A bipartisan group of House Financial Services Committee members asked the Federal Reserve in an April letter to extend an emergency loan program to a host of controversial financial firms that offer high-interest loans to low-income Americans.
In other words, firms that offer Americans high-interest loans want a low-cost loan from the government.
All 14 signatories of the April letter are recipients of campaign contributions this election cycle from the political action committee of the American Financial Services Association, or AFSA, which represents subprime lenders’ interests in Washington.
“It’s bad on the substance to have the Federal Reserve be lending to subprime consumer and small business lenders,” Graham Steele, a former Democratic counsel on the Senate Banking Committee, who now runs Stanford School of Business’ Corporations and Society Initiative. “It doesn’t look good when the members asking for that kind of bailout for these companies are also funded by those predatory lenders.”
Writing to Federal Reserve Chairman Jerome Powell, the lawmakers encouraged the Fed to expand eligibility for loans from its Term Asset-Backed Securities Loan Facility, or TALF, for “non-bank lenders and fintech platforms.” “Non-bank lenders” issue loans that are less regulated than loans made by traditional banks, but they are also willing to take greater risks. And “fintech platforms” are a kind of non-bank lender that operate online and through mobile apps.
The House members ― seven Democrats and seven Republicans ― were responding to a letter that the AFSA sent to Congress appealing for its members to become eligible for the program.
In late March, the Fed reinitiated TALF, a program it created to shore up consumer lenders after the 2008 financial crisis, to address the economic fallout from the public health response to the COVID-19 pandemic. The Fed has said that every financial institution is eligible for the emergency loans, but it will not bail out some riskier forms of credit.
In the letter, the House members make clear that they specifically want TALF to include loans issued by “installment” lending firms that the program currently excludes. Those firms offer high-interest loans for low-income borrowers to pay off in installments.
“The market for consumer and small business credit, including consumer installment loans, play a much more vital role in the economy than they did twelve years ago,” the letter states. “In light of this development, we hope you agree that any expanded TALF program should include investment-grade securities backed by unsecured consumer loans as eligible collateral.”
Financial reform advocates consider installment loans only slightly less exploitative than the notorious payday loans that exploit low-income workers’ desperation for quick cash by saddling them with debts they can never pay off.
Steele called installment lending “payday lending by another name.”
“It has slightly more favorable terms,” he said. “There are a whole bunch of ways in which they are not as predatory, but still predatory.”
HuffPost reached out to the offices of all 14 members of Congress for their response to the criticism.
Rep. Josh Gottheimer (D-N.J.) said in a statement that his support for expanding TALF springs from his agreement with a March 18 op-ed by former Federal Reserve chairs Ben Bernanke and Janet Yellen calling for the Fed to restart TALF to ensure households and businesses have access to credit.
He said he “took guidance from the community banks and small businesses in my District, who are also advocating to restart TALF.
“That’s who I listened to on this, because if credit markets freeze up, small businesses can’t stay in business and pay their employees right now,” he continued. “That would put even more of our local jobs at risk.”
A spokesperson for Rep. Vicente Gonzalez (D-Texas) pointed to the same column as inspiration for the letter.
The trouble with their claim is that the Fed announced it was restarting TALF on March 23 ― days after Yellen and Bernanke’s op-ed, and several days before the House members’ letter. The House members’ letter addressed the scope of the program, not whether it would get off the ground at all.
The only other lawmaker to respond was Rep. Ed Perlmutter (D-Colo.), who disputed that the lenders the letter was seeking help for were unsavory. Perlmutter said in a statement that the letter “does not encourage the Federal Reserve to support high interest, predatory loans, instead specifically requesting ‘investment-grade securities’ to be included in any expanded TALF program.”
“The purpose of the letter is to assist small businesses and consumers who rely on personal loans and will benefit from additional credit availability during the COVID-19 crisis,” he added.
A loan that is “investment grade” is considered at lower risk of default. It does not preclude a loan from having a high interest rate or otherwise being predatory.
Nat Hoopes, the executive director of the Marketplace Lending Association, a trade group that represents fintech platforms, contacted HuffPost unprompted when he learned about the story from a congressional office. He cited data showing that two-thirds of the “investment-grade” assets that the letter is asking for loan help for are from his group’s member companies. Marketplace Lending Association members “typically” issue loans with interest rates of 11-17%, according to Hoopes.
“The TALF program could be a really a critical program for low interest rate consumer credit to help people be able to borrow,” Hoopes said. “And if the Fed will respond to what Congress has asked of them, it doesn’t touch the payday lenders.”
