[Senate Hearing 113-568]
[From the U.S. Government Publishing Office]
S. Hrg. 113-568
ASSESSING AND ENHANCING PROTECTIONS IN CONSUMER FINANCIAL SERVICES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
ASSESSING THE CONSUMER FINANCIAL MARKETPLACE SINCE THE FINANCIAL
CRISIS, PARTICULARLY THROUGH THE WORK OF THE CONSUMER FINANCIAL
PROTECTION BUREAU
__________
SEPTEMBER 18, 2014
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Laura Swanson, Deputy Staff Director
Jeanette Quick, Counsel
Phil Rudd, Legislative Assistant
Greg Dean, Republican Chief Counsel
Jared Sawyer, Republican Counsel
Dawn Ratliff, Chief Clerk
Troy Cornell, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, SEPTEMBER 18, 2014
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
WITNESSES
Travis B. Plunkett, Senior Director, Family Economic Stability,
The Pew Charitable Trusts...................................... 4
Prepared statement........................................... 18
Sheri Ekdom, Director, Center for Financial Resources, Lutheran
Social Services of South Dakota................................ 6
Prepared statement........................................... 25
Oliver I. Ireland, Partner, Morrison & Foerster.................. 8
Prepared statement........................................... 29
Hilary O. Shelton, Director, NAACP Washington Bureau and Senior
Vice President for Policy and Advocacy......................... 9
Prepared statement........................................... 32
(iii)
ASSESSING AND ENHANCING PROTECTIONS IN CONSUMER FINANCIAL SERVICES
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THURSDAY, SEPTEMBER 18, 2014
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 11:04 a.m., in room 538, Dirksen
Senate Office Building, Senator Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I call this hearing to order.
Six years ago this week, the collapse of Lehman Brothers
sparked a financial panic more severe than most of us have seen
in our lifetimes. The crisis exposed many failures in the
financial system, including a failure to adequately protect
consumers from financial products designed against their
interests.
We created the Consumer Financial Protection Bureau to make
sure that consumers would always have a voice and a guardian in
the financial marketplace.
In the 3 years since the CFPB opened, the Bureau has proven
itself to be a vigilant watchdog, standing up for hardworking
American families and obtaining nearly $5 billion of relief for
consumers.
Extensions of credit should be provided on fair and
transparent terms and should be affordable and accessible to
all populations--a point I also emphasized throughout this
Committee's work on housing finance reform.
Small-dollar, short-term credit products serve an important
demand, but like mortgages, should be carefully managed by both
consumers and credit providers. Other financial products, such
as prepaid cards, installment loans and payment developments,
should include appropriate consumer protections. And consumer
protections should also be a part of student loans to guard the
next generation of Americans as they enter and leave college--
an important topic this Committee has explored.
Ensuring that financial products are safely designed is one
piece of the consumer financial puzzle. Another is ensuring
that consumer are treated fairly when consumer debt enters
collections.
Debt collection has consistently ranked as one of the most
complained about issues with attempted collection of debt that
is not owed as the most common complaint about debt collection.
Among other effects, errors in debt collection can have adverse
impacts on a consumer's credit report.
Credit reports, another top area of consumer complaints,
are increasingly used for many purposes outside of credit
decision, including employment, rental decisions and child
custody. Although the accuracy and reliability of credit
reports are of paramount importance, recent studies show that
one in four consumers identified errors on their credit reports
that might affect their credit scores.
I look forward to hearing from witnesses today on these
important topics and other financial issues facing consumers
today.
I am especially looking forward to hearing from Ms. Ekdom
about issues in my home State of South Dakota which,
unfortunately, has the highest student loan debt and also
unique consumer challenges facing its tribal and rural
populations.
As memories of the crisis fade, we must remain diligent in
focusing on consumer financial issues, ensure that consumers
have adequate protections and access to affordable credit, and
support the CFPB's efforts to guard against abusive practices.
With that, I turn to Ranking Member Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman.
Consumer protection is an important part of a well-
functioning and safe financial marketplace. However, consumer
protection cannot happen in a vacuum.
Our regulators must consider the impact of regulatory
actions on both consumers and financial institutions. Without
taking these factors into account, regulators risk negatively
impacting the cost and availability of credit and increasing
the regulatory burden on financial institutions, especially at
community banks and credit unions.
Increased regulatory burden manifests itself in two
distinct ways--either consumers pay more for products and
services or small depository institutions have to exit the
market, leaving many rural areas with no banking presence to
the detriment of local communities.
During the two most recent Committee hearings, I have
highlighted the increasing regulatory burden that small- and
mid-sized financial institutions face. These institutions are
experts at relationship-building in communities across America,
especially rural communities where longstanding consumer
relationships are critically important.
The annual privacy notice requirement is an example of a
policy sounding good in theory but ending up causing great
confusion and ultimately becoming an unnecessarily burdensome
regulation. Millions of dollars are spent on privacy notices
that are neither read nor readily understood.
As was heard in the past two hearings, Senators Brown's and
Moran's bill to repeal this requirement has widespread
bipartisan support, with over 70 Senate co-sponsors. I fully
support its quick passage in the Senate.
Regulations are not the sole reason for confusion and
overreaction. In March 2013, Federal banking regulators led by
the Department of Justice began an operation to prevent fraud
in the payment system. The operation called Operation Choke
Point, while allegedly commenced to make sure that fraud stays
out of our payment system, has morphed into an attempt to shut
down entire industries of law-abiding merchants.
Small businesses, banks and payments processors have all
been targets of this expansive regulatory approach. Just this
week, I heard from two Idaho business owners involved in the
guns and ammunition business who experienced difficulty finding
essential banking services as a result of Operation Choke
Point.
While Federal regulators have reissued some guidance in
this area, unfortunately, greater clarity is necessary for bank
examinations so that law-abiding businesses are not denied
banking services.
Regulators also have a duty to be fair and transparent when
they change the rules. In March 2013, the CFPB issued a
bulletin on their Web site called the Indirect Auto Lending
Bulletin, which suggested that auto lenders move from a risk-
based, competitive pricing model to a flat fee model. This is
notwithstanding the fact that auto dealers themselves were
exempted from coverage by the CFPB.
Because this significant policy change did not have to go
through the traditional rulemaking process nor have public
notice or comment, no cost-benefit analysis was completed. Such
an approach could remove any assessment of a borrower's credit
risk and dissolves any competition in the marketplace.
Without a cost-benefit analysis of this policy change, we
have no idea how many consumers will be denied auto credit, and
we have no idea how this will affect competition.
As the CFPB proceeds with its rulemaking agenda on items
such as payday lending, overdraft protection, auto financing
and arbitration, I, once again, urge the Bureau to complete a
thorough, qualitative and quantitative cost-benefit analysis
for each rule.
Regulation has real costs to consumers and businesses. It
is incumbent upon the agencies to understand the cost of each
regulatory action and to promote balanced and tailored
regulations that provide market certainty.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Crapo.
I remind my colleagues that the record will be open for the
next 7 days for opening statements and any other materials you
would like to submit.
Now I would like to introduce our witnesses.
Travis Plunkett is the Senior Director of Family Economic
Stability at the Pew Charitable Trusts. Prior to joining Pew,
Mr. Plunkett directed the Federal Legislative and Regulatory
Affairs at the Consumer Federation of America.
Sheri Ekdom is the Director of the Center for Financial
Resources at the Lutheran Social Services of South Dakota.
Sheri has 22 years of experience in the credit consulting
industry as well as a background in credit analysis, corporate
training and credit operations.
Sheri, I am glad you were able to travel all the way from
South Dakota to testify today.
Oliver Ireland is a Partner at Morrison & Foerster.
Hilary Shelton is Washington Bureau Director and Financial
Vice President for Advocacy at the National Association for the
Advancement of Colored People.
I thank you all for being here today, and I would like to
ask the witnesses to please keep their remarks to 5 minutes.
Your full written statements will be included in the hearing
record.
Mr. Plunkett, you may begin your testimony.
STATEMENT OF TRAVIS B. PLUNKETT, SENIOR DIRECTOR, FAMILY
ECONOMIC STABILITY, THE PEW CHARITABLE TRUSTS
Mr. Plunkett. Good morning, Mr. Chairman, Ranking Member
Crapo, Senator Reed. It is great to be here with you.
Mr. Chairman, I would particularly like to thank you for
holding this important hearing.
As you prepare to leave the U.S. Senate, I want to applaud
your strong efforts and the Committee's strong efforts, to
ensure that the Nation's financial markets function in an open
and fair manner so that both consumers and businesses have an
opportunity to thrive.
I lead a portfolio of work at the Pew Charitable Trusts
that rigorously assess and, where warranted, promotes
nonpartisan, evidence-based solutions to improve the safety and
transparency of consumer financial markets and the financial
health of the American family.
As you pointed out, Mr. Chairman, the Consumer Financial
Protection Bureau is looking at a number of important consumer
financial issues, some including debt collection and credit
reporting that Pew is not involved with, but several very
important issues that we are. I would like to highlight two for
you today--prepaid cards and small-dollar loans.
Pew's most recent survey of card users shows that prepaid
cards are used by 5 percent of Americans, about 12 million
people, at least monthly, loading more than $64 billion onto
these cards.
These cards are a versatile financial tool for 10 million
households in the United States that lack or cannot get a
checking or savings account, or that want to supplement
checking or credit card accounts with one dedicated to saving
or paying for something without the temptation of buying it on
credit.
Considering the growing use of these cards as an
alternative or complementary product to the traditional
checking account, we think it is very important for consumers
to be able to keep the funds on their prepaid cards secure and
perform transactions without risk of losing money or going into
debt.
Although the cards are used like checking account debit
cards, currently, legal protections and rules governing debt
cards do not apply to prepaid cards. For example, there are no
rules preventing credit products, such as overdraft or a line
of credit, from being attached to prepaid cards even though our
research shows that a substantial majority of prepaid
cardholders do not want overdraft features.
We have made a number of recommendations to the CFPB. I am
just going to highlight a few:
First, that they prohibit overdraft or other automated, or
linked, lines of credit.
Second, that they require the funds on these cards be
insured by the FDIC or the NCUA. This does not happen in some
cases for nonbank prepaid card issuers.
Third, that there be very good disclosure--concise,
uniform, easy to understand and comparable to checking accounts
because consumers compare them.
And, very importantly, the key fees and terms need to be
disclosed very prominently and not in several parts so that
some key fees and terms are disclosed and some are less
disclosed. We are concerned that some cards then might hide the
true cost of that card for the consumer.
On small-dollar loans, 12 million Americans take out payday
loans each year, spending more than $7 billion. Our research
has identified serious failures in the small-dollar loan market
and shows how new policies can help lenders provide access to
credit that leads to better consumer outcomes.
Here is the problem: A typical payday loan averages $375
but requires lump sum payment within 2 weeks of more than $400,
on average, far exceeding most customers' ability to repay and
meet other financial obligations without quickly reborrowing
again. Most borrowers can afford, according to our research, to
put no more than 5 percent of their paycheck toward a loan
payment and still be able to cover basic expenses. Yet, in 35
States, repayment requires about one-third of an average
borrower's paycheck.
Here are several recommendations for the CFPB as well:
First, ensure that borrowers have the ability to repay the
loan as structured. Only a strong ability-to-repay rule can
solve the problems caused by unaffordable loan payments.
The CFPB's own research--you know, their own research--has
shown that half-measures about how often people can borrow do
not work. If lenders are permitted to make any lump sum loans,
they will likely circumvent the CFPB's role by directing
borrowers to alternate between several lenders operating near
each other.
We would like to see a role from the CFPB that covers both
lump sum, the traditional payday loan, and installment payday
loans. The market is migrating toward payday loans, small-
dollar loans, that are paid off over time, over a longer period
of time. But these loans also often have unaffordable payments,
such as a $500 payday installment loan with fees of more than
$1,100.
And we have also encouraged the CFPB to protect against
excessively long loan terms. Some lenders have made loans that
drive up costs by extending the terms far longer than
necessary. Example: 16 months to repay a $500 title loan.
Final issue is to address a rulemaking that the Department
of Defense is considering on the Military Lending Act to make
sure that, once again, we have a broad role that does not allow
lenders to shift their products just a little bit and not be
covered by the law.
I would like to close by just reflecting on the CFPB's
role. As you well know, it was created in the wake of the
financial crisis to make markets safe, efficient and
transparent. The CFPB will play a crucial role in the next
couple of years--to enhance consumer protections in the areas I
have identified.
So far, they have taken a very methodical approach to
understanding and addressing problems in these markets. In
particular, their research in initial enforcement actions on
transaction accounts and small-dollar loans has been thorough
and deliberate.
These steps provide a basis for the Bureau to propose
effective new rules in the months ahead, and it is now up to
the CFPB to seize this historic opportunity.
I applaud this Committee once again for its oversight of
the Bureau's work and urge you to continue to do this in the
next year or so, to ensure that the Bureau acts in a timely,
effective and also balanced manner.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you.
Ms. Ekdom, please proceed with your testimony.
