    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                             H.R. 1214, THE PAYDAY
                            LOAN REFORM ACT OF 2009

    =======================================================================

                                    HEARING

                                   BEFORE THE

                     SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                              AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 2, 2009

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-24

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             THADDEUS G. McCOTTER, Michigan
    RON KLEIN, Florida                   KEVIN McCARTHY, California
    CHARLES A. WILSON, Ohio              BILL POSEY, Florida
    ED PERLMUTTER, Colorado              LYNN JENKINS, Kansas
    JOE DONNELLY, Indiana
    BILL FOSTER, Illinois
    ANDRE CARSON, Indiana
    JACKIE SPEIER, California
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    STEVE DRIEHAUS, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan
    DAN MAFFEI, New York

            Jeanne M. Roslanowick, Staff Director and Chief Counsel
           Subcommittee on Financial Institutions and Consumer Credit

                     LUIS V. GUTIERREZ, Illinois, Chairman

    CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
    MELVIN L. WATT, North Carolina       J. GRESHAM BARRETT, South Carolina
    GARY L. ACKERMAN, New York           MICHAEL N. CASTLE, Delaware
    BRAD SHERMAN, California             PETER T. KING, New York
    DENNIS MOORE, Kansas                 EDWARD R. ROYCE, California
    PAUL E. KANJORSKI, Pennsylvania      WALTER B. JONES, Jr., North
    MAXINE WATERS, California                Carolina
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    CAROLYN McCARTHY, New York               Virginia
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    AL GREEN, Texas                      JIM GERLACH, Pennsylvania
    WM. LACY CLAY, Missouri              RANDY NEUGEBAUER, Texas
    BRAD MILLER, North Carolina          TOM PRICE, Georgia
    DAVID SCOTT, Georgia                 PATRICK T. McHENRY, North Carolina
    EMANUEL CLEAVER, Missouri            JOHN CAMPBELL, California
    MELISSA L. BEAN, Illinois            KEVIN McCARTHY, California
    PAUL W. HODES, New Hampshire         KENNY MARCHANT, Texas
    KEITH ELLISON, Minnesota             CHRISTOPHER LEE, New York
    RON KLEIN, Florida                   ERIK PAULSEN, Minnesota
    CHARLES A. WILSON, Ohio              LEONARD LANCE, New Jersey
    GREGORY W. MEEKS, New York
    BILL FOSTER, Illinois
    ED PERLMUTTER, Colorado
    JACKIE SPEIER, California
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 2, 2009................................................     1
    Appendix:
        March 2, 2009................................................    41

                                   WITNESSES
                            Thursday, April 2, 2009

    Flores, Michael, Chief Executive Officer, Bretton Woods, Inc.....    12
    Fox, Jean Ann, Director of Financial Services, Consumer
      Federation of America..........................................     9
    Guzman, Gerri, Resident, Montebello, California..................    14
    McCullen, Troy, President and Chief Executive Officer, Finance
      America of Louisiana...........................................    11

                                    APPENDIX

    Prepared statements:
        Flores, Michael..............................................    42
        Fox, Jean Ann................................................    47
        Guzman, Gerri................................................    76
        McCullen, Troy...............................................    78

                  Additional Material Submitted for the Record

    McHenry, Hon. Patrick:
        Federal Reserve Bank of New York Staff Report entitled,
          ``Payday Holiday: How Households Fare After Payday Credit
          Bans,'' dated November 2007, revised February 2008.........    82

