David Silberman Associate Director, Research, Markets, and Regulation Consumer Financial Protection Bureau April 4, 2014 Dear Mr. Silberman, The Assets & Opportunity Network (the Network) is grateful for the Consumer Financial Protection Bureau s (CFPB) extensive research and other efforts to understand and bring to light problems consumers have with small dollar loan (SDL) products and markets. In 2013, the Network shared recommendations for regulating the SDL market with several staff at the CFPB, including members of the regulations, consumer engagement, intergovernmental affairs and financial empowerment teams. In addition to sharing recommendations, Network leaders met in person with CFPB staff to share how SDL products impacted their clients, as well as the outcome of various state level reforms. Following the recent payday loan hearing in Tennessee, the Bureau s March report on payday loan usage patterns and the news that a proposed rule to establish regulations for SDL products is coming soon, we would like to reiterate our concerns about these loans. The Assets & Opportunity Network is a movement oriented group of advocates, practitioners, policymakers, and others working nationally to expand the reach and deepen the impact of assetbuilding strategies. The Network is comprised of nearly 1,500 members, from all 50 states and the District of Columbia, on the frontlines of federal, state and local policy advocacy, coalition building, and service delivery. The Network is both a learning and advocacy community, which aims to enhance each member s capacity to advocate and deliver critical community services, and to lead the growth of the asset building movement. The Network is guided by a nationally representative Network Steering Committee and is convened locally by 73 Lead State and Lead Local Organizations. The Corporation for Enterprise Development (CFED) supports the Network s infrastructure and provides technical assistance and policy consultation. Network members include social service providers, community organizations, advocates and researchers who share a common goal of helping low and moderate income (LMI) families save money and build wealth in order to move up the economic ladder. Network organizations provide services that enhance their clients financial capability and wellbeing, increase access to affordable and consumer friendly mainstream financial products and services, encourage saving for emergencies as well as long term goals and asset purchases. They also help clients limit liabilities through debt counseling, credit building or repair, and offering alternatives to predatory lending. 1
High cost, small dollar loans 1 are a serious concern for asset building practitioners and advocates, and for the families that Network members serve. For lower income households that sometimes struggle to meet basic needs, a small, short term loan can seem like an attractive way to meet expenses when cash runs short. However, research from the Pew Charitable Trusts shows that these loans are not as small or as short term as consumers anticipate: in a year long period, the average payday loan borrower is indebted for five months, spending $520 in interest to repay a $375 loan. 2 In fact, this same research finds that only 14 percent of payday borrowers can afford to pay off the full balance of their loan within the standard two week period. The large majority is only able to afford payments of $100 per month, which covers the fees for re borrowing but not paying off the principal. Similarly, the Bureau s own research found that nearly half of payday borrowers take out 10 or more loans per year, paying fees on each loan rollover and new loan. 3 As a result, families who take out payday loans spend hundreds of dollars to repay them, rather than the one time fee lenders advertise. These dollars could be used to support families day to day needs or save for the future, but instead they are paid to re borrow a short term loan. Moreover, the Bureau recently found that half of all payday loans are part of sequences of 10 or more loans. 4 This cycle of debt is a serious threat to low income families financial security and a barrier to upward economic mobility. Clients in the matched savings and financial education programs that many Assets & Opportunity Network members offer are harmed by SDL products and often misled about their true costs. There is clearly market demand for SDL products, and we recognize that some short term loans are not predatory or wealth stripping products. Rather than ban these loans entirely, we recommend that the Bureau use its authority to protect consumers from unfair, deceptive and abusive practices in the market through regulation and supervision that clearly identify predatory SDL features and shift the market away from them. 5 The Network leadership recommends five policies that will ensure that consumers only receive affordable loans that do not undermine borrowers financial security, and also provide lenders the opportunity to innovate and create better, less expensive short term loan products: 1 High cost, small dollar