Kansas City, MO: Field Hearing on Small Dollar Loans 6/2/2016 (Part 1)

Welcome to the Consumer Financial Protection
Bureau’s Public Field Hearing in Kansas City, Missouri, at the Kansas City Music Hall. At
today’s field hearing you will hear from Director Cordray and a panel of distinguished experts
who will discuss issues related to small-dollar lending. The Consumer Financial Protection Bureau,
or the CFPB, is an independent federal agency whose mission is to help consumer finance
markets work by making rules more effective, by consistently and fairly enforcing those
rules, and by empowering consumers to take control over their economic lives. My name is Zixta Martinez. I’m the Associate
Director for External Affairs at the CFPB. Our audience today includes consumer advocates,
industry representatives, state and local officials, and, of course, consumers. We are
especially pleased to welcome Kansas City Mayor Sly James— —Acting Commissioner of the Missouri Division
of Finance, Debbie Hardman, and Supervisor of Consumer Credit, Joe Crider. We’re delighted
that you’re here. Let me spend just a few minutes telling you
what you can expect at today’s field hearing. First, you’ll hear from Mayor James, then
CFPB Director Cordray, who will provide remarks about today’s publication of the Notice of
Proposed Rulemaking, or NPRM, to address consumer harms from practices related to payday loans,
auto title loans, and certain installment loans, as well as publication of a Request
for Information and Supplemental Research. Following the director’s remarks, David Silberman,
the Acting Deputy Director for the Bureau and the Associate Director for the Bureau’s
Research Market and Regulations Division will frame a discussion with a panel of experts.
After the discussion there will be an opportunity to hear from members of the public.
Today’s field hearing is being livestreamed at ConsumerFinance.gov, and you can follow
CFPB on Facebook and Twitter. So let’s get started.
Mayor Sly James was born and raised in Kansas City and learned valuable lessons about resiliency
and dedication watching his parents work hard to take care of their family. Despite the
challenges they faced, Mayor James’ father, a chef, a janitor, and small business owner,
and his stepmother, who helped manage their business, still made sure that their children
had the opportunity to go to a good school and follow their dreams. This laid the foundation
for Mayor James’ commitment to education to ensure every child receives a high-quality
education regardless of where they live or their socioeconomic background.
Mayor James focuses his efforts to make Kansas City best in four areas: education, employment,
efficiency, and enforcement. In addition, Mayor James has worked to raise Kansas City’s
statewide and national profile by highlighting the myriad cultural and human capital resources
in Kansas City. Join me in welcoming Mayor James. Good morning. First of all, let’s thank the
Consumer Financial Protection Bureau and their director, Richard Cordray, for choosing Kansas
City to have this hearing. I also want to thank Communities Creating
Opportunity for their leadership on this issue. CCO has worked hand-in-hand with the faith
community to get people in the door to testify today, and I very much appreciate that. And
as we go about making Kansas City a better place to live, work, and raise a family, predatory
lending is one of those things that we simply have to fix. In Missouri, there are more payday
loan shops than Walmarts, McDonald’s, and Starbucks stores combined, and invariably
these proliferate in areas of town where the residents are the most vulnerable and predominantly
minority. That’s no accident. Research suggests that payday lending practices
drain $26 million a year from the Kansas City economy. That’s money that our constituents
could be spending on food, clothing, transportation, rent, school supplies, and other things that
make their lives better. It’s money they could donate to churches or other charities if they
so decided. Instead they get caught up in this inescapable debt trap because of the
obscene interest rates that our state legislature refuses to address. A credit card lender can
legally charge a high annual percentage rate of 36 percent, and that’s kind of high. The
average payday loan in this state has been allowed and legislatively sanctioned to rise
to 455 percent, and that’s astronomically obscene—455 percent. It’s not just incomprehensible,
it’s obscene, it’s immoral, and it should be illegal. Auto title loans aren’t much better. An industry
that charges triple-digit interest rates on small-dollar loans is not really the kind
of financial service that we really want or need in this city. Payday lenders like to
promote their loans as some short of short-term solution to emergencies, but payday lenders
aren’t philanthropists. They’re motivated by profits, not people, and they prey on those
least stable. They prey on those who have the fewest options,
and 70 percent of the borrowers with payday loans aren’t using it for an emergency. They’re
using it to try to cover basic household expenses. The payday loan shop becomes a foundation
of the household budget. Pew Charitable Trusts tells us that typical payday loan borrowers
have to pay almost 38 percent of their next paycheck just to cover the prior loan—38
percent just to cover the prior loan. Now you think about it. If you’re struggling already
and you’re having a hard time making ends meet, and now you’ve got to take 38 percent
of that check out to cover something on a loan that’s going to be with you forever,
that’s certainly not a good thing. Paychecks and paybacks should be limited to
5 percent of the loan, and that way people can pay back the loans but still have enough
money to live. If they are forced to continue with the way things are then we just create
an endless cycle of exploitation. You don’t have enough money to pay the loan and your
monthly bills? No problem. Go back to the lenders. They’ll happily lend you some more.
At 455 percent interest rates, why wouldn’t they?
And while we can look at these numbers and see that they don’t add up to a sound financial
future for anyone, numbers alone don’t tell the entire story. It’s almost always folks
who are struggling to make ends meet and have few options who are hurt the most by payday
lending, and those are the folks that you’re going to hear from today. I encourage you
to listen to their stories and remember them as you create a policy and talk about policies,
and bring transparency and accountability to these small-dollar loan businesses. Predatory
lending creates a cycle of debt that is virtually impossible to escape. Further, this cycle
just helps keep the poor poorer. It robs the city, state, and country of the potential
economic contributions that people could make if they had other options at their disposal.
While doing that, it also taxes social services, driving those services and the cost of them
higher. While all of that is happening on the negative side of the ledger, the payday
lenders just get richer and richer and richer. They put more and more stores out.
We’re not talking about small loans with reasonable interest rates here. That’s not the point.
Sometimes everybody needs to have a loan or have access to a loan. Things happen. What
we’re talking about are obscene, triple-digit annual percentage rates on payday loans and
car title loans that hurt families in my cities and across this entire country. A few hundred
dollars to fix the family car or pay for a medical bill can end up costing the borrower
thousands or hundreds of thousands of dollars. In what world is that okay?
These predatory lenders should more closely and strictly be regulated. For example, lenders
should not be allowed to maintain access to a borrower’s bank account or auto title for
an unlimited amount of time. We need to make sure that all small-dollar
loans are actually affordable to the borrowers and that interest rates are set at a level
where the borrower has a legitimate shot at paying it off, and I don’t have a problem
with people making a legitimate profit. That’s what business is about. But 455 percent interest
rate is by no means legitimate. We should also allow borrowers more time to
repay their loans, keeping them out of that paycheck-to-paycheck-to-paycheck-to-paycheck
cycle and debt trap. And finally, we need to cap these outrageous triple-digit interest
rates. Not all of these things can be done by the
people who have decided to come here to our city and talk about this and hold this hearing,
the Consumer Financial Protection Bureau. They can’t do it alone. Our state legislature
is responsible for these interest rates. Our state legislature has some responsibility
to do something about it. And I’ve got an idea. If we go to the state
legislature and tell them that for every borrower they can give them a gun if they lower the
interest rates, they may just do that. I’m wearing my gun violence orange today.
I’m not really serious. Our state legislature has to act on this situation.
They have a responsibility to the people in this state not to see them exploit it. If
desired, they can work with the CFPB to create a more just and transparent set of regulations
to guide this industry. But before they do that, they have to understand what it means
for a person to be caught in this cycle of endless debt and hopeless poverty, and the
way that they can do that is by listening to you today and taking it to heart.
Thank you for allowing me to be here. Let’s start to put some money back in the pockets
of our citizens. Thank you. Thank you, Mayor James, for the warm welcoming
remarks. I’m very pleased to introduce Richard Cordray.
Prior to his current role as the CFPB’s first director, he led the CFPB’s Enforcement Office.
Before that, he served on the front lines of consumer protection as Ohio’s Attorney
General. In this role, he recovered more than $2 billion for Ohio’s retirees, investors,
and business owners, and took major steps to help protect its consumers from fraudulent
foreclosures and financial predators. Before serving as Attorney General, he also served
as an Ohio State Representative, Ohio Treasurer, and Franklin County Treasurer.
Director Cordray? Thank you, Zixta. Thank you to the mayor,
to the commissioner for being here. Thank you to all of you who are joining us today,
and we appreciate having so much interest in our work.
We are here in Kansas City, known as “the Heart of America,” to discuss concerns about
payday lending and other types of loans made to consumers facing an immediate need for
cash. We have been here before, when we brought an enforcement action to shut down the Hydra
Group. This was a predatory online-lending scheme that maneuvered people into small-dollar
loans and then stripped money out of their accounts without their consent. We froze their
assets and put them out of business. We also held an earlier field hearing in St.