                             H.R. 1214, THE PAYDAY
                            LOAN REFORM ACT OF 2009

                                  ----------

                            Thursday, April 2, 2009

                 U.S. House of Representatives,
                 Subcommittee on Financial Institutions
                                   and Consumer Credit,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2:30 p.m., in
    room 2128, Rayburn House Office Building, Hon. Luis V.
    Gutierrez [chairman of the subcommittee] presiding.
        Members present: Representatives Gutierrez, Maloney, Watt,
    Sherman, Moore of Kansas, Waters, McCarthy of New York, Baca,
    Green, Clay, Miller of North Carolina, Scott, Cleaver, Ellison,
    Meeks, Perlmutter, Speier, Childers, Minnick; Hensarling,
    Castle, Royce, Capito, Garrett, Neugebauer, McHenry, Marchant,
    Lee, Paulsen, and Lance.
        Chairman Gutierrez. This hearing of the Subcommittee on
    Financial Institutions and Consumer Credit will come to order.
        Good afternoon, and thanks to all of the witnesses for
    agreeing to appear before the subcommittee today. Today's
    hearing is a legislative hearing that will examine H.R. 1214,
    the Payday Loan Reform Act of 2009.
        We will be limiting opening statements to 10 minutes per
    side, but without objection, all members' opening statements
    will be made a part of the record.
        I yield myself 5 minutes.
        Over the last 2 decades, payday lending has become a very
    controversial source of credit in many of our communities. The
    payday loan industry is grown in size from roughly 300 offices
    in 1992 to over 24,000 last year. As our constituents are faced
    with even tougher economic conditions during this recession,
    they are more and more likely to turn to the services offered
    by the payday lending industry to pay for emergency car
    repairs, an unexpected doctor's bill, and even groceries for
    their families. Many of these families have been ignored or
    shut out of the mainstream financial services industry and have
    nowhere else to turn for credit.
        The last hearing on payday lending in front of the House of
    Representatives was held in March of 2007, and much has changed
    in those 2 years. More States have enacted protections against
    abusive payday loan practices by enacting cap rates or by
    banning payday lending all together. A select few States like
    New York, North Carolina, Pennsylvania, and West Virginia have
    banned payday lending altogether and many States do not offer
    their citizens even a decent level of protection against
    abusive payday practices. And, seven States failed to have any
    cap on small loan rates.
        Missouri, for example, has an APR cap as high as 1,955
    percent. While I have and will continue to support consumer
    groups' tireless efforts to eliminate abusive practices, in the
    lending industry, they are fighting an uphill battle against
    better-funded lobbyists in States like Delaware, New Hampshire
    and Wisconsin, where there is no rate cap at all.
        [chart]
        Chairman Gutierrez. This chart separates States into three
    classes: those that have banned payday lending, first; those
    that kept interest rates for payday lenders at 15 percent or
    391 percent APR; and, either those that have no cap at all or
    have a cap in place that exceeds 391, which is the largest
    number of 26 States there, the object of my bill is to move all
    23 of the States in the far right column over to the middle
    column. Then the consumer groups will have a realistic
    opportunity to work their magic and move as many States as
    possible over to the far left column.
        By the way, that column on the far right represents almost
    113 million who would be helped by the bill. The current state
    of affairs for those consumers is unacceptable, and Congress
    would be derelict in its duty if we allowed them to remain
    unprotected from abusive and predatory lending. H.R. 1214, the
    Payday Loan Reform Act of 2009, creates significant protections
    from abusive payday practices by preventing rollovers and
    freeing consumers from the debt trap by mandating a cost-free
    90-day repayment plan.
        The bill lowers the effective APR of a payday loan to 48
    percent of 15 cents for every dollar loan. This is a rate that
    is lower than the 23 current State rate caps, including
    California, Colorado, New Hampshire, and even my home State of
    Illinois. My legislation would also prohibit unfair mandatory
    arbitration clauses, provide increased disclosure, and honor
    all existing, stronger State protections by creating a Federal
    floor on which stronger laws can be built.
        We may hear from the consumer groups today that a similar
    law that was passed in Illinois has been a failure, but
    according to the State Department of Financial Institutions,
    Illinois' 15.5 percent rate cap has already saved consumers in
    our State over $35 million since its enactment in December of
    2006. My bill would move that rate cap even lower.
        I recognize that my bill is not a cure-all for this issue.
    My intent with H.R. 1214 is to give the efforts to protect
    consumer rights a boost by creating a minimum level of
    protection that all consumers will enjoy. This legislation
    would lower the APR cap for nearly 113 million Americans
    immediately upon its enactment, despite complaints from the
    industry that the bill sets rate caps too low and assertions
    from consumers that the bill does not go far enough.
        I think that improving protections for 113 million
    consumers is a significant step in the right direction. The
    status quo in the payday industry is unacceptable. The Payday
    Loan Reform Act says ``no'' to the status quo. It would protect
    millions of Americans from abusive lending practices in one
    fell swoop.
        I look forward to hearing the testimony of our panelists
    and also look forward to a lively debate on this controversial
    issue.
        I yield to the gentleman, Mr. Hensarling, 5 minutes for his
    opening statement.
        Mr. Hensarling. Thank you, Mr. Chairman.
        Congress and the Financial Services Committee continue to
    enact legislation that retracts credit in the middle of a
    recession. There is the mortgage cramdown that made mortgage
    loans more expensive for some and inaccessible to others.
        Now, just a few moment ago, the credit card bill, which
    will deny credit to some may get more expensive to others; now,
    we have the payday lending bill. The bill before us, I fear,
    essentially does two harmful things: Number one, it establishes
    price controls; and number two, it erodes risk-based pricing,
    which permits people, particularly low-income people who
    haven't had access to credit before, to finally have access to
    needed credit.
        What will the outcome be if we pass this legislation?
    Again, consumers will lose. They will lose choices. They will
    lose credit. They will lose economic freedom. What will they
    gain? They will gain bounced checks. They will gain utility
    reconnect fees. They will gain eviction notices, and they will
    gain the opportunity to be forced into the underground economy.
        Now, I continue to observe. Particularly, I have been
    involved in the budget debate on the Floor. And listening to my
    colleagues on the other side of the aisle here, how many talk
    about the benefits of the free enterprise system? Yet, we
    continue to have legislation after legislative initiative that
    appears to attack it and erode it daily.
        I would remind my colleagues that just because you don't
    need or you don't appreciate a particular service doesn't mean
    that your neighbor doesn't. Now, I know we will hear a number
    of sad stories about people who are caught up in cycles of
    debt, and I assume they are all true, and my heart will go out
    to these people. But I wonder though, if this never-ending
    cycle of debt that we hear so often, is that a symptom? Or is
    that the cause? My belief is that it is probably the symptom,
    and, indeed, I have a quote from a recent Federal Reserve study
    that said:
        ``There is no evidence that loan rollovers and repeat
    borrowers affect store profits beyond their proportional
    contribution to total loan volume. In other words, the
    industry's profitability does not depend on the presence of
    repeat borrowers, per se.''
        So I believe we need to go to the root cause of the
    problem, not the symptom; the root cause of the economic
    turmoil that is affecting the lives of our citizens.
        We need to pass policies in this Congress and in this
    committee that will help preserve our fellow citizens' jobs
    today and grow better job opportunities tomorrow, and prevent
    punitive taxes from shrinking their already-shrinking paycheck.
        I have a suggestion. We could start this afternoon by
