[Senate Hearing 113-814] [From the U.S. Government Publishing Office] S. Hrg. 113-814 PAYDAY LENDING: SHORT-TERM SOLUTION OR LONG-TERM PROBLEM? ======================================================================= HEARING BEFORE THE SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION __________ WASHINGTON, DC __________ JULY 24, 2013 __________ Serial No. 113-9 Printed for the use of the Special Committee on Aging [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.fdsys.gov ____________ U.S. GOVERNMENT PUBLISHING OFFICE 91-170 PDF WASHINGTON : 2016 ________________________________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. SPECIAL COMMITTEE ON AGING BILL NELSON, Florida, Chairman RON WYDEN, Oregon SUSAN M. COLLINS, Maine ROBERT P. CASEY JR, Pennsylvania BOB CORKER, Tennessee CLAIRE McCASKILL, Missouri ORRIN HATCH, Utah SHELDON WHITEHOUSE, Rhode Island MARK KIRK, Illinois KIRSTEN E. GILLIBRAND, New York DEAN HELLER, Nevada JOE MANCHIN III, West Virginia JEFF FLAKE, Arizona RICHARD BLUMENTHAL, Connecticut KELLY AYOTTE, New Hampshire TAMMY BALDWIN, Wisconsin TIM SCOTT, South Carolina JOE DONNELLY Indiana TED CRUZ, Texas ELIZABETH WARREN, Massachusetts ---------- Kim Lipsky, Majority Staff Director Priscilla Hanley, Minority Staff Director CONTENTS ---------- Page Opening Statement of Chairman Bill Nelson........................ 1 Prepared Statement........................................... 120 Statement of Ranking Member Susan M. Collins..................... 2 Prepared Statement........................................... 128 PANEL OF WITNESSES David Silberman, Associate Director, Research, Markets, and Regulations, Consumer Financial Protection Bureau.............. 4 Mark Pearce, Director Division of Depositor and Consumer Protection, Federal Deposit Insurance Corporation.............. 11 Eric Wright, Staff Attorney, Maine Bureau of Consumer Credit Protection..................................................... 18 Annette Smith, Deposit Advance Consumer/Social Security Beneficiary.................................................... 42 Rebecca Borne, Senior Policy Counsel, Center for Responsible Lending........................................................ 47 Dennis Shaul, CEO, Community Financial Services Association of America........................................................ 72 Richard Hunt, President and CEO, Consumer Bankers Association.... 86 APPENDIX Prepared Witness Statements and Questions for the Record David Silberman, Associate Director, Research, Markets, and Regulations, Consumer Financial Protection Bureau.............. 7 Questions submitted to Mr. Silberman......................... 136 Mark Pearce, Director Division of Depositor and Consumer Protection, Federal Deposit Insurance Corporation.............. 13 Eric Wright, Staff Attorney, Maine Bureau of Consumer Credit Protection..................................................... 20 Annette Smith, Deposit Advance Consumer/Social Security Beneficiary.................................................... 45 Rebecca Borne, Senior Policy Counsel, Center for Responsible Lending........................................................ 50 Dennis Shaul, CEO, Community Financial Services Association of America........................................................ 74 Richard Hunt, President and CEO, Consumer Bankers Association.... 89 ADDITIONAL STATEMENTS FOR THE RECORD Board of Governors of the Federal Reserve System................. 138 Consumer Financial Protection Bureau............................. 141 Federal Deposit Insurance Corporation............................ 186 FDIC Quarterly, 2010, Volume 4, No. 2............................ 208 Community Financial Services Association of America.............. 222 Nick Bourke, Director, Safe Small-Dollar Loans Research Project, The Pew Charitable Trusts...................................... 225 Lisa McGreevy, President and CEO, Online Lenders Alliance........ 229 Andrea Luquetta, Esq., Policy Advocate, California Reinvestment Coalition...................................................... 231 PAYDAY LENDING: SHORT-TERM SOLUTION OR LONG-TERM PROBLEM? ---------- WEDNESDAY, JULY 24, 2013 U.S. Senate, Special Committee on Aging, Washington, DC. The Committee met, pursuant to notice, at 2:07 p.m., in Room SD-562, Dirksen Senate Office Building, Hon. Bill Nelson, Chairman of the Committee, presiding. Present: Senators Nelson, Wyden, Donnelly, Warren, Collins, and Heller. OPENING STATEMENT OF SENATOR BILL NELSON, CHAIRMAN The Chairman. Good afternoon. We have an important subject to discuss today, payday loans and other short-term lending products and how they impact seniors, and especially how they impact seniors' Social Security income. The marketplace for these products has evolved rapidly, just in the last several years. We have been aware of these storefront payday lenders, which have been around for some period of time, where people can bring a pay stub or proof of income into a store and get an advance on their next paycheck while paying a very high premium in fees for the privilege. But now there are additional players in this market. Some online lenders and even now big banks are offering seniors these short-term loans. The Center for Responsible Lending just released a report showing that one in four users of the bank payday loan known as a deposit advance, one in four, 25 percent is a Social Security recipient. Well, think about how the math works on this, or how it does not work for seniors with fixed income and fixed expenses. Seniors take one of these deposit advances out because they cannot make ends meet or they have some sort of emergency-- health issue, car problems, you name it. Then when their next Social Security check arrives, that amount they borrowed plus very high fees are automatically deducted before the money even hits their bank account. So how do these senior citizens get through the month when they still have all the same expenses but their income is cut, in some cases, we will hear in testimony, potentially cut in half, for the rest of that whole month? The answer in most cases is, what happens? The cycle repeats and they borrow again and again. And some people even borrow from a variety of different sources, from storefronts, from banks, and online lenders. Take the case of Annette Smith, who has traveled here and she will testify in the second panel. She has traveled here all the way from California to tell just how hard it is to get out from under this cycle of debt. She took out a $500 loan about five years ago, and in the same time since, she has gone back to her bank 63 times to secure a deposit advance, paying out a total of around $3,000 in fees and interest for a $500 loan. Or, consider the story of Donna Johnson, a grandmother. She is from Ocoee, Florida. She managed to break a two-year payday loan debt trap only after receiving insurance money associated with her husband's death. We are grateful to Ms. Smith for being here today, and she is going to talk about her financial struggle. And we also want to thank the regulators for joining us to talk about why they are considering stepping into this market. This is a critical time for these products, and we want to hear from the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation about what they have seen from these loans and the regulatory power that they already have to protect these customers and these consumers. Well, one thing is clear. Millions of Americans with poor or no credit have a need for money in emergencies, and the focus of this committee clearly is our senior citizens who are in that position. But how can we make sure that the products available to these people, especially the seniors, will not trap them in the cycle of debt? We brought all the parties involved here this afternoon to see how we can answer this question. While everyone agrees payday lending and deposit advance products are many times necessary, and they are expensive forms of short- term credit and borrowing, we must ensure that they are properly overseen with adequate consumer protections and safeguards against predatory lending. And so we have two very fine panels of witnesses today. Thank you all. I turn to our Ranking Member, Senator Collins. OPENING STATEMENT OF SENATOR SUSAN M. COLLINS Senator Collins. Thank you very much, Mr. Chairman, for holding this hearing to examine the impact of payday loans on American consumers and for assembling such an impressive group of witnesses. I am particularly pleased that the committee will be hearing today from Eric Wright, an attorney with the Maine Bureau of Consumer Credit Protection. Since the Bureau was first established in 1975, it has earned a well-deserved reputation as the leader in the field of consumer credit protection. Some two decades ago, I had the privilege of overseeing the Bureau when I served as Maine's Commissioner of the Department of Professional and Financial Regulation for five years. It was a wonderful experience and I am delighted to have a witness from the Department here today. Payday loans are typically unsecured, closed end, small dollar amount loans of short duration with high upfront cost. Repayment of the loan is typically structured as a single balloon payment tied to the borrower's next paycheck or some other regular source of income, such as a Social Security check. Payday loans are usually made without underwriting, in other words, without a credit check or any other attempt to determine the borrower's ability to repay. In years past, the borrower would simply give the lender a check to be cashed on the borrower's next payday, which explains why this kind of financial arrangement came to be known as a payday loan. Today, however, it is more likely that the borrower will authorize the lender to draw the funds directly out of the borrower's savings or checking account on a preset date. Studies show that payday loans are relied upon by low-and moderate-income customers who need the short-term flexibility that these loans provide or who have poor credit ratings and simply cannot get a traditional bank loan or a credit card. According to a study by the Federal Reserve, two-fifths of all households considered underbanked have used payday loans, and most of those households have done so in the past year. By contrast, only one out of 20 fully banked households has ever taken out a payday loan. While payday loans can provide consumers with a useful way to get cash quickly when they need it, the high cost built into the loan, the fees can make it difficult or impossible for low- income borrowers to repay them. Too often, then, the consumer gets trapped into a cycle of debt and then may be subjected to aggressive, even abusive, collection practices. For many years, the Maine Bureau of Consumer Credit Protection has been able to protect my constituents from the worst of these abuses largely because Maine State law tightly regulates unsecured consumer debt and requires lenders who wish to provide these products to register with the State and abide by legal limits on fees and interest rates. For these reasons, Maine's experience with payday lenders differs from those of other States. Storefront payday lenders have not been much of a problem in Maine as they have been elsewhere. Banks also are not a source of abusive payday loans in the State of Maine. In fact, Will Lund, the longtime Superintendent of the Maine Bureau, who came to work at the same time I did for the Department, has told me that the Bureau has never fielded a consumer complaint over a payday loan when the lender was a State or Federally-licensed bank. But that does not mean that Mainers are not victims of abusive payday loan practices. With the advent of the Internet, online and offshore lenders have direct access to Maine consumers. Not a day goes by when the Bureau does not get a call from the victim of an unscrupulous online lender who has been trapped--who has trapped the consumer into paying off a loan that was never legal to offer in the State of Maine in the first place, and that is what is so frustrating. For Maine to try to protect consumers against these offshore or online lenders is very difficult. I understand that online payday loans still make up a minority of payday loan volume nationally, but I will predict right now that it will continue to grow and may eventually overtake storefront lending, particularly if States start following Maine's example and regulating payday lenders more closely. This raises troubling issues, since online lenders typically get authorization from their borrowers to draw funds directly from their bank accounts. Since so many of the abusive payday loans affecting Maine consumers were made by online lenders, this is a topic that I am particularly interested in exploring with our regulators today. Again, Mr. Chairman, thank you so much for calling this important hearing. The Chairman. Thanks for your personal perspective on this. All right. The first panel. First, we are going to hear from David Silberman. He is Associate Director for Research, Markets, and Regulations at the Consumer Financial Protection Bureau, what we refer to as CFPB. Then, Mark Pearce, the Director of the Division of Depositor and Consumer Protection at the FDIC. And then to hear our guest, our witness from Maine, Eric Wright, a Staff Attorney for the Bureau of Consumer Credit Protection for the State of Maine. So, Mr. Silberman. STATEMENT OF DAVID SILBERMAN, ASSOCIATE DIRECTOR, RESEARCH, MARKETS, AND REGULATIONS, CONSUMER FINANCIAL PROTECTION BUREAU Mr. Silberman. Chairman Nelson, Ranking Member Collins, and members of the committee, thank you for the opportunity to provide you with an overview of the Consumer Financial Protection Bureau's recently released white paper on payday loans and deposit advance products. This is perhaps the largest study to date on the short-term small dollar loan market. With this paper, the Bureau endeavored to provide all stakeholders with a shared set of facts on this market. What the Bureau found is precisely what Senator Nelson and Senator Collins were describing, that too often, consumers are finding themselves caught in a extended and costly period of debt, likely as a result of chronic cash flow shortages. A little bit of background. In January 2012, the Bureau added payday lenders to its supervision program. We held a field hearing that month, our first field hearing as a Bureau, to hear directly from consumers and lenders and we began to study these issues, resulting in our white paper issued in April. Our study found that payday and deposit advance loans lead many consumers into long-term expensive debt burdens. For far too many consumers, payday and deposit advance loans are traps. Returning every two weeks to reborrow the same dollar amounts at a high cost becomes a drag on the financial well-being of consumers already facing income shortfalls. The findings in our study were developed from information obtained from a number of storefront payday lenders covering a 12-month period. For each account with activity in the first month of the study period, we then studied all activity over the full 12 months. Similarly, our deposit advance findings were developed from information obtained from a number of depository institutions offering this product. And for this group, we examined for a 12-month period a random sample of accounts that were eligible to receive a deposit advance during the