Louis, on the other side of the “Show Me State.” There we learned about loans offered at rates
as high as 1,950 percent annually, made to consumers who lacked the ability to repay,
causing some people to roll over their loans again and again and again. Today we are here
to show everyone concerned our proposed new rule on payday loans, auto title loans, and
certain high-cost installment and open-end loans. In such markets where lenders can succeed
by setting up borrowers to fail, something needs to change. From the beginning, payday lending has been
an important priority for the Consumer Bureau. I In the statute creating this new agency,
Congress authorized us to exert supervisory authority from the outset over all financial
companies in only three specified markets, and one of these is the market for payday
loans. In addition, we have the authority to enforce the law against all payday lenders.
We have deployed this authority in a number of cases, involving both storefront and online
lenders, where our investigations have found violations of the law. And we have the authority
to write new rules to clean up unfair, deceptive, or abusive practices that harm consumers.
That is the purpose of our discussion today. In January of 2012, just after I was appointed
as the first Director of the Consumer Bureau, we held a field hearing in Birmingham, Alabama,
focused on payday lending. We have held others since on the same subject in Nashville, Tennessee,
and Richmond, Virginia. These issues have drawn interest from people of diverse backgrounds
all over this country. In addition to these public events, we have sat and talked at length
with many stakeholders, from consumer groups to lenders to academics.
Perhaps most telling of all, we have held numerous sessions with a broad set of faith
leaders from across the country. They have shared searing experiences of how payday loans
affect the people they care for every day in their churches and synagogues and mosques,
and they have described how these loans undermine financial life in their communities. In devising
this proposed rule, we have been listening carefully, and we will continue to listen
and learn from those who would be most affected by the rule, and we will take their comments
into account as we go forward and work to finalize new reforms in this area.
We have also looked at the history of small-dollar lending in this country. Some early examples
were “salary lenders” who offered quick cash to consumers by essentially purchasing their
next paycheck at discount rates that were very costly. These practices led to a crackdown
and legal reforms designed to ensure that such loans would be made on more responsible
terms. Many states, covering tens of millions of people, have maintained strict usury caps
that effectively permit only small-dollar loans that are carefully underwritten. The
Consumer Bureau, by contrast, does not have authority under our statute to establish a
usury limit for such loans and so our proposal would not do so. More recently, other states
created legal frameworks that opened the door to loosely underwritten, high-cost payday
loans, auto title loans, and payday installment loans. These newer laws first arose when some
check-cashing outlets began to hold a customer’s personal check for a period of time for a
fee before cashing it, which spawned the payday loan business.
We have undertaken extensive research to understand how consumers experience these loans today.
We have done so with the recognition that people who live from paycheck to paycheck
sometimes need access to credit to deal with drops in income or spikes in expenses, as
well as times when their income and expenses are mismatched. But at the same time, we have
made clear our view that the credit products marketed to these consumers should help them,
not hurt them, and our research has shown that too many of these loans trap borrowers
in debt they cannot afford, instead of tiding them over in an emergency.
Specifically, we found that short-term loans with very high annualized interest rates offered
over a short period—typically 390 percent or more for two-week single-payment loans—often
result in consumers frequently rolling over these loans. Nearly four out of five of these
loans are reborrowed within a month, usually when the loan is due or immediately thereafter.
Approximately one in four new loans results in a sequence of at least ten loans, one after
the other, made in a desperate struggle to keep up with the payments that are due. Each
time, the consumer pays more fees and interest on the same debt, turning a short-term loan
into a long-term debt trap. It is much like getting into a taxi just to ride across town
and finding yourself stuck in a ruinously expensive cross-country journey.
Indeed, the very economics of the payday lending business model depend on a substantial percentage
of their customers being unable to repay the loan and borrowing again and again at high
interest rates, incurring repeated fees as they go along. More than half of all payday
loans are made to borrowers in loan sequences of ten loans or more. For borrowers who are
paid weekly or bi-weekly, one-fifth of these loans are in sequences of 20 loans or more.
We uncovered similar issues with single-payment auto title loans, where borrowers use the
title to their car or truck as collateral for a loan. The borrower agrees to pay the
full amount owed the lender in a lump sum plus interest and fees in a short time, usually
in about 30 days, to get their title back. These are high-cost loans, with an annualized
interest rate of about 300 percent. After analyzing over three million loan records,
we found that these loans are single payment and short term in name only. Only 12 percent
of new loans are repaid in full when due without having to reborrow. By contrast, more than
80 percent of auto title loans are rolled over or reborrowed on the day they are due
because borrowers cannot afford to pay them off in a lump sum.
Moreover, one in five of these short-term auto title loan sequences ends up with the
borrower having his or her car or truck seized by the lender because of a failure to repay
the loan. When borrowers lose their personal vehicles, they may also lose mobility, which
in much of the country, such as where I grew up and where we are here today, can greatly
imperil the foundations of people’s financial lives. For those who have to walk away from
a loan without their car or truck, the collateral damage can be severe if they have relied on
it to get to work or to conduct most of their daily affairs.
The rule we are proposing today also addresses certain longer-term installment loans and
open-end lines of credit. Specifically, the proposal would cover loans for terms longer
than 45 days when the lender either collects payment by accessing the consumer’s deposit
account or paycheck or secures the loan by holding the consumer’s auto title as collateral.
Of particular concern to us are payday installment loans. These are high-cost loans typically
made by lenders that also offer standard payday loans, with the installment payments timed
to fall on the consumer’s paydays and deploying these types of leverage to extract payments.
Some have a balloon payment that has to be repaid after a number of interest-only payments.
Our research into payday installment loans revealed that, at the end of the day, after
accounting for some amount of refinancing activity, more than one-third of loan sequences
end in default. Our study of auto title installment loans found similar figures, with loan sequences
ending in default nearly one-third of the time.  In addition, more than one in ten
loan sequences ended with the borrower’s car or truck being seized by the lender.
Currently, about 16,000 payday loan stores operate in the 36 states where this type of
lending takes place, joined by an expanding number of online lending outlets. Some of
these lenders also make auto title loans, or payday installment loans, or both. What
they have in common is that they offer quick cash on terms that make it very hard for consumers
to pay off their loans on time, and they have devised ways to be profitable without determining
whether consumers who take out these loans can actually afford them. In the case of payday
and single-payment auto title loans, this business model depends critically on repeat
borrowing. For payday installment and auto-title installment loans, the business model depends
primarily on access to a borrower’s account or auto title, which provides the lender with
the necessary leverage to extract payments even when the borrower cannot afford them.
Based on our research and what we’ve heard around the country, we believe the harm done
to consumers by these business models needs to be addressed.
As we took up the task of proposing reforms, we have spent much time and effort learning
about state and tribal regulatory regimes, including many discussions with state payday
regulators, state attorneys general, and tribal leaders. Payday lenders already have to comply
with federal laws on matters such as truth-in-lending and debt collection practices. Today the Consumer
Bureau is taking the next step, adding new federal protections against lending practices
that harm consumers by trapping them in debt they cannot afford. These strong, common-sense
protections would apply mainstream lending principles to payday, auto title, and certain
other high-cost installment and open-end loans. Traditional lenders, such as community banks,
credit unions, and many finance companies, make an effort to determine a borrower’s ability
to repay before offering a loan with affordable payments. Both the lender and the borrower
have a mutual stake in one another’s success. But today, the borrower’s ability to repay
is often entirely absent from the transaction when it comes to payday and other similar
loans. Our proposed rule seeks to address these concerns
by protecting consumers from such debt traps. Let me first describe how the proposal applies
to short-term loans. For these loans, the lender generally would need to apply a “full-payment”
test to determine that consumers have the ability to repay the loan without reborrowing.
Lenders could also offer a loan with a “principal payoff option,” but only under specified conditions
that are directly designed to ensure that consumers cannot get trapped in an extended
cycle of debt. To spell this out further, using the proposed
full-payment test, lenders making short-term loans would be required to check upfront whether
the borrower can afford to pay the full amount of the payment when it comes due, without
needing to reborrow. Specifically, lenders would need to verify the borrower’s income,
borrowing history, and certain key obligations. This would determine whether the consumer
will have enough money to cover their basic living expenses and other obligations and
still pay off the loan when due without needing to reborrow in the next 30 days. The proposal
further protects against debt traps by making it difficult for lenders to press distressed
borrowers into rolling over the same loan or reborrowing shortly after paying it off,
and it would cap the number of single-payment loans that lenders can offer to a consumer
in quick succession. Under the “principal payoff option,” consumers
could borrow a short-term loan up to $500 without passing the full-payment test, as
long as the loan is directly structured to keep the consumer from getting trapped in
debt. Under this option, if a consumer cannot pay off the original debt entirely or returns
to borrow within 30 days, the lender could offer no more than two extensions to the original
loan, and then only if the consumer repays at least one-third of the principal with each
extension. This proposal would afford somewhat more flexibility while expressly protecting
borrowers against debt traps and providing them with a simpler way to pay off their debt.
