 in contributions, with over 90 percent going to Republicans.

But regarding sponsors of friendly legislation, the payday lenders do not discriminate by party — both Democrats and Republicans who sponsored the bill are some of the industry’s biggest recipients of campaign cash. In the 2014 election cycle, Warner’s most recent, the primary sponsor of S.1642 took in the fourth-largest total in campaign donations from the industry ($21,500), including a maximum donation of $5,000 from the political action committee of the Community Financial Services Association of America, a major trade group for payday lenders. Warner received other PAC contributions from lenders such as Cash America International and Checksmart Financial.

“Campaign contributions have never influenced Senator Warner’s decision-making on policy matters and never will,” said Warner’s spokesperson.

Warner’s estimated net worth of $238 million made him the wealthiest senator and the third-richest member of Congress in 2015, the most recent year for which the Center for Responsive Politics (CRP) has estimates. In the 2014 election cycle, Warner was the Senate’s top recipient of campaign donations from finance and credit companies.

Cosponsor Toomey, a former currency trader and former president of the “free-enterprise advocacy group” Club for Growth, received the second-highest amount from payday loan donors in the Senate in 2016, his most recent election ($32,900). Maximum donations of $5,000 came from Lendmark Financial Services, trade group National Installment Lenders Association and the Online Lenders Alliance, another industry association. In 2012, a non-election year for Toomey, he still took in the largest amount of payday lending cash in the Senate — $57,250 — including $10,000 from the Community Financial Services Association. This year, he’s gotten $1,000 from the industry. CRP estimated Toomey’s 2015 net worth at about $2.7 million.

In the 2016 election cycle, payday lenders donated $5,000 to the campaign of co-sponsor Sen. Gary Peters (D-MI), a former financial adviser and executive, although his next election is in 2020. CRP estimated Peters’ 2015 net worth at just over $4 million.

Sen. Steve Daines (R-MT) received $6,000 from the PAC of Cash America International in the 2014 election cycle and another $1,500 in the 2016 cycle, according to CRP. Daines was worth $14.4 million as of 2015, according to CRP, making him the 17th-richest senator. In 2012, the senator worked at Rep. Greg Gianforte’s (R-MT) RightNow Technologies, and after Oracle bought the company, Daines made over $2 million by selling his stock options.

Photo: Andrew Bain/Flickr

A bipartisan trio of representatives introduced the companion bill in the House, and all have received campaign donations from the payday lending industry. So far during the current election cycle, primary sponsor Patrick McHenry (R-NC) hasn’t gotten any payday cash, but the campaigns of cosponsors Gwen Moore (D-WI) and Meeks of New York have taken in $5,000 and $4,000, respectively. From 2015 to 2016, Moore received over $16,000, Meeks got $13,000, and McHenry received $5,500 from payday lenders. In the 2014 election cycle, McHenry received over $43,000 from payday lenders in 2014, the fourth-highest total in the House during that session.

Executives and top-ranking employees of fintech firms have also donated to the bill’s House and Senate cosponsors. For example, Moore has received $7,500 in donations from individuals affiliated with fintech firm Elevate, which offers loans with interest rates of up to 365 percent. CEO Ken Rees donated $3,000 to Moore from 2014 to 2016, and Kevin Dahlstrom also gave Moore’s campaign $1,000 in 2014, when he was chief marketing officer of Elevate. Also in 2014, Sharon Clarey, then senior VP of human resources at Elevate, gave $1,000. In 2015, then-chief risk officer and executive VP of corporate development Kathy Boden Holland donated $2,500 to Moore’s campaign.

On Sep. 30 of this year, Elevate CEO Rees donated $5,000 to McHenry’s campaign. One year earlier, Walt Ramsey, then chief risk officer at Elevate, had given McHenry $1,000 and Daines’ campaign $1,500.

McHenry’s office did not return IBT’s request for comment.

Moore’s chief of staff Sean Gard told IBT that “[Moore’s] thinking is what is best for her constituents. She has taken many votes contrary to what some of her donors have asked.”

Meeks told IBT, “No, campaign donations do not impact my legislative activity. In fact, in September, I voted in favor of an amendment to the appropriations bill to protect the CFPB’s small dollar lending rule which was promulgated to stamp out abusive lending practices among financial firms, including payday lenders.”