STATEMENT OF SHERI EKDOM, DIRECTOR, CENTER FOR FINANCIAL
RESOURCES, LUTHERAN SOCIAL SERVICES OF SOUTH DAKOTA
Ms. Ekdom. Senator Johnson, before I begin my testimony, on
behalf of Lutheran Social Services of South Dakota, I would
like to recognize your upcoming retirement, your work as a
South Dakota legislator early on in your career and now nearly
30 years as a Congressman and Senator from South Dakota.
We thank you for your tireless efforts, especially your
dedication to underserved populations who have limited
resources and means. Over the years, you have allowed their
voices to be heard and their lives improved.
Your work has made a difference, and we thank you for that.
Chairman Johnson, Ranking Member Crapo and Members of the
Committee, thank you for inviting me to testify.
Lutheran Social Services provides financial counseling and
education designed to help consumers take control of their
financial future. Products offered are both reactive, as in the
case of working through a financial crisis, and proactive for
those seeking to prevent money problems or plan ahead for their
future financial goals.
We work with people from all age and income levels.
However, the majority of clients seen fall in the low to
moderate income range.
A number of factors put many South Dakotans at risk for a
financial crisis:
54 percent of South Dakota households have difficulty
covering their expenses and paying bills.
57 percent of individuals do not have an emergency fund.
32 percent have borrowed from a nonbank source, such as a
payday lender.
22 percent of South Dakota households are under banked.
South Dakota ranks 48th in the Nation for the average
weekly wages earned by workers.
South Dakota ranks first in the Nation for the percentage
of workers who hold more than one job.
South Dakota is home to nine Indian reservations.
The challenges faced by these residents have been well-
documented. Limited employment opportunities, generational
poverty and geographic isolation make it difficult for families
to become financially stable.
The following issues describe some of the most significant
financial challenges that we see in our work:
Low wages and underemployment remain significant issues.
The majority of clients seeking assistance are insolvent.
Their income does not cover their living expenses.
Clients coming into our office have high debt levels with
little or no savings.
There are many individuals that do not understand the
ramifications of using short-term or payday loans as an attempt
to resolve long-term issues.
Low-income housing options remain scarce. On average, those
seeking rental assistance can expect to remain on a waiting
list for three to 5 years. Landlord-tenant issues are common.
Medical issues and medical debt are one of the top reasons
consumers seek our assistance.
Consumers are quite often afraid and intimidated by tactics
used by debt collectors to collect payments.
Many consumers seek our assistance on how to build a credit
report and how to improve their credit score. Some have fallen
prey to credit repair scams that do little more than dispute
accurate negative information and charge a high fee.
The average client coming to see us with debt-related
issues owes 10 creditors over $28,000 in unsecured debt.
The Consumer Financial Protection Bureau and the Federal
Trade Commission Web sites are helpful in our work as we strive
to protect consumers by sharing educational tools and keeping
us abreast of changes within the consumer protection arena.
I would offer the following recommendations to enhance
financial protections:
First, limit the number of short-term loans consumers may
access at one time. Trouble typically comes when consumers have
multiple short-term loans that exceed their ability for
repayment. With the wide availability of online options, it
would seem that a limitation on multiple loans may need to come
from a Federal level.
Second, support and promote community-based financial
education. Our issue today is not a lack of good, quality,
accurate education materials. Our issue is getting that
information into the hands of consumers in a format they desire
and that they can understand and digest. We need to determine
methods, incentives and motivations so people will hear the
information that can change their financial futures.
Education from a neutral third party that is not selling
the financial product also ensures that consumers are able to
make decisions about big-ticket items, fully educated and
without the pressure of any sales tactics.
Thank you for the opportunity to testify.
Chairman Johnson. Thank you.
Mr. Ireland, please proceed with your testimony.
STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & FOERSTER
Mr. Ireland. Thank you, Chairman Johnson.
I understand this may be your last hearing on consumer
issues, and on behalf of the consumer financial services
community I want to thank you for your leadership on this
Committee.
Financial services issues, as we have heard already on this
panel, are complex and--as we will find out and as you know--
controversial, but they are critical to American households,
and we all owe you a debt of gratitude.
Chairman Johnson, Members of the Committee, my name is
Oliver Ireland. I am a Partner in Financial Services at
Morrison & Foerster here in D.C. I have been in retail
financial services and other financial services for 40 years,
26 years with the Federal Reserve and 14 as a private attorney.
I am here today to address consumer financial services in
the wake of the financial crisis and the enactment of the Dodd-
Frank Act. Key components of that Act were the creation of the
CFPB and the adoption of new standards for mortgages. The
Credit Card Act of 2009 has also shaped the current market for
consumer financial services.
Although real problems led to the enactment of these laws,
these Acts and the actions of the Federal banking agencies are
having a chilling effect on consumer financial services.
The Dodd-Frank Act stated that the purpose of the CFPB is
to ensure consumers have access to consumer financial services
and that markets for consumer financial services are fair,
transparent and competitive. This purpose has a lofty goal, but
the pursuit of fairness for consumers and zeal in enforcing
consumer laws can make services uneconomical for providers and
reduce access to services.
For example, the Credit Card Act was enacted to curb credit
card practices, but industry data shows a significant reduction
in the availability of credit card credit to consumers while
other forms of household credit, including automobile loans and
student loans, appear to have increased. These data show that
regulatory changes can lead to a reduction in the availability
of services, forcing consumers to find substitute services that
may actually be on less advantageous terms.
In making regulatory policy, it is important to consider
the effect on consumers' access to services and how consumers
will meet their needs going forward. In some cases, the stakes
are higher.
The Dodd-Frank Act sought to protect consumers and improve
the mortgage market. It has taken some time for these changes
to be put into place, and not all of them have been fully
implemented even now.
So it is difficult to assess the overall impact of these
reforms, but early indications are that they are materially
reducing mortgage originations. In the mortgage market, the
potential effects of fewer originations on economic growth and
employment are important as well as consumer access to credit.
Looking beyond credit cards and mortgages, the markets for
other consumer financial products and services are
characterized by a higher level of uncertainty than I have
observed before. This uncertainty appears to arise from
regulators' reliance on generalized guidance and enforcement
actions to shape policy. Broad guidance can cause financial
institutions to abandon products that may not have been the
focus of the guidance because the guidance is not well
understood. Similarly, it is simply not possible to read public
enforcement actions and to understand the specific practices
that led to the actions. This uncertainty makes it difficult to
determine how to proceed with current products and services,
and how to determine whether or how to offer new products or
services.
This level of uncertainty could be reduced if regulators
relied more on rule-writing processes where clear rules are
developed through notice and comment. This process, this rule-
writing process, is far more conducive to fair, transparent and
competitive markets as envisioned by Dodd-Frank than reliance
on vague guidance and enforcement actions.
Thank you for the opportunity to be here today, and I would
be happy to respond to any questions.
Chairman Johnson. Thank you.
Mr. Shelton, please proceed with your testimony.
STATEMENT OF HILARY O. SHELTON, DIRECTOR, NAACP WASHINGTON
BUREAU AND SENIOR VICE PRESIDENT FOR POLICY AND ADVOCACY
Mr. Shelton. Good morning, Chairman Johnson, Senator Crapo,
Senator Reed and esteemed Members of this panel.
Thank you so much for inviting me here today to testify and
for requesting the input of the NAACP on this very important
topic.
Founded more than 105 years ago, the NAACP currently has
more than 1,200 active membership units across the Nation as
well as military bases in Europe and Asia. We have hundreds of
thousands of card-carrying members in every one of the 50
States and, indeed, through the world.
I was asked to address whether the community is being
adequately served by financial services providers. Sadly, my
unequivocal answer is no.
Too many Americans, and especially racial and ethnic
minority Americans, lost their jobs and in some cases their
homes in the recession of 2008, and they have not, so far, been
able to fully recoup their losses. As a result, we have lost
access to affordable and sustainable credit and capital.
One example, which I provided in more detail in my written
testimony, is having a bank account. While just over 8 percent
of all American homes do not have a bank account, more than 20
percent of African Americans are outside of the American
banking system.
One direct result of being frozen out of the traditional
banking system is more of a reliance on nontraditional, or
alternative, sources of capital. By nontraditional, I am
referring to check cashers, title lenders and payday lenders,
among others, which usually lend relatively small amounts of
money for a short term.
Let me be clear. While the NAACP strongly opposes any law
or regulation which would restrict the flow of credit and
capital to our areas, we are strongly against any predatory
practices which drain financial resources and appear to target
particular segments of the American population. It is this
policy which brings us to the role of the Consumer Financial
Protection Bureau, or the CFPB.
The NAACP has been a strong and steadfast supporter of the
CFPB since its inception as it is the only agency with the
Federal Government whose primary charge is the protection of
the American consumer.
Since its inception, the CFPB has taken great steps to
limit the potential harm which financial tools and companies
can impart upon Americans. Over the past 3 years, the CFPB has
taken dramatic steps to help halt the financial abuses of
American consumers by financial companies.
In many cases, the victims of these abuses are people of
lower and moderate income. Since 80 percent of African American
families fall into this definition, the NAACP has worked with,
and monitored the impact of, the CFPB on the communities served
and represented by the NAACP since its creation over 3 years
ago.
On a national level, we at the NAACP Washington Bureau have
worked with the CFPB to ensure that the rules, enforcement
actions and supervisory activities are fair and will, overall,
have a positive impact on our communities.
In my written testimony, I provide detailed numbers of many
of the accomplishments the CFPB has in just 3 years, but allow
me to summarize here by saying they have given a huge voice to
consumers and others who may have questions about financial
services.
Locally, the NAACP Financial Freedom Center works with the
CFPB to enhance the capacity of racial and ethnic minority
Americans and other underserved groups through financial
economic education, to promote diversity and inclusion in
business hiring, career advancement and procurement, and to
monitor financial banking practices and promote community
economic development.
I was also asked to detail which consumer financial issues
warrant additional scrutiny.
Put broadly, it is the hope of the NAACP that the CFPB and
Congress will take a stronger look at the structural racism
inherent in the financial services arena and its impact on
communities of color. Many of the issues facing our communities
require legislative action, and as a result, the NAACP is
hopeful that the 114th Congress will prove to be more
responsive to our real financial concerns.
Higher-cost credit, or the lack of any credit, in the
communities of color widens the racial wealth gaps and
concentrates African American and Latino families into areas of
concentrated poverty. Specific issues include the need to stop
high-cost predatory loans that seem to be pervasive in the
communities across our Nation which are served and represented
by the NAACP.
The NAACP strongly supports legislation in the House and in
the Senate--that is, S. 673 and H.R. 5130--which place a 36
percent APR cap on all lending.
These wealth-stripping loans may provide very short-term
relief, but their ultimate price tag is too steep to justify
their existence.
In my written testimony, I also outline steps which the
CFPB can take through regulation to stop, or at least expose,
abusive lending services.
The NAACP also opposes the use of credit reports by
prospective employers as well as insurance companies, among
others.
Credit scoring favors consumers who have access to
traditional forms of credit, such as auto and home loans,
credit cards and personal loans. Thus, once again, racial and
ethnic minorities are at a disadvantage when credit scoring and
credit reports are increasingly used for everything from
renting an apartment to getting a job.
With that, Mr. Chairman and other Members of the Committee,
I look forward to your questions.
Chairman Johnson. Thank you all for your testimony.
I will now ask the clerk to put 5 minutes on the clock for
each Member.
Ms. Ekdom, you have been involved in credit counseling for
many years. Do you feel that the creation of the CFPB has been
helpful for consumers, and what impact has the Bureau had on
your work.
Ms. Ekdom. I would start by saying that I think the Bureau
has been helpful to consumers. It allows opportunities for them
to be heard.
Their Web site is set up in such a way that complaints can
be filed. We have referred some clients that have had housing
issues, and they have indicated that the responsiveness of the
CFPB was significant in terms of being very responsive.
And I think overall it has allowed customer service to be
improved. I do not know that consumers always receive the
ultimate answer that they want, but it eliminates some of the
red tape and improves communication.
There are a couple other parts of the Web site that I think
are very helpful.
There is a section where consumers can tell their story.
And I think a lot of times, when we are dealing with financial
issues, people feel that they are alone and that they are the
only ones that are in the situation or the only ones that have
a mistake or the only ones that are being victimized in a
certain way. So allowing people to tell their story and others
to be able to see that they are not alone, I think, is very
helpful.
There is also a component to the Web site where consumers
can ask questions to the CFPB and receive answers. It does not
necessarily just limit to the answer to the question. For
example, there are sections on how to choose like a credit
counseling agency, where the CFPB not only answers how to
choose that; it arms consumers with questions that they can
take as they go out and try to self-select--how am I going to
choose who I work with?
So I think the Web site and the information overall has
been helpful to consumers and has impacted our work also.
Chairman Johnson. Thank you.
Mr. Plunkett, under Wall Street Reform, the CFPB is
required to complete a study on the use of mandatory pre-
dispute arbitration agreements.
