[Senate Hearing 110-484]
[From the U.S. Government Publishing Office]
S. Hrg. 110-484
PREDATORY LENDING IN INDIAN COUNTRY
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HEARING
before the
COMMITTEE ON INDIAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JUNE 5, 2008
__________
Printed for the use of the Committee on Indian Affairs
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COMMITTEE ON INDIAN AFFAIRS
BYRON L. DORGAN, North Dakota, Chairman
LISA MURKOWSKI, Alaska, Vice Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
KENT CONRAD, North Dakota TOM COBURN, M.D., Oklahoma
DANIEL K. AKAKA, Hawaii JOHN BARRASSO, Wyoming
TIM JOHNSON, South Dakota PETE V. DOMENICI, New Mexico
MARIA CANTWELL, Washington GORDON H. SMITH, Oregon
CLAIRE McCASKILL, Missouri RICHARD BURR, North Carolina
JON TESTER, Montana
Allison C. Binney, Majority Staff Director and Chief Counsel
David A. Mullon Jr., Minority Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on June 5, 2008..................................... 1
Statement of Senator Dorgan...................................... 1
Statement of Senator Tester...................................... 4
Witnesses
Allen, Hon. W. Ron, Secretary, National Congress of American
Indians; Chairman, Jamestown S'Klallam Tribe................... 17
Prepared statement........................................... 20
Barkley, Jr., John, Vice Chairman, Umatilla Tribal Water
Commission; Enrolled Cayuse Tribal Member, Confederated Tribes
of the Umatilla Indian Reservation (CTUIR)..................... 34
Prepared statement........................................... 35
Brokke, Darwin, President/CEO, Citizens Community Credit Union... 27
Prepared statement........................................... 29
DeCoteau, Jerilyn, Director of Policy, First Nations Development
Institute...................................................... 5
Prepared statement with attachments.......................... 8
Fulmer, Jamie, Director of Public Affairs, Advance America, Cash
Advance Centers, Inc.; Representative, Community Financial
Services Association........................................... 36
Prepared statement with attachments.......................... 39
Gambrell, Donna J., Director, Community Development Financial
Institutions Fund, U.S. Department of the Treasury............. 22
Prepared statement........................................... 23
Appendix
Cirillo, Patricia, Ph.D., President, Cypress Research Group,
prepared statement............................................. 61
Hall, Tex G., Former Chairman, Three Affiliated Tribes--Mandan,
Hidatsa, and Arikara; Former President, National Congress of
American Indians, prepared statement........................... 67
Jurrius, John P., President/CEO, Native American Resource
Partners, LLC, prepared statement.............................. 69
National Congress of American Indians (NCAI), prepared statement. 74
Shuravloff, Marty, Executive Director, Kodiak Island Housing
Authority, prepared statement on behalf of the National
American Indian Housing Council (NAIHC)........................ 72
Umatilla Reservation Housing Authority Staff, prepared statement. 65
PREDATORY LENDING IN INDIAN COUNTRY
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Thursday, June 5, 2008
U.S. Senate,
Committee on Indian Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m. in room
562, Dirksen Senate Office Building, Hon. Byron L. Dorgan,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
The Chairman. We will call the hearing to order.
This is a hearing of the Indian Affairs Committee. The
hearing today is on the subject of predatory lending in Indian
Country.
As I begin the hearing, I want to mention that my
colleague, Senator Murkowski, the Vice Chairman, is at another
hearing and I believe will be here later in the morning.
I wanted to mention as well that I will be contacting other
members of the Indian Affairs Committee in the coming days. I
spoke to Senator Murkowski last evening about a subject that
this Committee has dealt with previously, and that is what is
called the Indian Affairs Jails Report. In February of 2006,
the Bureau of Indian Affairs contracted with Shubnum Strategic
Management Applications to assess the conditions and the needs
of tribal jails and to recommend improvements.
Now, I know from first-hand experience and others know that
the jails and the detention facilities on Indian reservations
are in desperate condition and in some cases shameful
conditions. We are working, on this Committee, to produce a law
enforcement bill to try to deal with law enforcement issues on
Indian reservations. That includes the question of how do you
deal with detention facilities.
I mentioned in February of 2006 the Bureau of Indian
Affairs contracted with Shubnum Strategic Management
Applications to do a review. In November of 2006, Shubnum
Strategic Management Applications issued a first interim
report. In March of 2007, that is a little over a year ago, the
associate director of the BIA testified before the Federal
Prison Rape Elimination Commission that the report ``would be
available in a month or two months at the most.'' That was
March of last year.
In August of last year, the Director of the Office of
Justice Services, Pat Ragsdale, met with our Committee staff,
indicated the report would be released in December 2007. In
September 2007, Mr. Ragsdale again speaks to our staff and says
the jails report will be issued January 2008.
In August and September 2007, the Shubnum Company issues a
second and third interim reports, containing recommendations
and evaluations. In December 2007, the consulting company
issues the fourth interim report, containing enumerated costs
associated with recommendations and plans for replacement of
jails.
On March 1st, I sent a letter to the Secretary of Interior
and to Assistant Secretary Artman. I also then telephoned
Secretary Kempthorne asking for a copy of the jails report. The
taxpayer has paid for it, after all. On March 3rd, the request
for copies of the report is denied by the Interior Department.
But the Assistant Secretary for Indian Affairs offers to brief
our Committee staff.
The BIA informed us that the company gave Interior seven
bound copies of the 1,000 plus page final report. On March 4th,
the Interior officials gave us a response to my letter. They
indicated the report will be released in early May, after the
Secretary has been briefed and after the Office of Management
and Budget reviews it.
In April, that is two months ago, Secretary Kempthorne is
briefed on the final jails report. In May, the Interior
Department informs our Committee staff that the Office of
Management and Budget has recalled all copies of the final
report, returned them to the company to be stamped draft and
place them in binders. The Committee staff has been given no
time frame for when a copy will be given to the Committee.
On May 23rd, the report was returned to the Office of
Management and Budget, which then embargoes the report. We
understand this embargo extends to all people outside the
Office of Management and Budget, and the only copies of the
report are at the Office of Management and Budget.
I tell you all of this because we are working on law
enforcement issues, on a piece of legislation. We have worked
long and hard on it. We have had meetings all around the
Country. Part and parcel of developing an approach to law
enforcement improvement on Indian reservations is dealing with
detention facilities and jails. The American taxpayer has paid
a fair amount of money now to a company through the Department
of Interior and the Bureau of Indian Affairs to do a consulting
report to tell us the condition of jails on Indian
reservations. We are now told that report is not available to
this Committee, after having been promised last year on four
occasions that it would be made available to this Committee.
I indicated to Senator Murkowski last evening that it is my
intention to present a subpoena to the Committee for a vote and
issue a subpoena to the Department of Interior. I expect
perhaps to do that at the next business meeting. But we will
not allow this stuff to continue.
The fact is, the taxpayers have paid for this report. It is
outrageous and arrogant of the BIA and the Interior Department
to withhold it. The report is completed. If the Office of
Management and Budget doesn't like it, that is tough luck, in
my judgment. The American taxpayers paid the bill and this
Committee is going to get the product. We will get it if we
have to subpoena it, and I am perfectly happy to issue that
subpoena and will do so at the earliest opportunity.
Let me, with that high note, indicate the purpose of this
hearing, of course, is quite different. But I did want to state
at the start what my intention is with respect to that report.
Today, the Committee will examine the problem of predatory
lending in Indian Country. The problem of predatory lending is
not just limited to Indian Country. It is not unique to Indian
communities. But the lack of financial services available on
Indian lands makes tribal communities particularly vulnerable
to the practice of predatory lending. The majority of Indian
reservations, the people who live on those reservations, in
many cases, have to travel at least 30 miles to reach an ATM or
a branch bank. In fact, only 14 percent of Indian communities
have some type of bank located in the community. And only 7
percent have an open access to an ATM.
The issue of predatory lending in Indian Country was
brought to this Committee's attention and a request was made
that we do some investigating by Senator Domenici, some months
ago. He was concerned about the unusually large number of
payday lenders located in Gallup, New Mexico, a border town on
the Navajo Nation reservation. In Gallup, there was one payday
lender for every 500 residents, and 70 percent of the customers
for these payday lenders were Native American.
We have heard many reports from constituents about the
issue of payday lending. I don't attempt or would not want to
tarnish all of those who are involved in this kind of lending.
Some of it is very necessary, some are very responsible. I
understand that.
I also understand that there are predators in this area.
That is why I use the term predatory lending. One woman on the
Chippewa Indian Reservation at Turtle Mountain said, ``A lot of
people are being terrorized and threatened by payday lenders
located off the reservation.'' She told a story of her friend
listing her as a reference when her friend took out the payday
loan. When the friend was not able to pay back the payday loan,
the lender began calling the woman and threatening her saying,
``We're going to break some legs.'' Well, that is way outside
the norm. But there are some bad actors here. We ought to find
ways to get bad actors off the stage.
She said they are attaching personal identification
numbers, debit cards, and food stamp cards of tribal members in
order to pay off loans. Again, I realize not all payday
lenders, in fact, most would not be this aggressive. But the
alleged behavior of abusive lenders, it seems to me, suggests
we ought to take a look at it.
Many people are unwilling to talk about the types of loans,
because it causes stress and debt and embarrassment. We know
there is a problem. The question is, what is the problem, how
do we address it, what kinds of information can we develop to
determine how this affects, in this case, Indian reservations.
As you know, the Congress has already dealt with this in law
with respect to military bases.
So the Committee will hear from a number of witnesses about
solutions. There is a growing movement to provide traditional
financial services on Indian reservations. I think that is good
news. Some initiatives are developing these institutions in
coordination with increased financial education as well. That
also is good news.
I want to thank the witnesses whom we have invited here
today to come and tell us about these issues. Before I turn to
the witnesses, I want to turn to my colleague, Senator Tester.
STATEMENT OF HON. JON TESTER,
U.S. SENATOR FROM MONTANA
Senator Tester. Thank you, Chairman Dorgan. I apologize for
being late. I thought there for a second maybe we changed the
topic today.
[Laughter.]
Senator Tester. I am glad we are back on. And by the way, I
support you in the endeavors that you talked about initially.
I also want to thank you for holding this meeting. It is a
very, very important one, and I thank the panelists for being
here today. I apologize, I am going to have to skip out on you,
because I have a conflict with this meeting.
But make no mistake about it, money flowing into Indian
Country and Indian communities is vital, whether it comes from
the Government or whether it comes from individual Native
Americans, or whether it comes from banking institutions. For
economic development to work and to move forward, money is a
necessary component.
One of the most important goals for work on this Committee
should be helping our Native American friends achieve economic
self-sufficiency. While providing vigilant oversight, the
Federal Government should give American Indians the tools the
need to succeed and then get out of the way. Unfortunately,
predatory lending practices are working against that goal.
Predatory lending is a nationwide problem. It is a critically
important issue for American Indians. The very survival of
tribes depends upon the development of a comprehensive strategy
for economic development and self-sufficiency. Many Native
American people are poor, and when their few assets are taken
from them, the dream of home ownership, of building stronger
communities, then their dream of self-sufficiency is beyond
hope.
At a time when the economy is stagnant and the price of
everything from food to gas to higher education is on the rise,
predatory lending, sub-prime mortgages and the like can be a
dagger in the heart of efforts to promote economic development
in American Indian communities. As I have seen in Montana,
predatory lending all too often traps Indians in a cycle of
poverty that culminates in the loss of assets through
bankruptcy and foreclosure. There is no magic bullet to solving
this problem created by predatory lending. Individual tribes,
the lending industry, States, the Federal Government, all have
a role to play. And at every level, financial education is the
first line of defense and should include basic instruction
about money management, credit repair, savings and investment.
This tide is starting to turn. I know the State
legislatures across this Country are considering bills aimed at
curbing consumer abuses from sub-prime mortgages, title and
payday loans and others. I appreciate the State of Montana for
leading the way on these issues.
Many lenders are stepping up as well. The good ones have
adopted best practices and are striving to operate by them.
Tribes are also working with non-profit organizations and
industry to educate and protect their members. That good work
must continue.
Although the Federal Government does not currently regulate
non-traditional lenders, that does not mean we don't have a
role to play. It is critical that the Government maintain its
trust responsibilities by holding Congressional oversight
hearings, such as this one, encouraging agencies to conduct
outreach and financial education, and partnering with
stakeholders to ensure that we are accomplishing our joint
goal: the goal of tribal self-sufficiency and prosperity.
Again, I want to thank the Chairman for holding this
hearing, and again, I apologize for having to leave and not
being able to ask some questions, because there are plenty of
questions to ask. Thank you very much.
The Chairman. Senator Tester, thank you very much.
We have six witnesses today, and I would like to tell all
of the witnesses that your entire statement will be made a part
of the permanent record. We would like each of you to summarize
your statements.
We will begin with Ms. Jerilyn DeCoteau, Director of
Policy, First Nations Institute in Longmont, Colorado. Thank
you very much for being here. Why don't you proceed?
STATEMENT OF JERILYN DECOTEAU, DIRECTOR OF POLICY, FIRST
NATIONS DEVELOPMENT INSTITUTE
Ms. DeCoteau. I will, thank you.
Thank you for inviting First Nations Development Institute
to testify here today on this important issue of predatory
lending practices and their effects on Indian people and Indian
Country. First Nations is a 27 year old non-profit that works
with tribes and Indian organizations across the Country to
restore Native control of assets and to prevent the stripping
of assets in Native communities.
For Indians, as you have noted yourself, predatory lending
results in the bleeding away of crucial assets. These
communities already lack the basic economic structures that
other communities take for granted. They are struggling to meet
the Federal and tribal goals of economic stability and self-
sufficiency.
First Nations' study, Borrowing Trouble, takes the first
close look at the effect of payday loans and refund
anticipation loans and similar loan products. Our findings show
that predatory lending is, in fact, a significant problem for
Native Americans. While our report contains good data, perhaps
the best way to illustrate the impact on Indians and Indian
communities is through the personal stories that have been told
to us.
I will tell a couple. I am actually from North Dakota, I am
a member of the Turtle Mountain Chippewa Tribe. So I want to
share a couple of personal stories, because they involve
members of my family. For example, the first one I am going to
tell you about is about a woman who uses refund anticipation
loans against their tax refunds, known as RALs. She has been
doing this for eight years. I called her and asked her about
it, I said, okay, honey, you have to tell me about this. She
said, well, I have been doing it for eight years, and it costs
her $150 plus the tax preparation fee to do this. Her refunds
are averaging about $1,800 to $2,000.
She said the tax preparer comes to the reservation two days
a week during tax season and sets up an office there, and
offers a RAL every time. Because that is what I said, how did
you know about RALs? I said, did you ask or were you offered?
She said, well, he offers it every time to everybody. So I
think maybe he brought it up. She said RALs are really the norm
in Indian communities, everybody does it, everybody thinks it
is the way to get your taxes. Lots of times people don't pay
their bills in December to have more money for Christmas, so
they owe double in January and February and they take their pay
stub from their last paycheck of the year and they can get a
loan off of that as well. They do it as soon as they get their
W-2s.
They don't understand, apparently, that if they use an e-
filing, they can get their tax refund probably in less than a
week. I understand that the IRS is working on getting them back
even sooner than that.
Another story that I want to tell you which is not so much
about payday or RALs, but just about high interest rates in
general, and that is, well, I should tell you, that woman was
my daughter. Both of my daughters, I have two daughters who
live on the reservation, and they both got car loans recently,
one at 14 percent, one at 18 percent. Both my daughters are
professional people, they have had long-time jobs. One got
behind on student loans and doesn't use banking services at
all, so really has no other credit record except that. The
other got into some credit card trouble and is paying her way
out of that and has been very stable for the last couple of
years. But these two loans that were made just in the last few
months were the best that they could do.
And it is really not out of the norm. I have a cousin who
is a lawyer with the Department of Justice in Michigan. He
wanted to buy a car for his son on the reservation, and he went
to the local bank when he was home, the off-reservation banks.
He went to two of them. He was offered loans of 13 to 18
percent. When he said, gee, why? He said my credit score is
very high. I have been employed for 20 years. They told him,
well, that is just the way it is.
He said, do you offer a different rate for people off the
reservation? They said yes. One of the banks explained that the
reason they do that is that they might be subject to tribal
court jurisdiction and tribal laws. So he reported that
incident. And he said, you know, it would be a relatively
simple thing to set up a study to find out whether or not
people are being treated differently in those institutions.
So those are a couple of stories from Turtle Mountain.
There are a couple more. One woman who earned minimum wage
borrowed $400, ended up owing $1,400, and the lender took her
to court. She had talked to the lender about some alternative
repayment provisions and they didn't work with her. So she
ended up owing $2,200, including court fees. So the woman I
spoke to is the woman who bailed her out. This woman also
bailed out her son, who is 21 years old. He was about $600 in
debt and panicking and being threatened with court, she helped
her son out. She thought that young people were being targeted
because they were less savvy about these things. She said, it
is not surprising to her that people don't want to share their
stories, because they are embarrassed. They feel ashamed and
they don't want to tell people their money problems.
A couple of others related to home purchase. Of course,
homes are the basic building block of asset wealth in our
society. One tribal member purchased a home with a loan from
his housing authority, but then he took out another loan from a
lender with high rates. He fell behind and he lost the home.
Another tribal member, and these are not North Dakota folks, by
the way, these are from our study, another tribal member who
owned a home outright, after 30 years of payments, got a home
improvement loan from an unscrupulous lender and eventually
lost his home as well.
Trailer homes present a similar kind of problem. One woman
got a trailer home with a 29 percent interest rate, even though
she had good credit and a good job. Then she decided she wanted
to sell the trailer and buy a house. She wasn't able to do
that, because what she found was that she was upside down on a
loan, as they put it. She owed $60,000 on a trailer that was
worth a little more than $15,000.
The Chairman. You are saying that she had an interest rate
of 29 percent on a loan to buy a trailer home?
Ms. DeCoteau. Yes.
The Chairman. From what kind of lender?
Ms. DeCoteau. You know, I don't remember that part. But I
don't think those rates are uncommon.
The Chairman. Let me ask you to summarize.
Ms. DeCoteau. Sure. So those stories are anecdotal, but we
believe they illustrate the problems created by usurious
lending in Native American communities. As one Indian man put
it, when people like me go looking for a loan, our only friends
are the predatory lenders, and that is because of lack of
access and so forth.
RALs are a huge problem in Native communities. The use of
RALs is disproportionately high. The four counties with the
highest RAL usage are Native communities in South and North
Dakota. In Shannon County, South Dakota, part of the Pine Ridge
Reservation, for example, 52 percent of the taxpayers eligible
for Federal tax refunds received a RAL in 2004.
So lending in an already under-capitalized Indian community
can sabotage the Federal policy of self-sufficiency for tribes;
and tribes lacking regulatory control and enforcement authority
over these off-reservation institutions are left with few
options for safeguarding the economic security of their
members.
I would point out, you already mentioned, the United States
Department of Justice has called loans with over 36 percent APR
predatory when they are made to military personnel. It is not
different with Indians. It applies equally. There is a Federal
interest in protecting military personnel, but there is also a
Federal interest in protecting Indian people and their assets
and communities. Federal assistance in finding solutions is
badly needed.
I won't go into all of our recommendations at this time,
because I wanted to highlight the stories. I would be happy to
do that later if the Committee wants to hear some of those
stories.
Let me just finish this way. This is the first time Native
Americans have been given a voice on how predatory lending
affects them and their communities, and to show what works to
prevent unfair lending practices. This is the first time anyone
has collected data to tell their side of the story, and the
first time that anyone has asked to hear those stories.
On behalf of First Nations, thank you for allowing us to
share what we have learned. Thank you.
[The prepared statement of Ms. DeCoteau follows:]
Prepared Statement of Jerilyn Decoteau, Director of Policy, First
Nations Development Institute
Chairman Dorgan, thank you for inviting First Nations Development
Institute to testify here today on a matter of great importance for
Indian Country and for the nation as a whole--that of lenders who prey
on vulnerable borrowers, resulting in loss of individual assets and
economic security. For Indians, predatory lending results in the
bleeding away of crucial assets from Native American communities. These
communities already lack the basic economic structures that other
communities take for granted and are struggling to meet the federal and
tribal goal of economic stability and self-sufficiency.
First Nations Development Institute (FNDI) is a 27-year-old
nonprofit headquartered in Longmont, Colorado with offices in
Fredericksburg, Virginia, whose work is with tribes and Native
communities across Indian Country.
FNDI's mission is to restore Native American control and
culturally-compatible stewardship of the assets they own--be they land,
human potential, cultural heritage, or natural resources--and to
establish new assets to ensure the long-term vitality of Native
communities. FNDI does its work using a three-pronged strategy of
educating grassroots practitioners, advocating systematic change, and
capitalizing Indian communities.
FNDI's core belief is that ``when armed with appropriate resources,
Native Americans have the capacity and ingenuity to ensure the
sustainable economic, spiritual, and cultural well being of their
communities.''
Directly relevant to the topic of this hearing is FNDI's recent
report, Borrowing Trouble: Predatory Lending in Native American
Communities. The report is the outcome of a research study conducted by
FNDI under a grant from the Annie E. Casey Foundation. Our report
provides an analysis of survey data collected from attendees at the
National American Indian Housing Council meeting in May 2007; survey
data collected from Native users of selected Voluntary Income Tax
Assistance sites; geo-coded data of payday lenders, bank branches, and
Native community development finance institutions; and a national data
set of home mortgage loans. The report also presents five case studies
of promising practices and concludes by offering concrete suggestions
about the steps Native nations can take to curb the impact of predatory
lending on their citizens.
The purpose of the study was to produce original research on the
extent of the problem of predatory lending in Native American
communities and to document local solutions currently being practiced
by tribal housing authorities and tribal governments. A predatory loan
is commonly understood to be an unsuitable loan designed to exploit
vulnerable and unsophisticated borrowers. Predatory loans may have
inappropriately high interest rates or fees or terms and conditions
that trap borrowers; often, these conditions are not well explained to
borrowers. When borrowers fall prey to these practices, they often
cannot afford to repay the loans, and end up in foreclosure,
bankruptcy, or other financial hardships. We wanted to understand the
effects of predatory lending on Native communities and collect data on
payday loans, pawnshop transactions stores, car title loans, Refund
Anticipation Loans, and mortgage loans with high interest rates and
hidden fees.
Predatory lending is a nationwide problem, but for Indian tribes
the bleeding of assets away from Native communities has consequences of
a greater dimension. The very survival of tribes is linked to securing
comprehensive strategies for economic improvement. Many Indian people
are poor, and when even paychecks are taken from them, the dream of
homeownership and building stronger communities is beyond hope.
We are pleased to share with you some of what we have learned about
lending industry practices and the special problems they presents to
members of Native communities. We are also pleased to share our policy
recommendations, based largely on best practices in the case studies
conducted on five Native programs. These best practices provide
alternatives to predatory loans, help build individual assets, and in
turn help tribal communities develop stronger, more secure economies.
Our written statement expands on our oral testimony addressing the
issues of concern to the Committee:
I. Identifying the problem: We will discuss the findings of our
study and provide examples of predatory lending through
personal stories told to us.
II. Addressing the problem: We will describe tribal practices
and programs that are having good results in combating the
effects of predatory lending.
III. Policy recommendations: We will recommend policies and
programs that will promote asset building and curb predatory
lending practices that affect Native American communities.
I. Identifying the Problem: Predatory Lenders Make it Difficult for
Individuals to Build Assets, to Become Mortgage Ready, and to
Move Out of the Cycle of Debt.
History is replete with examples of predatory practices involving
Indian assets, from theft of land to gross underpayment for the lease
or sale of natural resources. Now predators are reaching directly into
Indians' pockets for their paychecks and tax refunds. This is in large
part because vulnerable Indians have no other assets to steal.
Payday Lenders
Many Indians who use payday lenders lack access to mainstream
banking services, either because there are no such institutions nearby,
or because borrowers lack collateral (for example, no home equity),
have poor credit, or no credit history. To get over a financial crisis,
such as a car repair, medical bills, a missed mortgage payment, or a
heating bill in winter, many people have no alternative but to turn to
lenders who can dictate the terms. This fairly describes the situation
for too many in Indian communities, where wages are typically low. For
example, the median household income for American Indians and Alaskan
Natives is $33,132; the poverty rate is 23 percent. By comparison, the
median income for whites is $46,971 and the overall poverty rate is
12.7 percent. Recent research by the Harvard Project on American Indian
Economic Development suggests that this contrast is even more stark for
reservation residents--in 2000, the per capita income for residents of
Indian reservations was $7,942 as compared to $21,587 for the total
United States.
The number of payday lenders has exploded in the last 20 years. In
the early 1990s there were around 300 payday lending outlets in the
United States; recently the count was higher than 22,000. For
comparison purposes, there are 13,300 McDonald's restaurants and 7,087
company-operated Starbucks according to those chains' web sites. In New
Mexico, a state that has relatively lax regulation of payday lenders,
there are 4 payday lenders for every McDonald's.
The increase has been due to a number of factors, including
deregulation of the lending industry in the 1980s and 1990s. Protective
measures such as ``truth in lending'' have not been effective in
curbing abusive lending practices. Data from the industry itself
suggests that the average payday loan borrower is low-income and
minority: a borrower is more likely to be Latino or African American, a
renter, and have a median income lower than the U.S. average.
The Center for Responsible Lending reported in 2006 that most
payday loans cost $15-$30 per $100 for a two week term, resulting in
effective annual rates of 390 to 780 percent interest. The typical
payday borrower rolls his loan over several times and eventually pays
back $793 for an initial $325 loan. Ninety percent of the revenue
generated in the payday-lending industry comes from borrowers who are
trapped in a cycle of payday loan debt, or those who take five or more
loans a year. Fees play a key role--the Center for Responsible lending
estimated that the industry brings in $4.6 billion in fees per year.
The total impact on the poor and effect on the economy has been
quantified at more than $8 billion a year.
In their editorial ``Beyond Payday Loans'' in the Wall Street
Journal (Jan. 24, 2008), President Clinton and California Governor
Arnold Schwarzenegger said, ``Imagine the economic and social benefits
of putting more than $8 billion in the hands of low- and middle-income
Americans. That is the amount millions of people now spend each year at
check-chasing outlets, payday lenders and pawnshops on basic financial
services that most Americans receive for free--or very little cost--at
their local bank or credit union.'' According to the Report of the
Native American Lending Study, most Native communities do not have
access to local banks and very few have access to credit unions. This
makes them easy prey.
According to 101 survey respondents at the April 2008 National
Indian Gaming Association Trade Show and Convention, predatory lending
is a significant concern across Indian Country: 73 percent indicated
that they ``Strongly Agree'' or ``Agree'' with the statement that
predatory lending is a problem in their community (38 percent of
respondents were elected tribal officials). This corroborates the
results from 140 respondents to a survey at the annual National
American Indian Housing Council (NAIHC) meeting held in May 2007.