first month of our study or during the previous quarter. So allow me to summarize some of our key findings. First, we found that a fairly small segment of consumers using payday loans or deposit advances do so on an occasional basis. For example, 13 percent of the borrowers in our study took out only--payday borrowers in our study took out only one or two loans over 12 months, and 18 percent of the deposit advance borrowers obtained total advances of $750 or less over 12 months. However, a much larger group of consumers used payday or deposit advance on a sustained basis. Forty-eight percent of the borrowers in our study took out 11 or more loans over 12 months, and 52 percent of deposit advance borrowers obtained advances totaling $3,000 or more. Fourteen percent of payday borrowers had 20 or more loans during that 12-month period, and the same percentage of deposit advance borrowers were advanced more than $9,000 over 12 months. Many of these loans are taken on a nearly continuous basis, particularly for consumers who take out seven or more payday loans or obtained more than $3,000 in deposit advances. Most frequently, new loans are extended the same day or within a week or two of a prior loan being paid back. These consumers are unable to get to the next paycheck or the next regular infusion of cash without borrowing again. While most consumers in our study report income from employment, 18 percent of the payday borrowers reported public assistance rather than employment as their source of income, and these consumers were more highly concentrated toward the lower end of the income range as compared to the borrowers with income from employment. Although payday loans and deposit advances are sometimes described as tools to enable consumers to avoid either incurring overdraft fees or bouncing a check, in our deposit advance study, we were able to observe the relationship between the use of deposit advances and the incidence of overdraft and non-sufficient funds, or NSF, fees. And what we found is that 65 percent of those who took out a deposit advance also incurred at least one overdraft or NSF fee during the 12 months of the study. This percentage increased as the usage of deposit advance increased. It increased, going from 45 percent for light users to 83 percent of the heaviest users having one overdraft or NSF fee. And, similarly, the number of overdraft or NSF fees also increased with deposit advance usage, from an average of seven for light users to an average of 16 for the heaviest users. The Bureau is concerned that many consumers use these high- cost products in a sustained way. Lenders do not currently assess whether a borrower can afford to repay a loan and the fees while meeting their other expenses. Because the entire loan is generally repaid or due to be repaid in each pay cycle, it appears to be hard for many consumers to repay the loan and meet other expenses without experiencing another shortfall, taking out another expensive loan, and/or overdrawing an account. Financial products that trigger a cycle of debt can exacerbate the precarious balance of consumers' financial lives. The Bureau's white paper underscored significant consumer protection issues in the small-dollar loan market, and as we have said, further attention to these products is clearly warranted. The Bureau intends to continue its inquiry into small-dollar loan products to better understand why some consumers are able to use these products in a light or moderate way while others seem to find themselves trapped in prolonged borrowing cycles. We also would like to better understand the effectiveness of limitations that have been put into place by State laws and by providers, limitations designed to curb the sustained use that can lead to adverse financial consequences. As the Bureau looks to next steps, we will determine how best to exercise our authorities to protect consumers while still enabling access to affordable credit. The Bureau will work to make sure that consumers can get the credit they need without jeopardizing or undermining their finances. As Director Cordray has said, debt traps should not be part of consumers' financial futures. In closing, I just would like to thank the committee for its continuing work to protect older Americans. Protecting older consumers' financial well-being is one of the Bureau's most important missions. Our Office of Older Americans is working to help the approximately 55 million consumers age 62 and older lead safer and more productive financial lives. And as the older population dramatically increases the next two decades, we are likely to see an increase in the number of older consumers facing financial challenges, bringing substantial urgency to your work and to ours. So, again, thank you for the opportunity to share the Bureau's findings. I would be happy to respond to your questions. [The prepared statement of Mr. Silberman follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. And, Mr. Silberman, we want to know from you in the questions what are those next steps and when are we going to see some results by virtue of your regulatory power on the protections. Mr. Pearce. STATEMENT OF MARK PEARCE, DIRECTOR, DIVISION OF DEPOSITOR AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE CORPORATION Mr. Pearce. Chairman Nelson, Ranking Member Collins, and members of the committee, thank you for inviting the Federal Deposit Insurance Corporation to participate in today's hearing related to payday loans. I am pleased to have the opportunity to share our recently proposed guidance on deposit advance products, which are quite similar to payday loans, as well as to discuss the FDIC's research and perspective related to payday loans, small-dollar credit, and older Americans. Recent FDIC survey results show that in the previous 12 months, almost six percent of households obtained credit from an alternative financial service provider, such as a payday lender or a pawn shop. For a household headed by someone 65 or older, the proportion was nearly two percent, and for households headed by a person between 55 and 64, the proportion was nearly four percent. Our research also indicates that among those who use alternative credit products, households headed by a person 55 or older account for 17.5 percent of all users of those products. In 2003 and again in 2005, the FDIC provided guidance to the institutions we supervise regarding the risks associated with offering payday loans. The guidance provided our supervisory expectations that institutions offering these products should monitor customers' use of payday loans and avoid making recurring short-term payday loans to customers with long-term credit needs and to take other steps to appropriately manage the risks of offering these loans. Recognizing that consumers need access to small-dollar loans to handle unexpected emergencies, the FDIC has sought opportunities to encourage financial institutions to offer responsible small-dollar loans. In 2007, the FDIC issued guidance to encourage financial institutions to offer affordable small-dollar loans. This guidance encourages institutions to offer products that are affordable and structured with payments that reduce principal rather than repayment in one immediate lump sum. In addition to this guidance, we initiated a pilot program to demonstrate the feasibility of small-dollar lending by financial institutions in a safe and a sound manner. The loans made part of this pilot program were for $2,500 or less and they met certain common standards. The loans had to be 90 days or longer in term. They had to have an Annual Percentage Rate of 36 percent or less. And in addition, banks utilized streamlined underwriting to establish that consumers could reasonably be expected to make their loan payments and have sufficient funds remaining to meet their basic living expenses and other obligations while still providing a loan decision to them typically within 24 hours. Twenty-eight financial institutions with assets ranging from $28 million to nearly $10 billion participated in our two- year pilot. Participating banks made over 34,000 small-dollar loans for a total of approximately $40 million. The performance of these loans were shown to be in line with the performance of other unsecured consumer credit products, and the pilot concluded that it was feasible for banks to offer such loans in a safe and sound manner. Since we issued guidance on payday loans and affordable small-dollar loans, we have observed that a small but growing number of large financial institutions have begun to offer products that share characteristics with payday loans. These products, called deposit advances, are typically open-end lines of credit that have high fees, very short lump sum repayment terms, and limited or no analysis of the consumer's ability to repay the loan without subsequent borrowing. Our concern was heightened when we became aware that third parties had begun to market these deposit advance products to smaller community banks that had not traditionally offered payday loans or similar products. Although the products and practices appeared to be concentrated in a limited number of institutions, we thought it was important to be proactive to develop guidance to ensure that FDIC-supervised institutions that were considering offering these products were aware of the significant safety and soundness and consumer protection risks associated with these products. In April, the FDIC issued proposed guidance that outlines the credit, reputational, legal, third party, and compliance risks related to these products, as well as our expectations regarding how institutions can manage those risks. In particular, our proposed guidance details our expectation that institutions will engage in prudent underwriting to determine the borrower's ability to repay the loan without the need for recurring borrowing. We have received over 100 comments on our proposed guidance from a variety of stakeholders, including some members of this committee. We are carefully reviewing these comments as we work to finalize our guidance. Thank you again for the opportunity to testify today on this important topic. I would be happy to answer any questions you might have. [The prepared statement of Mr. Pearce follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Be thinking about the question, since you started this with your pilot in 2007. It is like the camel's nose getting under the tent and it has blossomed into something that is not in the interest of the consumer, where they are paying 300 percent. You put a limit on the annual rate that you testified and here we are going to have testimony that some of these banks that you are one of the regulators are charging upwards of 300 percent in fees and interest. So we would like to know what you can do about that. Okay. Mr. Wright, please proceed, and welcome from Maine. STATEMENT OF ERIC WRIGHT, STAFF ATTORNEY, MAINE BUREAU OF CONSUMER CREDIT PROTECTION Mr. Wright. Chairman Nelson, Ranking Member Collins, and members of the Special Committee, thank you for your invitation to appear. We at the Bureau of Consumer Credit Protection in Maine deal with the brutal reality of Internet-based payday lenders every day. Early last week, a consumer from Monticello in Senator Collins' home county called us to say that she has eight payday lenders hot on her heels, most from Internet-based Tribal lenders. She is in a real pickle. Previously, another woman had called to say that she owed $16,000 on six loans. Another consumer may tell us--did tell us that having already paid, say, $750 on a $300 loan, she reported, ``now they are telling me that I still owe the $300 that I borrowed.'' A consumer in Gardiner, where my office is located, near Augusta, the State capital, recently complained, ``They have been harassing me, calling me at work. I have asked them to stop, but they will not.'' For them, horrors. For us, another day at the office. When such calls are routine as they are, something is very wrong. Here is a snapshot. As Senator Collins pointed out, lenders in Maine must be licensed to make payday loans lawfully. The Internet-based payday lenders are never licensed and interest rates that they charge are excessive under Maine law, so their loans are illegal. This does not mean that the consumer has no obligation to pay back the principal borrowed. One has at least a moral obligation to do so. But it does mean under our unlicensed provisions of our law that the consumer does not owe any interest on the amount he or she has borrowed. Many callers--probably most--have multiple payday loans. They often take out one, then a second to pay off the first, then a third to pay off the second, and so on. These debts can go on endlessly, because all the money that is being paid if one does not pay back the loan fully on the first maturity date goes to paying interest and the loans just drive people deeper and deeper into debt. When the consumer has been paying--what the consumer has been paying, as I say, is only interest, associated fees, finance charges, and automatic rollover costs, whereby the lender asserts that the consumer has, often without knowing, obligated himself or herself to pay new loans. The consumers often have been bullied and tormented by collection calls and threatened with all manner of impending doom, and these are real examples. If they do not pay it now, a court action will be filed. If they do not pay it by credit card by 2:00 p.m., the caller will send someone to the consumer's home or workplace to deal with her to the fullest extent of the laws in her county. If they do not pay by 4:00 p.m. today, they will be arrested. They are threatened with jail or fraud of a financial institution. They are told their wages will be garnished, or that their driving privileges will be suspended or revoked, or that their employer will be notified of their debt status, or that the lender will notify the credit bureaus, thus damaging their credit. Now, we deal with these situations in two primary ways, or two primary circumstances. One is often before the principal has been paid off and the other is after the principal has been paid off. In either event--or let me go back and talk about the first. The first is to make sure that the consumer understands that he or she must pay off the loan, and we tell the consumer how to do that, and it is certainly not to pay by personal check but rather by a bank check and tell the lender, this is how I will pay, and that gives the lender to refuse if they do not want to accept that method. And we direct the consumer to be sure that they are telling the lender that this is at the direction of State regulators. If consumers have paid back more than they borrowed, they should consider the debt satisfied and they should, at our advice, close the bank account, their bank account that the lender has been debiting. In Maine, no payday lender has ever brought suit against a borrower who refuses to continue to pay more and more. Legally, they cannot do so, because as foreign businesses--that is, out-of-State businesses--they are not registered to do business in the State and so cannot maintain, under Maine law, court actions. They cannot use Maine courts when they themselves are operating in violation of Maine law. I also assure individual consumers that as a practical matter, these companies cannot chase individuals here and there across the country to bring