    rejecting the Democratic budget which establishes a national
    energy tax which CBO says could impact families at $1,600 a
    month--$300 billion of new taxes for small businesses with all
    the layoffs that would be associated with that.
        Again, if we pass this legislation, I believe that
    consumers are going to be forced into many alternatives that
    they may find more harmful to them. The average telephone
    reconnect fee is $50, maybe many consumers would have preferred
    to pay the $15 market fee to borrow the hundred. The average
    cable reconnect fee can be as much as $100. Again, there are
    many consumers who would prefer to pay the $15 than the $100
    reconnect fee.
        A bounced check can average $28.23. Overdraft fees can be
    $56. Now, if we get focused on APR, which may or may not be the
    best way to judge these loans, a bounced check can have an APR
    of 755 percent, and you add the overdraft fees. All of a sudden
    on that same $100 loan, you are at 1,449 percent.
        The Chairman of the FDIC has said, ``when used on a
    recurring basis for small amounts, the APR for fee-based,
    bounced protection far exceeds the APRs associated with payday
    loans. And, given that these tend to be small, short loans to
    people who were credit risky without collateral, there are
    fixed costs associated with these loans. The default rates are
    high. Of course this APR is going to be large, but why take
    away the option of what the consumer wants to do?
        Why replace his judgment or her judgment with ours?
        The answer is economic growth, economic opportunity for our
    neighbors, a competitive market, and effective disclosure.
        Mr. Chairman, thank you, and I yield back the balance of my
    time.
        Chairman Gutierrez. The gentleman yields back the balance
    of his time.
        Mr. Moore, you are recognized for 1 minute.
        Mr. Moore of Kansas. Thank you, Mr. Chairman, for holding
    this hearing and for your hard work in drafting H.R. 1214, the
    Payday Loan Reform Act. I am proud to be a co-sponsor of this
    balanced legislation, and whenever we have industry on one side
    saying the bill goes too far, and consumer groups saying it
    doesn't go far enough, we are probably striking close to a
    proper balance.
        In Kansas, we already have laws on the books protecting
    consumers that are nearly identical to H.R. 1214. Our State law
    already limits a maximum fee of 15 cents per dollar advance in
    advance rollovers. Applying these kinds of consumer protections
    to all States would probably permit States with tougher payday
    lending laws to maintain those requirements. That, I believe,
    is the right approach.
        Thank you, Mr. Chairman. I yield back.
        Chairman Gutierrez. Thank you.
        Mr. Paulsen is recognized for 2 minutes.
        Mr. Paulsen. Thank you, Mr. Chairman, for holding this
    hearing today.
        At a time when the credit markets are frozen or certainly
    drying up, I think it is very important that we ensure that we
    bring as much liquidity into the market as possible, and we
    need to make sure that there are as many options as possible
    that are available for consumers. I found it interesting that a
    recent report by the Federal Reserve Bank of the State of New
    York noted that payday lenders fill a very valuable niche
    market where banks and credit unions have left a void.
        The study found that people in those States that banned
    payday loans bounced more checks. They filed more complaints
    about lenders and debt collectors and they filed for bankruptcy
    at a higher rate. So, I want to make sure that any legislation
    that is pushed through by Congress does not exasperate those
    effects throughout the country. I certainly understand the goal
    of protecting consumers, but we must make sure that credit is
    available for those who need it.
        I also have some concerns about the preemption portions of
    the legislation which we will have discussions on. There's a
    patchwork of legislation out there right now through all the
    different States, but I want to make sure that we don't mire
    down the payday lenders with overregulation. I look forward to
    the testimony today from our witnesses, and I yield back to the
    chairman.
        Chairman Gutierrez. Congressman Baca, you are recognized
    for 3 minutes.
        Mr. Baca. Thank you very much, Chairman Gutierrez and
    Ranking Member Hensarling, for your leadership on this
    important subject.
        The issue of payday advanced lending reform is a critical
    one and I applaud Chairman Gutierrez for introducing the
    legislation on this subject, and, as some of you know I have
    introduced alternative legislation on this issue. I believe
    that my bill, H.R. 1846, the Consumer Lending Education and
    Reform Act or the CLEAR Act, reforms the payday loan industry,
    while also ensuring that borrowers have access to loans when
    they are needed.
        In these difficult times students, police officers,
    teachers, and other working Americans sometimes need access to
    emergency credit. These people, like Tina Hall, who would not
    have been able to pay for her daughter's emergency dental care
    if it hadn't been for the payday loan she received; and, I
    received about 47 different letters just in my area, and I
    would like to just read one of them. It says, ``Dear
    Congressman Baca: I come to (blank) for the payday loan.'' I'm
    not going to give advantage to that one. ``I use the services
    during an emergency. This is a good service to have when you
    need some money real quick. I feel this is a good service.
    Please don't take it away.''
        Again, we must have access to credit open to borrowers like
    Tina and this person whose letter that I just read, who are
    doing the right thing. But we also must have a clean-up
    industry with tougher regulations and consumer protections and
    oversight. The CLEAR Act achieves these principles and will
    also impose a strict national fee structure on payment loans.
    My bill caps it at 15 cents per dollar plus allowance for a 5
    percent original fees for loans borrowed over the Internet.
    This additional 5 percent fee for the Internet loan is due to
    higher consumer acquisition cost.
        My bill limits borrowers to refining a loan no more than 2
    times at a rate of 15 cents per dollar for the first
    refinancing, and 10 cents per dollar for the second
    refinancing. The CLEAR Act also requires lenders to obtain
    bonding to follow the Fair Debt Collection Practice Act and to
    advise borrowers of the availability of free credit counseling.
    These provisions will eliminate the fly-by-night lenders who
    take advantage of vulnerable individuals. It is my preempting
    existing State law, the CLEAR Act would create a national
    standard; and, I state, create a national standard for short-
    term loans. This will ensure residents of the 50 States have
    access to payday advance loans at affordable rates.
        We must remember that for many of our customers, advance
    loans are more effective than other alternatives, as you can
    see by the chart that we have out here. If a customer with
    overdraft protection on his or her checking account writes a
    $100 check, but only has $75 in the account, the bank charges
    them approximately $38.
        If a customer who does not have overdraft protection
    bounces the same $100 check, they will be charged $30.
        If I could have an additional 30 seconds?
        Chairman Gutierrez. There is no further time.
        Mr. Baca. Can somebody yield to me?
        Chairman Gutierrez. Well, we could try it.
        I recognize Mr. McHenry for 3 minutes.
        Mr. McHenry. I will yield to my colleague 30 seconds.
        Mr. Baca. Thank you. Thank you very much.
        Just to finish up, then, if a customer does not have the
    overdraft protection to bounced check for the same $100, they
    will be charged $30 for a bad check, which means both the bank
    and the merchants are giving them a total of $60. So they're
    actually paying more than going to a payday than what it would
    be otherwise.
        The CLEAR Act provides national regulatory reform that
    contains consumer protection and oversight, while also ensuring
    working Americans have access to credit.
        I thank the chairman for recognizing me, and I look forward
    to working with him and other members on this important issue.
    And thank you very much for yielding the time.
        Mr. McHenry. I thank my colleague, and I thank you, Mr.
    Chairman. I thank the ranking member as well.
        There is going to be a discussion about the North Carolina
    experience today. In North Carolina, we simply do not have
    payday lending recognized by the State. Now, the failure of
    State regulation means that there are no State-chartered