The federal government has alleged, however, that loans issued by at least one fintech platform contained hidden fees not reflected in the upfront interest rate. Consumer advocates asked the letter’s signatories to insist on a 36% cap on interest rates, but they did not end up including it in the letter, according to a congressional aide familiar with the matter. “The 36% rate cap should have been applied,” the aide said. “We want to avoid a situation where payday lenders ― and other predatory lenders ― are empowered to take advantage of this very severe recession that we’re now in.”
There are better ways to do it that don’t leave people indebted afterwards or involve the central bank. Graham Steelee, former Democratic counsel, Senate Banking Committee
The signatories of the letter to the Fed are right about one thing: In the wake of the 2008 financial crash, a growing number of workers became desperate for short-term cash and had fewer traditional credit options to get it. Filling the void, installment lending became a growth industry.
In recent years, the loans have spawned horror stories in prominent news outlets. ProPublica chronicled the story of one Walmart employee who ended up paying a 182% interest rate on a loan. A former employee of an installment lending firm told The Washington Post that the business was “basically a way of monetizing poor people.”
If the lawmakers’ intention was to help low-income Americans stuck in the less-than-ideal situation of relying on these fly-by-night lenders for cash, they might instead prioritize getting needy people more financial aid through existing safety net programs.
“There are better ways to do it that don’t leave people indebted afterwards or involve the central bank,” Steele said.
The AFSA PAC has contributed to the campaigns of the 14 House Financial Services Committee members who wrote a letter calling for aid that would benefit the trade group’s members.
In the 2020 election cycle alone, the AFSA PAC contributed $30,000 to the seven Democrats on the letter: $3,500 to Gottheimer; $7,000 to Perlmutter; $4,500 to Gonzalez; $5,000 to Rep. Denny Heck (Wash.); $4,500 to Rep. Bill Foster (Ill.); $4,500 to Rep. Jennifer Wexton (Va.); and $1,000 to Rep. Jim Himes (Conn.).
The PAC gave $41,500 to the seven Republicans on the letter: $9,000 to Rep. Lee Zeldin (N.Y.); $7,000 to Rep. Barry Loudermilk (Ga.); $7,000 to Rep. Scott Tipton (Colo.); $6,500 to Rep. William Timmons (S.C.); $5,000 to Rep. Blaine Luetkemeyer (Mo.); $4,000 to Rep. Denver Riggleman (Va.); and $3,000 to Rep. Warren Davidson (Ohio).
Some of the signatories have still deeper relationships with installment lending firms.
Luetkemeyer, ranking member on the Financial Services Committee’s subcommittee for consumer protection, has received a total of $8,000 since 2015 from the World Acceptance Corporation PAC. The World Acceptance Corporation is the corporate name for World Finance, the installment lender ProPublica investigated.
Gottheimer, a co-chair of the bipartisan House Problem Solvers Caucus, has received $24,700 since 2016 from Marc Rowan, billionaire co-founder of the private equity giant Apollo Global Management, and Rowan’s wife, Carolyn. As The American Prospect first reported on Friday, employees of the private equity firm have given Gottheimer $97,600 over the course of his career.
Apollo currently owns the nation’s largest installment lender, OneMain Financial. OneMain styles itself as a more ethical installment lender, claiming it caps interest rates at 36%. But it’s also proven adept at lobbying for looser regulations of subprime lending at the state level.
The New York Times shined a light on Gottheimer’s ties to Apollo in a Wednesday report exposing the controversial private equity industry’s efforts to secure its share of federal coronavirus aid money. Shortly before Gottheimer joined the letter to Powell, Rowan used similar arguments to pitch the Problem Solvers Caucus on allowing businesses owned by private equity firms to become eligible for the TALF program, according to the Times. (Among the signatories of the April 1 letter, Gonzalez is also a member of the Problem Solvers Caucus.)
What’s more, OneMain is one of several non-bank lenders that have explicitly called for greater access to TALF.
The prospect that Democrats like Gottheimer, who received more money from the private equity industry than any other House member this cycle, would lobby the Fed for loans not only for unsavory lenders, but for fly-by-night lenders owned by private equity firms, is particularly galling to advocates of financial reform.
“The Fed and the Small Business Administration should do everything they can to stop private equity from getting access to taxpayer funding, as private equity funds will use that funding to lay people off and buy themselves more private jets,” said Matt Stoller, a former House Financial Services Committee staffer, who is now director of research at the American Economic Liberties Project.