Can you describe why such a study is important?
Mr. Plunkett. Certainly, Mr. Chairman.
Pew has done a great deal of research on mandatory pre-
dispute arbitration agreements both for checking accounts and
prepaid cards, finding, for example, that the larger financial
institution is the--more likely, its checking account agreement
is to contain a clause requiring binding mandatory arbitration.
The reason this is important for the CFPB to study, and
ultimately to look at rules on, is because pre-dispute binding
arbitration clauses prevent consumers from choosing the option
of challenging unfair and deceptive practices or other legal
violations in court, potentially allowing abusive practices to
spread without legal or public scrutiny.
They also deprive consumers of important legal remedies
such as a jury trial, curtail judicial civil procedures and due
process protections such as the ability to appeal a decision,
and raise serious conflict-of-interest concerns if companies
that provide arbitration services provide repeat business to
the financial institutions that mandate it.
Chairman Johnson. Thank you.
Mr. Shelton, the EEOC has stated that using a person's
credit rating for employment adversely impacts minorities and
women, and others have noted the impact of credit reports on
the ability to obtain credit or rent for a home.
Can you provide your perspective on the use of credit
reports for these purposes and whether you think credit reports
adversely impact minorities?
Mr. Shelton. Thank you very much, Mr. Chairman.
It is a really challenging process when those of us, those
who have been out of work for so long, find themselves in the
position of the challenges they have had paying their bills
during the time they were out of work. I mean, many of us still
very clearly remember the big economic downturn of 2008.
As such, those who have been able to hold on long enough to
look for a job find themselves at odds with the situation they
are in; that is, the employer will not consider hiring them
because their credit score suffered during the time in which
they were unemployed, but the manner in which you fix the
payment problem is to make sure they get employed, that they
have an income.
African Americans and other racial and ethnic minorities
find ourselves disproportionately unemployed, and it takes even
longer, according to our experts, for us to get a new job after
losing a job. In essence, we find ourselves in a much worse
condition.
On any given day, you can look at the reports coming from
the Department of Labor, and you will see that the African
American community is unemployed at a rate that is twice as
high as our white counterparts.
So it creates a major problem for us.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
Mr. Ireland, on Tuesday, the Committee heard from several
witnesses regarding the regulatory burden for mid to small
financial institutions. And, previously, I have raised concerns
with the Consumer Financial Protection Bureau's often irregular
regulatory process.
For example, the Bureau's Indirect Auto Lending Bulletin,
which I referenced in my opening statement, represented a major
shift in policy in the United States, with no public notice, no
public comment and simply the issuance of a bulletin from the
agency.
Another example is the Bureau's supervision by repeated
enforcement action. You mentioned this general issue in your
testimony.
Could you describe in a little more detail the compliance
challenges that financial institutions face when dealing with
regulation through bulletins or with best practice regulation
or supervising through enforcement?
Mr. Ireland. Sure. I would be happy to. It is what I do a
lot and spend a lot of my time doing.
And we will get--an institution will come to us, a bank or
other financial institution--to look at their policies,
procedures, their practices, to make sure that they are
compliant because they have seen a new guidance come out or a
new enforcement action.
And a lot of times we will look at the guidance, and the
guidance will be written so broadly; it covers almost
everything. If you look at one part, they will have a string of
coverage terms, of factors that may go into coverage of the
guidance, that will cover almost any service you look at in
that area.
And so it is very hard to sort out what they are trying to
get at and what they are not.
Enforcement actions are even more difficult. You will see
an enforcement action on a product, and without knowing the
discussions between the individual institution and the
enforcing agency, be it the CFPB or the banking agencies, you
do not know what the problem was with that product.
So you cannot sit down and read the enforcement actions in
a specific area and figure out what the current rules of the
game are, and that makes it very difficult to figure out how
to--whether or not to continue to offer financial products and
whether or not to offer new or innovative financial products.
Senator Crapo. Well, thank you.
And one example that I would like to pursue with you, if
you have any other observations to give to it, is the idea of
the operation that I mentioned also in my opening statement,
Operation Choke Point, which I think is something that is
operating and having the consequences that you just described.
This operation has received a lot of attention in the media
and in Congress, and I am concerned that financial institutions
are facing unrealistic regulatory expectations as a result of
this operation.
It has already negatively impacted at least two Idaho small
businesses that have come to me and a number of community banks
that do not really know how to act with regard to this
operation that is going on. So what they end up doing is
retrenching very radically.
And just this week, I heard from two gun manufacturers.
Apparently, firearms and ammunition are not politically favored
at this point through this operation.
And so totally legitimate businesses are finding it hard to
find access to financing as a result of this very confusing
regulatory system that we are facing.
Could you offer some of your observations there?
Mr. Ireland. Yes, I would be happy to.
It is not just financing. It is deposit accounts as well.
They are having their accounts closed. Some of the banks refer
to it as de-risking.
When the examiners come into an institution and start to
criticize various areas--you do not have enough controls over
who your deposit account customers are--without giving clear
guidance as to what the problem is, the natural reaction,
particularly in the post-crisis environment, is to get out, is
to cut back services, so that you do not get examiner
criticism. And Operation Choke Point, in my opinion, has
resulted in a lot of banks, small and large banks, cutting back
on particularly deposit and payment services to customers.
Senator Crapo. But these are totally legitimate businesses.
Mr. Ireland. These are totally legitimate businesses.
We hear from it. We hear about this all the time.
And it is difficult for them to find replacement services.
And the banks that are trying to deal with Choke Point do
not really have a good handle on what they are supposed to do,
and so they are overly conservative in response to it.
Senator Crapo. Thank you.
My time is out. I would like to explore it further with you
if we get a minute.
Mr. Ireland. Sure.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you, Mr. Chairman.
Thank you, all the witnesses, for their excellent
testimony.
Let me address a question to Mr. Shelton and Mr. Plunkett.
I have been very active in trying to ensure that the
Military Lending Act truly protects our soldiers, sailors,
airmen and Marines.
And you know that, Mr. Shelton, many of your members are
active duty and on post.
Mr. Plunkett, you are very active in this area, too.
I come to this from when I was much, much younger,
commanding a paratrooper company and listening to soldiers walk
in, saying they had done something financially, unaware of the
consequences and suffering.
An example of that was recently given to us by the Consumer
Federation of America. A lender made a vehicle title loan to a
service member in June of 2011 on a 13-year-old car. The loan
amount was $1,615 to be repaid in 32 months with $15,613 of
interest at a 400 percent annual percentage rate.
Now this loan was exempt from the current MLA rules because
it was 181 days. The rule only covers 180-day loans.
Also, there is a mandatory arbitration clause in the loan,
which would have been prohibited in the MLA.
Now I will ask what might be described as a leading
question. Do you think we should broaden the rules so that we
actually protect service men and women?
Mr. Shelton. Senator Reed, absolutely, yes.
It was a smart idea to provide those protections to those
very brave young men and women that are serving in our armed
services today throughout the country. We hear so many stories
of them for the first time actually having the kind of income
that they may be able to own an automobile as a hardworking
member of our services.
The example you just gave is one of many that have been
shared with us. I was looking at the data of a guy that took
out a loan for $2,604 and ended up paying $4,426 and other
charges--which is the equivalent of 124.7 percent APR.
It is outrageous. It has to stop. And we have to do
everything we can to fill in those loopholes that are still
part of the Act. Senator Reed. Thank you.
I am hearing that the Defense Department is revising
regulations, but your comments might provide more impetus.
Mr. Plunkett, your comments?
Mr. Plunkett. Senator, as I mentioned earlier, our policy
recommendation is very broad for all policymakers, whether at
the State level, the CFPB, the Department of Defense, to have a
broad--take a broad look and regulate broadly on all small cash
loans, and that would include payday loans, title loans,
signature loans, and make sure that very narrow legal
requirements cannot be skirted in the way you describe.
Senator Reed. Thank you very much.
Mr. Shelton, let me turn to another issue, and that is
foreclosure.
The data we have seen are about 4.5 percent of white
borrowers lost their homes in the period between '07 to '09;
African American communities, 7.9 percent; Latino communities,
7.7 percent, respectively.
And that means that roughly the African American and Latino
communities were more than 70 percent more likely to lose their
homes to foreclosure during that period.
There are many reasons, many explanations, but what the Fed
Reserve and OCC have right now is residual funds from the
Independent Foreclosure Review Process.
And how important is it for the Federal Reserve and OCC to
ensure that these funds go to States that still have a need,
particularly in these communities, and have demonstrated the
ability to get the money out to people, not just sit on it and
let this problem fester?
Mr. Shelton. Well, it is crucial.
Again, as we talk about the income gap among African
Americans and other racial and ethnic minorities and white
Americans in society, we know that we lost our homes at a much,
much higher rate, as you indicated in your opening statement.
Certainly, resources that have been sat upon along those
lines need to be distributed to very needy families so that
they can keep their homes and their family nest eggs.
Even organizations like the NAACP--as we mentioned, we have
got over 1,200 membership units throughout the United States.
We would be delighted to be helpful in making sure we can
identify people that need that kind of assistance and see to it
they get those much needed resources.
Senator Reed. Thank you very much.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you.
I will ask one more question and then turn it over to
Senator Crapo.
Ms. Ekdom, you noted in your testimony that medical issues,
or medical debt, is one of the top reasons consumers use your
assistance.
Can you describe what you heard and why this information
about medical debt may be particularly problematic on a credit
report, and what should be done to address these issues?
Ms. Ekdom. The reasons that people come in to see us with
medical debt are pretty varied. As I mentioned in my opening
testimony, a lot of people coming in have limited income and no
savings. So any kind of bump in the road can be a tipping
point.
So, for some consumers, it can even be small medical bills
that create big issues within their monthly living expenses. We
also see clients on the other end of the spectrum, that maybe
they are uninsured or the portion that their insurance is not
going to cover is significant and they need to figure out a
repayment plan.
Most of the consumers that we are working with that have
medical debt were not dealing with the original provider. They
have all been turned over to collections.
In our work, when we see judgments, most of them are
related to medical collections. And if the judgment goes to
garnishment, it causes even more issues for the consumer.
Sometimes we see issues related to the billing process that
cause issues for consumers.
So they had a medical event happen, and they are receiving
invoices in the mail that may say: This is an invoice. You do
not need to pay it, and insurance is still pending.
And somewhere along the process, things get messed up.
Something does not get paid. And a lot of times consumers find
out about it because it is a collection item or they get the
notice in the mail that you now have something at collections.
When we are counseling people who are looking at purchasing
a home or purchasing a car, sometimes that is when they
discover that information. And usually, it is a lender that is
referring them, saying, in order to be looked at for this loan,
you need to clear up the judgment and collection items.
So those are some of the things that we see.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
I do have a number of questions for other members of the
panel and some more for Mr. Ireland, but I know that we are
under a time restraint here. So, if it is OK with you and with
the witnesses, I will submit some questions to you if you would
be willing to follow up.
I do want to say to all the witnesses; I found your
testimony today to be very helpful.
These are very critical issues that we are dealing with,
and we need to get it right from all aspects. We do not want to
restrict access to credit because we are too tight in asserting
protections, but we want to make sure that we have the proper
protections in place to protect those who are facing
discrimination or other abusive treatment in our credit system.
And our financial institutions are a key part of our economy.
And your perspectives have been very helpful. So thank you
today.
Chairman Johnson. I want to thank all of our witnesses for
testifying today and for all their work to improve the consumer
marketplace.
This hearing is adjourned.
[Whereupon, at 11:56 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF TRAVIS B. PLUNKETT
Senior Director, Family Economic Stability
The Pew Charitable Trusts
September 18, 2014
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee:
I am pleased to be here with you today to discuss protections in
consumer financial markets. As a senior director at the Pew Charitable
Trusts, I lead a portfolio of work that rigorously assesses and, where
warranted, promotes nonpartisan, evidence-based solutions to improve
the safety and transparency of consumer financial markets and the
financial health of the American family. We focus on families' ability
to borrow and manage their funds safely and wisely, to save for the
future and to move up the economic ladder. Included in our work is an
extensive body of research examining the current financial condition of
diverse families, the effect of employer benefits on household
financial security and the connection between financial capital--
especially emergency and retirement savings--and economic stability and
mobility.
Chairman Johnson, I would like to thank you for holding this
important hearing and--as you prepare to leave the U.S. Senate at the
end of the year--applaud your strong efforts to ensure that the
Nation's financial markets function in an open and fair manner so that
consumers and businesses have an opportunity to thrive.
