Congressman who's giving payday loan companies legal 391% APR loans says he's powerless to resist their lobbying

The US House subcommittee on Financial Services is agitating to legalize payday loans with 391% APRs. Key committee members have received large campaign contributions from the "payday" industry, and the committee chairman, Luiz Gutierrez (who also received contributions from the payday people) says the reason he's offering the industry this sweetheart deal after being on record as opposing this sort of thing is that their powerful lobbying has left him powerless to resist them: "...[T]hey're very powerful. Their influence should not be underestimated."
After watching members of the military fall prey to exorbitant payday loans, Congress in 2006 capped the interest rates for military payday loans at 36%. Fifteen states have similar caps or outright bans.

Congressman Gutierrez is competing with Congressman Joe Baca to see who can author the biggest giveaway. Baca's legislation would allow rollovers, higher fees for online banks, and would pre-empt state laws banning payday loans.

House Preparing To Legalize Payday Loans With 391% APRs


  1. One would think Mr Congressman should find another field of endeavour if he is unable to serve his constituency effectively, if a particular lobby is capable of making him impotent.

  2. Something is terribly wrong.

    An elected representative of the people has no qualms about publicly stating he’s been bribed into passing a law? In fact, given his opposition, it’s the only reason there is. He’s on record as stating that this law is bad for his constituents.

    What sort of insight does this give into Congress?

    Why is this even remotely OK, especially given the state finance, worldwide, domestic and locally?

  3. Heaven knows he couldn’t just say “No, keep your money,” and continue to vote against them. No, they’ve obviously holding a gun to his head until he takes their dirty money. Perhaps they’re threatening his family?

    No? No extortion, you say?

    Well then, I guess he’s just a weak, cowardly man.

    How do these payday lenders not run afoul of usury laws?

  4. Oh wait…he’s in the House. Meaning he’s got a two year term, meaning he’s basically constantly running for re-election. It doesn’t excuse the activity by any means, but I can see why he thinks he’s got no choice but to take their money.

    Still a cowardly little man, though.

  5. Well, I for one am impressed with the power of their lobbying. Look at the effect they had on this congressman!

    You can’t buy power like this.

  6. The solution to this problem isn’t to outlaw the loans, it’s to teach people basic mathematics. Improving numeracy in the population will have many run off benefits that getting mad at some push over politician will not.

  7. This is sickening. There were laws on the books (called usury laws in the olden days) against this sort of interest rates except in New Jersey. And now you know why all your credit card offers come from there and other states bended towards deregulation.
    The fact is that the “overdraft fees” are in fact a kind of unwanted loan when the bank pays the check and doesn’t let it bounce. Which if the fees were calculated as an interest rate would be much more than the ruinous payday loans.
    Then there is the larger issue of our corrupt government. I’m waiting for change I can believe in this area. But not very hopeful.

  8. I don’t think it’s fair to use APR (Annual Percentage Rate) when talking about short-term “payday” loans. 391% obviously sounds outrageous and gives the impression that these lenders are rolling in loot. Try putting yourself in their position and consider if you’d be willing to operate at a more “reasonable” rate:

    Imagine someone comes to you and asks to borrow $200 for two weeks. You don’t know them, they offer no collateral but they do provide several pieces of ID including proof of employment. You’re reasonably sure that you’ll get your money back and so you “approve” the loan. Since you’re not an unscrupulous payday lender, you agree to the more reasonable APR of 30% (which I’m sure some would argue is still too high). So how much do you make in interest when this loan is re-paid?


    Would you be willing to risk $200 for a potential gain of only $2.34? Remember that you have very little recourse if the person chooses not to repay you. Sure there are remedies you can take, but for $200, they’re extremely cost-ineffective. Even if you would be willing to make this loan, would you be willing to do so if you had to pay rent, wages and capital costs to set up a business to do so? Consider the fact that if it takes a minimum-wage clerk just 15 minutes to process this loan, you’ll be spending about $1.50-$2.00 just for that clerk’s wages! Once you consider all your other costs, you’ll be losing money on every loan you make.

    I think you’d quickly come to the conclusion that such a business is un-viable. So perhaps you decide to take a different approach and charge a flat fee of $25 to lend someone $200 for two weeks. This doesn’t seem like an outrageous amount considering your costs to make the loan. You’re not going to be rolling in money with this level of pricing, but you might just be able to run a sustainable business. Sound reasonable? Well, this is equivalent to an APR of 345%.

