Little Rock, AR – CAB Meeting on 6/9/2016 (session 2)


Good afternoon. I would like to thank you for rejoining in
today’s Consumer Advisory Board meeting. This morning we discussed a new consumer tool,
which focuses on the auto-financing experience. This afternoon, we will hear from Consumer
Advisory Board members about trends and issues that they are spotting on the ground. At every CAB meeting, we invite a few CAB
members to share information about their specific expertise. Today we have had CAB members present on a
variety of issues, including consumer protection and servicemembers, older Americans, arbitration,
preaquired account marketing, among others. Following this morning’s focus on auto lending,
we will hear from Chris Kukla, who will provide us with a look at consumer experience in the
auto lending and finance market. He will highlight some areas where consumers
are impacted. And then following Chris, we hear from Seema
Agnani, who will provide an overview of financial service trends and practices in immigrant
communities. Seema Agnani has nearly 20 years of experience
working in the community development and immigrant rights sectors, focused primarily on the challenges
of providing housing, economic opportunity and support systems for new immigrants. She is the founder and former executive director
of Chhaya CDC, a member of the National CAPACD; works with New Yorkers of South Asian origin
to advocate for and build economically stable sustainable and thriving communities. Chhaya CDC reaches thousands of new immigrants
each year through its organizing, education and service work. Chris Kukla is the Senior Vice President of
the Center for Responsible Lending in Durham, North Carolina. The Center is a non-partisan nonprofit policy
and research affiliate of self-help, a community-development lender that has provided more than 6 billion
in financing to home owners, small businesses and nonprofit organizations nationwide. Chris leads CRL’s work of auto lending issues
as well as CRL’s policy work in North Carolina. He also counsels policy makers and advocates
in Washington, D.C. North Carolina and the other states. So consumer lending legislation and regulation. He graduated from Alma College and has a law
degree from the University of Notre Dame Law School. Prior to joining CRL, Chris served as congressional
aide for five years, focused primarily on arbitration, appropriations and financial
issues. Chris, please begin. So it looks like my slides aren’t up yet,
so this is going to be fun. Well, in your case ‑‑
Do you want me to go ahead anyway. Or should we ‑‑
Seema, are you ready? Let’s go. She is ready. All right. Okay. We are flexible. Seema. Thank you. Thank you. So my name is Seema Agnani. I am the Director of Policy with national
capacity. It is the Coalition for Asian Pacific Americans
for Community Development. We are a coalition of about 100 community-based
organizations around the country, working on economic vitality and community development. So today I am going to talk about financial
trends and practices in immigrant communities. So I apologize. I know that some of the CAB members, this
may not be new information for you. But I thought it was important to take a step
back, and sort of give an overview of immigrant communities nationwide. And then I am going to sort of move us to
some of the factors that play into, you know, why new Americans are more vulnerable to predatory
practices. And then lastly, I am going to share a model
that national capacity has been testing in peer lending circles, type two immigrant financial
education. So first, I just wanted to share sort of,
you know, who are the new Americans and what the diversity is. So you know, in 2014, the foreign born made
up 13.3 percent of the total population. And in 1990, more than 80 percent of the foreign
born were living in cities with populations over a million. So the point here is really that, you know,
a large percentage of our new immigrants are living in the major cities. And that is what I am going to focus on today. I know that there is a very substantial immigrant
population in rural communities. But really, the issues I am going to focus
on today are in the cities. So here, again, just to give people a sense
of the diversity, in New York City, immigrants and their children make up more than 60 percent
of the population. So six out of ten New Yorkers are immigrants,
or their children. And not one population makes up more than
12 percent of that immigrant group, not one ethnicity. And so New York is unique in that there isn’t
one necessarily one immigrant group that city agency could target for sure. So working in that kind of diverse population
comes with its own challenges. Houston, the immigrant population makes up
almost ‑‑ hold on. I don’t want to get this wrong. I pulled this data out for us. It increased by 60 percent from 2000 to 2010. And 44 percent of that is made up of Mexican
immigrants, and another 13 percent from Central and South America. So in Houston, the population looks a little
differently. And then I pulled up some data about Arkansas,
since we are here. And the immigrant population here, what is
important to note here is that it is growing. It grew by 82 percent in the last decade,
between 2000 and 2010. And immigrants made up 7 percent of the workforce
in Arkansas and 10 percent of children in the state. So this population is growing. There is also worth noting, a substantial
population of Marshallese COFA migrants here. So for those of you that don’t know, COFA
stands for Compact of Free Association. So these are ‑‑ this is an agreement
between the U.S. and the Marshall Islands. And so their status is similar to that of
Puerto Rico, similar type of representation. So they qualify for some benefits like the
EITC and others, they don’t, So factors contributing to vulnerability to
predatory practices. You know, I wanted to just share sort of the
overall statistics on limited English proficient population in the U.S. Overall, it is about
8 percent of the total population. What is notable here is that 19 percent of
the LEP population was also born in the U.S. And so it is not only immigrants. And those with limited English proficiency
also have much higher poverty. And so this four times more likely PCC on
the right refers to, that comes from one of the studies that my organization conducted
recently on Asian American and Pacific Islander seniors. Leading into what I am going to talk about
next, those AAPI seniors are four times more likely to conduct their banking in their own
language. I wanted to make a note about ethic and community
media. I couldn’t find good research on it. But what I was able to find is, the statistic
from CUNY in New York City. Which basically showed 4.5 million is sort
of the circulation of community and ethnic media equal to about 55 percent of the population
of New York City. But only 18 percent of the City’s advertising
resources are going into community and ethnic media. So just to say that when we are talking about
predatory lending, we all know that advertising has a big role to play in it. And I think that there is a lot of opportunity
for us to think about better strategies in working with media, when addressing financial
education and combating predatory practices. So this chart is from a study that my organization
did with National Council of La Raza and the National Urban League. It is called Banking in Color. It was released in 2013. And really, what we wanted to look at was
what other financial practices of communities of color, what do they have in common. And where are differences. So in terms of bank account ownership, really,
the ultimate story here is that about 80 percent of people are banked. Twenty percent that are not, or are using
alternative financial services. And those that are ‑‑ that have the most
rates of being banked are on the extreme. And so those who have been in the country
for less than ten years, and those who have been in the country, for more than 40. So we are talking about seniors and newer
immigrants. It is generally that trend is consistent among
the different racial groups. One story that I always like to share is of
a senior citizen who came to one of our organizations. And they asked her if she was banking. She was a Chinese immigrant. And she said yes, I am banking. And then they asked her a little bit more
about how she was banking. And it turned out that she has a safety deposit
box. And she was going into the bank and putting
her cash into the safety deposit box. And so these are the kind of stories that
we hear. So when you say people are banked, are they
really using banking services, is a real question. So now, I am going to sort of switch to the
Asian American and Pacific Islander population. National capacity rolled out this research
in 2015. It is essentially a survey we conducted in
seven languages through our community partners in five cities. We surveyed about 2,000 individuals in Chinese,
Nepali, Bengali, Korean, one or two others. And what we again wanted to do was what are
the financial practices and what is really happening. And what we found here is that most of our
communities don’t really know where to turn for financial services. And that really, reliance on family and friends
is the number one source of where people go when they are not sure what to do, or when
they are looking for financial advice. This is regardless of income status. And we also found that community-based organizations
were really underutilized in this arena. A little ‑‑ you know, there was an FDIC
survey that came out around the same time as this report, and our results were a little
bit different. Ours showed a much lower usage of alternative
financial services in the Asian American and Pacific Islander community, about 18 percent. But those that were being used were payday
loans, check cashing, and non bank money orders. And then 10 percent were cashing checks by
endorsing to a friend or family. Recent immigrants are particularly vulnerable
in this scenario in terms of where to turn for financial advice. So you can see by generation here. The other point here that is important to
make is, I don’t know if you can see the statistic, but it says, cash is king. We found that 74 percent of those that we
surveyed were still predominantly working in cash. So here, we are looking at, where to people
turn to for emergency funds. And again, of course, the predominant place
is family and friends, regardless of generation. The striking statistic is that 23 percent
of those we spoke to really didn’t know where they would go for emergency funds. And you can see here, in terms of generation,
it is pretty consistent. So this I thought would be interesting in
light of our recent conversations about mobile banking and online banking. Seventy-four percent of those who even use
the internet did not use online banking. So 75 percent of those we surveyed were online,
but three-fourths of them were not using online banking. And then credit scores, that chart on the
bottom really just shows that people don’t really know what their credit scores are in
this research. So again, this is sort of leading me to sort
of show why people are more vulnerable to predatory lending practices. In addition to the areas I just pointed out,
some of the other issues I wanted to highlight was the ethnic and community media. You know, if you go to Southeast Queens or
Jamaica or even many parts of Brooklyn and turn on the AM radio, you will hear the Carribean
stations there. And, you know, I would say 60 percent of the
broadcasts are advertisements for various financial services. And this is all in English, too. So I also wanted to share this, not just language
issues. It is specific targeting. And it is cultural isolation. You know, so we often say that it is not just
limited English proficiency, but it is also cultural isolation, which really makes many
immigrants more vulnerable to these scams. Then of course, the high cost of living. We all know the story of the sub prime lending. Really, I think the part of that story that
isn’t really often told is that I think many new immigrants fell prey to that, because
they are living in the highest cost cities. And rents are too high. And so in the end, taking a loan that might
not have looked as good was actually more affordable than trying to pay for rent in
a community that they wanted to be in. Immigrant status of course, is always a factor. People are afraid to go to mainstream financial
institutions, whether it is their own status or a family member’s. And then the fact that people are living in
crisis most, I think, when an emergency occurs, they don’t know where to go. Wherever they can find somebody who speaks
their language, that they can turn to for some resources or support is where they will
end up. They are working multiple jobs, hours available. I think this is why we see some of the cash
checking and payday lenders growing in our neighborhoods, because they are the only places
that are open after working hours, and the people that work there speak the language. So I think that has a lot to do with people’s
vulnerability. And then of course, transportation and neighborhood
availability. Last month, I went to ‑‑ or a few months
ago, I was in Chicago visiting one of our member organizations there, the Korean American
Service Center. And when I arrived in the building, the Executive
Director had to take a few minutes, because somebody had just walked in who had taken
a bus four hours to get to him. And if you are familiar with Chicago, you
know that Korea town is no longer in existence, because it kind of dissipated because of new
immigrants that have come in. But also because of the increased costs. And I think that is really part of what my
organization is looking at, is what is the importance of these cultural neighborhoods. The good food that we all get to enjoy, those
neighborhoods actually play a really critical role. You know, we visited Ninth Street yesterday
here in Little Rock. And a lot of the things that I saw and heard
were very familiar to me. And a lot of the same challenges that our
groups are facing in terms of preserving those neighborhoods, because those small businesses
are really our critical source of information for a lot of people. And then of course, seniors and women in the
neighborhood like the one I used to work in, in Jackson Heights, Queens. They are definitely more vulnerable, because
they are in a neighborhood where they know people, where they feel safe walking around,
and where people speak their languages. And so, you know, all these factors combined,
I think really add up to making people more vulnerable to just using what is in front
of them, rather than being able to shop around, and really look for the best product for themselves. So that is sort of ‑‑ those are the issues
that I think our communities that are dealing with. And I think a lot of the work the CFPB has
been doing is helpful. It is now the issue of getting that information
to our communities. So now I am going to switch gears a little
bit to sharing the model that, you know, national capacity has been working on for the last
year and a half. And, you know, we can get some model that
works well in immigrant communities. And we are trying to expand this work. So really, what it is is immigrant sort of
financial education, coaching, combined with this peer lending circle model. So many of you may have heard about this model
which the mission asset fund out of the Bay Area really helped to bring to scale. But really, it is a practice that is very
common in many immigrant communities throughout Central and South Asia, South America and
in a lot of African countries and even in Europe. So essentially it is a kitty model. Once a month, everybody puts in a certain
amount, and each month, one person in a set group of people gets to take the pot. Right, so the benefit of it, is that you get
a large sum of money at a time, so you can actually plan around that. But then also the benefit of the model in
working with the mission asset fund is that it gets reported to the credit bureaus. And so those folks without any credit history
or who need to improve their credit can start to build that way, and they also start to
build relationships within their circles, so that when there is an emergency, if one
member of the circle really needs the money that month, the group can come to an agreement,
and they can decide to share the resources with that person that month. So sometimes the pool ‑‑ the monthly
pool ends up being as small as $500, and it can be ‑‑ I have seen pools, lending
circles that are getting to as large as 2‑ or $3,000, but depending on what the group
decides is affordable to them to put forward every month. But what we also have found is the peer lending
circles alone don’t do the trick; you also need to integrate it with the financial education
and alongside other services, so we piloted this project with four organizations in four
cities initially. Now we have expanded, I think, to eight cities. And each of those organizations was asked
to integrate this model with their existing services. So they integrated it with their ESL classes,
so they can ‑‑ engagement classes, and/or other entitlement benefit services. And that really was what made the difference,
rather than in an isolated way offering a service, but really, you know, suppose somebody
is trying to build up the savings to apply for citizenship. In this model, they are able to get a big