Since Pew launched our safe credit cards project in 2007, we have
focused on better understanding household financial needs and
experiences, identifying policies that improve consumer outcomes and
promoting a marketplace and regulatory environment that allow
businesses to innovate and better meet consumer needs. We employ a
data-driven approach, working to inform policymakers with a detailed
empirical analysis of industry practices and their effects on
consumers.\1\ Along with the work of a number of organizations, senior
Members of Congress from both parties and President Obama, Pew's
research on the credit card marketplace contributed to the passage of
the Credit Card Accountability, Responsibility, and Disclosure (CARD)
Act and the adoption of rules by the Federal Reserve that have
effectively implemented this groundbreaking and effective law. A 2013
academic study, authored by professors from New York University's Stem
School of Business and the University of Chicago's Booth School of
Business, concluded that the CARD Act is saving consumers more than $20
billion annually, with little to no reduction in access to credit.\2\
Last October, the Consumer Financial Protection Bureau (CFPB) released
a report concluding that the CARD Act had eliminated the deceptive and
unfair credit practices it had targeted and that the total cost of
credit paid by consumers had declined by 2 percentage points between
2008 and 2012. The CFPB also found that, while the amount of card
credit declined during the financial crisis, creditworthy consumers
still had access to $2 trillion of credit lines.\3\
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\1\ For example, Pew conducted a comprehensive scan of all credit
cards offered by dominant card issuers, which found that 100 percent of
the products had at least one feature that Federal regulators later
deemed to be harmful or deceptive. Just two of these practices--which
were later eliminated by the CARD Act--were costing American consumers
at least $10 billion per year. The Pew Charitable Trusts, Still
Waiting: ``Unfair or Deceptive'' Credit Card Practices Continue as
Americans Wait for New Reforms to Take Effect (Oct. 2009), http: //
www.pewtrusts .org//media/legacy/uploadedfiles/wwwpewtrustsorg/
reports/credit_cards/PewCreditCards
Oct09-Finalpdf.pdf.
\2\ Johannes Stroebel, Neale Mahoney, Sumit Agarwal and Souphala
Chomsisengphet, Regulating Consumer Financial Products: Evidence From
Credit Cards, (Aug. 2013), http://papers.ssm.com/sol3/
papers.cfm?abstract_id=2330942.
\3\ The Consumer Financial Protection Bureau, CARD Act Report,
(Oct. 2013), http://files.consumerfinance.gov/f/201309_cfpb_card-act-
report.pdf.
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Pew's current consumer financial efforts focus on the transaction
accounts that Americans rely on every day to manage their finances,
including checking accounts, prepaid cards and mobile payments, and on
small-dollar loans. Our consumer banking initiative began in 2010 with
market research on consumer experiences with checking accounts,
analyzing the offerings of the Nation's largest banks. Our work on
checking accounts has focused on disclosures, overdraft and dispute
resolution policies.
We've also conducted extensive research on general purpose
reloadable (GPR) prepaid cards, which are a relatively new consumer
financial product that is growing in popularity. In our most recent
survey of prepaid card users, Pew found that 5 percent of adults
(implying roughly 12 million people) used these prepaid cards at least
monthly. Consumers load money onto the cards and are not required to
undergo a credit check before purchasing them. These cards are a
versatile financial tool for the 10 million households in the United
States that lack a checking or savings account; that cannot obtain a
credit card because of poor credit histories; and that want to
supplement checking or credit card accounts with one dedicated to
saving or paying for something without the temptation of buying it on
credit. U.S. consumers loaded more than $64 billion onto these cards in
2012, according to the Mercator Advisory Group, up from $56.8 billion
in 2011.
The increasing popularity of the cards is good news for consumers
who want an alternative to traditional checking or credit accounts--
particularly because these cards have become more affordable over the
past year and, in many cases, offer lower and fewer fees than basic
checking accounts. The bad news, however, is that there are no Federal
laws or regulations that directly protect consumers from hidden fees,
liability for unauthorized transactions similar to Regulation E, or
insurance against loss of funds in the event of an issuing
institution's failure. Nor are there Federal rules requiring these
cards to provide disclosures of fees, terms, conditions, or dispute
resolution practices. Federal Reserve Board checking account rules that
require consumers to affirmatively opt in to overdraft service also do
not apply to GPR cards, and there are no rules preventing other credit
products such as a line of credit from being attached to prepaid cards.
These omissions are troubling because Pew's research shows that most
GPR prepaid cardholders do not want overdraft features to be available
on their cards. Instead, they want a safe and useful financial tool
that helps them maintain financial discipline.
Considering the growing use of these cards as an alternative or
complementary product to the traditional checking account, it is
important for consumers to be able to keep the funds on their GPR
prepaid cards secure and perform transactions without risk of losing
money or going into debt. Though our research finds that the providers
are competing for business by lowering some fees and are facing
pressure from new entrants in the market, including retail banks and
established financial services companies, current consumer protection
measures clearly lag behind similar products such as debit cards linked
to checking accounts.
With regard to checking accounts, Pew's most recent research shows
that the marketplace has improved in some respects, with more banks and
credit unions using a summary document to disclose key checking account
fees, terms, and conditions. In 2011 after analyzing account
information from the 10 largest banks and finding that the median
length of the disclosures was 111 pages we developed a summary
disclosure ``box,'' consumer-tested and promoted its adoption among
financial institutions. As of September 2014, 20 banks, including 11 of
the 12 largest, and 8 credit unions, including the three largest, have
worked directly with Pew to adopt this model document. Additionally,
the box appears to be evolving into an industry standard, with many
institutions adopting a box without collaborating directly with Pew. A
sample of the Nation's 50 largest banks found that the number with a
disclosure box adhering to Pew's recommendations increased from 23
percent in 2013 to 54 percent in 2014.
We've also studied the disclosures that are included with the
purchase of general purpose reloadable (GPR) prepaid cards. Currently,
most consumers shop for prepaid cards in a store and only have access
to the complete fees, terms and conditions for a card after purchasing
it and opening the card packaging. This makes it impossible for these
consumers to comparison-shop for the card that best meets their needs
prior to purchase. Based on the current ``clamshell'' packaging, we
were able to develop a disclosure document that consumers could open in
a retail establishment to help them choose the card that will best meet
their needs. Since a GPR prepaid card can be used as a replacement for
a checking account, we developed this prepaid disclosure box based on
our checking account model, allowing consumers to not only comparison
shop among prepaid cards, but also making it easy to compare these
products to checking accounts.
JPMorgan Chase was the first company to adopt a prepaid disclosure
box, for its Liquid card. We have also worked with Visa on a new
designation that identifies safe cards that meet significant consumer
protection standards. To receive the designation, cards must have the
following features: no overdraft charges, a simplified fee structure
with a flat monthly fee; clear cost disclosures; deposit insurance by
the Federal Deposit Insurance Corporation (FDIC) or National Credit
Union Administration (NCUA); and no customer liability if the card is
lost or stolen. Cards must also be in compliance with most aspects of
Regulation E of the Electronic Fund Transfer Act. Cards that qualify
will receive a special Visa insignia that will be visible on card
packaging and materials, allowing consumers to identify and easily
select them.
We also continue to focus on overdraft policies as part of our
research and advocacy on checking accounts. Previous Pew research
examining the financial stability of low-income Hispanic households in
the Los Angeles area during the Great Recession showed that more of
these families had a checking account involuntarily closed--or closed
the account themselves--because of hidden fees (31 percent) than
because of a reduced income (27 percent). Our research also showed that
families with a checking account weathered economic problems better
than those without and were able to save more money.
Since research shows that overdraft policies are a large factor in
causing consumers to leave the banking system, Pew has focused on
working with financial institutions to reform bank overdraft policies
and practices. For example, we provided advice to Bank of America as
they developed their Safe Balance account, a new product that does not
include overdraft as an option. Effective marketing by Bank of America
will be the key to ensuring that large numbers of consumers are aware
of and can choose this account option.
Another area of our focus is small-dollar credit. Pew's small-
dollar loans project focuses on payday, auto title, and traditional
installment loans, as well as emerging alternatives to these products.
In 2011, when Pew began work in this area, we shared the concerns that
some policymakers and other stakeholders expressed that the small-
dollar loan market showed signs of harmful practices and market
failures. Yet research on the often-complicated motivations behind
consumer use of these types of products was limited, as was data about
borrower experiences and attitudes. This lack of fundamental knowledge
made it difficult to assess the potential effectiveness of policy
solutions. Therefore, Pew embarked on an extensive research project. We
completed the first-ever nationally representative survey of payday
loan borrowers, and conducted an exhaustive analysis of regulatory data
and academic papers.
Pew's research, which has been published in our Payday Lending in
America series,\4\ demonstrates that there are serious failures in the
small-dollar loan market and shows how new policies can help lenders
provide access to credit that leads to better consumer outcomes. Key
findings of our work include:
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\4\ The Pew Charitable Trusts, Payday Lending in America,
www.pewtrusts.org/small-loans.
12 million Americans take out payday loans each year,
spending approximately $7.4 billion annually. The average loan
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is $375.
A payday loan is characterized as a short-term solution for
unexpected expenses, but the reality is different.
The average borrower is in debt for 5 months during the
year, spending $520 in interest to repeatedly reborrow the
loan.
69 percent of first-time borrowers use the loan for
recurring bills (including rent or utilities), while just 16
percent deal with an unexpected expense such as a car repair.
Payday loans are unaffordable.
Only 1 in 7 borrowers can afford the more than $400
needed, on average, to pay off the full amount of these lump-
sum repayment loans by their next payday.
Most borrowers can afford to put no more than 5 percent
of their paycheck toward loan payment and still be able to
cover basic expenses. Yet in the 35 States that allow lump sum
payday loans, repayment requires about one-third of an average
borrower's paycheck.
Most payday loan borrowers have trouble meeting monthly
expenses at least half of the time.
41 percent of borrowers have needed a cash infusion, such
as a tax refund or help from family or friends, to pay off a
payday loan.
Payday loans do not eliminate overdraft risk. Most
borrowers also overdraw their bank accounts.
A majority of borrowers say payday loans take advantage of
them. A majority also say they provide relief.
Borrowers want changes to payday loans.
By almost a 3-1 ratio, borrowers favor more regulation of
the loans.
8 in 10 borrowers favor a requirement that payments take
up only a small amount of each paycheck.
9 in 10 favor allowing borrowers to pay back the loans in
installments.
CFPB Efforts to Date on Transaction Accounts and Small-Dollar Loans
The CFPB is required by law to ensure a safe and transparent
consumer financial marketplace, which includes mandates to address
unfair, deceptive and abusive practices and to ensure consumer access
to financial services. It is empowered under the Dodd-Frank Act with
rulemaking, enforcement and supervision powers to achieve these goals,
as well as a mandate to collect and respond to individual complaints
about products and services and to engage and educate consumers.
Significantly, it has authority to oversee the business conduct of
virtually all depository institutions and designated large nonbank
financial services companies in a uniform manner. This allows the
Bureau to write consistent rules that cover similar products offered by
different types of financial services providers--such as prepaid cards
or small-dollar loans. This approach has benefits for both financial
services companies and their customers, ensuring a level regulatory
playing field for industry and equivalent protections for consumers, no
matter what type of company they seek out or product they use.
Research
The CFPB is also required under the Dodd-Frank Act to put research
and analysis at the center of its work and to carefully balance the
interests of industry and consumers. For example, it is required to
monitor consumer financial markets to assess risks to consumers and the
impact of existing regulations on financial institutions and small
businesses in order to reduce burdensome requirements and minimize the
impact of new rules. Since it opened its doors over 3 years ago the
CFPB has published many research papers that document activity that is
occurring in various consumer product markets and provide an evidence
base-along with the work of research-oriented institutions like Pew--
for any regulatory actions the Bureau proposes to take. For example,
the CFPB found in its July, 2014 Data Point that 8 percent of customers
incur 75 percent of overdraft fees.\5\ Similarly, Pew found in a recent
survey of consumers who had overdrawn their checking account with a
debit card that 7.3 percent of customers are responsible for 49 percent
of the overdraft fees charged.\6\ This data demonstrate that consumers
who repeatedly overdraft are not only providing a substantial part of
overdraft revenue but are also sustaining very high aggregate fees,
putting their financial security at risk.
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\5\ The Consumer Financial Protection Bureau, Data Point: Checking
Account Overdraft, (July 2014), http://files.consumerfinance.gov/f/
201407_cfpbreport_data-point_overdrafts.pdf.
\6\ The Pew Charitable Trusts, Overdrawn: Consumer Experiences with
Overdraft, (June 2014), http://www.pewtrusts.org//media/Assets/2014/
06/26/Safe_Checking_Overdraft_Survey
_Report.pdf.
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The CFPB also found in this Data Point that the propensity to
overdraft is higher for younger account holders, with 10.7 percent of
the 18-25 year old age group having more than 10 overdrafts per year.
Pew's survey research found that a 25-year-old is 133 percent more
likely to pay an overdraft penalty fee than a 65 year-old. The CFPB's
Data Point also concluded that most consumers who overdraft bring their
accounts into the black quickly, with more than half achieving a
positive balance within 3 days and 76 percent within 1 week.
Correspondingly, Pew's research has found that most consumers who
overdraft had negative balances for four or fewer days. Finally, the
CFPB found that the median size of debit card transactions that result
in an overdraft fee is $24 and that the median fee is $34. If put in
terms of an annualized loan interest rate, a typical overdraft carries
a 17,000 percent APR. Based on this data, we can conclude that
overdraft programs offer expensive, very short-term loans that are
disproportionately used by younger customers who are new to the banking
system.