actions against all the people they think owe them still more and more money. None of this minimizes the fear that consumers feel and the almost self-loathing that consumers have for having put their families at financial risk. And, finally, whether or not we can locate the lenders, we issue cease and desist orders on our public Web site to warn away consumers, and we also attempt to get collectors to cease their efforts to collect by convincing them that the consumer knows their tactics and will not be paying any more. I welcome any questions you have. [The prepared statement of Mr. Wright follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Understand that I come to the table having been involved in this issue with regard to payday loans to our active duty military and of which we had a witness table that was full of the Joint Chiefs of Staff, which included the Chairman and the Vice Chairman, years ago that said this thing had to stop with regard to their military members because they were getting fleeced right outside the gates of the military installation. And as a result, we passed a bill that set a cap of 36 percent APR on those payday loans made to active duty servicemembers and their dependents and, of course, granted the regulatory authority. Now, if we can do that and if we are dealing, as you all have testified--and I am going to turn the gavel over to Senator Collins because I am going to have to temporarily go and testify in front of another committee--if we can do that with active duty military and if, in fact, you all are the regulators of Federal institutions that have now gotten into this business, why can you not do the same, or do you need some kind of legislative authority? I cannot imagine. I would think that you have the regulatory authority. I would like to hear from you, Mr. Silberman and Mr. Pearce. Mr. Silberman. Thank you, Senator Nelson, for the question and for focusing our attention on the concerns of servicemembers, which, as you know, is a very large area of concern for the Bureau. Holly Petraeus, who runs our Office of Servicemember Affairs, has been an effective advocate for servicemembers and has helped sort of bring sensitivity to servicemembers' issues throughout the entire Bureau. We--last year, Congress amended the Military Lending Act to give the Bureau the authority to enforce the Military Lending Act for the first time and also a seat at the table in consulting with the Department of Defense around regulations under the Military Lending Act. And while that is a relatively new authority, I can assure you that we are actively engaged with the Defense Department in consultations around the regulations affecting the Military Lending Act and affecting servicemembers directly. The Chairman. All right. We did that. We passed that several years ago. I want to know, what about now, particularly with emphasis on these folks that we have just heard about here and that you are going to hear more of. Mr. Silberman. So, with respect to the very specific question you asked, the Dodd-Frank Act does expressly state that the Consumer Financial Protection Bureau cannot establish a usury cap. So, if it were Congress' judgment that the kind of legislation that was enacted for military borrowers should apply beyond the military sector, beyond protecting servicemembers, we would require additional Congressional authority. We do, however, have a large amount of authority. Our job is to assure that the laws that are on the books are implemented effectively and enforced effectively. We have large authority under that and we will use that authority to the full extent that we can to try and regulate practices to assure that these markets are, in the words of the Dodd-Frank Act, fair, transparent, and competitive. The Chairman. Mr. Pearce, I am not entirely satisfied with the confidence of what Mr. Silberman has just said that this is going to stop this fleecing of folks with 300 percent interest. You do have jurisdiction and so does the Comptroller of the Currency over these Federal institutions. So what can you do about it? Mr. Pearce. Right. So, first of all, I should probably say that, currently, to our knowledge, there are not any institutions that we directly regulate that are offering deposit advance products with the kind of interest rates that you are talking about, and Mr. Silberman is correct that the Military Lending Act is somewhat unique in that it establishes a Federal usury ceiling of 36 percent interest that we do not have in other areas. It is normally a State law matter as to what the interest rate for each State is. That having been said, that does not mean that we cannot take some action to address some of the problems with the product. As I mentioned in my opening statement, we have issued proposed guidance that takes a look at the deposit advance product which has those high fees, but also really short repayment which leads to that cycle, recurring cycle that you pointed out in your opening remarks. We can identify that there are some issues there that we can address and encourage institutions to make sure that they are underwriting the borrower so that they can repay the loan that they take out over time rather than in one single up-front lump sum. So that really--we do have authority to require institutions to operate in a safe and sound manner and make loans with prudent underwriting and we are currently working on that. The Chairman. Well, other banks outside the FDIC scope are offering these high interest loans, banks regulated by the OCC and the Fed. Do we need to go to them to get them to crack down? Mr. Pearce. Well, yes. So, I cannot speak for the OCC or the Federal Reserve. I would note that OCC, when we issued our proposed guidance, the OCC issued nearly identical guidance on the same day and the Federal Reserve also communicated that it had significant concerns with these products. So I would think it would be fair to say that all the regulators, those here and those who are not here today, have significant concerns with the deposit advance product. The Chairman. Senator Collins. Senator Collins [presiding]. Thank you, Mr. Chairman, and I remember your good work on the issue with our military personnel. I think you and Jim Talent worked hand in hand on that. I want to put this issue into a broader context just to illustrate how pervasive of problem it is. According to the Pew Charitable Trust, an estimated 12 million Americans take out payday loans. These borrowers spend about $7.4 billion in payday loans annually. Payday loans are obtained at more than 20,000 storefronts and hundreds of Web sites. To me, most startling, the CFPB found that 22 percent of consumers secure these loans with public assistance or retirement income sources. So I think the picture that is painted is of lower-income individuals who are frantic for some short-term money spending enormous amounts in order to get these loans. And I would suspect that there is an educational program that is needed here to alert them to the downsides of these loans. I was thinking about--since I am in the midst of refinancing a mortgage--of how much paperwork you have to go through and how many disclosures there are. And that is one of the issues that I am going to raise, is what kind of disclosures do payday lenders have to provide, and we will go right down the panel. Mr. Silberman. Mr. Silberman. Senator Collins, with respect to under Federal law, which we are responsible for enforcing, a payday loan, a storefront payday loan or a closed-end payday loan is subject to disclosures with respect to the APR, so that the lender would have to disclose what the APR is to the consumer. The deposit advance product we have been discussing is structured as an open-end line of credit, and under the law as it currently stands, there is no comparable requirement for disclosure of an interest rate or an APR. The fees would be disclosed. And that is certainly one of the issues we will be looking at, is whether the disclosures that are currently required are effective to achieve the goal of assuring that consumers can understand, appreciate, and make judgments with respect to the cost and risks of this product. Senator Collins. Mr. Pearce. Mr. Pearce. Sure. I would agree with what Mr. Silberman said, but also, I would add to that that most of the research on these types of products indicate that people utilize them not for one time emergencies, but really to meet basic living expenses---- Senator Collins. Good point. Mr. Pearce [continuing]. And when the disclosures in the marketing of these loans will often indicate that these loans are not appropriate for long-term use. And so there may be disclosures that they are expensive products, but they really target that they are for short-term use only. I think from our proposed guidance, we want to make sure that institutions that are marketing the products actually have the products line up with how they are marketing, so that if they are intended for short-term use, they actually are used for short-term use and not for this long-term recurring, as so many borrowers, as Mr. Silberman pointed out in his research, clearly use them. Senator Collins. Mr. Wright, you gave very vivid examples of consumers who had gotten into trouble, then often were harassed for repayments and who were paying exorbitant amounts on these loans despite the fact that Maine has a usury law that limits the interest rate and the fees. And I would note that usury laws usually are considered at the State, not the Federal, level. Do you think these consumers had any idea what they were getting into---- Mr. Wright. No. Senator Collins. Have you taken a look at any of the online disclosures that they have---- Mr. Wright. Yes. Beyond the--and I am speaking here today only about the online or Internet-based payday lenders---- Senator Collins. Right. Mr. Wright [continuing]. Not the storefront folks, not the banks. We do not have problems, as you pointed out in your opening statement, with the banks. The storefront lenders obey the law. Those folks are licensed with us and those people do not give us any heartburn, or consumers, I should say. But these--the Internet-based payday lenders, like any lenders, are required to comply with Truth in Lending requirements. What they do not disclose is the true cost in dollars and cents of the loans that consumers are taking out, so that you can use any figure you want. You can put--inject into that any finance charge you want, and that is all done by--set by the lender at a rate or an amount that he or she thinks that they can get away with. You can calculate it all out and you can arrive at enormous, astronomical APRs, 1,800 percent in some cases. What the consumer is not told--they are told--for instance, they are told the amount you are financing, say, $500. Here is the finance charge, say, $90, repayable in two weeks. Well, $590 does not sound bad, but, of course, the reality is that somebody who takes out one of these loans is not going to be in much of a financial position to repay $590 in two weeks when they had to two weeks earlier take out the loan to begin with. And so it does not get repaid, and then what happens is, because it is not repaid on time, these loans get rolled over. The interest rates fly away. And they might get--this is a real example that I have just given you. The annual APR--this is a real case--as calculated by the lender in the case I am speaking of, is about 469 percent. Well, that sounds pretty awful, but also fairly abstract. The reality is that the true cost of that $500 loan, calculated by APR, is $2,300. Senator Collins. Gee. Mr. Wright. Over $2,300. And so I would say to you, yes, that there is room for improvement in disclosure by which the consumer has a better understanding of what he or she is really getting into. Senator Collins. Because, again, to think of a mortgage situation, you are told how much you will spend over the life of the loan, assuming the interest rate stays at a certain percentage, and it is always a wake-up call for me when I see how much I am going to end up actually spending for that mortgage. Mr. Wright. Yes. Senator Collins. So there is not that kind of disclosure in dollars and cents? Mr. Wright. No, that is right, and that is when people call us. I mean, I do not hear from anybody who has had a wonderful experience with Internet payday lenders. Senator Collins. I am sure you do not. Mr. Wright. What we hear about are the problems that I have described to you, and we try to deal with them in a very realistic way, a very reality-based way to help that consumer. But the common theme is they had no idea how much these loans were truly going to be costing. Senator Collins. And one final question before I turn to my colleagues. Is there anything that individual States can do to regulate online lenders that are domiciled outside of their States, or is that a matter of interstate commerce---- Mr. Wright. I think it is largely a matter of interstate commerce. Our law, by its terms, reaches payday lenders wherever located. But the reality of these payday lenders is that, in many, many cases, they do not want the consumer, let alone the regulator, to know where they are located or who they are or what their name is. I heard of one the other day called cashinawink.com. It was a call yesterday morning that I took. That company may have a different name by next week for all I know. And so I think it really requires Federal action in terms of disclosure that I have just mentioned. There are some other things I think that Congress can do. Congress certainly has the authority, plenary authority in the area of interstate commerce. Nobody can deny that this is interstate commerce. The powers that we have, such as licensing and so on, while we would like to think them to be real, are largely ignored by these companies. So something, I think, more globally needs to be done at the Federal level. Senator Collins. Thank you. Senator Warren. Senator Warren. Thank you very much, Ranking Member Collins. Thank you again, and thank the Chairman for holding this hearing. I also want to say, your statement about the reputation of the Maine Consumer Credit Protection Bureau is spot on. They are known around the country for the great work that they have done and the great leadership you have shown. Mr. Wright. Thank you. Senator Warren. I also want to say that Mr. Pearce and I had a chance to work together when I was at the Consumer Agency and he was working for Chairman Bair on multiple consumer issues, including particularly mortgages, and so I know you have great experience and want to thank you for being here today. And, Mr. Silberman, whom I worked with at the Consumer Bureau and for whom I have great respect, has great knowledge of the industry and great judgment, and so I very much appreciate your being here today and appreciate the work that all of you are doing on behalf of our consumers. I thought what I would follow up on is where Ranking Member Collins started us, and that is on online lending, if I could. Payday lenders do not have a physical presence in Massachusetts, as well, but we remain very concerned about the growth of online payday lending. I understand from the Pew Charitable Trust that more than three million Americans received an online payday loan in 2010. The number is expected to increase significantly. It is now at about 35 percent of payday loans were online in 