chunk of money that can pay for the citizenship application. So tying it to that made a big difference. And then we heard about coaching earlier today,
that also made a big difference, instead of counseling, but coaching. It is really a model that we think works. So just some key findings. You know, we found that there was significant
increase in people’s confidence and knowledge. Fifty percent of them after the program was
over said they were budgeting on a regular basis. There was a 27 percent increase in the number
of clients that reported financial stability was their goal. So in terms of changing behaviors, this model
really works. And then you can see that the average credit
score improvement was significant. It was 133 after going through the cycle. And, you know, repayment rates and default
rates were very low. Repayment rates were as high as 98 percent. So, you know, the lessons learned, I guess,
that financial capability is gained across the spectrum of financial services, service
delivery and product dissemination is best done in combination with the education. And then in order to address the issue of
language diversity and immigrant diversity, we really feel that private public partnerships
are the way to go in terms of solving this in the long run. And of course, in partnership with community-based
organizations. I think, you know, because each city looks
a little different, the local groups will know which languages are needed and how to
really reach those communities. And of course, trust is a key ingredient. And, you know, I think the community-based
organizations have earned the trust and then the peer-lending model. The benefit of that is people are working
with the other members of their community. And that trust also exists in terms of sharing
their resources. And then that last piece is really about ‑‑
there is a lot of opportunity here. We are now starting to test this with youths
and with seniors, with women. And it really seems to be working well. So that is all I have got. Well, thank you very much. I think what I would like to do now, is to,
if we could get Chris’ presentation up. And ask him to make his comments. And then we will ‑‑ if we have time after
that, we will open up the floor for questions and discussion. I am the one who gets to get up and stretch
my legs. So you all should do the same. I can tell we are starting to fade a little
bit. So I am going to zip through some of these
data slides. Because there is a lot to cover. And certainly auto lending as we learned this
morning from the educational piece is quite a complicated area. There is a couple of main kind of trends and
themes that I wanted to focus on in this presentation. I think the first is to talk a little bit
about some of the discussion that has been going on about subprime auto in particular,
and some issues around underwriting and the way that some of the changes in underwriting
and terms that have been going on, and address that. And talk for just a second about add-on products. But we talked a lot about that this morning. So I think I can zip through that pretty quickly. And then I want to touch a little bit on buy-here
pay-here lots as well. And I know that in some of the data that was
released earlier, talked about that here in Arkansas there are quite a few buy here pay
here dealers in the area. So I wanted to talk a little bit about who
they are, kind of how they operate. And some of the things that we have seen as
we have looked at that. I always like to do a little bit of level
setting, just to make sure we are all sort of on the same page here. So one of the things about auto lending is
that folks tend to look at it, and compare it to mortgage. Because mortgage is sort of familiar. They have heard a lot about it. They see it that way. There is a couple of big difference in auto
lending compared to mortgage, however. So especially if you do lending through the
dealer. If you do it through your bank, it is going
to be a typical loan product. But running it through the dealer, this indirect
lending model, it is through a retail installment sales contract. So it actually technically isn’t even ‑‑
it is not a loan. It is an installment contract. The contract is between you, the consumer,
and the dealer. And the dealer isn’t going to sell that contract
to a third party. Is is bank, credit union, finance company
or whoever. Professor Fox has talked about how in an earlier
career, she was the one that was hanging the paper. So she knows as well. The dealer in most cases, has been in contact
with that third party, maybe one, maybe multiple, to figure out what terms they are willing
to accept. Anything from interest rate, loan, how long
can I go. How much loan-to-value can I do. They do all that. So those conversations, in most, in a lot
of cases, have happened already. Before you even start talking to the consumer
about what the terms will look like. So it gets kind of important to acknowledge
that is how it works. And there is a couple different places in
here, a couple of places where I think it is important to keep that in mind. The second thing is that we have heard this
a lot about, that there is a bubble growing in subprime. And I will be the first to tell you that I
am not one of the people who says it’s a bubble. And I am very careful to tell reporters or
anybody who will listen that this is not a bubble. Even though the reporter will still put me
in the story where they call it a bubble, I keep telling them, and I am telling you,
it is not. For a lot of people “bubble” is shorthand
for some issues in the marketplace that are worth paying attention to and that, if left
unchecked, could cause harm to either lenders, the economy, specifically borrowers. The second piece is that we often talk about,
you know ‑‑ and I’ve said this, is that there are some conditions in the auto lending
market that remind me of things going on in the mortgage market precrisis. I will be the first to tell you they are two
very different markets. I understand, and it is always in there, no,
it is not as big as the mortgage market. So if it crashes, it won’t have the same economic
impact. The piece I do say, however, is that I hope
that the standard is not that we only intervene when it is something that will completely
and utterly destroy the economy. But if it is going to cause harm, that we
could otherwise avoid, it seems like that is a place where we might want to pay some
attention. So there is my level setting. The two places within the marketplace that
I think look a lot like mortgage, one is, within ‑‑ is alignment of incentives,
and then the other is in risk layering. And I am going to talk a little bit about
both of those. So first I think it is worth sort of mentioning
how important the finance and insurance office is to your local dealership. We talked a lot earlier about the information
sites like Edmunds.com, like Consumer Reports, things like that, that have given people a
lot of tools to use in negotiating the price of their car. That has resulted in some pretty significant
compression of margins within the new car and used car sales piece, where car deals
are not making as much money moving the iron as they used to. In fact, most of the money the dealers are
making is coming from either service parts, or F&I. And this is from the latest NADA data, both
that shows a 41.9 percent of gross profit came from F&I. Just up from 25 percent. The service contract penetration is at 43
percent in 2015, compared to 36 percent in 2009. Also pointed out that a large dealer group
and its publicly traded, and in some of its most recent earnings data, said that they
were making $1,500 of profit per vehicle retail ‑‑ and that is gross profit ‑‑ from F&I. So $1,500 with every car that is rolling off
the lot, that is money that is coming from F&I. So, and I think one of the things to keep
in mind as well, is that the F&I manager, or the person who is selling you these, the
finance product and the add-ons, is paid a commission based on the amount of profit that
they were able to build in to the deal. So it doesn’t matter how big the loan is. What matters is how much profit is there in
that deal. So there is a significant incentive to pack
as much profit in as possible. And that is kind of a common sales piece. But the other piece that I would just argue,
is that when you hear that it is a very competitive market. So you hear this a lot. Especially in the industry trade press. This is a very competitive market. It is important to understand that the competition
is between the lenders trying to get into the dealership to get the dealership to get
to present that loan to the consumer. And while some of that benefit may roll down
to the consumer, and ‑‑ this is part of what we talked about in the early, in the
morning process is ‑‑ if that consumer has a leverage to be able to come in with
other offers and be able to leverage that competition, then they succeed. If they are going in straight, trying to just
negotiate it for nothing, the chances are that they are not going to do as well. Because there is this powerful incentive on
the other side to sell that person the loan that provides the most incentives to the dealer. So I think it is just an important thing to
keep in mind. So in terms of lending and sales traps. I mean one of the things that you have heard,
we have heard quite a bit in the industry, first of all, is that the auto sector is booming. And that is true. There are loans coming with that, with the
auto sales. So this is a slide from the Wall Street Journal
that shows that new auto loans have significantly increased over since the recession. And you can see that the number of subprime
loans is starting, is, you know, is bouncing back up from where it was in the recession. Now, important to note that during the crisis,
and in the aftermath, auto lending really constricted. And, you know, Clara had stories. I know Chrysler financial isn’t lending to
anybody with a credit score below 700 at one point. There were lots of people who were being left
out of the credit markets. It stands to reason that these markets would
grow back, now that lending has started to relax. Now that we are starting to see some recovery
in the economy, it makes sense. So it is not the issue that subprime growing
in and of itself is the problem. We would expect that that would happen. And I don’t think ‑‑ you know, I think
reaching those markets is important. I think the concerns that folks have are in
the later slides, about what is being offered to folks in the subprime space, and what is
changing in that space. Let’s talk a little bit about that. This is lending volume by channel. And you see on the left hand side, it has ‑‑
what auto finance companies are offering. And then on the right hand side, banks and
credit unions. It is a little tough, tougher to see than
I thought it would be. But in the auto finance company space, you
see that blue line at the top. Those are folks with credit scores below 620. So you see that that is a significant channel
for that finance company piece. And you can see, sort of see, in banks and
credit unions, it is running right along that red line, which is the 620 to 659. So banks and credit unions. And this is pretty true, historically, have
not really reached down into the subprime space in the same way that finance companies
have. But this will, I think this is important,
in a minute. This is open, outstanding open loan balances. And you see, the amount of subprime lending,
compared to 2012 has grown pretty substantially. This is one place where there is a lot of
discussion about what share is subprime and how big is this. As a percentage basis, it stayed relatively
the same. But auto lending volumes overall, have increased
significantly. So even though subprime may be a constant
percentage, in terms of actual dollars, it is significant, and has grown, grown in a
big way. This also points to an issue of data. And one of the things about the auto lending
industry is that data is a little tough to come by. If you don’t have the financial wherewithal
to buy it, or if folks are even willing to sell it to you, you have to rely on a lot
of the publicly available data, which is coming from folks who sort of have an incentive to
be aligned with the auto finance industry. Experian is certainly one of them, they sell
a lot of their services to the auto finance company. Or so they have a ‑‑ there is a tie there. American Banker wrote an article about a year
and a half ago, where they discovered that a number of the companies that were publicly
releasing data on subprime had actually changed their definitions of subprime without sort
of really telling people that, or bringing it to your attention early on, to say, oh
by the way, we changed this. So as you would start to compare it to their
previous data releases, you find that subprime actually looked like a smaller percentage
of the amount of outstandings. But that is because they had reduced the ‑‑
they had lowered their threshold for subprime. So more loans are being considered prime loans,
which of course, then would change the way that these are being expressed. So it gets more complicated to do an apples
to apples comparison, than we were able to do before. One thing that we were seeing is lengthening
long terms. I think, we have ‑‑ I have heard a lot
of folks internally who have been talking about this. You can see from this here, the sort of greenish
bar is prime, and the blue is subprime. And the average loan term now, for a subprime
loan is just over 67 months. And that has been growing, as you can see,
significantly. Even in the prime space, you are looking at,
you know, an average of about 65 months. It has been growing about a month a year,
roughly, where it was not at that growth rate, you know, prior to 2006. There is a couple of reasons for that, I think. The first is that the price of cars has outpaced
wages. So the amount of money people are making is
not keeping up with the increasing cost of cars. Cars are also continually being important
to being able to get to jobs. A group out of Maryland did a study looking
at how many jobs were available to people within reach of public transit, and they found
that only 41 percent of jobs in the Baltimore area was accessible by public transit. So if you want to get a job, you have got
to have a car, and to get a car, you have to be able to pay for it. Cars are getting more expensive even with
these lengthening loan terms, the monthly payments. The average monthly payment is still at a
record high, as is the amount financed. So you have this affordability issue kind
of colliding with this issue of paychecks staying relatively stagnant, or in some cases,
decreasing. With that, and with another slide that we
will talk about in a second, you know, as you increase the loan term, you are underwater
for longer than you would have been otherwise. So one statistic is, you know, they are seeing
is that for a 72-month loan, it is not until month 54 that you are above water. And so if you need to trade that car in for
some reason, and especially if you see a 72-month loan on a used car, there is a chance that
that loan is going to outlive the actual vehicle itself. There is also just changing circumstances,
you know. You buy a two-door, and four years later,
you have kids and you get tired to trying to shove them into a two-door car, you know,
you need a new one. So you can see here that there is sort of
a correlation between the lengthening loan terms and the amount of loans that have negative
equity. And negative equity is basically when you
trade in your car and you owe more on the car than it is worth and you roll that unpaid
loan balance into the new loan. And so the data show that now around 29 percent
of deals that are being done have negative equity in them. So almost a third are basically paying for
two and driving one. Also, one of the things that we are seeing ‑‑
and this is again where the data ‑‑ there’s some frustration from at least our end on
the data. Experian had been reporting this up until
2013, and then they stopped reporting it. And we’re not sure why. But loan-to-value ratios have also been increasing. And you can see from this slide that on the
far left, that this is sort of the change in loan-to-value ratio by credits here. And you can see that loan-to-value ratios
are increasing for subprime consumers and then actually decreasing for superprime and
staying relatively level for prime. The next slide, shows you ‑‑ gives you
a different view of it. What are we talking about when we’re talking
about the loan-to-value ratio. You see for borrowers with a 620 credit score ‑‑
and I apologize there is no legend here. The dark blue is new cars, and the light blue
is used. You can see that the loan-to-value ratio for
a below-620 borrower is around 150 percent LTV, s they are borrowing 50 percent more
than the car is worth. Now, in a used car, you don’t get that same
instant depreciation hit driving off the lot that you get with new. You know, a new car, you know, the old adage. You drive the car off the lot, you drop 25
percent. But it is not an appreciating asset either. I mean, we are not talking about ’68 Mustang
fastbacks. You know, this is ‑‑ so in this prime
space, where you see the loan-to-value ratios increasing, that’s another reason for increasing
loan terms, because you are borrowing heavily against this asset. But when you stretch that loan term out, remember,
I talked about it. On a 72-month loan on average, it takes you
until month 54 to get above water. Or if you are at 145, 150 percent loan-to-value,