To further safeguard against extended indebtedness, lenders could not offer this option to any
consumer who has been in debt over the preceding year on short-term loans lasting 90 days or
more. Our proposal takes the same basic approach
to the longer-term loans that it covers. Here again, our proposed rule would generally require
lenders to apply the same full-payment test to determine whether borrowers can pay what
they owe when it is due and still meet their basic living expenses and obligations. For
payday and auto-title installment loans, either with or without a balloon payment, this means
consumers have to be able to afford to repay the full amount when it is due, including
any fees or finance charges. Our proposed rule would permit lenders to
offer certain longer-term loans without applying the full-payment test if their loans meet
specific conditions designed to pose less risk to consumers and provide access to responsible
credit. In particular, we are not intending to disrupt existing lending by community banks
and credit unions that have found efficient and effective ways to make small-dollar loans
to consumers that do not lead to debt traps or high rates of failure. Indeed, we want
to encourage other lenders to follow their model.
Therefore, our proposal would not require lenders to apply the full-payment test for
loans that generally meet the parameters of the kind of “payday alternative loans,” known
as “PAL” loans, authorized by the National Credit Union Administration. For these loans,
interest rates are capped at 28 percent and the application fee is no more than $20. This
option would be available to all lenders on the same basis and not just to federal credit
unions. Our proposal also would not require the full-payment
test for certain installment loans that we believe pose less risk to consumers. These
loans would have to meet three main conditions. First, they must be for a term of no more
than 2 years and be repaid in roughly equal payments. Second, the total cost cannot exceed
an all-in percentage rate of 36 percent, plus a reasonable origination fee. Third, the projected
annual default rate on all of these loans must not exceed 5 percent. The lender would
have to refund all of the origination fees paid by all borrowers in any year where the
annual default rate of 5 percent is exceeded. Lenders would also be limited as to how many
such loans they could make to a consumer each year.
The Bureau is also proposing new requirements to address how lenders go about extracting
payments from consumer accounts for the types of loans covered by the proposal. From our
research, we found that when these attempts failed because they were returned for insufficient
funds, online payday and payday installment lenders often made repeated attempts to extract
money electronically even though they were unlikely to succeed in doing so. When these
attempts repeatedly fail, consumers risk incurring substantial fees, both for insufficient funds
by their bank or credit union and for returned payments by the lender.
Some lenders even break up the total amount they are owed into smaller chunks and feed
them through the system piecemeal, even though one payment will rarely succeed when another
fails. This can lead to multiple penalty fees being assessed on what started out as a single
payment, hiking costs for consumers while typically failing to collect any more money.
Our research also found that many online payday borrowers lost their bank accounts after one
or more failed attempts by a payday lender to extract a payment from the account.
For the loans covered by our proposal, lenders would have to give borrowers advance notice
before accessing their account to collect a payment. This would give consumers a chance
to question or dispute any unauthorized or erroneous payment attempts and to make arrangements
for covering payments that are due. We believe this will reduce the risk of consumers being
debited for payments they did not authorize or losing their accounts as a result of debits
they did not authorize or anticipate. In addition, we propose what we call the “debit
attempt cutoff.” After two straight unsuccessful attempts, the lender could not make further
debits on the account without reaching out to the borrower to get a new and specific
authorization. This would keep consumers from being slammed by multiplying fees for returned
payments and insufficient funds. Under all aspects of the proposal we are releasing
today, we recognize that consumers may need to borrow money to meet unexpected drops in
income or unexpected expenses. We recognize too that some lenders serving this market
are committed to making loans that consumers can in fact afford to repay. We do not intend
to disrupt the basic underwriting approaches taken by many banks, credit unions, and traditional
finance companies, as well as some newer entrants, which offer installment loans in ways designed
to assure that consumers can afford to repay them. We believe these lenders will have little
difficulty adhering to our proposed rule. In fact, many elements of our full-payment
test are based on information these lenders have shared about their approaches. But let
me be clear: if a lender can succeed when borrowers are set up to fail, it is a telltale
sign of a malfunctioning market. When the balance between lenders and borrowers is knocked
askew, the “win-win” dynamic found in healthy credit markets disappears and puts consumers
at great risk. We believe the rule we are proposing would
make a positive difference by prompting reforms in the markets for these products. Based on
our review of the available evidence, we believe the vast majority of borrowers would still
be able to get the credit they need in an emergency, either by passing the full-payment
test or by utilizing one of the other options. But now they would be shielded by an umbrella
of stronger protections that would keep them from getting trapped in debt they cannot afford.
As we move forward with this rulemaking process, we are also launching a related inquiry into
other situations that may harm consumers. Our Request for Information will help us learn
more about a further range of products and practices that fall outside the scope of this
proposal. This includes, for instance, further questions about high-cost, longer-term installment
loans and open-end lines of credit that lack vehicle security or an account access feature.
We will look into the business model for these loans and the underwriting practices of these
lenders. We also want to learn more about the extent
to which these loans may keep borrowers on a debt treadmill by applying the payments
to interest rather than paying down the principal. And we want to know whether these loans encourage
loan churning or discourage early loan repayment. What we learn may affect future rulemaking,
and it will clearly help guide our continuing efforts to supervise companies and take enforcement
actions against unfair, deceptive, or abusive acts or practices.
Missouri’s own President Harry Truman notably said, “Every segment of our population, and
every individual, has a right to expect from our government a fair deal.” Our proposed
rule is designed to ensure more fairness with these financial products by making systemic
changes to steer borrowers away from ruinous debt traps and restore to them a larger measure
of control over their affairs. Ultimately, our objective is to allow for responsible
lending while making sure that consumers do not fall into situations that undermine their
financial lives. This hearing and the notice-and-comment process
are important steps. We greatly value the feedback we receive and we study it carefully.
It invariably refines our thinking and our approach, and it makes our final rules better
in the end. What we hear from you and from all stakeholders will help us decide how we
can better protect financially vulnerable consumers. We ask you to share your thoughts
and experiences to help us get there, and we appreciate your joining us today. Thank you, Director Cordray. At this time,
I’d like to invite all the panelists to take the stage, and while they are doing so, I’ll
briefly introduce CFPB and guest panelists who will participate in today’s discussion.
David Silberman serves as the Bureau’s Acting Deputy Director and Associate Director for
the Bureau’s Division of Research, Markets, and Regulations. Cheryl Parker Rose serves
as the Assistant Director for the Bureau’s Office of Intergovernmental Affairs. Daniel
Dodd-Ramirez serves as the Assistant Director for the Bureau’s Office of Financial Empowerment.
Our guest panelists are Rev. Dr. Cassandra Gould, Executive Director, Missouri Faith
Voices; Carrie Smith, Staff Attorney for Community Legal Services of Philadelphia; Wade Henderson,
President and CEO of The Leadership Conference on Civil and Human Rights; Galen Carey, Vice
President, National Association of Evangelicals; Darrin Anderson, President and CEO of QC Holdings;
Keith Sultemeier, President and CEO of Kinecta Federal Credit Union; Bill Himpler, Executive
Vice President, American Financial Services Association; and Kirk Chartier, Chief Marketing
Officer, Enova. David, you have the floor.
Thank you, Zixta. Good morning, everyone. It’s my pleasure to welcome you today to chair
this portion of our field hearing. As Zixta has indicated, we’re going to hear from a
number of respected panelists today, including advocates from the civil rights, faith-based,
and consumer advocacy communities across the country and at the local level. In addition,
we have a broad spectrum of lenders represented, making a variety of different types of loans.
Each panel member will give us some background and provide their perspective. We will then
pose questions to our panelists and engage in a discussion. The panel discussion will
be followed by the public comments component of the hearing, where we’ll hear from members
of the public who have signed up to speak. So before I turn it to our panelists, let
me take a moment just to frame the discussion. As Director Cordray noted in his remarks,
after having studied payday, vehicle title, and what we call payday installment loans
over the last four years, the CFPB has found that these products often prove unaffordable
to consumers, leading to significant consumer harm. Today the Bureau has issued a proposal
that would, if finalized, address the harms flowing from unaffordable payments by requiring,
among other things, that lenders determine that consumers have the ability to repay their
loans. The proposal would also require lenders to obtain new account access authorization
from borrowers after two consecutive debit attempts have failed.
At our last field hearing on payday lending in March of 2015, we released an outline of
proposals under consideration. Since then, we have convened a meeting of small business
representatives, consistent with the Small Business Regulatory Enforcement Fairness Act,
or SBREFA. We held a tribal consultation and we’ve met with a wide range of stakeholders
to discuss the proposals we were considering. We have continued our own research as well.
We’ve considered the feedback on the proposals we’ve put forward and have decided to proceed
with a formal rulemaking. The director explained the basic premise of our proposal in his remarks.
In short, under the proposed rule we are considering, we would be introducing protections into these
markets that would require lenders to determine whether borrowers have the ability to repay,
so that fewer consumers fall into debt traps or into loans they cannot afford.
So at this time I’d like to invite our panelists to present their opening remarks. I’m going
to ask each panelist to keep their remarks to 3 minutes. Then, following the statements,
my colleagues, Cheryl Parker Rose and Daniel Dodd-Ramirez, and I will moderate a discussion
with the panelists. We’ll start, from my left, with Darrin Anderson,
the President and CEO of QC Holdings. Thank you, Director Cordray, and members of
the panel. I’m Darrin Anderson, the CEO of QC Holdings. We started our company in Kansas
City almost 30 years ago and have grown to become the largest provider of short-term
loans in Missouri, with nearly 100 retail locations across the state and an annual payroll
of almost $45 million across the country. My company proudly offers access to credit
that makes people’s lives better. I’d first like to make an important clarification.
