This is part one of a series on how high-cost lenders beat back a Missouri ballot initiative that would have capped the annual rate of payday and similar loans at 36 percent.
As the Rev. Susan McCann stood outside a public library in Springfield, Mo., last year, she did her best to persuade passers-by to sign an initiative to ban high-cost payday loans. But it was difficult to keep her composure, she remembers. A man was shouting in her face.
He and several others had been paid to try to prevent people from signing. “Every time I tried to speak to somebody,” she recalls, “they would scream, ‘Liar! Liar! Liar! Don’t listen to her!’”
Such confrontations, repeated across the state, exposed something that rarely comes into view so vividly: the high-cost lending industry’s ferocious efforts to stay legal and stay in business.
Outrage over payday loans, which trap millions of Americans in debt and are the best-known type of high-cost loans, has led to dozens of state laws aimed at stamping out abuses. But the industry has proved extremely resilient. In at least 39 states, lenders offering payday or other loans still charge annual rates of 100 percent or more. Sometimes, rates exceed 1,000 percent.
Last year, activists in Missouri launched a ballot initiative to cap the rate for loans at 36 percent. The story of the ensuing fight illuminates the industry’s tactics, from lobbying state legislators and contributing lavishly to their campaigns; to a vigorous and, opponents charge, underhanded campaign to derail the ballot initiative; to a sophisticated and well-funded outreach effort designed to convince African-Americans to support high-cost lending.
Industry representatives say they are compelled to oppose initiatives like the one in Missouri. Such efforts would deny consumers what may be their best or even only option for a loan, they say.
QUIK CASH AND KWIK KASH
Missouri is fertile soil for high-cost lenders. Together, payday, installment and auto-title lenders have more than 1,400 locations in the state — about one store for every 4,100 Missourians. The average two-week payday loan, which is secured by the borrower’s next paycheck, carries an annual percentage rate of 455 percent in Missouri. That’s more than 100 percentage points higher than the national average, according to a recent survey by the Consumer Financial Protection Bureau. The annual percentage rate, or APR, accounts for both interest and fees.
The issue caught the attention of Mary Still, a Democrat who won a seat in the state House of Representatives in 2008 and immediately sponsored a bill to limit high-cost loans. She had reason for optimism: the new governor, Jay Nixon, a Democrat, supported reform.
The problem was the Legislature. During the 2010 election cycle alone, payday lenders contributed $371,000 to lawmakers and political committees, according to a report by the nonpartisan and nonprofit Public Campaign, which focuses on campaign reform. The lenders hired high-profile lobbyists, and Still became accustomed to their visits. But they hardly needed to worry about the House Financial Institutions Committee, through which a reform bill would need to pass. One of the lawmakers leading the committee, Don Wells, owned a payday loan store, Kwik Kash. He could not be reached for comment.
Eventually, after two years of frustration, Still and others were ready to try another route. “Absolutely, it was going to have to take a vote of the people,” said Still, of Columbia. “The Legislature had been bought and paid for.”
A coalition of faith groups, community organizations and labor unions decided to put forward the ballot initiative to cap rates at 36 percent. The main hurdle was collecting the required total of a little more than 95,000 signatures. If the initiative’s supporters could do that, they felt confident the lending initiative would pass.
But even before the signature drive began, the lending industry girded for battle.
In the summer of 2011, a new organization, Missourians for Equal Credit Opportunity, or MECO, appeared. Although it was devoted to defeating the payday measure, the group kept its backers secret. The sole donor was another organization, Missourians for Responsible Government, headed by a conservative consultant, Patrick Tuohey. Because Missourians for Responsible Government is organized under the 501(c)(4) section of the tax code, it does not have to report its donors. Tuohey did not respond to requests for comment.
Still, there are strong clues about the source of the $2.8 million Missourians for Responsible Government delivered to MECO over the course of the battle.
Payday lender QC Holdings declared in a 2012 filing that it had spent “substantial amounts” to defeat the Missouri initiative. QC, which mostly does business as Quik Cash (not to be confused with Kwik Kash), has 101 outlets in Missouri. In 2012, a third of the company’s profits came from the state, twice as much as from California, its second-most-profitable state. If the initiative got to voters, the company was afraid of the outcome: “Ballot initiatives are more susceptible to emotion” than lawmakers’ deliberations, it said in an annual filing. And if the initiative passed, it would be catastrophic, likely forcing the company to default on its loans and halt dividend payments on its common stock, the company declared.
In late 2012, QC and other major payday lenders including Cash America and Check into Cash, contributed $88,000 to a group called Freedom PAC. MECO and Freedom PAC shared the same treasurer and received funds from the same 501(c)(4). Freedom PAC spent $79,000 on ads against Still in her 2012 losing bid for a state Senate seat, state records show.
MECO’s first major step was to back three lawsuits against the ballot initiative. If any one of the suits was successful, the initiative would be kept off the ballot regardless of how many citizens had signed petitions in support.
Meanwhile, supporters of the ballot initiative focused on amassing volunteers to gather signatures. The push started with umbrella organizations such as Metropolitan Congregations United of St. Louis, which ultimately drafted more than 50 congregations to the effort, said the Rev. David Gerth, the group’s executive director. In the Kansas City area, more than 80 churches and organizations joined up, according to the local nonprofit Communities Creating Opportunity.