Seventy-three percent of the respondents to that survey also reported
that predatory lending was either ``a big problem'' or ``somewhat of a
problem'' in their communities.
Respondents to the NAIHC survey represented over 67 tribes in 28
states. Their insights are valuable because tribal housing
professionals are uniquely placed to observe and understand the impact
of predatory lending practices in their communities. They assess
clients' eligibility for housing assistance, provide advice about
mortgage access, and often offer financial education and credit repair
services; their perceptions of predation are based on these
interactions.
When asked about specific predatory practices, 67 percent of
respondents to the NAIHC survey identified payday loans as either
``somewhat of a problem'' or ``a big problem.'' Thirty-three percent of
respondents stated these loans are a problem because a lot of people
have them, and 63 percent stated that the interest rates on these loans
are too high. Sixty-two percent responded that they feel that payday
loans prey on vulnerable people. Significantly--and perhaps to be
expected--the most common reasons respondents cited for clients falling
prey to predatory lenders and products included a generic need to get
access to cash and the more specific need for money to pay bills.
Drawing upon geo-coded data of payday lenders (provided by Dr.
Stephen Graves at the California State University--Northridge who has
identified a pattern of predatory lending in relation to military
bases) we produced several maps of the location of payday lenders in
relation to several Indian reservations (see maps of South Dakota and
Gallup, New Mexico at the end of this testimony). The maps drive home
the point that American Indians living on or near tribal lands have
nearly as many payday lending choices (red dots) as bank branch choices
(green dots). Our map of the Gallup, New Mexico area demonstrates that
citizens in that community, 75 percent of whom are Native American,
have nearly twice as many payday lenders than banks to do business
with.
South Dakota provides an interesting example. On November 26, 2007,
The Rapid City Journal observed, ``Rapid City, with its proximity to
Ellsworth AFB [Air Force Base] and its growing Native American
population, is particularly vulnerable to the payday industry.
Pennington County has just 12 percent of the state's population, but it
contains almost one quarter of its payday lending operations.'' As many
as one in five members of the armed forces took out a payday loan in
2005, a Pentagon report said last year, contributing to rising debt
levels that interfere with troop deployment and service members'
security clearances. South Dakota eliminated usury laws in 1980 as a
means of attracting financial services businesses. As compared to other
states, it now has the highest number of banks per capita and the
second highest number of payday lenders.
Given the strong service orientation of payday lenders and their
allied businesses as compared to that of banks, and given many
reservation residents' limited experience with banks, ready access to
payday lenders has translated to predation and escalating debt for
numerous Native consumers. One participant in a breakout session on
asset building at the National Congress of American Indians 2007
midyear conference in Anchorage, Alaska put this access and experience
linkage succinctly: ``When people like me go and look for a loan, our
only friends are the predatory lenders.''
Refund Anticipation Loans (RALs)
Loans against tax refunds are another common form of lending that
is receiving increasing scrutiny. These loans are appropriately termed
refund anticipation loans, or RALs, but they are perhaps best (but
inaccurately) known as ``rapid refunds.'' Those taking out RALs pay
large fees to receive an immediate payment by taking a loan against
their tax refund--in many cases receiving their money only a few weeks
earlier than they would have otherwise. This can result in an effective
annualized interest rate of anywhere from 70-700 percent, depending on
the size of the tax refund. Research has shown that RALs are heavily
marketed among low-income populations, especially those that qualify
for the Earned Income Tax Credit (EITC). Our research suggests that
many people in Native communities are not aware that they could have
their taxes prepared free of charge, or that they could access the EITC
without paying for tax preparation.
Sixty-eight percent of respondents to the survey administered at
the National American Indian Housing Council (NAIHC) meeting identified
loans against tax refunds as ``somewhat of a problem'' or ``a big
problem.'' Forty-three percent of respondents stated that these loans
are a problem because a lot of people have them, and 53 percent believe
that the interest rate is too high. Fifty-five percent of respondents
stated that they believe these loans are a problem because they prey on
vulnerable people.
Data is available at the county level regarding the usage of Refund
Anticipation Loans. An analysis of the top ten states with the largest
American Indian/Alaska Native population indicates that among the
counties with 50 percent or more American Indian/Alaska Native
population (usually indicating a reservation), usage of Refund
Anticipation Loans was nearly 4 four times more likely than among non-
Native majority counties. Over 28,000 people in these Native-majority
counties used a RAL in 2005, amounting to a total cost of approximately
$6,888,000 paid for the RAL service.
In early 2007, the Gannett News Service analyzed data from the IRS
(originally obtained by the National Consumer Law Center) and ranked
the counties in which the take up of these loans was the greatest. The
top four counties on the list are ``Native counties'' in South Dakota
and North Dakota--counties where land is largely reservation land and
at least 80 percent of the population identifies as Native.
In Shannon County, SD, part of the Pine Ridge Reservation, 62
percent of taxpayers eligible for federal tax refunds received a refund
anticipation loan for the 2004 tax year. In Todd County, SD (where the
Rosebud Reservation is located), Buffalo County, SD (where the Crow
Creek Indian Reservation is located), and Sioux County, ND (where the
Standing Rock Reservation is located), the percentages were 56 percent,
51 percent, and 49 percent respectively.
The cost of this activity is substantial. Looking at the 2005 tax
year (taxes filed in 2006), the National Consumer Law Center estimated
the annualized interest rate for a loan covering the average refund
(about $2,150) at 178 percent--or a $100 cost in addition to the fee
for tax preparation (which averaged $146).
The Kathryn M. Buder Center for American Indian Studies and the
Center for Social Development at Washington University in St. Louis
calculated comparable costs for the 2005 tax year among Native clients
of Volunteer Income Tax Assistance (VITA) sites. Some 600 of the 2,300
Native clients who were surveyed during the 2007 tax season reported
using a paid tax preparer in the previous tax year. Over half of those
filers accepted a RAL. On average, those accepting a RAL paid $189 for
tax preparation services, as compared to $121 for those who did not.
Volunteer Income Tax Assistance (VITA) sites in Native communities
have been effective in reducing the use of paid tax preparers who often
charge fees and offer clients Refund Anticipation Loans. The Menominee
housing authority initiated a VITA site for the Menominee reservation
when they found out that Menominee County, whose boundaries are the
same as the reservation, had the highest usage of Refund Anticipation
Loans in the state in 2002 (the top four cities were also on Wisconsin
Indian reservations). The VITA site on the Menominee reservation
processed over $560,000 of federal refunds in 2007, an increase of 23
percent from the previous year. A total of 439 returns were processed
free of charge, potentially saving over $120,725 in preparer fees for
the community that year.
Evidence of Other Predatory Lending Practices
In our research report Borrowing Trouble: Predatory Lending in
Native American Communities we identified several other predatory
lending practices that are affecting Native communities. Fifty percent
of respondents to the survey administered at the National American
Indian Housing Council (NAIHC) meeting identified car title loans as
``somewhat of a problem'' or ``a big problem.'' Fifty-four percent
identified mortgage loans as a ``somewhat of a problem'' or ``a big
problem,'' and fifty-eight percent identified pawn shop transactions as
``somewhat of a problem'' or ``a big problem.''
Due to the presence of trust land on Indian reservations and the
difficulty in getting private mortgages, abusive mortgage lending may
be less of a problem on Indian reservations than in urban areas.
However, data in our research report demonstrates that nationwide,
between 2002 and 2005, American Indians borrowed from lenders engaged
in the subprime mortgage market at a rate disproportionate to that of
non-Indians. Comparing the percentages of loans made by high-cost
lenders to American Indians and Whites, we found that Natives were
engaged with the high-cost market more than twice as often as Whites
(disparity ratios in the range 2.06:1 to 2.32:1). This suggests that
nationwide, Native borrowers remain more at risk of the negative
outcomes associated with subprime lending than non-Natives.
The Cost of Predatory Lending in Native Communities
The report Borrowing Trouble: Predatory Lending in Native American
Communities provides case study data on the impact of abusive lending
practices on Native communities (and therefore Native economies). Our
case study research included interviews with several key informants who
work in economic development organizations and coordinate asset-
building programs. In all five of our case study sites, economic
development practitioners identified predatory lending as a problem
that strips economic resources from economically stressed families. One
practitioner put it this way:
First and foremost it affects the financial security of the
family. Many of our families are just one minor emergency away
from extreme financial hardship. This in turn affects family
relations--stress, divorce, bankruptcy, child welfare. The
extreme cost of predatory lending dramatically decreases living
standards (eventually, if not immediately). The aggressive
nature of predatory lenders encourages poor financial
management practices, which make this a perpetuating cycle.
Many of our clients come to us in extreme emergencies regarding
foreclosure, utility cutoff, or repossession because nine out
of ten times they have been making their predatory loan
payments and foregoing essential payments--the predatory
lenders are such aggressive collectors (and many times not
ethical or legal) that families forgo making shelter, utility,
and transportation payments just to satisfy the predatory
lender. High fees lower the standard of living and drain money
from the general economy, particularly with non-local predatory
lenders. The financial stress involved for families borrowing
from predatory lenders also negatively affects workplace
productivity, which drains resources from the local economy.
Many of the economic development practitioners we interviewed work
on repairing their clients' credit so that they may qualify for asset-
building programs such as those focusing on small business development
or homeownership. Nearly every practitioner we interviewed identified
the need to repair credit or extract people from predatory loans as one
of their highest priorities.
Several examples of the devastating outcome of predatory lending
emerged from the study and our follow-up research:
A middle aged man took out a payday loan to pay his electric
bill. The high interest rate and hidden fees, the cost of which
became a cyclical drain on his paychecks, eventually took his
whole regular paycheck plus $200 to pay.
A tribal member purchased a home with a loan from his
housing authority but then took another loan from a predatory
lender, with a high interest rate. The family fell behind on
payments and lost their home.
A tribal member who owned his home outright after 30 years
of payments got a home improvement loan from an unscrupulous
lender and eventually lost his home.
A community practitioner on a reservation in Arizona stated
that she has seen a lot of problems with trailer loans. She
provided an example of one case in which an individual was
given a loan on a trailer but it was not explained that a
trailer is a depreciating asset. The loan had a 29 percent APR
even though the borrower had good credit and a decent income.
The trailer owner wanted to sell the trailer and buy a home,
but was so far in debt (also called being ``upside down on a
loan'') that she was not able to sell the trailer. The trailer
owner owed $60,000 on a trailer that was worth about $15,000.
A woman earning minimum wage borrowed $400 and ended up
owing $1,400. The lender took her to court. She ended up owing
$2,200 including court fees. The lender would not work with her
on a repayment plan that she could afford.
A 21 year old on a North Dakota reservation wrote two
letters and went in person four or five times to a payday
lender to try to work something out. When he was $600 in debt,
the lender threatened to take him to court. His mother bailed
him out. She said payday loans are common and she believes
youth are targeted. She said she is not surprised that
individual stories are hard to get because people are ashamed
and will not talk about the trouble they are in.
A couple on a North Dakota Reservation used RALs every year
from 2000-2007. They paid $150 plus tax preparation fees of $70
on refunds of $1,800-$2,400. The tax preparer comes to the
reservation 2 days a week during tax season. He offers people a
RAL every time. The couple said RALs ``are the norm, especially
if you get a return of around $4,000-5,000. You don't see it
[the interest] and you don't feel it. People get RALs as soon
as they get their W-2s. You can even take your last pay stub of
the year and get a loan. After Christmas, people need the
money--sometimes they skip a bill in December and they have a
double payment in January.''
This same woman, when asked about payday loans, said yes
people use them, but first you have to have a job and the
unemployment rate here is 73 percent according to BIA
statistics. The woman is the employment outreach coordinator at
the tribal college.
On the same North Dakota reservation, two women obtained car
loans for 14 percent and 18 percent, respectively. Both have
longtime professional jobs. One fell behind in student loan
payments, but is nearly caught up. She does not keep a checking
account or use a credit card, so besides the student loan, has
no credit. The other fell behind on credit card payments and is
paying off current debt, but no longer uses credit cards.
A lawyer employed by the United States Department of
Justice, with a credit rating of 780, wanted to help his son
buy a car. Two banks just off a North Dakota reservation
offered him 13 percent-18 percent rates. One bank explained
that rates were higher for reservation borrowers because the
lender might be subject to tribal laws and tribal court
jurisdiction. The lawyer went home to Michigan and obtained a
loan for 6\1/2\ percent. He reported the problem to the Civil
Rights Division. He noted that a simple investigation using
undercover borrowers would quickly document this type of
discrimination.
While these stories are anecdotal, we believe that they illustrate
the problems created by predatory lending in Native communities. Loans
that charge high interest rates or fees are often made to people who do
not understand the terms of the loans, are not qualified to receive
them, and are not able to pay them back. The most notable outcome of
these predatory loans is asset stripping, or the draining of economic
resources away from Native families and communities. Given that many
Native families and communities are already experiencing economic
hardship, the outcome of predatory lending is especially problematic
for them.
II. Addressing the Problem: Providing Financial Education, Alternatives
to Predatory Lending Products, and Consumer Protections
The report Borrowing Trouble: Predatory Lending in Native American
Communities presents case studies of five tribal programs whose
innovations with financial education, alternative financial services
and products, and other asset-building programs and strategies are
helping to eliminate reliance on predatory lending, repair credit and
build economic security.
In these five communities, economic development practitioners are
developing innovative strategies to combat predatory lending. These
strategies include providing financial counseling, credit repair, and
financial education to encourage people to avoid using predatory
lenders, and using community development financial institutions (CDFIs)
to provide alternative credit products to borrowers. Additional
research in the report demonstrates that tribes can also set interest
rate caps that may reduce the incidence of predatory lending on
reservations.
Our recommendations, based on the findings in our study, are that
tribes and tribal organizations should:
1. Develop credit programs and borrowing opportunities that
reduce the demand for predatory loans.
2. Develop consumer education programs that assist in financial
planning, savings and credit repair.
3. Set interest rate caps.
Deserving special emphasis are Community Development Financial
Institutions.
Native CDFIs meet a market demand met by few others in the local
community. They can provide affordable access to credit for borrowers
with poor or no credit while at the same time providing financial
education and helping the borrowers build assets. David Fleming, former
director of the Lac Courte Oreilles Federal Credit Union (LCOFCU)
provides an example of this approach:
Our goal is not to make a lot of money, but to establish a
healthy relationship with that borrower. Instead of going to
pawn shop or payday lender, they come to us. We want to build
relationships with borrowers. The goal of the credit union is
to provide an alternative, getting people to come in the door.
We hope they are learning to trust banks. Many have never been
in a bank before.
Staff at LCOFCU work closely with borrowers when necessary. David
Fleming stated,
When someone lost their job at the tribe, or couldn't pay their
loan, we wanted them to be comfortable coming to talk with us.
We would work with them to refinance, or lower the payments on
the loan until they got back on their feet. This made a
difference and helped people learn to trust us.
Another lesson learned is that the ``low stakes'' loans are
important stepping stones to becoming credit worthy. Smaller consumer
loans, including one called the ``Easy Money'' loan, allows people to
learn to use credit responsibly. Payroll deduction was used to ensure
that people had a low default rate. David Fleming stated,
Many people told us that the ``Easy Money'' loan made them
credit worthy--gave them a credit history, or helped improve
their credit score. We reported payment on those loans to the
credit agency and it helped people establish or repair credit.
People told us that it made them eligible for a home loan later
on.
FNDI supports the 2008 policy recommendations made by the Native
Financial Education Coalition, which were based in part on FNDI's
research. We agree that there is a need to expand financial education
opportunities, combat predatory lending, improve institutional
infrastructure, increase access to EITC, and promote and expand IDA
utilization.
III. Policy Recommendations
Our report Borrowing Trouble: Predatory Lending in Native American
Communities focuses on what tribes can do to combat predatory lending,
but there is also an important role for the federal government, as
trustee with responsibility for implementing and overseeing the federal
policy of tribal self-determination and protection of tribe
sovereignty. Our first three recommendations focus on actions tribal
governments may take, and our final recommendation provides suggestions
for a federal role.
1. Recommendation One: Tribes Should Develop Credit Programs and
Borrowing Opportunities That Reduce the Demand for Predatory
Lending and Stem The Bleeding of Assets from Indian Communities
Tribes have the ability to develop their own financial
institutions, and these financial institutions can offer alternative
credit products to the citizens of Native nations. There are currently
over 84 Native-owned banks, credit unions, and loan funds that are
actively providing financial products and services to Native people,
many of which have received support from the CDFI Fund as part of their
Native American programming. As detailed in our report Borrowing
Trouble: Predatory Lending in Native American Communities, several of
these financial institutions currently offer short term consumer loans,
which reduce the demand for high fee payday loans. Many of these
financial institutions also provide financial education and credit
repair in a variety of forms.
2. Recommendation Two: Native Nations Should Develop Consumer Education
Programs that Assist in Financial Planning and Credit Repair
Consumers resort to payday, car title, pawn shop, and usurious
consumer finance loans not only because they lack alternatives but
because they lack experience in borrowing and investing. This is
especially true in Native communities that are underserved by
mainstream banking institutions. By providing financial education--from
basic education on spending and saving to more complex education on
credit repair and investment--Native nations arm their citizens against
the practices of predatory lenders. Financial education can help tribal
citizens avoid predatory loans in the first place and help those
already in usurious situations extract themselves.
While our research shows that some financial education is already
being provided in many Native communities through housing authorities,
Native CDFIs, schools, and tribal colleges, research in other settings
(among military service members) indicates that those most in need may
be least likely to seek financial education--at least until there is no
other alternative. These facts suggest that to be effective against
predatory lending, financial education and remediation activities
should be coupled with credit repair and preventive loan products, such
as those described in the five case studies in our report.
The bottom line is that financial education is critical, but
unlikely to be effective by itself, if there are no alternative lending
services available.
3. Recommendation Three: Tribes Should Set Interest Rate Caps
Tribes should set caps on the interest rates offered by lenders
under their jurisdiction, as a few tribes have done already, notably
the Navajo Nation (21 percent APR); the Blackfeet Tribe (21 percent
APR); and the Grand Traverse Band of Chippewa and Ottawa Indians
(Homeownership Protection From Predatory Lending Ordinance).
This recommendation echoes the best policy advice from outside
Indian Country. States such as New York and North Carolina have set
effective interest rate caps and have made significant inroads against
payday lending. Similarly, in late 2007, the U.S. Department of Defense
issued regulations to implement the consumer protection provisions of
Public Law 109-364 (The John Warner National Defense Authorization
Act). These regulations set a 36 percent APR cap for loans to military
borrowers. On January 7, 2008, the Department of the Treasury proposed
a rule to limit the ability of tax return preparers to market RALs.
4. Recommendation Four: Effective Federal Policy Actions
The Federal Government, as trustee with responsibility for
implementing and overseeing the federal policy of tribal self-
determination and protection of tribe sovereignty, can act to limit
predatory lending in Native communities. We recommend that the Federal
Government: (a) assist in determining the economic and social impact of
predatory lending practices on Indians and Native communities, (b)
provide funding in support of increased financial education and
alternative loan products; (c) develop a strategy to address the
impacts of predatory lending and the flow of assets off of Indian
reservations.
(a) Collect Data on Predatory Lending in Native Communities
The Federal Government should commission a detailed study of
lending practices in Native communities, including all usurious and
discriminatory practices, such as charging higher interest rates than
are charged to off-reservation borrowers and refusal to make loans to
people and businesses on reservations.
It is worth noting that discrimination in lending gave impetus to
the founding of Turtle Mountain State Bank, which opened in December,
2007 on the Turtle Mountain Chippewa Reservation. One of the bank's
owners, tribe member Ken Davis, stated in News From Indian Country that
tribe members often had difficulty getting loans from banks off the
reservation. ``The other banks all the way around us don't necessarily
want to lend money over here,'' he said. ``If a new home is built, or
new business does start, they want it to be built or started in their
town.''
(b) Continue to Provide Funding in Support of Increased Financial
Education and Alternative Loan Products
The Federal Government currently supports several programs that
help increase financial education, provide alternative financial
products, and educate consumers. The CDFI Fund of the U.S. Department
of the Treasury has several programs that help Native nations establish
community development financial institutions (CDFIs) for their citizens
which provide financial education and alternative financial products.
The funding for the Native Initiatives program and the Expanding Native
Opportunities program of the CDFI Fund, and the other Native specific
programs within the CDFI Fund, should be continued. The Social and
Economic Development Strategies (SEDS) program of the Administration
for Native Americans provides funding for community groups to provide
financial literacy training and educate consumers. Finally, consumer
education regarding Volunteer Income Tax Assistance sites has been
effective in keeping money in Native communities and reducing the use
of paid tax preparers who charge high fees and offer refund
anticipation loans.
(c) Develop a Strategy to Address the Impacts of Predatory Lending and
the Flow of Assets Off of Indian Reservations
Federal assistance is needed to develop a strategy that will
address legislation to regulate discriminatory lending practices,
provide for tribal court jurisdiction where possible, and help tribes
develop needed consumer protection codes and enforcement capabilities.
Conclusion
Predatory lending takes many forms, including payday loans, refund
anticipation loans, and mortgage lending with high rates or fees. The
cost of offering loans with high rates or fees is significant,
especially to those who are not qualified to pay them back. Predatory
lending can trap people in a cycle of debt, ruin credit, and cause
stress that leads to divorce, bankruptcy, loss of self esteem, and
hopelessness. For Native Americans the impact is even more devastating
because it keeps the flow of money going away from the reservation,
destroying the potential for asset building that is desperately needed
to bring economic security to Indian families and their communities.
Predatory lending in an already under-capitalized tribal community can
sabotage the federal policy of self sufficiency for tribes. And tribes,
lacking regulatory control or enforcement authority over these off-
reservation lending institutions, are left with few options for
safeguarding the economic security of their members. Federal assistance
in finding solutions is badly needed.
Thank you for inviting FNDI to offer what we have learned from our
study of predatory lending in Indian country and best practices to
combat abusive lending and prevent the bleeding of assets from Indian
communities. We appreciate the opportunity to talk with you about the
challenge these practices present for vulnerable borrowers in Native
communities and for tribes themselves in reaching the goal of economic
self-sufficiency.
The Chairman. Ms. DeCoteau, thank you very much for your
testimony. We appreciate your being here.
Next we will hear from the Honorable Ron Allen, Secretary
of the National Congress of American Indians; also Chairman of
the Jamestown S'Klallam Tribe in the State of Washington. Mr.
Allen, Chairman Allen, thank you very much for being here, and
you may proceed.
STATEMENT OF HON. W. RON ALLEN, SECRETARY, NATIONAL CONGRESS OF
AMERICAN INDIANS; CHAIRMAN, JAMESTOWN S'KLALLAM TRIBE
Mr. Allen. Thank you, Mr. Chairman. It is always an honor
to come before you and this Committee to testify on many issues
that affect our tribal government and our communities.
I appreciate your accepting our testimony for the record.
We have submitted to you some oral testimony, and I hope that
it is okay that we can add some additional comments that will
provide some recommendations that we would suggest to the
Committee to address this issue that we are all concerned
about.
Predatory lending, of course, is a nationwide concern. It
is not just Indian Country; it is all over the Nation. We are
here to talk about how it affects our Indian communities.
Generally, and I am sure others will share some of their
experiences with regard to the problem that we have in Indian
Country, this is really a symptom of the fact that for
mainstream Indian Country, we really are impoverished and are
struggling just to have a median kind of income and any kind of
stable lifestyle, because of our weak economies and our low
employment opportunities on our reservations.
I want to share a quick little story to add to Jerilyn's
examples. I know of an individual in eastern Washington who
borrowed a pay loan, which is often the issue, the short-term
pay loans that many of our tribal members will borrow, to take
care of domestic expenses or other emergency kinds of expenses,
pay for fuel, a car payment or whatever. Consequently, they
fall into a spiral worsening situation. She did too. She ended
up in a spiral where she couldn't pay her rent; she didn't meet
the leasing obligations of her housing program on the
reservation; she was given notice and one thing led to another.
Eventually, she was summoned before the tribal court, she was
behind in her fiscal commitment. This is a woman who lives on a
fixed income.
Because she couldn't keep making these payments and missed
loan payments, she ended up getting so far behind that she
couldn't pay the rent. They eventually evicted her.
That just creates a new kind of problem for the tribe, if
our housing program evicts somebody because they can't make the
payments, because they are trying to deal with the day to day
expenses. Now we have to deal with them because they are out on
the street, homeless. So what do we do with them, and where do
we put them? It is a problem that we are experiencing. It is
criss-crossing all of Indian Country. It is the same for large
tribes and small tribes. It doesn't matter the size of the
tribe, we all have that problem in similar situations.
So we are here to talk about some solutions and a course of
action to try to find some solutions in this matter. This
problem is definitely persistent. The banking industry is very
weak on the reservation, as you well know, at all levels. It
wouldn't matter whether an individual is going for a home or
car loan, or whether individuals or tribes are looking for
loans for business, et cetera. The industry is just weak in
terms of how it provides assistance for Indian Country. We
really think this needs to be seriously looked at.
I think underlying this problem is the fact that for the
most part, tribal citizens like mainstream America really lack
the education and understanding on how to manage their finances
responsibly, if they are going to go look for a short-term
loan, what are they looking for? What should they be examining
in terms of what they are signing and what kind of commitment
they are making and is it working for them?
I would point out that these short-term kinds of loans are
needed. We simply need some sort of controls around them, we
need some sort of responsibility with regard to the industry
practices. But they are needed. We have a lot of Indian people
out there who just basically operate check to check and
emergencies happen. They are needing resources to deal with
just the day to day operations that come up for them and they
need some sort of recourse. So we don't want to create
regulations that would chase those institutions away. What we
do need is institutions or regulations and/or laws, if
necessary, that would provide order and control to protect the
interests of the tribe and our citizens.
That is our interest from the tribal government
perspective. We want to protect our citizens. We don't want
them to get into a spiral to make their personal financial
situation worse. We definitely need that kind of a financial
environment. We want them to be able to become better fiscal
managers so that they can build up their assets, so that they
can build up their equity, build up their wealth and become
more stable personally or as a family financially. So we are
very concerned about the situations where there may be entities
out there who are predators and they go after our citizens and
basically put them in a very precarious situation which causes
us as tribal governments a serious problem.
We have three areas we want to quickly talk about and one
of them is financial choice. Because we are unbanked
communities, what are our options? You have the community
development financial institutions that are getting out there.
Well, what more can be done? How can we strengthen those
opportunities, how can we strengthen the institutions who do
provide those kinds of services throughout Indian Country? Are
they actually predatory or not? We don't know. There is a need
to investigate this situation. We would certainly offer our
services to be a part of that solution in working with the
Congress, the Federal Government, and the institutions with
regard to finding those kinds of solutions. What is the
problem? How bad is it?