We’ve heard horror stories in the media about illegal, unlicensed lenders, but it’s simply
unfair to compare responsible lenders who abide by federal, state, and local laws with
the criminal element. Let’s be clear. We encourage enforcement actions
and prosecution about law lenders by the Bureau and other authorities. However, the appropriate
way to deal with illegal activity is with enforcement action directed at those criminals,
not with blanket regulation that would eliminate a significant portion of an already well-regulated
industry. Just as you wouldn’t get rid of automobiles
because of a few accidents, you shouldn’t eliminate a source of credit for the majority
of folks who appreciate it. What’s ironic about today’s proposed rules is it will actually
decrease consumer protections. The rules contemplate that 70 percent of licensed lenders will go
out of business, but the rules don’t presume a decrease in the desire for short-term credit.
Indeed, a May of 2016 study by the Federal Reserve found that nearly half of all Americans
cannot come up with $400 to meet unexpected expense. With the absence of highly regulated,
licensed lenders in the marketplace, the CFPB’s proposed rules would push consumers to unlicensed,
illegal lenders. The reality is that the vast majority of payday
loan customers understand the product and use it responsibly. Our customers are overwhelmingly
satisfied with the product and complaints about payday loans have been nearly non-existent
through the decades of state regulation. Even at the Bureau’s own complaint portal, only
about 1.5 percent of all complaints are directed at payday loans, and more than three-quarters,
75 percent of those, are generated by illegal, unlicensed lenders. In the first part of 2016,
payday lenders did millions and millions of transactions but generated only 409 complaints
to the Bureau. Payday lending was the only industry with consumer complaints that went
down during that period. This lack of complaints, combined with high
customer satisfaction survey results, demonstrates that the vast majority of payday loan customers
are highly satisfied with the product and do not have problems managing the loan payments.
Unfortunately, the CFPB rule proposed, written by a small group in Washington, would preempt
laws that have been crafted, debated, and refined over decades by local and state policymakers
who know their constituents best. But perhaps most disappointing is the fact that the Bureau’s
proposed rules do nothing to address the unlicensed lenders who circumvent state law, pose the
greatest threats to consumers, and generate the majority of customer complaints and horror
stories. Despite its claims of extensive research and
being a data-driven agency, the Bureau still cannot answer three fundamental questions:
(1) Why do millions of consumers choose payday lending over other options? (2) Why do payday
lenders have such a high customer satisfaction rating? (3) What will replace payday lending
when the Bureau regulates us out of existence. Unfortunately, the Bureau has created a rule
that will eviscerate the ability of regulated, small-dollar credit providers to serve our
customers, driving those customers to more expensive, illegal options or denying them
access to credit altogether and make their lives worse. Our customers overwhelmingly
appreciate and value the product, because it makes their lives better. They need more
credit options, not less. Thank you. Thank you. Keith Sultemeier, President and
CEO of Kinecta Federal Credit Union. Thank you, Director Cordray and CFPB Staff,
for this opportunity to dialog on short-term, small-dollar lending. My name is Keith Sultemeier
and I serve as President and CEO of Kinecta Federal Credit Union and its wholly owned
subsidiary, Nix Neighborhood Lending. Kinecta is a full-service financial institution, headquartered
in Southern California, for 75 years, with assets of roughly $4 billion. Our Nix subsidiary
has provided alternative financial services to the communities of Central and South Los
Angeles for 50 years, and has extended short-term, small-dollar credit for approximately 20 years.
Like all credit unions, Kinecta is a mission-driven, not-for-profit cooperative that is owned in
equal measure by each of its 280,000 members. Our primary objective is not to maximize profits
but instead to improve the financial lives of our members and to provide meaningful benefit
to the communities in which they live. As such, we question the need for including
credit union in this rulemaking and encourage Director Cordray to exercise his authority
to exempt those with assets under $10 billion. Kinecta has a long-standing commitment to
serving underserved communities. After 50 years of doing so, we believe that we understand
the needs of consumers in these areas and the many challenges that they face. Similarly,
we understand the difficulties involved in providing them with affordable, short-term,
small-dollar loans. The lending objectives of Nix are to meet our customers’ immediate
need for liquidity, get them out of debt, build their credit, and position them for
lower cost traditional financial products, hopefully from the credit union, but if not
then elsewhere. Although Kinecta is a not-for-profit, we are
not a charity. Our capital belongs to our members. Today credit unions may only grow
capital and assets through retained earnings. As our members increase their wealth over
time, we cannot accept new deposits without sufficient earnings to support these. Additionally,
we cannot invest in the technology and service enhancements necessary to keep up with changes
in regulation or the evolving needs of our members unless we earn a reasonable margin
on our products and services. In providing affordable small-dollar loans,
earning a margin has been, and continues to be a significant challenge for us. All of
our short-term, small-dollar loans are offered at substantial discounts to market. We provide
loans with terms up to 31 days at fees that are 40 percent less than competitors, as well
as installment loans up to 24 months with interest rates capped at 18 percent. Additionally,
payments on installment loans are restricted to be no more than 5 percent of monthly income.
Although we generate sufficient loan revenue to cover variable costs, we have not yet been
able to earn a net profit. Scaling this business has been costly and
time-consuming, especially given our capital constraints. It has been a slow and, at times,
a frustrating process, but the need for small-dollar loans in our communities is overwhelming.
If responsible, regulated entities are not meeting the needs, consumers will go elsewhere,
but the need remains. Although we agree in principle with the proposed rule’s objectives,
we expect that it will be consistent with the Bureau’s previous rulemakings in that
it increases our costs and/or decreases our revenues. New costs include, among others,
gathering, analyzing, imagining, and storing of additional borrower documentation, third-party
costs for credit and other data, and costs for designing or modifying our loan origination
and servicing systems. When coupled with potentially lower interest income, increased credit risk,
and higher servicing costs, we fear that we may be reaching the point at which the credit
union can no longer provide short-term, small-dollar credit and still be seen as a responsible
steward of our members’ capital. Again, we appreciate the opportunity to share
our perspective and experience on this topic, as it’s so important to the underserved communities
where we do business. Thank you. Thank you. Next we’ll hear from Kirk Chartier,
the Chief Marketing Officer of Enova. Thank you. Well, I’m glad to be here today
representing the customers and the employees of Enova. Enova’s mission is to help hard-working
people meet their financial obligations and we’re proud to serve the consumers who rely
on us for fast access to credit that they can trust. The need for our small-dollar loan
products is clear. We’ve already heard about the Federal Reserve research that found that
half of America doesn’t have $400 for an unexpected expense. Today I’m going to focus on facts,
not anecdotes and stories—though I could. We have plenty from our customers about how
our products have helped get them through tough times.
Enova is a state-licensed and directly supervised by states we lend in and the CFPB. We support
fact-based regulations that emphasize transparency and fair practices in consumer lending. Companies
like Enova are subject to the same laws and regulations regarding loan documentation and
disclosures, repayment methods and collection practices as big banks like Citi and Wells
Fargo. We don’t see more complicated regulations will not necessarily result in a better customer
experience or more consumer protection. A second fact: 40 percent of Americans have
non-prime credit scores. Enova can support a simple ability-to-repay standard that does
not unduly restrict access to credit for those borrowers. We believe the final small-dollar
rule must allow for innovation, must preserve consumer convenience, including the ability
for consumers to quickly apply for credit via their computer, tablet, or mobile phone,
and receive funding electronically when they need it. They don’t expect that getting a
$500 loan will have the same requirements as a mortgage.
Over the past 12 years, Enova, along with other online lenders, has expanded the availability
of mainstream credit products by using individual consumer data, combined with advanced statistical
algorithmic underwriting, to make loan decisions. As you would expect, the default rate in interest
rates on these unsecured loans are often higher than those experienced with prime credit consumers,
but non-prime consumers still deserve financial access, choices, and flexibility, and that’s
what our quality products provide to millions of Americans.
A third fact: While we’re often told that consumers should just borrow from friends
and family, recent research from Bankrate.com shows that 63 percent of Americans don’t have
$500 in savings, and only 15 percent can borrow from friends and family. So let’s call that
the “15 percent solution.” What about everybody else? A final fact: Enova has served over 4 million
customers and our current customer satisfaction scores show 90 percent of our customers are
either satisfied or very satisfied with the service they received. This isn’t what critics
of our industry want to talk about, but it’s supported by the CFPB’s own research, showing
that a majority of consumers using small-dollar loans take 3 or fewer loans in a row and successfully
pay those loans off. It is also supported by research published
by the Federal Reserve that shows short-term loans can help borrowers avoid more costly
overdrafts and defaults on other obligations. All Americans deserve access to quality credit—I
think we all agree on that—regardless of income level and despite flaws in their credit
history. Enforcement of existing laws, as we have seen CFPB and FTC step up over the
recent years, should be combined with reasonable, fact-based rules on ability to repay, lender
registration and reporting, and consumer-friendly disclosure, to ensure that consumers are being
treated fairly. But the rules must not restrict the ability of consumers to access credit
when they need it, and that includes making sure that any requirements aren’t overly burdensome
for consumers nor create impractical standards that deter lenders from a willingness to make
small-dollar loans. Our customers will provide comments to the
CFPB, we’re sure, as will Enova. I hope CFPB will listen and adjust the final rules to
eliminate unnecessary restrictions currently in this proposal to ensure that fair, transparent
credit remains available for all Americans. Thank you. Thank you. Next we’ll hear from Bill Himpler,
the Executive Vice President of the American Financial Services Association.