loans include payday loans (the most common type), deposit advance loans, and other products that feature a short (14 to 30 day) term with a balloon payment and very high interest rate often as much as 400% APR. 2 Pew Charitable Trusts. Payday Lending in America: Who Borrows, Where They Borrow, And Why. August 2012. Available at: http://www.pewstates.org/uploadedfiles/pcs_assets/2012/pew_payday_lending_report.pdf. 3 Consumer Financial Protection Bureau, Payday Loans and Deposit Advance Products: A White Paper Of Initial Data Findings, April 24, 2013, http://files.consumerfinance.gov/f/201304_cfpb_payday dap whitepaper.pdf. 4 Consumer Financial Protection Bureau, CFPB Data Point: Payday Lending, March 2014, http://files.consumerfinance.gov/f/201403_cfpb_report_payday lending.pdf. 5 Our recommendations focus on regulations that the Bureau should develop and implement, but we recognize that active supervision is also necessary. There are many supervisory systems that would effectively ensure that lenders are in compliance and are held accountable, from a national tracking system of all short term small dollar loans, to a consumer complaint based system, to one of random audits of lenders. The Bureau should develop a supervisory framework for the short term small dollar loan market that will effectively and efficiently achieve its regulatory objectives. 2
1. The Bureau should establish an Ability to Repay standard In January 2013, the Bureau published an Ability to Repay rule for mortgage lenders; it should follow suit and establish an Ability to Repay rule for the short term small dollar loan market. Currently, lenders in this market whether a store front payday lender, bank or online only lender are not subject to any federal underwriting standards. The Bureau should develop and implement underwriting standards that are designed to ensure that borrowers only receive loans they can afford to repay. Lenders should have to verify and document that a borrower can afford the loan based on criteria set by the Bureau. 2. The Bureau should establish a minimum loan term of 90 days We recommend that the Bureau set a minimum 90 day term as a required standard for all shortterm, small dollar lenders. There are several precedents for establishing a longer minimum loan term than the current industry standard 14 days. For example, in Colorado, small dollar loans must allow installment repayments over at least six months. Oregon and Ohio require a repayment period of at least is 31 days. The Federal Deposit Insurance Corporation (FDIC) ran a pilot on affordable short term, small dollar loans offered by FDIC insured financial institutions and found that 90 days was the minimum time needed to repay a small dollar loan. 6 One outcome of the pilot program was FDIC s recommendation that, in order to be affordable to borrowers, short term loans must have repayment terms of at least 90 days. Establishing a minimum loan term is important because the shorter the repayment period is, the more likely that the borrower will have to re borrow rather than pay back the loan in full. More than 80 percent of payday loan borrowers cannot afford to repay the loan in full at the end of the initial two week term; once they take out a loan they effectively have no choice but to re borrow and enter a cycle of debt. Given that this is true for the vast majority of borrowers, mandating a longer minimum loan term is appropriate. Such a requirement should also address refinancing issues and prepayment penalties. Requiring a 90 day term is one of the most important steps the Bureau can take to help consumers break the cycle of debt. However, if the Bureau does not establish such a requirement, there are still steps it can take to break the cycle of debt. For example, the Bureau could establishing a cap on the number of loans a borrower can have in any 12 month period, establishing a cap on the total number of loans that a borrower can have outstanding at one time, or requiring all loans to be fully amortizing with no balloon payments. 3. The Bureau should prohibit mandatory check holding and limit automatic bank withdrawals, particularly for deposit advance loans In the current market, many lenders require the borrower to provide a post dated check or written permission to automatically withdraw money from the borrower s bank account (ACH holding). The lenders cash the check or withdraw the money regardless of whether the borrower has money in the account. These practices prevent borrowers from being able to control their own bank accounts a fundamental threat to their financial security. They can also exacerbate financial 6 Template for Success: The FDIC s Small Dollar Loan Pilot Program. FDIC Quarterly Vol. 4. No. 2 (2010). Available at: http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/fdic_quarterly_vol4no2_smalldollar.pdf. 3