With the law that was applied around the military
institutions, what happened? What is the result of that new
law? Did that cause a problem, cause a new problem? We don't
want to go down a road that is not being successful. We want to
make sure that our tribal members have an opportunity for this
kind of an interest i.e., the availability of short term loans.
Second issue is the education, the fiscal literacy. We need
programs. I know there are programs out there. How good are
they? How well are they reaching out to our community? How well
are they collaborating with the tribal governments in terms of
managing those kinds of affairs? There is a need to ratchet
that relationship up.
The last item is jurisdiction. This is an area where, as we
move forward, we want the financial institutions to come onto
our reservations or around our communities. But we need some
sort of controls over that industry.
So as we explore these issues, it really becomes an issue
of, should there be some additional legislation that provides
clarity about the tribes' authority over these institution,
whether they are banking or non-banking lenders on the
reservation.
So I will conclude with that, Mr. Chair, and say that we
are here to find solutions. We are here to help our citizens.
We want them to become more stable. There is a prevalent
problem, as Jerilyn had described, and we want to work with you
to help make that happen. NCAI is at your beck and call. Thank
you, Mr Chair.
[The prepared statement of Mr. Allen follows:]
Prepared Statement of Hon. W. Ron Allen, Secretary, National Congress
of American Indians; Chairman, Jamestown S'Klallam Tribe
Good morning Chairman Dorgan and members of the Committee. I am
honored to be here today on behalf of the National Congress of American
Indians, the nation's oldest and largest national organization of
tribal governments. We hope this hearing serves to bring to light the
important role Congress has in ensuring tribes are empowered to protect
their citizens and give them every opportunity to advance themselves
and their families.
A tribal member on a rural eastern Washington reservation obtained
a pay day loan from a border town to purchase household expenses during
the winter. She lives on a fixed income and raises her grandchildren.
The tribal member did not realize how the loan functioned and the high
costs associated with the loan. The loan came due and the tribal member
paid part of the loan but continued to have an outstanding balance
owned. A few days after she paid the payday loan, her rent became due
to the tribal housing authority. She did not have enough money to pay
the rent in full so she paid a portion of the rent but was not
sufficient under her lease. Within a few days she was provided with a
notice that she had not paid her rent in full and she had a meeting
with her case worker as required by the tribal housing code but there
was no accommodation for her because she did not have enough money to
pay her rent.
The month went on and she was unable to pay the rest of the rent
and what she still owed on the pay day loan. When she received her
public benefits the next month she paid a portion of the pay day loan
but still could not pay it off. Again she did not make her rent
payment. This time, there was no meeting with a case worker; she was
given an eviction summons in tribal court. The impact of an eviction
from a tribal housing authority is serious because the tribal citizen
can no longer rent a tribal housing authority unit leaving her no other
options in her home community. In the end this tribal member was
evicted, still had a pay day her debt and had the same obligations to
buy food, clothing and provide housing for her grandchildren.
Where was the due diligence? Where is the financial responsibility
of the lender? And where are the regulations that used to protect our
people that need it the most?
This Committee knows well that American Indian Tribes continue to
occupy the bottom of key indicators of prosperity: employment, asset
holdings, home ownership, educational attainment and economic progress.
Because of the persistent lack of economic opportunity, a
sustainable financial services market and tribal jurisdictional issues,
there have only been a handful of banks that serve tribal communities.
As a result, tribal citizens continue to lack basic financial services
or choices that most Americans have come to take for granted. Tribal
members have limited access when financing a home, starting a business
or purchasing necessary property like cars needed to make a living.
The vacuum created by the lack of responsive and regulated
financial institutions offering competitive consumer financial products
has been quickly filled by predatory lending firms that have
proliferated after usury laws were lifted a few years ago--especially
in transient and unbanked communities, like military bases and
reservations.
The effect of having a tribal population unbanked and subject to
predatory financial firms is that it strips an already vulnerable
population of the opportunity to advance by preventing them from
building assets, equity and wealth. And the result of individuals
having limited and sometimes no viable options for responsive bank
products means tribal citizens pay higher fees and much higher interest
rates leaving tribal citizens that live check to check more vulnerable
when one of life's predictable emergencies arises such as a death in
the family or medical bill, forcing a cycle of debt.
There is real concern by tribal leaders to address personal
property and income loans by non-banking lending firms that target a
captive Native population. The complete lack of due diligence--required
in every other aspect of the financial services industry--coupled with
inadequate fee and interest-rate limitations make defaults predictable
and payments from a fixed income very difficult. Especially considering
the debtors expenses increase, compelling multiple loans from the same
limited income.
This lack of industry accountability is why banking laws and
limitations were imposed in the first place and a core reason that our
tribal population will be prevented from building equity and wealth
through property ownership.
While families with greater means or financial education turn to
regulated financial institutions or are better able to negotiate terms;
those with limited means and financial experience tend to get easily
caught in a cycle of debt that is all but impossible to escape on a
fixed income and exponentially increasing expenses.
While the problems run deep and will take a while to work through,
we feel we can focus on a 3-pronged approach to moving toward a
solution.
1. Financial Choice--Indian Country is unbanked. There is a
lack of regulated banking options that are responsive to tribal
community needs. This tends to be true regardless of a tribe's
success in building a local economy. The Community Development
Financial Institutions (CDFI's) have just started to meet the
needs of some tribal communities and Indian country is
appreciative of the support Congress has shown by increasing
CDFI funding, however, this serves a very specific and limited
role in tribal communities and falls short of providing viable
and responsive banking to the Native population. Congress
should work to provide an incentive for banks and credit unions
to serve the tribal population and provide competitive products
and services that meet the unique financial needs of the tribal
community.
2. Financial Education--Tribal governments need to be able to
incorporate culturally relevant financial literacy programs at
a young age to; understand fundamental credit issues and
alternatives, understand the value an types of savings programs
available such as ``individual development accounts (IDAs)''
and learn to take advantage of available programs such as
``Volunteer Income Tax Assistance (VITA)'' to reduce the
incidence of Refund Anticipation Loans. In addition there is a
need to increase the presence of Intermediaries in tribal
communities. Tribal citizens need help when buying a car,
financing a mobile home or accessing a micro-loan to start a
business. Intermediaries are under-represented in Indian
country. These non-profits serve a key role in guiding
consumers to make better financial and life decisions.
3. Jurisdiction--Non-bank lenders tend to cluster around
reservations and military bases taking full advantage of
financially unsophisticated consumers. To protect our soldiers
and sailors on federal military bases from the irresponsible
practices of payday lenders, car dealerships and tax preparers,
Congress passed a bill that places a cap on non-bank loans to
the military personnel. Congress should consider giving tribes
the same capability to protect their citizens with the ability
to opt into models such as the military fix. Congress should
also consider promoting responsive community banking in tribal
communities by giving tribes the authority to approve banks
that do business on their reservations in a manner similar to
state governments.
Because we have been unbanked and under-banked for so long, we may
appreciate having a lender of any sort serve the need in tribal
communities. But do we really need to settle for lenders that are not
part of our community like every other bank? And do we need to settle
for loan shark rates with no consideration for an individual's ability
to pay?
We need to fix the underlying problems. We need jurisdiction, we
need financial literacy and we need banks, credit unions, CDFI's and
non-profits in Indian country. Our citizens deserve better.
The Chairman. Chairman Allen, thank you very much for being
here and for your testimony.
Next we will hear from Donna Gambrell, Director of
Community Development Financial Institutions Fund, the
Department of the Treasury in Washington, D.C.
Ms. Gambrell, thank you very much for being with us and you
may proceed.
STATEMENT OF DONNA J. GAMBRELL, DIRECTOR,
COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND, U.S.
DEPARTMENT OF THE TREASURY
Ms. Gambrell. Thank you. Good morning, Chairman Dorgan.
I am pleased to be here today to testify on the issue of
predatory lending in Indian Country. Before I begin, though, I
would like to share with you that just last Saturday, I spent
the morning at a financial education workshop for Native
American interns at American University. The CDFI Fund
sponsored this one-day workshop for approximately 100 young
Native Americans participating in the Washington internship for
Native students and the Udall Native American Congressional
Internship programs.
Financial education is one of the best ways to understand
how to avoid predatory lending tactics. I hope that the
students will use what they learned to make positive financial
decisions in their lives, and will take the knowledge back to
their communities.
There is no clear-cut definition of a predatory loan. But
many experts, and I believe certainly that the witnesses here
today will agree, that it is the result of a company
misleading, tricking and sometimes coercing someone into taking
out a loan, typically at excessive cost and without regard to
the consumer's ability to repay.
What is clear-cut is the devastating impact that predatory
lending can have in Indian Country. Several studies, including
one recently conducted by First Nations Development Institute,
in collaboration with the National American Indian Housing
Council, highlight the extent of the problem. The report states
that in Native communities, predatory lending has been a major
concern for years. I concur with the report. Predatory lending
is a serious issue in Indian Country, which makes this hearing
today so very important.
Briefly, CDFIs are community-based institutions that are
certified by the CDFI Fund and serve low-income people in
economically distressed communities. CDFIs use the Fund's
financial awards to engage in a wide range of economic
development activities. These investments include small
business lending, affordable home mortgage products, financial
education, homeownership counseling and other innovative
solutions to meet community needs.
The CDFI Fund's Native initiatives increase access to
credit, capital and financial services through the creation and
expansion of Native community development financial
institutions, called Native CDFIs. The CDFI Fund provides
financial assistance awards and technical assistance grants to
these Native CDFIs through the Native American CDFI Assistance
Program, or NACA program.
Since 2002, we have awarded 148 grants, totaling $23
million, to Native CDFIs serving 89 separate Native
communities. In addition, the CDFI Fund has expanded the number
of certified Native CDFIs by over 300 percent, from 14 in 2002
to 47 today. Another 50 Native CDFIs are in the emerging phase.
I would like to share a few examples of the efforts Native
CDFIs and award recipients of the CDFI Fund are taking to
respond to predatory lending and to promote financial education
in their communities. Four Bands Community Fund serves the
residents of the Cheyenne River Reservation in rural western
South Dakota. With awards from the CDFI fund, Four Bands now
offers micro-loans, small business loans and has recently
started a credit enhancement loan of up to $2,500 to help
residents repair their credit history.
In addition, Four Bands offers several financial education
courses, and offers an individual development account program
designed to help people learn positive saving habits and how to
begin to build assets.
Another example can be found at the Lac Courte Oreilles
Federal Credit Union in Hayward, Wisconsin. With awards from
the CDFI Fund, they have developed the GOOD loan, which is an
acronym for Get Out Of Debt. The credit union staff there
reported in a Fund-sponsored study that will be completed later
this year that the purpose of this product is to provide an
alternative to payday loans that charge very high annual
interest rates.
Many payday loans have annual percentage rates of up to 400
percent and sometimes more, while Native CDFIs are developing
short-term consumer products with annual percentage rates
between 15 and 18 percent. Our data from 2003 to 2006
demonstrates that 81 percent of award recipients serving Native
communities offered financial education. Sixty-six percent
offered credit counseling services. This demonstrates that
supporting Native CDFIs is critical in order to expand the
reach of financial education and credit counseling in Native
communities.
The CDFI Fund recognizes the importance of training and
technical assistance to Native CDFIs through its expanding
Native Opportunities Initiative. This initiative focuses on
increasing the number of Native CDFIs, strengthening the
operational capacity, and guiding Native communities in the
creation of important financial education and asset building
programs. The CDFI Fund plans to continue supporting the
nationwide growth of Native CDFIs through its funding program
and through its training series. The success of the NACA
program and training series makes out continued involvement
critical to the institutional development and capacity building
of Native CDFIs.
We have made great progress. But barriers to credit and
capital still exist in Indian Country. The CDFI Fund is open to
working with the Committee and Congress on what greater role,
if any, we should play in further helping Native communities
overcome these barriers.
Mr. Chairman, thank you for holding this important hearing
and for allowing the Treasury Department to testify. I look
forward to working with the Committee and its staff to further
address the prevalence of predatory lending in Indian Country.
I am happy to answer any of your questions. Thank you.
[The prepared statement of Ms. Gambrell follows:]
Prepared Statement of Donna J. Gambrell, Director, Community
Development Financial Institutions Fund, U.S. Department of the
Treasury
Introduction
Good morning. Chairman Dorgan, Vice Chairwoman Murkowski and
members of the Senate Committee on Indian Affairs, I am delighted be
here today to testify on the issue of predatory lending in Indian
Country. My name is Donna Gambrell and I am the Director of the U.S.
Department of the Treasury's Community Development Financial
Institutions (CDFI) Fund.
To begin, I would like to share with you that just last Saturday I
spent the morning at a financial education workshop for Native American
interns at American University. The CDFI Fund sponsored this one-day
workshop for approximately 100 young Native Americans participating in
the Washington Internship for Native Students (WINS) and Udall Native
American Congressional Internship programs. The students were
instructed on the dangers of predatory lending and how to identify such
practices so that they can be avoided. I hope that the students will
use what they learned to make positive financial decisions in their
life and to take the knowledge back to their Native communities.
Created in 1994, the CDFI Fund has an important mission: to expand
the capacity of financial institutions to provide credit, capital and
financial services to underserved populations and communities
throughout the United States. To meet its mission, the CDFI Fund
provides monetary awards to Community Development Financial
Institutions--or CDFIs. Our awards serve as investments to help CDFIs
build their capacity to serve low-income people and communities that
otherwise lack access to credit, capital, financial products and
services. Currently, there are over 800 certified CDFIs.
CDFIs are specialized financial institutions operating in markets
that have not been adequately served by traditional financial
institutions. They comprise a variety of types of institutions,
including loan funds, venture capital funds, and insured depository
institutions, such as credit unions and banks. In addition to providing
financial services and products, CDFIs provide services, such as
financial literacy training, technical assistance, and credit
counseling to help consumers use credit effectively.
CDFI Fund Native Initiatives
The CDFI Fund supports three types of applicants under the Native
Initiatives: (1) certified Native CDFIs; (2) emerging Native CDFIs;
and, (3) sponsoring entities. Currently, 47 Native CDFIs have been
certified by the CDFI Fund and another 50 Native CDFIs are emerging or
sponsoring entities. In FY 2007, 19 organizations received a total of
$3.6 million though the Native American CDFI Award (NACA) Program. To
date, 148 grants for approximately $23.5 million have been awarded to
Native CDFIs serving 89 Native communities. In addition, the CDFI Fund
has awarded over $7.5 million in contracts to organizations that
provide capacity-building and financial services training programs.
The CDFI Fund has a longstanding commitment to Native communities.
The Fund's publication in 2001 of the congressionally mandated Native
American Lending Study identified 17 barriers to credit and capital,
including the lack of financial institutions on or near Indian lands.
Since that time, the CDFI Fund has awarded $23 million to Native
communities.
The CDFI Fund's Native Initiatives are designed to increase the
access to credit, capital and financial services through the creation
and expansion of CDFIs that serve primarily Native communities. The
CDFI Fund works to achieve these objectives through two principle
strategies:
1. Native American CDFI Assistance Program--A monetary award
program that provides support to Native CDFIs and entities
proposing to become or create Native CDFIs and to build their
capacity to better address the community development and
capital access needs of Native communities. Through the NACA
Program, the CDFI Fund provides financial assistance awards to
certified Native CDFIs, and technical assistance grants to
Native CDFIs and entities proposing to become or create Native
CDFIs.
2. Expanding Native Opportunities--A training program that
fosters the development of new Native CDFIs, strengthens the
operational capacity of existing Native CDFIs, and guides
Native communities in the creation of important financial
education, asset building, and entrepreneurial programs.
Native CDFIs Respond to Predatory Lending
With that background, I would like to focus on the important
purpose of today's hearing. There is no clear-cut definition of a
predatory loan, but many experts agree that it is the result of a
company misleading, tricking and sometimes coercing someone into taking
out a loan, typically at excessive costs and without regard to the
consumer's ability to repay. What is clear is the devastating impact
that predatory lending can have in Indian Country. Several studies,
including one recently conducted by First Nations Development Institute
(FDNI), in collaboration with the National American Indian Housing
Council (NAIHC), highlight the extent of the problem and demonstrates
the negative impacts of predatory lending in Indian Country.
Through the NACA Program, the CDFI Fund supports Native CDFIs to
ensure that they are stable, independent financial institutions that
offer loan products and development services to meet the needs and
demands of their Native communities. As alternatives to predatory
lending practices, Native CDFIs generally make lower interest consumer
loans available to community members so as to increase the consumer's
experience with low cost lending products which, in turn, decreases the
demand for short-term and unaffordable consumer credit. Native CDFIs
also provide development services, such as credit counseling and
financial education, offer personalized technical assistance to help
borrowers avoid unsustainable credit practices, and provide credit
repair and asset-building programs.
The CDFI Fund collects institutional data from CDFIs that receive
its funding. Through our data collection system, known as the Community
Investment Impact System (CIIS), we see evidence that CDFIs provide
services as a preventive measure to predatory lending. For example,
data from 2003 to 2006 demonstrates that 81 percent (76 of 94
responses) of the funding recipients serving Native communities offered
financial education; 66 percent (62 of 94) offered credit counseling
services. In total, 4,423 Native clients received either financial
education or credit counseling services. This evidence clearly shows
that Native CDFIs are offering services to prevent predatory lending in
their communities.
Under our NACA Program, the CDFI Fund has a unique funding
application consisting of a comprehensive business plan that requires
detailed analysis of the market and business strategy for each
applicant, including narratives of its financial products and services.
Recent funding rounds of the NACA Program have demonstrated that many
applicants seek funding to offer affordable financial products and
services as an alternative to payday loan shops located in or near
their communities that provide short-term consumer loans with high
rates and fees. Many predatory loans have annual percentage rates of
upwards to 400 percent, while Native CDFIs are developing short-term
consumer products with rates between 15 percent and 18 percent.
Native CDFIs are also offering credit repair loan programs, payroll
advance programs and low-cost credit programs. Recently, Native CDFIs
have also started offering services in tax preparation and established
Volunteer Income Tax Assistance (VITA) sites. VITA sites provide free
tax preparation assistance to help low income consumers avoid costly
Refund Anticipation Loans (RALs) and fees often associated with paid
tax preparation services. The volunteer tax preparers also help
qualified families capture the millions of unclaimed tax credits
available under the Earned Income Tax Credit (EITC).
I would like to share with the Committee a few specific examples of
how Native CDFIs are successfully developing innovative products and
services that combat predatory lending and promote financial education.
1. Turtle Mountain CDFI, located in north central North Dakota,
serves the Turtle Mountain Band of Chippewa. The community
suffers from an unemployment rate of 65 percent among the
16,500 enrolled members living on or near the reservation. A
diverse group of partners, including the Tribal Council,
Pathways to Prosperity, the Tribal high school, and housing
authority came together to create the Turtle Mountain CDFI in
21 short months. With only two full-time staff Turtle Mountain
CDFI is providing financial counseling, homebuyer education,
and loan packages to residents that otherwise could fall victim
to predatory lenders. Turtle Mountain CDFI has received two
NACA awards for a total of $268,000.
2. Four Bands Community Fund is a 501(c)(3) nonprofit
corporation serving the residents of the Cheyenne River
Reservation in rural western South Dakota. The Cheyenne River
Reservation has a land area approximately the size of
Connecticut with some of the highest poverty figures in the
nation. Four Bands offers micro-loans and small business loans;
in addition, the organization has recently started a credit
enhancement loan of up to $2,500 to help a person repair his/
her credit history. In addition, Four Bands offers several
financial education courses every year, and offers an
Individual Development Account program designed to help people
learn the savings habit and build assets. Four Bands has
received a significant amount of funding from the CDFI Fund--
approximately $1.3 million in multiple awards.
3. The Northern Shores Loan Fund (NSLF) is an emerging Native
CDFI located in Harbor Springs, Michigan. The NSLF serves
Tribal members of the Little Traverse Bay Bands of Odawa
Indians and provides loans in the three-county area surrounding
the Tribal headquarters. NSLF offers a range of loan products
and developmental services. NSLF provides three types of
business loans: micro loans, small business loans, and Tribal
corporation loans. Its target audience is Tribal members within
the traditional service area, but it is also interested in
lending money to other Tribes and other Native American
individuals nationwide. NSLF plans to work with the Tribe's
housing and education departments to offer financial education
and to develop a partnership with the local community college.
It also has a relationship with a local non-Native CDFI and
plans to partner with it to offer some services. NSLF has
received $258,991 from the CDFI Fund--through the Little
Traverse Bay Bands of Odawa Indians, its fiscal sponsor. It was
awarded a NACA grant in 2005, and another in 2007.
4. The Lac Courte Oreilles Federal Credit Union (LCOFCU) in
Hayward, Wisconsin has developed the ``GOOD'' loan, which is an
acronym for ``Get Out Of Debt.'' LCOFCU staff reported in a
Fund-sponsored study (to be completed later this year) that the
purpose of this product is to provide an alternative to payday
loans, which charge very high annual interest rates. LCOFCU has
received a single 2002 CDFI Fund technical assistance award
which it used to hire a consultant to help develop loan
policies and collection policies and in-house policies for
working with low-income clients.
Expanding Native Opportunities
``Expanding Native Opportunities'' is a training initiative that
focuses on increasing the number of Native CDFIs, strengthening the
operational capacity of existing Native CDFIs, and guiding Native CDFIs
in the creation of important financial education and asset-building
programs for their communities. These programs are fully funded by the
CDFI Fund and administered by contractors that are selected through a
competitive bidding process.
1. Native Communities Financing Initiative (NCFI): The CDFI
Fund contracts for the provision of training and technical
assistance to Tribes, Tribal programs, Native nonprofits and
community development practitioners interested in developing
Native CDFIs through the NCFI. NCFI is an intensive series of
workshops and follow-up technical assistance conducted over a
12-month period to help Native Communities develop and expand
Native CDFIs. Since 2003, nearly 235 Native Communities and
organizations have participated in NCFI workshops. The CDFI
Fund has expanded the training to provide technical assistance
to existing Native CDFIs and launched a new Native Credit Union
development program.
2. Native Financial Skills and Enterprise Initiatives (NFSEI):
In 2007, the CDFI Fund awarded the NFSEI contract. The
contractor provides training and technical assistance in two
activity areas: financial education and entrepreneurship
development. The financial education activity focuses the
training of trainers in the Building Native Communities
financial education curriculum and related tools such as the
Earned Income Tax Credit, Individual Development Accounts, and
integrated asset building programs. The entrepreneurship
activity focuses on entrepreneurship development systems,
curricula integration and program development at the local
level.
3. Native Individual Development Account Initiative (NIDAI):
Training and technical assistance is available to Native CDFIs
and like organizations to create and administer Individual
Development Account (IDA) programs. Preparation for IDA program
practitioners is provided through three-day training sessions
designed to help Native CDFIs, Tribes, or other Native
organizations start, implement, and sustain IDA programs in
their communities. During the training sessions, participants
are guided toward developing plans customized to their
communities; after participation in the training institute,
they are offered technical assistance in local program start-up
and implementation.
The Expanding Native Opportunities training series has seen a
strong increase in demand within Native communities. Essentially, NCFI
is a ``nuts and bolts'' development and implementation training on how
to build a Native CDFI. The NFSEI effort also trains CDFIs on how to
build a financial education program in a Native community. These
training efforts offer technical assistance from professional community
development practitioners with experience in Indian Country, which
program evaluation has shown to be the most important aspect of the
series. Since 2003, 75 different organizations have participated in the
NCFI program and 30 have are emerging Native CDFIs. Twelve
organizations have achieved the CDFI Fund's certification status. The
NFSEI program has had 254 participants from 112 organizations; 40
financial education programs in Native communities are up and running
today.
FY 2008 Award Round
Congress appropriated $8 million for the CDFI Fund's Native
activities in FY 2008. For the FY 2008 award round, the CDFI Fund
received 45 applications requesting over $17 million from certified
Native CDFIs, emerging Native CDFIs, and Sponsoring Entities.
Sponsoring Entities are organizations, typically Tribes or Tribal
Housing Authorities, seeking to create a Native CDFI in their
community. I am pleased to notify the Committee that we expect to
announce the FY 2008 awardees by the end of the month.
The success of the NACA Program and training series makes our
continued involvement critical to the institutional development and
capacity building of Native CDFIs. The CDFI Fund plans to continue
supporting the nationwide growth of Native CDFIs through its funding
program and training series. While there has been much success in the
CDFI Fund's Native Initiatives, we recognize that barriers to credit
and capital still exist in Indian Country. As I mentioned earlier, the
Native American Lending Study identified 17 barriers in 2001. We have
made progress, but further efforts to address barriers still exist. The
CDFI Fund is open to working with the Committee and Congress on what
role, if any, we should play in helping Native communities overcome
these barriers.
Conclusion
Mr. Chairman, thank you for holding this important hearing and for
allowing the Treasury Department to testify. I look forward to working
with the Committee and its staff to further address the prevalence of
predatory lending in Indian Country. Thank you.
The Chairman. Director Gambrell, thank you very much for
being here.
Darwin Brokke, you are President of a credit union in
Devils Lake, North Dakota, Citizens Community Credit Union. You
are here to give us your perspective on these issues. We
appreciate your traveling to Washington, D.C. for that purpose.
You may proceed.
STATEMENT OF DARWIN BROKKE, PRESIDENT/CEO, CITIZENS COMMUNITY
CREDIT UNION
Mr. Brokke. Thank you, Chairman Dorgan. I appreciate being
here today. Thank you for the opportunity to testify on behalf
of the Credit Union National Association on predatory lending
in Indian Country.
CUNA represents about 90 percent of the credit unions in
the Country. Those credit unions serve about 90 million
members.
My name is Darwin Brokke, and I am President and CEO of
Citizens Community Credit Union in Devils Lake, North Dakota.
We were founded in 1940, and my credit union currently serves
about 10,700 members in areas around Devils Lake, Bisbee and
Larrimore, North Dakota. Among our 10 branches, one is located
on the Spirit Lake Reservation and one is in St. John, which is
on the border of the Turtle Mountain Reservation.
The lack of access to financial institutions plays a key
role in poverty in any community. Those without access to
financial institutions don't have the opportunity to build
assets and accumulate wealth. In many cases, they are forced to
use informal lending structures, including borrowing from
family and friends and turning to payday lenders.
Mr. Chairman, I see many of my members use payday lending
services on somewhat of a regular basis. My staff and I can see
this when we view a member's account information. We will see a
deposit into an account from a payday lender. And when it comes
time to clear the checks, we will often notice that a number of
them have bounced. My credit union's daily overdraft list has a
number of non-sufficient items payable to payday lenders.