Thank you, David. Thank you, Director Cordray and the CFPB staff for inviting AFSA to participate
in this important hearing. AFSA represents the traditional installment lending customers
and industry, and we’ve been in business for 100 years, a successful track record over
that time. Make no mistake: this proposal before us today
could impact access to affordable credit for up to 30 percent of the population. Kirk said
40 percent, but somewhere in there. It’s a big number. The director has noted that there’s
a need for high-quality credit and has articulated that CFPB actions need to preserve the ability
of responsible installment lenders to continue to offer safe and affordable loans. Rather
than preserving this ability to offer high-quality products, I’m afraid this proposed rule significantly
diminishes that ability. Installment lenders have, for 100 years, a
successful track record. Our loan performance is at or above 90 percent. This rule would
subject our customers—teachers, laborers, first responders—to mortgage-like underwriting
that just does not work in the small-dollar space. Our other option is to offer loans
at or below an all-in APR of 36 percent, that was devised 100 years ago. This won’t work
either. Loans below $3,500 will cease to exist. Millions of good customers will have nowhere
else to turn, as my colleagues have pointed out. Banks and credit unions won’t make these
loans either. In fact, the head of the National Credit Union Administration that regulates
credit unions said, in response to a 36 percent rule with the Pentagon, that her member companies,
the credit unions across this country, are unable to make loans under that regime.
So what’s the answer? The Center for Financial Services Innovation designed affordable small-dollar
loans are ones that are based on sound underwriting, a loan structure whereby the loan can be repaid
fully without having to reborrow and still meet other obligations and pricing. But the
CFSI went on to say that you cannot judge an affordable product just on pricing alone.
It takes all three components. The CFSI goes on to define high quality as a matter of balancing
both customer protections and lender profitability. As I mentioned, for over 100 years our members
have met this standard. The Department of Justice is even more clear
about the virtues of installment lending, and I quote: “Installment loans are closed-end,
fixed-rate, fixed-term and fully amortizing loan products. In a fully amortized loan,
both principal and interest are paid fully through scheduled installments by the end
of the term. Each monthly payment is the same amount and the schedule of payments is clear.
If the borrower makes each scheduled payment, at the end of the loan term the loan will
be paid in full.” Again, Department of Justice, “Installment lenders mitigate credit risk
by closely analyzing a borrower’s characteristics and ability to repay the loan.” And finally,
“Subprime borrowers turn to installments loans when they need cash, but have limited access
to credit from banks, credit card companies, and other lenders. The products offered by
these other lenders are not meaningful substitute for installment loans for a substantial number
of subprime borrowers.” However, we believe that today’s proposed
rule is inconsistent with the Justice Department’s findings and will severely constrict the ability
of responsible lenders to offer safe and affordable installment loans. We work face-to-face with
our customers, assess their financial situation, and develop a budget with them. Installment
lenders test the ability to repay, as evidenced by the fact that over half of the applicants
that come in our store are turned away because they do not quality. However, this assessment
is done on a case-by-case basis. This rule is just too prescriptive. Installment lenders
are not opposed to documenting their assessment, but requiring underwriting that is on par
with a 30-year mortgage will not work for the typical installment loan customer. We
need greater flexibility in meeting this requirement. Without it, millions of hard-working Americans
will have nowhere else to turn. I look forward to the question-and-answer
session, and again, I thank the CFPB for inviting us to participate. Thank you, Bill.
I’d ask the audience to let the people speak, and nobody needs to be afraid of letting anybody
express their point of view here. Thank you. Next, Wade Henderson, President and CEO of
The Leadership Conference on Human and Civil Rights.
Thank you, David. Good morning, everyone. I’m Wade Henderson, President and CEO of The
Leadership Conference on Civil and Human Rights, a coalition of more than 200 national, civil,
and human rights organizations dedicated to building an America as good as its ideals.
I’d like to start by thanking you, Director Cordray, and your colleagues at the Consumer
Financial Protection Bureau for organizing today’s hearing and for your efforts to tackle
one of the most important economic justice issues facing the nation, and most especially
communities of color today. The Leadership Conference on Civil and Human
Rights believes that the ability to obtain financial services on a fair, equal, and sustainable
basis is an essential civil and human right of all Americans. Unfortunately, communities of color and other
vulnerable groups have long been subjected to abusive financial practices that have undermined
their economic security. They have gone from experiencing redlining and other forms of
overt discrimination to, in more recent years, being aggressively steered into predatory
and deceptive mortgage and consumer loans, with the end result speaking for themselves
over the course of the past decade. We are relieved by the numerous improvements
to federal and state financial regulations in the wake of the financial crisis, as well
as by the overall change in philosophy that gave rise to the CFPB. And the number of financial
services provides do appear to have learned the lessons of the financial crisis. Yet communities
of color are still being targeted by predatory lending practices, and this has been especially
true in the market for small-dollar lending. Payday loans and many other products like
auto title loans are marketed as an easy solution to financial emergencies, but they too often
fail to work as advertised. Payday lenders argue that they verify that their borrowers
can repay their loans but what they don’t do is to verify that borrowers can repay their
loans while also meeting their other living expenses. This means borrowers are often left with no
choice but to renew their loans at the same high cost and getting trapped and slowly drained
of what limited assets they have. Indeed, the very nature of the payday lending business
depends on renewals of existing loans. What is just as troubling is the aggressive marketing
of these loans to communities of color and other economically vulnerable populations,
including older Americans who rely on Social Security. Studies show that payday lenders
are heavily concentrated in African American and Latino American communities where access
to mainstream banks is limited. And I realize my time is limited now, but perhaps during
the discussion we can touch on postal banking and on modernizing the Community Reinvestment
Act as ways to improve access to better financial services. While The Leadership Conference has called
for a 36 percent interest rate cap on loans, as a number of states have done and as Congress
rightly did with respect to military servicemembers, we realize that this is beyond the CFPB’s
authority. But what the CFPB is proposing today is a very strong, very important step
in the right direction. It is a matter of common sense that lenders would ensure that
borrowers not simply have enough money to repay their loans but to ensure that borrowers
can repay loans on time, without being left in an even worse financial position. In the
same way that we require drug companies to show that their cures for disease are safe,
we have a moral imperative to make sure that the cures being sold for financial ailments
aren’t worse than the disease itself. Thanks, in part, to Dodd Frank, mortgage lenders
now utilize common sense ability-to-repay rules, and today we applaud the CFPB for applying
those rules to small-dollar lending practices as well, and we look forward to supporting
you in your efforts to protect all Americans, including communities of color, from the scourge
of predatory loans. Thank you. Thank you, Wade. Carrie Smith, Staff Attorney
for the Community Legal Services of Philadelphia. Good morning. Thank you for the opportunity
to testify on behalf of our low-income clients at today’s hearing. Fortunately for our clients,
Pennsylvania has one of the strongest laws in the country to guard against predatory
lending, with a strict cap on fees and interest for consumer loans. Pennsylvania residents
are among the 90 million Americans, nearly a third of our nation’s population, who live
in states free of high-cost payday lending and the host of harms it causes. Our law has
been effectively enforced against payday lenders operating illegally in storefronts and online,
and Pennsylvanians are better off without these unaffordable predatory loans. Likewise, in states where payday lenders once
operated but now are banned, research shows that former borrowers were glad to be rid
of a product that is the equivalent of financial quicksand—easy to fall into but almost impossible
to escape. While high-cost payday lending has never been legal in Pennsylvania, payday
lenders have aggressively and relentlessly sought to bring their loans into our state
by lobbying to weaken our law. Based on our experience fighting to keep our consumer safeguards
in place, we know that payday lenders will exploit any weakness in the national rule
as justification for legalizing their loans in our state. In fact, payday lenders already
have been using the rule as a Trojan horse. They’ve been crafting legislation to legalize
high-cost, unaffordable, long-term payday loans, claiming that the CFPB gave these loans
its seal of approval in its outline of the payday lending rule that it released last
March. That’s why it’s critical that the CFPB adopt a strong rule that sets a high bar to
end debt-trap lending nationwide. We understand that that’s a difficult task,
given that the Bureau can’t cap the rates on these loans, but the CFPB can go a long
way to reining in abuses by making sure that every loan is affordable. We support the fundamental
principle of the proposed rule that a lender must ensure that a borrower has the ability
to repay the loan without having to borrow again while still being able to cover living
expenses. But we can’t support any exceptions to that standard. Payday lenders are notorious
for exploiting regulatory loopholes to continue making debt-trap loans. In addition, any exception
risks sending the message that the CFPB has sanctioned a whole category of high-cost predatory
loans as desirable and safe, when, in fact, they are harmful and dangerous to borrowers.