instability by causing overdraft and insufficient funds fees that effectively increase the cost of borrowing. Requiring check holding should be prohibited, as this practice delivers no benefit to the consumer, can frequently cause harm and exposes the consumer to additional fraud and identity theft risks. In contrast, ACH repayment may at times be beneficial to the consumer and is not inherently risky or harmful. Its use should be limited, however; when lenders attempt to automatically debit an account but are notified that an account has insufficient funds, they should be required to notify the borrower before attempting to charge the account again. In these cases, lenders should be prohibited from attempting to charge the account again for a minimum of 3 days to avoid unnecessarily triggering multiple fees from the consumer s account provider and the lender itself. Limiting automatic bank withdrawal is especially important for deposit advance loans; in these cases the financial institution that made the loan has access to borrowers account balance information is knowingly triggering additional fees. In this area, the Bureau s previous research and supervisory guidance has already led to positive developments in the deposit advance market. 4. Ensure that state restrictions on short term, small dollar loans are obeyed by online only lenders Many states have substantially limited or effectively banned traditional payday lending by instituting usury caps, requiring installment payments, limiting re borrowing, and other measures. However, some lenders that operate exclusively online continue to make loans to consumers in states where the loans are not legal. These lenders have been able to circumvent state laws because they are licensed out of state in areas with few restrictions on short term, small dollar lending. This practice undermines consumers financial security in all the same ways that traditional payday lending does, and additionally circumvents state laws intended to protect a state s citizens from predatory lending. The Bureau should continue to use its authority over this industry to ensure that consumers living in states that restrict access to these loans are covered by the laws enacted in those states. Network members in states with restrictive laws, including Maryland, Oregon and New York, were especially concerned about online lenders flooding their areas and taking advantage of their residents, and strongly recommend that online payday lenders must be required to abide by state payday lending laws. 5. The Bureau should support research and testing of alternative small dollar loans In addition to restricting harmful loan features, the Bureau should use its powers to support the development of small dollar loan products that are consumer friendly. As one Network member put it, having more affordable, responsible small dollar installment loans will do more to help people manage short term emergencies and break the cycle of debt. Some lenders, particularly credit unions, technology driven startups, and traditional financial institutions, are working in partnership with nonprofit service providers to develop and test affordable consumer friendly small dollar loan products, but are concerned about negative reactions from regulators, including the Bureau. 4
The Bureau can address these concerns and create space for innovation through supporting research and evaluation of new or experimental short term, small dollar loan products. Such research is needed to identify the mix of loan features that help borrowers improve their financial situation while remaining a sustainable and even profitable product for lenders. The Bureau could then use this research to provide guidance to lenders about what is acceptable and what is problematic when developing new small dollar loan products. Thus, allowing lenders the ability to test and pilot new products with assurance that their efforts meet the Bureau s standards of consumer safety and affordability. Network members recognize and appreciate the Bureau s efforts to engage service providers and advocates for low and moderate income families in its regulatory process. We would be happy to discuss our recommendations with you or your staff as you prepare to release a proposed rule for public comment, and we look forward to providing feedback through the comment process. Finally, it is important to note that the recommendations in this letter do not necessarily reflect the views of any individual member of the Assets and Opportunity Network. The organizations listed below, all members of the Network s leadership, have endorsed the recommendations. Sincerely, Alameda County, California, Social Services Agency Center for Asset Building Opportunities Center for Public Policy Priorities Corporation for Enterprise Development Florida Prosperity Partnership Heartland Alliance for Human Needs and Human Rights Illinois Asset Building Group Innovative Changes Lakota Funds Maryland CASH Campaign Michigan Economic Impact Coalition Midas Collaborative Mission Asset Fund Neighborhood Housing Services of Greater Cleveland Oklahoma Policy Institute Opportunity Fund Partners for Prosperity PathWays PA Raise Texas Rural Dynamics, Inc. Step Up Savannah The Economic Progress Institute United Way of Greater Houston 5
Voices for Children in Nebraska Washington Asset Building Coalition 6