The "Giant Sucking Sound" Recession--What Ross Perot Did Not Tell Us

A month ago I gave testimony at a Texas Senate committee concerning bills to close a loophole in Texas lending law.  Last week I had another opportunity to speak before the Texas House of Representatives Committee on Pensions, Investments, and Financial Services.  The loophole has allowed an abuse of the Credit Service Organization (CSO) law, designed to regulate businesses who help people with bad credit "repair" their credit.  To operate, they need to charge fees, and this law sets the terms for their operation.  They are not lenders, but provide a service.

Unscrupulous lenders came along and decided to create a business model which would make use of this law to prey on borrowers who believe they cannot get traditional loans from banks, credit unions, or consumer credit storefronts.  These lenders claim to be CSOs.  Officially, they are not the lenders.  They have a cozy relationship with a lending organization which operates under the restrictions of the usury laws.  Therefore, the borrower gets a loan at a low rate of interest around 1% per month.  THE CATCH is that in order to get this loan, the payday lender or car title lender charges a CSO "fee" of $20 per $100 for a 10-day or 14-day or 30-day loan.

That "fee" is really interest, masquerading as a CSO fee.  The loans cannot be paid in installments.  If they can't repay the whole amount of the short-term loan, the "CSO" can arrange another loan for another "fee."  Let's get this straight.  On a regular schedule, the borrower pays a "fee" in order to keep a loan from going into default.  The principal does not decrease, and a "new loan" replaces the "previous loan."  Again, the borrower is forced to come up with the entire principle within a few days or face another "fee" to get a "new loan."  I'm setting a record for scare quotes here.  That is a bunch of technicalities and paperwork to bury the truth that lenders are charging usurious interest rates on short-term loans designed to be hard to pay off.

If I pay a $20 (20%) fee to use $100 for a month, the annualized rate is 240%.  On this business model, if I am living close to the edge in my finances and the month lasts longer than the money, I could end up paying $240 in a year without paying off any of my $100 debt.  The average short-term payday loan is $300 to $500, so the amounts would be three to five times as much as this case:  $720 to $1200.  But that is for a 30-day term, while most payday loans can recycle two or three times a month, charging "fee" after "fee" after "fee."

Pastors, priests, and church community ministers from around the state delivered testimony about the effects of payday lending on their parishioners and neighborhoods, along with the Better Business Bureau, United Way, and City Government:  Del Rio, San Antonio, Houston, Midland, Dallas, Austin, Fort Worth, Palestine, LaPorte, El Paso, and all around the state.  Thanks go out to Suzii Paynter of Texas Baptists, to Texas IMPACT, and to the Texas Catholic Conference for their leadership in this effort.  Only two lobbyists stood up to oppose the bill.  I guess they could see what was coming and decided to do their work behind the scenes.  We found out that day that $8 million has been spent by the payday lending industry to kill this legislation, so I was not fooled into thinking that they were conceding this fight.  In fact, it seems they are increasing their efforts.

Sadly, the chair of the committee, Rep. Vicki Truitt of Tarrant County, who treated us all with respect on the day of the hearing (even if she did think I was talking too loud), has come out against closing this loophole in the name of "finding a compromise which can keep these lenders in business."  In other words, she is caving in to the industry demand for higher interest rates even though there is no credible evidence that people using these predatory financiers would not be able to get a loan if the loophole is closed.  Maybe some kinds of lending businesses would close, but the lending will go on at rates less likely to create a system of permanent indebtedness.  If fairer lending goes on, then the jobs the lending provides will not go away.  Reps. Ken Legler of Harris County, Rafael Anchia of Dallas County, and Marc Veasey of Tarrant County all seemed very knowledgeable about this issue, but it was not clear where on the committee there was strong support for closing this loophole.