Just as doctors take an oath pledging first to do no harm to their patients, the CFPB,
our nation’s consumer cop on the beat, must ensure that its rule does not put at risk
the state laws that currently protect 90 million Americans from predatory loans. Instead, the rule should bolster and support
our state laws that prohibit debt-trap lending. The rule should provide our states with additional
enforcement tools to protect our residents by making a violation of our state’s lending
laws an unfair, deceptive, and abusive practice under federal law. The CFPB must strengthen
its proposal by eliminating exemptions from the ability-to-repay standard, and by building
upon our state protections. Given that you don’t have the authority to set a national
usury limit, states must continue to enact and defend interest and fee caps, the most
effective way to curtail predatory lending. A strong national rule, coupled with strong
rate caps, will benefit people everywhere. Thank you. Rev. Dr. Cassandra Gould, Executive
Director of Missouri Faith Voices. Director Cordray and CFPB staff, I’m grateful
to be a part of this distinguished panel, representing PICO National Network, which
is the largest faith-based, social justice, grassroots organizing entity in the country,
as well as the African Methodist Episcopal Church, the oldest African American denomination
in the country, one borne out of social justice. My background is finance. Before entering
the ministry, I spent 17 years in finance, and the latter part of my career in the banking
industry. It was at that point when I first encountered payday lending, and I thought,
what in the world? It was shortly after our legislators got rid of our usury law that
capped rates at 28 percent. And so here I saw some of my customers, after losing jobs
with car plants and other industry, when TWA left St. Louis and became American Airlines,
I started to see customers having their bank accounts overdraft, and did a lot of research
to figure out what was going on. And I realized that these customers were in over their heads
and was very surprised when I learned that there was very little regulation in the industry,
as well as the fact that there was no real underwriting.
In essence, what I found is that basically to get a payday loan all you needed was a
checking account and to be breathing. There were really no other real requirements. And it is because of that that many American
citizens have found themselves in this debt trap.
As I moved into parish ministry, in a community of color, pasturing a church in the African
American tradition, I became aware of the predatory nature of payday lending. As an
African American pastor, I have been targeted by lobbyists. When we were in the fight of
our lives, trying to get a ballot initiative here in the state of Missouri, back in 2012,
we received letters—many of you worked on that. We received letters indicating that
if said anything or if we allowed people to sign the petition, that we could lose our
IRS status. So this speaks to the predatory nature of this lending. It is primarily, as
one of the other panelists has said, these lenders target communities of color, they
target communities that are already vulnerable, where people are poor.
I believe that predatory lending is part of the unholy trinity. It’s poverty, financial
predation, and poor health that have really become a scourge on minority communities. Predatory lending is like an undiagnosed cancer
and it’s attacking every part of the lives of people who we serve in our communities
and in our churches. It’s not just a moral issue but it’s also a health issue. The debt
trap, in my mind, is much like a death trap. It is my job, as a person of faith, to move
people to what the Bible calls the land of the living, and away from wealth extractors
who are operating under the guise of payday lending. One of my favorite scriptures in Proverbs
says “do not rob the poor because they are poor.” And so while I think that these rules are
certainly a step in the right direction, what we need is very strict underwriting guidelines,
there need to be no exceptions, no opportunity for predatory lenders to find the loophole
which will ultimately harm the people that are already the most vulnerable citizens.
We must stop the debt trap with a strong rule that eliminates these loopholes and also has
strong protection against loan flipping. It really is a matter of life and death for the
most vulnerable citizens in our state, and in states all across the country.
Thank you. Thank you. Finally, Galen Carey, Vice President
of Government Relations for the National Association of Evangelicals.
Thank you, Director Cordray, and my fellow Americans. When used responsibly, credit can
be a blessing. Banks, credit unions, and other financial institutions play a vital role in
the efficient functioning of a modern economy, contributing to the common good. The Bible
offers these guidelines for honorable lending and borrowing: (1) Don’t take advantage of
the vulnerable. (2) Don’t charge excessive interest. (3) Lend generously. (4) Avoid unnecessary
indebtedness and default. (5) Forgive debts that cannot be repaid. (6) Bear one another’s
burdens. (7) Seek the common good. When evaluated against these criteria, the
current predatory and car title lending system falls far short. It must be judged unacceptable.
An industry that targets vulnerable people with a product that leaves many of its customers
worse off does not contribute to the common good. The National Association of Evangelicals brings
together 40 evangelical denominations with more than 45,000 congregations, millions of
constituents, and we have seen the devastation that predatory lending has wrought in too
many communities. In 2014, the NAE adopted a resolution calling on the CFPB “to investigate
predatory lending abuses and to establish just regulations that protect consumers, particularly
the most poor and vulnerable, from exploitation.” We are grateful to the CFPB for heeding this
call and for proposing a rule today that attempts to rein in some of the worst abuses. We hope
that the final rule will be strengthened to be free of loopholes that lenders may exploit
to continue abusive practices. We look forward to studying the rule and offering input during
the comment period. The NAE has joined with other faith-based
organizations to establish Faith for Just Lending, a broad coalition including many
represented here today. Our statement of principles, which is available at LendJustly.com, calls
on government to prohibit usury and predatory or deceptive lending practices. In partnership
with Lifeway Research, we conducted a national poll of evangelicals who live in the 30 states
that allow predatory, payday, and title lenders to operate freely. We found that 94 percent
agree that lenders should extend loans at reasonable interest rates and based on the
ability to repay, 86 percent believe that laws or regulations should prohibit lending
at excessive interest, and 80 percent believe that laws or regulations should protect borrowers
from loans that cannot be repaid. While today’s rule is an important step forward,
addressing underwriting standards and abusive loan frequencies, the CFPB is statutorily
prevented from undertaking one of the most needed reforms, an interest rate cap that
would prohibit usury. That is a role that falls to Congress and to state legislatures.
Through the Military Lending Act, Congress has already instituted a 36 percent rate cap
on loans to servicemembers. Congress should extend this important protection to all Americans. States that do not regulate interest rates
can learn from the example of those that do. For our part, evangelical churches will continue
to provide charitable assistance to those most in need, for whom loans of any kind are
inappropriate, and we will continue to advocate for fair and just regulation of loans so that
when credit is made available, it is offered under terms and conditions that allow borrowers
to resolve their problems rather than become more deeply mired in them.
Thank you. I want to thank all the panelists for their
thoughtful and forthright remarks. Cheryl, Daniel, and I will now ask the panelists some
questions to try and generate some interesting dialog. And I’ll take the prerogative of asking
the first question to Keith Sultemeier. Keith, can you talk about some of the products that
exist in the marketplace that provide access to credit?
Yes, sir. Several studies show that a great many U.S. households lack some substantive
savings, and during any given year they’re either temporarily or habitually illiquid.
This is consistent with what we see in Los Angeles. Because 60 percent of all jobs in
the U.S. are paid hourly wages, income volatility is common, and when coupled with illiquidity
this is one of the biggest challenges that low- and moderate-income households face.
The problem is often exacerbated by damaged or thin credit files which limit their access
to traditional forms of credit, like credit cards or lines of credit. Because most of
their income is used to cover basic needs, quite often they must borrow when unexpected
things happen, like a car repair, medical bills, or a smaller paycheck. To address these
cash shortfalls, many families use short-term credit products such as payday, auto title
loans, pawn shops, workplace loans, cash advance options, and installment loans. Failure to
do so exposes them to a litany of penalties which are usually more costly, like late fees
on loans and utility bills, reconnection fees for essential services like water and power,
and overdraft charges on checking accounts. Today, Kinecta members with damaged or little
credit may choose from single-payment loans for up to 31 days, installment loans up to
24 months, and secured credit cards. Each of these comes with a savings account and
Kinecta funds the first $5 deposit. Additionally, we have a payday payoff loan that allows consumers
to consolidate up to three payday loans, or any other high-cost debt, and pay these off
over time at 18 percent interest. Similarly, we have a citizenship loan that allows people
wishing to become citizens of the United States to finance the $680 in fees and charges over
time. We’ve helped over 12,000 families with these loans so far. Cheryl Parker Rose has the next question.
Thank you, David. My question is for Rev. Dr. Gould. Can you tell us, for your parishioners
who are in financial distress, what’s been their experience with small-dollar loans?
Thank you. I have talked to not just parishioners but many people in the community, and one
of the stories that I’m just reminded of is a professional woman by the name of Waltrina,
who shared with me getting a loan to make a car repair, and not being able to pay off
the whole loan in the allotted time, and having her bank account debited 15 times in one day,
which then left no money when her paycheck hit, which led to losing her apartment.
And so what I am seeing is people that are struggling because of the lack of underwriting
and because of predatory lenders not looking at the whole picture, not just if you have
the income to pay but what your other obligations are. And so that has been a common theme that
I’ve heard over and over and over again. One of the panelists mentioned about the low percentage
of people that report problems with payday loans, and I believe that’s because of the
shame element. There is a level of shame that exists. And that really speaks to kind of this seedy
nature of the predatory lenders. People don’t want people to know that they’ve had one of
those loans, and so, no, they don’t report the abuses. But in pastoral care, we find
that out. Many of the calls that we get on a monthly basis were tracking why they got
into the situations they’re in. Every now and then someone is asking, “Can you help
me get out of this loan? Not only am I in threat of losing my home or my car but I’m
about to lose my mind.” There really is an emotional and a physical side effect of it.
