The primary opponent of payday loans is The Center for Responsible Lending (CRL), which says it is a “nonprofit, nonpartisan research and policy organization” working to eliminate predatory lending practices. The truth is that it is a public-relations front for an organization that seeks to put payday lenders out of business so that it can capture the payday loan customer base. Even worse, the CRL itself engages in predatory practices.
So what exactly does the CRL do? It is the PR front for the Self-Help Credit Union. CRL was founded in 2002. Under CEO Martin Eakes, the CRL has created a massive lobbying and PR machine purportedly to expose unethical financial industry practices on behalf of its parent company, the Self-Help Foundation.
CRL’s approach is to try to get payday loans banned. One strategy they use is to publish bogus studies to sway public opinion and legislators. One of the most infamous of these studies was “Race Matters”. CRL’s study claimed that cash advance stores target minority neighborhoods – the implication that payday lenders were racists taking advantage of minorities. The study not only plays the race card, it does so by assuming another falsehood to be true – that payday loans are predatory when they are not. Dr. Thomas Lehman, who conducted several scientific studies on payday lending, said that the research “contains severe weaknesses and presents conclusions that are overstated at best, and misleading at worst…the tone of the study suggests a lack of objectivity motivated by an ideological bias against the payday lending industry”.
But the CRL doesn’t always rely on the race card. It usually just uses sloppy research and methodology. In the study “Financial Quicksand”, it concocted 20 questionable assumptions and 50 estimates, all from data that did not represent the actual demographics of the U.S. population. The study also authoritatively states that taking out five or more loans a year is “flipping” them back-to-back. Not only is this a false assumption, it denies the fact that many states prohibit loan flipping.
Once CRL gins up legislators with bogus research and inflammatory rhetoric, they try to get loans passed that effectively ban payday loans, such as instituting a 36% APR rate cap. CRL was behind legislation that killed payday loans in North Carolina, insisting all along the way that its credit union would take the place of payday loans.
What developed instead was the opposite. With the payday loan option removed, consumers were forced into more expensive overdraft fees. A study by Donald Morgan from the New York Federal Reserve concluded that, “Compared with households in states where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check “protection” sold by credit unions and banks or loans from pawnshops.
The Institute for Liberty concluded that “under the CRL’s lending reforms, North Carolina leads the U.S. in foreclosures. In a year-over-year comparison, the state’s foreclosure rate outpaced the nation with a whopping 146% increase vs. 94% nationwide.” And what a shock – the Self-Help Credit Union benefited from these increased borrowing costs. I guess that’s what they meant that they would fill the borrowing gap in North Carolina.
Other studies have come to the same conclusions about what happens when payday loans are banned. A 2008 study from George Mason University announced that such bans reduced consumers’ likelihood of surviving financial crises. They concluded that having the payday lender option increased a borrower’s probability of “financial survival” – paying for necessities like housing, groceries, utilities and other bills without facing economic collapse – by 31 percent.
Of course, this is all in service of Self-Help’s own agenda of getting customers into its own credit union.
CRL had succeeded in pushing through short-term payday loan bans or interest rate “caps” in New Hampshire, Montana, Ohio, Oregon, Virginia, Arkansas, Georgia, and North Carolina. Meanwhile, Despite its legal status as a nonprofit, CRL’s has increased its assets from $900,000 to $4.5 million, and its annual revenue rose from $1.95 to $6.1 million. In addition, CRL spent $1.7 million lobbying for bankruptcy and finance laws from 2004 to 2007, and more than that in subsequent years. It’s curious behavior for a “non-profit”.
Curiously, Self Help has some predatory practices of its own. Its credit union’s loan delinquency rate is 6 times that of its peers. Meanwhile, while pretending to advocate on behalf of its low-income clients, it drags them into court if they are late on loans as small as $100.
But that’s small potatoes. The billionaire founders of the CRL, Herb and Marion Sandler, pioneered the exotic mortgages that caused the financial meltdown. They made $2.3 billion on the sale of their company to Wachovia in 2006. One of CRL’s largest donors also made a fortune off Americans’ mortgage woes: billion-dollar hedge fund manager John Paulson. He shorted the subprime market – the market that the Sandlers helped create.
While the CRL was attacking “predatory” mortgage lenders, the Sandlers were purveying their option-ARM, or “pick-a-payment,” mortgages, at the heart of their Golden West Financial/World Savings Bank empire. These mortgages allowed thousands of Americans to acquire more debt than they could afford by making monthly mortgage payments smaller than their interest charges. We know what happened to those folks. They defaulted on their mortgages and the financial meltdown began. But as the housing bubble burst, the Sandlers managed to fob off $120 billion of these garbage loans to Wachovia, and then sold their company for $2.3 billion. It may not have been a Ponzi scheme, but just as many people got screwed.
With all the information about CRL available, it is amazing that legislators still try to make political hay on the backs of Americans who need short-term credit. Instead of listening to an obviously corrupt organization, politicians should listen to the people who matter – borrowers who are smart enough to make their own choices.
