One of the first orders of business for influential payday lending lobbyists in Washington is to undo the industry’s potential subjugation to the federal government, as Senate Banking Committee chair Christopher Dodd urges in his blueprint for financial reform. That might seem counterintuitive, given the possible weakness of a new federal consumer protection bureau and what the industry repeatedly faces in places such as Arizona, among dozens of states where citizens and politicians alike are calling for tougher regulation and even banning short-term, high-fee loans.

In Arizona, the payday lenders are locked in another bitter showdown today with consumer activists and their allies. The industry is battling to overturn a 2008 referendum that would close them down as of June 30.  A state legislative committee is considering a law that would allow payday lenders to continue offering their services. It’s another colorful, costly battle between groups such as AARP, the SEIU union, Arizonans for Responsible Lending  (Motto: “No More Loan Sharks”) and “pro-payday loans” forces such as Arizonans for Financial Choice, who were to hold an afternoon rally on the Capitol lawn in Phoenix, complete with signs such as “Save Our Jobs” and “Don’t Eliminate Industry.”

Among the tactics of consumer activists is reminding each member of the state Senate Appropriations Committee of the specific majority of citizens in their districts who voted against the industry in November 2008. For their part, payday lenders are reminding the same state senators of the number of businesses and employers in their districts. While state law generally limits annual interest rates to 36 percent, payday lenders operate under a temporary exemption that allows them to charge up to $17.85 for each $100 borrowed for two weeks, equivalent to 400 percent on an annual basis. (For fees in your state, look it up on an industry site.)

Steven Schlein, Washington-based spokesman for the industry’s national trade group, the Community Financial Services Association, tells us such state-by-state headaches are worth it. States understand the industry, he says, and a state like Arizona is better positioned to police it than overseers in some bureau in the Federal Reserve. “The state has experience regulating consumer financial services. The federal agency created from scratch just doesn’t make sense to us,” he says.

Dodd’s blueprint does allow states to pass tougher laws than the federal government, and some, such as North Carolina, have indeed banished payday lenders from their territory. But the industry already has its hands full – and wields extraordinary clout in many state capitals, the better to fend off assaults on its practices. As we’ve noted elsewhere, such influence is the result of millions of dollars in campaign contributions, public relations efforts, and a large lobbying army of some 115 lobbyists in 34 states and the nation’s capital.