Reporting from Washington — Payday lenders didn't cause the economic crisis, but consumer advocates hoped their sky-high interest rates on loans would be reined in as part of a sweeping regulatory overhaul to prevent a repeat of the financial fiasco.
However, key senators feverishly working to craft a bipartisan bill want to make payday lenders -- companies that offer short-term loans to tide people over until their next paycheck -- largely exempt from oversight by a new consumer financial protection agency.
Consumer advocates said that exemption would keep payday lenders in California and 34 other states mostly under state controls, which have allowed the lenders to prey on low-income people with loan fees that translate to interest rates of as much as 460% a year.
"They are a debt trap for consumers who struggle to make ends meet," said Jean Ann Fox, director of financial services for the Consumer Federation of America.
Consumer advocates had hoped a new agency would severely restrict, or even outlaw, payday loans. They are pushing back against the financial regulatory proposal being drafted by Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and Sen. Bob Corker (R-Tenn.), adding to the difficulties of getting legislation passed this year.
A draft proposal from Dodd for a Bureau of Financial Protection, to be part of an existing federal regulatory agency, would scale back the broad powers of an independent consumer agency proposed by President Obama and included in a House regulatory bill that passed in December.
Backers of the agency have said that consumer protection needed to be extended beyond the banking industry to companies such as mortgage brokers and payday lenders that offer such high-interest-rate products as subprime mortgages that take advantage of unsuspecting customers.
Under the draft proposal, which could become final in days, the new consumer bureau would be part of the Federal Reserve and would be able to write rules for any financial product, even if it is not offered by a bank.
But the bureau would be able to enforce those non-bank rules only against mortgage companies. Payday lenders would not be covered unless the bureau petitioned a council of federal banking regulators to give it that enforcement authority based on consumer complaints.
Without enforcement power, the new consumer agency would be unable to stop abuses, Fox said.