We have seen how some members, by using payday lenders,
have really mismanaged their finances. This has resulted in
poor credit scores for many of them, making it difficult for
them to get financial help anywhere, including sometimes the
credit union. There have been occasions when we have had to
turn down a member for a loan, because we see that they are
already in debt to payday lenders, and we don't want to be
adding to the problem. When we see this happening with one of
our members, we try to educate them on the risks and the costs
involved in payday lending, then we try to help them with
finding a suitable solution.
Mr. Chairman, the problems associated with payday lending
is a tough cycle to break. My credit union has two programs
which we consider to be alternatives to payday lending. I think
they help our members break out of this cycle. The first
program is an open-end lending program, which we began back in
1983. Open-end lending essentially means that one can add to an
existing loan under various circumstances, and it can work much
like a revolving credit arrangement.
Once it is opened, open-end lending allows for multiple
advances, except without the need for all the additional
paperwork, such as applications and notes. Each advance request
can be quickly underwritten and disbursed without the labor and
the cost of other types of loans, like closed-end loans.
Furthermore, open-end lending is convenient for the member. He
or she doesn't even have to come into the office to sign papers
when they need some funds, they simply pick up the phone and
call.
One advantage with open-end lending is that it anticipates
repeat usage. This helps both the credit union and the members.
The credit union is able to handle additional loan volume
without the extra staff, and the member has the opportunity to
take an advance with very minimal effort.
Secondly, and most recently, Citizens Community Credit
Union began offering a line of credit program called a reward
line of credit. Because of my experience with loans that I made
to people working for tribal businesses, I learned quickly that
a lot of times there would be multiple requests for advances on
a frequent basis. I also realized that many individuals were
beginning to use payday loans as a means to get these advances.
I understood that this could turn out to be a real problem,
so my credit union implemented this reward credit program. The
program carries many of the same characteristics of open-end
lending; however, it has a specific criteria one must meed in
order to qualify. The main difference between the two programs
is the size of the line of credit, but the advances are self-
funded. The program is only available to individuals with lower
credit scores. It requires payroll deduction for repayment. The
minimum advance is only $25, with a minimum repayment of 5
percent of the balance. Plus, $20 goes into a savings account
to help develop the savings habit. There are no fees at all
associated with the program, and the interest rate is held at
16 percent.
Mr. Chairman, on a daily basis, we make loans to our
members during challenging times for them, whether it is $30 to
a member to pay their heating bill or a $50 loan to a member
who can purchase their medication. To us, these types of
situations are part of our typical work day. To pull one
anecdote out of a thousand would be impossible, and it would be
really an injustice to take such a narrow focus. We do what we
do because we believe in the credit union philosophy of people
helping people. We are lucky in that we understand the culture,
we understand the people and we understand the risks. This
helps us to manage our program and serve our community to the
best that we can possibly.
This concludes my oral remarks. It is an honor to be here
today and I look forward to any questions you may have.
[The prepared statement of Mr. Brokke follows:]
Prepared Statement of Darwin Brokke, President/CEO, Citizens Community
Credit Union
Good morning, Chairman Dorgan, Vice Chairwoman Murkowski, and
Members of the Committee.
Thank you for inviting me to testify today on behalf of the Credit
Union National Association (CUNA) regarding predatory lending in Indian
Country. CUNA is the largest credit union trade association,
representing approximately 90 percent of the nation's 8,400 state and
federally chartered credit unions which serve approximately 90 million
members. This testimony will address the following:
The Cycle of Payday Lending
The Credit Union Response to the Cycle of Payday Lending:
Citizens Community Credit Union, Devils Lake, ND
The Native American Credit Union Initiative
Examples of Credit Union Service to Native American
Communities:
Bear Paw Credit Union, Havre, MT
Tongass Federal Credit Union, Metlakatla, AK
The Credit Union Record of Lending to Native Americans
Legislative Initiatives to Enhance Credit Union Service to
Native American Communities
Introduction
My name is Darwin Brokke, and I am President and CEO of Citizens
Community Credit Union in Devils Lake, North Dakota. Founded in 1940,
my credit union serves 10,700 members in the area around Devils Lake,
Bisbee and Larimore, North Dakota. Among our ten branches, one is
located on the Spirit Lake Reservation and one is in St. John on the
border of the Turtle Mountain Reservation.
Lack of access to financial institutions plays a key role in
poverty in any community. The additional challenges associated with
serving Native American communities make it even more the case in these
areas. Those without access to financial institutions do not have the
opportunity to build assets and accumulate wealth. And, in many cases,
they are forced to use informal lending structures, including borrowing
from family or friends, or turning to payday lenders.
Credit unions are a natural ally in the effort to reduce predatory
lending in Indian Country. After all, the purpose of credit unions is
to promote the economic well being of all people through a system which
is cooperative, member-owned, volunteer directed, and not-for-profit;
to provide a secure financial alternative for all consumers; and to
provide financial and related products and services to members.
I would like to focus my testimony today first on my experience at
Citizens Community Credit Union with respect to our members' use of
payday lenders, refund anticipation loans and our open-end lending
program. My written testimony describes some of the challenges credit
unions throughout the country are facing with respect to service to
Native American communities, and includes examples of how credit unions
in other states are serving these communities, as well as a description
of legislation which would permit credit unions to better serve all of
their members, including Native Americans.
The Cycle of Payday Lending
Mr. Chairman, I see many of my members use payday lending services,
some on a regular basis. My staff and I can see this when we view a
member's account information, particularly their checking account. We
will see a deposit on their account from a payday lender. When it comes
time to clear their checks, we will often notice that a number of them
have bounced checks. My credit union's daily overdraft list has a
number of bounced checks made out to payday lenders.
We have seen how some members, by using payday lenders, have really
mismanaged their finances. And this has resulted in very poor credit
scores for these members, making it difficult for them to get financial
help anywhere, including, sometimes, the credit union. There have been
occasions when we have had to turn down a member for a loan because we
see that they are already in debt to payday lenders--we do not want to
add to the problem of insurmountable debt. When we see this with one of
our members, we will try to educate him on the risks involved in payday
lending, and we will try to help him them find products that could be
part of the solution.
Mr. Chairman, I also see other lenders take advantage of my members
through tax refund anticipation loans. At the time this product was
first developed, my credit union was one of the first financial
institutions to offer a refund anticipation loan. We would allow
members to come in with their 1040 and electronically file it. We would
then confirm the refund with the IRS and issue an advance.
Although we charged minimal fees to participate, we began to
realize the program was more of a disservice to its members. Over a
period of time, I realized it was a rip-off for my members. They would
often be better off by waiting for the entire refund to come in and not
pay any fees on any resulting loan. When we gave up the program, I
noticed that some members began using other businesses to take out
these refund loans.
By using a tax refund anticipation loan, members can end up owing
money instead of receiving their tax refund. Considering the fees
associated with the refund anticipation loan, the members are at a
disadvantage. What members may not realize is that you pay the fee for
the loan, in addition to fees for check cashing and tax preparation.
When it is all said and done, some members can lose hundreds of dollars
that they would have received had they waited a few more weeks. We now
advise our members to stay away from refund anticipation loans.
The Credit Union Response to the Cycle of Payday Lending
Mr. Chairman, I believe that financial education is perhaps the
best solution to combat payday lending. My credit union has worked hard
to educate our members on the risks of payday loans, especially the
high interest rate associated with them. It has been my observation
that the payday loans are going to members with little money to pay it
back. For the vast majority of my members, these payday loans are doing
more harm than good.
But financial education alone is not the solution. Even with our
financial literacy efforts, some members do not always understand that
the high interest rates associated with these loans can get them stuck
in a cycle of debt. They cannot see that payday loans are making it
more difficult for them to realize a stable financial situation. And,
the longer they have subjected themselves to abuse by payday lenders,
the more difficult it is to offer products to help these members
because their credit is completely shot. At Citizens Community Credit
Union, our members have two programs serving as alternatives to payday
lending products.
Citizens Community Credit Union: Open-End Lending Program
and Reward Line of Credit Program
In 1983, when I became President of Citizens Community Credit
Union, I immediately recognized a need to develop a strong relationship
with the tribe and the tribal members. This need was two-part: the need
for financial education and also the need for greater access to
financial services and products.
It seemed as though most financial institutions would not make
loans to Native Americans back when I started. Perhaps things have
changed some now that everything is credit score driven. However, back
in the 1980s, that was not the case. The need for financial services
was so great and the lending environment was so fragile that I didn't
even pull credit bureau reports; instead, we went out into these
communities and built relationships with the people. In addition to
reviewing credit histories and credit scores, much of our lending
continues to be relationship driven, based on a level of trust between
the credit union and the members.
Citizens Community Credit Union instituted an Open-End Lending
program in 1983. Open-End Lending essentially means that one can add to
an existing loan, under certain circumstances. It can work much like a
revolving line of credit. Once opened, Open-End Lending allows for
multiple advances, except without the need for all the additional
paperwork, such as applications and notes. Each advance request can be
quickly underwritten and disbursed without the labor and costs of other
loans. Furthermore, Open-End Lending is convenient for the member; he
or she does not need to visit the office to sign papers each time they
need funds, they can simply pick up the phone and call.
Traditional closed-end loans have a specific maturity day; because
of this, refinancing required establishing a completely new loan. In
offering an open-end solution, new loans made for autos and other types
of collateral will require much less paperwork and offer additional
options, such as subsequent loan advances.
One advantage of Open-End Lending is that it anticipates repeat
usage; this helps both credit unions and their members. The credit
union is able to handle additional loan volume without the extra staff,
and the member has the opportunity to add an advance with minimal
effort.
Generally, the interest rate on open-end loans is associated with
the collateral offered for the overall Open-End Lending program. Also,
factors to consider when determining the interest rate include the
individual's credit score, as well as the length of the loan.
Generally, we can offer open-end loans with interest rates from 12
percent, to as low as 5.9 percent.
Recently, Citizens Community Credit Union began offering a line of
credit program, called Reward Line of Credit. Because of my immediate
experience with loans I made to people working for tribal businesses, I
learned quickly that the employees would request multiple advances on a
frequent basis. Furthermore, I realized many individuals were beginning
to use payday loans as a means to get these advances. I understood that
this could turn out to be a real problem, so my credit union
implemented the Reward Line of Credit program.
The Reward Line of Credit program carries many of the same
characteristics of open-end lending; however it has specific criteria
one must meet in order to qualify. The main difference between the two
programs is that the line of credit is limited in size. This program is
only available to those individuals who have lower credit scores, and
requires payroll deduction for repayment. Furthermore, the minimum
advance is $25, with a minimum repayment of 5 percent of the balance
plus $20 that goes into a savings account. There are no fees associated
with the program, and the interest rate is held at 16 percent.
Mr. Chairman, there is considerable default risk with this type of
lending. In most cases, if the member were to lose their job, there are
generally few assets to resolve the debt. It is well known that the
tribal court systems are not always the easiest to work with, making
any recovery efforts very difficult. With that said, we have made a
commitment to our members to continue offering these loans--we have a
relationship with the Reservations, and the people have one with us. We
will work with our members as best as we can to find a solution to any
financial problem they may have.
On a daily basis, we make loans to help our members during
challenging times; whether it is a $30 loan to a member to pay his heat
bill or a $50 loan so that a member can purchase her medication. To us,
these types of situations are a part of a typical work day. To pull one
anecdote out of a thousand would be impossible, and it would be an
injustice to take such a narrow focus. We do what we do because we
believe in the credit union philosophy of ``people helping people.'' We
are lucky in that we understand the culture, we understand the people,
and we understand the risks. This helps us manage our programs and
serve our community.
The Native American Credit Union Initiative: Identifying
Challenges; Identifying Solutions
While solid statistics regarding the number of credit unions
serving Native American communities are difficult to come by, I know
that my experience is not unique within the credit union movement. In
2006, the National Credit Union Foundation (NCUF) began implementing
the Native American Credit Union Initiative, an effort to study credit
union service to Native American communities.
NCUF found that credit unions were serving Native Americans but
details of the level of service were anecdotal and piecemeal. So, they
instituted an informal survey of credit unions serving Native American
communities to determine the types of products and services they offer
and the degree to which they were serving this population. They also
sought to facilitate the discussion, on a national level, of best
practices for and barriers to service of Native Americans by convening
a conference in July 2006 for credit unions serving Native Americans.
Twenty-one credit unions responded to the NCUF informal, voluntary
survey and fourteen credit unions participated in the July 2006
conference.
The average asset size of the survey respondents was $95 million
and half of the credit unions responding to the survey had a ``low-
income'' designation by the National Credit Union Administration
(NCUA). The ``low-income'' designation means the credit union is
eligible for regulatory assistance in serving low-income fields of
membership. Three of the credit unions responding to the survey were
located on an Indian reservation.
The responses to the survey showed that nearly all credit unions
adapt their products to reflect members' and market needs, including
those of Native Americans. For instance, a consumer loan might be based
on credit history rather than credit scores for some Native American
borrowers. The respondents also indicated that they provide Individual
Development Accounts (IDAs) and Volunteer Income Tax Assistance (VITA)
with financial education.
Both the survey respondents and the conference participants
identified understanding the tribal governing process and the tribal
court system as one of the most difficult operational challenges to
serving Native American communities. Each tribe has its own system, and
special expertise is needed to understand Indian law.
Another challenge identified by credit unions was the lack of
financial literacy. As is the case with many Americans, tribal members
often do not understand the long-term impact of their financial
decisions, making them vulnerable to payday lenders and the chronic
cycle of poverty. Like many Americans, not all Native American credit
union members have developed a habit of saving on a regular basis,
which jeopardizes their families' financial security and stability.
The credit unions participating in the NCUF Initiative also
indicated that mortgages on trust land are difficult to collateralize,
making it risky to lend on trust land unless there is a government
guarantee. The HUD Section 184 Indian Housing Guarantee Loan program
can be bureaucratic and complex, according to the credit unions
participating in the Initiative.
The credit unions participating in the Initiative identified
several opportunities for credit unions to serve Native American
communities, including:
Membership expansion: Native American credit union members are
usually very loyal once a trusting relationship between the
member and the credit union is developed. If someone shares
their positive credit union experience with a friend or family
member, the credit union has a very strong possibility of
adding a new member. Member loyalty presents a good opportunity
for membership expansion for credit unions serving Native
American communities.
Financial education: As previously noted, credit unions want to
work with Native Americans and view this as an opportunity to
fulfill the movement's ``People Helping People'' mission.
According to the credit unions serving Native American
populations, the greatest financial education need involves
budgeting and long-term planning assistance. There is a need
for financial education not only in the tribal schools, but
also for Native American adults.
Increased lending opportunities: The credit unions responding
to the initiative agreed that consumer loans, auto loans, home
mortgages--both on and off the reservation--construction
lending, micro-financing, and business lending are all
opportunities for credit unions serving Native American
communities.
Accounts for tribal governments: Tribal governments can also be
a significant source of deposits for credit unions serving
these communities.
Minimal competition from other financial institutions: Finally,
the credit unions serving Native American communities noted
there is minimal competition for new branches or ATM services.
Opening a new branch or providing ATM services on a reservation
can generate income to cover costs while also meeting a
community need. Some of the credit unions participating in the
Initiative have opened a branch in the casino where their
members work or in the high school their members attend.
Examples of Credit Union Service to Native American Communities
Using funding from the Community Development Revolving Loan Fund
(CDRLF) and the National Credit Union Foundation, several credit unions
have been able to enhance service to Native American communities. I
would like to highlight the experience of two very successful credit
unions:
Bear Paw Credit Union, Havre, Montana: Bear Paw Credit Union
received both CDRLF assistance as well as a grant from the
National Credit Union Foundation for software upgrades, staff
training, and financial education for its members. The credit
union's field of membership includes residents of the Fort
Belknap Indian Reservation. Since 2004, credit union
representatives travel weekly to the reservation (90 miles
roundtrip) and assist tribal members with their financial
needs. The National Credit Union Foundation grant helped the
credit union place two ATMs on the reservation to accommodate
cash needs. This has dramatically decreased tribal members'
dependence on predatory lenders and check cashers.
Tongass Federal Credit Union (FCU), Metlakatla, Alaska: Tongass
FCU initiated financial education and savings programs to
schools in the communities they serve, helping promote the
importance of savings at an early age. The National Credit
Union Foundation made a $45,180 grant to Tongass FCU to enable
the credit union to serve a Native American island community
only reachable by ferry. In 2007, the credit union provided
financial education to 50 Metlakatla Indian families through a
personal financial advisor. The families learned about savings,
credit, budgeting, and online financial tools.
The Credit Union Record of Lending to Native Americans
Home Mortgage Disclosure Act (HMDA) data from 2006 makes it clear
that credit unions are more likely than other lenders to grant loans to
Native Americans. The HMDA data also shows that credit unions generally
lend to Native Americans on more favorable terms. That's not
surprising--as member-owned, not-for-profit financial cooperatives,
credit unions care deeply about their member-borrowers.
Specifically, the most recent HMDA data shows that credit unions
approved 66 percent of the applications they received from Native
Americans. In comparison, other lenders approved just 52 percent of
applications they received from this group. In addition, credit union
pricing is more consumer-friendly to Native Americans. Only 5 percent
of single family mortgage loans originated by credit unions were high-
rate loans while 28 percent of such loans originated by other lenders
(i.e., non-credit union financial institutions) were high-rate loans.
High-rate loans are defined as those with interest rates 3 percentage
points or more above the rate on comparable-maturity Treasury
securities.
Legislative Initiatives to Enhance Credit Union Service to Native
American Communities
Mr. Chairman, there are challenges and opportunities for credit
unions serving Native American communities. While not envisioned to
exclusively encourage credit union service to Native American
communities, two bills contain provisions that would assist credit
unions in these efforts.
S. 2957, the Credit Union Regulatory Improvements Act: S. 2957,
as introduced by Senator Lieberman, contains several provisions
aimed at giving credit unions the flexibility to better serve
their members. In particular, S. 2957 would clarify that all
federally chartered credit unions are eligible to add areas
which qualify under as a Community Development Financial
Institution Investment Area or a New Markets Tax Credit Area to
their field of membership. Current law restricts single-sponsor
and community chartered credit unions from applying to serve
underserved areas. The companion bill to S. 2957 in the House
is H.R. 1537, introduced by Representatives Paul Kanjorski and
Ed Royce, which has 148 cosponsors.
H.R. 5519, the Credit Union Regulatory Relief Act: H.R. 5519
also contains a similar provision addressing credit union
service to underserved areas. It also contains a provision that
would permit federally chartered credit unions to offer payday
lending alternatives to non-members within their field of
membership. This provision is modeled after a section in the
Financial Services Regulatory Relief Act of 2006 enabling
federally chartered credit unions to offer check cashing and
remittances services to non-members within their field of
membership.
Conclusion
Mr. Chairman, thank you again for the opportunity to testify on
this important issue. We share your concern regarding the availability
of mainstream financial services to Native American communities and we
stand ready to serve.
The Chairman. Mr. Brokke, thank you very much for your
testimony.
Next we will hear from John Barkley. He is the Vice
Chairman of the Umatilla Tribal Water Commission and the former
Chairman of the Umatilla Tribal General Council at the
Confederated Tribes of the Umatilla Indian Reservation in
Pendleton, Oregon.
Mr. Barkley, thank you for being with us. You may proceed.
STATEMENT OF JOHN BARKLEY, JR., VICE CHAIRMAN, UMATILLA TRIBAL
WATER COMMISSION; ENROLLED
CAYUSE TRIBAL MEMBER, CONFEDERATED TRIBES OF THE UMATILLA
INDIAN RESERVATION (CTUIR)
Mr. Barkley. Good morning, Mr. Chairman.
I am very pleased to represent my home and community. As a
first time home buyer through the Wapayatat: Financial and
Homeownership classes, which is orchestrated through our
Umatilla Reservation Housing Authority, I will be providing
testimony about my personal story and information about what my
tribes are doing to combat predatory lending on the
reservation.
As you know, Native American people suffer the highest rate
of poverty, unemployment, alcohol and drug abuse, high school
dropout rate, diabetes, heart disease. As such, they are more
susceptible to financial woes and thereby vulnerable to
predatory lending and the unethical enticements resulting in
exorbitant interest rates, unrealistic terms and conditions,
counterproductive to creating healthy communities and stable
economies. At times, predatory lenders are the only hope for
tribal members, because they have nowhere else to turn. This
leaves little nothing for savings, they essentially survive
payday to payday, rely on social services, or hedge their
meager quarterly gaming dividend.
Payday loan venues, rent-to-own vendors, shady car dealers
and credit card companies and financial institutions take
advantage of people's lack of financial education. But through
education and extensive counseling, offered through our six-
week financial literacy program we call Wapayatat, which means
``to learn,'' we were able to train nearly 400 tribal members
about cleaning up their credit, improving their credit rating,
assessing unnecessary spending habits and how to avoid the
trappings of credit cards, late fees, interest rates exceeding
28 percent and taking years to pay off maxed-out credit cards.
Instead, they come to learn how to control their finances,
to save, avoid frivolous spending, and how to buy a car or
traverse the complex, overwhelming process of saving money for
a down payment on a new home, selecting a home, finding a home
site, seeking a competent contractor, working with the escrow
agent, completing the paperwork and finally moving into a new
home.
Wapayatat provides individuals the tools to understand the
process and the fees attached to borrowing money from any
lender. What once was minimal access to finance capital has
been resolved by Wapayatat and the Individual Development
Accounts. This is a savings-match program that serves as an
incentive for tribal members to save and improve their credit.
Our program, Umatilla Saves, offers a three-to-one matching
Individual Development Account in which we save $1,500 in six
months, and an additional $4,500 was matched in our savings
accounts that enabled us to use that as a down payment on our
new home. We continued to save beyond our obligation because of
what we learned through this program. My wife and I worked on
our tri-merge credit reports and also our personal budget and
other savings for future needs.
Of course, the results of this diligent effort was a new
manufactured three-bedroom, two-bath home, with a deck, two-
car garage, one acre of trust land in the beautiful Blue
Mountains at home in our reservation. It is a good sense home,
energy-efficient, with energy-efficient appliances. It is an
investment that we have made into ourselves and our community,
and we continue to build and maintain and develop, because it
is an asset that appreciates, and it is something that we have
equity in.
The Umatilla Saves and Umatilla Builds program have
received national awards from the Harvard Honoring Nations and
the National Association of Realtors Award. I believe it is a
model and through our experience, a microcosm of how we can
help build Indian nations. Empowering tribal members through
financial literacy has proved to be a valuable tool in which
they sense hope for stability, security, investment and for
improving their living conditions and livelihoods. This sets
the stage for subsequent generations. Lessons can be learned,
and learning about financial literacy is where it starts.
One alternative to predatory lending is to developing
community development financial institutions that build on the
success of Wapayatat and provides technical and educational
resources to thwart predatory lenders. Building such capacity
through collaborative partnership with Federal agencies and
with legislative acumen, we can attend the plethora of
intricate factors inhibiting full transition from financial
literacy to stable family structure, healthy communities,
viable economic well-being and self-sufficiency.
It has been a privilege to speak before you this morning.
Thank you, Honorable Chairman, for this opportunity. Your
interest in this subject is so critically important in Indian
Country.
[The prepared statement of Mr. Barkley follows:]
Prepared Statement of John Barkley, Jr., Vice Chairman, Umatilla Tribal
Water Commission; Enrolled Cayuse Tribal Member, Confederated Tribes of
the Umatilla Indian Reservation (CTUIR)
Mr. Chairman, and members of the Committee, my name is John
Barkley, Jr., former Chairman of the General Council and former member
of the Board of Trustees for the Confederated Tribes of the Umatilla
Indian Reservation. The Confederated Tribes consist of the Cayuse,
Walla Walla and Umatilla in northeast Oregon. I am currently a Training
Generalist with the Council for Tribal Employment Rights, a national,
non-profit organization representing over 300 Indian Tribes and Alaskan
Native Villages with Tribal Employment Rights Ordinances. I am pleased
to represent my home and community. As a first-time homebuyer through
the Wapayatat: Financial and Homeownership classes orchestrated through
the Umatilla Reservation Housing Authority, I will be providing
testimony about my personal story and information about what my tribes
are doing to combat predatory lending on our reservation.
Native American people suffer the highest rate of poverty,
unemployment, high school drop out, diabetes and heart disease, and, as
such, are more susceptible to financial woes, and thereby vulnerable to
predatory lending and unethical enticements resulting in exorbitant
interest rates, unrealistic terms and conditions counterproductive in
creating healthy communities and stable economies. At time predatory
lenders are the only hope for tribal members because they have nowhere
else to turn. This leaves little to nothing for savings--they
essentially survive pay day to pay day, rely on social services, or
hedge their meager quarterly gaming dividend.
Pay day loan venues, rent-to-own vendors, shady car dealers and
credit card companies take advantage of people's lack of financial
education, but through education and extensive counseling offered
through the tribal financial literacy program called Wapayatat--which
means ``to learn''--we were able to train nearly 400 tribal members
about cleaning up their credit, improving their credit rating, assess
unnecessary spending habits, and how to avoid the trappings of credit
cards, late fees, interest rates exceeding 28 percent, and taking years
to pay off maxed out credit cards. Instead they come to learn how to
control their finances, to save and avoid frivolous spending, and how
to buy a car or traverse the complex, overwhelming process of saving
money for a down payment on a new home, selecting a home, finding a
home site, seeking a competent contractor, working with an escrow
agent, completing the paperwork and finally moving in your new home.
Wapayatat provides individuals the tools to understand the process
and the fees attached to borrowing money from any lender. What once was
minimal access to finance capital has been resolved by Wapayatat and
the Individual Development Account, or IDA's.
This savings-match account served as an incentive to establish a
savings account, clean up your credit, seek lower interest rates, and
provide a down payment for fulfilling part of every American's dream--
to own your own home. The Umatilla Saves program offered a 3-to-1
matching IDA in which we saved $1,500 in six months and an additional
$4,500 was matched in our savings account. This enabled $6,000 for down
payment on a new home, and we continued to save beyond our obligation
because of lessons learned. My wife and I worked on our tri-merge
credit report and also on a personal budget and other savings for
future needs.
The results of our diligent efforts was a new manufactured 3-
bedroom, 2-bath home, a deck, 2 car garage, and fenced yard on one-acre
of trust land on the reservation in the beautiful Blue Mountains. The
good cents, energy efficient home came with energy efficient
appliances. Now we continue to maintain, build and develop our place so
that this investment appreciates in value. Home is where the heart is,
and our new home has our heart.