But when we analyze how they got into it, sometimes even when they’re asking for a payment
for a utility bill, it is because the payday lender has basically left them with nothing
because of the continuous debt extractions that come from their accounts. And so there
has to be—and I’m grateful that the rule speaks to no more than two more of those extractions
in a day—but there has to be really strong underwriting—I cannot say that enough—that
eliminates the loopholes. And I’m also reminded of Sharon, who had five loans and each loan
was designed to pay off the last loan. That cannot happen. There has to be a limit on
the number of loans that a person can have, and six is way too many. Daniel Dodd-Ramirez, for the next question.
My question is for Darrin. Darrin, are there particular challenges to assessing a consumer’s
ability to repay? Thanks. Like all lenders, assessing ability
to repay is very important and challenging. Our product, in particular, makes it challenging
because the loans are so small and short in duration. A 2-week period of time makes it
difficult to find information that’s predictive on repayment during that short period of time,
and the size of the loan and the fees on those loans make it somewhat cost-prohibitive to
spend a lot of money to acquire that information as well.
So we, over the last 20 years of operations, and doing millions of transactions with thousands
of customers, have developed a model to help us understand who we think can pay us back
and at what period of time. For those who can’t pay us back, we’ve developed extended
payment plans, so they have a safety valve if they feel like they can’t pay us back,
to get more time at no additional cost to pay those loans back.
I believe those two things have helped us generate 95 percent of our customers eventually
pay us back over time. Carrie, in your experience, what is the impact
on local communities if small-dollar loan products are offered or not offered?
We know that harmful small-dollar loan products, such as payday loans, are disastrous for individuals
and communities. Although Pennsylvania has never legalized payday loans, payday lenders
have employed a variety of schemes to set up shops in our communities, and victims report
heartbreaking stories, confirming what research has shown. Payday lending leads borrowers
to fall behind in other bills—their rent and their mortgages. It causes them to overdraft
and eventually lose their bank accounts. And payday lending also has an impact on communities,
creating strains on food pantries and charitable relief services.
Fortunately, courts and regulators effectively stopped the debt trap in our state, bringing
relief to consumers and communities, and having once seen the harms of payday lending, we
now have a diverse coalition that’s working very hard to keep our strong state law in
place. Like Pennsylvania, 13 states and D.C. have concluded that their communities can
best thrive without harmful debt-trap products, and studies from across the country, from
North Carolina to Arkansas, show that borrowers are better off with strong interest rate caps
in place. That’s why we need the CFPB to reaffirm state interest rate caps and do everything
it can to build upon state protections and not undermine them. Kirk, what technological improvements are
needed to determine a customer’s ability to repay? And I have a second part to the question,
please. Have you used technology to enhance your product in the marketplace?
I’m actually going to take the second part first, maybe. Our technology is pretty advanced
already. Our technology lets consumers apply securely online, over their phone or their
computer, lets us then access third-party data almost instantly, in order to fill in
information on that application or to start our statistical algorithmic assessment of
that application. And what we try to do is we’ll take that information, look at the history
of the individual so that we can make a judgment on (1) are they being accurate in the information
they’re presenting, and (2) from their past payment history, is it likely they’ll be able
to repay going forward? We use that then to patch against our database of the 4 million
customers to match that up, to figure out how it is that we think is most likely qualified
and able to repay. That’s a very important part. It’s good technology.
Those are the things that we put in place, and we were one of the leaders in online lending
and bringing that statistical approach. I would say what could make it better, obviously,
is going to be data. We need more data. Data access to bank transactional records is really
important to us. Unfortunately, under pressure, one of those products was removed from the
market last year, and that hasn’t helped us. We’re going in the wrong direction. We’re
taking data away from companies like ours instead of adding to it.
So more access to bank transactional record data—that will be very helpful. The other
thing is when we go to access credit reporting history, the big guys with the best technology,
the big CRAs don’t allow us to report. They don’t like to have non-bank lenders reporting
to them. And then the smaller, proprietary systems that the states have in place aren’t
very accurate and they don’t have access to the main CRA systems either. So a better reporting
infrastructure to support us as well, so we could pull down data and push data up. I think
those are the two big things that could help improve it. The next question is for Wade. Wade, will
assessing a borrower’s ability to repay address the biggest challenges facing consumers in
the small-dollar lending market? I think, first of all, this will be a tremendous
step forward in eliminating some of the most troubling practices from the marketplace,
but it may not address problems caused by up-front fees, and flipping an installment
loan market. But a strong final rule that applies without exemptions and loopholes will
really go a long way toward addressing the problem.
Now that said, the communities that are currently being targeted by lenders still have a troublingly
low level of savings and a lack of access to traditional banking services. So the more
we can do to address that problem, the more we can do to reduce their vulnerability to
predatory lending practices. The one thing that I and others, like Senator
Elizabeth Warren, have called for is to engage the U.S. Postal Service in providing banking
services. This is an institution with a very long history of providing well-paying jobs
and building trust in the community, and serving everyone’s needs who comes through their doors.
And if it could provide a range of low-cost financial services as well, either on its
own or through partnerships with existing banks to bring them into the neighborhoods
where they once were, I think we could address the problem.
And then, lastly, I’d like to also take another look at modernizing the Community Reinvestment
Act, to make sure that it’s keeping up with the rapid growth and technology and giving
banks the strongest incentive to reach underserved communities. There will continue to be a need
for public education, and a little over a year ago we undertook a research project on
how to talk to communities of color about financial matters, and we shared it with credit
counselors, the Bureau’s Division on Consumer Research, and other parties, and we’d like
to do more of that research. But I think all of those things are necessary to really address
the problem. For Bill, what are your thoughts on the effect
of small-dollar products on consumers? Thank you, David. I think it’s critical to
paint an accurate picture of what this rule will result in. We’ve already heard how the
provisions of this rule will cripple, if not kill, payday and title. The director of NCUA
has said that her credit unions cannot make the loans in an affordable fashion that have
been prescribed as an alternative in this rule. At the end of the day, you have to have
somewhere for folks to go to meet their credit needs. Installment lending has been around for 100
years. We were created to serve this need. We have over 90 percent performance. In North
Carolina alone—and it goes to what Kirk said about data—in 2013, 2014, and 2015,
installment lenders made 1.6 million loans, totaling $5 billion in loan activity, and,
on average, there were 15 complaints in the state of North Carolina. That just doesn’t
add up. The options that are afforded to the installment
lending industry is to either employ mortgage-like underwriting, that won’t work, or try and
fit into a 95 percent performance in conjunction with a 36 percent rate cap. Add to that, and
probably most troubling, is the fact that there are new UDAP provisions in this rule.
So let me paint a picture for the folks in the audience and for the folks that are watching
at home, that happens every day in communities across this country in installment lending
branches. Lisa comes into one of our branches and I’m there. I’m the lender. She’s there
with her little daughter of 5 years of age. I know her family but I don’t know her really
well. She needs $2,000 to get out of an abusive situation. Under the current structure, I
might take a risk on her because I know her family. I know her; I don’t know her really
well. But with the restrictions that are incorporated in this rule, I can’t afford to take a risk
on Lisa because if I get it wrong, I am going to be punished. There’s no incentive.
As I mentioned earlier, the Center for Financial Services Innovation has laid out standards
and guidelines for small-dollar lending, and they said at the end of the day, what we need
is to align consumer protections and lender profitability, so that they can work together.
Under this rule, millions of Americans just like Lisa, 9 out of 10 that are already performing
in the installment lending community, will be out of luck. My last question is for Galen. Galen, what
have you seen with respect to a consumer’s ability to repay a small-dollar loan in full
, without having to go back to the lender to refinance or reborrow?
Well, about 3 out of 4, something like 76 percent of all payday loans occur within 2
weeks of a previous loan, and on average, borrowers take out about ten of these loans
per year. So it appears that payday loans are actually structured to avoid the possibility
of successfully being repaid without additional borrowing. In fact, in some cases the first
loan is offered as a loss leader at free or reduced interest in order to lure customers
into the trap. Around Christmas time we see an uptick in advertising for these kinds of
loans, trying to attract people needing Christmas money.
There are exceptions but most people who desperately need $400 today will not miraculously have
an extra $450 two weeks from now to repay their loan, the fees and the interest— —and to meet their ongoing current expenses.
So what makes refinancing so entrapping is the high interest rate. If interest rates
were reasonable and payments over an extended time were allowed, the burden would still
be challenging, but more likely manageable. But with triple-digit interest and lump-sum
repayment, it’s nearly impossible to meet the demands of the loan without reborrowing.
In fact, in some cases the interest and fees as well as the principal are rolled over into
a new loan so that there’s actually a snowballing debt that gets larger and larger until it’s
destroyed the borrower and oftentimes their family. And we’ve seen cases where families
have actually been destroyed in careers, by the debts.