it is going to be even longer. You may never be above water until you actually
pay it off. And so we are starting to see a little bit
of a change in the delinquency and default numbers. Now, a couple of things I want to point out
here, is one is that a lot of the delinquency numbers are for the market overall. And I think what we see in these slides here
is that the numbers and prime which are actually quite good are masking a little bit of what
is going on in the subprime market. So Fitch issued a report recently that shows
that delinquencies in subprime auto ABS hit 5 percent, double to 5 percent from February
of 2016. The highest level since October of 1996. Now, folks who were around for a while will
remember that in the late 90s, there was also a significant event in auto lending where
there were some serious issues in the auto buying prices. Or seeing a number that hearkens back to the
late 90s is not exactly comfort. And Moody has pointed out that underwriting
continues to weaken overall with larger balances and longer loan terms. Now, if you read that report further, they
say well, everything is okay. Because investors have figured out how to
make sure to protect themselves, which is great. But there is no mention anywhere about what
happens to the borrowers who end up you know having their cars repossessed. And what does that do to people reentering
the market. And I think there is some legitimate concern
there. About a year ago, Wall Street Journal had
Moody’s Analytics take a look at some data that they had gotten from Equifax. And it found that early payment defaults increased
to about 2.62 percent which was the highest it has been since before the crisis. A couple of points to make there. They found additionally that 8-1/2 percent
of subprime borrowers who took out loans in the first quarter of 2014 had missed at least
one payment by November of that year. Which was highest, also highest since 2009. So you are seeing some signs that the folks
who are getting into these loans are having some pretty serious trouble paying them. Remember before, I showed the slide about
how ‑‑ what kind of market the auto finance companies were in, versus banks and credit
unions. And you can see the differences and the delinquency
numbers. Now, they are certainly down from, you know,
the middle of the crisis. But they are starting to tick up. And I think one interesting point is that
in most of the major other credit markets, delinquencies are dropping. You know, the market is recovering people
or at least getting more financially stable. Auto lending and student lending are the two
that have the distinct honor of being ‑‑ my financial markets where you are seeing
an uptick in delinquencies, even with, even in the midst of a recovery. Since, I think, and especially with this slide
showing that the folks who are the most active in the subprime space are seeing their loans
increase, while banks and credit unions are seeing their decrease. When I talked about how prime seems to be
masking what is going on in subprime. This is part of what I am talking about there. Talk a little bit about add-ons before I get
to buy here pay here. A couple of things that we found in some ‑‑
and we did a survey of close to 1,000 folks across the country asking them about their
auto lending experience. And one thing that we found was that African
Americans and Latinos were far more likely to report having bought an add-on product
than white borrowers were. I did not include this slide. But a corollary data finding was that African
Americans and Latinos also reported at twice the rate of white borrowers that they were
given misleading information about their loan. Two main things that came out of that. One, is that they were more likely to be told
that an add-on product was required as a condition of financing, which is generally not true. And the other was that they were more likely
to be led to believe that the interest rate that they received was the best that they
could get. Now, it wasn’t necessarily told them that
this is the best rate possible. But certainly, they were led to believe that
they couldn’t do any better, which then cuts ‑‑ you know, that stops you from negotiating. If you feel like you are getting the best
rate, you are not going to keep arguing about it. And you can see that for three or more add-on
products, it was sort of the same. In looking at that same survey, we also asked
the question of whether they had missed payments. What we found was that as people reported
buying more add-on products, they also showed a higher likelihood of reporting that they
had missed payments as well. Since the reason you pack more into the loan,
seeing the data already about increasing loan-to-value ratios, increasing. And especially if you are at a high interest
rate, that risk layering piece, that thing, you know, where something we saw in the mortgage
market as well, these things don’t happen in isolation. And so as you keep adding on things that increase
the risk of the loan going bad, that is going to make the loan ‑‑ there is a better
chance the loan will go bad. So let’s talk about buy-here pay-here for
just a second. So the buy-here pay-here dealers are a little
different than the traditional finance market. These were the folks that are on the corner. They say, you know, they actually say buy-here
pay-here. A couple of key differences. One is that to make your payment, you have
to go to the dealership in most cases. It is weekly, not monthly. So you are making weekly payments on the car. Most buy-here pay-here dealers do not sell
their contracts. They keep them in house, or they assign them
to an affiliated third party or an affiliate that they set up for tax purposes. So they hang on to the paper. So they are not selling it into the market. So here is a couple off key data points, I
think, worth mentioning about this. This is from the industry data that they release
on a yearly basis. This is hot off the presses as of a couple
of weeks ago. In 2015, the average purchase price from wholesale,
which is from an auction or from somebody else, which is $5,200. The average, they have spent about $1,200
in rehabs and repairs. And most of that is cosmetic for a $6,400
investment. It is then sold for $10,900. Usually, well above the Kelley Blue Book or
the actual value of the car. With an average down payment of over $1,100. So the difference is all ‑‑ it is roughly
twice the wholesale price. Payments are due weekly, as I said. On average, it is a 36 month term at $91 a
week, with an average APR of 27 percent. The dealer breaks even on their investment
less than halfway into the loan. So once the borrower is paid about 45 percent
of the loan, they have gotten back whatever they paid for the car in the first place. The average borrower defaults after seven
months. This shows you the market share of buy-here
pay-here is roughly ‑‑ it runs depending on the credit cycle. And so you can see, up in 2011, 2012, post
crisis, when credit was tight, 14, 14 percent of the market, of the used car market then
starts to slide down to about twelve. It is part of the overall loan market, you
know. Somewhere in the neighborhood of 8 to 10 percent. Not a huge part, but certainly not insignificant. And I know there are folks who use buy-here
pay-here to finance their cars. I think there is a ‑‑ there are high
delinquency rates. High default rates. About a quarter of all buy here pay here borrowers
will default by the end of the ‑‑ within the year. You can see that the light blue lines are
loans that do not pay to maturity. It runs about half of all of their loans;
25 percent are in collection, and about 30 percent get written off. At industry conferences, you will often hear
the buy-here pay-here dealer say, we are not in the car sales business, we are in the collections
business. And you have to shift your mindset to that. A couple of things I will just point out. There was an LA Times series of stories in
2012, that talked about the buy-here pay-here model. We can talk about some of the legislative
things that happened in California. A couple of things about buy-here pay-here
dealers, they often don’t price, put the price on the car. They pull your credit report they figure out
what monthly payment you can afford. And then they tell you, these are the cars
you can pick from. In California now, they actually have to put
the price of the car on the window. It is one of the only states that requires
that. There was a settlement between the North Carolina
AG, the Department of Justice and a dealership in Charlotte. It was based on an ECOA claim where they were
actually making broad statements about making sure to take advantage of African Americans. But it was, that was part of the terms of
the settlement, was that they have to post the price on the car. The other term of the settlement was that
they can’t sell the car for more than 10 percent above Kelley Blue Book value. The fact that they have to be told not to
sell a car for 10 percent above Kelley Blue Book value tells you how much above Kelley
Blue Book they were selling that. In a recent St. Louis Post Dispatch article,
it looked at there were three small finance companies in Missouri who were filing lawsuits
in the courts. Three dealers, three buy-here pay-here dealers
filed 15,300 lawsuits in a three-year period, in the local courts. Most of them resulted in default judgments. The average interest rates would be 24 and
29 percent. The most interesting thing is, 300 of those
cases, they found that there were ‑‑ that there was a lawsuit by the buy-here pay-here
dealer. And a lawsuit by a finance company around
the same time. So we are related to the same borrower. They talked to one of them. She borrowed the down payment from a finance
company at 62 percent interest. You can imagine, that loan did not work out
well. So that is that. Thank you, Chris. Thank you, Seema. We do have time for questions. I will open the floor to the CAB. Raul. Thank you. Both of these were really great presentations. But I wanted to use this for a moment for
something we discussed in a previous session, though. What is interesting, if we go into a little
bit more detail on the breakdowns of immigrants, compared to other race categories, you find
some, I think, really interesting things. First of all, I am looking also at the FDIC
study which came out a little earlier before you. You know, Spanish speaking only, for example,
are 82 percent unbanked, all right. So I mean, there are definitely pockets of
this stuff that is very strong, and obviously, also by particular types of other categories
like undocumented status. But what is really interesting is that again,
if we look at the white population, there are about ‑‑ there are more white unbanked
than there are Latino unbanked, as a total number of the population. And of immigrants of course, right. And but actually total number of actual unbanked
African Americans, are the biggest number in absolute terms. But what I find is really interesting in terms
of where we are trying to focus our energy. One statistic is about 70 percent of whites
who are unbanked used to be banked. About 40 percent, 44 percent of African Americans
who are unbanked, no actually, it is more than that. Fifty-four percent of African Americans who
are unbanked used to be banked. So this means that the banking system is failing
people in the sense, there are some people who are being basically being left out, all
right. And there is an issue of how access is developed. But there is another issue here that is happening,
which is how people are going through the system and basically being kicked out of the
system. Right. And, you know, one of the things that is really
disturbing to me from this type of statistics is that, you know, it is African Americans
and whites more that are most being hurt by these situations. We rarely look at these, the way in which
these statistics are presented. And, you know, just to say that because there
is, I think, is particularly, if you look at Arkansas right, and where we are in Arkansas
here, we are in a belt of very strong white poverty, right, that goes through the Ohio
River Valley, all the way really through Texas, into. That it would be interesting to go further
into details as to what are the mechanisms that are keeping people out. And this just back to Chris’ presentation. Also, in terms of the race differentiation,
right. And what is interesting, is that the number
of people who are being affected by these types of practices. In absolute terms, is also ‑‑ even thought
obviously, it is disproportionate as a share of the population, of Latinos and African
Americans or as a proportion of their population being negatively affected. Again, the absolute numbers among whites are
a lot higher. So it is just ‑‑ I think it is ‑‑
there is, this is a critique I am making in general, in terms of the way we generate statistics
and talk about issues and how we framed them as well. And finally, just the ‑‑ how to get very
specific about how that helped particular populations and their problems. You did mention obviously, the issue of remittances,
right. Because in many ways, what is going on here
is in the immigrant population. You know, these are community ‑‑ these
are populations where households are spending about 10 to 15 percent of their income supporting
other populations across, outside of the borders of the United States. Which, by the way, are by definition are going
to the communities where immigrants come from. Right. So one thing, I will just put it on the table
for us to think about, that financial empowerment of immigrants, not only is of significant
impacts, because the numbers are really huge. The impact of getting financial empowerment
by immigrants has a very dramatic impact in terms of their income and their ability to
contribute to the United States economy. But it is also a way of solving the problem
of where people come from in terms of immigration. And I’ll just put that on the table for us
to broaden the discussion a bit more. Yes. Thank you. Just one related point. They are a bit dated, but a few years ago,
Bloomberg did a report that says of 1,800 bank branches that have closed since the recession
at the time, 93 percent were in low income communities. And I think that cuts across race. And so I think it supports the point that
you were making. Just one quick comment. Sure. A comment on the closing of accounts. We actually did a study in Queens in partnership
with a few other organizations. And there was a high percentage of people
who had been banked who closed accounts. And what we found, it was primarily because
of the fees. They essentially were overwhelmed by the number
of fees, the overdraft and ended up just closing the accounts in the end. Okay. But not check systems, not because they were
kicked out because of excess overdrafts. And again ‑‑
Yes. That was part of it. Check systems. Yes. Absolutely. Okay. All right. Julie. Chris, can you define a subprime loan for
me in the auto lending world. And I am not sure I caught ‑‑ I am sending
you a presentation. And I don’t mean to put you on the spot. But do you know what percentage of consumers
who got a subprime loan could have qualified for prime? Two great questions. There are lots of definitions of where subprime
hits. And so one of the challenges with the data,
as I mentioned earlier, is that the data providers all have their own version of what is subprime. In the auto lending space, you will often
even see this middle category of non-prime. So it will be deep subprime, subprime, non-prime,
prime, super prime. And each lender has their own definition. I mean, I think, you know, generally speaking,
you know, someone with a credit score below 680 generally, kind of fits into that. But below 720 for some lenders can be considered
subprime as well. So it just ‑‑ it depends. Say that again? I am sorry. Say that again. That below 720, 680, 720 can sometimes be
considered non-prime. So what do you do with that? I don’t know. But they are not calling it prime. So but I think when you get below 680 is when
you can ‑‑ you know, the general cutoffs are below 620, is in that deep subprime category. Below 680 is roughly subprime. And then depending on whose data you are looking
at, above 680, there is either two or three tiers. In terms of who could qualify for prime and
subprime, that data is just not out there. If you will recall, from the mortgage discussions,
that was Freddie Mac’s number from, you know, statistics that they were looking at. You would really have to have access to the
credit scores and then that is just that local data it is just not ‑‑ you know, it is
available to some. But it is not available to us. All right. Josh. Just a very quick question. I strikes me that the buy-here pay-here is
very analogous to rent to own in many ways. And we had, in New York, done work around
rent to own. And we mapped the stores, the location of
stores in New York. And they were very heavily concentrated in
communities of color. And I imagine that varies some. But I wonder if in urban areas, that is not
the case also, with buy-here pay-here. And I am just wondering if you guys have done
that kind of mapping. And if you have a sense of whether that is
a piece of the business model as well. So we have not done that mapping. So I don’t, you know, have that definitive
data where the stores are located. Certainly, I think you can get a feel for
it by just you know driving around our community. And you can kind of ‑‑ you know where
they are. But I mean, generally speaking, they are in