    I do think taking payday loans are a horrendously bad idea and should be avoided at all costs, but I don’t think it’s fair to portray the lenders as criminal even when they charge APRs of 300-400%.

  9. To #13,

    It appears that you don’t know anyone that’s ever done a payday loan.

    There are some details to appropriating a loan that you have missed out on:

    1. You are normally only given 2 weeks to pay back the ENTIRE loan in full.
    2. If you can’t pay the loan back in its entirety, you can’t just keep paying it down: you have to refinance an entire new loan (which has a finance charge of let’s say $50).
    3. If you are so desperate for cash that you need an advance on this paycheck, chances are you’ll be short of cash the following paycheck and hence unable to pay off the entire loan.

    So really you end up adding on the $50 finance charge every two weeks on a meager $200 loan. This can quickly get out of control. It is wrong and should be outlawed.

  10. Wait wait wait. So 15 states realize that pay day loans are evil enough that they cap rates or ban them outright… for military families only?

    Either they recognize that they’re evil or they don’t. If they are evil, they are evil for everyone, not just military families. If they are not, they are not. They can’t have it both ways.

    The states should make all usurious loans illegal.

  11. We heap scorn on Blago for his blatant pay-to-play way of doing business, but this is no less widespread and certainly just as detrimental.

    Once again, we have the powerful stacking the odds against the powerless. Is it any wonder that the nation is in its current condition?

  12. In Canada IIRC anything greater than 60% annually is an actual factual explicitly-defined-by-the-Criminal-Code CRIMINAL rate of interest: it voids the contract and opens the lender the criminal prosecution.
    Ah, legal loan-sharking: remember to thank your Congressman!

  13. #7 / anon:

    No, overdraft fees are not going to be a problem compared to the interest of a payday loan lender.

    #13 / Alecnevicus:

    And the 300%+ doesn’t translate down into a monthly payment. For $200 you’d be paying something closer to $60. Plus any fees various states allow these places to put on top.

    And since the regulators generally class alot of lending as being similar (state to state MMV) to that of banks, you will find one of yearly fees up to the hundreds of dollars on the first transaction you take out with one of these lenders.

    These people prey on the the people who can least afford their services and are the least likely to be able to understand that.

    And just saying no? I hope your comment about Nancy Reagan was sarcastic, Anon. I’m too tired to actually interpret that one.

  14. #10

    >The solution to this problem isn’t to outlaw the loans, it’s to teach people basic mathematics.

    The willfully stupid deserve all they get, however, there are the other careful people that are one financial disaster, say a kid who needs expensive medicine, or a necessary car that breaks and needs immediate repair that are all too common. So it’s all too easy to be in a position with no good alternative and start on the spiral of financial doom, when payday loan rates could be capped and still make money for the lenders.

  15. any public official who admits, ON RECORD, to not being able to resist the power of industry bribery should be either:

    a) removed from office immediately and put in jail, or
    b) shot, or
    c) both.

  16. I’m assuming that Reps. Gutierrez and Baca are Democrats since their party is not mentioned.

  17. Okay tons of our elected officials are weasels but I actually like this idea.

    Some economist actually support this kind of thing.

    Payday loans are EVIL, rather then cap fees we should raise mandatory fees to the point that no one would ever consider using them. Supply and demand, demand would plummet and supply would dry up in no time.

    I say 600 APR, with very clear, government mandated pay back tables, and graphs to illuminate the actual pay off.

    Payday loan companies are evil, they prey on low income minorities and they should actually be outlawed but mandatory 600% APR would work as well.

  18. Perhaps I missed this detail when I got Citizenship in the Nation Merit badge but I never knew that lobbiest could be “too powerful to resist.”

  19. Any lobbying entity that is “too powerful to resist” is making way too much money already.

    All campaign donations should be capped to prevent this kind of influence on (read: legalized bribery of) our elected officials.

    Damageman: The only people I have ever known to take such a loan were folks desperately clinging to survival. Down here in Texas, there are no laws keeping the utilities from shutting off your power / heat if you don’t meet their arbitrary schedule. They will do very little to work with you ’til the next payday. How does charging these folks usury make it better? It doesn’t. They don’t need less incentive, and less to go around to pay for other essentials. This is pure mustache twisting evil no matter how you slice it.