    institutions that are allowed to do payday lending.
        However, payday lending still occurs, even though,
    illegally, in North Carolina. There are mechanisms to do that.
    We have individuals who drive over the State lines to do that.
    We have those who access other opportunities via the Internet.
    We have other individuals in the State who access credit
    through simply unregulated means. The North Carolina experience
    is not a good one in terms of access for low- and moderate-
    income individuals to opportunities for lending. So the North
    Carolina experience, we need to be clear about.
        Mr. Chairman, I ask unanimous consent to submit a Federal
    Reserve of New York staff report on payday credit bans.
        Chairman Gutierrez. Without objection, it is so ordered.
        Mr. McHenry. Thank you, Mr. Chairman.
        Beyond that, this is the worst time to further constrict
    credit. We see the recession with the impact on other
    traditional means of lending, the constriction within our
    credit markets. The access of credit has been severely limited
    right now. The impact on families is real and so we need to
    have regulated means of individuals being able to meet their
    demands, their worldly demands of paying their car payment and
    making their home payment, paying their rent, even feeding
    their kids. This is a very basic function.
        I want to commend the chairman, though I have concerns
    about his legislation. I do appreciate the fact that he has
    approached this in a pragmatic way and I hope that we can have
    a realistic discussion on how we can properly allow for the
    function of the credit markets in many different ways in this
    country. And I am very grateful for the opportunity to have
    this discussion before this committee.
        I think it is important, especially now in these tough
    economic times, that we have this discussion about the
    importance and the necessity of payday credit advances.
        Thanks so much, and I yield back.
        Chairman Gutierrez. The gentleman yields back the balance
    of his time.
        We have Mr. Scott for a 1\1/2\ minutes.
        Mr. Scott. Thank you very much, Mr. Chairman.
        Let me just say very quickly, these are tough times. And
    with the tumultuous financial markets, bank bailouts, rising
    unemployment, and the continued downturn of our housing
    markets, many working and middle-class Americans indeed are
    finding it harder and harder to make ends meet, and some are
    turning to short-term loans to get them over certain hurdles.
    This is a market. These are consumers. These are our
    constituents out there who do need help.
        I think what we are trying to do with this legislation,
    which I am a co-sponsor of, Mr. Chairman, as you know, we are
    asking and reaching for what I will refer to as a delicate
    balance. And that delicate balance is to make sure that those
    of our consumers, those of our constituents who need in an
    emergency situation to have access to safe, protected, and fair
    means of acquiring funds that they need to get them over in a
    tough time. But, yet, we must do it in a way that protects them
    from getting caught in long-term debt in a cycle of debt. This
    bill will not put payday lenders out of business, but what it
    will do is it will cause this industry to lose some profits;
    but, all of it at the expense of ensuring that those 23 States
    with weak or even no payday lending rules will receive
    increased protections from those that are less than honest
    lending practices.
        The bill also will not preempt States that already have
    laws on their books that may be strong or even outlaw some of
    these practices. And there are those who say the bill does not
    go far enough. There are those who say the bill goes too far.
    But again, Mr. Chairman, what I feel we have here is a bill
    that does reach that delicate balance that is needed to give
    access to credit in these tough times to those folks who need
    it, while, at the same time, providing maximum protections for
    our consumers in this industry.
        I yield back the balance of my time.
        Chairman Gutierrez. The gentleman yields back the balance
    of his time. I ask unanimous consent to add an additional
    minute for opening statements on each side. Hearing no
    objections, it is so ordered.
        Mr. Ellison, you have 45 seconds.
        Mr. Ellison. Thank you, Mr. Chairman.
        Sadly, there are millions of hardworking Americans out
    there without checking and savings accounts. These are the
    unbanked. Until we change that, until we make much greater
    progress in areas of financial access, we will continue to have
    payday lending industry.
        In the meantime, we have to make sure that all consumers
    using payday loan products are protected. For that reason, I
    want to commend you, Chairman Gutierrez, on your leadership in
    convening this important hearing on payday lending reform. In
    sum, I believe the legislation makes a lot of progress towards
    striking a balance between ensuring basic protections for
    consumers and not stifling their access to credit.
        However, it's only a first step of many to provide
    affordable financial products to all Americans. To that end, I
    am especially interested to hear more about these efforts of
    regulated financial institutions like community banks, credit
    unions, and others, to bring millions of unbanked Americans
    into the fold of the mainstream financial services industry.
        Thank you. I yield back.
        Chairman Gutierrez. Thank you.
        Mr. Hensarling, you are recognized for 1 additional minute.
        Mr. Hensarling. Thank you, Mr. Chairman.
        Not unlike the gentleman from California, I have heard from
    a number of my constituents. I have heard from a lady named
    Theresa in Dallas where I live, a 43-year-old divorcee who
    recently survived stage 4 cancer. She wrote to me and said:
        ``Congressman, without these loans I would have been
    evicted from my apartment on two separates occasions. Please
    help to keep these loans from being banned. There are many of
    us out here with no other choice at all.''
        I also heard from Paul in Mesquite, Texas: ``Working payday
    to payday in this economy we sometimes need a quick loan for
    food, gas, utilities, prescriptions. If payday loans are
    banned, our checks may have to bounce and then I have to pay
    the big banks overdraft charges. I won't name the name of the
    company. Payday lenders are helping working Americans stay
    afloat 'til payday.''
        Mr. Chairman, I hope we keep in mind Theresa of Dallas and
    Paul of Mesquite as we go through this debate.
        And I yield back the balance of my time.
        Chairman Gutierrez. We certainly will.
        Mr. Meeks, you are recognized for 45 seconds.
        Mr. Meeks. Thank you, Mr. Chairman, and I just want to say,
    briefly, that I wasn't always a Member of Congress. In fact, I
    didn't always wear a suit like this.
        I grew up in a neighborhood that was tough. My parents had
    no money. And what this is about is about options. It's about
    options that average, everyday people, good people can have,
    if, in fact, they find a hard time. In fact, it could save
    their credit. Because, if you, not only by paying a late fee,
    it ruins your credit and stops individuals who have aspirations
    to own a home one day.
        Because when they want to go in that home, if they didn't
    pay that back to the bank because they paid late, then their
    credit rating goes down, and, they're not able to afford a
    house to even move themselves up. This is about options. We
    have some concerns. This bill addresses the concerns to protect
    consumers. You know, no rollovers or fee capped at 15 cents for
    every dollar. You know, default extended as far as repayment is
    concerned. So, among others, in my brief time, I just want to
    say that this is for everyday people and I don't have to give
    the testimony of what someone has given me.
        I can tell you that I have lived through it and I have seen
    these results when someone doesn't have options. I have seen
    them to go to someone else who gives that option, and they
    don't pay back. Unfortunately, sometimes they come back without
    a limit, and we need to stop that.
        I think this is a good bill and I support it.
        Chairman Gutierrez. Thank you.
        Okay. We have some great witnesses. We are going to hear
    from them now.
        Testifying first before the subcommittee is Ms. Jean Ann
    Fox, who is the director of financial services for the Consumer
    Federation of America, but she is also testifying on behalf of
    Consumer Action, Consumer's Union, the National Association of
    Consumer Advocates, and the National Consumer Law Center as
    well as U.S. PIRG.
        Please, Ms. Fox, you are recognized for 5 minutes.