In the case of small-dollar lending, the CFPB has taken a
methodical approach to studying the market. In April of last year, the
Bureau published findings of a year-long study of usage data obtained
through its supervision of conventional and bank deposit advance payday
loan providers. The Bureau found that the structure of payday loans
created substantial risk of harm to consumers. This is because payday
loans require borrowers to pay several hundred dollars out of their
next paycheck to lenders that have a priority payment position,
allowing them to reach directly into borrower checking accounts before
other bills are paid. The Bureau found that a sizable share of payday
loan users conduct transactions on a long-term basis (two-thirds of
borrowers use seven or more loans per year, mostly in rapid
succession), suggesting that they are unable to fully repay the loan
and pay other expenses without taking out a new loan shortly
thereafter.
In March of this year, the Bureau followed up with a second report
that revealed new usage data, showing for example that the vast
majority (80 percent) of payday loans originate within 2 weeks of a
previous loan, suggesting how important consecutive repeat usage is to
the payday loan business model. With these studies, the CFPB used its
unique access to market data to release definitive research that
confirms findings by Pew and other researchers,\7\ that the vast
majority of payday loans (and therefore lender revenue) result from
long-term, repeat usage. This lending is often predicated on leveraging
access to the borrower's checking account to collect payment on loans
that many cannot afford, leading to repeat borrowing to make ends meet.
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\7\ Robert De Young and Ronnie J. Phillips, Payday Loan Pricing,
(Federal Reserve Bank of Kansas City, Economic Research Department,
Feb. 2009), 7, http://www.kansascityfed.org/PUBLICAT/RESWKPAP/PDF/
rwp09-07.pdf.
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Enforcement and Rulemaking
The CFPB has said that it will propose rules this year on prepaid
cards. In 2012, the CFPB released an advanced notice of proposed
rulemaking, asking about significant consumer protection issues for
consumers using these cards, including disclosure, unauthorized
transactions and product features, specifically overdraft or credit
linked to these cards.\8\
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\8\ The Consumer Financial Protection Bureau Advanced Notice of
Proposed Rulemaking, (May 2012) http://files.consumerfinance.gov/f/
201205_cfpb_GPRcardsANPR.pdf.
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The CFPB has also stated its intention to issue rules governing the
payday and small-dollar loans market. In November of 2013, the Bureau
took its first enforcement action against a payday lender that was
allegedly engaging in inappropriate collections activity.\9\ More
recently, the Bureau sanctioned another lender for ``pushing payday
borrowers into a cycle of debt.''\10\ Notably, the Bureau found that
the company in question had ``created and leveraged an artificial sense
of urgency to induce delinquent borrowers with a demonstrated inability
to repay their existing loan to take out a new [company] loan with
accompanying fees.'' This, the CFPB concluded, took unreasonable
advantage of consumers' inability to protect themselves, and was an
abusive practice under applicable law.
---------------------------------------------------------------------------
\9\ See http://www.consumerfinance.gov/blog/our-first-enforcement-
action-against-a-payday-lender/.
\10\ See http://www.consumerfinance.gov/newsroom/cfpb-takes-action-
against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-
debt/.
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Problems that Remain in the Transaction Account and Small-Dollar Loan
Markets
Although much progress has been made by Congress and the CFPB in
recent years in addressing problems in consumer financial markets, a
great deal of research by Pew and the Bureau itself demonstrate there
are still significant safety and transparency problems that need to be
addressed.
Checking Accounts and Prepaid Cards
One area of particular concern regarding checking accounts is
consumer confusion about whether they have opted in for overdraft
coverage when using their debit card for a purchase or at an ATM. In
2010, the Federal Reserve implemented new rules requiring that
consumers affirmatively choose to ``opt in'' to overdraft coverage, but
our most recent survey of checking account consumers who had incurred
an overdraft in the last year showed that over half were not aware that
they had chosen coverage.\11\
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\11\ The Pew Charitable Trusts, Overdrawn, 5.
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Unfortunately, this situation has not improved. We asked the same
question in a 2012 survey of consumers who overdrafted and got a
similar result. The CFPB's research into overdraft further elucidated
the problems with this market. Their 2013 ``Study of Overdraft
Programs'' found that of opt-in rates varied dramatically for the banks
they examined, ranging from less than 10 to more than 40 percent. The
CFPB study suggests that the manner in which each institution describes
or sells overdraft options to new customers varies considerably. We
have urged the CFPB to write new rules requiring financial institutions
to provide account holders with clear, comprehensive, and uniform
pricing information for all available overdraft options so that each
consumer can make an informed decision about this product. This could
be accomplished by modifying the Federal Reserve's ``safe harbor'' opt-
in form to ensure that consumers understand all of their options and
the implications of their choices.
Furthermore, ``high-to-low'' transaction reordering remains a
serious concern. This involves financial institutions manipulating the
order that transactions post to an account in order to deplete the
balance more quickly, leading to more overdrafts and additional
fees.\12\ In its 2013 study, the CFPB found that debit posting orders
vary considerably from institution to institution and, in fact, no two
banks studied use the same approach.
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\12\ For a data visualization of this practice, see http://
www.pewtrusts.org/en/multimedia/data-visualizations/2014/checksand-
balances; The Pew Charitable Trusts, Checks and Balances (Apr. 2014),
21. http://www.pewtrusts.org//media/Assets/2014/04/09/
ChecksandBalances
Report2014.pdf.
---------------------------------------------------------------------------
Pew's research shows that somewhat fewer banks are engaging in
high-to-low transaction reordering in the last year. Our latest
analysis found a small decrease in the proportion of banks that reorder
transactions from high to low, from 54 percent in our 2013 report to 49
percent in 2014. While this indicates some progress, it's important to
note that all of the banks that we surveyed state in their disclosures
that they retain the right to change their practices at any time. Pew
has urged the CFPB to write new overdraft rules that prohibit the
reordering of transactions to maximize fees, in favor of posting
deposits in a fully disclosed, objective, and neutral manner. Without a
rule forbidding this practice, even banks that no longer reorder
transactions have the ability to reinstate this practice at any time.
Given the extremely high cost of overdrafts described above, we have
also urged the Bureau to require all financial institutions to make
penalty fees reasonable and proportional to a bank's costs in covering
the overdraft transaction.
General purpose reloadable cards are relatively new financial
products. As a result, they do not carry the same consumer protection
requirements as checking accounts, despite the similarity in how they
can, and are being, used. Comparing the data from our two market scans
published in 2013 and 2014 we have observed that the fee structure of
these cards is shifting to more closely resemble checking accounts.\13\
Interchange fees for each transaction are not as common as for debit or
credit cards, and monthly fees, like those associated with a checking
account, are more prevalent.
---------------------------------------------------------------------------
\13\ The Pew Charitable Trusts, Consumers Continue to Load Up on
Prepaid Cards (Feb. 2014), 2. http://www.pewtrusts.org//media/legacy/
uploadedfiles/pcs_assets/2014/PrepaidCards
StillLoadedReportpdf.pdf.
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Additionally, our survey research finds that a primary reason
consumers use GPR cards is to avoid unexpected or hidden fees, like
overdraft, associated with traditional checking accounts.\14\ We found
that 66 percent of prepaid consumers use the cards so that they do not
spend more money than they actually have.\15\ In fact, 63 percent
report having paid checking account overdraft fees and 41 percent say
they have closed or lost a checking account because of these fees.\16\
In our 2014 market scan we found that only one card in the marketplace
offers overdraft, demonstrating that this feature is not necessary to
make the product financially viable. For these reasons, we have urged
the CFPB to prohibit overdraft or other automated or linked lines of
credit on GPR cards. In addition, we have recommended that the Bureau
extend important protections under The Electronic Fund Transfer Act
(EFTA) that apply to checking accounts to prepaid cards. These
Regulation E protections include requirements that financial
institutions: investigate unauthorized transaction claims, place
limitations on the liability of consumers, credit the account for the
amount of a disputed transaction while the dispute is pending, and
provide consumers access to periodic statements and past transaction
information. Given the substitutability of these products it makes
sense for consumers to expect and receive similar protections.
---------------------------------------------------------------------------
\14\ The Pew Charitable Trusts, Why Americans Use Prepaid Cards
(Feb. 2014), 8. http://www.pewtrusts.org//media/legacy/uploadedfiles/
pcs_assets/2014/PrepaidCardsSurvey
Reportpdf.pdf.
\15\ Ibid., 14.
\16\ Ibid., 8.
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Another important protection for consumers is the requirement that
funds on GPR prepaid cards be FDIC insured. Currently, while most cards
are covered by Federal deposit insurance, nonbank prepaid card
providers that do not carry a Visa or MasterCard logo are not required
to make sure that these funds are federally insured should the company
go out of business. Rather, the card provider can choose to comply with
State money transmitter laws, which do not offer the same level of
protection for consumers as Federal insurance. As stated above, the
CFPB has broad authority to ensure that similar products are regulated
consistently. The Bureau should require that all funds loaded onto
prepaid cards are covered by this insurance.
Both checking accounts and prepaid cards need clear, concise, and
easy-to-understand disclosures. This information should be accessible
both online and when consumers purchase the cards at bank or credit
union branches (for checking accounts) and retail locations (for
prepaid cards) to enable the consumer to shop among different
providers. While we applaud the many banks and credit unions that have
voluntarily adopted clear checking and prepaid card disclosures,
consumers will only have access to uniform information that allows them
to easily compare the terms and condition for all checking account and
prepaid providers if the CFPB requires it.
Finally, in December 2013, the CFPB's report, ``Arbitration Study
Preliminary Results,'' found that larger banks tend to include
mandatory arbitration clauses in their consumer checking contracts,
while mid-sized and smaller banks and credit unions do not.
Interestingly, the Bureau estimates that only about 8 percent of banks
include arbitration clauses in their checking account contracts but
that these clauses cover 44 percent of insured deposits. Mandatory pre-
dispute binding arbitration clauses present several risks. They prevent
consumers from choosing the option of challenging unfair and deceptive
practices or other legal violations in court, potentially allowing some
abusive practices to spread without legal or public scrutiny. They also
deprive consumers of important legal remedies--including a jury trial--
curtail judicial civil procedures and due process protections, such as
the ability to appeal a decision, and raise serious conflict-of-
interest concerns if the companies that provide arbitration services
provide repeat business to the financial institutions that mandate it.
In Pew's 2012 report, ``Banking on Arbitration: Big Banks,
Consumers, and Checking Account Dispute Resolution,'' we also found
that the larger the financial institution the more likely an account
agreement contains a clause requiring mandatory binding arbitration. We
determined that financial institutions that require arbitration are
much more likely to ban class-action lawsuits. In our most recent
``Checks and Balances'' report, we found that more banks have added
class-action and jury trial waivers along with mandatory binding
arbitration clauses to their account agreements, all of which limit a
consumer's options during a dispute.\17\ In a separate report on
prepaid cards, we found that 51 of the 66 cards studied (77 percent)
have contractual clauses that require cardholders to submit to
mandatory binding arbitration. Fifty cards (76 percent) also disclose
that cardholders are not permitted to participate in class action
litigation involving that card.\18\ As a result of this research, Pew
has recommended to the CFPB that mandatory arbitration clauses in
checking accounts and prepaid card contracts be prohibited.
---------------------------------------------------------------------------
\17\ The Pew Charitable Trusts, Checks and Balances, 2014 Update.
\18\ The Pew Charitable Trusts, Consumers Continue to Load Up on
Prepaid Cards.
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Small-Dollar Loans
As you know, the CFPB has the power to regulate some nonbank
financial entities, such as payday lenders, which is the first time
these institutions will be under Federal oversight. Though the Bureau
has not yet issued rules to govern this market, it has stated its
concern over the potential harms in this market, and its intention to
use its powers to address those harms. Similarly, after several years
of intensive study, Pew has concluded that the CFPB must issue broad
new rules to govern the entire small-dollar loan market.
Pew's research conclusively shows that payday loans are
unaffordable for most borrowers. The loans require payments equal to
one-third of a typical borrower's income, far exceeding most customers'
ability to repay and meet other financial obligations without quickly
borrowing again. Payday lenders have a unique legal power to withdraw
payment directly from borrowers' checking accounts on their next
payday, prompting those without enough money left for rent or other
bills to return to the lenders, repay the loans, and pay an interest-
only fee to quickly re-borrow, resetting the due date to the next
payday. This extraordinary form of loan collateral allows lenders to
thrive even as they make loans to those who cannot afford them. The
average borrower is in debt for nearly half the year, and the vast
majority of lender revenue comes from those who borrow consecutively.
Payday lenders achieve profitability only when the average borrower is
in debt for months, even though the product is promoted as a short-term
bridge to the next payday. These facts demonstrate a significant market
failure.
