Roughly 20 years ago, during the administration of President George H.W. Bush, I wrote a news article for the Wall Street Journal about the federal government's plans (later codified in legislation during the Clinton administration) to distribute food stamps and other government benefits electronically. Poor people would have debit cards and could have immediate access to the funds they needed. This was a more novel idea than it sounds today, because speedy, point-of-sale credit card terminals still lay in the future. In those distant days, when you went to the supermarket, you had to bring cash or write a check. The Bush appointee I interviewed was very excited about the new scheme for one simple reason: It was going to put check-cashing companies out of business. This was an industry despised even by Republicans for exploiting society's least advantaged by charging them outrageously high fees. Instant access to cash would eliminate this market. I don't remember exactly what the Bush appointee said, but his overall message was loud and clear: Good riddance to a sleazy and predatory business.
Two decades later, check-cashing companies are still around and a thriving new sleazy and predatory business, the payday-loan industry, has grown up beside them. Payday loans replace check-cashers' outrageously high fees with usurious interest rates. What neither the Bush appointee nor I anticipated was that the same technology that sent welfare moms and retirees their government benefits in the blink of an eye could give a new kind of predatory lender instant access to unwary customers' bank accounts. Electronic banking giveth and electronic banking taketh away.
I thought about all this on Oct. 4, when the Federal Trade Commission announced that the co-founder of Swish Marketing Inc. paid $850,000 to settle charges that he allegedly debited customers' bank accounts without their knowledge. According to the FTC, Swish operated Web sites that guided consumers to payday lender sites. (One of them piously named "Christian Faith Financial"; never mind Matthew 21:12.) To get the loan, you filled out a form giving the lender access to your bank account. That's a bad idea, but standard practice for payday lenders, and perfectly legal. The illegal part (according to the FTC) was what followed. When you submitted your application, you were automatically sent to a Web page with a button that said "Finish matching me with a payday loan provider!" (example here). This Web page also happened to offer consumers the chance to acquire four additional items. Three of these offers were pre-clicked "No," but a fourth was pre-clicked "Yes," which was easy to miss. This fourth offer was for the purchase of a debit card on which you could load $2,500, in the unlikely event that you happened to have $2,500. (If you had $2,500 why would you be applying for a payday loan?) Just to purchase the empty debit card cost $54.95. Some sites billed the debit card as a "bonus offer" and revealed the $55 charge only in tiny type. In any event, it was very easy for the borrower to miss entirely the fact that in applying for a payday loan, he or she was also letting a separate company reach into his or her bank account to extract $55 to pay for an unrelated product that he or she almost certainly didn't need.
The attorney for alleged perp Jason Strober said in a press release, "We are confident that [he] would have prevailed in court." Strober settled only because "it became too expensive to continue fighting." Strober, meanwhile, has created a blog, Prosmallbusiness.org, whose first entry states that the FTC's "power to destroy businesses they don't like is truly scary."
It may or may not give Strober solace to learn that under the recently-passed Dodd-Frank financial regulation law, the FTC will yield jurisdiction over payday loans to the newly created Consumer Financial Protection Agency, whose overseer, Elizabeth Warren, really, really hates payday loans. In a 2008 paper coauthored by Oren Bar-Gill of New York University Law School, Warren offered payday loans as a key example of "a credit product that can impose substantial costs on imperfectly informed and imperfectly rational borrowers." Typically, she explained, you pay a $30 fee for a two-week cash advance on a $200 paycheck, which amounts to an annualized interest rate of 400 percent. That's not particularly high for this type of loan; some of them go up to 780 percent. Thirty bucks "is unlikely to bankrupt any consumer," Warren conceded, but the payday lender is counting on the likelihood that many customers will roll the loan over for another two weeks, and then another. Ninety percent of the industry's profits come from suckers who do this five times or more over the course of a year. "This is very expensive credit," Jean Ann Fox of Consumer Federation of America told me.
Indeed, interest rates don't get more insanely high than this. That raises the question: Isn't usury illegal? It turns out the federal government imposes no statutory maximum on interest rates. Many states do, and some states (for instance, New York) ban payday loans altogether. But under federal law, payday lenders who don't commit outright fraud may operate with impunity. Well, almost. The Pentagon got fed up with its recruits getting ripped off by payday lenders and in 2007 got Congress to make it illegal to extend such loans to members of the military. But civilians remain fair game.
Indeed, one of the sketchier provisions in Dodd-Frank affirmatively prohibits Warren's new agency from setting a maximum interest rate on payday loans. This was inserted at the behest of Senator Bob Corker, R.-Tenn. (The payday-loan business was reportedly born in Corker's home state and continues to thrive there.) You might think the banking industry would pressure Congress to shut down payday lenders because they give lending a bad name. But a recent report by National People's Action, a network of community activist groups, and the nonprofit Public Accountability Initiative revealed that big banks extend $2.5 to $3 billion in financing to payday-loan companies. Wells Fargo is in especially deep.
"The payday industry WELCOMES regulation," according to Payday Loan Industry Blog, operated by Trihouse Enterprises, which owns 16 payday-loan stores. "It helps the industry legitimize their industry, it manages the few unscrupulous payday loan operators that exist in all industries, and it creates a level playing field for consumers." Implicit in this assertion is the confident belief that no regulator would dare put them out of business. The authors don't seem terribly worried that Warren will prove that assumption wrong. Do they know something we don't?