lower income communities, and heavily communities that are heavily concentrated in a minority
community. So maybe it just ‑‑ I don’t have the
exact maps. But just from, you know, from what I have
seen, you know, it is there. Yes. It strikes me that that might ‑‑ it seems
like a very troubling business model, obviously. And it strikes me that that might be yet another
layer that is troubling. Yes. I mean, there is a lot more. There is a lot more research to be done in
that area. We have spent some time on it. Because it is becoming ‑‑ it is certain
an issue that kind of keeps cropping up. We are paying a little bit more attention
to it. Okay. A couple of more questions, then we will wrap
up. Ann, and then Paheadra. Chris, based on the data you presented, it
seems like collections is a big part of the subprime auto market. And one of the more egregious or concerning
practices that we have been hearing more about is devices that are installed in vehicles
that shut them off. That, if someone misses a payment. Or other kinds of very intrusive tools. How common is that across the different markets,
and do you see that as a current concern or a growing concern in the collections space,
related to those lines. Yes. I appreciate you bringing that up. One point that I meant to add in the presentation ‑‑
but I can tell I was going far too long ‑‑ is in one of the reports, one of the recent
reports that came out. I think it was Fitch’s report. I will go back and look. One of the trends that they noted was that
the repossession of velocity seems to be increasing, particularly in the subprime space. And what they were finding was that some of
these lenders weren’t even waiting for them to go 60 days past due before they were repossessing
the car. Now, that plays with the delinquency and default
numbers because obviously, that loan never gets to the 60-day delinquency mark. And so it doesn’t get reported. So if that is the case, and this is the first
time I have seen it. But certainly, that is a troubling piece,
is if lenders are repossessing, you know, pretty quickly after ‑‑ you know, one
missed payment. In terms of the GPS, there is a couple of
different devices that folks use. One is a starter interrupt. And so in talking to the folks who provide
this technology, if done correctly, it prevents you from starting the car. Now, you know, you could be in a vulnerable
situation when you go to start the car. But, you know, it is theoretically not supposed
to cut it off while you are driving. So I push back the iPad player. But certain, you know, if your car gets shut
off, you are pretty well stuck. And certainly, your story is about people
you know, shopping with their kids, you know, trying to get home and, you know, the car
won’t start. The other is the use of GPS technology as
a way to track down the car, to find it through ‑‑ so that the repossession agent can find it
quickly. Certainly in buy-here pay-here it is almost
standard for many subprime loans, we know that those are being used. You know, most prime consumers don’t want
them, and they don’t try to force them on folks. So you know, generally we see these in the
subprime space. You know, I will note one thing. And the interesting about it is that it is
a tool, that if it was used, I mean, there is some real privacy issue with the GPS locator. And the kinds of information that you can
get from GPS location, and the way that you could use that to leverage collections. You know, if you happen to see that someone
is going places that they probably wouldn’t want people to know about, you might threaten
to let some folks know about that. There is YouTube videos from some of the providers
where the show, like we can tell you how long the car has been parked in that location,
and where the last three places it has been. All of that stuff. But you know, it could be used as a way to
drive down the costs of making the loan. There is actually a credit union in Roanoke,
Virginia, that actually, if you put a starter interrupt device on it, it cuts your interest
rate from about 16 percent to around nine. So if that is the way it is being used, then
actually, it could be a really helpful thing. Because if it is driving down the costs. But what we are finding is, that is not ‑‑
it is not this kind of cost. I mean, you are seeing a GPS locator or a
starter interrupt on a loan with a 29 percent interest rate, I assure you, they are not
going to discount for that. So what it has really done is cutting the
cost of collections which is great for the lender, but it is not getting passed along
to the consumer. But it is incredibly intrusive product. Paheadra. Hi, Chris. Okay. I had a couple of points that I wanted you
to address for me. A couple of things that we have seen in the
market, is around tax time, of course, is an explosion of new buy-here pay-here lots. You have consumers who will purchase a vehicle
from those lots. And within a few months, the lot no longer
exists. And since it is so difficult sometimes to
figure out who is really regulating these lots, what is your advice to consumers, when
they find themselves in a situation, where they have a lemon essentially, and nowhere
to turn in order to get any recourse. The second thing that we see quite frequently
are situations where consumers have applied for a loan. Have been told to take the car. And they drive it for a few days. And they are told that the loan was not approved,
to bring the car back. But their trade in has been sold. And they will not return their down payment. And so we have a lot of frustrated consumers
who now find themselves in a situation where they don’t have their previous vehicle, and
they have lost money on the car. Do you see a lot of that in your research. And if so where is it more prevalent? Two big questions that I will try to answer
quickly, because I know I will get the hook. In terms of the buy-here pay-here dealers,
certainly tax refund time is a great time for them. Because then you have cash in pocket that
you can put down for the down payment. So certainly, if there is an issue with buy-here
pay-here and you know, the Attorney General’s office could help. You know, my understanding of the car crowd
is that because it ‑‑ more of the requirements of the car buy is that you sell your contracts
to a third party. Since, most buy-here pay-here dealers don’t,
that the Bureau has some authority over buy-here pay-here dealers. And so certainly folks here could probably
be helpful as well. So it is really reaching out to as many and
all people that you can find as possible. In terms of the issue of the yo-yo scam. I mean, that is something that certainly has
come across my desk quite a bit. And what this is related to is that the vast
majority of auto deals that go out the door now are conditional deliveries. So there is a usually a clause in your contact ‑‑
in some cases, there is not ‑‑ just someone asserts it anyway, that basically says that
if the dealer cannot find a deal to sell your loan at terms of the dealer is liking, then
the dealer is allowed to rescind the deal. And you are supposed to get your down payment
and your trade in back. You are supposed to be allowed to walk away
from that deal. Certainly, we hear plenty of stories, of people
going in and finding out that their trade in is unavailable or their down payment is
unavailable. But what it means is that virtually every
car that goes out the door, that there is the potential for this happening. Now, there may be some cases, and there are
some cases, where the dealer has basically sent you out without the deal being final,
and something has come up within the loan that requires something different. They can’t secure the terms that they had
agreed to you with. I think the challenge of that ‑‑ this
is a bigger issue for another day, but it is a significant risk shift. So what it is telling people is, we are going
to send you out with the collateral, and the financing is not final. Which is one of the few markets where anybody
does that. Can you imagine if Best Buy let you go home
with a TV and then decided three days later, you know, we sold to you for 5-, but we really
wanted 7‑, so give us $200 or we are coming to get it. Usually you walk out with the merchandise,
you think it is final. But in this case it is not. Who has got the better ‑‑ who is in the
better position to assess whether or not that deal is going to go through. Is it the dealer who is doing more of these
deals in a day than most people will do in a lifetime, or the person who is walking out
the door. And that is one place where I think there
is a need for some attention. And on an ominous note, unfortunately we’re
going to have to wind this down. Chris and Seema, thank you for very insightful
presentations. For our last session today, the CAB will have
an opportunity to hear about the details and contours of the recent notice on proposed
rulemaking in the small-dollar ‑‑ in installment-lending space. Over the past few years, the Consumer Advisory
Board has examined research and trends in the small-dollar space and has had numerous
discussions on small-dollar lending. In general, most CAB members saw the need
to provide access to this type of credit. However, many shared concerns that this credit
not be predatory and further not put vulnerable consumers in more challenging circumstances
and endless debt traps with egregious interest rates and terms. Last week the Bureau unveiled its proposed
rule to regulate small-dollar and other long-term installment products. I had the privilege being on one of the first
groups to receive a briefing on this momentous rulemaking. I’d like to invite Kelly Cochran, the Bureau’s
Assistant Director of Regulations, to provide us with an overview of the proposed rule,
after which you’ll have an opportunity to ask questions and comments. Thank you, Kelly. Thank you. It’s a pleasure to be back here a year after
our last presentation. At that time we were starting the process
of consulting with small businesses that would likely be affected by the rule and had put
out an outline of the proposals that we were considering at that time. We sought comment from ‑‑ through the
small business process as well as from a broad range of other stakeholders. We got your feedback and talked to a number
of our other advisory boards. So we’ve been working for the last year to
fine-tune the proposals, to draft the document, to do additional research and consumer testing
on disclosure so it’s been a very busy year. I’m glad to be back. So on Tuesday when we actually released three
major documents. I’m going to talk through all three today
briefly to give an overview, and then we’ll have time for questions and comments. But first is the notice of the proposed rulemaking
itself. The comments for that will be due on September
14 this fall. So it’s ‑‑ we’ll have an opportunity
and are really seeking comment from a broad range: everyone who gave us feedback last
time, as well as additional people. The second piece of a request for information
about issues that are not covered within the scope of the notice of proposed rulemaking. And I’ll talk a little bit more about that,
but in particular, we’re focusing both on products that would not be covered by the
proposal as well as some industry practices that may be occurring in the ‑‑ even
in covered markets but are not covered by the proposal. The comments on that will be due in October
14. And the last part that we released was a supplemental
findings reports that had six chapters, detailing our research on additional topics on top of
four previous research reports that we has released. The Bureau has evaluated about 18 million
loan files in the course of the last four years building towards this rulemaking. And so we’ve been summarizing our research
as we go, and we’ll talk a little bit about the most recent releases from this spring
and also on June 2. So as we discussed last time a year ago, our
major concerns here with these markets is that we are seeing practices in the payday
auto title and certain other high-cost lending markets that seem to deviate from other credit
markets in at least two key respects. The first is with regard to underwriting. We do see some evidence that lenders are screening
borrowers to try to account for up-front default risk, but they do not appear to be evaluating
whether consumers can actually afford to repay their loans. And because so many consumers are getting
unaffordable loans, they’re left with a choice of three bad outcomes. One is taking out additional loans to try
to give them some more time to figure out how to pay back. The second is to default on the covered loan,
which often means the loss of a vehicle where vehicle title has been taken. And the third is to make the payment on the
covered loan but to shortchange themselves somewhere else, either with another major
financial obligation or failing to be able to cover basic living expenses. What we’re seeing is that this pattern of
harms works out slightly differently with different products. So with very short-term products we’re seeing
a great deal of reborrowing and some default. With longer-term products the major concern
is default. In the first instance the consumers simply
are not making it through a sequence of loans at all. And we’ll talk a little bit more about that
when we get to the research part. The other major concern that the Bureau has
is with regard to payment practices, and in particular that lenders in these markets are
making unpredictable and repeated attempts to collect payments out of consumer’s accounts. When this happens, it tends to cause a great
deal of bank fees to accumulate quickly, either from nonsufficient fund fees or overdraft
fees. And there appears to be an increased risk
of account closure for the consumer, which has all sorts of spill-on effects for the
consumer’s financial stability overall. So we are proposing to use a number of authorities
in this rulemaking. The primary one is our authority under the
Dodd-Frank Act to identify and prevent unfair, deceptive, and abusive acts and practices. The tests are laid out on the slide, but I
won’t go over them here. We’re also using other authorities, including
our disclosure authority exceptions and supervision of certain nonbank entities. The covered loans that we are proposing to
cover are the same as they were last spring. It’s short-term loans where the loans are ‑‑
the total amount due is due within 45 days either of consummation of the loan or of the
advance of loan proceeds in a case where it’s an open-end product which may have multiple
advances. For longer-term loans that are 46 days or
longer, there are two thresholds that must be met before they would be covered under
the proposal. The first is that the all-in cost of the loan
would be above 36 percent. The second is that there is a form of leverage
over the consumer, either that the lender takes account access, paycheck access, or
vehicle title. We believe that those forms of leverage are
causing consumers to continue paying on unaffordable loans past the point they would otherwise
because something else is at stake, and in some cases, the lender’s able to draw the
money directly out of the account even if the consumer doesn’t want to be paying at
that point. The proposed exclusions are also again largely
as they were last spring. It covers purchase money loans where an auto
or consumer good is being purchased with the funds that are being lended, real estate secured
loans, credit cards, and so on. With overdraft services, the Bureau’s doing
a separate rulemaking on that topic, so we’re not covering that here. The basic requirements are largely as they
were last spring. The main requirement is that lenders are required
to make a reasonable determination that consumers have the ability to repay all scheduled payments
while also meeting major financial obligations and their basic living expenses without defaulting,
without reborrowing. The proposal would specify a methodology that
lenders would use to actually go through this calculation. And it proposes limited exceptions for loans
that satisfy certain requirements where they would not have to apply the methodology but
there are other conditions laid out on the loans to ensure that consumers would not get
stuck in an unaffordable loan over a long period. And the second set of interventions concerns
the payment practices. One is to require a prewithdrawal notice for
most loans so that consumers know that the count withdrawal attempt is about to come. And the second would be a prohibition on further
withdrawals after two unsuccessful attempts have been made across any channel. At that point the lender would need to go
back to the consumer and ask for an authorization before proceeding to try to withdraw funds
again. The other pieces of the proposal address supporting
requirements, things like developing compliance policies and procedures, recordkeeping, and
some of the credit-reporting pieces that are necessary to make other pieces work. So we’ll talk briefly about those. The first part is the ability-to-repay requirements
themselves. The full-payment test has a couple of components. The first is to ensure that the lender is
getting the information they need to assess the consumer’s ability to repay. So we’re expecting that lenders would need
to collect certain information from the consumer. One is the consumer’s net income. The second is specified major financial obligations,
such as housing, debt payments, and child support. And then the third is to pull their borrowing