Based on our research findings on small-dollar loans we developed
policy recommendations urging the CFPB to:\19\
---------------------------------------------------------------------------
\19\ The Pew Charitable Trusts, Payday Lending in America: Policy
Solutions (Oct. 2013), 44-47. http://www.pewtrusts.org//media/legacy/
uploadedfiles/pcs_assets/2013/PewPayday
PolicySolutionsOct2013pdf.pdf.
Ensure that the borrower has the ability to repay the loan
as structured. The key to achieving this goal will be to
require lenders to more carefully consider a borrower's ability
to repay the loan, as structured, without having to borrow
again to make ends meet. Payments on a payday loan currently
take more than one-third of the borrower's next paycheck, and
that is an unreasonable amount. Pew's research provides a clear
benchmark for identifying a more reasonable payment--for most
borrowers, monthly payments above 5 percent of gross monthly
income are unaffordable. The CFPB should treat loans requiring
payments above this threshold as unreasonable unless the lender
can clearly demonstrate, through proper underwriting, that the
borrower can afford more. With such a clear benchmark in place,
the CFPB could eliminate a broad array of harms while giving
honest lenders a clear and low-cost way of making safer credit
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available.
Spread loan costs evenly over the life of the loan. Front-
loading of fees and interest creates incentives for lenders to
refinance loans and extend overall indebtedness (sometimes
called loan flipping). Any fees should be paid evenly over the
life of the loan. Sensible rules to limit lender incentives for
loan flipping should be part of any small-dollar loan rule.
Guard against harmful repayment or collections practices.
Borrowers need stronger rights to protect their checking
accounts against unscrupulous lenders or debt collectors, and
banks should be held more accountable for honoring their
customers' requests to stop payments or cancel automatic
electronic withdrawals. Sensible safeguards can preserve the
integrity of the electronic payments system and help honest
lenders make affordable loans to those who need them.
Require concise disclosures of periodic and total costs.
Consumers need accurate information to make good decisions.
Continue to set maximum allowable charges. Research shows
loan markets serving those with poor credit histories are not
price competitive.
Pew has also recommended that policymakers protect against
excessively long loan terms and have developed a formula based on
borrower income and the size of the loan to prevent this costly
practice. The formula can be included in laws or regulations in
conjunction with other legal requirements, or can be used as a
benchmark by financial institution examiners.
Pew has shown empirically that enacting such measures can yield
much better consumer outcomes with almost no loss in consumer access to
credit, in a way that works for lenders.\20\ Access to credit remains
virtually unchanged after a recent legal reform in Colorado, but
borrowers spend less, and payments are far more affordable.
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\20\ See The Pew Charitable Trusts, Payday Lending in America. The
report includes a case study of Colorado's 2010 payday loan reform,
which required all payday loans to become 6-month installment loans and
included many features that approximate Pew's policy recommendations.
---------------------------------------------------------------------------
Conclusion
The CFPB, which was created in the wake of the financial crisis to
make consumer financial markets safe, efficient and transparent, has a
crucial role to play in the next few years in enhancing consumer
protections for transaction accounts and small-dollar loans. The CFPB
clearly has the authority and jurisdiction it needs to effectively and
fairly address the serious problems I have identified today. It has
also demonstrated that it will take a methodical approach to understand
and address problems in these markets. In particular, the CFPB's
research and initial enforcement actions on transaction accounts and
small-dollar loans have been thorough and deliberate. These important
early moves provide a basis for the CFPB to propose effective new rules
in the months ahead that eliminate unfair, deceptive or abusive
practices, while also allowing scrupulous financial services companies
a fair chance at serving consumers profitably. It is now up to the CFPB
to seize this historic opportunity. We applaud the Committee for its
attention to and oversight of the CFPB's work in these areas and urge
you to continue these efforts to ensure that the Bureau acts in a
timely, effective and balanced manner.
Thank you for the opportunity for Pew to participate in this
discussion. My colleagues at The Pew Charitable Trusts and I would
welcome the opportunity for further conversations at any time.
______
PREPARED STATEMENT OF SHERI EKDOM
Director, Center for Financial Resources, Lutheran Social Services of
South Dakota
September 18, 2014
Senator Johnson, before I begin my testimony, on behalf of Lutheran
Social Services of South Dakota, I would like to recognize your
upcoming retirement, your work as a South Dakota legislator early on as
you began your career, and now nearly 30 years of service as a
Congressman and Senator from South Dakota. We thank you for your
tireless efforts--especially your dedication to those underserved
populations who have limited resources and means. Over the years, you
allowed their voices to be heard and their lives improved. Your work
has made a difference and we thank you for that.
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee:
Thank you for inviting me to testify this morning on the topic of
assessing and enhancing protections in consumer financial services. For
the past 22 years, I have worked in the financial counseling and
education industry. I am currently the director of the Center for
Financial Resources at Lutheran Social Services of South Dakota.
LSS has provided financial counseling and education services since
1984. Our agency is a member of the National Foundation for Credit
Counseling, a HUD-approved housing agency, accredited by the Council on
Accreditation (COA), and an approved provider of bankruptcy counseling
and education under the Department of Justice Executive Office of U.S.
Trustees.
LSS provides financial counseling and education designed to help
consumers take control of their financial future. Services include:
financial management and budgeting sessions, debt management programs,
bankruptcy counseling and education, and credit report and student loan
consultations. Housing counseling and education is available to
renters, first-time home buyers, homeowners and those seeking to
prevent or resolve housing delinquency or default issues. Since long-
term financial success often means making deliberate changes to
priorities and lifestyles, LSS offers a full range of education
products on topics to promote financial literacy and complement
financial counseling and debt management programs.
Products offered are both reactive, as in the case of working
through a financial crisis, and proactive, for those seeking to prevent
money problems or plan ahead for their future financial goals.
At the Center for Financial Resources, we work with people from all
age and income levels--although the majority of clients seen (69
percent) fall in the low-to-moderate income (LMI) range. Client ages
for counseling sessions for last year ranged from 18 to 92, with the
majority of our clients falling in the 31- to 45-year-old age bracket.
When people come into our office, the most common ``primary causes
of financial problems'' include poor money management, reduced income,
separation or divorce, excessive spending, unemployment and medical
issues.
A number of factors put many South Dakotans at risk for a financial
crisis:
54 percent of South Dakota households have difficulty
covering their expenses and paying bills.
17 percent of South Dakota households spent more than they
made during the last year, even excluding major purchases like
a car.
57 percent of individuals don't have an emergency fund in
case of unexpected expenses or a job loss.
32 percent have borrowed from a nonbank source such as a
payday loan, title loan, or pawn shop.\1\
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\1\ FINRA Investor Education Foundation, National Financial
Capability Study. (2012). http://www.usfinancialcapability.org/
about.php.
22 percent of South Dakota households are under banked--
they have a bank account but routinely use nonbank services
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such check-cashing services, payday lenders, and title loans.
46 percent of South Dakotans have sub-prime credit
ratings--without good credit, consumers pay higher interest
rates than other consumers on everything from credit cards to
car loans to mortgages
The average South Dakotan owes $6,666 in credit card
debt.\2\
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\2\ Corporation for Enterprise Development, Assets & Opportunity
Scorecard. (2014). http://scorecard.assetsandopportunity.org/2014/
state/sd.
South Dakota ranks 48th in the Nation for the average
weekly wages earned by workers.\3\
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\3\ U.S. Department of Labor Bureau of Labor Statistics, Covered
Establishments, Employment, and Wages by State, Fourth Quarter 2013.
http://www.bls.gov/news.release/cewqtr.t03.htm.
6.9 percent of South Dakotans are unemployed or
underemployed. In addition to those people who are counted in
the official unemployment rate, this also includes people who
have given up looking for work, or who want to work full time
but have only been able to find part-time work.\4\
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\4\ U.S. Department of Labor Bureau of Labor Statistics,
Alternative Measures of Labor Underutilization for States, Third
Quarter of 2013 through Second Quarter of 2014 Averages. http://
www.bls.gov/lau/stalt.htm.
South Dakota ranks first in the Nation for the percentage
of workers who hold more than one job (8.9 percent).\5\
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\5\ U.S. Department of Labor Bureau of Labor Statistics, Multiple
Job Holding in States in 2013, Monthly Labor Review, August 2014.
South Dakota is home to nine Indian reservations and has one of the
highest concentrations of Native Americans at the State level. The
latest Census figures report that Native Americans or Alaska Natives
compose just over 10 percent of the State's population, the majority of
whom reside on reservations.
The challenges faced by residents of South Dakota reservations have
been well documented. Limited employment opportunities, generational
poverty, and geographic isolation make it difficult for families to
become financially stable. Despite the tribes' and State's economic
development efforts, the people living on these reservations still have
significantly lower income and home ownership rates, and higher poverty
rates than the rest of South Dakota. Although numerous reservation
communities across the country suffer from high rates of poverty and
unemployment, five counties in South Dakota in which reservations are
located rank in the top 25 counties with the highest poverty rates for
the entire United States. The overall poverty rate in the five counties
ranges from 39.2 percent to 47.4 percent, compared to the State poverty
rate of 13.6 percent.\6\ Of the financial counseling clients we have
seen on reservation communities, most have been unbanked. This makes
them susceptible to predatory products such as payday loans and title
loans.
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\6\ U.S. Census Bureau, Small Area Income and Poverty Estimates,
2012 Release. http://www.census.gov/did/www/saipe/data/highlights/
2012.html.
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The following issues describe some of the most significant
financial challenges we see in our work:
Low wages and underemployment remain significant issues for
South Dakotans.
The majority of clients seeking assistance for financial
counseling are insolvent (their income does not cover their
living expenses). Clients coming into our office have high debt
levels with little or no savings. For families living paycheck
to paycheck, this combination leaves them lacking the means to
deal with financial emergencies and limits access to low-cost
loans or financial products.
The flow of needed credit to credit-worthy home buyers
has tightened as traditional banks, both large and small,
navigate new regulator expectations under Dodd-Frank.
There are many individuals that do not understand the
ramifications of using short-term or payday loans as an attempt
to resolve long-term issues. The individuals could benefit from
education on the consequences if misuse of the loans occurs and
discussion of other options to prevent a similar financial
crisis in the future.
About 13 percent of households we counsel struggle with
payday loans:
55 percent of these clients had 2 or more payday loans;
20 percent had four or more payday loans
For clients with 7 or more payday loans, the average
balance per loan was $758
Annual interest rates from 100 percent to 400 percent can
compound these payday loan debts to unmanageable levels.
Low-income housing options remain scarce.
Since the demand for housing assistance often exceeds the
limited resources available to HUD and the local housing
agencies, long waiting periods are common and South Dakota is
no exception with 6,000 people on waiting lists. On average,
those seeking rental assistance can expect to remain on a
waiting list for three to 5 years. The lack of safe, affordable
housing is particularly severe on Native American reservations.
Landlord-tenant issues are common. We receive calls daily
from consumers with questions about pending evictions,
confusion on lease issues and fair housing issues. Many times
we see low- to moderate-income individuals have fewer resources
available to stand up to unfair practices or have a lack of
understanding of their rights or responsibilities.
Medical debt--medical issues and medical debt are one of
the top reasons consumers seek our assistance.
Consumers may have trouble navigating the medical billing
process (i.e., when has insurance or other coverage paid--when
are they responsible).
One medical ``event'' may generate multiple bills from
multiple providers; invoices may be received for many months
before the billing is complete.
Debt collection--consumers are quite often afraid and
intimidated by tactics used to collect payments; many are
unsure how to verify/dispute collection items; many don't
understand debt/divorce situations, or the risks and
responsibilities of co-signing a loan.
Credit reporting--many LMI consumers seek assistance on how
to build a credit report; how to improve their credit score;
how to obtain free reports and how to insure accurate
information is on the reports; some fall prey to credit repair
scams that do little more than dispute accurate, negative
information and charge a high fee.
Many consumers are ill prepared for retirement--36 percent
of people in the United States have no retirement savings; this
includes 26 percent of adults between the ages of 50 and 64--
one of the most crucial age groups for retirement planning and
saving.\7\
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\7\ Indexed Annuity Leadership Council, New Study Shows One-third
of Americans have Zero Retirement Savings, Why? August 22, 2014. http:/
/indexedannuitiesinsights.com/new-study-shows-one-third-of-americans-
have-zero-retirement-savings-why/.
We continue to see consumers with high debt levels. The
average client coming to see us with debt-related issues owes
10 creditors $28,227 in unsecured debt. Student loan debt, now
the second-largest form of consumer debt and growing, is also
an area of concern for many consumers and an area that seems to
be garnering significant national attention as we seek
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solutions for over-extended borrowers.
The Consumer Financial Protection Bureau (CFPB) and Federal Trade
Commission Web sites are helpful in our work as we strive to protect
consumers by sharing educational tools and keeping us abreast of
changes within the consumer protection arena. Asking consumers to
``tell their story'' and tracking consumer complaints positions the
CFPB to quickly identify trends and respond appropriately. We have
referred a few clients directly to the CFPB with housing complaints;
they were pleased with the responsiveness the Bureau and indicated they
felt ``heard.''
