by Lawrence Meyers

(Second of a series in articles about the payday loan industry)

Senator Richard Durbin has a curious new bill he’s flogging around Washington. The deceptively titled S. 500, “Protecting Consumers from Unreasonable Rates of Credit Act”, only serves Sen. Durbin and his big banking contributors. Why? Because it seeks to effectively eliminate all forms of short-term credit except one – bounced check fees from banks.

I’ve already covered the outrageous scam being perpetrated on consumers by the banks, and I didn’t even discuss how these banks automatically opt consumers into their ODP programs. Now it seems the banks have a friend in Senator Durbin.

Families in need of short-term credit – generally used to help make ends meet, to pay a car mechanic so they can get to work, to help pay a utility bill – are able to turn to any number of alternative financial services. Payday loans, of which I am a common sense advocate, are one such service. As I’ve explained many times, payday loans are a reasonably priced product used 154 million times in 2008 by millions of Americans. They use these loans of their own free will, all fees and terms are clearly disclosed, and 94% of customers pay the loan back on time (contrary to the myths you read in the media).

Due to the 6% default rate and average monthly store overhead of $8000, these lenders cannot make a profit unless they are able to charge about $15 per hundred borrowed.

Consumers facing a necessary expense and caught short between paydays must often choose between costly and undesirable options: pay the bill now and face bounced check or overdraft protection fees; pay the bill late and incur late payment penalties; borrow from a payday or title lender to cover the bill; or go over-the-limit on their credit card.

Sen. Durbin’s bill would create a federal rate cap of 36% on all forms of short term credit.

Sen. Durbin claims this is “good for the consumer”, but he ignores the litany of non-partisan, non-biased studies proving that consumers fare worse when such credit is restricted, as has happened in numerous states recently. He also ignores that fact that almost 100,000 people will be put out of work! Think about that. Here we are in a recession, and Durbin is deliberately proposing to put one hundred thousand people on the unemployment line. SHAME ON YOU, Senator.

And yet, how interesting that the one form of credit – bouncing checks – is mysteriously exempt from this new bill. That would create a monopoly in this space for the banks – the same institutions that have shown their altruistic caring for America by utterly destroying its economy in pursuit of subprime mortgages. Oops!

Bretton Woods, a strategic analysis company, and provide these 2008 estimates for the amount of revenue generated by each form of short-term credit:

Bank ODP/NSF fees: $37 billion
Credit Card over-limit fees: $19 billion
Payday lenders: $6.8 bilion

If Durbin’s bill passes, banks will pull in another $25 billion abandoned by its competitors. However, since they’ll now control a monopoly in short-term credit, you can bet the average NSF/ODP fee of $28.95 will skyrocket, adding to their ill-gotten gains.

Not only can bounced check/NSF fees be the most expensive product available in this market (based on term and amount of credit provided), they offer the least consumer protections and result in the most damage to a consumer’s credit score. Bouncing a check also poses a legal risk to the consumer, as it is illegal to knowingly write a bad check.

So what, exactly, is Sen. Durbin up to?, which tracks political contributions, shows that Durbin received $65,000 from Citigroup. What soft-money contributions has he received from the banks? What is his agenda? There must be something more going on here than political grandstanding. Has Sen. Durbin cut a deal with the banks we don’t know about? It wouldn’t be surprising. Since the Democrats took over complete control of the government, would-be appointees have been exposed as tax cheats and Sen. Dodd is embroiled in the AIG scandal.

Could there be back-room dealings going on between Sen. Durbin and the banks?

For investors, stocks that would be affected by his bill include First Cash Financial Services (FCFS), EZCorp (EZPW), Cash America (CSH), QC Holdings (QCCO), Dollar Financial (DLLR),Advance America (AEA), Citigroup (C), Wells Fargo (WFC), Bank of America (BAC), JP Morgan Chase (JPM), Bank of New York (BNY), and every other publicly traded bank. So watch what happens.

In the meantime, write to your senator and tell them to oppose S. 500, because the average household spent $1,400 on NSF/ODP fees last year, that amount will leap if the bill is passed, and you may be one of the people affected.

Full Disclosure: At the time of writing, Lawrence Meyers was long shares of EZCORP, and held April call options on Advance America and EZCORP. Lawrence Meyers is a former writer for the Motley Fool, and is President of PDLCapital, a private equity firm ( This article is only an expression of the author’s opinion, may contain inaccuracies, and is not a solicitation to buy or sell any security. All readers are advised to consult with a financial advisor prior to making any investment. The author may be contacted at  Also, check out the author’s first published non-fiction book, Teacher of the Year: The Mystery and Legacy of Edwin Barlow

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