history so that they can assess recent activity in borrowing to see if that sheds light on
whether the consumer’s going to be able to afford the loan that they’re applying for. Most of the changes that we’ve made in the
last year on these elements are really to refine the process and try and think through
ways we can make the process as least burdensome as possible for both consumers and lenders. So, for example, we’ve thought about ways
that lenders may be able to ‑‑ if they can get access to review borrowing ‑‑
excuse me ‑‑ payroll history or account history to prove income. For housing, we’ve proposed an option that,
in addition to getting the actual information about consumer’s rent, that lenders under
certain circumstances would be able to estimate using reliable sources and compare that to
what the consumer’s reporting so that that might give lenders more flexibility to automate
their processes and then move through the process more quickly. So they’re fine-tuning changes to try and
make it more flexible and easier for both sides. I’ll come back to the consumer reporting piece
at the end and we can talk a little bit more about that. With regards to the underwriting test, the
basic concept is pretty simple: that you take the net income, you subtract the major financial
obligations, and you see if there’s enough money left over to pay the covered loan and
to cover basic living expenses. The proposal will provide flexibility on how
a lender would estimate basic living expenses. They could work through a process with the
individual consumer to think about their individual, but they could also use average estimate numbers
as they’re reliable. Where it’s seeking comment in particular on
a number of sources that might be useful here, we know the Bureau of Labor Statistics does
some surveying on living expenses and that the IRS and bankruptcy courts also have been
working with this concept. So we’re hoping we’ll be able to find additional
sources that will be useful for people to use and make this process more straightforward. For short-term and balloon payments only,
the proposal would require that lenders look not only for the term of the loan but also
for 30 days after the loan, to make sure that the consumer can continue to make all those
payments. Because these loans have such a pattern of
reborrowing, we want to look at the period directly after the loan payment is made to
make sure the consumer hasn’t shortchanged themselves for something that’s just coming
due a few weeks later. For open-end loans, the proposal would require
that the lender make certain assumptions about how the loan is going to be used and how quickly
the consumer would draw down the funds. And we are also proposing that lenders would
have to reunderwrite open end lines of credit after 180 days if they are advancing additional
funds. The concern here is that the consumer’s financial
situation could have changed substantially from the original underwriting, so we believe
a periodic update makes sense. And then the last piece concerns the assessment
of borrowing history. This is the place where we’ve made one of
the largest changes since last spring, where we’ve been thinking a lot about the sequence
of loans that can happen and what happens when the borrower’s taking out multiple loans
in quick succession. We think there’s reason to believe that a
first unaffordable loan may be spilling over to cause the consumer to take out their next
loan and that also knowing what the consumer has been doing and how they have been able
to pay or not pay recent loans also just tells the lender more generally about their ability
to afford. So what we’re expecting to do, similar to
what we talked about last spring, is that there would be a presumption of unaffordability
under certain circumstances where the borrower’s recent history suggests there’s cause for
concern. But what we’ve decided to do for the proposal
is to look at a 30-day period out from the last loan rather than a 60-day period our
from the last loan. We’ve thought ‑‑ we’ve looked at various
measures here, and it’s a challenging balance to strike. But we think 30 days makes sense because it
ties to the expense cycle for a consumer. A consumer may be paid every two weeks or
they may be paid every four weeks, but their major expenses tend to come due on a monthly
basis. So rather than tying to the income cycle,
we think it makes sense to look at an expense cycle. And we believe there’s reason to think that
if the consumer cannot make it through a single expense cycle without going back in, that
there’s concern that that earlier loan is part of the problem that’s fueling this ongoing
cycle. So the presumption of affordability that we’re
proposing would apply in a couple of circumstances. One is where there are open-end loans or balloon
payment loans and a consumer comes back in the 30 days. We’re also proposing a presumption that would
apply for other types of loans where the consumer comes back in to the same lender or the affiliate
and there are circumstances that make you think that the consumer’s already in trouble. They’ve had a delinquency in the last 30 days. They’ve expressed concern that they can’t
afford the loan, or there are other circumstances that seem to indicate that the new loan is
helping them to skip a payment or to get cash out simply to cover the loan they already
have. There would be certain exceptions where the
presumptions would not apply. So in circumstances where the payments are
substantially smaller, the loan is substantially smaller, or the total cost of funds is going
way down, then there are other things going on that may be to the consumer’s benefit. There’s less reason to think that the prior
loan’s unaffordability is causing the new application. Presumption can be overcome where there’s
documented evidence that the consumer’s financial capacity has improved since the last loan. One of the changes in this proposal relative
to where we were last spring is we’re really trying to put more definition around what
is improvement in financial capacity. So one situation may be that the major financial
obligations have changed. They’ve moved and their new rent expenses
are going down. Or they’ve gotten a new job and their income
is going up. Another circumstance that we think would apply
here is in the circumstance where the consumers have one income shock ‑‑ maybe they got
laid off briefly or were sick or for some reason their income didn’t perform as expected
earlier but there’s ‑‑ they’re now back on stable ground and it makes sense to ‑‑
there’s not reason to think it’s going to happen again. One place where we’re seeking comment is with
regard to expense shocks that have happened in the past and whether there’s a way to account
for those in this underwriting process without undermining the whole course of the rule. We think expense shocks are quite a bit more
complicating. And so that’s an area where we’re really particularly
interested in getting comment about how to balance those concerns. There is one circumstance where that presumption
cannot be overcome. That’s in the short-term space. If the borrower has already taken out three
loans within this 30-day cycle, so it’s a three-loan sequence, there would be a mandatory
cooling off period for 30 days. At this point, we think it’s highly unlikely
that the consumer’s going to be able to afford a fourth loan and that the lender is going
to be able to underwrite accurately at this point, and so we think that at that point,
a cooling-off period is warranted. With regard to the limited exceptions to this
overall frame, there’s three that we are proposing. There were a number of other options that
we looked at last spring, and we are continuing to seek comment on those, even in places where
we did not draft out full language for them. So we’re really thinking about this area carefully
and seeking a lot of comment to try and fine-tune and get to the right answers. The first alternative is what we’re calling
the principal-payoff option. This is a short-term option. The basic concept is that lenders would not
have to follow the residual income analysis and the presumptions in circumstances where
they’re making a few limited loans to consumers to allow some flexibility. The maximum amount of these loans would be
$500. And in a situation where the consumer comes
back at the end of the loan or within 30 days and realizes that they need to reborrow, the
lender could make smaller limited exceptions ‑‑ extensions, but the idea is that the consumer
would have to pay back one-third with each increment, so that within three loans, they
would be done, they’d be out of debt, and they would be not trapped in the kind of extended
sequences that we’ve been seeing in our research. A mandatory cooling-off period would apply
at the end of the third loan again, and the consumer could go from there. There are certain other restrictions on these
loans that would apply. We believe that first the lender would need
to check reports and furnish information to the reporting system so that ‑‑ because
it’s really important to understand where the consumer is, if they’ve already had borrowing
that’s been going on in the recent past. Otherwise, the step-down process won’t work
properly so it’s particularly important in this setting. There are various other requirements, and
this option would not be available in certain circumstances where we think there’s particular
risk and a full underwriting process is required. For instance, where the consumer’s already
had short-term loans for more than 90 days or six loans within the last year, their borrowing
is so heavy we really think a full underwriting is warranted. And the second situation is where there’s
open-end credit or auto title involved. We think it’s important that the consumer
be fully underwritten to make sure that the lender has the full financial picture before
making the loan. And the lender also would be required to issue
certain disclosures to the consumer so that they understand how the step-down process
will work and that this loan has certain limitations on it. There are two options that we’re proposing
for longer term loans. One is based on the National Credit Union
Administration’s Payday-Alternative Loan Program. You may remember this from last spring. It’s largely the same. The basic concept here is that any lender,
not just credit unions, who make loans that meet the PAL or RIM parameters would be allowed
to go ahead and do that without going through the full methodology that the general rule
would require. There are a number of elements to the PAL
program. The first is its cost limitations. So it generally would be limited to 28-percent
interest and an application fee of no more than $20. The loans must be fully amortizing with terms
between 46 days and six months, and there are limits on the amount of principal. There are certain other requirements that
we’re proposing, for instance, to protect the consumer from having funds swept out of
their deposit accounts in connection with these loans. And a borrower cannot be indebted on these
loans for more than three in a rolling 180-day due date period. So that’s largely the same as it was in the
spring ‑‑ last spring. One of the challenges we faced is that a number
of depository institutions told us that while they are doing other forms of relatively low-risk
lending, this payment structure did not ‑‑ this pricing structure did not really work
for them and didn’t accord with what they were doing. They wanted a structure that allowed them
to recover more of their underwriting costs up front with a lower interest rate. And so the second alternative that we’re proposing
is a new alternative where we’re really trying to grapple with that question. So this is called the portfolio option, and
the basic concept here is that it would provide some more flexibility on the pricing structure
along the lines that we just talked about. It would also look at back-end protections,
specifically looking at the portfolio default rate for all of these loans being made by
the lender. So the lender would be allowed to make these
loans as long as their portfolio’s default rate did not exceed 5 percent. That’s consistent with the kind of accommodation
lending that we’re seeing from some of these depositories. And the risks are much lower than what we
are seeing in the data from some of the other installment loans in this section. So the basic concept is that the total cost
of credit would be no more than 36 percent plus one origination fee that’s reasonably
proportional to the actual costs that the lender is putting in to originating the product. There would be a safe harbor for fees of $50
or lower. The loans would have to be fully amortizing. The terms that we’re proposing are longer
so it could be 46 days to up to two years, so it’s a little bit more flexible than the
PAL program in that respect. There’d be restrictions on how many could
be made within a rolling 180-day period. And if the lender exceeded the 5 percent default
rate, they would have to refund origination fees to all borrowers. So we’ll go on quickly to the payment practices
and the other elements of the rule, and then I want to save some time to talk about the
request for information and the research. And then we’ll have lots of time for questions. On the payment collections requirements, as
I said, and consistent with last spring, there are really two elements here. One is the prewithdrawal notices, so that
lenders would be generally required to tell consumers at least three business days in
advance that they’re about to make a withdrawal attempt from the account. It would have basic information, contact info,
the amount of principal, fees, and so on. The second element is the prohibition on making
further withdrawal attempts in a situation where the lender has already failed twice
in succession. The lender at that point would need to send
a notice to the consumer, tell them that this prohibition has been triggered, and then they
can proceed to ask for a new authorization to withdraw more funds. The proposal would set out a specific process
for them to use to make sure that the consumer has the information they need to make decision
and that the process of the new authorization is going to work well. This requirement would apply across channel,
so that it applies even if the first attempt is by deposit of a check and the second is
by ACH. Once you get to two, it’s triggered, and we
think that’s extremely important because one of the things we’re seeing here is that lenders
often change channels when they’re trying to withdraw funds from the account. As I mentioned, there are a number of supporting
elements in the rule that we’ve also built out quite a bit since last spring. The first are pretty basic concepts. One is that we are proposing that lenders
would be required to develop written policies and procedures to ensure compliance. We would expect that these policies and procedures
would vary depending on the lender’s business model and scale and scope and so on. And so we’re not expecting a single uniform
structure there. The second is that lenders would be required
to retain records to demonstrate compliance with the rule for 36 months. We are proposing some specific requirements
with regard to certain types of core records and how they’re going to be stored. One of the challenges here is that there will
be documentation information coming in to the lender from outside. And then there’s also information that the
lender is going to generate in the course of doing the underwriting and the other pieces. So we’re trying to think about how to manage
different systems and ensured consistency and facilitate the lender’s own compliance
efforts as well as supervision. The other piece of this is the data-reporting
part of this with regard to consumer reporting. As I mentioned, borrowing history is a really
important piece of what’s happening here. The national consumer reporting agencies don’t
generally collect data or accept data on many of these types of loans, but there are specialty
CRAs that are developing in this market. What the Bureau is proposing is that certain
CRAs could become registered with the Bureau if they meet basic requirements that they
have the systems to do the technology work to accept data and report it back out, that
they provide evidence that they comply with federal consumer laws, and that their information
security safeguards are sufficient. Once their systems are registered with the
Bureau, we would require that lenders report basic information on the covered loans to
them and pull a report back in the course of origination so that they would have information
on the consumer’s recent borrowing history. This is a significant part of the rule. We had expected to do this in the spring last
year, but we’ve put a great deal of more thought into building out the required elements. And one of the effects of this is to really
think about the effective date, because we need to think about not only about the lenders
getting prepared for this and building our their policies and procedures but also the
stand-up of the reporting systems. We’re proposing a 15-month implementation
period and some staggered elements to that to help build out the credit reporting part,
but we’re seeking a great deal of comment on this, because thinking about both elements
of the implementation process, it’s important ‑‑ we want to ensure an orderly sequence that’s
good for lenders and for all the other participants, so that’s something we’re thinking about. Okay. So really briefly, I’m going to go through
