302 West Main Street, Durham, NC 27701
Phone (919) 313-8500 | Fax (919) 313-8595 | Email web@responsiblelending.org
The Center for Responsible Lending (CRL) is the most prominent critic of payday loans. Unfortunately, CRL uses bad research and false accusations in support of its positions. Independent research from the Federal Reserve has shown fees charged by credit unions are more costly to consumers than the payday loans CRL seeks to ban. Payday loans offer consumers a helpful option in the form of short-term credit.
Eliminating Lending Options and Harming Consumers
CRL's most important policy success to date was a well-funded campaign to ban payday lending in its home state of North Carolina. CRL and its allies repeatedly claimed that credit unions would step in to fill the void in borrowing options caused by the ban.
However, in November of 2007 Federal Reserve economists released an analysis of the effect of North Carolina's payday loan ban; the ban significantly hurt consumers. Federal Reserve research showed that payday lending was actually better for consumers than the fees charged by credit unions such as Self-Help, CRL's primary sponsor.
In a relatively rare academic rejoinder to activist talking points, the Federal Reserve researchers specifically rebutted CRL's claims that a ban on payday lending in Georgia would save residents $154 million. Instead, the Federal Reserve researchers concluded, "it cost them millions per year in returned check fees."
In February 2008, researchers from George Mason University announced that CRL-backed bans on cash-advance lending reduced consumers' likelihood of surviving financial crises. They concluded that having the payday lender option increased a borrower's probability of "financial survival" - paying for necessities like housing, groceries, utilities and other bills without facing economic collapse - by 31 percent.
The Institute for Liberty concluded that "under Eakes' [CRL's founder] lending reforms, North Carolina leads the U.S. in foreclosures. In a year-over-year comparison, the state's foreclosure rate outpaced the nation with a whopping 146% increase vs. 94% nationwide."
CRL's Slanted "Research"
The quality of research from the Federal Reserve and respected academic professionals stands in stark contrast to the low-quality and suspect "studies" CRL uses to prop up its attempts to limit consumer choice in lending options.
Many of the claims CRL advances are suspect assertions with little hard evidence provided in support. One example of questionable evidence cited by CRL: in North Carolina they touted an opinion poll and focus group results, rather than an economic study, to "prove" that few people missed payday loans after they were banned. The "study" had an additional conflict of interest problem, as the Deputy Commissioner for the state's banks, who conducted the poll was previously the head of CRL.
As we noted above, however, reputable studies of the actual economic effects of the payday loan ban found that it materially hurt North Carolina consumers. And even the poll, as reported in the Daily Press of Virginia, found "payday lenders had some advantages that people in the focus group liked." For instance, consumers "like the speed and ease of a payday loan," which they could get "without undergoing a credit check, or a default being reported to credit bureaus." Consumers liked that payday loan shops made small loans they "didn't think traditional banks would make" and "remembered their names and didn't look down on them like they felt bank workers did."
Some of CRL's other research is inflammatory and methodologically unsound.
In a racially charged report entitled "Race Matters," CRL implies that cash advance stores unfairly "target" minority neighborhoods because there are more of them in minority neighborhoods. Thomas Lehman, an Indiana Wesleyan University economics professor, said that the research "contains severe weaknesses and presents conclusions that are overstated at best, and misleading at worst." Lehman concluded, "the overall tone of the study suggests a lack of objectivity perhaps motivated by an ideological bias against the payday lending industry, which may explain why (the authors) appear to overstate their case given the weakness of their research."
A 2006 report called "Financial Quicksand" likewise relies on weak research and methodology. It relied on nearly 20 often questionable assumptions and 53 estimates, with data from areas unrepresentative of the total U.S. population. In addition, the analysis is based on the incorrect assumption that a person taking five or more loans a year is "flipping" them back-to-back; in fact nearly half of all states prohibit "flipping" loans and many limit rolling over the loans into larger ones. Again, research from the Federal Reserve contradicts these CRL reports and concludes that payday loans are a valuable part of consumer lending options.
CRL's Money Motive
The Center for Community Self-Help is a financial network based in North Carolina that includes the Self-Help Ventures Fund (the largest loan-making body), the Self-Help Credit Union, the Self-Help Community Development Corporation, and the Self-Help Services Corporation.
The Center for Responsible Lending was created by the lucrative Self-Help financial network to attack alternative lenders and boost Self-Help's own share of the short-term loan market. The Center for Responsible Lending acts as a lobbying and PR division for Self-Help.
The Self-Help network behaves in ways that are very close to the unfounded accusations that CRL hurls at Self-Help's rival lenders.
Self-Help makes loans to people who have trouble repaying; its credit union's rate of delinquent loans is nearly seven times its peers, and its customers carry a balance more than three times higher than at similar institutions. When Self-Help has poor clients on the line, the group often takes aggressive legal action against its delinquent low-income consumers - taking people to court for as little as $96.
Despite the Self-Help's pretensions to charitable intentions, they filed eviction papers against a childcare center in 2003. It has also taken legal action against a barbecue restaurant, a NASCAR collectibles shop, a fried chicken restaurant, and the Calvary Christian Church.
