Tougher enforcement key to reining in payday lenders

By WARREN BOLTON - Associate Editor

IF LAWMAKERS fail to do the wise thing and ban payday lending, they must not only pass tough rules governing the predatory practice, but they must make sure the regulations are aggressively enforced.

It’s bad enough that the current law favors lenders. Worse, the division of the Board of Financial Institutions that regulates payday lenders, title lenders and finance companies doesn’t adequately defend consumers.

That’s why some advocates want the attorney general or the Department of Consumer Affairs to have more of the responsibility to enforce any new payday lending regulations.

After he and others filed lawsuits against payday lenders last year, Sen. John Hawkins said the board doesn’t do a good job of enforcement: “As a senator, I’ve been very disappointed in the Board of Financial Institutions.”

During Senate subcommittee hearings last year, Dean Bratton, director of the Consumer Finance Division of the Board of Financial Institutions, testified that the state’s pitiful law gives the board no real way to protect consumers.

Last week, Sen. Linda Short, who sponsored the 1998 payday lending bill, said Mr. Bratton assured lawmakers the law they passed was sufficient. “I have everything I need. We won’t have any problems at all,” she recalls Mr. Bratton saying.

She said hearing Mr. Bratton now say the law is flawed “made me furious.”

“He’s either lying now or he was lying then,” Sen. Short said.

Mr. Bratton said he doesn’t remember making the comments. “That’s been 10 years ago. But that doesn’t sound like something I would say, because it was brand new to everybody,” he said.

He reiterated Monday that the state’s law is toothless. “If you look at it closely, you’ll see there’s not much you could do wrong to violate it,” he said.

He said it bothers him that people question the effectiveness of his department. “As to what we had to work with, I think we’ve done a hell of a job,” he said.

Mr. Bratton said the Consumer Finance Division does a good job of examining payday lenders and addressing the limited number of complaints borrowers make. The agency has required lenders to return nearly $500,000 in fees to consumers over the past decade, he said.

He readily admits he knows the Legislature’s intent was to allow one $300 payday loan at a time per customer from a given lender. The law doesn’t say that, so he can’t enforce it, he said.

Once payday lenders figured out they weren’t going to be tightly policed, they began issuing two $300 loans. Mr. Bratton said the way the law is written, a lender could offer one consumer even more loans. “If he had the guts to do it, he could make him five or six or seven,” he said. And some do, he said.

Mr. Bratton said he told payday lenders they shouldn’t offer the multiple loans. “I didn’t feel that it was good business.”

A regulatory agency charged with protecting consumers has to take stronger action than that. The board should have prohibited lenders from making multiple loans. If they persisted, their licenses should have been pulled.

As to whether it was good for business or not, you decide: In 1998, there were 274 payday lending locations in South Carolina. As of Monday, there were 1,042. In fiscal year 2006-07, payday lenders made $1.6 billion in loans in South Carolina. They make more loans annually than there are people in our state of about 4 million, and collect $186 million in fees.

Payday lenders thrive on the flawed business model of making loans to people they know can’t repay. Some people — me included — believe that unconscionable practice is against state law. Where’s the Board of Financial Institutions on that?

The whole basis of lawsuits against payday lenders is that they routinely break at least two state laws: the Deferred Presentment Services Act (that’s payday lending) and the Consumer Protection Act. The suits allege that lenders act in bad faith by making loans with no regard as to whether borrowers can repay them. State law requires that lenders take steps to determine a borrower’s ability to repay.

“Everybody wants to blame me,” Mr. Bratton said. “The Legislature, that’s who wrote the bill. I don’t have a vote in the Legislature.”

He’s right. Lawmakers did a horrible job of protecting consumers when they passed the law sanctioning loan-sharking.

But the Board of Financial Institutions hasn’t been much help. Of course, the way the board is set up, it’s hard to imagine it being an effective regulatory agency. The agency’s governing board is made up of representatives from the financial industry. Its operating budget — used to pay regulators — is provided strictly from licensing of institutions. So its financial future is based on making sure as many are licensed — and remain licensed — as possible.

Mr. Bratton doesn’t think the set-up hinders the agency’s effectiveness. “I’ve never even thought of that, really,” he said. “I don’t see where there is a conflict.”

But he admits that if a considerable number of lenders lose licenses, it could cause budget cuts.

Is it good to allow a regulatory agency to be dependent on revenue from licenses that keep its doors open and regulators employed? How tough will an agency whose board is made up of folks from the financial industry really be on the industry?

The Board of Financial Institutions has had 10 years to prove itself worthy and fallen short. It’s time for lawmakers to call in the attorney general and/or Consumer Affairs.

Consumers need relief.

Reach Mr. Bolton at (803) 771-8631 or wbolton@thestate.com.