  20. This is my old district- machine to the core. The 4th district also includes the 1st Ward, a former stronghold for the Chicago outfit; and Cicero, also known for mob activity. The various local officials (ward captains, aldermen, mayors) in these areas play an important role in getting democratic reps elected at the national level.

    Gutierrez might actually want to limit payday loans, but he also probably wants his constituents’ trash to get picked up, their snow to get plowed and their roads to get patched. He’d probably also prefer that his car not explode when he starts it in the morning.

  21. The issue here is a Congressman claiming to be “powerless to resist” lobbyists, which if nothing else is a sad commentary on Washington culture.

    As for payday loans themselves, it would be stupid to outlaw them or try to regulate them out of existence. People wouldn’t be taking them if they had better options, so getting rid of them is going to hurt the lendee much more than the lender.

    As for the whether the fee is “exploitive,” I don’t know. I’m guessing it could be significantly lower and still be profitable, but I don’t have enough information to gather up the lynch mob just yet. It could be exploitive, and I wouldn’t be opposed to a regulatory cap on fees, as long as banks could still make enough profit for the service to be worth it. I just can’t help but wonder, if it is in fact feasible to have much lower fees, why there aren’t any banks which have them and advertise them, as they would immediately take all the “exploitive” banks’ business.

    Anyway, ignorance + anger = trouble. That’s a mantra that ought to be repeated a lot more around any lynch mob, whomever the target. And this isn’t even a new target! Flinging around accusations of “usury” ought to make anyone familiar with European history rather nervous…

  22. is that all they cost? I’m gonna buy one!

    “A newer player representing Internet payday lenders — a growing segment of the market — also ramped up its lobbying and political giving efforts. The Online Lenders Alliance, formed in 2005, nearly quintupled, to $480,000, its lobbying expenditures from 2007 and 2008. It contributed $108,400 to candidates in advance of the 2008 elections compared to about $2,000 in the 2006 contests. Gutierrez was among the top House recipients, getting $4,600, while the top Senate recipient was Sen. Tim Johnson, D-S.D., a Banking Committee member who got $6,900.”

  23. Lovely, one more way to exploit and hold down the poor…

    I know a fellow who got caught in a nasty cycle with these payday loans, the incredibly high interest rate is only a part of the problem… it’s too easy for someone who’s already living at the edge of poverty to get hooked on this things, and it ends up costing hundreds of dollars a month to immediately take out a new loan after the previous one is repaid just to keep from going over.

    I have to strongly disagree with Damageman @ 24, higher rates will not discourage the poor from taking out these loans – when you’re starving and 600% interest is your only option, you simply don’t care. That sort of math-based mentality overlooks the very real factors of hunger and desperation.

  24. they aren’t “loans”. They are huge cheque cashing fees. If you are already so broke as to use these “services”, you are already effectively bankrupt anyway. It’s like the crack dealers that wait outside the mental hospitals to pick off the newly discharged on the way to the welfare office. And then wait outside the welfare office every cheque day. Farming the poor is an ancient trade.

  25. Again, the solution is Campaign Reform, and public financing for elections. This would have the practical effect of chasing out carpetbaggers like these guys, who are in office only as a means to ‘do business,’ as opposed to representing the interests of their human constituents.

  26. He’s the lawmaker. And while the lobbyists do have a vote, so do a lot of other people. If any decent number of those people are paying attention he just lost the next election.

    So I fail to see what power the lobbyists should continue to have unless they literally are threatening his family.

    I’ve always felt there was nothing wrong with taking bribes as a bribe is nothing more than money. It’s if you actually change how you were going to act in favour of the briber… (in other words, take the money, vote how you want)

  27. “…[T]hey’re very powerful. Their influence should not be underestimated.”

    Christ, it sounds like he’s talking about Lord Voldemort.

  28. What’s the worst that could happen to him if he said no? Is he being blackmailed? Are they holding his kids hostage?

  29. moriarty – People wouldn’t be taking them if they had better options, so getting rid of them is going to hurt the lendee much more than the lender.

    Yeah, we’d better just give up this social justice thing, huh?