Public disclosures offer a glimpse into Self-Help's amazingly profitable "non-profit" world.
CRL's assets jumped from less than $900,000 in 2002 to more than $4.4 million in 2005.
- The Center for Community Self-Help, the center of the financial syndicate, saw its own assets jump from less than $5 million in 2002 to more than $13.5 million in 2005.
- The Self-Help Services Corporation, which handles pay and logistics for the web's operations, saw its revenue nearly double between 2002 and 2004.
- The Self-Help Community Development Corporation more than doubled its annual revenue from 2002 through 2005, when it brought in more than $1.3 million.
- The Self-Help Ventures Fund, a lending arm, reaped approximately $200 million in revenues exceeding expenses in the decade beginning in 1997. In 2005 alone it reaped an "excess" - or, profit - of more than $21 million, following its $25 million in 2004 and $16 million in 2003.
- Even excluding Self-Help's credit union, the entire syndicate increased its assets by more than a third between 2002 and 2004, amassing a staggering $245 million under its control. That's a quarter-billion-dollar business.
- The credit union manages hundreds of millions of dollars, bringing the total capital controlled by Self-Help to more than a half-billion dollars.
CRL: Building Its Lobby
CRL is heavily focused on lobbying efforts to drive rival lenders out of business. In July 2006, CRL named as its new president Michael Calhoun, a long-time lobbyist and lawyer. And CRL and its parent Self-Help network use all of their considerable financial muscle to accomplish this goal.
CRL utilizes a "safe harbor" in federal law that allows non-profit groups to lobby up to a defined portion of their revenue, though few are able to do so because they lack the resources of the lucrative CRL/Self-Help network.
Despite its status as federally tax exempt as 501(c)(3) non-profit organizations, Self-Help spent a stunning $23 million for a downtown Washington D.C. office building for CRL to lobby from. Federal disclosures show CRL spent more than $1.7 million on its lobbying efforts to shape banking and finance laws from 2004 to 2007.
While many organizations lobby to improve legislation, Self-Help's and a major donor's financial conflicts of interest have raised significant ethical concerns. An October 2007 news item showed that a billionaire hedge fund manager who gave $15 million to CRL made billions betting against the nation's housing economy. CRL in turn lobbies for laws that make home foreclosures more likely. Another investor who made a similar bet explained that if legislation favored by CRL and its billion-dollar backer passed, housing "losses would be realized much faster and they'd be larger."
CRL's Would-be Whistleblowers
In September of 2007 CRL arranged a series of press events that sought to damage the payday loan industry. The events featured a few former industry employees who alleged the payday loan industry was rife with bad business practices. However, the credibility of these so-called "whistleblowers" is dubious at best. CRL's premier "whistleblower" is Michael Donovan, a self-confessed liar and convicted felon. The Washington Post reported Donovan's June 2007 testimony before the D.C. city council that the payday loan industry was proud to serve communities other banks passed over. By September, Donovan had dramatically changed his story. Donovan said he could no longer "stomach the lies" of the companies he once worked for. Since then he has carried the activist group's message during public debates over bans or restrictions on payday loans, being described by the press blandly as a "former employee."
No major newspaper or TV outlet mentioned Donovan's long record of felony indictments and criminal convictions, or questioned his own lengthy record of lies. Donovan's criminal record spans decades and includes charges in at least 13 separate criminal proceedings since 1977. He has been convicted on 10 felony counts and has multiple criminal convictions relating to theft. Since 1997, he has faced more than $30,000 in civil judgments.
Why would a financial-industry employer hire a convicted felon and thief? It's simple: he lied.
A lawsuit filed by Donovan's former employer alleges that he falsified information on his employment application, including a fake Social Security number. When questioned about the irregularity, the lawsuit contends Donovan provided a forged Social Security Administration document. They say he got the job based on lies and forgeries.
Donovan also allegedly helped associates, later cited as whistleblowers by unsuspecting reporters, to gain employment. One of these "whistleblowers," Richard Moore, served jail time for offenses related to theft and was ordered to pay more than $7,500 in restitution. Donovan and Moore have been co-defendants in civil cases going back to at least 1998. Donovan also allegedly helped gain employment for Richard Robinson, who has pleaded guilty to stealing government property and using unauthorized access devices.
In CRL's zeal to attack lending institutions that challenge its Self-Help parent, the group has gotten into bed with some very unsavory characters.
Conclusion: The Money Machine Chugs On
CRL continues to serve its role as an attack dog for the Self-Help financial network.
CRL publishes embarrassingly weak research and spends huge amounts lobbying against payday lenders and mortgage lenders - against any financial institution that offers consumers an alternative to the kinds of services provided by Self-Help Ventures Fund and Self-Help Credit Union.
CRL shows no signs of slowing down. Facing a public rebuke from Federal Reserve researchers who found that credit unions (like Self-Help's) cost consumers more money than payday lenders, the group lashed out at the researchers and redoubled its efforts to demonize and ban payday lenders.
Unfortunately, it is consumers who are most hurt by their campaign to limit lending options.