2011, and it is expected to be about 60 percent of all payday loans by 2016. That is a grim future to think about. So I am very pleased to have sponsored with Senator Merkley the Stopping Abuse and Fraud in Electronic Lending Act, with the acronym of SAFE Lending Act. It is an Act that would help close loopholes and better protect consumers in online lending and other forms of electronic lending. So, Mr. Wright, I wanted to ask you, if I could, to take, I think, what is the next question, and that is what things would be helpful at the Federal level in terms of making sure that consumers are better protected. Mr. Wright. Well, I appreciate that question. I have seen and familiarized myself in a general sense with the SAFE Act proposal that is being sponsored. We have a SAFE Act in Maine. Of course, the Federal Act from a few years ago mandated States to adopt SAFE Acts---- Senator Warren. That is right. Mr. Wright [continuing]. In the area of mortgage lending, and we did that promptly. The proposal now, as I understand it, would be essentially to expand that same kind of licensing requirement and so on to the area of payday lending. In addition, as I read the proposals, and I may have not gathered them all, there is one point that I think that needs to be stressed here and that is meaningful--for instance, meaningful disclosure is one thing, and that may go to consumers not being bamboozled. But some are going to be, and so how do we get a handle on that? And I think the answer is, keeping in mind that these transactions these days now are not literally paychecks, post- dated paychecks, or checks, but are all done by ACH debiting, I would propose to you consideration of requiring banks to be sure before debits are made to consumer accounts that those debits are compliant with State laws. Senator Warren. So, superb point, Mr. Wright, and, in fact, can I just expand the point a little bit in asking about this with remotely created checks, the notion that payday lenders are getting access, direct access to people's checking accounts---- Mr. Wright. That is right. Senator Warren [continuing]. Whether or not better protection to give consumers control over their own checking accounts and the ability to stop the access and the withdrawals from their accounts when they see a problem. Would that be a useful tool? Mr. Wright. It is. I think some of that actually has already been done under the Electronic Fund Transfer Act at the Federal level, allowing consumers to stop payments and so on, but it obviously can be beefed up because, to the extent that it is already the law, perhaps that law has not been working as effectively as it might be. Senator Warren. Right. And then I think you mentioned earlier, and I just want to see if we can kind of go through a list here, the idea of making sure there is a level playing field, and that is that everyone must be compliant with local State laws on usury. So if someone is lending online in Maine, they must follow Maine law. If they are doing it online in Massachusetts, they must follow Massachusetts law. Would that be helpful? Mr. Wright. Yes. I think that is the real point at which these abuses can be pinched. Senator Warren. Good. Good. And then if I can ask you about one more, are you familiar at all with lead generators? Mr. Wright. Well, generally, yes. Somebody will go online and--and I always ask people, how did you find these folks, and they are up at 2:00 a.m. clicking away on their computers and hit a button. It does not necessarily go directly to a lender, but it goes to a lead generator and then the inquiry made by the consumer gets kind of farmed out, shipped out to one lender or another. And so while we do not deal directly with the lead generators, what we hear about--and, frankly, the consumers do not even know how the lead generation process is working. What we are dealing with and the complaints we take are about the payday lenders, you know, flybynight.com, cashforyou---- Senator Warren. Right. Mr. Wright [continuing]. Or whatever. That is what we hear about. Senator Warren. So, I take it, more restriction on the lead generators, too---- Mr. Wright. Oh, sure. Senator Warren [continuing]. Could be very helpful. Mr. Wright. Oh, absolutely. Senator Warren. Good. Mr. Wright. It goes hand in hand. Senator Warren. Good. Thank you very much, Mr. Wright. Mr. Silberman--may I have one more minute? Senator Collins. Absolutely. Senator Warren. Thank you. Mr. Silberman, could you comment on Mr. Wright's comments, since--not directly on the bill, I know that is not what you are here to do, but on Mr. Wright's comments about what might be helpful at the Federal level to deal with payday lending? Mr. Silberman. So, Senator Warren, I appreciate your understanding that the Bureau does not comment on particular pieces of legislation, but the principle of a level playing field is a sort of core bedrock principle on which the agency was founded. That applies with respect to depository and non- depository institutions, but it certainly should apply equally with respect to lenders who take different forms, online versus--a marketplace cannot work--a competitive, fair marketplace cannot work if not everybody is governed by the same set of rules. So having consistent rules that all players have to abide by seems to me to just be a sort of first principle of consumer protection. Senator Warren. Thank you, Mr. Silberman. Very helpful. And, Mr. Pearce, would you like to add anything to that? Mr. Pearce. Sure, if I could. I think Mr. Wright makes an important point about banks being really the gatekeepers of the processing networks, and the FDIC has been active in this area, to remind banks about their responsibilities to do due diligence in monitoring of transactions that go through the payment system. Just last year, we issued guidance that really encouraged institutions to be careful and attentive to higher- risk types of transactions, whether they are online payday lending or they could be online gambling or different other kinds of activities. They do have a role to monitor that and make sure that they are not illegal. Senator Warren. Good. Thank you very much, and thank you very much for your indulgence. I appreciate it. Senator Collins. Thank you, Senator. Senator Donnelly. Senator Donnelly. Thank you, Madam Chair. This is in regards to what was mentioned before about lead generators, that oftentimes online, the company advertising the loan--some are the lenders, but others are just selling the information to the highest bidder. So when you see that, my question would be, and this is to any of the three of you, what are the kind of things that you see out there that we can do to track the ones who are the bad actors who are not providing suitable financial products with this but are trying to prey on people in the online process? Mr. Silberman. Senator Donnelly, I think you point to a very large concern that we have about the online payday space. It was not the subject of our study, but is something we said we very much want to study. A concern we have is not simply that the lead generator is selling the lead to the highest bidder, but that they are either selling it to or at least distributing it to multiple would be bidders. And so a consumer provides financial information and potentially their Social Security number, a checking account number, and it is not--that that information then gets pinged across multiple number of unknown lenders. The consumer has no idea who that information is going to, and the risks of privacy invasions, even identity theft, these are all serious risks that we need to be addressing in as comprehensive a way as we can. Mr. Pearce. I do not have much to add. As the regulator of State chartered banks, they are not generally engaged in lead generation. It is really the question for banks is when they are processing these transactions, to make sure they are doing the due diligence with the processors and institutions the processors work with, on one hand, and also for the consumer's bank account, if a consumer goes into a bank and tries to stop payment, you know, make sure that the laws are followed in honoring a stop payment request when those transactions are unauthorized or the consumer does not want to make further payments. Senator Donnelly. Mr. Pearce, let me ask you, on the deposit advance payments, have any of the banks indicated that, at a 36 percent interest rate, that they would not be profitable, those products? Mr. Pearce. So, we have received comments as part of our proposed guidance on deposit advance from a few of the banks that do offer deposit advance and they do not specifically, to my recollection, speak to whether they would be profitable at 36 percent interest. Senator Donnelly. The reason I ask that is, you know, is there a point where, when you look at, okay, maybe this will not get paid back, but you have deposit advance as a protection, as well. How is 36 percent not a significantly profitable enough operation on those kind of loans? Mr. Pearce. That is a good question. I do think that the cost structure---- Senator Donnelly. Just picking that number, as opposed to 33 or 39, I am not saying, but it is a pretty significant interest rate, and so how is that not enough of a compelling number for these companies to make these loans? Mr. Pearce. So, we did research just last year on bank efforts to serve the unbanked and underbanked, and one of the things from our findings, we asked banks, do you make loans of less than $2,500 that are repayable in 90 days or more, that have streamlined underwriting, that are 36 percent, you know, so we have asked them these questions. Sixty-five percent of the banks indicated that they offer those kinds of products. Our small-dollar loan pilot, which I mentioned earlier in my oral statement, you know, the institutions were able to make those loans and identified, three-quarters of them, that they were beneficial in establishing long-term relationships with their customers. So we think it can be done at 36 percent interest. Senator Donnelly. Okay. Well, then, one other question, and that would be this. I was privileged to talk to Ms. Smith earlier today, who will be on the second panel, and in talking to her, one of the things she mentioned is that on these deposit advance loans, they would not accept partial paydown each month, that if it is a $500 loan, they are not willing to take the interest plus $100 so that next month it is $400, and then you pay another $100 and so that the next month it is $300 that you are paying on. You either pay the $500 or the whole thing rolls over. And this is with some well-known banks. I am wondering about your view at the FDIC of the appropriateness of not being able to make partial paydowns of the principal. Mr. Pearce. So, you point out one of the things that--one of the features of deposit advance that is very common and closely related to a payday loan, that it is sort of a lump sum, have to repay it in a very short time period, which then leads you to not have enough money to make the next month's expense, and then you roll it over and over and over. That is one of the concerns with the products that we have that led us to issue our proposed guidance on deposit advance products. Senator Donnelly. All right. Thank you very much. Thank you, Madam Chair--or Mr. Chair now. The Chairman [presiding]. Senator Wyden. Senator Wyden. Thank you very much, Mr. Chairman. I want to commend you, Mr. Chairman, and Senator Collins. I think this is a very important topic. Mr. Silberman, a question for you about installment loans, and particularly, I want to take a look at what you all can do to help seniors, clearly a vulnerable population, from installment lenders, because in many respects, they are quite similar to the payday lenders. In both cases, you have got both types of loans, in effect, offered by the same lender. And I particularly was struck by an investigation by the publication ProPublica into installment loans. I mean, this was a jaw-dropping drill showing how consumers, particularly seniors and others, are being ripped off by some of these unregulated installment loan companies that, in effect, are targeting seniors and those in the military. And you have got companies--they cite one like World Acceptance. It sets up shop outside of military bases, in low-income areas to provide loans that have interest rates attached to them that, in effect, are over 150 percent. And what ProPublica is saying is they are basically using a business model to get around interest rate caps, interest rate caps that are established in the law. We have one, for example, in Oregon, and they do this by wrapping in insurance products to the loans. And the model is to structure the loan payments so that the insurance premiums and the interest is paid up front and then they go out and chase the borrowers hither and yon and try to persuade them to refinance in order to trap them into this cycle, this cycle of just paying premiums and interest and never paying down principal. Evidently, they go out and harass them in their homes. They go out and harass them in the workplace. What are your thoughts about what the Consumer Financial Protection Bureau can do in this area to deal with these kinds of practices that you see utilized by World Acceptance and similar companies? Mr. Silberman. Well, Senator, to begin with, the Federal consumer protection laws which we are charged with enforcing apply--are product agnostic, if you will. They apply to all forms of products, and one of our jobs is to regulate in a consistent manner. So we are attempting to take a holistic approach to the small-dollar credit market, which is why our first report was on both payday loans and deposit advances, followed shortly thereafter with a report on overdraft, so that we would intend to look holistically at all products and make sure that we are not simply squeezing air in the balloon from one place to another. That would not serve anybody's interest. With respect to the practice that was reported of selling, I guess we would call, add-on products in conjunction with installment loans, that, as you know, has been an area in which the Bureau has been particularly active. Our first enforcement action was around add-on products in the credit card market and there have been several of those. We recently brought an action which involved products being sold to servicemembers, and one piece of that was add-on products that were not clearly transparently disclosed. So we have ample authority to assure that in that sort of situation, the products--that consumers understand what is being sold, they are not finding themselves that they have bought a product without even realizing that they actually had bought it, without ever saying yes to it, without understanding the terms of the product. That is a very important part of what we are all about. Senator Wyden. So what can be done about World Acceptance? I mean, this is evidently an important investigation by a credible consumer rights group, something that has been an ongoing problem. Is there anything else that you need to do, that the Congress needs to do, that regulators need to do? Mr. Silberman. Well, Senator, we have the authority to supervise both depository institutions and non-depository institutions. For non-depository institutions, Congress actually gave us plenary authority over payday lenders. But for other types of lenders, we