Some campaign finance experts have found otherwise in recent years. While there are differing views on the influence of campaign donations, several studies have concluded that contributions do influence policy outcomes. A 2012 book by University of Rochester political science professor Lynda Powell found that at the state legislative level, while the effects vary, campaign donations do affect the bill-drafting process.

“I am not arguing that there is much quid-pro-quo influence,” said Powell. “But even the best intentioned legislator receiving money from an interest group is likely to at least listen to what donors have to say. And if you are hearing much more from people who donate money to you, it is hard not to be swayed by the greater body of argument and evidence from donors.” Powell’s study also found that “the access legislators give to lobbyists clearly is biased in favor of campaign donors.”

Another study from 2010 by Baylor political science professor Patrick Flavin found that states with stricter campaign finance laws spend more of their annual budget on public welfare. And the populace appears to have caught on: A 2014 poll found that most voters think members of Congress are more concerned with their donors than their constituents.

Payday Lenders Lobby Congress To Help Expand Their Operations

Research shows that a “particularly effective” strategy for helping shape public policy is a combination of campaign donations and lobbying — and payday lenders and their trade groups don’t just donate to candidates they hope will support legislation that boosts their interests. Three trade associations representing lenders have spent a combined $1.6 million on lobbying in 2017 to lobby Congress on specific legislation and issue areas, according to federal lobbying records reviewed by IBT.

The Community Financial Services Association of America spent over $700,000 on lobbying in the first three quarters of 2017, lobbying the U.S. House and Senate in 2017 on issues including consumer financial protection, short-term lending, payday advance loans, Operation Choke Point — an Obama-era Justice Department program to investigate banks’ business with fraud-prone industries such as payday lending, rules by the CFPB, and a House resolution against a CFPB rule barring financial firms from preventing their customers from joining class-action lawsuits.

The Online Lenders Alliance has spent $840,000 on lobbying so far this year, speaking with Congress and the Executive Office of the President about FinTech, Dodd-Frank and Operation Chokepoint, “ CFPB regulations on short-term lending,” and bills from past sessions relating to lending regulation. The groups lobbying on Dodd-Frank implementation don’t specify the particular provision in question, but their lobbying likely has to do with the provision in the House’s Financial Choice Act hobbling the CFPB and other CFPB-related issues.

In 2017, the Online Lenders Alliance has spent over $112,000 lobbying Congress and the CFPB on Dodd-Frank, small-dollar lending, and a previous consumer credit bill.

Individual companies that have donated to the sponsors of Warner’s Senate bill are also lobbying directly on the same issues. ACE Cash Express, which donated $2,500 to Toomey in the 2016 election cycle, reported spending $460,000 this year to lobby Congress on the House’s Financial Institution Customer Protection Act of 2017 as well a 2018 financial services appropriation bill and other matters.

Elevate has spent over $1.1 million to lobby Congress since late 2013 on credit issues. The company has lobbied on Dodd-Frank implementation, Operation Choke Point, 2014 legislation relating to online lending charters, and CFPB regulations on short-term lending.

Bill sponsors said that they always consult with lobbyists on both sides of an issue. “Our staff meets with a wide range of constituents, groups and advocates, including some who support this bill, and some who oppose it,” said a Warner spokesperson. Meeks said much the same thing to IBT. “As a Senior Member of the House Financial Services Committee, I naturally interact with every stakeholder that has an interest in the bills before the Committee including their opponents and proponents.”

“Yeah, I have met with a lobbyist from just about every financial services stakeholder,” said Gard, Moore’s chief of staff, who has worked in government affairs for the National Association of Bond Lawyers and was previously a broker for online investment firm TD Ameritrade. “I have an open door for anyone so there can never be a question about impropriety. The meetings did not affect the drafting of bill; the congresswoman was added to the bill after drafting.”

While the payday lending bill’s sponsors say they aren’t influenced by campaign donations or lobbying, the people affected by payday lending laws have been clear: voters in several states have approved measures that impose interest rate caps on short-terms loans.

Nov. 17, 4:35 PM: This story has been updated to include comments from the office of Sen. Pat Toomey.