the RFI and the research, and then we’ll open the floor. So the request for information ‑‑ there’s
a couple of things going on here. First, this is a really important step we
believe to address very critical practices that are causing a great deal of consumer
harm. But we are very aware that it doesn’t cover
all products that are being marketed to consumers who are facing liquidity shortfalls, and it
doesn’t cover all practices even within the markets that we are covering. So there are two ways that the Bureau is approaching
this. One is that we’re already engaged in a number
of other rulemakings that will start to tackle other pieces of this. So as I mentioned and certainly told you last
spring, we’re also working on debt-collection rulemaking. We are separately considering an overdraft
rulemaking. We’re also going to be looking at a larger
participant rulemaking that will define what installment lenders and vehicle title lenders
are subject to the Bureau’s supervision jurisdiction. A number of both industry and consumer groups
have suggested to us that we look at a nonbank registration system as well as being particularly
important in this market. And so that’s another thing that we’ll be
looking at. But in addition to those specific workstreams
that were already kind of in the at least planning stages, we also wanted to open the
floor for a broader discussion at the same time that we put the proposal out. So the request for information is really an
attempt to do that. It focuses both on products and practices
that are beyond the scope of the proposal. And it also asks more generally about market
evolution. We know this evolution ‑‑ that these
markets tend to be very fluid, they change over time, and that this is a time of both
technological change, regulatory change, new entrants, a lot of things going on. So as much ‑‑ even as we work to complete
this workstream, we also need to be thinking about what’s going to happen next and where
things will go and where the Bureau may need to concentrate its efforts going forward. And this isn’t necessarily limited to rulemaking. It can also affect supervisory exams, enforcement,
and consumer education efforts. So it’s really a broad-spectrum discussion. Really briefly, just to focus on the main
elements, we believe that most of the liquidity loan products out there are going to fall
within the scope of the proposal, but we have heard at least anecdotally of a few that don’t. Most often the reason that they fall outside
the scope is because of that prong that focuses on leverage. They don’t have account access, payroll access,
or vehicle title as we’ve defined them in the proposal, but there may be other forms
of leverage that are involved that are keeping the consumer there. So we’re particularly interested in the underwriting
practices and whether there is something else that the lender may be using besides an assessment
of the consumer’s ability to repay to kind of change their risk profile and keep themselves
in business. So that’s a significant part. And then we’re generally ‑‑ we’re just
seeking information about what else is out there, how large they are, what conditions
these other products are occurring in, and what kinds of new entrants are coming into
the market. The second focus on risky practices focuses
on a number of specific items. One is things like garnishment orders, judgment
liens, and some other forms of what we’re thinking of is kind of very specific enhanced
collection. The second is default interest rates, late
payment penalties, prepayment penalties, and general back-end pricing practices: loan churning
and situations where a refinancing may not be spurred by the consumer’s financial distress
but there may be other things going on about that refinancing that raise concerns certainly
about what the consumer understands about the new loan product and what’s happening,
and then add-on products are also an area of interest. We’re also seeking comment on the role of
nonlenders, so third-party organizations, brokers, credit service organizations, and
other intermediaries that may play an important role in these markets and whether there are
particular consumer concerns with regard to those. So the last topic is the research. And unfortunately, our head economist couldn’t
be with us here today. I’m not going to try and do a full substitute,
but he was able to join us for a committee call yesterday. But very briefly, we’ve released two reports
this spring as well as the report that came out in June. I’ll just give you the very quick highlights. The first was a report focusing on online
payday and payday installment track record with regard to withdraw attempts made through
the Automated Clearing House Network. What we found was that at least half of borrowers’
accounts had at least one debit attempt that failed or resulted in an overdraft in an 18-month
study period and that the average amount of fees for those consumers that had at least
one failed account was $185 in bank penalty fees. There’s an additional piece of this, which
are lender penalty fees, which we can’t see from the data. So that’s a substantial additional cost that
consumers probably don’t know that they are risking when they take out these loans. We also found that there was a heightened
increase in account closure, so that 36 percent of accounts where there had been a failed
attempt ended up closing usually within 90 days. And that was significantly higher, four times
higher, than the accounts where there was an NSF or an overdraft that didn’t come from
a payday or a payday installment source. So we compared those two, and it seems that
there’s a number of concerns raised by that information. The next report was released in May, and it
focused on single-payment vehicle title. The results that we have are very similar
to the results that we have reported in the past about payday lending. These again are short-term loans, generally
30 days. We found that more than 85 percent of loans
were reborrowed usually within the same day but certainly within 30 days of the last loan
and that about one-third of loan sequences ended in default. About 20 percent of loan sequences ended with
the borrower’s car being repossessed. So these are, you know, serious risk for consumers
who may be depending on these vehicles to get to work, to get to medical care, and so
on. We also found, very similar to what we found
in payday, that the vast majority of loans being made are being made to consumers in
very long sequences of loans so that more than half of all the loans being made were
to borrowers who had sequences of at least ten months in time, and again, very, very
consistent with what we found in payday. The June report has six elements. I’m not going to try and go through all of
them myself. The first chapter, though, I did want to call
out, which is the evidence that we found regarding installment loans and vehicle title and payday
installment loans. So these are loans that are longer term. Some of them are balloon products, where the
consumer’s paying just a small amount of interest and then paying one big payment at the end,
and some are even payments so it’s a mix. We found a couple of things here. First of all, balloon payment loans shows
a lot of reborrowing very similar to what we were seeing with short term. So if there seems to be a pattern where the
consumer gets the end of the loan but can’t make the last big payment, they roll it over. And the second thing is that the default rates
were extraordinarily high on these loans. In the payday installment space, more than
40 percent of default ‑‑ of loan sequences ended in default. And on online space, the numbers were even
higher. For vehicle title about one-third of loan
sequences end in default and about 11 percent of the sequences ended with the consumer’s
vehicle being repossessed. The very last slide is just a short listing
of the other chapters, which I commend to your reading. I’ll mention a couple of things on them briefly. The first is on Chapter 2. So Chapter 2 we looked at what happened with
bank deposit advance programs when the banks stopped offering this product. As you may remember, deposit advance programs
look very similar to payday in the sense that they are required to paid out of the consumer’s
next deposit. We saw very high rates of reborrowing and
continuing activity in these programs in our early research. A number of them have stopped since because
of guidance from the credential regulators. So we looked at what happened to the consumers
after the product stopped. What we found is that there was a brief period
of adjustments. For instance, consumers had more days with
a negative balance after the debt program stopped if they were debt borrowers. But overall and over the long term, we found
no increase in overdraft or NSF fees, no increase in payday lending and borrowing from those. So the consumers were able to adjust to the
stoppage of this program without showing signs of substantial financial distress in their
accounts. So it’s a really interesting report, and it
may be worth further look. Chapter 3 spells out some of the data that
we have about state impacts at a more deep level than what we had provided in earlier
presentations. One place we looked was at Texas, which has
looked at disclosure regimes that were specifically targeted at trying to alert consumers to the
risk of reborrowing and short-term loans. What we found was relatively modest impacts:
about 13 percent drop in loan volume but a very small, only 2 percent drop in reborrowing. So what seems to be happening is that some
consumers may have decided to do something else and not take out a loan originally. But the consumers that did take out the loans
ended up in the same kinds of reborrowing sequences that they had before. It didn’t have that kind of impact. The other thing that we looked at was also
physical access to storefront payday lending and three states that had implemented new
regimes. This is Virginia, Colorado, and Washington. What we found was that the three regimes have
significant impacts on the number of stores in each of the states, but because there tend
to be so many stores and they’re relatively close to each other, the impact on physical
geographic access was quite modest. The median increase was 1.2 miles, so relatively
small. There is a little bit more in rural areas. That’s probably not surprising, but very,
very modest effects overall. So the fourth chapter looks at also information
that we had already talked about, some of it, but looking at the rates of reborrowing
across different states that have different types of imitations on renewals and reborrowing. What we found is that there was really no
substantial difference. About 80 percent of the loans were being reborrowed
no matter what the particular state combination of rules was. The last three chapters are really ‑‑
well, Chapter 5 looks at different definitions of sequences, provides the information for
30-day sequences as well as 14- and 60-, so that you can see the difference on how that
affects. And then Chapter 6 provides some supplemental
information for impacts analysis in the main document, estimating different impacts of
the different parts of the proposal. So I know that was a lot to cover. I’d be more than happy to answer questions
and really look forward to all the discussion. As you know, we’re in the ex parte period,
so we’ll be recording your feedback and, you know, taking it under consideration. Great. Thank you. You did a great job of condensing hundreds,
almost thousands of pages into a very coherent discussion. Kathleen? This is great, Kelly. And it was a lot of information, so I apologize
if any of my questions you actually gave ‑‑ No problem. ‑‑ the answers to as you were going on. I was trying to take notes. I wanted to start with some of your questions. The question about garnishment that you were
asking I think is really important, because in many states the garnishment laws are very
antiquated. So, you know, the way they draft it was to
take the cost of living, you know, for a modest person at a particular time, and they don’t
all have cost of living increases. Some of them have ‑‑ I’ve seen have had
sort of an annual dollar amount that it will increase by like $25. But if you look at them, it’s possible that
under the state law, a lender could go in and garnish all but, you know, $400 a month
and that’s all the person has to live on. So I think that’s a big problem. When you were asking about other liquidity
loan products, there’s been ‑‑ you know, the
refund anticipation loans, which I would put in that category I think, have come back,
and it’s the same bank financing them that was financing them six or seven years ago
when we thought they had disappeared for good. So that was a product ‑‑ I don’t know
how it ‑‑ it doesn’t align quite as neatly as the others, but it seems like it falls
in that category. And actually, I gave Julianne an article about
them earlier. Oh, thank you. And then two concerns I have is is there any
vehicle that would allow payday lenders to know whether somebody has an outstanding payday
loan at another ‑‑ with another lender? Because I like the restrictions on the rollovers,
but they aren’t effective if people could just go down the street. That’s one we’ve proposed be requirements
regarding registered information systems, because lenders would be required to report
out at the time that they originate. So the information will be reflected in that
system when someone else goes to pull the report. And then lenders would be required to update
and at the end of the loan report back one last time to say this has been closed out. So we want to get a reasonably comprehensive
system that’s close to realtime so that lenders have exactly that information to know what’s
outstanding and how recently the consumers borrowed and what their pattern is, because
that’s an incredibly important part of making sure that the interventions work properly. I might have missed that when you started,
but that’s perfect. Yeah. Would that be something that would be run
through the CFPB, this kind of ‑‑ Well, as we talked about, there are a number
of specialty CRAs that are already emerging in this market. What we’re expecting is that they would register
with the Bureau, but they would provide this without us having to provide a ‑‑ build
a database to do that. So we believe the private market can supply
this and probably put it in place faster than we could do if we built it from scratch. And then my last question is I know there
was some discussion about limiting the ‑‑ in thinking about affordability, about having
some bright-line rule that says nobody’s payment should exceed 5 percent of their income. And I saw that wasn’t in the rules, what I’m
wondering the thinking about that ‑‑ So that was actually an alternative option
that we were looking at, not the main underwriting requirement. The main ability-to-repay analysis has always
looked at residual income as I talked about. But last spring when we were looking at potential
alternative exceptions, we looked at a 5 percent payment income option. We’re still seeking comment on that. At the time that we got feedback about it
last spring, people had mixed reactions. A number of banks and depositories told us
that they couldn’t do all of the accommodation lending that they are doing today under a
5 percent PTI threshold. But we’re continuing to comment on that and
really looking forward to hear more and also to hear more about the new option that we’ve
put on the table, which is looking at the portfolio default rate. That would give people flexibility to use
payments, income, or other forms of underwriting as long as they can have that back-end threshold. So that may provide additional flexibility. And like I said, we’re just seeking comment
on all the options at this point. Right. Just to make sure I understand, there’s the ‑‑
The other thing Kelly didn’t mention is a lot of consumer groups were quite concerned
about that option. They thought it was not protective enough
and could facilitate some what they viewed as abusive lending. You know, one of the concerns is that for
consumers at the very, very end of the income spectrum, that even 5 percent PTI might be
too high. So I think one of the questions is whether
having this back-end protection, which is looking at default ratios may be a way ‑‑
a better way to safeguard against those kinds of concerns. So we’re looking to continue to seek comment. Thank you. And as I understand it, you’re really thinking
about kind of more like safe-harbor provisions ‑‑ Right. These are ‑‑
‑‑ is sort of the way you’re thinking about it? These are the alternative regimes that lenders
could use if they ‑‑ and consumers if they find them more flexible, but it’s an
alternative. The main underwriting analysis is the residual
income analysis that I went through. Don? Sure. So I have I guess two specific questions. I’ve been kind of ‑‑
Okay. ‑‑ crossing some out. So the first one is really about the covered
loan provision for longer-term loans. And I saw that if it was over 45 days but
did not include account or paycheck access, that it was not covered. Or a vehicle title. There really is two ‑‑
Or a vehicle title, right. Could you talk about the rationale for not
covering those loans? Well, our concern is that we think that those
forms of leverage are causing the dynamics to work differently for lenders and consumers
alike; that the lenders are less likely to look at full ability to repay because they’re
