Mary Cheh dreams big — the first-term City Councilwoman wants to transform the District of Columbia into a financial center.
“It is the political center of the country. I think with banking, the same could be true,” the George Washington University Law School professor said in an interview. “It’s an ideal place to do this, because we have a sophisticated regulatory regime in place that is highly respected, we have the expertise here, and we have extraordinary economic development.”
But the district has just two banks with $380 million of assets under its jurisdiction. A third bank is being formed, and Industrial Bank is converting its national charter.
As the chairwoman of the City Council’s public services and consumer protection committee, Prof. Cheh has a lot of sway over the rules that govern banks operating in the nation’s capital. And Washington recently streamlined the chartering process by lifting a requirement that new banks get the council’s approval.
The 57-year-old Democrat, who represents the affluent northwest quadrant on the council, is leading a charge against abusive lending. Legislation she wrote to limit the interest rates charged on payday loans made in Washington won the council’s unanimous, initial approval last month. A final vote is scheduled for Sept. 18. It is unclear whether Mayor Adrian Fenty will sign the legislation, but the city’s banking commissioner has backed it.
Prof. Cheh said payday lending is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need.
“Their entire model is based on the fact that they are going to aim at low-income people, who have an immediate need for cash,” she said.
The Payday Loan Consumer Protection Act of 2007 would cap the annual percentage rate on payday loans at 24%, or about 90 cents for a $100 loan repaid within two weeks. Current market rates are roughly $15 for a $100 loan.
“Payday lending is built on a foundation that … [the customer] will not be able to pay the loan back,” Prof. Cheh said. “If you’re on the margin and suddenly need $300, how are you going to get the $300, $500 later [to repay]? You’re not.”
Washington residents who use payday loans typically pay around $700 to borrow $325, she said.
The legislation is designed to put payday lenders on par with the rates charged by other local institutions, such as credit unions and banks, she said.
The argument that a rate cap would force lenders out of business and cost employees their jobs is “empty,” Prof. Cheh said. “It’s not clear that they will go out of business, because many of them have other services that they provide: check cashing, remittances, etc. What if some of them do close because they do not conform to a fair rate of interest and a fair lending practice? I say, good riddance.”
Tyrone Bland, director of government affairs for Ace Cash Express Inc., opposes the legislation and said there is a big demand for payday lending in Washington.
A rate cap of 24% “is a great arbitrary number, but it doesn’t help the industry,” Mr. Bland said. “Twenty-four is prohibition.”
The D.C. Financial Services Association has collected 2,000 signatures on a petition opposing the rate cap, and this week the trade group rolled out an advertising campaign against the bill.
Prof. Cheh, a Harvard Law School graduate, said finance companies and credit unions would fill any void created by the absence of payday lenders.
“Nature abhors a vacuum, so if there is a market for this, there will be a provider,” she said, listing finance companies, credit unions, and banks. “The banks themselves have to do more — they haven’t really stepped up yet.”
Though she is “fairly confident” her bill will become law, “I do have to worry, because the industry is putting out a lot of money, a lot of lobbying,” she said. “I don’t want to underestimate the influence of powerful business entities when they are aroused.”