What these businesses do is target communities of very low income working poor.  In Austin, they targeted school teachers when the press was claiming as many as 30% of teachers could be laid off before the coming school year.  They locate in clusters in order to make as many short-term loans as they can to people who are led to believe they have no other options.  They feed off each other's business because people take out a second loan down the street to pay off the fees on the first loan.  In the process, we hear what Ross Perot once called a "giant sucking sound."  That is the sound of low- and middle-income paychecks being sucked out of their communities into the executive bonuses of the payday lending corporations.

This entire recession is about that giant sucking sound.  It started with mortgage-backed securities, and when the demand for those grew, it became a feeding frenzy of sub-prime lending, speculative real estate pricing, and a housing bubble.  Then it matured into a labyrinth of credit default swaps and bonus-incentivized selling of toxic assets, creating an unregulated house of cards which crashed on the backs of the middle class workers.

What follows is the testimony I offered on March 22.  It is similar to what I said at the Senate committee in February, but reorganized and tweaked at a few points.  You can hear it down below.

My name is Dr. Mike Broadway.  I am a Baptist minister and theological professor living in Salado.  I come representing myself and any citizen offended by predatory lending.

         I have been working for the past two years with pastors, seminary professors, and all sorts of church people to address economic injustices pertaining to predatory lending and usury in its many forms, from high credit card fees, to foreclosure abuse and fraud, to tax refund loans, to predatory payday lending. 

My colleagues and I have met with top executives of Bank of America and Wells Fargo/Wachovia, with AGs Tom Miller of Iowa and Roy Cooper of NC who are leading the national investigation into foreclosure fraud, and with congressional leaders in various states and Washington, DC.  Predatory lending is a national problem, and it is a local problem, that has to be addressed on every front.  I’m here today because you have a chance to make a difference for the citizens of Texas.

         The biblical tradition makes a clear statement concerning usury, or unjust lending practices.  It says that no society can be a just society if it allows lending practices that create and maintain a permanent debtor class.  Laws against usury go back at least four thousand years, more broadly than the Jewish and Christian traditions.  Yet the writing of new laws in Texas and across the US as recently as 1979, 1980, and 1987 has ignored the wisdom of millennia and allowed the protections against usury to be swept away. 

         Lenders claim when they speak to you and to the press that they have to be able to charge usurious rates to stay in business.  They must be terribly inept financiers, because for four thousand years financial institutions have flourished under regulations against usury.  Why do these people need to make so much more in interest?  They don’t.  There are many current business models which flourish serving the communities where payday lenders do their predatory work, but without preying on their customers.

         Payday lending as we know it is a new financial form of sharecropping.  It is debt sharecropping.  Just like the unfair systems which kept sharecroppers always indebted to the landowners whose land they cultivated, payday lending places barrier after barrier in the way of borrowers in order to maintain a subscription to their future income. 

The business plan is perpetual indebtedness for those who are struggling to make ends meet.  Portraying themselves as a friend who is doing a service, they draw people into the trap of usurious borrowing.  Under the guise of being a CSO, these lenders are “the guy who knows a guy who can get you the money right away, but it’ll cost you.”  We all know what to call this kind of lender:  the term is loan shark.

         The current law allows this trap to be set.  The law has a loophole, and predatory lenders squeezed through it and stretched it wide.  One of their favorite deceptions is the doublespeak that calls interest by another name—a fee.  But if I borrow money from you, and you charge me for borrowing the money, then that is interest, no matter what you call it. 

The ancient text of Deuteronomy makes it very clear that usury is usury, whether you collect a fee up front, you charge it along the way, or you claim it at the end of the agreement.  Playing with the words, this smoke and mirrors, uses a loophole in the letter of the law in order to disregard the spirit of the law.  It also ignores what Jesus called the weightier matters of the law, justice and mercy.

         Rampant injustice in CSO lending is why you must close this loophole.  Stand in the heritage of Texas, a heritage of protecting workers and homeowners from usury, protecting us from large national corporations who suck the life out of neighborhoods so that they can pay huge bonuses to executives who have devised these schemes of debt sharecropping.