The CFBP could assist us further in our work by making referrals to
or partnering with community-based, State and Federal resources poised
to help consumers deal with their financial issues to ensure a better
chance of success. By continuing to provide links and information on
their Web site such as ``How to Choose a Credit Counselor'' or ``How to
Locate a Housing Counselor,'' we can insure that as people look for
ways to stabilize or improve their financial situation they are aware
of help that is available to them. It also empowers clients to self-
select and be armed with the proper questions so they receive the help
they need from a trusted source.
Having provided some context on the issues we see consumers dealing
with on a daily basis, I would offer the following recommendations to
enhance financial protections related to consumer financial services:
1. Limit the number of short-term loans consumers may access at one
time
We recognize there are situations when consumers need access to
small dollar credit; the trouble typically comes when consumers have
multiple short-term loans at one time that exceed their ability for
repayment. With the wide availability of online options, it would seem
that a limitation on multiple loans would need to come from a Federal
level.
It may also be worth considering a requirement for short-term
lenders to provide customers with information on available financial
education services from a neutral third party that is not selling the
financial product.
2. Support and promote community-based financial education
(Assist with incentives to encourage attendance and discourage
conflicts of interest related to providing the education)
We know that education works! For example, a recent study suggests
that pre-purchase financial counseling may reduce, by an average of 29
percent, the likelihood of a first-time home buyer becoming seriously
delinquent.\8\
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\8\ Tsien, Freddie Mac, Executive Perspectives-Insights on Housing
Finance, Pre-purchase Counseling is Getting Better all the Time, April
15, 2013. http://www.freddiemac.com/news/blog/robert_tsien/
20130415_getting_better.html.
Most of the LMI consumers that attend a pre-purchase class
initially register as they need to complete the class in order
to receive a certificate of completion that may allow them to
qualify for various down payment or closing cost assistance
programs. This may be the ``carrot'' that prompted them to
register. We need to help consumers understand the ``what is in
it for me'' as we seek to increase financial responsibility and
empower consumers to take control of their finances. Whether we
are training youth on managing money or becoming a first-time
renter, or assisting consumers in understanding how to build a
better credit record, incentives that encourage consumers who
may not otherwise attend a class to show up may ultimately not
only increase their financial knowledge but their financial
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situations.
Although education is often called the gateway to success,
many are hesitant to take that first step. If you are unaware
of options available, you may not be able to see the value that
financial literacy training can provide. Incentives along with
education sessions may open the door for individuals to gain
awareness, discuss their issues and proactively learn lessons
that may otherwise be taught as the hard and unforgiving
consequences of money management mistakes (i.e., evictions,
repossessions, NSF fees, etc.).
Our issue today is not a lack of good, quality accurate
education materials; our issue is getting that information into
the hands of consumers in a format they desire and that they
can understand and digest. Just because we ``build it''--does
not mean they will come. We need to determine methods and
motivations so people will hear the information that can change
their financial futures.
Insuring that consumers receive education prior to some of
the largest purchases in life (i.e., homes, cars, student
loans, etc.), from a neutral third party that is not selling
the financial product, also ensures that consumers are able to
make decisions about big-ticket items fully educated and
without the pressure of any sales tactics.
Thank you for the opportunity to testify.
______
PREPARED STATEMENT OF OLIVER I. IRELAND
Partner, Morrison & Foerster
September 18, 2014
Chairman Johnson, Members of the Committee, it is an honor to be
here today. My name is Oliver Ireland. I am a partner in the Financial
Services practice at Morrison & Foerster here in Washington D.C. I have
over 40 years of experience working as a lawyer on financial services
issues. I spent 26 years with the Federal Reserve System, including 15
years as an Associate General Counsel at the Board in Washington where
I worked on issues ranging from writing rules to protect consumers, to
establishing policies and writing rules to reduce systemic risk in the
financial system. I have 14 years' experience as a private sector
attorney helping providers of financial products and services to
navigate the financial regulatory system.
I understand that this may be Chairman Johnson's last hearing on
consumer issues as Chairman of this Committee and as Senator from South
Dakota. On behalf of the financial services community I want to start
by thanking Chairman Johnson for his work as a Member of this Committee
and as its Chairman. Financial services issues are complex and usually
controversial. At the same time they are critical to American
households. Chairman Johnson, we all owe you a debt of gratitude.
I am here today to address the State of the market for consumer
financial products and services in the wake of a severe financial
crisis where consumer household mortgages played a key role, and in the
wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') which was designed to address many of the problems
related to the financial crisis. A key component of the Dodd-Frank Act
was the creation of the Consumer Financial Protection Bureau
(``CFPB''), but the Dodd-Frank Act also specifically addressed
standards for mortgages in a separate Title. In addition, the Credit
CARD Act of 2009, enacted shortly after the peak of the financial
crisis, has also played an important role in shaping the current market
for consumer financial products and services.
There is no denying that problems in the market for consumer
financial products and services led to the enactment of the Credit Card
Act, the mortgage provisions of the Dodd-Frank Act and the creation of
the CFPB; however, both statistical and anecdotal information suggest
that these initiatives, coupled with actions of the Federal Banking
agencies, are having a chilling effect on the markets for consumer
financial products and services.
At the outset, it is important to remember that we regulate
providers of consumer financial products and services because of the
importance of these products and services to American households and to
the economy as a whole. Our goal should be to ensure that the markets
for these products and services are fair and efficient and that
consumers have access to these markets. In establishing the CFPB, the
Dodd-Frank Act stated that the purpose of the CFPB is to ``seek to
implement and, where applicable, enforce Federal consumer financial law
consistently for the purpose of ensuring that all consumers have access
to markets for consumer financial products and services and that
markets for consumer financial products and services are fair,
transparent and competitive.''
This purpose statement sets a lofty goal that can be approached but
may be very difficult to achieve. Congress recognized the difficulty in
achieving this goal by including the word ``seek'' in the purpose
statement. A key factor in seeking this goal is the recognition that
there are two sides to every consumer financial product and service--
the consumer and the provider. Pursuit of fairness for the consumer can
make products or services uneconomical for providers and have an
adverse effect on access to those products or services for some, or
all, consumers.
Zeal in enforcing consumer laws, particularly those that do not
have well defined standards such as the unfair, deceptive and, with the
passage of the Dodd-Frank Act, abusive standards that originated in the
Federal Trade Commission Act and are incorporated into the Dodd-Frank
Act, can also adversely affect access to consumer services as providers
become more reluctant to continue existing products and services and to
introduce new ones. To illustrate the concerns, I will focus on three
areas: the effect of the Credit CARD Act on access to consumer credit
for everyday needs, the potential effect of the mortgage provisions of
the Dodd-Frank Act on access to mortgage credit, and the chilling
effect of uncertainty on access to consumer financial products and
services generally.
CREDIT CARD ACT
The Credit CARD Act was enacted in response to a number of
practices in the credit card market. For example, in seeking to provide
access to credit to more consumers, credit card issuers had developed a
practice of granting credit to cardholders with uncertain credit
characteristics and, where the cardholder later exhibited higher risk
characteristics, increasing the rate on the cardholders account to
address that risk. Cardholders who thought that they were going to be
able to enjoy credit at a lower initial rate viewed this practice as
unfair; however, many cardholders continued to enjoy the rates that
they had originally anticipated. The Credit CARD Act generally
prohibited credit card issuers from raising rates on existing balances,
except in very limited circumstances.
In connection with Federal Reserve Board rulemakings on this issue
that preceded the Credit CARD Act, industry analysis indicated that
restricting the ability to raise rates on existing balances would
reduce credit card issuer revenue by billions of dollars and that in an
effort to adapt to this loss of revenue credit card issuers would
either raise interest rates on credit card accounts generally or remove
risk from their portfolios by limiting access to credit by consumers
that appeared to be higher risk.
Although data on the credit card market subsequent to the
implementation of the Credit CARD Act has been affected by the
financial crisis and the ensuing high levels of unemployment, data
developed by the American Bankers Association, in conjunction with
Argus Information and Advisory Services and Keybridge Research, shows
marked changes in the credit card market since the implementation of
the Credit CARD Act including a significant reduction in the
availability of credit card accounts and, where such accounts are
available credit card lines, to consumers with higher credit risk
scores. These data also show that credit cards, where available, are
increasingly being used as payment instruments rather than as means of
obtaining household credit. For example, the proportion of credit card
accounts that pay off their balance each month has increased even while
monthly use of credit cards has increased. At the same time, the
effective finance charge yield on credit card portfolios, the amount
actually paid for credit, has declined.
These data might be attributed to household deleveraging in the
wake of the financial crisis, and indeed mortgage credit has also
declined sharply; however, mortgager credit relative to disposable
income had shown a marked bubble that appears to coincide with the
bubble in housing prices during the first decade of this century, but
credit card credit did not experience a similar bubble. Further, other
forms of household credit, including automobile loans and student
loans, appear to have increased as credit card credit has decreased.
A detailed analysis of these data is beyond the scope of this
testimony and is best conducted by economists with a strong
understanding of consumer financial transactions and the consumer
financial markets, however, these data strongly suggest that
significant changes in the regulatory environment for consumer
financial products and services, such as the Credit CARD Act, can lead
to a reduction in use or the availability of those services. These data
also suggest that in order to achieve the goal of assuring that
consumers have access to markets for financial products and services in
regulating these markets, it is important to understand the consumer
demand that these services meet. If new regulations result in unmet
consumer demand because of a redirection in consumer access to
financial products and services, that unmet consumer demand is highly
likely to lead consumers to try to meet their needs from other,
substitute sources. These substitute services may be more expensive or
otherwise on less advantageous terms than the products or services that
are no longer available. For example, in the case of the Credit CARD
Act it is possible that consumers with higher credit risk scores who
are no longer able to obtain credit cards to meet their needs for
short-term credit may find themselves turning to other higher cost
credit to meet their needs or to increasing their secured borrowing
collateralized by their automobiles or their homes to provide a
liquidity cushion to deal with unforeseen events.
At this point in time it is not clear how higher risk score
consumers have met any needs for credit that they would have met
through the use of credit cards before the Credit CARD Act was
implemented. In formulating regulatory policy to meet the goals that
the Dodd-Frank Act established for the CFPB, it is important to
consider the effect of that policy on consumers' access to retail
financial product and services and how consumers may meet their needs
if access to the financial products or services that are the focus of
new regulation requirements is curtailed.
MORTGAGES
In some cases the stakes are higher. In the case of home mortgages,
the financial crisis demonstrated that the failure of a sufficient
volume of retail consumer transactions can have destabilizing effects
on the economy as a whole. This potential is significant in the area of
home mortgages where mortgage credit outstanding represents almost half
of nominal gross domestic product (``GDP''), and at the time of the
financial crisis represented more than sixty percent of nominal GDP.
The Dodd-Frank Act sought to protect consumers and improve the market
for home mortgages, and potentially the market for residential real
estate more broadly, by improving mortgage underwriting standards. It
has taken some time for these changes to be put into place and not all
of them have been fully implemented even now. Accordingly, it is
difficult to assess the overall impact of these reforms on consumers'
access to mortgage credit in developing regulatory policy for the home
mortgage market. Nevertheless, early indications are that these reforms
are materially reducing mortgage originations.
Given the significance of mortgage credit, and housing more
broadly, in the economy, the potential effects of an undue reduction in
mortgage originations on economic growth and employment have to be
considered, as well as individual consumer's access to home mortgage
credit.
UNCERTAINTY
Looking beyond the markets for credit cards and home mortgages
credit, the markets for other consumer financial products and services
are characterized by a higher level of uncertainty on the part of the
providers of those products and services than I have observed before.
This uncertainty appears to arise from the level of reliance by the
CFPB and the Federal bank regulatory agencies on generalized guidance
and enforcement actions to shape these markets and to address perceived
harms to consumers. While financial institutions have long criticized
regulatory initiatives as overly prescriptive, the absence of clarity
can be as constraining as detailed rules, and in some cases more so.
Broadly drawn ``guidance'', whether issued by the CFPB or the Federal
bank regulatory agencies, can, and has, caused financial institutions
to abandon products even though those products were well received by
their customers.
More difficult to measure is the extent to which new product
initiatives are abandoned before they see the light of day out of fear
that they will run afoul of hazily defined regulatory concerns. In
particular the Federal banking agencies broad reliance on reputational
risk is difficult to predict and or anticipate until it appears.
Although banking institutions in particular rely on their reputations
in the market to maintain their ability to raise deposits and fund
themselves in the wholesale markets, in some cases reputational risk
has been used in cases where the link to bank safety and soundness is
not apparent.
Similarly, the labeling of practices as unfair, deceptive, or
abusive in enforcement actions is difficult for financial institutions
to interpret. This difficulty arises both from the vagueness of these
standards themselves and from the generality of the language included
in public enforcement actions. It is simply not possible to read public
enforcement actions and to understand the specific practices that were
led to the enforcement action. Given the complexity of financial
products and services, an enforcement action directed at a specific
term of a product or service, or to specific marketing language, but
that is described in the public action as unfair or deceptive in
connection with the product or service simply does not enable other
providers of similar products or services to understand the specific
regulatory concerns. This uncertainty makes it difficult to determine
how to proceed with current products and services and to determine
whether or how to offer new products or services.