really relying on those leverages as a kind of ability-to-collect model. And we think that that does two things to
the consumer. One is that the consumer is likely to stay
in the loan longer even if they ultimately can’t afford it. And remember these have very high default
rates. But the consumer is staying and paying longer
than they would otherwise because their account’s on the line. In some cases, the lender can pull the funds
out whether the consumer likes it or not. And vehicle title’s there, and they don’t
want to walk away from the car. So we think that they both pay longer and
that when they do default or run into other problems, the harms are bigger because they
may lose their car, they may lose their account. The damage is greater because of those things. Those are the loans we’ve really focused on,
that we’ve done the research on. And so that’s what’s in the proposal. But in the request for information, we are
seeking comment exactly on the question of very high cost loans, they don’t have those
kinds of leverage to see how many there are, how they work, whether lenders are doing ability-to-repay
analysis, whether they’ve come up with some other form of leverage that might be a substitute
instead. So we’re kind of pursuing both prongs, but
the proposal is focused on the ones where we’ve done the research. And the second question is on the credit reporting,
and I’m wondering if you could talk a little bit more about how that might work and how
you all were able to potentially simulate the impacts on consumers with regard to how
credit reporting might now affect their ‑‑ Well, we’ve ‑‑ the impacts analysis of
the proposal lay out everything we’ve been able to do so far trying to think through
impacts for both consumers and lenders. We think having access to this kind of information
actually will be a substantial benefit that lenders ‑‑ there are a substantial number
of lenders who are working with specialty CRAs right now. What they’re really looking for is that first
payment default question, whether the consumer might walk away without ever paying anything. But the information in those systems really
varies as to quality. Our sense is particularly when it comes to
longer-term loans, the quality’s very sporadic. People may only report the first loan. They may not report all the time. So the information is not very high quality. We think having a reasonably comprehensive
and realtime system where all lenders can access this will make it better and really
make the system work so that it is more predictable for lenders and consumers alike as to the
ability to repay. So we think it’s going to be a substantial
actually benefit for lenders, you know, as well as consumers. So kind of the last one is just a comment. I’m really happy to see that the registered
information systems is in there. And my hope is that once everything kind of
gets up running, that there will be access to, you know, whether or not it’s local or
statewide data, you know, for interested parties to be able to review as a virtue of this ‑‑
that system. Interesting to see. Chris? Thanks. So kind of last question and providing a little
bit of feedback. And thank you for this presentation. I don’t envy your having to try to summarize
this as you did. You did a terrific job, so thank you for doing
that. I think it was a little long. Yeah, you’ll keep hearing that. It doesn’t make it any less true. So, you know, we think that there are certain ‑‑
there are areas within the ability-to-repay center and that do need to be strengthened
and that we’re concerned about some of the potential loopholes that are there. We do believe that the ability-to-repay approach
is the right way to do it. And so we applaud you for the approach that
you’re taking. And really our concern’s about the loopholes
are really informed by our experience with the Military Lending Act. So when the Department of Defense initially
wrote rules to implement the Military Lending Act, we and others warned that there were
significant loopholes that lenders could use to continue to make high-cost loans to servicemembers
and that is in fact exactly what they did. And DoD had to go back later and close those
loopholes. So you can imagine that if lenders were willing
to exploit loopholes to take advantage of servicemembers, you can imagine what they
would do to the rest of us. So, you know, we think that that’s something
that, you know, as we ‑‑ as this moves forward and we look forward to submitting
a full comment, we hope that you’ll continue to take a look at and look at ways to strengthen
the rule. If those loopholes were closed, this approach
would provide protection for millions of consumers and would be a huge game changer in the states. I do want to point out one place where we
did notice that there was a significant strengthening from the SBREFA proposal to the proposed rule,
and it goes to Kathleen’s point, removing the exception to the underwriting requirement
for loans where the payments were less than 5 percent of the borrower’s income. And the supplemental findings, we were happy
to see the data that, you know, that confirmed that even with that approach, a number of
loans would still be too expensive for borrowers to be able to handle. And so we were glad to see that that approach
was removed from the proposed rule. One other suggestion that we would make is
to provide states additional enforcement tools that they can use, particularly states that
have already either prohibited payday lending or car title lending or have significant restrictions
on those loans. And the way we would suggest to do that is
to consider any loan that’s made in violation of the state’s interest rate limits or usury
limits to be deemed an unfair and deceptive act or practice so that states would have
that tool to be able to use to enforce against lenders that would go in and try to circumvent
their interest rate laws. And it would also help to protect those states
where they have taken those step versus states that have not. We are also pleased to see the additional
questions and additional RFI. We’ve had longstanding concerns about the
traditional installment industry and two points in particular that you utilize. One is loan churning, and certainly we’ve
seen quite a bit of data that suggests that people in those installment loans even at
lower interest rates still are getting repeatedly refinanced in those loans. For instance, in North Carolina where the
regulator reports lots of data, 80 percent of the loans made ‑‑ and this is consistent
for the last 15 years ‑‑ are made either to existing consumers or to people who have
previously had a loan with the company. So there’s significant repeat borrowing and
then add-on products, credit insurance and the use of credit insurance. And again, in North Carolina, the Commissioner
of Bank’s Report showed that in the last report, there were more credit insurance policies
sold than there were loans made. So that is certainly something that is prevalent
in this area. And in fact, one publicly traded lender suggests
that they use credit insurance as a way to circumvent state interest rate laws. Since most state interest rate limits follow
TILA, they exclude credit insurance from those interest rate limits. And so in states where there’s lower limits,
they sell more credit insurance than in states where they don’t. So it’s certainly something to take a look
at. So thanks again for everything and for giving
me the opportunity to share my thoughts. Judith? This is really great, and it’s a huge bill,
and I haven’t read through all of it yet, so maybe my question answered another part
you haven’t covered yet. But one of the areas that I find most abusive
about this is the collection of them. And you mentioned the prewithdrawal notice
which exists in other areas of law, but I’ve run into a constant problem with this that
what does it actually mean. And this is my question. So, for instance, when a customer gets this
prewithdrawal notice and then calls up and their rights and says, Hey, wait, don’t do
that; I know that there’s no money in the bank, there’s nothing that prevents them from
putting the check through and it bouncing anyway. So to me, the notice doesn’t have any teeth
unless the consumer has the right to say, Hey, there’s no money in there; don’t do that. The second thing is that this industry uses
the ‑‑ and this might be something better dealt with in the fair debt rules, which I
know are to be announced at some point in time ‑‑ they use the bad check laws. So essentially they tried to use ‑‑ they
try to use the criminal laws as a sword here and claim, you know, deceptive ‑‑ you’ve
written a bad check, and you’re going to get arrested and all that. So it would be useful, whether it’s here or
in the next project, to have something that prohibits using deceptive check laws and the
criminal law in the collection of these debts. Okay. Raul and Ann. Yeah. No, I just wanted to say that I think this
is an incredibly important move by the CFPB, and I think it’s addressing an issue which
is obviously of critical importance. But I wanted to just ask, because I’m getting
a lot of questions, and I’m only really just beginning to learn more about this. I understand the attempt to try to limit it. I think it’s a laudable attempt to try to
let people know that they should not get into these types of mechanisms without them being
able to really find a way out at the end. And I’m just curious, though, the position
on this debate, if you could clarify that a bit, that was mentioned in The New York
Times editorial and the Pew comments that somehow this 5 percent cap would be a stronger
way of addressing the same objective of trying to maintain. And I understand you addressed that. If you could address that a bit more carefully,
because I’m getting a lot of questions about that. And the other question here ‑‑ I mean
I think the broader issue is that what’s really going on is a lot of payday lending and I’m
sure the research ‑‑ your research as well as other people’s research ‑‑ has
shown this that it’s a ‑‑ it’s usually an emergency type of a situation. What other types of mechanisms could we begin
to start thinking ‑‑ and obviously you’re not going to have the answer this minute,
but it’s obviously a question that I think we need to think about, right. How do we incentivize the industry and maybe
some other ways of an initial loan turning into a more manageable installment after a
while, if there’s any thinking about how to move forward on how to create a more sustainable
solution. Sure. Well, very briefly since we’re kind of running
short on time. As I said, we’re continuing to see comment
on the 5 percent payment-income option. At the time that we started talking about
last spring, we heard a couple of concerns. One was that for very, very low income consumers
even 5 percent was too much and that it would still lead to default. And on the other side, we heard from a number
of banks, credit unions, other lenders saying it wasn’t high enough. It wouldn’t allow them to continue the kind
of low-risk lending that they’re doing today, let alone incentivize them to do a lot more. That’s one of the reasons why we haven’t put
quite as much energy into it, but we are continuing to seek comment. In the meantime, we’ve also developed this
new approach, which is looking at this back-end option, 5 percent default rate on the portfolio,
which we think might get closer to the real consumer harm that’s at issue while still
giving lenders a lot of flexibility to use whatever underwriting they find gets them
to that number. So we’re definitely thinking about that. In terms of the broader question, I think
that we expect that this proposal, if it was finalized, would do a great deal to encourage
lenders to start looking at other options and longer-term loans in some circumstances
where that’s really what the consumer needs; that a 45-day option is just not practical
for this consumer to pay back that much money that fast, but that a longer-term approach
might be more predictable and more likely to succeed. But I think there are other pieces to this
that involves consumer education and outreach and, you know, a lot of other topics and maybe
we could come back and do another broader presentation then and discussion about some
of those other pieces beyond the scope of this particular proposal. But let me a little more direct on The New
York Times editorial that you had asked me about. The premise of the editorial was based on
the fundamental mistake in understanding of the 5 percent proposal. Nobody had ever put forward the 5 percent
proposal as the protection of consumers in this area. It’s always been the ability-to-repay framework
that’s the fundamental protection of consumers in this area. And the notion we would throw out the ability
to repay framework in favor of 5 percent being the limitation on what you could lend to consumers
and that being sufficient is something that a number of consumer group had real problems
with. Instead, this was only ever presented as an
alternative exception to the longer-term loans, so it was only ever a loosening, not a tightening,
so the notion that we set it aside which we did in terms of the text of the proposal,
but we’re asking questions about it and thinking more about it could never have been the problem
with toughening the rule. It would have been an issue of possibly loosening
the rule in certain respects to facilitate certain types of lending. So I think that’s where there was a fundamental
misunderstanding in that discussion. Ann? So I have a question, building on what Kathleen
asked about lending from multiple lenders. And I wanted to give you a specific scenario
just to understand how it would play out. So if someone came and got a single-payment
loan that was not underwritten under the repaying 30 percent or one-third of the loan with each
payment, so they went to one lender and then at the due date went to another lender and
got another loan to repay that loan, what would apply? How would that scenario work? Well, there are certain restrictions that
we’ve proposed to try to make sure that consumers are either in the ability-to-repay zone or
they’re in the alternative space and they don’t jump back and forth. There are also some limitations that we’re
proposing to try to make sure that the step-down process works properly, so that if there are
already outstanding loans, that that gets taken into account and a consumer either can’t
get the new loan or that the one-third step-down applies. So there are a number of pieces in the proposal
that we’re seeking comment on to make sure that we can govern that situation. We are concerned about consumers having two
loans out at the same time because that interferes with the step-down process. So we’re trying to figure out exactly how
to make sure that that works properly, and it has been an issue that we’ve identified
and are trying to work through. So we’ll be really looking forward to people’s
comment on whether the way that we’re restricting that would work. In certain circumstances, a consumer simply
couldn’t get the second loan; that wouldn’t be allowed because it would mess up the step-down
process. So otherwise it would be that you could get
a new loan from the new lender where you’re paying down the principal, and then you would
just be able to have one more loan. Even though it’s a new lender, is that ‑‑
Well, that’s what we’re trying to do. We don’t necessarily want to lock borrowers
in with the same lender over time if they want to switch. But we do want to make the one-third step-down
process work properly, so that’s exactly the balance we’re trying to strike. Okay. Thank you. And just to add, one of the requirements is
that before the second lender could make that loan, they would have to check with the registry
information system ‑‑ Yeah, and that’s exactly right. ‑‑ to find out and discover that there
already is an existing loan. And as a result, it would be subject to the
same rules that the first lender would be in terms of this being a second loan. Yeah. That’s part of the process to make sure it
works properly and that consumers don’t slip through, yeah. Incredibly thoughtful process; agonizingly
thoughtful process. It almost hurts to listen to it, because I’m
just imagining. So I’m greatly appreciative of that and love
an ability-to-repay approach. I have not in life fully digested the rule,
but one quick question is about the 45-day cutoff. I think when consumers experience a bump in
the road financially, I think we’re finding ‑‑ I think the U.S. Financial Diaries has been
one source of information, but there are other sources of information that suggest that maybe
it takes more like 60 to 90 days before somebody’s able to get rolling again. So in my comment letter, there will be a discussion
about it, but I wanted to ask you why that time period? So there are a couple of time periods that
might be help to talk about. The 45-day period separates short-term loans
that are covered from long-term loans, so. But I think what you’re really focusing on
is what’s the length of sequence time that really means the two loans are related to
each other. That’s the question that we’re focusing on. It’s a complicated one, and we’ve looked at
everything from 14 days to 30 to 60 days. And there’s no magic formula, there’s no scientific
number that you can point to and say that is the right place to draw the line. So it’s a balancing act, and we’re trying
to think through a number of considerations. We think that 30 days makes more sense than
