House Financial Services Subcommittee on Financial Institutions and Consumer Credit Hearing
I. Introduction
Chairman Neugebauer, Ranking Member Clay, and members of the Subcommittee thank you for inviting me to testify today. My name is
CFSA was formed in 1999 to promote laws and regulations that protect consumers while pre-serving access to credit options and to support and encourage responsible practices within the payday loan industry. CFSA's member companies represent more than half of all traditional payday loan storefronts across the country, in more than 30 states. Our members provide pay-day loans to more than 19 million households, as well as a wide range of other financial prod-ucts and services, including bill payment, check cashing, installment loans, prepaid debit cards, and tax preparation services.
Our members' storefront locations put us in the heart of many financially underserved and un-derbanked communities including rural and less populated areas, where credit options are not always readily available. CFSA members are heavily regulated. For nearly 20 years, individual states have worked with the industry to enact laws, and also to regulate the product through state supervision, licensing, and audit requirements. Requirements for a state license typically include a bond, background investigations and fingerprinting of company officials, evidence of industry experience, and minimum capitalization and liquidity requirements. State examina-tions monitor compliance with laws and regulations, and often include a review of loan agree-ments, customer files, federal and state disclosures, and collection procedures.
In addition, payday lenders are regulated at the federal level under supervision and rulemaking authority of the
To serve our customers responsibly, CFSA has developed a set of 13 Best Practices that expect compliance with all applicable state and federal laws. Our members hold themselves to high standards, and we believe that these practices differentiate our members from other providers in the short-term credit industry.
As an economist and lawyer by training, I held several positions in public service and worked in the financial services industry for decades before joining CFSA. My prior work includes serving as Chief Financial Regulator in the state of
However, I have often been disappointed by recent actions of the CFPB. Federal legislation that was intended to reform
In observing how the CFPB implements the Dodd-Frank Act, I am concerned that the Bureau has at times shown disregard for specific parameters laid out by
II. Consumers Choose and Appreciate the Payday Loan Product
The 2013
Our customers know their budgets, and often use the credit provided to them to stay afloat be-tween paychecks. Research from Columbia law school shows that consumers understand the product and can accurately predict how long it will take them to repay their loan. n5 Our custom-ers often use a short-term loan to manage existing debt, such as to pay their utility bills or rent. According to
CFSA is proud of the fact that our customers value our product, and that they like and appreci-ate our store employees and managers. In fact, a recent survey of payday loan customers con-ducted by the international polling company,
One of our biggest disappointments about the CFPB's lack of understanding and proper analy-sis of payday loan products is that our customers and employees are so often the ones without a voice in the debate. The comments and questions in support of our product from the dozens of customers and employees who have attended CFPB field hearings frequently go unanswered and unrecognized during CFPB policymaking. Attached is a sample of just some of the thou-sands of positive customer testimonials we have received.
For example, at the recent CFPB Field Hearing on payday lending in
Despite the CFPB's presumptions that payday loan products harm consumers, the CFPB has produced no evidence to prove this. Instead, the CFPB relies on third-party studies that lack empirical, objective rigor, causing it to draw subjective conclusions. In fact, the vast majority of consumers have favorable outcomes from their use of small-dollar, short-term credit. Research has proven that consumers actually experience positive outcomes as a result of payday loans such as an increase in their credit scores. n7
Despite the CFPB's claims that payday loans harm consumers, payday loan products continues to have a proportionately miniscule percentage of complaints compared to other types of products. According to the FTC's annual consumer complaint report in 2012, less than one per-cent of complaints in the "Banks and Lenders" category were about payday loans. n8 Even within the CFPB's own complaint data, it is clear that our businesses have far fewer complaints than those businesses of other financial products and services. In 2014 payday loans accounted for only one percent of complaints, and only one-tenth of those complaints were about storefront lenders. n9 In the CFPB's latest report released last month, once again payday loan complaints remain proportionately much lower than most other products and services, and this is also consistent with a continuously low number of complaints at the state level. n10
III. CFPB's Payday Lending Proposal Outline for Small Businesses
On
A. About SBREFA
Federal law requires federal agencies to evaluate the impacts of their proposed regulations on small entities, to consider alternatives that meet the regulatory goal while minimizing harm to small businesses, and to make the analysis available for public comment. The SBREFA also re-quires the
A review panel convened under SBREFA consists of representatives from the CFPB, the
B. CFSA Concerns for Small Business Owners and their Families
A central concern for the industry is the unprecedented impact the CFPB's proposal will have on small business owners, their employees, and customers. Within the SBREFA materials re-leased, the CFPB acknowledges that its proposal would sharply reduce revenue for small busi-nesses - and in our estimation would lead to the near annihilation of all small businesses in this industry. In its report the CFPB admits that small businesses will lose 69 to 84 percent of their loan volume, and we believe this is an underestimation. n11
It is virtually unparalleled for an agency to openly indicate that there will be such a cata-strophic impact on small businesses in a SBREFA proposal, and it gives us great concern that there is a lack of consideration for the many employees who will lose their jobs and their source of income. Throughout discussions and in the proposal the CFPB talks about industry "consolidation" which of course is a cleansed way of saying closing businesses. The CFPB even states, "Given those impacts, it is likely the case that the number of monoline stores that could operate profitably within a given geographic market would decrease. Some stores might diver-sify their product offerings, including offering other forms of covered loans, while others might close. The proposals under consideration could, therefore, lead to substantial consolidation in the short-term payday and vehicle title lending market." [Proposal, pp. 45-46.]
