The Obama administration's new consumer protection agency held its first public hearing Thursday about payday lending, an industry that brings in some $7 billion a year in fees nationwide.
The Consumer Financial Protection Bureau said testimony from the session in Birmingham _ where City Council members recently passed a six-month moratorium on new payday lending businesses amid concern over their prevalence and high interest fees _ would help guide the development of future regulations.
Director Richard Cordray said the bureau recognizes the need for short-term loans, but the lending needs to help consumers, not harm them.
"Before this month, the federal government did not examine payday lenders," Cordray said. "Some state regulators have been examining payday lenders for compliance with their state laws. We hope to use our combined resources as effectively as possible."
About 19 million American households now have payday loans, officials said. With interest rates often in the teens and easy application procedures, lenders said they generate business through radio and television advertising, plus word-of-mouth and by locating offices in areas where other small-loan lenders are located.
Many in the standing-room crowd of more than 400 were lending company customers or employees who wore "I Choose Payday Advance" stickers provided by the industry.
Tanzy Bonner told a panel she got a payday loan to cover the cost of her 6-year-old's birthday party; LaDonna Banks said she got one because she couldn't work after donating a kidney to her brother.
"I borrowed the money, I paid the money back," Banks said.
Steven Hoyt, a Birmingham City Council member who supports the moratorium, urged the agency not to be swayed by such stories because the loans come with exorbitant interest fees.
"It's fleecing by any other name," Hoyt said.
The Consumer Financial Protection Bureau has been in the spotlight because of Republican opposition to its formation and President Barack Obama's use of a recess appointment earlier this month to tap Cordray, a former Ohio attorney general, as its director.
With GOP legislators blocking the nomination because they said the agency lacks sufficient congressional oversight, Obama installed Cordray _ a move that Republicans said was an unprecedented power grab. Democrats disagreed, saying Republican presidents routinely filled vacancies by the same process. Obama nominated Cordray after congressional Republicans opposed consumer advocate and Harvard University professor Elizabeth Warren becoming director.
Republicans kept up the criticism over the bureau's formation as Thursday's hearing began. The chairman of the Alabama GOP, Bill Armistead, said Cordray's decisions "could have devastating impacts on an already fragile economy."
"The last thing we need is another big government agency putting more regulations on our businesses," Armistead said in a statement.
Often criticized by advocates for the poor, payday loans are short-term, high-interest loans that work like cash advances. Storefront payday loan operations are prevalent in middle- to lower-income areas around Alabama, sometimes taking over closed convenience stores or fast-food restaurants.
Loan amounts in Alabama are capped at $500 by state law, which limits the maximum interest rate to 17.5 percent. An industry website said the annualized interest rate for a 14-day loan of $100 tops 456 percent.
In a typical transaction, a borrower writes a check for $117.50 and gets $100 from the payday lender, who holds the check for a short period before depositing it. If the customer needs the check held another two weeks, he pays another $17.50 fee.
Officials said more than 20 percent of Alabama households have taken out loans from payday storefronts or similar businesses at more than 1,000 locations statewide. Opponents said the businesses prey on people who lack access to traditional loans when they get in a pinch for cash.
"People get churned through the system six, eight, 10 times a year," said Stephen Stetson, a policy analyst at Alabama Arise, a Montgomery-based anti-poverty organization. "If we have laws against gouging for gas and water, we ought to have laws against gouging for loans."
The head of Ohio-based Community Choice Financial Inc., which operates in Alabama and more than a dozen other states, said the industry serves some 60 million people nationally and already is regulated by states, licensing requirements and federal disclosure laws. CEO Ted Saunders said he was offended by suggestions that payday lenders take advantage of poorly informed people.
"Listening to what you heard here today, you'd think my thousands of employees go to work every day to hurt their neighbors," he said. Rather than enacting sweeping federal rules, he said, states should concentrate on getting rid of "bad actors" in the business.
A Democratic state lawmaker in Alabama also expressed concern about the potential for new regulations, defending state oversight of the industry and arguing that low-income people need access to quick, easy-to-obtain loans. Many people can't walk into a bank and get a loan or withdraw money from an automatic teller, said Rep. Oliver Robinson of Birmingham.
"The people who live in my district don't have alternatives," Robinson said.