first have to--our authority is limited to larger participants, which we have to define by rule. So that would be something we would have to do before we could engage in our supervisory activity. Senator Wyden. So you would need to pass a rule to go after people like World Acceptance? Mr. Silberman. Not quite, Senator. I said that we have--in order for us to be able to do a supervisory exam, that would be true. But our enforcement authority is not so limited. We have the authority to investigate and enforce the consumer protection laws against any non-depository institution. Obviously, I am not at liberty to talk about any particular investigations that may or may not be going on. Senator Wyden. Well, why do we not do this. I would like you to get back to me in writing with what the tools you have are with respect to World Acceptance, A, and what your take is of the urgency of this matter, because this looks to me like-- and I thought you were spot on with respect to how you want to look at this holistically--that this looks like another way to get around efforts by some who are pro-consumer, like in our State of Oregon you get around limits on payday lenders and so you try to tuck this kind of approach in and you basically can accomplish the same thing. So get back to me in writing on both of those points, okay? Mr. Silberman. I would be delighted to do so, Senator. Senator Wyden. How long will that take? Can you have that done within, say, two weeks? Mr. Silberman. I would--I would think so, but let me just-- yes. Senator Wyden. Very good. Thank you. [Laughter.] Thank you, Mr. Chair. The Chairman. Your minders behind you suggested that two weeks was sufficient time. Mr. Silberman. I am mindful, Senator, that Director Cordray is out of the country and I am sure he would want to be able to review anything we sent on a topic as important as this, so I just wanted to double-check on that one. The Chairman. I want to invite each of the three of you to remain and hear the second panel, because I think it is important testimony that you hear. And so may I invite up the second panel, please. And as you hear, Mr. Silberman and Mr. Pearce, as you hear this testimony, just think about what we are trying to accomplish in this committee in stopping some of these egregious cases. All right. First, we are going to hear from Annette Smith. She will share her personal experience as a deposit advance customer and the difficulties she has had in getting out of this cycle of debt. And then Rebecca Borne, who serves as the Senior Policy Counsel of the Center for Responsible Lending. And then Dennis Shaul, CEO of the Community Financial Services Association of America. And then Richard Hunt, population and CEO of the Consumer Bankers Association. And I might tell everyone, in 25 minutes, the Senate will take and observe a moment of silence in the memory of Officer Jacob J. Chestnut and Detective John M. Gibson of the U.S. Capitol Police, who were killed 15 years ago in the line of duty defending the Capitol, defending the people who work here and the visitors against an armed intruder, and they paid for that defense and protection with their lives. So we will stop for a moment at 3:40. So, Ms. Smith. STATEMENT OF ANNETTE SMITH, DEPOSIT ADVANCE CONSUMER AND SOCIAL SECURITY BENEFICIARY Ms. Smith. Good afternoon, Mr. Chairman and Mrs. Collins. Thank you for having me here. My name is Annette Smith. I am a 69-year-old widow. I live in a small town outside of Sacramento, California, and I am a longtime customer of Wells Fargo. I was once a business owner and a land owner, but an identity theft scam left me without assets or credit. The thieves were prosecuted, but I was not compensated and was never able to rebuild from that experience. Many years later, I am still poor. I have received Social Security as my only source of income for the last seven years. My Social Security check is for about $1,200 a month. That is the only income I have to pay all of my expenses. Five-and-a-half years ago, I asked my local branch for a small personal loan, just enough to fix my car so it would pass California's smog test requirement. They told me they did not offer those but that I could get a direct deposit advance online. I went home and with just a few clicks I had $500 in my account. A couple of weeks later when my Social Security check was electronically deposited to my account, the bank withdrew the $500 plus a $50 fee. Back then, my monthly Social Security check was far less than the $1,200, and the $550 that Wells Fargo took was half of my monthly income. Without it, I could not pay my rent and other bills and expenses. So a few days later, I took out another $500. But the same thing happened the next month. The bank withdrew the entire amount plus a fee again. I could not pay the advance in full and all of my bills and expenses. I had to take another loan, again and again, to my surprise, for five years. A few times, I tried not to take another advance, but to do that, I had to let other bills go. The next month, those bills were behind and harder to pay. I never made it two full months without having to borrow after paying the last advance. A few other times, I tried taking out less than $500, maybe only $200 or $300, but I still could not stretch my Social Security check to pay the whole advance and make ends meet. Any time that I tried to not borrow again or to borrow less, the bills and expenses I could not pay would catch up a month or two later and I was back where I started. It was horrible, but I thought there was no way out. I did not have a credit card. I am sorry. I do not want to cry. I did not have a credit card. Wells Fargo had already told me that they would not give me a personal loan. I could not borrow from my kids, who were themselves struggling. And I never considered going to one of those payday loan stores because I knew they had a reputation for charging really high interest rates and those are things I could not afford. In fact, I thought that since banks were required to follow certain laws, they could not do what those payday loan people were doing. I thought that the problem was me, that I just could not figure a way out, even though I tried everything I could think of. I recently learned that Wells Fargo has installment plans. If I had known that then, I would have been really happy. In fact, I tried to set up an installment plan recently, but they told me it was impossible. Finally, I talked to someone at the California Reinvestment Coalition who was looking for people who borrowed a Wells Fargo direct deposit advance. I described my situation and answered their questions. They looked into my bank statements and helped me figure out how much this was costing me. In total, I got 63 advances from Wells Fargo in five years and the fees I paid totaled almost $3,000. I was shocked, but mostly deeply embarrassed. But then I realized that I could not be the only one that this had happened to in this situation. That is when I agreed to tell my story, so that other seniors would not think like I did, that borrowing a direct deposit advance was safe and you could end up paying your Social Security on a loan that is so hard to get out of. With CRC's support, I even went to the Wells Fargo shareholder meeting to tell CEO John Stumpf about my situation. He told me that someone from the bank would work with me. A few days later, I went with CRC to my local branch to ask for an installment plan. I wanted to pay the money I owed in small amounts that I could afford. CRC had told the bank we were coming, so when we got there, the branch manager and the district manager were there waiting for me. They also had someone from the corporate office on the phone. We asked for an installment plan so that I could pay the advance over time like you would other loans. The bank people said their system was automated, that there was no way to stop the next withdrawal or fix it so that I could pay in small installments that I could afford. Instead, they offered to forgive my last advance as long as I never borrowed an advance again from them. I agreed. A few days later, I saw that after they withdrew the payment, they credited me the same amount with a label marked ``Customer Satisfaction Credit.'' It was finally over. It feels good not to owe Wells Fargo anymore, but I know that there are others like me who have not had their loans forgiven and are still struggling with the direct deposit advance. I am asking you today to please do something, whatever you can, to stop banks from doing this to other seniors across the country. Thank you. [The prepared statement of Ms. Smith follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. That is one of the reasons for this committee, Ms. Smith, is to learn from senior citizens such as yourself about your real world experience and to try to change the system so that this does not happen to other people. Ms. Smith. Thank you. The Chairman. Now, you paid $50 a pop in fees 63 times. Ms. Smith. The first few years. Lately, it has been $37.50. A couple of years ago, it got lowered---- The Chairman. The total amount---- Ms. Smith [continuing]. But a total of $3,000. The Chairman. Okay. Ms. Borne, tell me what you think about this. STATEMENT OF REBECCA BORNE, SENIOR POLICY COUNSEL, CENTER FOR RESPONSIBLE LENDING Ms. Borne. Good afternoon, Chairman Nelson, Ranking Member Collins, and members of the committee. Thank you for the opportunity to testify today. I would like to begin by sharing a couple of comments from former payday lenders about borrowers receiving Social Security or other Federal benefits. One former manager of payday loan stores described the industry's affection for these borrowers, saying, ``These people always get paid, rain or shine. They will always have money every 30 days.'' A former employee of Advance America, the nation's largest payday lender, said, ``Borrowers receiving Social Security or disability payments would come in for a small loan and write a check to the company dated the third of the month, when their government checks would arrive. All the Advance America employees were required to come in early on that day so we could quickly cash their checks and wipe out their checking accounts.'' Older Americans are particularly attractive to payday lenders because of their steady stream of benefit income. It is not surprising that a study commissioned by the Wall Street Journal found that payday loan stores clustered around subsidized, disability, and senior housing. Payday loans are aggressively marketed as a short-term loan, a quick solution, but in reality, they quickly engulf most borrowers in an expensive cycle of long-term debt. Though their loan is typically technically repaid on the due date, the repayment of the loan plus the fee does not leave borrowers enough money to pay for necessities, like rent or food, for the rest of the pay period or month, so borrowers are forced to renew their loan or reborrow before the end of the next pay period, paying a new fee each time with no reduction in principal. CRL's research has found that payday borrowers remained in debt an average of 212 days of the year, and that 76 percent of all payday loans are made within two weeks of a previous payday loan being repaid. Eighty-two percent of all payday loans made within one month of the previous loan being repaid. And these findings include data from States that have implemented so- called best practices or safeguards that purport to stop the debt trap but clearly do not. Ultimately, about half of payday borrowers eventually default, many after spending months or years in debt and paying fees that far exceed the principal borrowed. Research has shown that payday loans cause serious financial harm to borrowers, delayed medical care, paying other bills late, increased likelihood of bankruptcy, and these harms are particularly acute for older Americans, many of whom are already struggling with a decline in the value of their home and retirement assets and who often have less income and a shorter time horizon to recover from financial shortfalls. In a disturbing trend, a few banks have now joined the ranks of the payday lenders. We know of six: Regions Bank, Fifth Third Bank, Wells Fargo Bank, Bank of Oklahoma, U.S. Bank, and Guarantee Bank. These banks make payday loans even in States where laws clearly prohibit payday lending by non-banks. Banks call these deposit advances, but they are designed to function just like any other payday loan. Bank payday borrowers end up with 13 loans a year and spend large portions of the year in debt, even as the banks claim the loans are intended for occasional emergencies. Our research found a striking number, over one-quarter, of bank payday borrowers were Social Security recipients. On average, banks repaid themselves 33 percent of the borrower's next Social Security check to repay the loan. Though only a few banks make payday loans today, the threat that payday lending by banks becomes the norm is very real. We are at a tipping point. As already noted today, the OCC and FDIC, recognizing that this product poses both safety and soundness and consumer protection concerns, recently proposed guidance that would address the central problems with bank payday lending. We urge these agencies to issue finalized guidance that preserves their proposals' key provisions. The Federal Reserve Board, the prudential regulator for Regions Bank and Fifth Third Bank, did not issue the same proposed guidance. We continue to urge the Federal Reserve to do so. The Board did, however, issue a supervisory statement, the content of which should compel Regions and Fifth Third to make meaningful changes to the product that eliminate the debt trap it has been shown to cause. To our knowledge, the banks have not indicated plans to do so. The CFPB's recent extensive study of storefront and bank payday loan data both confirmed and expanded on prior research finding that payday lending puts borrowers in a debt trap. The CFPB has indicated it will use its authority to address this problem and we urge it to do so. Twenty-two States, home to over 40 percent of all Americans, have decided they do not want unfettered payday lending for their residents. As mentioned earlier, Congress, with the leadership of Chairman Nelson and at the urging of the Department of Defense, decided seven years ago that payday lenders should be prohibited from making payday loans to members of the military. Payday loans affirmatively harm rather than help older Americans. They affirmatively harm rather than help Americans of all ages. We thank you for holding this hearing today and we ask that you support ending the payday lending debt trap by banks and non-banks alike. Thank you. [The prepared statement of Ms. Borne follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Thank you, Ms. Borne. Okay, Mr. Shaul. We want your perspective as the Community Financial Services Association, and you have longstanding experience in this position, having been a member of the staff of the Banking Committee under Chairman Barney Frank for years. So give us your perspective and what can we do about this, and in States that prohibit, as Ms. Borne said, payday lending, what is, in essence, the same thing that she has testified, tell us if that is what is occurring, and if so, what can be done about it. STATEMENT OF DENNIS SHAUL, CHIEF EXECUTIVE OFFICER, COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA Mr. Shaul. Thank you, Mr. Chairman. Thank you, Ranking Member Collins and members of the committee. I am Dennis Shaul. I am the Chief Executive Officer of the Community Financial Services Association of America. CFSA's member companies represent more than half of all traditional payday loan storefronts across the country. We are regulated at the Federal level and by the individual States where we operate. Also, CFSA members adhere to a strict code of best practices that cover everything from advertising to collection practices. We believe in providing consumers with a product that is fully disclosed and easy to understand if the structure of a payday loan is simple and clear to the borrower. Members have left our organization and others have not joined CFSA because they are unwilling to comply with these best practices. There are unregulated offshore entities and other illegal or unscrupulous lenders who prey on the most vulnerable, and here I would say it is important to note that not everyone who is online is either unregulated or preying on the vulnerable. We share your commitment to protecting consumers from those that engage in such practices. Payday loans serve those who need to borrow relatively small sums to meet critical short-term expenses. Eliminating access to storefront payday does not eliminate their needs. Borrowers turn to unregulated lenders. The protections States want to extend to their citizens are not in force for those loans. Today's hearing looks specifically at the use of payday loans by senior citizens, which is an extremely small set of payday loan borrowers, about eight percent from storefronts, a figure that is verified by Clarity, a quasi-credit examining organization that collects data across the country, and also by Veritech, which does the same thing. Payday loans' usage among senior citizens is even lower than their use of other forms of credit. We recognize that payday loans are just one of many tools in a consumer's financial toolbox. Our member stores are friendly and convenient and typically provide a wide range of financial services. Our member companies work extremely hard to ensure that their consumers take payday loans that meet but do not exceed their individual needs. It hurts both the lender and the customer when a loan is not repaid. If a customer is unable to pay back a loan, we will work with them to find the best solution. One option is an extended payment plan, which is a part of our best practices. The plan offers customers more time to repay a loan without additional fees or interest. We know from experience that educated borrowers are our members' best customers. Access to clear, consistent, unbiased information benefits both the lender and the borrower. Here, Senator, I would like to say that it is not usual for a person of my background to take the position I have had. Neither did I see it in my future nor would our members have readily chosen someone with my political disposition. What is clear is that our members recognize what has been, I think, well pronounced during this hearing. Payday loans as we have known them are not likely to survive another five years. Each member that I talk to realizes that not only is reform necessary, but a greater product variety. To speak specifically of things that need to be done, first of all, we need to do a different and better form of underwriting so that we catch people much earlier who might wind up in a cycle of debt. Secondly, we need to offer installment loans that are truly installment loans and not a way of making further profit, but are geared to the customer who cannot make a payment within two weeks. Third, we need to register all companies that are making loans, whether they are Internet or storefront lenders, so that we have greater access to supervision of them. And, fourth, I think we need--and I am here campaigning with the CFPB--I think we need to make our code of business practices, of best business practices, a part of the rulemaking process and make sure that it is enforced across the board. Many of the examples, anecdotal examples that we hear from people who have been abused stem from those who do not accept or practice the kind of best business practices that we demand. Finally, I would say that one thing that is very important, and we say this over and over again to the CFPB, is that we readily accept supervision both at the Federal and State level. But the States provide us with a dynamic, multi-faceted approach toward lending in this sector. I hope that there is not a form of preemption that occurs, but I do think there is a need for a Federal presence such as the Bureau has. We gain much from the experience that each State has. Your State of Florida is very different from the State of Illinois, which is different from Michigan, which is different from California. There are good and bad aspects in all those States and we have yet to come up with a perfect solution to what will work in terms of regulation or what would be the perfect product. But what we surely know is that the product availability that we now have is not enough to meet the needs of the customers in this sector. Installment lending will help. We also know that we need to be vigilant in not forcing people into a less good situation, and we see the numbers crawling up dramatically on those who go offshore to unregulated entities. I am grateful for the opportunity to be here and particularly eager to answer any questions you might have. [The prepared statement of Mr. Shaul follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. This committee is not assaulting payday loans. I stated very clearly in the opening comments that there is a need for those kind of advance payments. It is the cases that this committee is interested in of the egregious examples of abuse and where someone is paying 300 percent interest when a State's law says that the max is 36 percent interest. Then we have an interest in seeing that those kind of practices are stopped. You also bring up very cogently and timely the fact that we are going to have another creature out there to try to protect seniors from, and that is the online offshore kind of lending. We have been involved in some of that offshore scam stuff that is going on among seniors. So we want to work with you, Mr. Shaul. Mr. Hunt, tell us, as CEO of the Consumer Bankers Association, what can we do. I am going to stop right here. It is 3:40. All across Capitol Hill, there is now a moment of silence for Officer Jacob Chestnut and Detective John Gibson, killed 15 years ago in the line of duty. [Moment of silence observed.] And thank you all very much. Okay. Mr. Hunt, you are the CEO of the Consumer Bankers Association. Tell us what you think is the problem and how can we go about correcting it with your members. STATEMENT OF RICHARD HUNT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CONSUMER BANKERS ASSOCIATION Mr. Hunt. Sure. Thank you very much, and good afternoon to you, Mr. Chairman and Ranking Member Collins and members of the committee. I am President of the Consumer Bankers Association. We represent the retail section of a bank. We appreciate the opportunity to be here today. Unfortunately, 75 percent of today's consumers in this economy live paycheck to paycheck, meaning many times they need help to pay their mortgage or rent, hospital bills, or an automobile repair. When an existing customer walks into one of our banks, we can do one of two things. We can help them or we can turn our back on them. If we try to assist, and remember, we only have six banks in this country that offer a deposit advance product--we represent four of those six--if we try to assist them and they qualify, they have the option to use something called a deposit advance product. It is important to highlight for this committee, this product is a short-term line of credit. It is not a loan. It has been widely used by consumers to meet their short-term liquidity needs. It is a very popular product. A deposit advance is absolutely not a payday loan. Banks do not participate in any payday lending, as the costs and terms are very different. Deposit advance products are consumer driven and driven by demand. One can eliminate the product, but unfortunately, cannot eliminate the demand. We try and do everything we can to keep customers in a heavily regulated entity, such as we are. In many instances, deposit advance product is one-half the cost of a traditional payday loan and much cheaper than that versus other industries such as pawn shops and unregulated online lenders. There are very stringent requirements that must be met for one to receive a deposit advance product. A customer must be in good standing with a bank. That means they have an established relationship with their bank from two to six months, no extensive negative actions against their account, and have a history of recurring direct deposit. If the customer qualifies for this product, they must then review the bank's transparent and easy to understand disclosure, which includes fee structure details, an agreement to pay off the balance of this line of credit with the next direct deposit, and importantly, each bank clearly highlights and discloses to the consumer this is a short-term product. Then, and only then, will a customer receive access to a deposit advance product. I would like to point out, our four banks do not spend one penny marketing this product. Of the four banks, three percent participation of all checking account holders. Fifteen percent of those three percent are seniors. So a quick review. There are 7,000 banks in this country. Only six banks present this product. Only three percent of the account holders participate in a deposit advance product, and 15 percent are seniors. So it is 15 percent of the three percent are seniors. Customers must review the terms and disclosure each time they access this line of credit. These four banks have worked with regulators, customers, and consumer groups to improve this product to make it as transparent and less costly as possible. Over the years, we have changed our product to include cooling off periods, installment repayment options, lower credit amounts, and lowered the cost. We also do not charge for any late fee a customer may have. The other option we have when a customer walks into the bank wanting assistance is to turn our back on that customer and tell them the most heavily regulated industry in the country cannot help you in your time of need, in a time where the number of underbanked and unbanked customers are rapidly increasing. We do not think this is in the best interest of the consumer. If we do not choose to help them, they have several choices. They can go to the traditional online payday lending, which is expensive, the pawn shop, which is even more expensive, or, as the Wall Street Journal pointed out recently, they will turn to the Tony Sopranos, rest in peace, of the world. That is the most expensive alternative. One thing you may have seen over the last couple of weeks is something we called regulatory olympics in this country. There are now four regulators, numerous States, and now this body overseeing this product. We understand. We appreciate the jurisdiction all may have. However, this is an inefficient and ineffective way to regulate. In this town, we call it regulatory olympics. We think it fits the situation well. We urge another cooling off period. Let us let the CFPB conduct its comprehensive analysis before any agency takes further action. I would like to close with a quote from a prominent member of banking, the newly confirmed Director of the CFPB, Richard Cordray, who said, and I quote, ``I want to be clear about one thing. We recognize there is a need and demand in this country for emergency credit.'' January 19, 2012. We align ourselves with that comment. We want to improve this product. Any suggestions you may have will be taken seriously. We want to make sure customers are happy with their banks. With that, Mr. Chairman, I will yield for any questions you may have. [The prepared statement of Mr. Hunt follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Well, some of the suggestions were made by Mr. Shaul, which I would encourage you to share with your member banks. Mr. Hunt. Sure. The Chairman. Instead of the three alternatives that you listed, installment loans for up to two weeks, extended pay plan so they would not get into the cycle on a limited income, such as Social Security that Ms. Smith made. So we will discuss that later. Senator Collins. Senator Collins. Thank you, Mr. Chairman. Mr. Shaul, today in your testimony, you gave a number of constructive suggestions for tightening the regulation of payday lenders. That seems very much at odds with the tone that your organization took when you sent a comment letter to the CFPB on its white paper on payday loans, and I am going to read specifically what your organization said. You wrote, ``The tone, conclusions, and specific language within the report seem aligned with the type of rhetoric that more often comes from advocacy groups that are not always driven by facts but rather are driven by agendas and unsupported anecdotal information.'' I am trying to reconcile your constructive approach today and at least conceding the need for codifying best practices, taking steps to clean up the industry, with your indictment of the paper done by the CFPB on payday loans. Mr. Shaul. Perhaps I can help you, Senator. The indictment of the white paper is not an indictment of the Bureau or those who work within it. I should say that we were surprised by its timing because the data collection was not complete, a fact that they themselves acknowledge. We were disturbed by the methodology because I think, as our critique would show, it gives an unrealistic and unwarranted sample to those who are frequent users of the product as opposed to taking the body of those who use the product across the whole field, the whole field of users. And then, perhaps most importantly, there is a speculation on consumer welfare that is a part of the end of the paper which draws no factual research to support it. Now, it is important to say a number of things. First, we recognize that the Bureau is here to stay and we wish to cooperate with it. As a matter of fact, one of the great disappointments here was, as you can imagine, in a trade association, it is not always easy to convince the members to give up their data to a regulatory agency. We took that step, and it was not an easy one to convince our members to do. Therefore, when we found that though the data was not complete, the conclusions had been reached, it was a moment of some seriousness within the trade association. Secondly, we do feel, and we have seen it here today, and this is such a disappointment to me, I thought that when I took this position, the one thing that would be extremely helpful was to do or have at my disposal research that would be extremely useful in getting at how many on a spectrum of 100 customers are really led into a poverty situation--into a greater poverty situation by their use of the loan, how many are well served, how many are left neutral. I do not find that research. Moreover, as you have seen today, there is a dispute about the research. In my judgment, the one place in which that research can be conducted in a way that neutrally will affect all parties and where there will be a respect