  30. “too powerful to resist” means they’ve got some real dirt they’re holding over him… a big skeleton in his family closet… perhaps they’ve set him up with hookers and blow and videoed it? or found out he’s got a secret “love-child”…

  31. MDH – Yeah, we’d better just give up this social justice thing, huh?

    What is that supposed to mean?

  32. @Aleknevicus (13):

    You could argue that APR was misleading, if it weren’t for the despicable practice payday lenders have of pressuring overdue customers into rolling their debt over into a brand new loan. If your check doesn’t clear on the date it’s supposed to, the lender demands that they take out a new loan, with another $25 fee. This can go on for months and months.

    If it were a straight fee-for-service, with a reasonable APR if they didn’t pay it back on time, I’d have much less of a problem with it. But payday lenders don’t play that way unless forced to by state regulations.

    You assert that these fees are necessary in order to stay in business, but there’s at least one piece of counter-evidence: non-profit payday lenders. The group in the story charges lower fees, allows people to convert their debts into zero-interest loans (upon taking a finance class), and presumably is a lot less bastardly about collections.

    According to the story, they write off about 4.5% due to non-payment, and another 4.5% goes to administration and overhead.

    I’m still worried that the product they’re selling is too dangerous for unwary consumers. But it’s hard to argue that they need to charge as much as they do — or engage in all the other bastardity.

    @everyone else

    The reason for the military exemption in federal law: Apparently, their debts were interfering with deployment schedules to Iraq, and jeopardizing security clearances. It was considered a military readiness issue more than an ethical issue.

  33. When all else fails, there’s always the implied ad hominem, eh?

    Yes, I have extensive “knowing poor people” credentials. I even have some “being a poor person” credentials. And I happen to think that it’s not worth screwing over poor people just so we can screw over some rich people. In fact, I think that mentality is seriously screwed up and deeply counterproductive. But apparently not liking lose-lose solutions means I’m a heartless bastard who doesn’t care about “social justice.” Neat!

  34. What is that supposed to mean?

    That you care enough to comment, but not enough to actually care.

  35. Thanks for clearing that up.

    Dude, it’s not screwing rich people when you make them stop making their lucre by screwing over poor people.

    BUT – if it is that way, (as you seem to imply, or are merely leaving plenty of room for in your admitted indecision on what is just and fair), then all attempts at legislation that would support social justice would be for naught.

    What I am saying is that capital is power, but might does not make right.

    And I certainly never said you were heartless, but I do mean to wonder aloud at the misguidedness of statements like this one: “I wouldn’t be opposed to a regulatory cap on fees, as long as banks could still make enough profit for the service to be worth it.”

    My bank will lend me money for a couple weeks at less than 10% APR, it’s called a credit card. But I don’t use one. When I screw that up I lose the privilege. End of story.

    But these are not real banks we are discussing here. These are loansharks attempting to buy further legitimacy though the purchase of apparently terrified congressmen, with the goal of being legally allowed to shake down poor people even harder.

    I am sorry if that was not clear to you.

  36. There’s a difference between profiting and profiteering.
    We learned that the hard way in New Orleans when gas stations were charging people trying to escape the hurricane 10 dollars a gallon.

    But I guess to some of you that’s just good capitalism.

  37. Capitalism is all supply and demand.

    Who has the highest demand: desperate people!

    Any good capitalist doesn’t view them as human beings.

    They view them as a market!

    I’m just glad the medical industry isn’t fleecing desperate people who need health care…..

  38. @Anonymous (45):

    The non-profit lender in the article you quoted charges $9.90 per $100 per two week loan (equivalent to an APR of 252%).

    I don’t think this serves as counter-evidence to the point I was making.

  39. What’s this “payday loan” thing I wondered. Is this an American thing? Over here, we call them loan sharks. So I look up wikipedia on “payday loan”, and it says a 390% APR translates to 3686% EAR. Well, it makes sense. The loans being for such a short term, are compounded many times in a year. Borrow $500 now, and after a year, that turns into $18,000!

    This makes me think of the loan sharks on TV. A man owes a $5000 gambling debt and is unable to pay it. He’s dragged by the loan shark’s goons to the office, where he’s badly beaten, and they threaten to hurt his family. He crawls home, begs, borrow, and in a week somehow manages to scrounge up the $5000 from his relatives and friends. He’s relieved, and goes to pay off the loan. But they tell him, because of interest, the loan is now $15k. They take the $5k, tells him he owes them another $10k, and beats him up again.