Taking the Showdown to the Texas Senate

One of the efforts for economic justice of which I have been a part in recent months goes by the name Showdown in America.  On February 22, the showdown made its way to a committee hearing in the Capitol of Texas.  An overflow crowd packed into the Committee on Business and Commerce of the Texas Senate, lining up to give public comment on legislation designed to eliminate a loophole in the Texas credit laws which has allowed payday lenders and car title lenders to avoid regulation and charge "fees" and interest rates amounting to APRs of 300%, 395%, 529%, 740%.  It is almost a reverse limbo dance: "How high can you go?  It's the payday lending rock."

Things got pretty hot when the CEO of a national payday lending business testified, and in the process was unwilling to go beyond the party line:  if Texas applies any new controls or interest caps on the "short-term, small principle" lending business, we will all go out of business.  The senators finally had their fill of this vague, undocumented scare tactic.  They demanded that credible documentation and good faith negotiation had better come fast from this industry if they want to have a say in how this legislation turns out.  It was a sight to see.

After a break for the Senate to do some business, the committee reconvened in the afternoon.  Suddenly, more forthcoming witnesses discussed a path toward mutual interest in regulating these businesses.  Forced to admit that their businesses are profitable in many states where regulations are much more strict, industry representatives offered to dialogue further on the kinds of regulation that would allow them to stay in business.

A friend of Shaw University and a well-known leader among Baptists had opportunity to speak in the morning about the effects of predatory lending where their church ministers, Rev. Freddy Haynes of Friendship West Baptist Church in Dallas.  He said, "Instead of throwing them a lifeline, we're throwing them shackles."  Rev. Chad Chaddick, pastor of Northeast Baptist Church in San Antonio told of predatory lending affecting his church's ministries.  Bishop Joe Vasquez of the Catholic Diocese of Austin, addressed both the tradition of Catholic social teaching and the ways that it had become clear that the diocese's funds were indirectly subsidizing profits of payday lenders when desperate borrowers came seeking charity from the churches.  Suzii Paynter of the Texas Baptist Christian Life Commission laid out extensive information on the way the business operates, then made an impassioned plea to the senators that they owed as much concern and compassion toward families harmed by predatory lenders as they seemed willing to show toward business owners trying to make a buck.

I hit a few key points that have been recurring themes of my public work on usury in the past year.  Below see my remarks and a video of my testimony that was broadcast live on the Texas legislative television coverage.

Remarks presented to the Texas State Senate

Committee on Business and Commerce

February 22, 2011

Rev. Dr. Mikael Broadway, Associate Professor of Theology and Ethics, Shaw University Divinity School, resident of Bell County, TX, http://mbway.blogspot.com

My name is Dr. Mike Broadway, and I am a Baptist minister and theological professor living in Salado.  I am representing myself as a citizen. 

For the past year and a half I have been working with a wide range of church people, including pastors and seminary professors, to address economic injustices which have become increasingly acute in the wake of the mortgage security debacle and the burst housing bubble.

Along with other leaders, I have met with the top credit and mortgage executives of Bank of America and Wells Fargo/Wachovia to address usury and  justice issues.  I have also joined leaders from around the nation to meet with Attorney General Tom Miller of Iowa to articulate our concerns for justice pertaining to a national investigation of foreclosure fraud perpetrated by major national and regional banks, of which he is the lead investigator.  Only last week we sent a letter to all the state attorneys general, including Texas Attorney General Greg Abbott, to outline a path toward economic justice in housing.

I give you this background because I want to emphasize that the struggle against usurious lending is not only a Texas struggle, but a nationwide struggle.  In many states, legislators like you have worked diligently with citizen leaders to try to clean up the predatory lending practices that continue to spring up in our cities, towns, and neighborhoods. 