      STATEMENT OF JEAN ANN FOX, DIRECTOR OF FINANCIAL SERVICES,
                     CONSUMER FEDERATION OF AMERICA

        Ms. Fox. Thank you, Mr. Chairman, and Ranking Member
    Hensarling.
        I appreciate the invitation to come and testify before you
    today. I am also representing the Woodstock Institute in
    Chicago.
        We appreciate your interest in protecting consumers from
    the payday loan debt trap that results from these extremely
    expensive, balloon payment loans that are secured by direct
    access to consumers' checking accounts. Payday loans are
    harmful to borrowers. They undermine scarce family resources.
    They risk bank account ownership. They double the risk that you
    will end up in bankruptcy or seriously delinquent on a credit
    card payment.
        When you study actual payday loan borrowers, you find that
    these products are harmful to the families who use them. We
    agree that payday lending and similar products should be
    reformed, but we respectfully disagree with the specific
    methods used in H.R. 1214. The bill authorizes single payment
    loans for as short as a day or two at a cost of 391 percent APR
    for a 2-week loan, or 782 percent for a 1-week loan.
        The bill sets up an unaffordable repayment term. It has to
    be repaid in full out of your next paycheck that is deposited
    to your bank account, otherwise, you will end up paying
    bounced-check fees to the payday lender and to your own bank. A
    family making $35,000 a year, which is a typical payday loan
    income range for borrowers, would not be able to pay a typical
    $300 loan back out of their next paycheck, even if the loan
    were free. These are simply unaffordable, single-payment loan
    terms.
        The bill also authorizes loans to be secured by unfunded
    checks. In other words, to get a payday loan, every borrower
    has to write a check when they have insufficient funds in the
    bank at the time they write it, or they sign over electronic
    control of their bank account to the payday lender. This bill
    authorizes lenders to turn a debit authorization into a paper
    check that takes money out of a consumer's bank account,
    depriving them of current protections they would have under the
    Electronic Fund Transfer Act.
        The narrow definitions of a payday loan and of a creditor
    in this bill also mean that it's easy to evade application of
    the law. For example, the chairman mentioned the Illinois
    experience. Illinois defines a covered payday loan as 120 days,
    so most of the big payday lenders turned their product into
    121-day or longer loans, and they are not subject to the rate
    cap or the other provisions in the Illinois payday loan law.
        There are other loopholes in this bill. It doesn't cover
    open end credit. Most of the big payday lenders in Virginia
    turned their product into open end credit to get around changes
    to the law that took effect this year in Virginia. In Texas,
    almost all of the payday loan business is done under the credit
    services organization model, so it is doubtful whether this
    bill would apply to those payday lenders in Texas.
        The chairman has mentioned that at least rates would go
    down in some of the States where rate caps are set higher than
    $15 per hundred; however, in 10 of those States, there's no
    rate cap for an installment loan, so there would be little
    barrier to the payday lenders just changing their product into
    a 91-day installment loan and continuing to charge even higher
    interest rates.
        The protections against the payday loan debt trap in this
    bill are well-intentioned and we appreciate that, but they have
    been tried in other States and they don't stop payday lending
    from being a debt trap. The average customer has nine loans per
    year, even in States that limit you to one loan at a time, or
    that prohibit renewals or that have repayment plans. As long as
    you allow this product to be offered under the terms of a
    typical payday loan, you will have a payday loan debt trap.
        Congressional approval for a bill that caps rates at this
    high rate will undermine the momentum in the States. For
    example, at the ballot box last fall, voters in Arizona
    rejected a ballot initiative that had the same rate cap, the
    same kind of repayment limits, as are included in this bill.
    Voters rejected 391 percent lending in Ohio and the trend in
    the States is away from legalizing payday lending, and the
    momentum is toward restoring conventional, smaller rate caps;
    and, I fear that passing this bill would undermine that
    momentum.
        We urge you to ban loans secured by getting consumers to
    write unfunded checks and we urge you to support the rate cap
    in Representative Speier's H.R. 1608, which would provide real
    protection for all forms of credit to all consumers.
        [The prepared statement of Ms. Fox can be found on page 47
    of the appendix.]
        Chairman Gutierrez. Thank you.
        I tried to give the gentlelady a little more time, since
    she is against the bill, but we are going to show fairness
    here. But I hope we won't all continue, Mr. McCullen, as you
    are next, the president and chief executive officer for Finance
    America of Louisiana.
        You are recognized for 5 minutes.