    These shows usually have the same moral. You cannot pay off the loan from a loan shark. Go to a loan shark once, and he’ll never let you go. He will suck as much money as he can from the victim, until eventually he cannot pay anymore, and they kill him. Or the hero-cops turns up and shoots the loan shark and his goons. Don’t American’s watch TV?

    Where I work, if you need a small loan for 2 weeks, you ask your boss. It’s deducted from your next pay check. No interest. Out of a staff of about 200 people, approximately 5% – 10% take these loans every month. It’s not the same 10% every time. The rate is so high because the bosses gives them out so readily. The rationale being it’ll be better than if they were to “borrow” that money from the till box. (The company is very decentralized with many locations having only 1, 2, or 3 employees).

  40. Dainel: Over here, very few employers will give an advance, at least in my experience, and most really don’t even want to hear you ask for one. However, I did work for a startup where the COO personally lent me $1000 because my direct deposit was going to arrive a few days late.

  41. This is why we have historically called bankruptcy protections one of the essential parts of living in a civilized liberal democracy.

    So that rather than mandating the terms of legal contracts, getting outraged at systematic “greed”, or tacitly endorsing debt slavery, Congress can sit back and relax as the system punishes those who have the audacity to offer debt to people who can’t afford it.

  42. #61 —

    Bankruptcy protection in the US is very, very weak. And how exactly is someone who’s got a 361% APR loan to pay back supposed to hire a lawyer in the first place?

  43. That was my point – Bush drastically reduced the ability to declare individual bankruptcy and have debts forgiven. This is one of the less noticed ways we have fallen farther from the ideals that we philosophically claim to espouse, and it’s a direct contributor to the insanely optimistic debt ratings that allowed the current financial crisis to reach this point.

    Bankruptcy is a basic tenant of human rights, and human-rights organizations are not shy about calling arrangements with impossible-to-repay, impossible-to-escape, ancestral debt, “slavery”. This is not often acknowledged.

    There are plenty Of situations where a 361% APR debt is an appropriate market condition – but when you remove the ability to safely exit that contract (and therefore remove the obligation that the lender has, to ascertain that they will be able to get back the loan without breaking legs), you create a great number of societal ills. Bankruptcy is the natural counterweight to this type of thing, not arbitrary moral panics about a certain percentage rate.

  44. I don’t think it’s right to use A.P.R., or annual percentage rate when talking about short term loans. A payday loan has an opening interest rate of only 15%, and that is capped in most states. That is it, period. This means that a person pays $15 for every $100 borrowed. Does this sound bad, no, of course not. However, if the person decides not to pay it back, and rolls the same loan over 26 times, meaning every two weeks when the loan comes due instead of paying it off, they roll it over to another loan, then this would be an A.P.R. of 400%, but the same is true for any loan. If the person pays the loan back on time, according to the terms, then the APR is only 15%. There is no other hidden fees or payments. That is it, 15%. What are people crying about? Would a bank loan money if they were only making pennies? I don’t think so, and thus the reason they have long term loans with lots of payments. They make money over the long run and take money every month, but a short term loan doesn’t have the same advantage and there is only one payment, so we can’t use the same formula to calculate and regulate these two different types of loans.

  45. Lets just say you loaned someone 100.00 for two weeks at 40%APR Thats only $1.50 in interest. would you loan a stranger 100.00 bucks WITH ZERO AND MESSED UP CREDIT for Possibly getting 101.50 back? No you wouldn’t. Congressman Guterrez gets it. This service is just that, it’s very short term and much better than bouncing a check and paying 50.00 in bank and merchant charges. Thats the real choice that we make when we run short.

  46. Payday loans, in many cases, are a less expensive option for struggling consumers than incurring an overdraft fee at their bank for a bounced check. The FDIC issued a comprehensive study just 5 months ago about bank overdraft charges and found the median APR on the overdraft fee to be over 1067%

    Although APR is less meaningful on short-term loans in that the shorter repayment period exponentially drives up the APR, this calculation is still useful for consumers in comparing apples to apples of the costs between different loan from different companies.

    In addition, many banks have policy in place to to pay larger checks first thereby resulting in a higher quantity of overdrafts and thus more fees. Consumers that use payday loans avoid the time and hastle of undoing this string of events.

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