14 days, because it does give you that one complete expense cycle. Like I said, the borrower’s income can be
coming in in different ways at different times, but the expense cycle is pretty consistent
for most consumers, and we think that gives you a good snapshot of their overall picture. If they can’t make it to the end of the expense
cycle without reborrowing, there’s a pretty good, you know, suggestion that that prior
loan may be part of the problem here. You can go farther out. And there may be circumstances where the loan
itself is causing more problems even farther out, but we think that’s less likely as time
goes on and that it may be more likely that other things have occurred in the course of
the consumer’s financial situation that are just different that happened downstream. So we have to consider the causation and the
consumer’s access to credit in those circumstances and what makes sense. So we were really looking at the sequence
based on how likely was it that the last loan is part of the problem, as opposed to is there
another shock going on. As I said, one of the things we’re really
trying to think about is how the presumptions apply in cases where there has been an income
shock or an expense shock, where it’s not the prior loan, there’s something else that’s
happened to the consumer, but how does that affect their ability to repay and how should
the lender work through that situation to determine whether, you know, they have a reasonable
chance of repaying? So it’s a really complicated set of situations,
and we really look forward to comment about what people are seeing and income and expense
options. There’s no question that it’s a really important
question for this population of borrowers. We know a lot of what’s happening has to do
with shock, you know, situations. And so we want to be as thoughtful as we can
be in working through how that affects the overall underwriting process that the lender
goes through. Can I ask one quick follow-up? Go ahead. Okay. I’m also thinking ‑‑ thank you for that ‑‑
and I’m also thinking about just coverage and how a short-term loan is defined. Uh-huh. If it were defined as 90 days or less, for
example, I’m thinking about trying to capture more loans, because I am thinking about the
Military Lending Act that was talking that issue of, Oh, we’ll just go ahead and price
and put the timing over a certain line, and so that I think is a slightly different issue. Sure. So we have thought about this a lot and. again, no magic formula. We picked 45 days because most of the loans
that we’re talking about in the short-term space or generally about one pay cycle long. So for consumers who are on a monthly cycle,
it’s generally about 30 days but sometimes if the consumer comes right before a payday,
they’ll actually go to 42 or 45. So that was the way that we were looking at
that. The definition for a longer-term loan is 46
days or longer, but it includes, as we talked, about total cost of credit above the 36 percent
threshold and either paycheck access, account access, or vehicle title access. So we think that when it comes to payday,
payday installments, vehicle title installment, we’re picking up those loans. We’re just picking them up in a longer term ‑‑
Long term. ‑‑ category. But we are very conscious of the MLA experience,
and we’re seeking comment on whether we’ve drawn the lines in the right place both on
coverage and a wide variety of other parts of the proposal. And we also are proposing an anti-evasion
provision, really trying to think through places where, you know, lenders might try
to work around the language to ‑‑ in a way that would be inconsistent with what
we are trying to accomplish in terms of consumer projection. And, you know, admittedly, there is some real
complexity here, and that’s an issue. But there’s a lot of moving parts, and in
this marketplace, things are very fluid. And we have seen evasion of the law in the
past with the Military Lending Act and at the state level. And it’s something that we’re trying hard
to address. We’re very interested in hearing comment on
how we’re doing in terms of trying to address that sufficiently in a satisfactory way and
a workable way. That’s something we’re very interested in
as we go forward. What’s amazing to me, Kelly, is that you’ve
been doing this for so many years now and you still come up with rules that are innovative
and really try to meet the needs of consumers and industry. It’s just a really impressive enterprise here
that you have. I just want to be clear that I understand
the affordability requirements and that the 5 percent portfolio default rate is only for
the longer-term loans. Correct? That’s right. So the general requirement for longer term
is to follow the ability-to‑repay analysis using the residual income ‑‑
Yes. ‑‑ analysis and the presumptions in certain
circumstances. There are two alternatives. One is the PAL program, and one would be the
5 percent default portfolio structure. So it would only be as an alternative for
longer-term loans. It wouldn’t be available for short-term loans. So I’m curious how you came up with the 5
percent and how industry responded, because that seems like a very, very low default rate
for these products. Well, we’re waiting to see what kind of response
we get. Where we started the discussion was with banks
and credit unions that are already doing some accommodation lending that seems to involve
substantial underwriting, although it may not look exactly like our ability-to-repay
methodology. And they’re getting very good results with
very low default rates. So our understanding and from what told us
is that 5 percent is in this range for them, that they’re able to be in that range. Obviously, we’re going to seek a huge amount
of comment and, you know, we’ll hear from different lenders in different parts of the
market as to what’s practical and whether that’s the right number and also really seek
input from consumer advocates and so on about whether that’s the right number. But we thought it was an interesting concept
to start looking at this kind of back-end protection to see whether that was a way to
provide more flexibility on the front end while still making sure that the primary harms
that we’re seeing with installment loans are getting addressed and that this is, you know,
a relatively safe narrow space that might encourage more people within this range to
get into this market and do, you know, more activity. I think that’s exactly the right approach. I certainly think it’s been our experience
that within the parameters that you outlined, the interest rate ‑‑ and it’s 28 percent
for ‑‑ in the NCUA model as well as the 5 percent default rate ‑‑ strikes me
that any responsible lender can make loans within those parameters. I’d also just applaud you on the flexibility
and the thoughtfulness that you approached this. We ‑‑ I think releasing the additional
research along with the proposed rule was very helpful and opening up for information. The RFI is going to obviously inform the process. But we’ve already seen again with the Military
Lending Act and as it has became clear that the Bureau is going to start taking seriously
protecting consumers against abusive payday loans that lenders have already started gravitating
toward different models, installment loans, and trying to fit and trying to encourage
state policymakers to shift their rules to accommodate them. I think the supplemental research helps, as
it hopefully is intended to send the signal that, if it smells like a skunk and it has
stripes, then it’s a skunk, and it’s to be the type of evasion that we saw allowed with
the Military Lending Rules. And so, again, I applaud you for the approach,
and I applaud the Bureau for taking this historic step in protecting consumers. I think with that, I would like to turn the ‑‑
thank the CAB and thank you for that presentation and like to turn the meeting over to Zixta. We want feedback from consumers, from industry,
from our state and local partners, and from community advocates across the U.S. And obviously one of the ways that the Bureau
gathers public feedback is through events such as these. To date, the CFPB’s CAB has held public sessions
across the U.S., including sessions in St. Louis, Missouri; Los Angeles, California;
Itta Bena, Mississippi, Reno, Nevada; and Little Rock, Arkansas. At these CAB meetings we not only hear from
experts, we also invite the public to participate. But before I open the floor for public comments,
I want to remind folks that are here today that there are several other ways that you
can communicate your observations, concerns, or complaints to the CFPB. You can submit a consumer complaint with the
CFPB through our website at consumerfinance.gov. Our website will walk you through that process,
or you can call 1-855-411-2372. The CFPB takes complaints about mortgages,
car loans or leases, payday loans, student loans, or other consumer loans. We also take complaints about credit cards,
prepaid cards, credit reporting, debt collection, money transfers, bank accounts and services,
or other financial services. If you don’t have a specific complaint but
would like to share your story with us, we have a feature on our website called Tell
Your Story, where you can tell us your story, good or bad, about you experience with consumer
financial products or services. Your story will help inform the work that
we do to protect consumers and create a fair marketplace. We have another feature called Ask CFPB, where
you can find answers to over a thousand frequently asked questions about consumer issues as well
as additional resources. We also have a Spanish language website called
CFPB en Español, which provides access to essential consumer resources as well as answers
to consumers’ frequently asked questions. I encourage you to visit consumerfinance.gov
to learn more about the resources and tools that the Bureau has developed to help consumers
make the best decisions for themselves and for their family. Now it’s time to hear from members of the
public that are here today. A total of two individuals have signed up
to share public comments and observations about today’s discussion. The public comment portion of this field hearing
is an important opportunity for the CFPB to hear about what’s happening in consumer finance
markets in your community. We typically encourage comments to be about
two minutes, but I am mindful that there are only two individuals that signed up today. So with that, I’ll call our first public commenter,
and that is Hank Klein. Hi, my name’s Hank Klein. I founded ECOA here in Arkansas, Arkansans
Against Abusive Payday Lending in 2004. Our goal is to rid our state of predatory
payday lending, and we were successful in 2009. And Arkansas has been a payday lending-free
state for seven years now. How are our citizens doing? Very well. No longer are citizens subject to borrowing
small amounts of money they can’t afford to repay. No longer are the citizens subject to renewing
those loans over and over and over again because the borrower really couldn’t afford the loan
to begin with. A recent survey conducted in Arkansas seven
years after the payday lenders have left our state found, a significant majority of borrowers
said their financial life was better since they were no longer enticed by the offer of
quick cash from high-cost payday lenders. Although payday lending may seem like a lifeline
during times of financial strife, it’s actually an anchor that causes borrowers to sink deeper
and deeper into a sea of debt that’s very hard to get out of. Without payday lending ‑‑ and we don’t
have title/pawn lending in our state either ‑‑ the Center for Responsible Lending has estimated
our citizens annually have $139 million in their pockets every year to take care of life’s
necessities because they don’t have to pay those high interest rates. In your proposed regulation issued last week,
one thing the CFPB got right was not including the proposed safe harbor that would exempt
loans from underwriting based solely on whether the loan payments were 5 percent or less than
5 percent of the borrower’s income. Assessing income alone is not enough to ensure
that affordable loans are safe. The CFPB data release confirms this. Your data shows that installment payday loans
whose monthly payments do not exceed 5 percent have a default rate of 25 to 40 percent. That’s leaving families worse off, not better
off. As the rule moves forward, there are other
important ways that the Bureau can continue to strengthen the rule to close the business
as usual loophole that’s too easily gamed by the payday lenders. For example, the ability-to-pay rule does
not go far enough to ensure that after repaying the loan the borrower still have enough money
left over to pay for basic living expenses without having to reborrow. The CFPB should also strengthen the enforceability
of our states laws by declaring that your payday lending rule that offering, making,
collecting, or facilitating loans that violate a state usury or other consumer protections
laws of a state would be unfair, deceptive, and abusive acts or practices, UDAAP. The number of enforcement actions that the
Bureau has taken in the last few years should be applauded, especially those under payday
lenders, debt collectors, payment processors, and lead generators. They all provide a strong foundation for including
this explicit determination in your payday lending rule. By doing so, the CFPB will offer states additional
and stronger tools to crack down on illegal lending and ineffective enforcement of their
laws. Just as the Arkansas Supreme Court and the
Attorney General did rid our state of high-cost predatory lending, I urge the CFPB to issue
a final regulation without loopholes to hold the high-cost lenders, payday lenders, auto
title, and installment lenders accountable to ensure that borrowers have the true ability
to repay the loans and are not trapped in an endless renewal and refinancing because
they really couldn’t afford the loan in the first place. Thank you. Thank you, Mr. Klein. Judy Urich? My name is Judy Urich. In my work life I was a family resource management
specialist through the University of Arkansas Cooperative Extension Service. And in fact most of my career I was involved
in teaching people family financial management. And I’m going to speak from the aspects of
education. I think it’s really tough when you’re a lonely
consumer covered by debt and you’re trying to work against the establishment, which is
the production side of the equation. And I’d like to say that I think that we need
to encourage more players into this, not necessarily nonprofits. I’m going to tell you about when I first came
to Arkansas. I lived in Mississippi County, which borders
on the Mississippi River and to the north is the Missouri boot heel. This is a persistently at the time was regarded ‑‑
probably still is ‑‑ as a persistently poor county in the United States. And I heard about this new manager at a factory
east of town. And this is one of the smaller ‑‑ many ‑‑
an example of the many smaller factories in Arkansas. And he wanted to work with his workers and
really upgrade and make sure that he had a really vital workforce. And his enlightened employee said, Well, why
don’t you do something about these garnishments? And so how many garnishments were there in
this factory? Somewhere in the neighborhood of 15. So his solution was to work with his employees,
and he asked me to help. And we talked about budgeting and credit and
all those basic financial strategies. Then he lowered the boom. He said, you know, you’ve been educated, and
she’s here in town ‑‑ me, meaning me ‑‑ you can call her. And I’m going to frown on any more garnishments. Well, I got a few phone calls. And one of the messages is, I will be fired. What a motivator, but believe it or not, after
a two-year period, I checked how many garnishments were there in the factory? One. So using ‑‑ it’s a stick approach and
maybe that’s the wrong thing. It was an educational approach, which I like
to thing was the right thing, but it was a motivator. And whatever happened back in the family when
they worked their way through, I do not know. But it is possible to do things through other
means. After I remembered that, some of my colleagues
before I retired were doing work on the effect of financial management problems in your employees
on your productivity. Well, what they found out is that, employers,
when you hire an employee that has lots of problems ‑‑ and you can’t tell me that
the people that you’re writing these regs for don’t have financial problems, because
they do ‑‑ you take at a minimum a 20 percent hit. In other words, you hire somebody for 40 hours
a week and you’re going to get at best 30 hours. So as you work your way through this, I just
want to encourage you to kind of always ‑‑ you’re looking at the nuts and bolts, and
that’s really important, and it just glazes my eyes over. And I’m retired and I don’t have to deal with
it. But, you know, looking at this broader picture
and enlisting these sectors that are providing your productivity and getting the best employees
possible would go a long way. Thank you for letting me talk. Of course. Thank you for being
here today. Thank you all that provided thoughtful testimony. Thank you to the audience. Thank you to our CAB members. Thank you again to the audience. You all have been here all day, and I really
appreciate that. We all do. This concludes the CFPB’s CAB meeting in Little
Rock, Arkansas. Have a terrific afternoon. Thank you.

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