Despite these sweeping statements and the dismissive references to harming small businesses, the CFPB indicates that it has failed to provide data from actual small businesses in developing the proposal. What data it has provided is based on large businesses and understates the ad-verse impacts on small lenders. It has also failed to analyze the impacts for each of the product lines that will be regulated.
There is no question that if implemented, the CFPB's proposal will lead to thousands of em-ployees losing their jobs, health benefits, and the ability to support their families. Furthermore, there is no doubt that if the CFPB's proposal were to be finalized as proposed this would create a new adverse precedent for limiting access to consumer credit, ignoring the impact on middle class families and small business owners in the country.
IV. Limiting Access Will Hurt Consumers
There has been an abundance of research showing that when consumers' access to payday credit is limited, consumers do not stop borrowing; they switch to inferior substitute forms of credit - often products that are unlicensed, unregulated, and offshore. n12 Additionally, research shows that states that have banned payday lending have found that consumers end up worse off. n13 There is ample evidence that restricting access to payday loans may be counterproduc-tive and harmful to consumers. It is imperative for the CFPB to conduct research and analysis about how consumers' welfare will be impacted by its proposal, and it must provide a more de-tailed cost-benefit analysis before moving forward with the current proposal.
CFSA recognizes that payday loans are just one of many tools in a consumer's financial toolbox, albeit a critically important one. As a
CFSA strongly opposes the numerous presumptions and conclusions drawn in CFPB's pro-posals, which do not have any basis in research or data. We urge the CFPB to start over again and work with us to better understand our small businesses, their employees, and the needs of our customers. The CFPB and consumers would both be better off if the Bureau begins a regu-latory process properly equipped with research and data and an informed understanding of how consumers use our products.
In conclusion, we are fearful that the CFPB's proposal is unduly burdensome on small busi-nesses and will create job loss and financial instability for American families. Furthermore, the proposal would restrict access to credit for consumers, and limit the ability of our members to offer their products to families in their community. In turn, this would force consumers to turn to unsafe, unregulated and unlicensed forms of credit.
CFSA looks forward to working with
n1 Section 1100 G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 2112 (
n2 Section 1024(a)(1)(E) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 2112 (
n3 Section 1033 (e)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 2112 (
n4
n5 Mann, R. (2013). "Assessing the Optimism of Payday Loan Borrowers."
n6
n7 See Priestley, J. (2014). "Payday Loan Rollovers and Consumer Welfare." available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2534628.; and Mann, R. (2015). "Do Defaults on Payday Loans Matter?" available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2560005.
n8
n9 Consumer Response: A snapshot of Complaints Received, available at http://files.consumerfinance.gov/f/201407_cfpb_report_consumer-complaint-snapshot.pdf (July 2014).
n10 Consumer Response: A snapshot of Complaints Received, available at http://files.consumerfinance.gov/f/201503_cfpb_consumer-response-annual-report-2014.pdf (March 2015).
n11
n12 See Goldin, J. and Homonoff, T. (2013). "Consumer borrowing after payday loan bans." available at http://scholar.princeton.edu/jgoldin/publications/consumer-borrowing-after-payday-loanbansReport_2670FS.pdf.); and Morgan, D.P., and Strain, M.R. (2008). "Payday Holiday: How Households Fare after Payday Credit Bans."
n13 See Morgan, D.P., and Strain, M.R. (2008). "Payday Holiday: How Households Fare after Payday Credit Bans."
n14 Bhutta, N.; Skiba, P.M.; and Tobacman, J. "Payday Loan Choices and Consequences," Vanderbilt University Law School Law & Economics Working Paper Number 12 - 30,
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-114-BA15-WState-DShaul-20150415.pdf
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News