for it is within the Bureau. Senator Collins. Well, what advocacy groups that are not driven by facts are you referring to? Mr. Shaul. I thought that the Pew paper was not--the Pew research paper was not a well-done paper, and I would be happy to augment my statement with some detailed criticism. Senator Collins. Mr. Shaul, I am just curious, were you involved in drafting the Dodd-Frank bill which created the Bureau? Mr. Shaul. Yes, in its later stages, I was, but I was not involved in the creation of the Bureau itself. Senator Collins. Did you support the creation of the Bureau? Mr. Shaul. Yes. Senator Collins. Do you support increased disclosure requirements for lenders such as Mr. Wright and I discussed, so that they know the actual dollar amount that they are going to end up paying? Mr. Shaul. Not only do I support greater disclosure, but one of the first things I did in January of this year as a part of a staff effort was to revise our disclosure to say that the payday loan is denominated or marked as a short-term loan. Experience shows that many borrowers use it longer than that. I think if you read our disclosure, it is a very comprehensive thing as it is now. I would say most---- Senator Collins. Does it say the amount that the consumer is going to have to pay back, or does it just give the interest rate---- Mr. Shaul. It gives the APR and it depends---- Senator Collins. Well, the APR is pretty hard for people to calculate---- Mr. Shaul. Right. Senator Collins [continuing]. If you do not give them the amount the way you get with a mortgage disclosure. Mr. Shaul. I am with you on greater disclosure and I would go one step further. It is not just greater disclosure, but it is also a form of education that we need for people in this sector of the economy so that they really understand what they are getting into. So I am completely open to greater disclosure and I think we have done a great deal on it. And I think your suggestion about denominated dollars is one that I would be happy to discuss with my membership, yes. Senator Collins. Thank you, Mr. Chairman. The Chairman. Senator Warren. Senator Warren. Thank you very much, Mr. Chairman. So, Mr. Hunt, I heard you say most emphatically that deposit advance is not payday lending. So, I just want to go over the specific example we have here from Ms. Smith. She says an installment loan was not available, that she asked for it and could not get it. Partial payment was not available. Once she had taken this out, she had to come up with all of the money, which is, I think, how it usually works with payday. That she rolled this over, Ms. Smith, did you say 67 times? Ms. Smith. Sixty-three times. Senator Warren. Sixty-three times over the space of five years. By my calculation, just back of the envelope, I think it is about 200 percent annual interest that she paid. She was given this when she had--evidently, it was verified that she would have a Social Security check coming in every month, which means, in effect, repayment was virtually guaranteed. Ms. Smith. They took it. Senator Warren. They took the money out---- Ms. Smith. I did not---- Senator Warren [continuing]. Did not even wait for someone to show up with a check. And it was all handled electronically, so there was no need even to have a storefront and a clerk to process this. So, I understand ways in which it is more effective than a payday loan, but what I do not understand is your statement about how this is not a payday loan, so maybe you could just explain that better to me. Mr. Hunt. Sure, Senator Warren. Sure. Thank you very much. I appreciate the question. As you know, Senator, we cannot get into the specifics of an individual case for privacy matters. I do not know the exact relationship between the witness and the bank in question. We cannot ask those questions. I would tell you generically and from a 30,000-foot standpoint, you do have an opportunity for installment loans. Senator Warren. I am sorry, Mr. Hunt---- Mr. Hunt. You do have an opportunity---- Senator Warren. Let me stop right there. Are you saying that Ms. Smith misunderstood Wells Fargo when she asked for an installment loan and was told that she could not get it? Mr. Hunt. I do not know what transpired between two individuals. I do not even know when it was. I am just telling you today---- Senator Warren. Ms. Smith? Ms. Smith. It is a matter of record that they forgave my loan about a month ago when I went in and asked for an installment loan. Senator Warren. Mr. Hunt? Ms. Smith. They said they were not equipped to do that. Mr. Hunt. Senator Warren, I am just going to tell you, Wells Fargo today offers an installment loan, that if a person cannot meet their needs on the next direct deposit, they have an opportunity to have an installment loan. Now, when that happens---- Senator Warren. Mr. Hunt, I am just saying to you, we have Ms. Smith here saying that that is not so. Ms. Borne, did you want to weigh in? Ms. Borne. I just wanted to point out that the installment option that Wells Fargo has and that other banks making payday loans have are notoriously hard to obtain. For example, Wells, even after having changed its policy, still requires the borrower to be in debt for three consecutive months before they can qualify for an installment plan. Another bank only lets you get an installment plan if you ask for it by calling the bank before you take out the loan. So once you actually have the loan, no installment option. This is consistent with the experience in the storefront arena, where the extended payment plan that Mr. Shaul mentioned has notoriously low pick-up rates. In other settings, the industry has admitted that it is a lot less profitable and they do not want borrowers doing it. Senator Warren. Thank you, Ms. Borne. Mr. Hunt, I am still trying to understand how the deposit advance is not a payday loan. Mr. Hunt. Well, I will tell you how exactly that is not a payday loan. One, you have to have an established relationship with the bank. We have to have a history with the bank. You cannot just walk into a bank and receive a deposit advance product. You have to have a history of a direct deposit, as well. And you cannot have any negative consequences happen to your bank. That is our form of underwriting. Senator Warren. So---- Mr. Hunt. That is completely different. Senator Warren. So let me---- Mr. Hunt. And the cost---- Senator Warren. Let me make sure I understand this, then. Mr. Hunt. The costs are completely different. Senator Warren. Let me understand, make sure I understand this, Mr. Hunt. Mr. Hunt. Sure. Senator Warren. So you only want to do these loans for your established customer base when, in the case like Ms. Smith, when you know that you are going to have effectively a 100 percent chance of repayment here, and that is how you distinguish yourself from being a payday loan? Mr. Hunt. That is one of the ways we distinguish ourself. I think it is a positive thing, we have an established relationship with our customer. I think it is a positive thing that only certain people qualify to get a deposit advance product. I think it is a positive thing that we charge half of what a payday lender charges. I think those are positive bodies. I think it is also positive, Senator Warren, that we keep people within the regulated entity and not the under- regulated. I think we can all agree we are one of the most heavily regulated industries. Senator Warren. Mr. Hunt, I see that I am out of time, but if I might, Mr. Chairman---- The Chairman. You can---- Senator Warren. No, no, I just want to say here that to describe yourselves as being part of a heavily regulated entity when it is the case that by her direct testimony we have someone here who received loans that were rolled over for five years. She paid an average of 200 percent interest on a loan that cost the bank very little to administer, since it was electronic, and was effectively 100 percent guaranteed that the bank would be repaid. So I appreciate that the bank is a regulated entity, but I am afraid I just cannot understand the distinction between how deposit advance has somehow improved Ms. Smith's life over that of going to a storefront, where she could have also gotten a payday loan. So, thank you. Thank you, Mr. Chairman. Mr. Hunt. Do I get a chance, Mr. Chairman, to respond? The Chairman. Of course. Mr. Hunt. Okay, great. Thank you very much. As you know, Senator Warren, banks offer cooling off periods, so if a customer has this product for five to six months, they are shut off. For one solid month, they cannot access their line of credit. It is up to the customer, then, to say, hey, I need this line of credit once again. The customer also, Ms. Warren, Senator Warren, has an extensive process for application, something you have always been in favor of, easy and transparent disclosures. So if you apply for a deposit advance product, you will see right here it says that deposit direct advance is a line of credit designed for short-term borrowing needs. It says the service is expensive. You have to understand the fees. Advances are automatically deposited into the checking account. Advances will automatically be repaid from your checking account. And on and on and on. Senator Warren. Mr. Hunt---- Mr. Hunt. And the customer has to voluntarily sign off on this. Senator Warren. Mr. Hunt, I am afraid what I was looking for here is how your product--I just started with your statement that a deposit advance is not a payday loan---- Mr. Hunt. It is not. Senator Warren [continuing]. And that is what I am trying to understand---- Mr. Hunt. It is not a loan. Senator Warren [continuing]. And you are telling me--you are telling me that there are extensive paperwork that you had her sign off on, you had Ms. Smith sign off, and actually, Ms. Smith is shaking her head no. Ms. Smith? Ms. Smith. It was all done online, point and click, and---- Senator Warren. So I am back in my original position. If the concern we have is about a product that is designed to ensnare people in repeat loans over time so that it is possible to extract from them 200 percent interest, then it seems to me that Ms. Smith is describing such a product from Wells Fargo. Ms. Smith. May I make a statement? Senator Warren. Of course, Ms. Smith. I am sorry, Mr. Chairman. [Laughter.] Sorry, Mr. Chairman. Ms. Smith. I do not quite understand where he said that I was eligible. I walked into the bank and asked for a small loan. They said they did not have them, but they had a service called a direct deposit advance. The only thing that made me eligible was I had a Social Security check in there that they could just take the money out. I did not have to buy a stamp in five years to mail it in. I was never late. I was never defaulted. Senator Warren. Thank you, Ms. Smith. Mr. Hunt. And just to finish up, I did make a mistake when I said sign off. In today's terminology, that also means you check off a box. Much like you do with iTunes, you can do services now online, as well. And it is true that many of our banks do this. But it is the same principle. You still have to check off on these boxes to do it. And again, this is a voluntary item that the customer chooses to do, and you do have to meet certain requirements in order to get this product. Senator Warren. Yes, Mr. Hunt, I think you are right. It is the same principle. The Chairman. There are customers and there are customers, and some of your customers, probably a good percent of them, do not know all the different products that are offered by a bank, and maybe that is one of the responsibilities of a bank, to present to them all the alternatives, particularly when it comes to a senior citizen that is on just Social Security and depends on that check for everything. Now, for the life of me, I cannot understand why your member banks would want to take the negative aura that is created by these kinds of circumstances that Ms. Smith has testified to, and there have been others that have been mentioned here today, in order to insist on a technical point of this or that. The bank ought to be helping the customer and we are going to follow up on this. Senator Donnelly. Senator Donnelly. Thank you, Mr. Chairman. And, Ms. Smith, it was a pleasure to have you stop by the office this morning. Thank you very much. Did you ever discuss your situation with anyone at Wells in regards to paying it back in installments? Ms. Smith. Just recently. Senator Donnelly. Okay. Ms. Smith. I did not think I had any choice. It was not an option for me. Senator Donnelly. Okay. Mr. Hunt, from the way these loans are repaid, would you agree they--or lines of credit, as you put it--would you agree they are fairly minimal risk? Mr. Hunt. Minimum risk for the customer or minimum risk for the bank? Senator Donnelly. For the bank. Mr. Hunt. Yes, only because---- Senator Donnelly. If there is direct deposit. Mr. Hunt. I do, only because of the requirements you have to meet before a person gets access to a deposit advance product. We have done our homework on the customer. Senator Donnelly. Okay. And now, the average amount the bank is paying for the money--a lot of savings accounts are one percent now, somewhere in that neighborhood. Say the average rate that the bank is paying for their funds, one percent, maybe two percent. How is 36 percent not a fair interest rate on these deposits? Mr. Hunt. Yes. So, Senator, as you well know, we do not charge interest rate or APR. It is a fee. It is a fee for service for people who need this assistance. And I think it is very simple in the disclosure. It says it is $7.50 for every $100, $2 for $20, $1.75 for $20. So it is not interest rate. I concur with Senator Collins' statement---- Senator Donnelly. So your fee rate---- Mr. Hunt. It is a fee rate. Senator Donnelly [continuing]. Comes out to be 200 percent a year. Mr. Hunt. Well, it depends, sir. It depends if you are doing it over a two-day loan. Is it a 35-day loan--I am sorry, line of credit? It depends on the line of credit. It is a fee for it. Senator Donnelly. Yes, Ms. Borne. Thank you for raising your hand. [Laughter.] Ms. Borne. If I could just interject quickly on this, so the fee per $100 that the banks charge is a finance charge. It is a charge in exchange for credit. Through a loophole by which the banks claim that their loans are open-end, they are not currently disclosing an APR, but an APR is the best way to compare the cost of credit across credit products. The studies have shown that they average 225 to 300 percent in APR terms, and even the CFPB, when it looked at deposit advance recently in its report, it did use APR as a manner of comparing the cost of bank payday loans to loans by other lenders. Mr. Hunt. And I would just say about APR, I think they are the most confusing item out there. The Fed, when they were looking at overdraft services, dismissed using APR because, A, they could not explain it, and B, customers could not understand it. Senator Donnelly. Well, it gives you a fairly ballpark idea what you are paying for---- Mr. Hunt. Well, I will tell you this. You are about to vote on a student lending bill and the Federal Government does not put an APR on Federal student loans because they know they cannot explain it nor can it be understood, either. And these are lines of credit, not for the whole year. There is nothing annual about a line of credit---- Senator Donnelly. Well, it is simple math, though. Here is the fees, or whatever you want