Umatilla Saves, and the new Umatilla Builds program, which offers a
5-to-1 match, have been the recipient of the 2006 Harvard Honoring
Nations Award and the 2007 National Association of Realtor's Award. In
light of the recent mortgage crisis experienced nationwide, Wapayatat
is a model and our experience a microcosm of how we can help build our
Indian Nations. Empowering tribal members through financial literacy
has proved to be a valuable tool in which they sense hope for
stability, security, investment and for improving their living
conditions and livelihoods. This sets the stage for subsequent
generations. Lessons can be learned, and learning about financial
literacy is where to start.
An alternative to predatory lending is to develop a Native
community development financial institution that builds on the success
of Wapayatat and provides additional technical, educational resources
to thwart predatory lenders.
Building such capacity through collaborative partnership with
federal agencies and with legislative acumen, we can attend the
plethora of intricate factors inhibiting full transition from financial
literacy to stable family structure, healthy communities and viable
economic well-being.
It has been a privilege to speak before you this morning. Thank you
Honorable Chairman, and committee members, for this opportunity and for
your interest in this subject that is so critically important to many
across Indian Country.
The Chairman. Mr. Barkley, thank you very much.
Finally, we will hear from Mr. Jamie Fulmer, who is the
Director of Public Affairs for the Advance America Cash Advance
Centers, Inc., and a representative for the Community Financial
Services Association of America. My understanding is you
represent about 60 percent of those institutions across the
Country.
So Mr. Fulmer, thank you for being here, and you may
proceed.
STATEMENT OF JAMIE FULMER, DIRECTOR OF PUBLIC
AFFAIRS, ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.;
REPRESENTATIVE, COMMUNITY FINANCIAL SERVICES ASSOCIATION
Mr. Fulmer. Thank you, Mr. Chairman. It is a pleasure to be
with you.
As you said, I am here today representing the Community
Financial Services Association, or CFSA, which does represent
about 60 percent of the 25,000 payday lending storefronts that
exist in this Country.
The payday loan provides consumers with access to small
amounts of short-term credit when they find themselves between
paychecks with some type of unbudgeted or unexpected expense.
The payday loan is not a predatory loan. We don't trick, mis-
lead or coerce our customers. The payday loan is typically a
two-week loan in the range of $300 to $400, collateralized with
a personal check, for which customers pay a $15 per $100
borrowed fee. Customers are not unsophisticated or vulnerable.
Our typical customer is the heart of the hard-working middle-
income American class. They have a household income of about
$43,000, they all have a job or a steady source of income, they
all have an active, open bank account. About 90 percent of them
are high school educated, about half of them are college
educated. About half of them own their own homes and about half
of them have a credit card.
These customers understand and choose the payday product
because they understand it can be a more rational, cost-
competitive alternative to many of the other options available
to them. They are certainly very pleased with the product and
very satisfied with the service. Out of 14 million transactions
that our company issued last year, there were only 80
complaints to State agencies.
Mr. Chairman, gone are the days when a consumer can go down
to their local bank and borrow a small, unsecured, short-term
from their local banker, probably from someone who was a
neighbor of theirs. Now, consumers are forced to turn to more
expensive options and more fee-based options offered by banks
and financial institutions. Consider the fact that a bounced
check costs consumers over $55 in out of pocket costs, once you
have paid the bank that you wrote the check on and the merchant
that you wrote the check to. Also consider the fact that
overdraft protection fees or credit card late fees are in the
$35 to $40 range, as are paying your rent or your mortgage
bills late or your utility bills late.
Customers choose the payday advance product not only
because it can be a less expensive option, but there are no
negative credit consequences, there is no revolving debt. It is
a simple, straightforward transaction. There are a lot of
research out there from independent analysis that suggests that
consumers are better served when they have more access to
financial options, not fewer.
There has been much discussed about where we locate our
centers. Our centers are located in high traffic, often
suburban retail locations near where middle-income consumers
work, near where they live and near where they shop. The ideal
location is in a strip center with a Wal-Mart, Home Depot or
another nationally-known retailer or large regional grocery
store chain. Our centers resemble a small bank branch and our
employees are focused on providing exceptional customer service
to the customers they serve.
Despite what the critics say, we don't target any specific
demographic. I brought a map here to show an analysis of the
licensed lenders in the State of North Dakota, that show where
we locate. It clearly shows that we locate in the high traffic
areas and the densely-populated areas within that State.
Also in that regard, I would like to acknowledge the
presence of Dr. Pat Cirillo from Cyprus Research at today's
hearing. Dr. Cirillo has conducted a detailed analysis
disputing the contention that payday lenders target any
particular demographic of customer. I ask that Dr. Cirillo's
testimony and analysis be included in the record of today's
hearings.
Mr. Chairman, there has been much discussion about the fees
that we charge and the applicable annual percentage rate. It is
important to note that we fully comply with all truth-in-
lending laws of this Country and in the States we operate in.
We disclose the rates and fees, and in our centers, we have
large 18 by 22 posters that have examples of those fees. They
are included in the customer agreements that customers sign.
They are easily accessible on members' websites and the
Association's websites.
Customers tell us, however, that the APR is not the
appropriate value indicator for the payday lending product.
First of all, a 391 percent APR that is so often quoted would
only apply if a customer took out the same loan every two weeks
for an entire year. That is not how customers use our product.
Also, the APR is typically intended for a longer term credit
product, such as a home loan or a car loan or any other type of
loan that you would have outstanding for a long period of time.
In fact, if you applied an APR calculation to the fee-based
products that I mentioned earlier, offered by financial
institutions, the bounced check fee, the credit card late fee,
you would have a range of 800 to 1,300 percent.
The fact of the matter is that we offer a product that is
competitively priced in the marketplace we serve. Much has been
made about the 36 percent annual percentage rate cap that was
placed on folks in the military and has been recently adopted
in a couple of States. First of all, let me make no mistake
about it: a 36 percent rate cap is a ban of the payday lending
industry.
The Chairman. Is a what?
Mr. Fulmer. It is a ban. An elimination. It would change
the fee that we charge, which is typically now $15 per $100 to
$1.38 per $100 borrowed. That would equate to 10 cents a day.
We can't meet our payroll costs. We can't meet our other
overhead costs, let alone assume the credit risk of basically
an unsecured loan at 10 cents a day. Unfortunately, the
consequence of a 36 percent rate cap results in the elimination
of a valued option to consumers.
While overwhelmingly, the number of consumers who use our
product do so responsibly, 97 percent of the customers who take
out a payday advance from Advance America will pay us back
within a day or two of their due date, like any other credit
product out there, we understand that there are folks who do
not use the product responsibly. As an association of
responsible lenders, CFSA supports reasonable regulations in
all States that we operate in, and are active participants in
that process.
In addition, CFSA has adopted a comprehensive set of best
practices designed to promote responsible use, prevent the
cycle of debt, require full disclosure, ensure collection
practices that are appropriate and proper, and ensures the
transparency of the payday loan product. In addition, we have
adopted an extended payment plan, which would give any borrower
who feels like they have gotten in over their head with the use
of payday loans the opportunity to pay off their obligation at
no additional cost, at no additional fee, at no additional
accruing interest over a longer period of time.
We strive to be good corporate citizens individually and as
an association, partnering with organizations all across the
Country to support financial literacy efforts and other
worthwhile causes.
Mr. Chairman, I appreciate the opportunity to be with you
today, and I ask that my written testimony, along with the
attachments, be accepted into the record of this hearing. I am
happy to answer any questions.
[The prepared statement of Mr. Fulmer follows:]
Prepared Statement of Jamie Fulmer, Director of Public Affairs, Advance
America, Cash Advance Centers, Inc.; Representative, Community
Financial Services Association
Introduction
Thank you for the opportunity to provide information at today's
hearing. My name is Jamie Fulmer and I am Director of Public Affairs
for Advance America Cash Advance Centers, Inc., a publicly held payday
advance company headquartered in South Carolina. I am appearing today
as the representative of the Community Financial Services Association
of America (CFSA), of which my company is a founding member.
Background on the Community Financial Services Association
CFSA was founded in 1999 to promote laws and regulations relating
to payday advance lending that protect consumers, while preserving
their access to credit options, and to support and encourage
responsible payday advance industry practices. Today, CFSA is comprised
of 164 member companies, representing more than half of all payday
advance locations nationally.
All CFSA member companies are required to adhere to a comprehensive
set of payday lending Best Practices aimed at ensuring consumer
protection. These Best Practices, a copy of which is attached, include
requirements that often exceed those contained in state law and ensure
that our member companies hold themselves to high standards of
responsible service and help our customers make sound and informed
financial decisions.
CFSA periodically audits its members to secure full compliance with
its mandatory Best Practices. CFSA also continues to enhance these Best
Practices as our industry evolves and I will highlight several
important recent changes later in my testimony.
General Background on Payday Lending
How Payday Advances Work--The payday advance application process is
simple and transparent. It requires supporting documents, including
proof of a regular income, a personal checking account and
identification. Individual companies have their own additional
underwriting criteria.
If approved, a borrower reads and signs an agreement containing
loan terms and disclosures required by the Truth in Lending Act and
writes a personal check for the amount of the advance, plus a modest
fee. The lender advances the customer funds immediately and waits to
negotiate the borrower's personal check until an agreed upon date,
usually within two to four weeks, when the borrower receives his or her
next paycheck.
The average loan is around $300 and the typical fee is $15 per $100
borrowed. Payday lenders do not require collateral or personal property
as security (e.g., no car titles) nor do payday loans involve check
cashing.
State Regulated--Payday lending is highly regulated at the state
level. CFSA member companies have taken a constructive leadership role
in working with state legislators, regulators and other interested
parties to help develop innovative and effective state statutes and
regulations for this still-developing industry.
State requirements include, among other things, limits on the
amount customers can borrow and the dollar amount of the fees lenders
can charge. States also generally either prohibit loans from being
``rolled-over'' (i.e., extended for another term in exchange for the
payment of another fee) or limit such rollovers to one or two times.
Size of Payday Advance Industry--There is a very strong consumer
demand for short-term credit. Our industry serves approximately 19
million American households each year. Payday lenders extend about $40
billion annually in short-term, unsecured credit to hard-working,
middle-class Americans who occasionally experience cash-flow shortfalls
between paydays. According to analysts at Stephens, Inc., the payday
lending industry employs more than 50,000 people in about 24,000
locations and pays its employees throughout the country roughly $2
billion in wages.
Payday Advance Customers--Research shows most payday advance
customers to be from middle-income, educated, working families, with
more than half earning between $25,000 and $50,000 annually, 58 percent
having attended college, and one in five having a bachelor's degree.
Further, payday advance customers are not the ``un-banked,'' as
every customer is required to have a checking account at a bank or
credit union plus a job or other steady source of income. Our customers
turn to payday lenders for a reasonably-priced, well-regulated option
for meeting unexpected, relatively low dollar, unbudgeted expenses and
other short-term financial needs.
When CFSA members make a loan to our customers, we do so only if we
believe the individual borrower can repay the loan in a timely manner.
And, to state the obvious, our members can stay in business only if our
customers do repay their loans.
Store Locations--Payday lenders are located in population centers
and areas where customers live, work and shop. These convenient
locations often include shopping centers with large national anchor
tenants such as Wal-Mart, Blockbuster, Radio Shack, and/or regional
grocery store chains.
Critics have often alleged that the payday lending industry
inappropriately targets vulnerable populations. During the past few
years, the industry unfairly has been accused of locating in
communities with high populations of military personnel, women, the
elderly, Hispanic Americans, Native Americans, African Americans,
recent immigrants, young people, social security recipients, veterans,
poor people and Christian conservatives. A recent Business Week article
even said payday lenders are targeting affluent neighborhoods.
The claims that we target any specific group are without factual
foundation. Payday lenders do not target people on the basis of class
or specific racial, ethnic or other characteristics. In fact, we
``target'' the general population no differently than do Home Depot or
other retail businesses and our lender locations reflect this fact.
Payday advance stores are simply located near population and commerce
centers. We do this for the convenience of our customers, who represent
a broad demographic segment and cannot be fairly grouped based on race,
sex, religion or similar characteristic.
Why Customers Choose Payday Advances--Customers use payday advances
to cover small, unexpected expenses between paydays. They are generally
ordinary people who have a bill to pay and who seek immediate, short-
term credit to meet this obligation.
Short-term small loans of less than $1,000 generally are not
offered by banking institutions. Banks have noted, and studies have
confirmed, that the cost of offering such short-term loans is quite
high relative to larger longer-term loans, and banks generally have
deployed their lending resources in other more profitable ways.
Ordinary Americans who need such short-term credit therefore
frequently must choose between a payday advance and often more costly
alternatives, such as bouncing a check or paying overdraft fees, late
bill payment penalties and credit card late fees, or asking family
members for money or pledging personal possessions as collateral. All
of these alternative forms of credit have associated fees or costs, and
while payday advances are not always the best option, in many other
cases consumers determine that a payday loan is in fact the best and
cheapest credit option available.
Payday Loan Critics Unfairly Use Misleading ``APR'' Calculations--
In addition to factors such as convenience and privacy, our experience
is that consumers generally look at the real cost of their available
credit options and make a rational, informed decision when they choose
a payday loan. By contrast, critics of our industry tend to disregard
the true relative costs of short-term credit alternatives and attack
payday advances because our loan product has a relatively high rate
when expressed in terms of an APR, or annual percentage rate.
Overly-simplified APR comparisons in this context tend to be quite
misleading. Measuring a two-week payday advance at an annual rate is
like Blockbuster quoting you what it would cost to rent a movie for a
year's worth of nights, when all you want is to rent it for one night.
Let me explain how the APR calculation works, or, in our view, does not
work.
First, with respect to payday loans--which typically are made on a
two-week basis for a fee of $15 per $100 borrowed--the APR is
essentially calculated by making a theoretical assumption that the loan
will be extended 26 times during a year with a new $15 fee being paid
each time. Under this approach, the APR is almost 400 percent ($15
26 weeks = 390 percent in APR ``interest''). This figure is
totally misleading and suggests that a borrower normally would be
paying $390 in interest on a $100 loan. \1\ In reality, however, this
theoretical APR situation never occurs and generally cannot occur as a
matter of law. State laws now usually prohibit rollovers entirely, or
allow only one or two. In real terms, the borrower is paying in most
cases a fee that equates to an actual interest rate of 15 percent per
$100 borrowed, which customers clearly understand.
---------------------------------------------------------------------------
\1\ The term length of a loan likewise skews an APR calculation.
For example, a $15 fee for a one-week loan = 780 percent APR; a two-
week loan for the same total $15 fee = 380 percent APR; a four-week
loan with this same set $15 fee = 180 percent APR. Under the extended
payment plans described below, this APR calculation continues to drop
dramatically.
---------------------------------------------------------------------------
Contrary to the impression given by some critics, financial data
shows that payday lenders are not making excessive profits, and that
their profits are often lower than those of other financial
institutions. American Banker reported public companies reported
profits of 8.5 percent and an article published in the Fordham Journal
of Corporate & Financial Law supports the position that payday advance
fees are in line with the high costs of operating payday lending
businesses. The market for payday loans demonstrates that payday
lenders' fees also are not out of line with the cost of competing
short-term credit alternatives when you consider the actual cost of all
fees and interest charged for these other credit options.
``Apples To Oranges'' APR Comparisons--Applicable regulations
require that the fees charged by traditional payday advance lenders
must be disclosed as interest and stated on an annualized basis in
terms of an APR. Unfortunately, these rules do not require that the
cost of many competing short-term credit options be stated in the same
way. Instead, depository institutions like banks and credit unions
typically have to disclose their interest rate as an APR, but do not
have to include in their APR calculation the various fees they also
charge for their short-term credit products.
The practical result of these differing APR calculation
requirements is that many other lenders charge a fee or both a rate of
interest and one or more fees for the short-term credit service they
provide, and yet have a relatively low APR because all their fees are
not included in the APR computations. ``Apples and oranges''
comparisons are then made by critics who unfairly attack payday loans
because they usually have a higher APR under these flawed calculation
methods.
Therefore, we believe that the APR, as currently required to be
calculated, is generally quite misleading with regard to the real cost
of payday loans compared to other small, short-term loan products.
Payday loans often are less costly in real terms when the annualized
rate for competing products is calculated so as to include all interest
and associated fees, as FDIC Chairman Sheila Bair and other experts
have recommended. Using an ``apples to apples'' comparison, payday
advances often prove to be the better borrower option. Consider these
typical rate examples for several basic short-term credit alternatives
when expressed as an APR as opposed to fees: a $100 payday advance with
$15 fee is 391 percent APR.; a $100 bounced check with $54.87 NSF/
merchant fee is 1,431 percent APR; a $100 credit card balance with $37
late fee is 965 percent APR; a $100 utility bill with $46.16 late/
reconnect fees is 1,203 percent APR; and a $29 overdraft protection fee
on $100 is 755 percent.
Flawed APR Caps--Many critics have called for capping rates at a 36
percent APR level as has been done with respect to military personnel.
Some critics now are saying that new loan products being offered by
credit unions show that loans can be made well below the proposed cap.
What's the real story? It's pretty simple, but not what the critics
would have you believe.
If a rate cap of 36 percent APR is imposed, payday lenders cannot
provide borrowers with this important short-term credit option. Such a
cap would mean that in real terms, a lender could only charge about
$1.38 per $100 borrowed. There clearly is no economically viable way,
short of subsidization from some source, that a payday lender, or for
that matter other lenders, can provide short-term small loans at such a
low rate. Why? Because the actual cost of delivering the loan, not to
even mention allowing for loan losses and a modest profit, is far
higher than $1.38 per $100.00.
For example, Goodwill, a non-profit, tax-exempt charity charges
customers $9.90 per $100 borrowed, a 252 percent APR, for their
``GoodMoney'' payday loan. Even the Goodwill could not offer the
product under a 36 percent annual rate cap.
The simple economic reality of a 36 percent APR cap is why we can
no longer offer payday advances to military personnel. We think this is
unfortunate because the better public policy approach would be to allow
military service members access to this important short-term credit
alternative. Military personnel now have fewer choices and often have
to select a credit option that is significantly more costly in real
terms than a payday advance.
We are not alone in our view that borrowers, be they military
members or other consumers, should not have their short-term credit
options limited. A staff report from the Federal Reserve Bank of New
York \2\ notes that ``banning payday loans is not, by itself, going to
motivate competitors to lower prices or invent new products.'' Research
confirms that consumers have suffered in states where payday advances
are no longer available. According to the authors of the Federal
Reserve Bank of New York staff report, consumers in Georgia and North
Carolina ``. . . bounced more checks, complained more about lenders and
debt collectors, and have filed for Chapter 7 bankruptcy at a higher
rate'' following the elimination of the payday lending industry in
those two states.
---------------------------------------------------------------------------
\2\ ``Payday Holiday: How Households Fare after Payday Credit
Bans'' by Federal Reserve Bank of New York Research Officer Donald P.
Morgan and Cornell University graduate student Michael R. Strain.
---------------------------------------------------------------------------
It also is important to understand that many of the new alternative
products, such as those being offered by credit unions, which are being
touted by our critics, have various additional requirements and
restrictions. Moreover, the ``low rates'' being advertised often prove
to be comparable or higher in real terms when one considers both the
interest rate and the fees being charged. In fact, if the current flaws
in the APR calculation requirements were corrected to include both the
interest rate and all fees, these alternative products could not be
offered under a 36 percent APR rate cap. Despite what industry critics
say, a 36 percent annual rate cap is not a reform approach, it is a
ban.
Nonetheless, we welcome the further entry of credit unions and
other financial institutions into the short-term credit advance market,
and believe competition is good for the consumers we serve. We also
recognize that some credit union products logically can be offered at
somewhat lower rates because credit unions do not have to pay taxes, do
not have to make a profit and may be able to subsidize the costs of
such products.
In any case, most of the ``alternatives'' that we have seen are
completely different products with different terms and different fee
structures. Many come with a variety of restrictions and complicated
fee structures. They provide another choice for some consumers, but
have only a limited reach in the larger market we serve, and in all
fairness cannot be considered a replacement for payday loans.
CFSA's Payday Lending Best Practices
Payday lending is a relatively new industry. As it evolves, CFSA
has listened to the concerns raised about our industry and developed
solutions to address them. In particular, we are proud that CFSA has
demonstrated its commitment to responsible lending by adoption of
payday lending industry Best Practices, beginning in 2000. Updating and
changing our mandatory Best Practices are part of our ongoing efforts
to respond to the concerns of policymakers and protect the financial
well being of our customers. A copy of our current Best Practices is
attached.
In the past year, CFSA has made significant changes to the Best
Practices and I would like to take a few minutes to highlight two of
them.
Fee Transparency--CFSA member companies have always met or exceeded
all applicable regulations in this regard. We have provided clear
information on our pricing structure in our loan documents and other
materials as required by applicable laws. Customers generally tell us
they clearly understand the cost associated with payday advances and
appreciate the straight-forward and transparent nature of the product.
Providing consumers with clear, accessible and easy-to-understand
pricing information is one of the most basic responsibilities of any
business. We have an obligation to make sure our customers understand
exactly how much a payday advance will cost before they enter into the
transaction.
This year, we took additional steps to ensure that the cost of a
payday advance is even clearer. CFSA began requiring all member
companies to present consumers with fees on poster-size displays in all
stores and on company websites. As a result, members of CFSA
prominently display the fees and annual percentage rates for at least
five different loan increments on posters that are at least 18,,
22,, in size in all stores and on company websites.
Now, every time a customer walks into a store they see a large
poster letting them know both the fee in a dollar amount and expressed
as an Annual Percentage Rate. Company websites also display the fee and
APR information. Potential customers are clearly aware of all fees
before they enter the transaction process.
CFSA has also established a website to provide consumers with
information about how to use payday advances responsibly. The site,
www.knowyourfee.org, includes a user-friendly, interactive map to make
sure consumers are aware of the maximum fees and rate caps allowed by
law in individual states.
Some consumers may review the fee structure of a proposed payday
loan and conclude that they would be better served with a different
loan product. Others will decide that a payday advance is their best
choice. In either case, the important thing is that consumers are fully
aware of the fees involved, and are able to make an informed decision.
Extended payment plan--Last year, CFSA's Board of Directors
unanimously approved an addition to the association's Best Practices
mandating the establishment of a new Extended Payment Plan (EPP) that
allows our customers additional time to repay their loans, with no
additional fee or finance charge of any kind. This EPP practice was
added to address the concern that borrowers sometimes are unable to
repay their loans in a timely manner.
Under this progressive Best Practice, CFSA member-companies make an
Extended Payment Plan available to all customers without restriction.
We also are actively supporting efforts to enact such a repayment plan
requirement into law at the state-level so that it will apply to all
providers of payday advances. Our efforts include active outreach to
state legislators, community leaders and other constituent groups. In
the past year, four states have added an extended payment plan to their
state law, joining the five states that previously had a mandatory
extended payment plan.
Taken together, these initiatives help ensure that CFSA member
companies hold themselves to a high standard of responsible service and
assist customers in making sound financial decisions.
CFSA's Financial Literacy Programs
CFSA and its member companies are committed to helping consumers
improve their personal finance skills and judgment. CFSA has sponsored
national public education advertisements on television and in print
media explaining that payday loans are only intended as a short-term
option, and are not for continued long-term usage. CFSA encourages
borrowers to use payday advances responsibly. CFSA also has developed
community outreach programs aimed at educating consumers on how to
become financially savvy.
Among these programs are the CFSA Youth Learn & Save program, which
teaches high school and college students in Boys and Girls Clubs the
importance of building a solid financial future; and the CFSA Community
Volunteer Train-the-Trainer program, which provides volunteers with
resources needed to teach financial literacy in their community. Based
on Money Smart, a financial literacy curriculum developed by the
Federal Deposit Insurance Corporation (FDIC), these programs cover a
broad range of personal finance topics, including basic banking
services, consumer credit, budgeting and money management,
homeownership, and savings and investing.
To assist member companies in their efforts to support local
financial literacy programs, CFSA provides Financial Literacy Grants.
Through this program, CFSA members can obtain a grant in amounts
ranging from $500 to $2,500. These grants are matched by the member
company, and are provided to community organizations to launch a CFSA
financial literacy program.
To help payday advance customers improve their credit histories,
CFSA partners with Pay Rent Build Credit (PRBC), a nontraditional
credit reporting agency designed to help consumers build and
rehabilitate their credit. PRBC offers payday advance customers the
opportunity to build an accurate and complete credit history by
monitoring payments on all the bills they pay.
On the national level, CFSA partners with organizations to combat
financial illiteracy around the country. In collaboration with the
National Conference of Black Mayors, CFSA sponsors Youth Empowerment
Summits (YES) to host a day-long financial education summit for high
school and college students. These events are organized in partnership
with minority institutions such as historically black colleges and
universities.
In addition, a partnership with the National Black Caucus of States
Institute, CFSA supports efforts to educate legislators on economic
issues impacting the African American community. Last year, CFSA
sponsored a series of Economic Empowerment Forums to underscore
inadequacies in the nation's credit reporting system. In doing so,
legislators examined how credit reporting methodologies negatively
impact African American consumers' ability to obtain wealth-building
assets.
We are deeply committed to increasing financial literacy in the
communities in which we operate, and would welcome the opportunity to
explore partnerships and financial literacy programs specific to the
Native American community. We recognize that the Boys and Girls Clubs
of America, with whom we have partnered in other areas, are very
involved in Indian Country. And, we understand that, like the
historically Black Colleges with whom we have partnered, Tribally
Controlled Community Colleges offer a rich resource for consumer
education and skill training. We look forward to expanding our
involvement in tribal communities throughout Indian Country.
Conclusion--In closing, we are proud of the service we offer to
millions of hard-working Americans who deserve access to more financial
options, not fewer. We employ tens of thousands of people and provide
them with good wages and benefits such as healthcare and retirement. We
are active members of the communities where our employees and customers
live and work. We spread wealth in the community by not only providing
access to credit, but hiring vendors, renting storefronts and using
other local services.
I would be pleased to answer any questions you may have. I have
attached a copy of our CFSA Best Practices as well as a map showing the
location of lenders licensed to provide payday and other loan products
in North Dakota. I ask that my written testimony be accepted into the
record of this hearing, including these attachments, as well as the
additional written testimony of Dr. Pat Cirillo who is accompanying me
at this hearing. Dr. Cirillo is an expert in the field of consumer
financial services behavior and choices. Thank you for your time and
interest.
The Chairman. Mr. Fulmer, thank you very much.
I thank all of the witnesses for their testimony. I think
that, as I indicated when I started, I do not intend to, or the
intention offered here is not to tarnish an industry, it is to
evaluate whether there are predatory practices and whether
certain groups and populations are targeted with certain
practices that we should be concerned about.
Mr. Fulmer, you heard Ms. DeCoteau talk about borrowing
$400, and ending up owing $1,400. We hear a lot of stories like
that. How does that happen? Someone comes in, needs to borrow
$100 or $200 or $300, ends up owing much, much more than they
borrowed from the payday lender.