All of you can agree with me that lenders and borrowers need to operate in a system built on fairness.  That is what the millennia of historical usury laws has been about.  Under this assumption, for four thousand years financial institutions have been able to succeed and flourish under the careful regulation of interest rates to protect people from usury.  Yet for some reason we now find ourselves, because of laws made in 1979, 1980, and 1987, operating with few legal protections from usury.  Perhaps contemporary humans have overestimated our maturity in failing to listen to the wisdom of four millennia, which recommends strong usury laws.

Of course, there have always been people who believe they should be able to charge as much as they want to lend money.  In saner times, we knew what to call them:  loan sharks.  Nowadays, they pass as respectable business operators.  When a legislature musters enough moral courage to try to prevent the worst forms of usury, these predators search the fine print and locate every loophole in the letter of the law.  Exploiting these loopholes, they find new and creative ways to abuse borrowers and scoff at the spirit of the law.  The latest way is to pretend that interest is not interest by calling it a fee.  The current abuse of payday lending and car title lending is an egregious example of this bald-faced lie.

If I borrow money from you, and you charge me for borrowing that money, then that is interest.  The ancient text of Deuteronomy makes it very clear that usury is usury, whether you collect a fee up front, you charge it along the way, or you claim it at the end.  The heart of the legal tradition’s bias against usury is that it is wrong to victimize the poor and weaker members of the community by creating lending practices which prey upon their weakness. 

Payday lenders may claim that closing this loophole will make it impossible to do business.  It will make it impossible to do business the way they do it.  But from my observations around the country, let me say that it will not make it impossible to operate a fair lending business among people of low and moderate income.  Numerous workable business models exist, from non-profits like Grace Period of Pittsburgh, PA, to microlending banks, to community banks and credit unions.  These businesses can make fair, non-usurious loans to fill the need of people who patronize payday lenders.

One of the shameful practices of the recent past in our nation was known as sharecropping.  Theoretically, it was a way for people to apply their labor to improve themselves and benefit the landowner, whose land they farmed, at the same time.  In reality, it was often a trap to keep people in debt to the landowner, living as debt slaves, perpetually indebted.  The biblical tradition opposing usury has at its core the assumption that no society can be just if it creates and maintains a permanent debtor class.  There must be a way out of debt.  Payday lending as we have it now is debt sharecropping . . . debt sharecropping.  Its business plan is perpetual indebtedness of its borrowers.  Please close this loophole and help our state take another step toward economic justice in consumer credit.

It's a Nationwide Fight Against Predatory Payday Lending

For numerous years, a fight has been going on from state to state and on a national level to curb and stop usurious payday lending.  This loan-sharking business exists by finding the cracks in the laws.  They hire sophisticated lawyers to find the legal loopholes, and slick PR firms to explain why they fill a need in the credit market.  They prey on desperate people and pretend to be a friend of the people who need credit.  The real nature of their business, however, is to be debt sharecroppers.  They gain an interest and claim on a person's future income in perpetuity.  It is a business designed to entrap borrowers so that they can never get out of debt.

I'll get a chance to speak about this predatory business at a public hearing on Tuesday, February 22, at the Texas Senate Committee on Business and Commerce.  I am impressed with the work of Texas Faith for Fair Lending, at whose invitation I will be speaking.  Some of these folks are the ones I used to work with as a wet-behind-the-ears seminary graduate in the mid-1980s.  In those days, these organizations were working to protect and provide for children in poverty and trying to hold off the tsunami of state-sponsored victimization through gambling businesses.  Suzii Paynter of the Texas Baptists Christian Life Commission will be part of the fight, and I am proud to get to work with such a distinguished drum major for justice.  The quoted material below comes from the Texas Faith for Fair Lending web site.  You can read the original at this link.