Predominantly African-American congregations in Kansas City and St. Louis made up a major part of the coalition, but the issue crossed racial lines and extended into suburbs and small towns. Within a mile of Grace Episcopal Church in Liberty, a predominantly white suburb of Kansas City, there are eight high-cost lenders. “We think it’s a significant problem and that it was important for people of faith to respond to this issue,” said McCann, who leads the church.
Volunteers collected signatures at Roman Catholic fish fries during Lent and a communitywide Holy Week celebration. They went door-to-door and stood on street corners.
In early January 2012, some clergy opened their mail to find a “Legal Notice” from a Texas law firm sent on MECO’s behalf. “It has come to our attention that you, your church, or members of your church may be gathering signatures or otherwise promising to take directions from the proponents’ political operatives, who tell churchgoers that their political plan is a ‘Covenant for Faith and Families,’” said the letter.
“Please be advised that strict statutes carrying criminal penalties apply to the collection of signatures for an initiative petition,” it said in bold type. Another sentence warned that churches could lose their tax-exempt status by venturing into politics. The letter concluded by saying MECO would be watching for violations and would “promptly report” any.
Soon after the Rev. Wallace Hartsfield of Metropolitan Missionary Baptist Church in Kansas City received the letter, a lawyer called. Had he received the letter? Hartsfield remembers being asked. He responded, “If you feel like we’re doing something illegal, you need to try to sue, all right?” he recalls. Ultimately, no suits nor other actions appear to have been filed against any faith groups involved in the initiative fight.
MECO did not respond to requests for comment. The law firm behind the letter, Anthony & Middlebrook of Grapevine, Texas, referred comment to the lawyer who had handled the matter, who has left the firm. He did not respond to requests for comment.
Payday lenders and their allies took other steps as well. A Republican lobbyist submitted what appears to have been a decoy initiative to the Missouri secretary of state that, to the casual reader, closely resembled the original measure to cap loans at 36 percent. It proposed to cap loans at 14 percent but stated the limit would be void if the borrower signed a contract to pay a higher rate — in other words, it wouldn’t change anything. A second initiative submitted by the same lobbyist, Jewell Patek, would have made any measure to cap loan interest rates unlawful. Patek declined to comment.
MECO spent at least $800,000 pushing the rival initiatives with its own crew of signature gatherers, according to the group’s state filings. It was an effective tactic, said Gerth, of the St. Louis congregations group. People became confused about which was the “real” petition or assumed they had signed the 36 percent cap petition when they had not, he and others who worked on the effort said.
MECO’s efforts sowed confusion in other ways. In April 2012, a local court sided with MECO in one of its lawsuits against the initiative, throwing the ballot proposition into serious jeopardy for several months until the state Supreme Court overturned the lower court’s ruling. During those months, according to video shot by the rate cap’s supporters, MECO’s employees out on the streets warned voters who were considering signing the petition that it had been deemed “illegal.”
MECO also took to the airwaves. “Here they come again,” intones the narrator during a television ad that ran in Springfield, “Washington, D.C., special interests invading our neighborhoods.” Dark figures in suits and sunglasses can be seen descending from a plane. “An army of outsiders approaching us at our stores and in our streets,” says the voice. “But together we can stop them: If someone asks you to sign a voter petition, just decline to sign.”
Although the ad discloses that it was paid for by MECO, it does not mention payday lending or capping interest rates.
OTHERS JOIN THE FRAY
Installment lenders launched a separate group, Stand Up Missouri, to fight the rate-cap initiative — and differentiate themselves from payday lenders.
As the group’s website put it, “special interest groups masquerading as grass-roots, faith-based alliances” were not only targeting payday loans but also “safe” forms of credit such as installment loans. “Stand Up Missouri does not represent payday lending or payday interests,” the group said in its press releases.
Unlike payday loans, which are typically due in full after two weeks, installment loans are paid down over time. And while many payday lenders also offer such loans, they usually charge higher annual rates (from about 300 to 800 percent). The highest annual rate charged by World Finance, among the largest installment lenders in the country and the biggest backer of Stand Up Missouri, is 204 percent, according to its last annual filing.
Still, like payday lenders, installment lenders such as World Finance profit by keeping borrowers in a cycle of debt. Installment and payday lenders are also similar in the customers they target. In neighboring Illinois, 56 percent of payday borrowers and 72 percent of installment loan borrowers in 2012 had incomes of $30,000 or less, according to state data.
World Finance was the subject of an investigation by ProPublica and Marketplace in May. The company has 76 locations in Missouri: Of all high-cost lenders, only payday lenders QC and Advance America have more locations in the state.
Stand Up Missouri raised $443,000 from installment lenders and associated businesses to oppose the rate-cap ballot initiative, according to state filings.
To broadcast their message in Missouri, the installment lenders arranged a letter-writing campaign to local newspapers, placed ads, distributed video testimonials by satisfied customers, and held a rally at the Capitol. Like MECO, Stand Up Missouri also filed suit with their own team of lawyers to block the initiative.
Tom Hudgins, chairman of Stand Up Missouri, as well as president and chief operating officer of installment lender Western Shamrock, declined to be interviewed but responded to questions with an emailed statement. Stand Up Missouri acknowledges that “some financial sectors” may require reform, he wrote, but the initiative backers didn’t want to work with lenders.
“Due to their intense lack of interest in cooperatively developing market-based reforms, we have and will continue to meet with Missourians in all corners of the state to discuss the financial market and opportunities to reform the same.”
COMING MONDAY • The high-cost lending industry’s high-powered effort to influence African-American community leaders.