       STATEMENT OF TROY McCULLEN, PRESIDENT AND CHIEF EXECUTIVE
                 OFFICER, FINANCE AMERICA OF LOUISIANA

        Mr. McCullen. Thank you, Mr. Chairman, and members of the
    subcommittee.
        It is an honor to be here today. I own the largest small-
    loan company in Louisiana, and operate 30 locations. I am also
    president of the Louisiana Cash Advance Association, and,
    working closely with the Louisiana legislature and the Office
    of Financial Institutions, helped draft and implement the laws
    that we currently operate.
        Our laws are working and I want to offer you information
    that will help you in your decisionmaking process. From the
    beginning we had two specific goals in mind: provide structure
    to a service that customers need and want; and implement tight
    consumer protections. All lenders are licensed, regulated, and
    extensively audited by the Office of Financial Institutions.
    And I believe we have one of the best consumer protection laws
    in the country.
        If you want a national standard, and want to implement
    something that will work, implement Louisiana's law. As with
    any new industry, ours has certainly had its problems, and
    there have been bad operators just as in any industry. But,
    with lots of hard work, things are leveling out and in
    Louisiana, the number of lenders is actually dropping. This
    phenomenon happens in every new industry, and it's the way our
    country's free market system works. Businesses rise and fall
    based upon consumer demand.
        I believe we will continue to see downward adjustments and
    consolidations in the future. Louisiana's law provides for full
    disclosure of all fees and terms on the promissory note
    including APR. It prohibits companies from accepting fees to
    rollover, flip, or renew a loan. This is one of my personal hot
    buttons, and our law keeps consumers from getting into a cycle
    of debt. Our law allows for the collection of reasonable
    attorneys fees and court costs, and mandates the posting of a
    fee schedule and the Office of Financial Institutions 800
    number for complaints.
        The maximum fee allowed on a cash advance in Louisiana is
    16.75 percent of the face of the check. This means when someone
    borrows $100, the fee is $20. If they borrow $200, the fee is
    $40; no compounding; no excessive fees. There is a $45 fee cap;
    and, like other lenders, we are allowed a $5 documentation fee.
    There are very few complaints. In fact, Louisiana had over 4
    million transactions in 2008, and regulators only received 24
    complaints, of which only 2 pertained to excessive fees.
        While we are an open book and disclose all fees in the
    promissory note, I believe we should be taken out from under
    the Truth in Lending. Ours is a fee-based business and APRs
    should not apply. Money is just like any other commodity and
    applying APR to our business skews reality and is illogical.
        I compare our business to a Triple A rental store. You can
    buy a hedge clipper at Home Depot for $100 or you can rent it
    from Triple A for $20. Our customers rent the same way. It's
    just that our product is money, and they pay a fee for the
    convenience. If they do not need our service, they will not
    come in.
        An example of how someone would use our services if they
    bounced three $50 checks, the total fees could exceed over
    $150. If the same person borrows $150 from one of our stores,
    the fee is around $30; $150 versus $30. It's that simple.
        Defaults are a constant problem. If a $300 loan customer
    charges off, 7 other customers must pay in order for us to
    break even. Louisiana's law could be better by allowing us to
    reduce or control bad debt in a better way. Some States have
    implemented a database which allows for only one or two loans
    at a time.
        I am not in favor of the database, but controlling consumer
    bad debt would be a benefit. We use Teletrack to track data,
    and if a customer has more than one loan, we will not loan to
    them. If they have charged-off somewhere else, we will not loan
    to them. The consumer groups want you to believe that we are
    trying to put people deeper into debt when in reality we want
    our customers to pay and not default. It's perception versus
    reality.
        The consumer groups have done an excellent job of spreading
    this information, and I have realized that perception can
    become reality when repeated enough times. But the horror
    stories you see in the newspaper and on television are not
    reality in Louisiana; and, for the record, we are not
    predatory. We take no collateral, and there is nothing to take
    away.
        Again, the consumer groups are spreading incorrect
    information and they know it. They have hijacked the word
    ``predatory'' and are incorrectly applying it to us. Predatory
    lending applies only to the mortgage business. It has nothing
    to do with rates or fees or APR. If it did, every NSF fee would
    be considered predatory.
        According to the recently released FDIC study of bank
    overdraft programs, the average $66 check that bounces and is
    repaid in 2 weeks incurs an APR of over 1,000 percent. A $60
    ATM overdraft that is repaid in 2 weeks incurs an APR of over
    1,100 percent. ATM overdrafts and NSF overdrafts paid by the
    bank for their customers are extensions of credit.
        I am not suggesting that you apply APR to these extensions
    of credit, but my point is that if you apply APR to us, then
    the same should be applied to them. I am comparing apples to
    apples. If you exempt them--
        Chairman Gutierrez. The time of the gentleman has expired.
        [The prepared statement of Mr. McCullen can be found on
    page 78 of the appendix.]
        Chairman Gutierrez. Testifying third is Mr. Michael Flores.
    He is the chief executive officer of Bretton Woods,
    Incorporated, a management consulting firm. And, Mr. Flores,
    your chart that you brought is going to be to my left, your
    right. Sorry, we can't put it on the other side closer to you.

     STATEMENT OF MICHAEL FLORES, CHIEF EXECUTIVE OFFICER, BRETTON
                              WOODS, INC.