Mr. Fulmer. Yes, sir. Well, I think with any credit
product, there is a potential for consumers to mis-use the
product. Certainly if a customer has an intent to mis-use or
gets in a situation where they are grasping for straws and try
to reach out to as many credit products as possible, they can
get in a situation where they have not used the product
responsibly.
Our industry trade association and our company goes to
great lengths to make sure that customers, first of all, have
all the information that they need to make a fully-informed
decision about all applicable aspects of the transaction, and
then use the product responsibly. Nobody benefits when a
customer gets into a situation like Ms. DeCoteau described. It
is bad for the customer, certainly, and it is a very real-world
situation for them, but it is also bad for the lenders. We are
fully aware that there are consumers, like with any other
credit product, that do mis-use it. But we believe that our
trade association's best practices address many of those
issues.
The Chairman. Your trade association's best practices cover
60 percent of the industry?
Mr. Fulmer. Yes.
The Chairman. Do you have some assessment of what the other
40 percent are doing?
Mr. Fulmer. Well, the other 40 percent are certainly
required to adhere to the individual State laws that we operate
in. And so what we have done at the State level is worked with
State legislatures to try to encourage them to adopt many of
the practices that we have in our best practices into State
law. So that would be the solution that we believe would be
best for consumers.
The Chairman. Let me ask, as you know, there is a
perception of payday lending that it is necessary in some
cases, but really taking advantage of a lot of people. Let me
give you some examples. Critics of your industry, the Center
for Responsible Lending, Consumer Federation of America,
National Consumer Law Center, and so on. The allegations that
are made are that the industry seeks out customers with little
access to cash, with an inability to pay the amount in a
typical two-week loan, which then rolls over, and for example,
a 28-day loan, a relatively small loan, you end up with a very,
very large effective annual percentage rate, a cost that is
applied to that loan.
Do you think that these organizations, as they view your
industry, are viewing the 40 percent or viewing a portion of
the 40 percent that are predatory? Why do you think this
perception exists? Is it real, or is it just a perception that
is wrong?
Mr. Fulmer. Senator Dorgan, I can't answer that
specifically. I do know that folks like the Center for
Responsible Lending, whose sole purpose as it relates to the
payday lending product are to see its elimination, are focused
on providing information that they think will present this
product in the worst light. We know from our conversations with
customers and the polling we do internally to determine
customer satisfaction that customers are overwhelmingly
satisfied with the product that we offer and also the service
that we provide.
We understand that there can be situations where customers
mis-use this product. But the average customer who uses our
product uses it between seven and eight times a year. They are
typically in the product as a whole, during the course of their
experience with us, on average about two years.
So we believe that the product we offer compares very
favorably in price to many of the other alternatives and also
in usage. We think the things that we have done to prevent
repetitive use and excessive use of our product are somewhat
unique to financial services products. I talked about the seven
to eight times they use our product on average in a year. If a
consumer writes a bad check, they are typically going to write
on average about 13 bad checks in a year. So we believe we
present a financial option to consumers, and that is why we go
to great lengths to make sure they have all the information.
I would also finally point out that the term ``rollover''
that you mentioned is only an allowable transaction in, I
believe, 11 States across the Country. There are 35 States now
that have specific enabling legislation. So that is only a
fraction of the States that allow this.
What we have seen at the State level is that States have
been moving toward the implementation of things such as a data
base that can track the loan limit, the number of loans that
customers have outstanding at any one time. They have adopted
reasonable cooling-off periods of a day or the next business
day so that if a customer has to take out a payday advance and
they would like to have another payday transaction, first of
all, they have to pay off that transaction in full. Then second
of all, they would have to wait at least until the next
business day to take out that transaction, to prevent them from
taking out a transaction that was not based on a rational
decision.
The Chairman. I am not very familiar with the industry, as
a matter of fact. But it seems to me if you have the same
people coming seven or eight times in a year for their
financial needs to a payday lending institution, borrowing
$100, paying a $20 fee, seven or eight times a year, that
particular class of population are ending up paying 400 or 500
percent interest on their money. If you are borrowing $100 for
14 days and paying $20 for it, and you do that repeatedly over
the year, that particular group of borrowers are ending up
paying the highest interest rates in the Country, by far. And
it seems to me they are the least able people to be doing that.
Mr. Fulmer. Senator, the only way you would end up paying
that 400 percent APR is if you took out a $100 the first day of
the year and you took out that same loan, that same $100, every
two weeks for an entire year. That is how you get to a 391
percent APR. In fact, many of the States that have a cooling-
off period, it is actually physically impossible, with the
cooling-off period, to get that high. And that is certainly not
representative of the normal use of our product. That is a very
small percentage of our customers who use the product
excessively like that.
So we understand that there are situations where customers
get into a situation where they are in over their heads. That
is why we have adopted many of the practices that we have
adopted, and that is why we have advocated their adoption at
the State level.
The Chairman. But if you borrow $100 for a year and it
costs you $20, that is 20 percent, right? A 20 percent APR for
the year?
Mr. Fulmer. Right.
The Chairman. If you borrow $100 and pay 20 percent for two
weeks, that is a vastly different interest rate.
Let me ask Mr. Brokke, you heard the testimony. You say
that you are president of a credit union, you have put together
some impressive programs to reach out to this group of
Americans. You exist and live and work in an area where there
are payday lenders near an Indian reservation in Devils Lake,
North Dakota.
Tell me, you of course are a competitor in a way of payday
lending, is that correct? Do you view yourself as a competitor
of the payday lenders?
Mr. Brokke. Probably more so an alternative than a
competitor.
The Chairman. Your assessment of what I have just described
with respect to interest rates, what kind of charge or interest
rate must you impose in order to offset the risk and in order
to involve yourself with responsible lending to those folks at
the lower end of the income level?
Mr. Brokke. Mr. Chairman, of course, loan administration
costs are quite expensive. It takes a fair amount of that
interest rate to service the loan, to put it on the books, to
meet disclosure requirements. There are a lot of costs
involved.
Our interest rates are all based on a simple interest rate,
365 day basis. Of course, when you add the fees in there, if
there should be any, the rate would increase considerably.
The Chairman. Mr. Brokke, let's say if I wanted to come to
your credit union and borrow $250, because I had a financial
need, and I don't have a lot of money. I have a job and I have
a pay stub, and I have a checkbook that I can show you. But, I
need $250 for something that is urgent and I need to borrow the
money. I come to your credit union. Are you interested in
dealing with me?
Mr. Brokke. Yes, certainly, we are.
The Chairman. All right. Let me ask you this. I don't go to
your credit union. I go to a bank in Devils Lake, I go to a
bank in Denver or Salt Lake City. Is the bank in most cases,
based on your knowledge of banking, are they going to be very
interested in loaning me $250?
Mr. Brokke. I really couldn't speak to that. My whole
career has been with the credit union.
The Chairman. Ms. Gambrell, can you speak to that? I will
tell you why I ask the question. My understanding is, there are
a whole lot of banks in this Country. You show up and want to
get a $225 loan. They are going to say, take a hike, we are not
very interested in processing a $225 loan. The cost of
processing exceeds, et cetera, and we are just not very
interested in dealing with you. Is that the case?
Ms. Gambrell. I don't work at a regulatory agency any
longer, but I will give you two observations. One, I think this
is one of the reasons why the Native Community Development
Financial Institutions play such an important role, because
they are able to offer affordable, short-term, small dollar
loans through a number of products and services that they
provide to their community members.
The Chairman. And I like that program, that is a good
program. But I am asking a different question. I am asking a
question about whether that program is necessary, because you
can't go, in most cases, to most banks in this Country and say,
you know, I am a customer here, I am going to be a new
customer, and I need a loan. They say, how big, well, $225,
what are they going to do to you?
Ms. Gambrell. Well, Mr. Chairman, like Mr. Brokke, we serve
as an alternative. We serve as a good alternative. I think what
you find with large institutions is that many will say that the
cost of that loan is too small for them to put that kind of
effort in.
However, I will say that there have been some recent
efforts by some of the bank regulatory agencies, including the
Federal Deposit Insurance Corporation, that has a pilot
underway now, looking at affordable, short-term, small dollar
loans. Because I think there is recognition that the banks need
to do more in this area, and that there are some options that
they need to explore in providing those kinds of loan products,
especially to low and moderate income communities.
The Chairman. Ms. DeCoteau?
Ms. DeCoteau. I just want to say that I can speak to not
being able to get a personal loan at a local bank. I have had
that experience many times on the reservation for a number of
reasons, loans ranging from maybe $300 to $700. I was never
granted one, even though I had a good income, my husband had a
good income, we were masters degree graduates. I didn't quite
get it at the time, but this is really opening my eyes, too.
I think what this speaks to is the need for alternatives,
for low interest alternatives that will help rebuild credit,
that will keep people--I quit going to those banks, by the way.
I think people do. But my alternative was that I did have an
income and I did just finally save enough money. But people who
don't have the masters degrees that we had don't always have
that option, they just have to go find another source. So what
we need to do is create those alternative sources.
The Chairman. Ms. DeCoteau, you raised another question
this morning that I think we will look into. I don't know the
answer to this, but you suggested that if someone has an
address on an Indian reservation or a zip code on an Indian
reservation, that there are some financial institutions that
decide you are in a different category with regard to interest
rates. Is that what you were suggesting?
Ms. DeCoteau. Absolutely. And this came right from the
mouth of the U.S. Attorney, and I am sure he would tell anybody
that story. He has said to me, in fact, please tell my story.
The Chairman. Is that in writing in your testimony?
Ms. DeCoteau. It is in our written testimony.
I might also point out that the Turtle Mountain State Bank
just opened on our reservation.
The Chairman. That is Indian-owned?
Ms. DeCoteau. That is Indian-owned, and one of the
principals of that bank, Mr. Ken Davis, was quoted in a
newspaper story saying that too often, Native Americans can't
get bank loans off the reservation . That was part of the
incentive for opening the bank. He said that if it is for a
business, off-reservation banks want to loan that money off-
reservation, they want to see you start that business off the
reservation, not on the reservation. So they are looking after
their own community financial interests.
The Chairman. Mr. Allen, the Congress took action dealing
with the payday lending that the Congress believed was
targeting military bases, soldiers on military bases. Congress
saw a number of reports that suggested that was the case. Mr.
Fulmer, of course, indicated his industry objects to and does
not like that legislation. Nonetheless, it is now the law.
Let me ask your perspective. You represent a national
organization. Your perspective of payday lending, and its
relationship to Indian reservations. The origin of this hearing
came about as a result of Senator Domenici asking us to take a
look at what was happening surrounding Indian reservations,
particularly in New Mexico, and especially Gallup, New Mexico.
He observed such a large number of payday lenders and asked us
to look into it. So we began to do that, and that is the origin
of deciding to do a hearing.
Give me your perspective of payday lending generally with
respect to the targeting of Indian reservations and your
analysis of the determination of whether this is difficult for
reservations, or whether it is an asset. Some would say it is
an asset. If you don't have payday lenders, those who cannot
get funding from any other area are going to lose a source of
funding. Others say that it puts people in a pretty difficult
situation, paying these rates and rollovers and so on, they get
stuck in a web of credit difficulties. Give me your perspective
of that.
Mr. Allen. Thank you, Mr. Chairman. First of all, there is
a need, there is no question that throughout our communities,
we have a sector of our tribal citizens who need these very
short-term loans, just to deal with day to day issues. There is
a whole, large variety of experiences and reasons that they
need it. There is a need to provide some sort of guidelines or
controls, similar to the State guidelines that Mr. Fulmer had
addressed that are in many States, so that it prevents
spiraling situations where a tribe, an Indian trial citizen
borrows money and then all of a sudden ends up with an
exorbitant amount of money that they owe, just for a simple,
little day to day expense or crisis.
We believe that there is a need, and there is a need on the
reservation. Without a doubt, the majority of these non-banking
lenders, particularly, are around the reservation, not on the
reservation. We believe there is a need to develop these kinds
of alternatives on the reservation. That is the tribal
jurisdiction issue that we referenced.
It does need to be a balance in terms of whether it is
interest rates or whether it is fees, in order to provide the
economic incentive for the institution to do business on a
reservation. So it is a balance of protecting the citizen and
of providing the right kind of incentive for the industry.
The military example, we are not sure, did it work or not
work. We believe that we should examine whether or not it did
cause more problems than the problems that it was trying to
solve. So our agenda really is that competition is going to
improve the situation for our tribal citizens, and as Ms.
Gambrell had addressed, the fiscal literacy issue is a big
ticket item in conjunction with the service. So we need the
service in our communities.
The alternative that Mr. Brokke addressed, I don't know
exactly if that serves it well or not. Credit unions usually
need liens against some asset, whether it is a car or house or
whatever it might be. So whether or not they have an
alternative program that serves it or not, I don't know. We
would certainly want to explore whether or not they can come
onto the reservation or near the reservation and become an
alternative and to improve the competitiveness that still
protects the interest of the tribal citizens.
The issue for us is, we need to examine this real closely
before the Congress decides on establishing any laws and/or
regulations that would address this issue. I can assure you
there is a need, there is a need for this service, there is a
need for the parameters of controlling the industry so that we
can move this agenda forward.
Our perspective, as a national organization, we advocate on
behalf of the tribes' authority as a government. So we would
like to see more on the reservation, we would like to see those
kinds of controls authorized for the tribal government. But we
also want to make sure that we increase the competition and the
protection for the tribal citizens who get themselves into
these precarious situations.
The Chairman. Mr. Barkley, you indicate that your program
on your reservation that incentivizes savings and provides a
match, I think you said it was a four to one or five to one
match.
Mr. Barkley. Three to one and a five to one. There are two
different programs.
The Chairman. Right. As a result, you got involved in that
program, and you now have a three-bedroom home, two bathrooms,
a deck, two-car garage, fenced yard, one acre of trust land and
a view of the Blue Mountains, is that correct?
Mr. Barkley. Yes, sir.
The Chairman. That is a pretty good deal, isn't it?
Mr. Barkley. It doesn't get better.
The Chairman. Congratulations to you.
Let me ask you, how does the tribe fund the match? Three to
one, five to one? Tell me the mechanism of that funding.
Mr. Barkley. The tribes are able to help leverage some of
those dollars in helping with this program. We also use some
other resources to help with this program. And we bring in
local experts, CPAs and bank lenders in to help conduct those
classes.
The Chairman. In many ways, that relates to the literacy
issues Ms. Gambrell is talking about and Mr. Allen was just
talking about, and Ms. DeCoteau. It sounds to me like a really
interesting program. The key to it, of course, is to have the
funding, to find the funding stream to be able to match in
order to incentivize people to decide they wish to begin this
savings process. But what it has done for you is quite
extraordinary.
Mr. Barkley. Just one example, and probably one of the more
positive attributes of that program that I see is that there
are a lot of younger people who are taking advantage of this
service, particularly my own son and daughter, who are going
through this program. It is going to benefit them.
The Chairman. Mr. Fulmer, let me try to understand once
again. My own sense it that here is some predatory lending
going on. You represent an organization that develops best
practices, perhaps enforces best practices or attempts to
enforce them, with 60 percent of an industry. The other 40
percent is not part of your organization. But let's assume for
the moment that a small percentage of it, 10 percent or 5
percent or the remaining 40 percent are predators, and there
are some. What do we do about that? Because you don't want
that, if your industry is an industry that you feel is
necessary for people to access some short-term loans that could
not otherwise access them in other circumstances, you I assume
want to try to shut down predatory practices. What are you
doing to shut it down and how extensive do you think those
practices are?
Mr. Fulmer. Senator, I agree with you, certainly this
industry is not unique, there are some bad apples in this
industry. It is difficult for those of us who are responsible
lenders to take the heat for those that are not.
Being regulated in the 35 States that we operate in, even
though they may not be members of the Association and may not
adhere to the industry trade association's best practices, they
still operate under State law, they are still regularly audited
by the State agency's oversight, who have responsibility for
oversight. They still can have enforcement actions taken
against them if consumers have felt like they have been abused,
so that they do complain to the State agencies.
I think many of the products we talked about here today on
the panel that are competitive product of the payday lending
product are all great products. I think there needs to be more
products in the competitive marketplace, not fewer. That is
what the independent research speaks to. We think that our
customer who uses our product is a price-savvy customer. If
there was an alternative that was better for them in the
marketplace, that was less expensive, and met their
requirements at that given time, they would be going to that
provider.
So we think that it is important to have as many options as
possible, as many regulated options as possible and have those
options enforced by the relative States that we operate in. We
think that is ultimately good for consumers and it is also good
for the providers of that product.
The Chairman. One point that has been raised that I want to
address for a moment is this issue of refund anticipation
loans. I think that there certainly is some indication that
there is a push to get people come in, do your income tax and
pay a pretty substantial amount for a refund anticipation loan.
That comes back in some ways to this issue of financial
information and awareness and financial education again. I
think the high number of people who are signing up for these
and therefore losing a part, a significant part of their tax
refund, they are doing it because they need the cash now, they
need money. So they sign up, but the result is they sacrifice,
in my judgment, too high a payment for that service. We are
going to take a look at that as well. I suspect that there is a
substantial amount of selling that is going on in connection
with the preparation of the tax return.
This Committee wanted today to just have an open discussion
about payday loans and payday lending and predatory lending,
and try to get a sense of what is happening out there. We have
had some discussions about what is happening around military
bases. But we have not had that similar discussion with respect
to Indian reservations. This is just a broad brush and a first
opportunity to take a look at what is happening.
I appreciate very much information that has been brought to
us by you. What we would like to do is keep the hearing record
open for 14 days, and ask that if there are those who wish to
submit information to complete this hearing record, they do so
within the 14-day period. Then Senator Murkowski, I and other
Committee members will be reviewing this. I expect this issue,
to the extent that we would move to do something on this issue,
and that is not certain, we want to try to understand what we
are dealing with, but I expect this is one of those issues we
will continue to look at in the remainder of this Congress and
then moving into the next Congress as well.
I want to thank all of the witnesses for their preparation
to be here this morning. Some of you have traveled some long
distance to be here, and you have described a number of
different approaches and programs and efforts to deal with
these issues. Mr. Fulmer, thank you for telling us about your
industry.
As I indicated when I started, I really think there is some
predatory lending going on. I think it is pretty hard to drive
down some streets, and I have driven down those streets in some
American cities, and take a look at those big old signs in
bright red and yellow and blue that say, get in here and get
yourself some quick cash. Pretty hard to take a look at that
and not believe there are some people trying to suck money out
of some people's pocketbooks in an untoward way.
On the other hand, as I indicated when I started this,
there will always be a place for short-term lending, provided
it is properly regulated and done by people who are
responsible. Ms. DeCoteau, did you have a concluding remark?
Ms. DeCoteau. I actually do. I am a little bit tardy in my
response, but I just wanted to point out that the problem is
with the product design, in that while most people do use those
products responsibly, but 90 percent of the revenue generated
in the payday lending industry comes from borrowers who are
trapped in a cycle of payday loans and they take five or more
loans per year. So while 60 percent of the industry may say
they are acting responsibly, they are offering a loan product
that obviously vulnerable people can't handle.
So they need to be redesigned.
The Chairman. That is the very point that Mr. Fulmer was
making, that in fact he was citing that as an asset, he was
citing as an asset the fact that people come back six or seven
times a year. I am not clear that is an asset, it seems to me,
I have always thought of payday lending as a circumstance where
somebody, on a rare occasion, needs some short-term cash. My
understanding is that only about 10 percent of the lending at
payday lenders is to someone who uses it once a year.
Mr. Allen. Senator, if I might. One of the problems is, a
tribal citizen may not just go back to the same lender, they
may go to multiple lenders, and they don't know about the
practice. So if there is a State condition or law that requires
a clearinghouse, a repository, so if a person comes in for a
loan, the loaner can find out, based on their data system, that
this person now has a half a dozen more from other lenders,
that is a problem. So it prevents them from getting into those
kind of multiple borrowing situations, where one lender doesn't
know what another lender is doing.
The Chairman. I want to ask a final question here. Wouldn't
it be better for someone who is using, on a more routine basis,
five, six, eight times a year, a payday lending institution
which is charging $20 every time they borrow $100, or $15 every
time they borrow $100, wouldn't it be better for that
particular borrower to be accessing some other kind of lending
institution at a much, much lower cost?
Mr. Fulmer. Yes, Senator Dorgan, it may very well be better
for that consumer. I think that is part of what we try to do,
is encourage responsible use of our product. If consumers are
needing a payday loan for a longer term financial solution, the
payday loan may not be the best alternative for them. It is the
same argument that you wouldn't take a cab across country, but
you might take it across town.
I don't want to leave you with the impression that I think
a customer who uses our product five or seven or eight times is
an asset for anybody. I think what I was trying to point out is
that we want to be available for that customer when they have a
need. It doesn't always fit into a cookie cutter approach. It
may be that between seven and eight times a year, they may have
a short-term financial need that they want to take care of very
quickly, they want to keep it out in front of them, they don't
want to use their credit card, they don't want to turn to one
of these other alternatives. We believe more options, not
fewer, is better for the consumer. We think that certainly our
option is one that should be considered for consumers who have
a short-term financial need, and they ought to carefully
evaluate the cost associated with our product and then make the
decision that they think is best for them and their families.
The Chairman. And our interest is, are certain kinds of
people being targeted, targeted in a way that entices them to
come in and pay higher rates than they otherwise would if they
were qualified and capable of using other kinds of banking
enterprises or lending alternatives. We will look at all of
these issues.
Ms. Gambrell?
Ms. Gambrell. Chairman Dorgan, if I may, just as a last
remark, I think certainly for us, from the Treasury Department,
the CDFI Fund works with Native CDFIs that in fact have been
very aggressive in reaching out to Indian populations to make
sure that folks who are in vulnerable situations are not
further preyed upon by offering those products that are
affordable, short-term, small dollar loans. So I think that is
an important point to continue to focus on, is the work that
they do.
If I may just go back and respond to something you had
asked me earlier about the banks and whether or not they can
provide those kind of short-term dollar loans, there is a
bigger issue here. I think in 2001, the CDFI Fund did a study
that looked at the 17 barriers to Indian Country in particular.
One of the primary obstacles to actually access to credit,
especially in Indian Country, is that there was a lack of
traditional financial institutions even in or near those
locales. So I think that is an even larger issue in terms of
asking what role financial institutions can and should play in
providing those services.
The Chairman. You are right, and I made that point in my
opening statement, that many Native Americans living on
reservations do not live anywhere near a lending institution.
But it is also the case that many lending institutions,
particularly many banks, are not very interested in a customer
that wants to borrow $300. They don't want to deal with it. The
processing costs of the loan, in many cases, would have them
saying, you know what, you will have to go elsewhere. In fact,
the credit unions, by reputation, are supposed to be
institutions of small borrowers and small savers. That is the
origin of the credit union movement, in my judgment.
I think all of these things together represent a whole
series of questions about lending, about access to financial
services, about education for consumers and about the issue of,
is there predatory lending going on and if so, what do we do
about that.
I appreciate again the testimony of all of you. This
hearing is adjourned.
[Whereupon, at 11 a.m., the Committee was adjourned.]
A P P E N D I X
Prepared Statement of Patricia Cirillo, Ph.D., President, Cypress
Research Group
Introduction
Good morning. My name is Patricia Cirillo, and I am president of
Cypress Research Group, a statistical research consulting firm in
Shaker Heights, Ohio.
Thank you for the opportunity to address the issue of payday
lending, and specifically, the scientific merit of a recent report by
the First Nations Development Institute entitled ``Borrowing Trouble:
Predatory Lending in Native American Communities.''
I have been a statistical analyst for 20 years, and I work in
numerous consumer and business-to-business industries. My areas of
focus include public education, arts and culture, and financial
services.
I have obtained a detailed understanding of the ``payday'' borrower
through my and my colleagues' research during the past four years,
where my work has included interviews with over 10,000 payday
borrowers.
While there are now numerous studies which look at aggregate data
of the payday loan industry (e.g., transaction data; Census Bureau
demographic statistics; store location data) my work is distinctive in
that I study the users of payday loans directly. The only other
researcher I know of doing primary data collection of the payday loan
market is Dr. Gregory Ellihausen at George Washington University.
In sum, we gain our views about the industry via the opinions,
understandings, and actions of payday borrowers themselves. We are
agnostic regarding whether or not payday loans are ``good'' or ``bad.''
Instead we rely on the wisdom of the consumer, collectively known as
the ``market,'' to teach us how the industry should be regulated and
how the industry can best serve this unique set of consumers.
Our understanding of the payday loan customer is fairly extensive.
He or she is typically lower-middle income (more than half have annual
incomes between $25,000 and $50,000), 35-40 years of age, employed,
banked, with children in the household. Payday borrowers own their
homes at half the level of the average American (one-third compared to
two-thirds). They are educated at roughly the same levels of the
general U.S. adult population.
Payday borrowers are extremely clear and consistent about why they
obtain a payday loan: they needed cash for some unexpected expense, and
a payday loan was their best (least expensive) option at the time. And
this very, very important understanding is almost always left out of
the debate over payday lending: borrowers choose a payday loan because
it is their cheapest, and sometimes also their most convenient option.
Many (about half) of the payday borrowers could opt (and sometimes they
do if it is the less expensive option) to allow one or more checks to
``bounce'' that month, thereby invoking overdraft protection.
Alternatively, most have the option of delaying the payment of
routine bills that month, thereby incurring the late fees associated
with that choice, or risking damage to their credit rating.
Another common choice is credit card cash advances, although only
about one in five payday borrowers have available credit on their
credit cards and many express a dislike for using their credit cards at
all because of the potential for revolving debt, which can grow far
larger than the debt associated with a $300-$400 payday loan. A fourth
option is obtaining a payday loan over the Internet, which is typically
more costly than a storefront payday loan.
Faulty Data Points
With specific regard to the report on predatory lending in Native
American communities, let me begin by first offering this summary of
the First Nations study:
The First Nations paper purports to analyze information regarding
what it calls the practice of ``predatory lending'' in Native American
communities throughout the U.S. by grouping five different lending
products under the category of ``predatory'': tax refund loans, payday
loans, pawn shop transactions, car title loans, and mortgage loans with
high rates/fees.
In reaching its sweeping conclusions, the First Nations paper
relies on two faulty data points rather than a broad, in-depth study
that the broader scientific community would find acceptable:
First, the paper relies on informal, survey data drawn from
attendees at a May 2007 conference of the National American
Indian Housing Council. Housing officials were asked their
opinions about types of predatory lending in their communities.
Second, the paper relies on analysis from a research paper
\1\ which examined the relationship between payday lending
store locations and Christian political power. This paper
references misleading map data of payday lending locations to
American Indian Land which I will discuss in more detail
shortly.
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\1\ Graves & Peterson, pending 2008.