Payday Lenders and Car Title Lenders Evade Existing Texas Lending Laws

Although Texas lending laws provide generous regulatory and fee structures, payday lenders and car title lenders sidestep these provisions by posing as credit services organizations (CSOs), giving them an unfair advantage in the lending landscape.  As CSOs, payday and car title lenders operate outside of the bounds of the rules set for all other consumer lenders in the state and exploit a state law designed to protect consumers from seeking credit repair help. Both payday and auto title lenders could operate under Ch. 342.  For the smaller loans, auto title lenders could use the rate computations under 342F (or 342E).  For larger loans, they could operate under 342E.ⁱ

Below is a comparison of Texas's existing lending law which payday and car title lenders evade, and a snapshot of their abusive practices permitted by the CSO loophole.

It's Time to Level the Playing Field. 

The state's CSO statute was designed to protect consumers from abuse when seeking credit repair help, not as a vehicle for loans that result in long term indebtedness.  After more than 5 years of permitting this evasion of state law to continue, it is time for legislators to close this loophole, and ensure that these lenders operate under the Texas lending laws in place for all other consumer lenders.  It's time to close the loophole.

__________________

ⁱ The maximum loan under subchapter F is $1,240.  Under subchapter E, loans of up to $15,000 may be made.

ⁱⁱ Under existing Texas lending laws, finance charges for payday loans are set by the Texas Office of Consumer Credit Commissioner (OCCC).  Texas OCCC's authority to set these rates comes from TFC § 342.007, which allows the finance commission to establish rules for payday loans, and in TAC § 83.604(c) which incorporates the fees by reference.  For current Texas OCCC rates, see http://www.occc.state.tx.us/pages/int_rates/Index.html and click on the link for “Deferred Presentment Transaction Rate Charts.”  However, instead of complying with this law intended for them, payday lenders operate as CSOs, for whom there is no limit on finance charges, and rates reach upward of 500% APR (and higher) fur a loan that typically has a 14-day term.

ⁱⁱⁱ Under existing Texas lending laws, car title loans can carry finance charges consisting of a $10 set fee, plus $4 per $100 a month installment charge.  Car title loan finance charges are authorized under TFC § 342.253, which incorporates the fees permitted by TFC § 342.252 (3).  In addition to these finance charges, under existing Texas lending law, TFC § 342.502 (b) (5) expressly permits a “fee for recording a lien on or transferring certificate of title to a motor vehicle offered as a security for a loan.”  (The recording fee is not included in APR calculations because they are excludable from inclusion in the finance charge under the federal Truth in Lending, Act, Reg. Z § 226(e) (l).)  However, instead of complying with these state lending laws intended for them, car title lenders operate as CSOs, for whom there is no limit on finance charges, and rates reach upwards 300% APR fur a loan that typically has a 30-day term.

^iv Regardless if the cost is classified as "interest” or “fees” under state law, the cost to the borrower is the same.  The federal Truth in Lending Act requires that both interest and fees be combined and disclosed to borrowers as an Annual Percentage Rate (APR).  Federal law requires the cost of the all credit to be disclosed in terms APR, regardless of whether the loan is for two weeks or two years.

^v Existing Texas laws expressly permit payday loans to use a borrower's post-dated check as collateral for the loan, and expressly permits car title loans to use a borrower’s title to her car as collateral.  For payday loans, see TAC § 83.604 (b) (“The check given in the [payday loan] transaction may serve as security for the payment of the loan.”).  For car title loans, car title as security is not expressly prohibited under TFC § 342.503 and is stated as a permitted practice for authorized fees in TFC § 352.502 (b) (5).  However, even though the CSO statute does not expressly allow any of these collaterals, these payday and car title lenders operating as CSOs use checks and car titles as collateral respectively, as well as electronic access to a borrower’s debit account and a letter of credit issued by the CSO.

^vi Under existing Texas lending law, payday lenders and car title lenders, just like all other consumer lenders and brokers, are subject to oversight by the Texas OCCC.  Although CSOs are subject to private litigation and oversight of the Attorney General, these provisions have proven insufficient to protect consumers against abusive high cost lending.  CSOs are the only entities engaged in consumer lending transactions that escape oversight and compliance requirements of the OCCC.

I'll let you know how it goes.  This will be a first for me.