ederal regulators earlier this month unveiled new rules aimed at reining in payday lenders and the exorbitant fees they charge. Now expect to hear a lot of what one payday lender named Phil Locke calls “the lies we would tell whenever we were under attack.”
The new rules announced by the Consumer Financial Protection Bureau are relatively straightforward, if not also a disappointment to some consumer advocates. A payday loan is typically a two-week advance against a borrower’s next paycheck (or monthly social security allotment, for that matter); lenders commonly charge $15 on every $100 borrowed, which works out to an annual interest rate of almost 400 percent.
Under the CFPB’s proposal, lenders would have a choice. One option would require them to perform the underwriting necessary to ensure that a borrower, based on his or her income and expenses, can afford a loan. Another option requires them to limit the customer to no more than six of these loans per year (and no more than three in a row).
But floating new regulations is only one step in a drawn-out process. The CFPB’s announcement in Kansas City, Missouri, on June 2, at what it advertised as a “field hearing on small-dollar lending” (the agency also offered rules governing auto-title loans — loans using a car as collateral), begins a three-month comment period, which could lead to a congressional review phase challenging the rules.
Payday and other small-dollar lenders spent more than $15 million on lobbyists and campaign contributions in 2013-14, according to a report by Americans for Financial Reform, “and I fully expect them to spend at least that much in the current election cycle,” said the group’s executive director, Lisa Donner.
Already the House Appropriations Committee on June 9 approved an amendment that would delay implementation of any new rules that restrict payday loans. The coming months will offer lenders plenty of opportunity to try and derail the CFPB’s efforts.
Which is why the voice of Phil Locke is so critical at this moment, as policymakers debate the future of short-term lending in the U.S. Locke, who opened the first of his 40-plus payday stores in Michigan in 1999, figured he and his investors cleared $10 million in profits in his first 13 years as a payday lender.
He built a $1.6 million home in a leafy suburb of Detroit and showered his wife with $250,000 worth of jewelry. For five years, he served as president of the Michigan Financial Service Centers Association, the statewide association formed to defend payday lending there.
But by September 2012, he was calling himself “a Consumer and Anti-Predatory Lending Activist,” which is how he described himself in an email he sent to me that month. He had experienced a change of heart, he said, and had turned his back on the industry. He had sold everything to move into an RV with his wife and two young children, bouncing between mobile home parks in Florida. “I really feel my mission in life is to educate lawmakers on what predatory loans do to the working poor,” Locke told me at the time.
Locke’s speaking style is recursive — and he certainly harbors his share of grudges — but the details I was able to confirm almost always checked out. A stocky man with the lumpy face of an ex-boxer, Locke had tried out any number of businesses before turning to payday. He and a friend had opened a bar in Flint, where he grew up, but that only left him with a lot of credit card debt.
He had tried — twice — to make it in what he demurely called the “adult entertainment industry.” He had then moved to Florida, where he tried getting into the reading-glasses business, but his first attempt, opening a mall kiosk, proved a failure. Somewhere along the way, he picked up a copy of Donald Trump’s The Art of the Deal — the only book he had ever read as an adult, he told me — but didn’t have the patience to finish it. In 1999, he declared bankruptcy, which meant using a local check casher in Orlando as his bank. Someone behind the counter at a shop offered to sell him a payday loan — and he started noticing these storefronts everywhere he looked.
Neither Locke nor his wife, Stephanie, had any money. But the ubiquity of payday in the Sunshine State made him wonder why they weren’t yet everywhere in a Rust Belt state like Michigan. Locke was soon back in Flint, where he says he convinced his in-laws to borrow $150,000 against their home. That would be the grubstake that let him build his payday business.
Locke was in his mid-30s when he opened his first store, which he called Cash Now, in a small strip mall across the street from a massive Delphi plant in Flint. He wasn’t the first payday lender in town — a check casher was already selling the loans, and one of the big national chains had gotten there first — but he had little competition in the early days. His rates were high — $16.50 on every $100 a person borrowed, which works out to an APR of 429 percent.
His advertising campaign was nothing more than the hundred “Need Cash Now” lawn signs that he and a friend put up around town the night before the store’s grand opening. He figured it would take months before he reached $10,000 per week in loans, but he reached that goal after three weeks. Within the year, he was lending out $100,000 on a good week and generating roughly $50,000 a month in fees. Occasionally a customer failed to pay back a loan, but most did and the profits more than covered the few who didn’t.
“Payday was like the perfect business,” Locke said.
Read More: Here