Scientific Shortcomings
These two data points, as offered by the First Nation's report,
present serious scientific shortcomings which undermine the credibility
of the study and definitely call into question the conclusions that are
drawn, for the following reasons:
First, an opinion survey of attendees at a housing
conference lacks the specificity needed to properly evaluate
the impact of payday lending in a community. Payday loans have
little to do with the housing market. The opinion survey
assembled anecdotal hearsay from housing representatives
unlikely to have experience with payday lending markets (i.e.,
providers and consumers).
Second, the study's premise that store location is a sole
indication of ``targeting'' ethnic minorities is faulty at its
very core. All retail establishments locate where their
potential customers are. The payday loan industry is no
different--with lenders locating in population centers,
convenient locations where customers live, work and shop. Race
and ethnicity (and of course, religion) are irrelevant. The
need to borrow small amounts of cash and the ability to pay it
back (which lenders need in order to survive) are associated
with one and only one consumer indicator: economic status.
Those with too low incomes cannot typically pay back a loan,
and are therefore too risky for any lender. Those with higher-
than-average incomes are likely to have access to emergency
cash via other, more ``mass produced'' sources of credit (e.g.,
credit cards), so locating near them is unlikely to produce
enough volume to keep the light bill paid. Targeting any racial
or ethnic group provides absolutely no business value to payday
lenders. Any relationship of store location and racial/ethnic
composition of customers is simply coincident; economic status
matters (need for the loan and ability to repay it); race/
ethnicity does not.
Third, the report itself does not support its own
conclusions that payday loan stores are concentrated near
American Indian land. The maps in the report demonstrate
conclusively that the allegations of ``locating near Native
American lands'' are without foundation in fact. The report
itself states, ``These maps do not provide visual evidence that
payday lenders have concentrated their services near Indian
lands . . .'' (page 6). In fact, the visual evidence in this
report confirms that payday lenders are located in population
centers convenient to where customers live, work and shop.
Fourth, if the payday loan industry were ``targeting''
American Indians, store location maps would look very different
than what is shown in this report (see below) and the
industry's marketing, advertising, and product design would
support the ``targeting'' of Native Americans. There is
absolutely no support, at all, for this allegation.
Below appears a sample map of Montana copied from the First Nations
report. It shows very clearly that payday lenders locate, with few
exceptions, near population centers and not near American Indian land.
Factual Errors
Mr. Chairman, in addition to the faulty data points included in the
report, the paper also includes several false factual assertions about
the payday lending service and the customers who use it. These factual
errors further call into question the reliability of the conclusions
drawn by the First Nations study. Those factual errors include the
following:
Report myth #1: Payday lending customers are not part of the
mainstream financial services.
Fact: 100 percent of payday lending customers have a checking
account with a bank or credit union. Each customer must have a
regular paycheck or other form of steady income. These are the
basic requirements for obtaining a payday advance. It is an
attractive notion to assume that payday lenders must be
outrageously profitable--why else would there be so many
concentrated in certain areas? In that same light, it is
tempting to conclude that payday lenders must be duping their
customers--why else would consumers agree to such high fees?
The answers to both of these questions can easily be explained
simply by listening to the consumers of these loans
themselves--the cost of both bounced checks and late bill fees
has tripled in the past ten years. Consumers who previously
relied on those options to get through a financially stretched
month now sometimes prefer a different option--payday loans--
simply because, for that particular month, they were the best
choice.
Payday loan stores are very small stores--on average they
employ only 3-4 people. Customers want privacy and quick
service; they prefer a small private setting to obtain a payday
loan; hence, this is exactly how payday loan stores are
structured and organized. The market prefers and therefore
supports a ``cluster'' of small, separate stores, as opposed to
a single, large, bustling store lined with customers. This is
more the business model for the opt-referenced comparison
industry of fast food chains. It is estimated that
approximately 5 percent of U.S. adults have obtained a payday
loan, while a good guess of the number of U.S. adults who have
eaten in a fast food restaurant is closer to 100 percent.
Report myth #2: Payday loans are predatory.
Fact: The term ``predatory lending'' is often used incorrectly
to describe sub-prime financial services, including payday
advances. The definition of ``predatory lending'' is unclear,
but even when looking at the range of definitions available,
payday loans do not meet the criteria of ``predatory lending.''
``Defining and Detecting Predatory Lending,'' a study by Donald
P. Morgan, Research Officer, Federal Reserve Bank of New York,
concludes that payday loans do not fit the definition of
predatory because they are not a ``welfare reducing'' form of
credit. To the contrary, the author suggests that payday
lenders enhance the welfare of households by increasing the
supply of credit.
Report myth #3: Payday loans compound rapidly.
Fact: Payday loans do not compound rapidly. Payday advances are
small, unsecured, short-term loans, usually due on the
borrower's next payday. The average loan is $300 and the
typical fee is $15 per $100 borrowed. In fact, payday loans do
not compound at all. Under CFSA's Best Practices, any customer
who cannot payback their loan when due has the option of
entering into an extended payment plan, allowing them to repay
the loan over a period of additional weeks. This option is
provided to customers for any reason and at no additional cost.
Numerous accounting and financial studies have shown that,
factoring in all of the costs associated with short-term,
unsecured, small-value lending, payday lenders' profits are
similar to other small-scale retail establishments. Payday
lenders which are publicly traded show profit levels right ``in
the middle'' of more mainstream retail financial institutions.
In a nutshell, providing such loans is expensive;
unfortunately, administering a $350 loan costs about the same
as a $10,000 loan in terms of man-hours. Proportionately, the
fees associated with payday lending then seem very high.
The issue of high rates is the most common criticism of the
payday loan product in its current form. Expressing the cost of
a payday loan in A.P.R. is inflammatory and a useful tool for
critics of the industry; even users of payday loans cringe when
they are reminded of the A.P.R. of a payday loan they obtained
and were perfectly happy about. What is more important, I
believe, is to compare the relative costs of a payday loan to
the particular options available to consumers; there is no
doubt that, in many cases, a payday loan is the most cost
effective alternative (assuming the cash is being obtained for
a non-frivolous reason, which it almost always is).
A triple-digit A.P.R. elicits a strong negative reaction from
everyone, and rightly so. But the cost of payday loans
expressed as an A.P.R. simply is not reflective of consumers'
experiences. Very, very, very few payday borrowers obtain a
payday loan every two weeks for an entire year, which is what
is necessary for a loan to have, in effect, a 400 percent
interest rate. While it is indeed typical for payday borrowers
to obtain several loans (7-9) in a year, these loans are mostly
``spread out'' over the year, with some clustering of 2-3 loans
within a short period, suggesting that the A.P.R. is not a good
indicator of the cost of the loans. Alternatively, consumers
use the ``$ per $100'' rate in order to make their purchase
decisions. Their other options are not typically expressed in
A.P.R. (bounced check fees are not, nor are late bill fees);
therefore, A.P.R. does not help the consumer make an apples-to-
apples comparison in the case of very short-term loans.
Report myth #4: Tribal credit unions can offer cheaper
alternatives to payday loans.
Fact: The report calls on Indian tribes to offer financial
literacy programs and develop payday lending alternatives, both
consumer-friendly suggestions. We caution, however, that the
payday loan products now offered by banks and credit unions
differ a great deal from payday loans offered by CFSA members.
Not only do banks and credit unions have stricter requirements
on who qualifies for payday loan alternatives (typically only
existing members of credit unions, or bank customers with
direct deposit who have strong credit scores, are offered
payday loans), they do not take on the default risk as do the
industry's payday lenders.
Summary
Mr. Chairman, consumers benefit when competition is alive and well
in markets. Competition encourages innovation to improve services,
lower cost, and increase access to consumers. The storefront payday
loan was, in itself, an innovation a couple of decades ago, in response
to a real need in the community. Eliminating access to that choice will
not improve the consumers' situation; limiting choice suppresses
innovation by discouraging competition. Eliminating access will do
nothing to impact demand; my studies and others have shown that when
storefront lending is eliminated as a choice for consumers, they simply
``substitute'' another product: bounced checks increase; late bill
payments increase; Internet payday borrowing increases.
What consumers need is vigorous enforcement of laws which ensure
that they are fully informed of the real cost of all of their options.
We don't want consumers to choose a payday loan when, in fact, being
late on a utility bill is a better choice for that month. We don't want
consumers to choose to bounce 5 checks if the resultant $175 in
overdraft fees could have been avoided with a $45 payday loan. We don't
want consumers to elect to be chronically late on a bill which will
unknowingly damage their credit rating, thereby decreasing their access
to credit even further. We want them to be fully aware of all of their
options, their real costs, and the consequences (short-term and long-
term) of each of their choices. Eliminating one of the choices with the
hopes of suppressing demand is ineffective and probably harmful.
Communication, in as many forms as possible, is what will best serve
the customer.
We can all agree that, for some consumers, a payday loan turns out
to be a bad choice. Research suggests that is about 10 percent of
payday borrowers, as indicated by their inability to pay back the
principle of the loan easily within the term of the loan. The
industry's response to this is to offer extended payment plans for that
particular consumer. Good public policy will ensure that extended
payment plans are built into the regulation of payday loans, but not to
a point where consumers have little incentive to pay back their loans
on time under any circumstances. In sum, at a certain point it is clear
that a minority of payday borrowers are ``in trouble,'' and the
industry and regulators should ensure a ``safety net'' for those
consumers.
This concludes my review challenging the findings of the First
Nation's Development Institute study. It is my professional opinion
that this paper combines faulty data points along with numerous
factually inaccurate assertions providing a misleading picture of the
payday loan industry. I would caution you and the Members of this
Committee from basing any conclusions derived from the findings of this
report.
Thank you for your time and attention.
______
Prepared Statement of the Umatilla Reservation Housing Authority Staff
Mr. Chairman, and members of the Committee, we are the Umatilla
Reservation Housing Authority (URHA) \1\ of the Confederated Tribes of
the Umatilla Indian Reservation (CTUIR). \2\ We wanted to provide a
little information about what Umatilla is doing to combat predatory
lending on our reservation.
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\1\ http://www.urhousing.org
\2\ http://www.umatilla.nsn.us
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I. History
URHA developed the six-week Wapayatat (meaning to learn): Financial
and Homeownership series integrated with the Individual Development
Accounts (IDA) savings-match concept in 2001. Umatilla developed and
implemented the legal infrastructure to begin lending on the
reservation prior to executing mortgages, but in the meantime the next
course of action was to provide the tools to community members on how
to save and budget with a long-term goal to assist families in gaining
assets and building wealth. The program created down payment assistance
as an IDA 3:1 match and later developed a Umatilla Builds IDA 5:1 match
for site development costs due to the tribal trust land complexities on
the rural reservation.
Although the initial goal was to help move families into a 30-year
mortgage, the financial literacy portion needed to be the most critical
objective to achieving home ownership. The program assisted nearly one-
third of the community population and identified a variety of
challenges that was not only unique to Indian country, but prevalent in
nearly any community such as high interest rate car loans, high
interest credit card debt often with high credit card balances, lack of
credit or no credit, no assets, subsidized housing (rentals or HUD
lease-to-own housing) into mortgages, fear of or bad relationships with
lenders, racial barriers, no savings or budget plan and changing
mindsets from a perception of free housing.
Umatilla adopted the Building Native Communities curriculum and
tailored it to the community needs. Umatilla partnered with community
stakeholders such as lenders, credit counseling, CPA's, attorney's,
small business, economic development, and other expertise to help
members understand how to be in financial control.
Nearly 1,500 Native Americans \3\ reside on the reservation in
which CTUIR currently owns approximately 174,000 acres of checker-
boarded reservation land. The housing needs are dismal with nearly 230
rentals and 150 lease-to-own HUD housing developed since the late
1960s.
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\3\ 1,200 enrolled Umatilla Tribal Members; 300 Other Native
Americans according to CTUIR enrollment data.
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II. Importance
Financial education is important to Umatilla, because it allows the
people to invest in the future, it creates a stronger-governance, it
builds a healthy nation and the people have better control over their
destiny including the ability to buy homes and pay their own bills.
III. Obstacles
Umatilla faces many challenges as is a common thread throughout
Indian County today. As Oregon's only Tribal rural checker-boarded
reservation out of nine federally recognized Tribes in the state there
lies a fury of tribal trust land complexities, Bureau of Indian Affairs
(BIA) oversight of the land and long waiting lists for title status
reports, generational poverty issues, the ability to move families from
subsidized housing into a 30-year mortgage, first-generation and first-
time homeownership and the list goes on.
As many Tribes face, there is a quixotic perception that Indian
Tribes have a lot of money. Umatilla received $85,000 in 2008 to build
housing. Indian Housing Authorities relied heavily on federal funding
formerly known as the 1937 Housing Act. When the Housing Urban
Development (HUD) revamped the program in 1996 and called the funding
Native American Housing and Self-Determination Act (NAHASDA), the
funding decreased and the needs continue to be unmet. Poverty is still
prevalent, but as Tribes focus on diversifying economic development on
the reservation the ability to earmark dollars for the social need will
take time. These efforts have only occurred over the past ten years.
Tribal families have been able to increase incomes through new
employment, which no longer meet the income restrictions through
federal funding. This is also a success, but requires ongoing education
to understand why there is no funding to build fair market rate rentals
or development for those who no longer meet under the 80 percent median
income levels. Next, Indian Housing Authorities face the daunting task
to rehabilitate existing housing stock built as far back as the late
1960s. IHA's are finding mold and mildew problems, subflooring, roof
repairs and the list of repairs go on. In most cases, NAHASDA funds can
barely meet these needs. IHA's face a long list of responsibilities
from administration, financial oversight, management, operations, crime
prevention and the ability to create safe neighborhoods. Umatilla not
only works on protecting families from predatory lenders, but is also
responsible for compliance and management of the housing authority and
providing services to the community.
IV. Successes
Nearly 400 individuals have participated in the classes, which has
been an amazing feat for Umatilla. In lieu of the myriad obstacles and
challenges, Umatilla continues to persevere and work at helping
families become self-reliant. Umatilla's mission statement is to
provide quality, community housing services and empower self-sufficient
living for future generations. Umatilla wants to learn from the past
and work on building communities to last generations. \4\
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\4\ Umatilla adopted new slogan called ``Building communities to
last generations.''
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Pay day loan venues, rent-to-own vendors and shady car dealers were
taking advantage of people's lack of financial education, but through
education and extensive counseling, participants were learning so much
more. Extensive budget counseling identified nearly 75 percent of class
participants with maxed out credit cards who were paying late fees and
high interest rates exceeding 28 percent or more. ``We were paying
14.95 percent interest and now we are paying 7.5 percent interest rate
after getting pre-approved,'' remarked one class participant. Another
member shared, ``I learned about buying a home, but also about interest
rates, car buying and unnecessary spending habits.'' Keeping in mind,
predatory lenders are sometimes the only hope for families because they
have nowhere else to turn. Wapayatat provides individuals the tools to
understand the process and the fees attached to borrowing money from
any lender. Umatilla partnered with the local Legal Aid office and
worked with the Attorney General's office to present material on how to
understand what predatory lending is about and how much it costs.
``Indian people weren't put here to be business people, in real
estate, or even own businesses. They only knew one thing and that was
to live off the land, the only way we knew how since the beginning of
time. During the Great Depression era our Indian people of the
Umatilla, Yakama, Wanapum, & Warm Springs wasn't even affected by this.
They didn't value the dollar like everyone else. They still lived off
the land in our areas. I heard my uncles say this and it's important
for all to know and understand that today we are behind main stream
America and we too are being ripped off, but we know about that too
much.''--Marcus Luke II, Tribal Member and First-Time Homebuyer/URHA
Homeownership Counselor.
The Wapayatat classes are critical and Umatilla is slowly adjusting
to those changes today, now that there is an economy. Umatilla is
learning about assets and the ability to grow and the purpose to
educate the young people yet to come. Umatilla understood this need and
implemented the action to protect themselves from the predatory
lenders. As a 2006 Harvard Honoring Nations Award and the 2007 National
Association of Realtors Award, the seven-year program continues to make
incredible strides, yet slow, but steady. Umatilla has leveraged nearly
$3.5 million in mortgage lending back into the community from first
generation and first time homebuyers. Nearly one-fourth of the
population completed the six-week series and nearly 25 families became
first-generation and first-time homebuyers on the reservation.
V. Recommendations
In order to truly reduce poverty and gain assets on the
reservation, it will be imperative for Tribes to have legislative
representation to help decision-makers understand sovereignty and the
ownership of land or real estate. The land today remains under the
auspices of the federal government and can only be leased land.
Additional funding needs are critical to help provide needed staff
capacity to manage effective programs and develop codes to help combat
predatory lending on reservations.
The last suggestion would be to provide funding to community
partners or agencies that not only provide literature, but have the
ability to provide extensive counseling and education needs.
VI. Conclusion
Joe Garcia, National Congress of American Indians former President
sums up what Wapayatat's vision is on the Umatilla Indian Reservation,
``Financial Savvy individuals become financially savvy Tribal leaders
who are equipped to make sound decisions for their communities.'' As we
prepare our future leaders, Wapayatat is one effort to help combat the
predatory lending issues that run rampant in every community, but will
also protect our families and future generations to be financially
strong.
In conclusion, Antone Minthorn, Board of Trustees Chairman
summarized the hopes and dreams for the Umatilla Indian Reservation,
``Self-governance . . . that means it is a place to build modern houses
for people to live in; to build an economy to help the people so they
can help themselves and their families; and as a part of creating
economic wealth, the personal responsibility of money management or
financial literacy. A viable Tribal economy means there is authority
and power to protect and enhance Tribal culture.''
We would like to thank you Mr. Chairman, and the Committee, for the
opportunity to share this information in testimony today and for your
interest in this subject and this Act which is critically important to
many across Indian Country. We would be happy to provide any additional
information that we have that would be of interest to the Committee.
Thank you.
______
Prepared Statement of Tex G. Hall, Former Chairman, Three Affiliated
Tribes--Mandan, Hidatsa, and Arikara; Former President, National
Congress of American Indians
Mr. Chairman:
I thank you, Mr. Chairman, my Senator and good friend, as a
constituent of yours from North Dakota, for the opportunity to share my
thoughts with the Committee, on the subject of payday lenders operating
in and near Indian Country.
I am Tex G. Hall, Ihbudah Hishi (Red Tipped Arrow). I am a past
President of the National Congress of American Indians and past
Chairman of my Tribe, the Mandan, Hidatsa and Arikara Nation in North
Dakota. Today, in addition to my work as Chairman of the Inter-Tribal
Economic Alliance and CEO of a private Equity Firm, MTE Management, I
am also the former Chairman of the Board of the Native American Bank.
Although the Native American Bank does not involve itself in the area
of payday lending, I understand banking, I understand risk, and I
understand business. Unfortunately, growing up in Indian Country, I
also understand how hard it is to get a loan.
It is because of my first-hand experience growing up in a hand to
mouth existence, with two pair of overalls, one for school and one for
ranch work, in a hard-working Indian ranch family that struggled to get
ahead, that I have dedicated my adult life to furthering economic
opportunities for Indian people and Indian businesses. I am very aware
of many Indian people who have availed themselves to the services of
payday lending and I feel that such lending is a service that is needed
in lower and middle income communities.
Payday loans fulfill an unmet need for many, and are a viable
short-term financial option:
The fact is, payday loans are for small amounts, less than
$500, and I understand more than half of the loans are for less
than $300. The term of the loan is usually for two weeks. Mr.
Chairman, you and I both know, banks will not loan such small
amounts for such short terms, there is simply no profit in it.
Most consumers who seek these loans have had an unexpected
circumstance, such as car repair, or other small emergency that
has left them short of funds until payday. Banks see the
inability to prepare for unexpected expenses as further
indication of high risk, payday lenders see filling this need
as a business opportunity. The average fee for a payday loan is
15 percent of the principal amount, which seems high given the
short, two week duration of the loan, but when you consider
that these lenders are willing to provide a service, to fulfill
a short-term need, that would otherwise be unmet; that they are
willing to assume a risk that traditional banks will not
assume, their compensation for that service is not
unreasonable. Why would consumers take out such a loan? Well,
if a consumer bounces checks to fulfill their short term needs,
gas to go to work, groceries for their family, the multiple
fees involved in bounced check charges and merchant recovery
charges will cost far more than a 15 percent payday fee. People
living on tight budgets can easily do that math.
Payday Concerns
Mr. Chairman, I share your concerns about stories of short-term
lenders ``preying'' on low income people, including Native Americans.
It is for this reason that I have familiarized myself with the
Community Financial Services Association (CFSA) and their ``Best
Practices'' requirements for their membership of payday lenders. Many
of the predatory lenders are not of the payday variety and those that
are, are not members carrying the CFSA seal. CFSA has been working with
state governments to promote regulation of unscrupulous lenders of all
types and trying to establish that best practices are followed in all
states.
CFSA members only give loans to consumers who can provide proof of
employment or other steady source of income, and proof of an existing
checking account. This indicates a reasonable expectation of the
individual's ability to pay. This also disqualifies many Indian people
on poor reservations where the unemployment rate is often 60 to 80
percent from taking out a loan that cannot be paid back.
Paternalism in Indian Country
I fear, that although well-intentioned, singling out Indian Country
for ``protection'' from a legitimate financial alternative would not
only be unworkable, and paternalistic, but unfair as well. Unworkable,
because how would a lender decide if a consumer was Indian? By their
appearance? By Tribal I.D. card? Paternalistic because an adult,
American Indian Tribal member, with a job, and checking account is
surely able to represent themselves in the financial marketplace. If
there are concerns about basic understanding of financial principles
among certain members of an Indian community, please allow the Tribes
the opportunity to provide financial counseling or enter into
agreements with outside organizations, like CFSA, that can provide such
education. Additionally, Tribal leaders should be allowed to work with
their state governments on effective reforms where needed, not a one
size fits all approach. For it would be unfair to deny qualified Native
People a viable financial alternative for short term financial
assistance that is not provided by the mainstream financial
institutions.
Rate Caps Deny Access
One approach by those that have the complete elimination of payday
lending as their goal, is rate caps. Such rate caps are usually in line
with high interest credit cards, about 36 percent annually, which
sounds quite high to those of us comparing annual rates. However an
annual percentage rate of 36 percent on a payday loan of $250.00 for
two weeks would only amount to less than $1.80 for the lender. There is
no incentive for the lender to assume the risk, if the fee is less than
two dollars! That effectively drives lenders out of business, and takes
this financial option off the table for consumers. Be aware, the
consumer's circumstances haven't changed, just their access to money
has been denied, so they now must pay higher rates for bounced check
fees for gas and groceries, or to have utilities reconnected after
payday. If such caps were only placed on businesses doing business near
Indian reservations, then the effect will be that Indian People will
have to use more gas to drive further to avail themselves to the payday
option. What we need is more credit options in Indian country, not
less.
Conclusion
I have no financial interest in any payday loan businesses. I come
to you today simply as an American Indian leader and businessman who
understands that businesses only survive if there is a legitimate need
for their services. I know of many people who have needed the services
of the payday lender. Is their rate one which I would pay to finance a
long-term project, or a car or home? Certainly not. But, Indian people,
like all consumers of moderate means, will have occasion when this type
of financial option might be the difference between feeding your family
for a few days, or bouncing hundreds of dollars of checks. It should
not be taken off the table, simply because we are Indian people.
Like all businesses, there may be some who abuse the system and
take advantage of consumers, including Tribal members, and we should be
allowed, as sovereign Tribal governments, to work with state
governments to address issues that concern us and find a balance
between keeping limited financial options open to Indian Country while
reigning in unscrupulous business people. I would also be willing to
work with the people at CFSA and in the banking industry as a whole, to
expand financial education to all of our people. Education, ultimately
is the answer to most problems, not regulation.
Mr. Chairman, I thank you again for your time, and for your service
to Indian Country.
______
Prepared Statement of John P. Jurrius, President/CEO, Native American
Resource Partners, LLC
Introduction
I would first like to thank and commend Chairman Dorgan and Vice
Chairman Murkowski for holding today's hearing on an issue of such
importance to Indian tribes and their members. My name is John Jurrius
and I am the President and Chief Executive Officer of Native American
Resource Partners, LLC (NARP), a private equity firm dedicated to
working with and investing in Indian tribes to help them achieve their
economic development goals.
Prior to founding NARP I served as financial advisor and strategic
counselor to several Indian tribes. From 1995 to 2001 I served in these
capacities to the tribal council of the Southern Ute Indian Tribe
located in southwest Colorado. From 2001 to 2007 I served in these
capacities to the tribal council of the Ute Tribe of the Uintah and
Ouray Reservation in northeastern Utah. I have worked with other Indian
tribes as well.
I was honored to work with the leadership of these tribes and my
role was to help them access the capital markets, provide strategic
guidance on how to aggressively deploy and maximize their energy
resources, and bring discipline to the interaction between tribal
government decision-making and tribal commercial operations. In
particular, I aggressively pursued what was then a novel concept in the
realm of Indian energy: the active participation by Indian tribes in
the development of energy resources on tribal lands. These activities
were made possible by securing over $900 million in capital for tribal
development partnerships and the creation of several billion dollars of
commercial value by forging partnerships between Indian tribes and
industry participants.
The tribes I worked with made the decision to re-assume control
over their energy assets and in so doing have made remarkable strides
in generating revenues, creating job opportunities, and achieving long-
term economic stability for their members.
The Ute Tribe of the Uintah and Ouray Reservation had no commercial
ownership of their energy activities when I began working with them in
2001. Seven years later, the tribe is an owner of Ute Energy LLC, which
owns commercial interests in over a hundred oil and gas wells on tribal
lands, generates hundreds of millions of dollars in energy revenues,
and possesses an interest in one of the largest gas gathering plants in
the State of Utah served by some 120 miles of gas gathering pipelines
and related infrastructure. The tribe's progress is a testament to its
leadership and tenacity in wanting to improve the lives of tribal
members.
I am particularly proud of the success enjoyed by the Southern Ute
Indian Tribe. As recently as 1990, the tribe was a poor tribe with 63
energy companies operating on the reservation. In 1992, the tribe
formed a tribal energy corporation to buy back the leases it had
entered with the private energy companies. Through expanded energy
development and skillful acquisitions, by 2005 the tribe came to own
commercial assets worth more than $3 Billion. The tribe has a bond
rating that exceeds the ratings of Denmark and Japan, operates a
sprawling real estate portfolio, and is identified by industry as
owning the eleventh largest private energy company in the United
States. This tribe, by any standard, is engaged in Indian Self-
Determination on a scale and to a degree that no one could have
foreseen just 18 short years ago.
This hearing is timely given the recent sub-prime meltdown that is
still rippling across the American economy and the lives of Americans
nationwide. Predatory lenders, whether lending for home mortgages,
business loans, or for other purposes, can and do take advantage of the
most vulnerable members of American society including tribal members
located on the reservation. In past years, this Committee has
investigated such practices as lender ``red-lining'' in Indian
communities and the general lack of capital and credit available to
Native people.