to call it. You know, you can call it a motorcycle or a motorsickle. You can call it about anything you want. Mr. Hunt. Right. Senator Donnelly. And one of the things you commented on, you said you want to make this the least costly possible for Ms. Smith. And I guess I would say, if you look at this product that comes out 200-plus percent, are you meeting that goal? Mr. Hunt. I think any time we meet the goals of the customer, and this is a demand-driven product---- Senator Donnelly. Well, but the goal---- Mr. Hunt. It is two for 20---- Senator Donnelly [continuing]. But you said the least costly possible way to do it. Mr. Hunt. I am sorry. Say that again, please. Senator Donnelly. You had mentioned in your statement the least costly possible way to do it. Mr. Hunt. Sure. Sure. And we think the charges--the line of credit fees that we charge are very competitive. Senator Donnelly. Well, I---- Mr. Hunt. And I will tell you, sir---- Senator Donnelly. I do not disagree, I mean, in terms of other products for those people. But is it not profitable enough for these banks to, instead of here is your fee for this money, to use a 36 percent interest rate, or 37, or 35, or 34? I mean, they are paying one percent for the money. Mr. Hunt. Well, Senator, I am not going to get into a debate whether we should use percentages or fees. We think, for the customer, it is much easier to understand it is $2 for every $20, or $10 for every $100. And I would tell you, if you really want to have competition, why do we not encourage banks to get into this process for more competition and have people stay in the regulated industry? The worst thing we can do is increase the underbanked numbers and unbanked numbers. We get criticized, sir, for having people pay their lines of credit on time. I think that is wrong. Senator Donnelly. I am not criticizing you. I am just asking you. Do you think that it is appropriate for some of the most respected banking names to be making 200 percent plus off of their customers? Mr. Hunt. First off, I do not accept that it is 200 percent because it is a line of credit. It is not a loan. If we were charging 200 percent for a home mortgage, I am with you. Senator Donnelly. No, that is---- Mr. Hunt. That is too much. Senator Donnelly. You know---- Mr. Hunt. But this is not a loan. This is a line of credit. Senator Donnelly. You know that is not what we are talking about. I mean, this is a woman who paid, on average, 200 percent plus. You can call it a fee. You can call it whatever you want. But that is about what the extra funds that were paid on this averaged out to for the amount that was loaned. And all I am asking is, in regards to the institutions that are doing this, do you not think they could do better? Mr. Hunt. I really do not think we ought to get in the business of price setting. We saw what happened on---- Senator Donnelly. I am not asking you to set prices. Mr. Hunt [continuing]. I mean, that has gotten worse. Senator Donnelly. I am just asking you, do you not think they can do better than having fees and such add up to over 200 percent plus on the money? Mr. Hunt. Again, Senator, I am not trying to be difficult, but we do not charge a percentage. It is a line of credit that the customer must pay off before they have an opportunity to have another line of credit. This is their choice. Senator Donnelly. I---- Mr. Hunt. It has to be reasonable. It has to be proportionate. There are UDAP violations if we are taking advantage of a customer. We work with regulators all the time on this product and other products, as well. Senator Donnelly. My time is up, Mr. Chairman. I will pass--no, I guess the question is reasonable. We have different views on what is reasonable. Mr. Hunt. Sure. Thank you, though. Mr. Shaul. Mr. Chairman, may I correct myself? The Chairman. Please. Mr. Shaul. I am unable to exit the office without a brain trust behind me and my brain trust, I am sure, after hearing from some of our members, wants to make clear that our disclosure does include a dollar amount as well as an APR. So I misspoke to Senator Collins. The Chairman. How is that different from Mr. Hunt's? He-- you represent the Community Financial Services Association and Mr. Hunt represents the Consumer Bankers Association. Mr. Shaul. Correct. The Chairman. So yours does have that---- Mr. Shaul. We have an APR. The Chairman. APR---- Mr. Shaul. And then we have an actual dollar amount that is paid, as well. The Chairman. And your members, Mr. Hunt, do not? Mr. Hunt. Ours is a line of credit. It is not a loan. And we show $2 for $20, $10 for $100, however you want to slice and dice it. It is clear. It is transparent. It is up front. The Chairman. Well, let me ask you, how does someone--and chime in, Senator Donnelly, if you have any other questions-- how does someone who is on Social Security ever get out from under this loan when the whole amount must be paid back out of their next Social Security check? Mr. Hunt. Yes, Mr. Chairman, I appreciate the question very much on it. It is a great debate. Do we have people pay this loan--this line of credit back immediately or do we let them finance it over months? I thought in this country it was always better to pay off your debt, and now we are getting in trouble for having consumers pay off their debt. They have to pay off that line of credit before they get access to another. Now, hearing from consumers, hearing from regulators, hearing from members of Congress, some of these banks have now said, okay, even though we do believe a person should pay this off as they agreed to, we are going to give them the option to pay longer, over three to four months' period of time. But, if we give them the opportunity, we are not going to allow them to access their line of credit. So we get criticized for asking people to pay their agreement on time and then we get criticized for making them have a longer opportunity, as well. So we give them the best. We can say, you are going to get paid--you are going to have to pay this off at your next direct deposit or an extension. The choice is now yours. The Chairman. If they have that choice. Mr. Hunt. That is correct. But remember, now, before they get a line of credit---- The Chairman. We have an example here with Ms. Smith that she did not have that choice. She was never told that. Mr. Hunt. Every consumer has a choice not to extend the line of credit. They also cannot get another line of credit, sir, until they pay that line of credit off. It has to be paid off before they get access to another line of credit. The Chairman. Well---- Mr. Hunt. And a cooling off period, sir. The Chairman. Here is what I do not understand. Banks like their customers to think that they are there to help them as financial advisors. What is the best product for you? Now, if you know that someone on Social Security, that the whole amount is going to be paid the next time they get their Social Security payment, and you know that is what they are living on, would that not trigger the bank to say, this might not be the right product for you, that there is a different product? Mr. Hunt. So, Mr. Chairman, we have a right and responsibility to give the facts to the consumer. We always tell them through financial literacy there may be less expensive products. It is clear as day in the disclosures that this is an expensive product, that it must be paid back, and it will be paid back with the next direct deposit, assuming it was reoccurring, and they must qualify for it. We are not going to be the parents of customers. We think they have the right to choose the product they so desire. If we present it in a clear and transparent manner, back that up with financial literacy that we do--we text people, we mail people, we do everything but fly a helium balloon over saying there could be less expensive items--we do everything we can to make sure we act in a responsible way for the consumer. But at the end of the day, sir, it is up to the consumer to choose which product they want to have. Some of the biggest criticisms we receive from people who use this product is why is there a cooling off period, when we have done everything we have been taught from the second grade to pay off our debt, and here we go, paying off our debt, and you are taking something away from us. And it is a very popular product until that occurrence happens, sir. The Chairman. Mr. Shaul, did all of this advance payment thing, did this really start when the use of electronics and electronic payments--of which almost all Social Security payments now are made by electronic payment instead of by paper checks, therefore, it is an easy thing for the banks to access to pay off the advance payment--did all of this just start when Social Security started making electronic checks? Mr. Shaul. I do not think so, Senator. I mean, what had been the traditional mode before that was that we would take a check that would be deposited on the payday and often--in nearly all instances--the person would be called in advance to be sure that the check would be good. Within the bank itself, I suspect the situation would be different because they would have accurate knowledge of the high and low points of the account at all times. The Chairman. This committee has a responsibility to the elderly and the senior citizens of this country, and I want to ask both of you--Ms. Borne, as well--if we have a system like this, are we not setting up Social Security recipients to fail? What do you think, Ms. Borne? Ms. Borne. You know, I think I would just point out that, as has already been remarked on here today, it is very unlikely that a Social Security recipient on a fixed income is going to be able to repay an expensive loan in full in two weeks. It is extremely likely they will end up in a long-term cycle of debt and that that cycle will leave them worse off than they were before they ever took out their initial loan. Mr. Shaul. If I may, Senator---- The Chairman. Please. Mr. Shaul [continuing]. Three points. As I have indicated, the percentage of our borrowers who are senior citizens actually is less than their average across the population. The second point is, it is true that there is a danger here, no question about it. If you track expenditures of those who are elderly, they tend to be more fixed than those who are younger because their aspirational goals and so on are a little less. But the danger is a real one, no question about it. I think it goes to this question that I feel strongly about that is a difficult one for us to do, both in terms of profitability and also in terms of the customer himself. Part of underwriting has to be to look at the person's condition in detail. And, obviously, if you are doing underwriting and you are looking at a Social Security recipient, you have a different case than if you were looking at someone who has a wide variety of incomes. The Chairman. That is exactly right, and what is the risk to the bank when there is a guaranteed Social Security payment coming in the next month? And that has got to be taken into account here. Mr. Shaul. Yes. That is different from our storefronts, of course, but I grasp the point that it is not different in the sense that if that person has written us a check and so forth, we are in the same position in that sense. The Chairman. Do you all have any further questions? Mr. Hunt. Senator, if I can just add on to that---- The Chairman. Yes, please. Mr. Hunt. We do not want an unhappy customer. That is not good for the banking institution. It is not good for the bank. We want to do everything we can to make sure the customer receives the right product at the right price with the right disclosures. The Chairman. I believe that you believe that. Mr. Hunt. Yeah. [Laughter.] The Chairman. But, Mr. Hunt, you have got some unhappy customers and you have got some unhappy Senators who represent those unhappy customers---- Mr. Hunt. And, Mr. Chairman, I---- The Chairman [continuing]. That are trying to straighten this thing out. Mr. Hunt. And we want to help them if there is some--but I would tell you this, sir. The vast, vast, vast customers, seniors, pay off their obligation. They do it. I do not want people to think that seniors are not paying it or they cannot. The vast majority are doing it. They are---- The Chairman. That is not the question here, and in terms-- again, I just repeat myself. In terms of risk to the bank, what risk is there? You have got the Social Security. As long as there is the United States Social Security Administration, you have got that coming in. So, I want to thank everybody. It has been a good discussion. I do not want you two to think that we picked on you, even though we have. [Laughter.] Mr. Hunt. And probably will again. The Chairman. Not if we get this thing straightened out. Mr. Hunt. We look forward to working with you. The Chairman. Well, that is going to depend on really what you do, go back to your member banks, and I see some of them out here in the audience, some of them that are dear friends of mine. And I want you all to address this, because this is not right on what has been testified here today. Ms. Smith. Ms. Smith. I just have one thing to say to some of his comments about paying off your debt. Someone asked me recently, why did you not just take your money out of Wells Fargo and go somewhere else? What would they do to you? And there is not probably much they could do to me because I do not have anything to take. They could harass me a long time with credit, you know. But I did come from the generation of where you do pay your debts and that is why I stayed and allowed this to continue, because I did owe the debt. I did make the loan. And I did pay it. They took it. So, I am a little insulted about that, you know, because I could have done that. The Chairman. You know, you mentioned that you are part of that generation. Let us hope that that passes to every generation. Ms. Smith. Yes. The Chairman. We are a nation of laws. That is what sets us apart from other countries on the face of Planet Earth, is that we respect the rule of law. Now, we just need to make sure, and I am looking at the CFPB and I am looking at the FS--I cannot even say it, there are so many acronyms--Federal Deposit Insurance Corporation--I am talking about the Comptroller of the Currency and others--to make sure that the laws are being effectively administered. And then if there is inadequacy in the law, we need to know about it so that we can address that through the making of laws. Well, it has been a robust discussion. I want to thank everybody. And I would suggest that we have, as a result of this discussion, I suggest that the financial community be proactive on a going forward basis. And I would ask you all to provide all disclosures for each of your banks offering these products to this committee by the close of business next Wednesday. I want to continue to encourage the FDIC and the OCC to move forward with the guidance that they have proposed and finalize those rules to protect the consumers, such as we have heard today. Some of us on this committee have already filed a public comment in support of the work that is being done by the FDIC as well as the OCC. And so for all of you who have been very patient and participated in this robust discussion, thank you and the meeting is adjourned. [Whereupon, at 4:24 p.m., the committee was adjourned.] APPENDIX [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]