Payday Loans Wait on Cantwell and Lincoln

Yesterday’s vote in the Senate on the CFPA should put a long shadow on the prospects of payday lending.

Senator Harry Reid pulled back the existing bill after 57 Senators voted in favor of one draft. Reid pulled it back because two Senators were withholding their support until the protections in the bill could be strengthened.  This creates an odd dynamic, where progressive concerns are holding up legislation that spells doom for some of the more predatory financial products out there. Payday lenders, who seem destined to become the fall guys for the sins of Goldman Sachs, will be severely constrained if the CFPA passes.

The holdups

Sen. Lincoln of Arkansas is concerned about derivatives, and she wants to see rules in place that would amend how they are traded. Lincoln wants an end to the trading of derivatives behind closed doors.  She’d go one step further and see to it that institutions trading in derivatives can’t gain access to the Federal Reserve’s discount window.

Sen. Maria Cantwell, working in concert with Sen. John McCain, have another proposal.  They would like to return to the rules laid out in Glass-Steagall. Gramm-Leach-Bliley rewrote how financial institutions are organized. It took away the firewalls that separated investment banks from commercial banks.  That was important.  It predicated the rise of money center banks like Citigroup and Bank of America. It also gave more exposure to the assets of insurance companies to other portions of the financial markets.  It allowed an insurance company like AIG to operate in the mortgage market, for instance.

The Vulnerable

Cash America, EZ Corp, and Advance America are among the payday lenders that would face a problematic environment going forward if the CFPA passes.  There is language in the bill, courtesy of Sen. Durbin, that would cap interest rates on payday loans.  Senator Kay Hagan has floated a proposal to limit the number of times that any consumer can re-up for another payday loan.  It would limit any one individual to six loans per year. The second feature might be the most powerful, as many payday consumers roll their loans over again and again.

The market seems to have mixed emotions over the likelihood that the CFPA will pass with the payday language.  Most of them fell after the Durbin and Hagan amendments emerged, but then they showed some bounceback from their floor. Today, Cash America is down.  So is EZCorp.