This uncertainty could be reduced if regulators relied more often
on a rule writing process where existing regulations are revised to
address new issues or, if necessary, where new rules are created. The
process of developing specific regulatory text, receiving comments on
that text, and responding to the comments in final rules imposes a
discipline on the regulatory process that increases the likelihood that
the desired goals can be achieved and unintended consequences avoided.
This process also gives providers of consumer products and services a
better understanding of the agency's goals than vaguely worded
enforcement actions and broadly worded guidance provide. This
regulatory process also gives providers lead time to implement new
requirements. This process is far more conducive to the fair,
transparent and competitive markets envisioned by the Dodd-Frank Act
than the apprehensive markets for consumer financial products and
services that the current process is creating.
As the agency with the primary responsibility for writing rules
with respect to consumer financial products and services, the CFPB is
still developing its expertise with the regulatory process. As it gains
experience with this process it should be able to streamline its
information collection process so that providers of consumer financial
products or services are not required to produce unnecessary
information, and so that the CFPB itself can avoid focusing on
collateral issues that do not directly promote the goals that it is
seeking to achieve. The CFPB should also be able to sharpen its focus
on key issues and potential solutions in order to reduce repetitive
clarifications of rules that it does issue.
Thank you for the opportunity to be here today, I would be happy to
respond to any questions.
______
PREPARED STATEMENT OF HILARY O. SHELTON
Director, NAACP Washington Bureau and Senior Vice President for Policy
and Advocacy
September 18, 2014
Good morning, Senator Johnson, Senator Crapo, and esteemed members
of this panel. Thank you so much for inviting me here today to testify
and for soliciting the input of the NAACP on this very important topic.
Founded more than 105 years ago, in February 1909, the National
Association for the Advancement of Colored People, the NAACP, is our
Nation's oldest, largest, and most widely recognized grassroots-based
civil rights organization. We currently have more than 1,200 active
membership units across the Nation, with members in every one of the 50
States.
My name is Hilary Shelton, and I am the Director of the NAACP
Washington Bureau and the Senior Vice President for Policy and
Advocacy. I have served as the Director of the NAACP Washington Bureau,
our Association's Federal legislative and political advocacy arm, for
over 17 years.
INTRODUCTION
Financial empowerment and the economic security of the communities
served and represented by the NAACP has, since our inception, been a
cornerstone of our agenda. ``Economic Sustainability'' continues to be
a priority for the NAACP in that it is one of the five ``game
changers'' (along with criminal justice, education, health, and civic
participation/voting rights) outlined in the most recent NAACP
strategic plan, designed to carry us through our second century in
fighting against racial bias and racial and ethnic inequality. To that
end, in addition to being very active legislatively on issues from
supporting an increase in the Federal minimum wage to opposing
predatory lending of all sorts in our communities, the NAACP currently
has a ``Financial Freedom Center,'' whose purpose is to enhance the
capacity of racial and ethnic minority Americans, and other underserved
groups, through financial economic education; to promote diversity and
inclusion in business hiring, career advancement and procurement; and
to monitor financial banking practices and promote community economic
development.
THE HISTORY AND THE SITUATION TODAY FACING MOST RACIAL AND ETHNIC
MINORITIES
In recent times, the concentration of wealth in fewer and fewer
hands has become an important subject of national debate. In 1982, the
highest-earning 1 percent of families received 10.8 percent of all
pretax income, while the bottom 90 percent received 64.7 percent. Three
decades later, in 2012, the top 1 percent received 22.5 percent of
pretax income, while the bottom 90 percent's share had fallen to 49.6
percent.\1\ For the past 5 years, wages have risen for the wealthiest
Americans while barely floating above inflation for most people.\2\
Furthermore, wealth inequality is even greater than income inequality.
While the highest-earning fifth of U.S. families earned 59.1 percent of
all income, the richest fifth held 88.9 percent of all wealth.\3\
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\1\ Saez, Emmanuel, ``Striking it Richer: The Evolution of Top
Incomes in the United States'' U.C. Berkley, September 3, 2013.
\2\ Clark, Meagan ``Rising U.S. Income Inequality Is Hurting State
Tax Revenues'' Standard & Poor's, September 15, 2014.
\3\ Wolff, Edward N. ``The Asset Price Meltdown and the Wealth of
the Middle Class'' The National Bureau of Economic Research, November
2012.
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Unfortunately, the crisis of the racial wealth divide has still yet
to be adequately discussed. The difference in median household incomes
between white Americans and African Americans has grown from about
$19,000 in 1967 to roughly $27,000 in 2011 (as measured in 2012
dollars). Median African American household income was 59 percent of
median white household income in 2011; yet as recently as 2007, black
income was 63 percent of white income.\4\
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\4\ Desilver, Drew ``Five Facts About Economic Inequality'' Pew
Research Center, January 7, 2014.
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The wealth gap, when combined with the disparate impact of the
recession of 2008, has further caused severe, disproportionate, damage
to the communities served and represented by the NAACP. As was
quantified in a released just this last Monday by Standard & Poor's,
States are struggling to meet the demands of funding programs including
education, highways, and social programs such as Medicaid.\5\ This lack
of State funds most hurts those who can least afford it, neighborhoods
and communities which are still reeling from the recession of 2008.
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\5\ Boak, Josh ``Wealth Gap Hurts State Budgets'' Washington Post,
September 15, 2014, p. A13.
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The recession of 2008 was tough on most Americans, but particularly
and disproportionately rough on racial and ethnic minority communities.
While White Americans made up the majority of the 2.5 million
foreclosures completed between 2007 and 2009--about 56 percent--
minority communities had significantly higher foreclosure rates.
While about 4.5 percent of white borrowers lost their homes to
foreclosure during that period, African American and Latino borrowers
had 7.9 and 7.7 percent foreclosure rates, respectively. That means
that African Americans and Latinos were more than 70 percent more
likely to lose their homes to foreclosure during that period.
Overall, blacks lost about 240,020 homes to foreclosure, while
Latinos lost about 335,950, according to an analysis of government and
industry data on millions of loans issued between 2005 and 2008--the
height of the housing boom.\6\
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\6\ Center for Responsible Lending, ``Foreclosures by Race and
Ethnicity: The Demographics of a Crisis'' June 18, 2010
www.responsiblelending.org/.../foreclosures-by-race-and-
ethnicity.html#sthash.geo75K3a.dpuf.
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So that brings us to today. Too many Americans, and especially
racial and ethnic minority Americans, have lost their homes as well as
their access to affordable and sustainable credit. One of the most
basic, fundamental steps is owning a bank account. It is among the most
basic symbols of financial growth, maturity, security, and
independence. Owning a bank account is a crucial step toward financial
security and success. A bank account not only provides people with a
vehicle for saving, it can help build credit and greater financial
capability. While just over 8 percent of all American homes do not have
a banking account, more than 20 percent of African Americans are
outside of the American banking system.\7\
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\7\ Selah, Makkada B. ``20 Percent of African Americans Too Broke
for Bank Accounts'' Black Enterprise Magazine, September 16, 2014.
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One direct result of being frozen out of the ``traditional''
banking system is more of a reliance on ``nontraditional,'' or
alternative sources of capital. By ``nontraditional,'' I am referring
to check cashers, title lenders, and payday lenders, among others,
which usually lend relatively small amounts of money for the short
term.
The problem with many of these loans is that they end up being
expensive, and even predatory, often trapping the consumer in a cycle
of debt when they are already having difficulties making ends meet.
Check cashers, for example, typically charge up to 4 percent of the
face value of a check--or $20 for a $500 check.\8\ And a typical payday
loan borrower is indebted for more than half of the year with an
average of nine payday loan transactions at annual interest rates over
400 percent.\9\
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\8\ Kim, Anne ``CFED Fact File'', The Corporation for Economic
Development, November 2012.
\9\ Center for Responsible Lending See more at: http://
www.responsiblelending.org/payday-lending/#sthash.6i1AGboi.dpuf.
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THE ROLE OF THE CONSUMER FINANCIAL PROTECTION BUREAU (CFPB)
One key component of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 was the creation of the Consumer Financial
Protection Bureau (CFPB). The NAACP has been a strong and steadfast
supporter of the CFPB since its inception, as it is the only agency
within the Federal Government whose primary charge is the protection of
the American consumer.
Since its inception the CFPB has taken great steps to limit the
potential harm which financial tools and companies can impart on
Americans. Over the past 3 year the CFPB has taken dramatic steps to
halt the financial abuse of American consumers by financial companies.
In many cases, the victims of these abuses are people of low and
moderate income (LMI). Since 80 percent of African American families
fall into this definition, the NAACP has worked closely with and
monitored the impact of the CFPB on the communities served and
represented by the NAACP since its creation over 3 years ago.
In its first 3 years, the CFPB has yielded aggressive, yet at the
same time measured, results. Specifically, looking at the numbers
alone:
$4.6 Billion: Money ordered in relief to consumers by CFPB
enforcement actions.
15 Million: Consumers who will receive relief because of CFPB
enforcement actions.
$150 Million: Money ordered to be paid in civil penalties as a
result of CFPB enforcement actions.
$75 Million: Monetary relief provided to consumers as a result of
CFPB supervisory actions.
775,000: Consumers who will receive remediation because of CFPB
supervisory actions.
400,000: Number of complaints CFPB has received as of July
2014.\10\
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\10\ Consumer Financial Protection Bureau, ``Consumer Financial
Protection Bureau: By the Numbers'' July 21, 2014. http://
files.consumerfinance.gov/f/201407_cfpb_factsheet_by-the-numbers.pdf.
In addition to congratulating the agency and its employees on a job
well done to date, I would be remiss if I did not also give a shout out
and high commendations to the Director of the CFPB, Rich Cordray. Under
Rich Cordray's leadership, the CFPB has grown and it now has a staff of
over 1,350 employees and is one of the most effective Federal agencies
in town.
RECOMENDATIONS
As the CFPB continues to mature and define its role in the
regulatory space, the NAACP hopes that they will take a stronger look
at the structural racism inherent in the provisioning of credit to
people of color and its impact. Higher cost credit, or the lack of any
credit, in the communities of color widens the racial wealth gap and
concentrates African American and Latino families into areas of
concentrated poverty. The NAACP feels that the CFPB, as the only
Federal regulator solely focused on protecting the needs of the
consumer, can play a key role in helping to shrink the unacceptable
wealth divide.
Regarding the availability of credit and the availability of
financial services from both deposit and nonbank lenders there
continues to be seen a disparate lack of access to safe and affordable
credit products in communities of color. The NAACP strongly urges the
CFPB to study this phenomenon and to make recommendation for its
rectification.
Other forms of credit also display sign of structural barriers, as
the CFPB revealed in their analysis of auto lending. In particular, the
prevalence of payday lenders in areas where banks are closing branches
results in a stubbornly high level of un- and under-banked racial and
ethnic minority families. Once these families lose access to
traditional banks their ability to access credit is further
constricted. We need to rid our neighborhoods of predators and stop the
proliferation of abusive predatory lending products that strip, rather
than build, financial health and wealth in our communities. While the
CFPB cannot implement a nation-wide cap on interest rates (we strongly
support the legislation introduced by Senator Cardin and Congressman
Cartwright, S. 673 / H.R. 5130, which mandates an interest rate of no
more than 36 percent APR), the Bureau can take affirmative steps to
curb abusive lending or at least expose it.
In short, the CFPB has an obligation to bring meaningful reform to
the marketplace. At the same time, the CFPB must take steps to allow
legitimate, nonexploitative, nonpredatory credit to remain viable and
readily available in every community. To that end, we urge that any
rule addressing payday, car title or any other short-term lending
product accomplish the following:
1. Requires the lender to determine the borrower's ability to repay
the loan, including consideration of income and expenses;
2. Does not sanction any series of back-to-back, consecutive, or
repeat loans;
3. Establishes an outer limit on length of indebtedness that is at
least as short as the FDIC's 2005 guidelines--90 days in a 12-
month period;
4. Restricts lenders from requiring a post-dated check or electronic
access to a borrower's checking account as a condition of
extending credit; and
5. Transparency of fees, penalties, additional interest rates, and
pay-off costs.
Another consequence endured by families who lack access to
traditional bank branches and bank accounts is the reduction of their
credit profile. Credit scoring favors consumers who have access to
traditional forms of credit, such as auto and home loans, credit cards,
and personal loans. Thus, once again, racial and ethnic minorities are
at a disadvantage when credit scoring and credit reports are
increasingly used from everything from renting an apartment to getting
a job.
Finally, the NAACP pledges to continue to work with the CFPB and
any other entity to ensure that credit is accessible and affordable to
all Americans, regardless of their race, ethnicity, gender, age, or any
other unique characteristic or where they live.