I have seen banks and other lenders treat Indian tribes and their
members poorly when it comes to lending practices, unsavory fee-
charging schemes, and other arrangements that did everything to serve
the interests of the banks but virtually nothing to serve the interests
of the Indians.
The capital deficit in Indian country is not simply a cause of
concern for economists or the Congress. Real people are suffering very
real problems because of it. Despite recent improvements in the
Indians' economic and social well-being, they continue to suffer high
rates of unemployment and poverty, poor health, substandard housing,
and social ills compared to any other group in the U.S.
To outside observers, this situation is in stark contrast with the
Indians' rich cultural legacy and, in many cases, abundant natural
resources on and under their lands and in their waters. As you know,
large numbers of Indian tribes possess developable timber, huge
reserves of coal, natural gas, and oil, fish and shellfish, and other
natural amenities.
Yet the potential for economic progress and improved standards of
living is stifled by geographic remoteness, distance from markets and
population centers, a lack of physical infrastructure, a mixture of
governmental and business functions, and most of all a lack of capital
and proven financial expertise.
For decades efforts have been made by the Federal government and
tribal leadership to resolve these problems and create more vibrant
economies for the benefit of Indian people. Indeed, this Committee has
focused on these factors--both alone and in combination--as part of its
efforts to help stimulate Indian economies and make the American Dream
achievable for America's Native people.
Energy Development in Indian Country
On May 1, 2008, this Committee held an Oversight Hearing the title
to which I believe is a perfect description for how Indian country is
currently positioned. The title of the Hearing was ``Regaining Self-
Determination over Reservation Resources.''
There are three factors that give me reason to believe Indian
country may be on the verge of an Economic Renaissance made possible by
the prudent and sustainable development of energy resources on tribal
lands. These factors are:
The enactment in 2005 of the Indian Tribal Energy
Development and Self-Determination Act (Title V of Pub. L. 109-
58);
The enormous energy resources the tribes own; and
The current pricing environment for energy products.
Heeding the calls by tribal leaders in the years leading up to
2005, this Committee endorsed a classically liberal, pro-production
Indian energy law that seeks to encourage tribal sovereignty and
decision-making when it comes to energy resources. The new law will
assist willing tribes develop whatever resources they have--whether
renewable or non-renewable--and to that end provides technical and
other assistance to them.
This new law also includes provisions that will assist tribes
identify and inventory their energy resources, require the Federal
purchase of energy produced on Indian lands, direct the Department of
Energy to establish an Indian energy guaranteed loan program, and many
others of importance.
While the new Indian energy law is comprehensive in scope and will
encourage the development of Indian energy resources, what it does not
and cannot provide is the volume of capital that modern energy project
development requires.
The second factor is the importance of tribal energy resources.
Indian tribes also possess energy resources of enormous quantity and
world-class quality. As far back as 2001, even before the run-up in
world energy prices, the U.S. government estimated that if tribes chose
to develop just their non-renewable resources (oil, gas, and coal) they
would generate hundreds of billions of dollars in revenues that would
be available for tribal needs such as health care, elder care, law
enforcement, education, housing and others.
These projections must be given some perspective: Indian gaming
generates $25 Billion in gross annual revenues and has resulted in the
rapid development of Indian economies fortunate enough to be located
near urban population centers. If the Indian energy sector receives the
kind if nurturing, technical expertise, and capital that is called for,
we have every reason to think Indian energy revenues will come to dwarf
Indian gaming in just a few short years.
The third factor at play is the pricing environment for energy
resources. Oil is now priced at $120 per barrel. The price of natural
gas is $12 per million cubic feet, and the price of coal ranges from
$40 per short ton in the Powder River Basin to $65 in the Illinois
Basin to $108 in Appalachia. Energy economists do not foresee a time
when these prices will abate in any significant way and, taken
together, these factors present an opportunity for Indian country that
has never been present before but the lack of capital is holding the
tribes back. With the founding of the Native American Resource
Partners, LLC, that is about to change.
Capital for Indian Country Development
It is no secret that lack of capital is a major impediment to
economic growth and development in Indian country. In November 2001 the
Department of Treasury's Community Development Financial Institutions
Fund issued ``The Report of the Native American Lending Study''--a
comprehensive study of lending and investment practices on Indian
reservations and other lands held in trust by the United States. The
Report issued dozens of findings and made recommendations to the
Congress and the President to overcome the obstacles encountered by
Indian tribes and their members. Among its conclusions, the Report
states
``Native American economies have about half the level of equity
that comparable international economies (that is, countries or
regions with similar GDP, population and other demographic
factors) have. Further, the Equity Investment Research Report's
comparisons to Indian Lands to similar economies suggests that
if external equity investors were located in or serving Indian
Lands and if the strategies to overcome existing obstacles were
pursued and were successful, an additional $10 billion in
equity could be invested in the Native American economy.''
The need for capital in Native communities is great but only part
of the demand is being met. Some Indian tribes own financial
institutions to support economic development and housing. In addition,
there are 19 tribally owned banks helping to provide banking services
and capital to tribes and their members. There are also credit unions
and Federally-created tools like Community Development Financial
Institutions (CDFIs) that are now operating in Native communities.
As important as these sources of capital may be for purposes of
housing, consumer credit, and small business loans, the volume of
capital is simply too modest and the institutions lack the capacity for
the kind of risk involved with energy development. The Native American
Bank, a consortium of Indian tribes, Alaska Native Corporations, and
other depositors, has just $59 Million in capitalization to lend across
the breadth of Indian country.
These entities provide services that help meet the demand for
capital but, frankly, the need for investment capital and growth in
Indian country are simply too great to be satisfied by the existing
lenders.
NARP'S Mission and Role in Capitalizing Tribal Projects
Whereas historically Indian tribes have assumed a passive role in
the development of their energy resources, NARP's vision is to be
partners in investing alongside tribes in their own tribal energy
corporations. The Southern Ute Indian Tribe and the Ute Tribe of Utah
have both used this model to achieve extraordinary success and benefits
for their members.
Whereas the passive model relies on a lessor-lessee relationship
between an Indian tribe and its energy partner, NARP's business model
will help tribes build and operate lasting tribal enterprises that
bring significant returns to the tribe and jobs and incomes to the
tribal members.
The reason I founded NARP is to create an avenue for private sector
capital to be channeled into Indian country for the development of
energy and associated resource opportunities. The NARP model relies on
the proven methodology of providing needed capital to tribes to create
tribally-owned and operated energy resource companies in the service of
Indian Self-Determination.
NARP's focus is not on developing or encouraging private sector
energy companies in Indian country but investing in energy companies
owned and operated by the tribes themselves on tribal lands.
Over the course of more than 15 years working with Indian tribes I
have raised large amounts of capital for those tribal clients as needed
for specific projects. My experience demonstrated to me the reality
that there simply was not an avenue for private capital to be accessed
by Indian country for development purposes.
In recognition of the billions of dollars of capital that has moved
into the energy sector over the last 5 years seeking and competing for
investment opportunities in exploration and development, mid-stream and
service companies, the opportunity to establish a ``Private Equity
Fund'' committed to Indian country at large was necessary and
appropriate.
NARP is backed by Quantum Energy Partners IV, LP, a private equity
firm founded in 1998 and specializing in the energy industry with over
$3.2 billion in capital currently under management. With the resources
and contacts of the Quantum team behind it, NARP will have access to
significant capital to be used in pursuing energy opportunities with
Indian tribes, including opportunities to develop oil and gas reserves,
midstream and downstream assets, power generation and transmission
assets, geothermal assets, renewable energy assets and water rights and
associated infrastructure.
NARP anticipates that it will leverage the capital and contacts of
Quantum to make direct investments as well as sponsoring the
development of other energy opportunities involving other participants.
I am pleased to inform this Committee that NARP was not only successful
in attracting capital for the purpose of investing in Indian country
but has secured a level of commitment never seen before in Indian
country: NARP has available to it and can deploy over $1 Billion in
capital dedicated to Indian country projects.
Mr. Chairman, I am certain that under your leadership the Committee
will continue to pursue the issues of concern to tribal communities
such as health care, education, housing, roads, law enforcement, and
all the other challenges faced by the tribes and their members. In
large measure, these challenges can be met with an infusion of
resources and an intense focus by the responsible decision-makers.
I remain convinced that the problems Indian country faces can be
solved by tribal leaders willing to accept the responsibility of Indian
Self-Determination and begin to regain control over their energy
resources and, indeed, over their own destiny.
That concludes my statement and I thank the Chairman for the
opportunity to present my views on this important issue.
______
Prepared Statement of Marty Shuravloff, Executive Director, Kodiak
Island Housing Authority; On Behalf of the National American Indian
Housing Council (NAIHC)
On behalf of the National American Indian Housing Council \1\
(NAIHC), I respectfully submit this testimony to the Senate Committee
on Indian Affairs (``the Committee''), regarding the Oversight Hearing
on Predatory Lending in Indian Country. I serve as the Executive
Director of the Kodiak Island Housing Authority in Kodiak, Alaska. I am
an enrolled member of the Lesnoi Village, Kodiak Island, Alaska. I am
also the Chairman of the National American Indian Housing Council.
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\1\ The NAIHC was founded in 1974 to support and advocate for
tribes and tribally designated housing entities (TDHEs). For nearly 35
years, the NAIHC has assisted tribes with their primary goal of
providing housing and community development for Native Americans. The
NAIHC consists of 266 members representing 460 tribes. The NAIHC is the
only national organization whose sole mission is to represent Native
American housing interests throughout the Nation.
---------------------------------------------------------------------------
Without a doubt, predatory lending exists. The purpose of this
testimony is not to debate the existence of impacts to Indian country.
Rather, we hope that this testimony will offer the Committee our
perspective on predatory lending and what we believe can be done to
combat the ill-effects of such practices. Namely, we believe now is the
time to devote considerable resources on financial education.
The pervasiveness and impact of predatory lending in all its
iterations has destructive consequences in Native communities. Still,
the NAIHC believes the impact can be limited through increased
financial education programs and through the development and promotion
of asset building rather than asset stripping in Native communities.
The NAIHC has been actively involved in the development, promotion and
training for homebuyer education since 2004. We are expanding that
service to include more curriculum development that centers on credit
counseling, predatory lending, and credit repair. To this end we will
offer several nation-wide training sessions later this year and in
2009. Additional support is needed to meet the growing demand for more
financial education in Indian country.
What is Predatory Lending?
Predatory lending is defined by the FNDI as: Any predatory loan
that is commonly understood to be an unsuitable loan designed to
exploit vulnerable and unsophisticated borrowers. Predatory loans may
have inappropriately high interest rates or fees or terms and
conditions that trap borrowers; often, these conditions are not well
explained to borrowers.
There are several methods that predatory lenders employ, such as
payday lending, loans made in anticipation of tax refunds, pawn shop
transactions, car title loans, and housing loans, especially for mobile
homes. Many of these loans are of a type that is commonly understood to
be of an unacceptable nature designed to exploit borrowers who are
among the most vulnerable and financially uninformed. While some view
this as ``credit abuse,'' casting such aspersions on the borrower is
not unusual in circumstances where the victim is seen as the culprit.
2007 NAIHC Survey
The NAIHC conducted a survey of its membership who participated the
2007 NAIHC Annual Convention. The purpose of this survey was to inform
our decisions regarding the training and technical assistance that we
offer our membership.
The NAIHC works closely with financial education leaders in Indian
country such as the Oweesta Corporation, an affiliate of First Nations
Development Institute (FNDI), to help provide tribes access to the
tools they need to ensure financial education is available to tribal
members. In partnership with FNDI, the survey was expanded to focus on
the predatory lending practices that our tribal housing authorities
experience in their communities.
The NAIHC membership is made up of housing professionals who work
closely, and in many cases on a day-to-day basis, with their low-income
residents to qualify them for rental assistance, down payment
assistance, and other critical financial issues. These housing
professionals manage admissions and occupancy policies and determine
rental rates that are income-based. NAIHC's housing professionals work
with basic Indian housing legislation, federal regulations and
guidance, tribal housing policies; they also work in the area of
assets, debts, and other financial scenarios; and they see predatory
lending as an issue of signal importance in their tribal communities.
More than 160 of NAIHC's housing professionals completed the survey
at the 2007 Annual Convention. While relatively small, this survey is
useful because tribal housing professionals are in a unique position by
virtue of their direct involvement in the provision of low-income
housing assistance. Miriam Jorgensen, Associate Director for Research
at the Native Nations Institute at the University of Arizona and
Research Director for the Harvard Project on American Indian Economic
Development, analyzed the data and noted that these housing
professionals ``know individuals and communities . . . they engage them
in loan markets, and they are basing their perceptions on that
knowledge.''
Predatory lending was seen by 73 percent of NAIHC's housing
professionals as an issue in their community. Just over 30 percent of
the respondents identified predatory lending as a ``big'' problem while
nearly 43 percent indicated predatory lending as ``somewhat'' of a
problem. According to the NAIHC survey respondents, the largest single
source of predatory lending was tax refund anticipation loans. Nearly
36 percent of survey respondents indicated that these refund
anticipation loan were a ``big'' problem in their community. Other
``big'' problems identified were payday loans and pawnshop transactions
at 33 and 30 percent, respectively.
Recommendations
On May 14, 2008, the NAIHC membership made financial education a
priority of the organization. The NAIHC membership resoundingly
approved Resolution #2008-08, ``Supporting the Policy Recommendations
of the Native Financial Education Coalition'' (Coalition). The
Coalition is a group of local, regional, and national organizations and
government agencies, coordinated by First Nations Oweesta Corporation,
which works to promote financial education in Native communities.
Resolution #2008-08 includes the following:
Endorsement and support NFEC policy recommendations on
financial education to federal and tribal policymakers;
Encouragement of its members to create and support Native
Community Development Financial Institutions (CDFIs) or other
organizations that offer financial education, credit counseling
and affordable loan products as an alternative to predatory
lenders;
Collaboration with state governments to establish policy
agendas that combat all types of predatory lending,
particularly those that affect Native communities, including
Indian reservations and border communities;
Support for the creation of Volunteer Income Tax Assistance
sites to assist Native people to file their income tax returns
free of charge and avoid using high cost commercial tax
preparers; and to create and support matched savings programs
such as Individual Development Accounts (IDAs), children's
savings, retirement, and college savings, adding tribal support
to other resources available for funding these programs.
The NAIHC also endorsed the recommendations made at the conclusion
of the FNDI study. The NAIHC will work with its non-profit
collaborations, with the federal agencies, foundations, other national
Indian organizations and, of course, the Senate Committee on Indian
Affairs and other committees of jurisdiction to implement those
recommendations that would result in the:
Development of credit programs and borrowing opportunities
that reduce the demand for predatory lending;
Implementation of consumer education programs that assist in
homebuyer education, financial planning, and credit repair;
Establishment of interest rate caps where appropriate; and
Collaboration with States and local governments to minimize
the impact of predatory lending in Indian communities.
Summary
We would like to summarize our remarks with the following
observations.
Predatory lending appears in many forms in Indian country--
but it does appear, and its impact harms Native communities.
Clearly, further research would reveal more accurate
information about the extent of that impact and we welcome that
research.
NAIHC believes access to capital is an ongoing obstacle to
housing and community development in Indian Country.
Financial education is the key to combating predatory
lending.
Financial education should be culturally-specific and
tailored to Native communities. These programs exist and should
receive more support and recognition by Federal appropriators.
More access to financial services should be created to
provide alternative credit programs. This is especially true
for Native American non-profit programs such as the Community
Development Financial Institution programs though the U.S.
Department of the Treasury. Responsible borrowing opportunities
should be increased to minimize the demand for predatory
lending.
Asset development, including tribal Individual Development
Accounts and other forms of matched savings accounts, should be
emphasized to change the landscape from asset stripping to
asset building.
Conclusion
Thank you for the opportunity to submit our perspectives, concerns
and recommendations. On behalf of the NAIHC Board of Directors and
membership, thank you for your continuing efforts to improve the
housing conditions of American Indian, Alaska Native and Native
Hawaiian peoples. The NAIHC stands ready to work with the Committee to
further those efforts.
______
Prepared Statement of the National Congress of American Indians (NCAI)
The National Congress of American Indians, the nation's oldest and
largest national organization representing tribal governments,
sincerely hopes the hearing held this past Thursday, June 5, 2008
serves to bring to light the important role Congress has in ensuring
tribes are empowered to protect their citizens and give them every
opportunity to advance themselves and their families.
This Committee knows well that American Indian Tribes continue to
occupy the bottom of key indicators of prosperity: employment, asset
holdings, home ownership, educational attainment and economic progress.
American Indian communities, regardless of economic success, lack
viable financial choices leaving them among the most under-banked in
the nation. Having non-banking financial services fill the void is not
an option that any community, military base or reservation should have
to settle for.
The primary cause of our current economic downturn is the housing
industry. The housing market run up and subsequent fall was caused by
lax regulation of the mortgage intermediaries and financial service
firms. Intermediaries pushed loan pools through while firms loosened
standard underwriting requirements and created new and hybrid loan
products to qualify a larger number of potential buyers. This lack of
proper underwriting or due diligence failed to adequately qualify
buyers or limit the amount approved to a reasonable value of a home's
worth. In addition, loan products designed for short term needs were
sold to borrowers as long term loans with the idea that housing would
continue to rise and interest rates would remain low.
Now that the impact of the loan terms and adverse market conditions
are being fully realized; many financial firms, homeowners, and
ultimately most tax-paying Americans are paying the price with record
defaults, decreased home values, tighter credit markets and possible a
congressional fix that will allow the renegotiation of existing
mortgages which may lead to further tightening of the credit markets. A
recent article in the Washington Post (June 10, 2008) commented
Loans were approved with little due diligence to qualify buyers
and, of course, the creation and use of new loan products
``Eager to put more low-income and minority families into their
own homes, the agency [HUD] required that two government-
chartered mortgage finance firms purchase far more
``affordable'' loans made to these borrowers. HUD stuck with an
outdated policy that allowed Freddie Mac and Fannie Mae to
count billions of dollars they invested in sub prime loans as a
public good that would foster affordable housing.
Housing experts and some congressional leaders now view those
decisions as mistakes that contributed to an escalation of sub
prime lending that is roiling the U.S. economy.
Today, 3 million to 4 million families are expected to lose
their homes to foreclosure because they cannot afford their
high-interest sub prime loans. Lower-income and minority home
buyers--those who were supposed to benefit from HUD's actions--
are falling into default at a rate at least three times that of
other borrowers.
``For HUD to be indifferent as to whether these loans were
hurting people or helping them is really an abject failure to
regulate,'' said Michael Barr, a University of Michigan law
professor who is advising Congress. ``It was just
irresponsible.''
The very people who were supposed to be helped by the advancement
of capital through lax regulation and due diligence are now the same
people who have the greatest risk of loosing their largest potential
asset and a tried path to the middle class. Predatory lending in its
current state offers the same risk to an entire class of citizens.
NCAI agrees that there is a need for tribal citizens to access
micro loans backed by income or assets. However, we have heard from
tribal leaders and those involved in financial literacy programs that
they are increasingly dealing with the adverse effects of tribal
citizens caught in a cycle of debt.
For example, a tribal member on a rural eastern Washington
reservation obtained a pay day loan from a border town to purchase
household expenses during the winter. She lives on a fixed income and
raises her grandchildren. The tribal member did not realize how the
loan functioned and the high costs associated with the loan. The loan
came due and the tribal member paid part of the loan but continued to
have an outstanding balance owned. A few days after she paid the payday
loan, her rent became due to the tribal housing authority. She did not
have enough money to pay the rent in full so she paid a portion of the
rent under her lease. Within a few days she was provided with a notice
that she had not paid her rent in full and she had a meeting with her
case worker as required by the tribal housing code but there was no
accommodation for her because she did not have enough money to pay her
rent.
The month went on and she was unable to pay the rest of the rent
and what she still owed on the pay day loan. When she received her
public benefits the next month she paid a portion of the pay day loan
but still could not pay it off. Again she did not make her rent
payment. This time, there was no meeting with a case worker; she was
given an eviction summons in tribal court.
The impact of an eviction from a tribal housing authority is
serious because the tribal citizen can no longer rent a tribal housing
authority unit leaving her no other options in her home community. In
the end this tribal member was evicted, still had to pay her on-going
debt and had the same expense obligations to buy food, clothing and
provide housing for her grandchildren.
Where was the due diligence on the part of the lender? And where
are the regulations that used to protect our people that need them the
most?
Predatory lending has the potential to be abusive to the consumer
because the practice provides so little protection to the consumer.
Banks and other financial institutions have an obligation to ensure a
loan in the form of a mortgage, credit card, or personal loan is
suitable for the consumer. They also can determine how much debt a
consumer has with other financial service firms. The predatory lending
industry has taken the obligation of consumer suitability out of
consideration. The only underwriting or due diligence acknowledged is
to ensure the industry participants will be repaid (paycheck, bank
account to write an advanced check and identification). There is no
consideration of a customer's ability to repay the obligation or a
process for checking to see how many other lenders the customer has
pledged their paycheck.
The industry touts that most payday loans are repaid within the
two-week period and that the average customer borrows from their checks
about 8 times in a year (Fulmer testimony). While this may be the case,
it leaves out the fact that many use multiple lenders and borrow from
one lender to pay off the initial lender and so on with some customers
holding up to ten loans at a time giving new meaning to borrowing from
Peter to pay Paul (and all of his relatives).
The lack of due diligence is the root of the current housing crises
where consumers are at risk of losing their homes. And it is the root
of the abusive practices of the predatory lending industry where it has
the potential to strip an already vulnerable population of the
opportunity to advance by preventing them from building assets, equity
and wealth. This applies to both income lending (payday loans) and to
asset lending (car or other title loans).
There is no doubt that there is a need for micro lending backed by
income or assets in Indian country and other parts of America; however,
there is also no doubt that protections should be provided to
consumers. There are no other aspects of the financial services
industry--from investments to all other forms of lending--that forego
the obligation of performing due diligence prior to a customer
investing or borrowing money.
The issue of predatory lending in Indian country is complex
because, as with most issues, there are underlying causes that make
tribal populations vulnerable to disproportionately using small payday
loans to fulfill fundamental financial needs including high-interest,
high fee, short-term loans with minimal due diligence. These loans are
used not because they offer a great competitive alternative, but
because they are simply one of only a few options available.
Because of the persistent lack of economic opportunity, a
sustainable financial services market, and tribal jurisdictional
issues, there have only been a handful of banks or credit unions that
serve tribal communities. As a result, tribal citizens continue to lack
basic financial services or financial choices that most Americans have
come to take for granted. Tribal members have limited access when
financing a home, starting a business or purchasing necessary property
like cars needed to make a living accessing a line of credit to meet
short term capital needs.
The vacuum created by the lack of responsive and regulated
financial institutions offering competitive consumer financial products
has been quickly filled by predatory lending firms that have
proliferated after usury laws were lifted a few years ago. This is
especially the case in transient and under-banked communities, like
military bases and reservations.
The effect of having a tribal population under-banked and subject
to predatory financial firms is that it leaves limited and sometimes no
viable options for responsive bank products. Tribal citizens pay higher
fees and much higher interest rates. When an emergency arises such as a
death in the family or medical bill, there is a greater risk of being
caught in a cycle of debt, especially for tribal citizens that live
check to check.
There is real concern by tribal leaders to address predatory
lending practices that target a captive Native population with limited
choices and leave them dealing with the social repercussions. The lack
of due diligence coupled with inadequate fee and interest-rate
limitations make above average loan defaults or rollovers predictable
and repayments from a fixed income very difficult. Especially
considering the debtors expenses increase, compelling multiple loans
from the same limited income.
This lack of industry accountability is why banking laws and
limitations were imposed in the first place and a core reason that our
tribal population will be prevented from building equity and wealth
through property ownership. While families with greater means or
financial education turn to regulated financial institutions or are
better able to negotiate terms; those with limited means and financial
experience tend to get easily caught in a cycle of debt.
The financial problems run deep in Indian country and will take a
long time to fully address. Congress, agencies and intermediaries
should focus on a 3-pronged approach to help tribal communities move
toward a solution. The focus should be on; developing incentives to
enable tribes to attract viable financial options and develop necessary
products to serve their citizens, creating culturally-appropriate
financial education programs, and authorizing jurisdiction over lenders
that do business with their citizens.
1. Financial Choice--Indian Country is under-banked. There is a
lack of regulated banking options that are responsive to tribal
community needs. This tends to be true regardless of a tribe's
success in building a local economy. The Community Development
Financial Institutions (CDFI's) have just started to meet the
needs of some tribal communities and Indian country is
appreciative of the support Congress has shown by increasing
CDFI funding; however, this serves a very specific and limited
role in tribal communities and falls short of providing viable
and responsive banking to the Native population. Congress
should work to provide an incentive for banks and credit unions
to serve the tribal population and provide competitive products
and services, including micro-loans, that meet the unique
financial needs of the tribal community.
2. Financial Education--Tribal governments need to be able to
incorporate culturally relevant financial literacy programs at
a young age to; understand fundamental credit issues and
alternatives, understand the value an types of savings programs
available such as ``individual development accounts (IDAs)''
and learn to take advantage of available programs such as
``Volunteer Income Tax Assistance (VITA)'' to reduce the
incidence of Refund Anticipation Loans. In addition there is a
need to increase the presence of intermediaries in tribal
communities. Tribal citizens need help when buying a car,
financing a mobile home or accessing a micro-loan to start a
business. Intermediaries are under-represented in Indian
country. These non-profits serve a key role in guiding
consumers to make better financial and life decisions.
3. Jurisdiction--Non-bank lenders tend to cluster around
reservations and military bases taking full advantage of
financially unsophisticated consumers. To protect our soldiers
and sailors on federal military bases from the irresponsible
practices of payday lenders, car dealerships and tax preparers,
Congress passed a bill that places a cap on non-bank loans to
the military personnel. Congress should consider giving tribes
the same capability to protect their citizens with the ability
to opt into models similar to the military fix. It is very
important for Congress to consider promoting responsive
community banking in tribal communities by giving tribes the
authority to approve banks that do business on their
reservations in a manner similar to state governments.
Because we have been under-banked for so long, we may appreciate
having a lender of any sort serve the needs in tribal communities. But
do we really need to settle for lenders that provide little in the way
of tribal citizen protections? And do we need to settle for
unreasonable rates and fees with no consideration for an individual's
ability to pay?
We need to identify and fix the underlying problems. We need
jurisdiction, we need financial literacy and we need banks, credit
unions, CDFI's and non-profits in Indian country. We need responsive
institutions and products. Our tribal citizens deserve better.