        Mr. Flores. Thank you, Chairman Gutierrez, Ranking Member
    Hensarling, and members of the subcommittee.
        I am CEO of Bretton Woods, a management consulting firm.
    And my clients include banks, thrifts, credit unions, payday
    lending industry, and bank technology companies. I have more
    than 30 years experience and have taught at the graduate school
    of banking in Madison, Wisconsin, and the Pacific Coast Banking
    School of Seattle, Washington, and published several articles
    and studies on the financial services industry.
        In essence, my business is helping banks improve
    profitability. Because this hearing is about payday lending, I
    am here today to put this in the context of the bigger picture:
    short-term, unsecured credit market. The short-term credit
    market is made up of products and services for people who need
    a small amount of cash for a short period of time. It is more
    than a $70-billion market that includes credit cared overlimit
    fees, overdrafts, NSF, and payday loans.
        Additionally, the market includes tens of billions of
    dollars in late fees or reconnect fees, as has been mentioned
    earlier. All of these credit products are short-term and are
    all unsecured. Currently, banks and credit unions control the
    largest share of this market. That may come as a surprise to
    some people, because very few banks offer the unsecured short-
    term dollar products, typically considered to be a loan.
        As the committee may know, only 30 banks have signed up for
    the FDIC small loan pilot program, which was designed to see if
    alternatives to payday lending could be offered profitably. The
    results are not in, but I am not encouraged that they will be
    profitable or encouraging. I have worked with banks over these
    years, and this legacy cost structure of banks inhibit their
    ability to offer these small-dollar, short-term credits in a
    profitable manner.
        So what role do banks play in a short-term credit market?
    Well, primarily through insufficient funds known as bounced
    check fees and overdraft protection, these products are all
    part of a competitive marketplace and all are considered
    alternatives to payday loans.
        [chart]
        If you will refer to our first chart here, the pie chart,
    published research I conducted in November and December of 2008
    and recently updated in early March of this year found that
    banks and credit unions earn $34.7 billion in combined NSF and
    overdraft fees. By comparison, the late and overlimit penalties
    on credit cards was $20 billion, and payday lenders earned $7.3
    billion for 2008.
        As had been mentioned earlier in your hearing 2 weeks ago
    on overdrafts and credit cards, these fees for banks are an
    increasingly significant source of revenue for these banks. As
    a matter of fact, if these fees were eliminated or reduced,
    many banks would be profitable in this country.
        Now, from the consumer perspective, when a consumer doesn't
    have enough money to pay a bill in his or her checking account,
    then they have the option of either bouncing the check using
    overdraft protection, getting an advance on a credit card, or
    using a payday loan.
        [chart]
        If you will look at chart two, please, it has been
    mentioned earlier about the FDIC study, that the average cost
    of a bounced check was $66 or the average amount was $66.
    Before that transaction, the consumer would pay $27 in
    overdraft fees. If they did not have overdraft protection, the
    fee would be averaging almost $29 to return the check, plus a
    merchant fee of over $26, payable to the merchant to whom they
    wrote the check.
        In comparison, a customer who took out a $66 payday
    advance, would pay approximately $10.56, based upon 16 cents
    per dollar advance. Just by looking at the household data, you
    can get a sense of what option is used most. This is one of the
    major points I want to make today, if you will bring up the
    next chart please.
        [chart]
        There are approximately 101 million households with
    checking accounts in this country. In States where payday loans
    are on a national average, these households pay approximately
    $343 in NSF and overdraft fees per year. In States where payday
    loans are available, the average household pays $239 per year.
    And, in States where these loans have been eliminated, the
    average household pays $496 a year in NSF and overdraft fees.
        Now, I want to stress that I don't maintain there is a
    direct relationship, but I think this is a significant
    indicator and should justify an extensive and robust study
    considering all the variables to determine if there is indeed a
    direct correlation between availability of an option, such as a
    payday loan, and the impact on NSF and overdraft fees.
        In conclusion, I am a proponent of competition and I am a
    proponent of options for the consumer. As long as there are
    options available, the consumers are smart. They will look for
    the best value at the lowest cost, and I would hope this
    legislation strikes a balance that encourages competition and
    not reduces competition.
        Thank you.
        [The prepared statement of Mr. Flores can be found on page
    42 of the appendix.]
        Chairman Gutierrez. Thank you very much.
        And, now we have, last but not least, Ms. Gerri Guzman, a
    resident of Montebello, California, who is coming before us
    today to discuss her role as a payday lending consumer.
        You are recognized for 5 minutes, Ms. Guzman.