This is why we hope that the new rule not only has strong up-front underwriting requirements
but also effective back-end protection against repeated flipping of the loans. One final question for all our panelists.
Can you talk about the right balance between access to credit and consumer protection in
this space? And we’ll go in the same order in which we did opening statements, starting
at my far left. Thank you. Access to credit is extremely important.
I wouldn’t be here today if someone didn’t give me money and loan me money to go to school.
So access to credit, I believe, makes people’s lives better. I see it frequently when I see
our customers who, with a few hundred dollars, solve extremely important issues for them.
We saw the study that says that people don’t have $400 saved up to cover short-term expenses.
But even with that huge demand, I think there needs to be strong consumer protections in
place. It needs to be a highly regulated, licensed industry that’s audited and examined.
There needs to be a viable complaint system where consumers can voice their concerns and
get those resolved and solved. I believe there needs to be an ability for consumers to get
additional time or pay back their loans if they need it. And I believe there needs to
be fair, professional collection efforts. Things like this will help the product still
exist and not go away. Consumers need more credit options. They don’t need fewer.
Thank you. David, how much time do I have to respond?
I think I was inadvertently cut off on my last statement so I just want to make sure
I keep it within the time frame. I mentioned that we have products like the
payday payoff loan and the citizenship loan, where we allow our consumers to consolidate
other high-cost debt and term it out over 18 percent. It’s regrettable that it appears
that these loans are invalidated under the current proposed rule, though admittedly it
was released last night so this assessment is kind of based on only a preliminary review.
I’m certainly appreciative that the CFPB carved out the NCOA’s payday alternative loan from
the rulemaking. We have significant experience with this product. To my knowledge, we are
the only credit union that has offered this loan at scale to a predominantly payday loan
audience. We promoted the payday alternative loan for nearly 2 years in our 35 Nix stores.
Given its restrictions and terms, it was widely rejected by our borrowers. For the 1,920 loans
that we did originate, the credit union lost approximately $21 on every loan. We hope that
other lenders will try it in their markets and enjoy better results. However, this is
not a viable product for Kinecta. Throughout this rulemaking process, we’ve
analyzed mountains of data, we’ve issued white papers, and funded studies on both sides of
the argument. It really shouldn’t surprise us that those with opposing views examine
the same data set yet can support vastly different conclusions. I believe it’s called “lies,
damn lies, and statistics.” What’s troubling to me is that in none of
these do I see the voices of the most relevant participants in the industry. What do consumers
suggest is the appropriate tradeoff between access and consumer protection? I suggest
the next study focus on answering this question. The truth is, I don’t know what the right
balance might be, but because we are again asking industry insiders and consumer advocates,
we should expect the answers to range from unfettered access to absolute abolition of
payday lending. As usual, the proper response is probably
somewhere in between. Excessive regulation will eliminate the short-term, small-dollar
lending industry and appears, with this proposal, we’re headed in that direction. However, try
as we may, we will not eliminate the need for these products. The right balance between
access and consumer protection is one that encourages the existence of a healthy market
where licensed and regulated providers, both large and small, compete. If we get it wrong,
the alternative will see the need met by unlicensed, unregulated entities, and in this environment
consumer protections will be few or nonexistent. Thanks. What is the right balance between access to
credit and consumer protection? I think the right balance is one that increases consumer
success and reduces potential consumer harm, without unduly restricting access and availability
to small-dollar credit. Rules that protect consumers are good. Enova has long been a
champion of these types of regulations. That includes things like requiring transparent
disclosure of terms, preventing abusive collection practices, and ensuring lenders are doing
the right things in terms of validation of key pieces of consumer information, like income
and expenses. What tips the balance much too far and isn’t
good is telling people they can’t take out a loan, or making arbitrary rules that restrict
access to credit. Placing that type of burden on the millions of Americans who are depending
on this access to credit helps no one. We believe non-prime consumers deserve to have
access to the same types of products as prime consumers have, with the same set of choices
and protections. First off, I want to again thank the director
and CFPB for inviting us to participate. This is a very important hearing. I’m struck by
Galen’s comment at the end there, about a $400 payment that’s due. Installment lending
doesn’t work that way. Our average loan size is $1,500. It’s 12 to 15 months, sometimes
18 months, and the average monthly payment is $135. If somebody makes that
payment through the term of the loan, that
will be paid off, and that’s very important, very critical, for many Americans in the space
that my colleagues have been talking about. I think terms of the balance, the outline
provided by the Justice Department, I think, is a great start. Also, as I mentioned, the
Center for Financial Services Innovation that talks about balancing or aligning the incentives
of lenders with the consumer protections. We work one-on-one with our customers in the
branches, assessing their unique situation, and we are talking about folks that you can’t
just do a cookie-cutter approach. We work very hard to make sure that we assess those
needs and structure the loan in a fashion that they can repay it without having to reborrow
it. But this rule, as proposed, could upset that
balance for millions of Americans that are at risk. What we would like to see is a rule
that puts forward clear, empirical evidence as to the harm, and we’ve talked about the
lack of evidence here today, and evidence that the proposal will effectively address
that harm before we roll the dice on millions of Americans. Thank you, David. I think striking a balance
is really very important. For me, the balance lies in whether a product is likely to leave
consumers in a better or at least the same financial position that they were in before,
or whether it puts them in even greater distress. Now, balanced regulation backed up by careful
research means giving borrowers every chance to succeed with a suitable and affordable
loan at the outset. What the CFPB is proposing today is a step
in the right direction. That said, I urge the Bureau to listen to the comments from
communities across the country, particularly in those in states that ban payday or car
title lending outright, about how they’re striking a more appropriate balance. I also
believe that driving out bad forms of credit can actually increase both the supply and
demand for more responsible forms of credit from lenders that might take more time than
those who offer fast cash. So it’s important to cut off access to the
most destructive forms of credit in its own right while giving responsible lenders the
opportunity to engage in this market in a way that helps the communities in which they
serve. I think 14 states and D.C. have struck the
right balance with rate caps for small-dollar loans, and the Department of Defense agrees.
In its report evaluating the Military Lending Act’s 36 percent all-inclusive rate cap for
loans for active duty military, DoD concluded that it had established a balanced approach
in using the regulation to curb products with demonstrated high cost and predatory features.
Now I understand the CFPB can’t issue a rate cap but it can help achieve the rate balance
by ensuring a strong ability-to-repay standard that prevents lenders from ensnaring borrowers
in unaffordable debt from which they can’t escape. That means no free passes or safe
harbors for poorly underwritten loans. Business-as-usual payday loans must end. Payday loans are not helpful credit. In fact,
payday loans, whether they’re traditional balloon payments or the longer-term payday
loans that they’re increasingly migrating to, they deepen financial distress for the
typical borrower. They are the equivalent of throwing a leaded anchor to a drowning
man. The right balance in the payday lending space
is to prohibit these unfair and deceptive practices through rate caps, as states have
done, and through an ability-to-repay standard with no exceptions. When answering the question about the balance
between access to credit and the harm that predatory loans have caused and is causing
Americans, I recognize that all credit is not equal. There is credit that is morally
sound and credit that does not do harm, and there is credit that is destructive. And so
as the Bureau goes forward, again, echoing the sentiments of some of our panelists, it
must go forward in holding a standard, a standard that ensures that Americans are not harmed.
In Flint, water was a good thing, but having access to water that was toxic was detrimental,
and caused much more harm than it did good. And in many cases, the kind of loans that
are given by predatory lenders is equivalent to the water in flint. So access and consumer protection should not
be seen as competing values on a continuum. Access is only valuable if the credit that
is offered is beneficial. Access to debt traps is not a benefit to be balanced against other
values. Access to debt traps is like a sewer hole
that has a missing cover. What’s needed is to replace the cover so that the unsuspecting
pedestrian does not fall into the sewer. Whatever the financial crisis that leads someone
to seek emergency credit, predatory payday or car title loans add to the crisis and often
create a new emergency by saddling the consumer with unaffordable debt, without providing
a manageable repayment schedule, and, of course, this wouldn’t include loans that go on for
a longer time. We have seen marriages, families, and careers all destroyed by predatory lenders.
The effect of consumer protection should establish guardrails that keep people who face emergency
needs from falling off a financial cliff. Someone who’s driving on a treacherous mountain
road does not need access to the ravine below. Someone who is sick does not need access to
poison. Access itself can be a red herring that obscures the fundamentally flawed nature
of some predatory loan products. Protecting consumers means assuring that the
financial products that are offered actually serve a useful purpose, that the terms and
conditions are transparently presented, and then they can be reasonably repaid by the
borrower without undue hardship and without the need of a new loan to pay for the principal
and interest on the original loan borrowed. This concludes the panel portion of our program.
Please join me in thanking all the panelists for a thoughtful and provocative discussion. At this time I’ll invite the panelists to
join the audience if they so choose, and turn the program back to Zixta Martinez, our Associate
Director for External Affairs, who will moderate the next portion of the field hearing. Thank
you again. Thank you, David. Please give our guest panelists
another round of applause. They were really terrific. Thank you.

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