      STATEMENT OF GERRI GUZMAN, RESIDENT, MONTEBELLO, CALIFORNIA

        Ms. Guzman. Thank you.
        Good afternoon. My name is Gerri Guzman. I am a resident of
    Los Angeles County in California.
        I currently serve on the Montebello Unified School District
    Board of Education, where I serve 33,000 kindergarten through
    12th-grade students and their families, 78 percent of whom
    qualify for free or reduced lunch. I am also active in the
    following organizations: Optimists International; the Boys and
    Girls Club; and my local chapter of the American Red Cross.
        I have also been a payday lending customer, and I am here
    today to talk about that experience. I am thankful for the
    opportunity to be here, as I think sometimes with issues like
    payday lending, the opinions of the people who actually use the
    service aren't often heard.
        I also would like to add that when my City considered a
    moratorium on payday lending business licenses, I took the
    opportunity to meet with several community members to listen
    not only to their experience but to gain an understanding of
    why my community uses payday lenders.
        Personally, I consider payday loans to be a necessary evil.
    If I had the choice, I would never have been in the situation
    where I needed a payday loan. I am sure this rings true for
    tens of millions of lending customers around the country. In a
    perfect world, we would all have the money set aside in a
    savings account to cover the expenses that are unexpected or
    unavoidable. But having much money in a savings account is not
    a reality for many working families, especially today.
        I first became a payday lending customer when I decided to
    leave my job and become my mother's primary caretaker 14 months
    prior to her passing. I do not regret for a moment my decision;
    however, I would be lying if I told you it didn't create a
    temporary financial hardship. At the time, my options were to
    take out a payday loan or not to purchase a water heater.
        I was aware of the cost of the payday loan and decided that
    it was the best option for me at the time. Thankfully, my
    financial circumstances have changed, and, although I am no
    longer a payday customer, I would like to know the option is
    available should I need to be again. I do wish that there were
    more choices and better choices for consumers, but in reality,
    there are not. There are more choices in tough financial times.
    People have the smarter decisions they can make and the better
    off they will be in the long run.
        I, like most people in this day and age, am budget
    conscious and look for the best options available in all
    situations. I knew what a payday loan would cost, but the
    bottom line is the process was simple and quick. I am aware
    that payday lending customers often get themselves into
    trouble, and some people make poor choices and get caught in a
    debt spiral. But, certainly, this is not unique to only payday
    lenders, lending customers.
        I do think that it is important that the government protect
    people from predatory lenders and abusive practices. I would
    like to see a mechanism in place to minimize a likelihood of
    payday lending customers getting trapped in a cycle of debt. I
    am sure that most people intend to pay off their loan when it
    is due, but often, unexpectedly again, the money is not
    available.
        In these situations, it is important that a lender work
    with a borrower to make sure they aren't worse off than they
    were before. An adjusted pay plan would be very helpful to many
    consumers and certainly be more realistic. It would also be
    helpful to make it easier for customers to compare credit
    products.
        Most of my neighbors are hard-working middle-class and
    lower-class families. Very minimal healthcare insurance often
    makes it a necessary situation to make a choice of making a
    payday loan or having bounced a check or doing without the
    necessary services. It would be helpful to make it easier for
    customers to compare those products. Companies need to be up-
    front and clear about how much the borrower will pay for the
    loan and exactly when it is due back.
        However, I have found that even with the information to
    make an informed decision, emergency situations often create
    urgency and all too often the quickest, easiest solution wins
    out over reason.
        I want to thank you today for your time. I appreciate the
    opportunity to represent the tens of millions of payday lending
    customers across the country, many of whom I represent. We each
    have our personal reasons for going to a payday lender, but I
    think that almost all of us would agree that while this is not
    a perfect option, and it's not right for everyone, we are very
    grateful that the option was available when we needed it.
        Thank you.
        [The prepared statement of Ms. Guzman can be found on page
    76 of the appendix.]
        Chairman Gutierrez. Thank you very much.
        I appreciate the testimony of all of the witnesses.
        First, let me take in terms of my 5 minutes, I think it is
    probably better to talk about a specific amount of money in
    relationship to $100 in terms of the service. Because when you
    do the APR, I'm not quite sure you can compare an apple to an
    apple and an orange to an orange.
        That's just my point of view. People can continue to use
    the APR argument if they wish to do so.
        I would like to share with Ms. Fox that I appreciate her
    testimony and I would like to have an opportunity--I addressed
    a group of consumer groups earlier today, this morning, so that
    we can begin the process of dialogue and open communication.
    Because it is clear, given her testimony, that you don't grasp
    the bill and what our goal is in the bill.
        First of all, I want to make sure that everybody
    understands what our bill does. It allows you 6 payments, 13
    days apart for 78 days, and including the 14 days, that's 92
    days. But if you listen to the testimony that was given
    earlier, you would think that you could simply roll it over.
    Well, we have a ban on rollovers. We have a ban on non-
    sufficient funds and being able to submit a check for non-
    sufficient funds. And our APR is actually lower than Louisiana,
    which is at 521. We were just at the 391, because we
    specifically relate $15 to 100.
        And then, of course, they said, well, they got around the
    bill. Ms. Fox says that and she is right. This is not an
    installment loan protection program. This is about the payday
    industry. We hope in the near future to be able to deal with
    installment loans, but that is not what we are talking about
    today.
        If people change the nature of their relationship with
    those providing funds, those changes should not be attributed
    to this measure. This measure, as many of my colleagues who are
    supporting it understand, is a measure which will allow us to
    take 23 States and over 100 million people who do not have
    these protections today and be able to encourage them.
        Ms. Fox, in your testimony you assert that H.R. 1214 would
    provide congressional approval for payday lending. I find the
    argument confusing. See, by not acting to curtail payday
    lending in over 18 years, it has gone from 300 store funds to
    24,000. So has not Congress already provided its approval?
        Nine million Americans participate in legal and authorized
    payday lending. Wouldn't Federal regulations on payday lending
    demonstrate that Congress is paying attention and ready to
    regulate the industry?
        Is your argument that no Federal legislation on payday
    lending would send us a message that Congress disapproves of
    payday lending?
        Ms. Fox. Thank you, Mr. Chairman.
        The action that Congress has taken on payday lending to-
    date has been to ban this product for service members and their
    families. In 2006, you enacted a provision in a defense
    authorization bill to put payday lending off limits to service
    members at the request of the Department of Defense, because
    this product was viewed as being harmful to them.
        Typically, small loan products are regulated at the State
    level where State laws authorized certain types of lending,
    like installment lending, pawn shops, or payday loans.
    Typically, Congress does not enact authorization bills for
    specific products. You have over-arching laws like Truth in
    Lending, which require all creditors to tell consumers what
    their loans cost.
        Chairman Gutierrez. I guess I understand those things, and
    since even though I am the chairman, my time is still limited
    to 5 minutes.
        Ms. Fox. Okay.
        Chairman Gutierrez. The issue here is whether or not we
    wish to take 23 States and over 100 million consumers and offer
    them a protection they do not have today.
        And so, I guess, would you like to see rollovers eliminated
    in 23 States, which this bill does? Just yes or no, because I
    know my time is waning.
        Ms. Fox. This bill doesn't stop back-to-back lending.
        Chairman Gutierrez. It does. It does do that.
        We will have a continuing conversation about it because it
    does, and it specifically states it.
        You know, if you wish to be against the bill because you
    wish us to do nothing other than eliminate payday lending,
    which in your statement anybody can read and extrapolate, Ms.
    Fox, you don't like the payday. I don't like the payday. You
    wish to eliminate it. You wish to ban it.
        That's not possible. That's not possible. So what we're
    trying to do, many of us, is to reform that very system that
    many of us, and as I stated earlier, we would like to take the
    columns over. But that's just not possible. So as we look at
    those situations in this Congress, and I just would like to say
    to the lady also that, you know, I began the amendment process
    for the military servicemen here in this committee that got it
    down to 36 percent. We were successful in that venture.
        I think I have a good gauge of what is and can or cannot be
    successful. But I will work with you, because the only bill
    that we have gotten after I introduced this bill is a bill that
    makes it harsher on consumers vis-a-vis the payday industry. I
    look forward to working with those who have the ability of
    doing better.
        I yield to the gentleman, Mr. Hensarling, 5 minutes.
        Mr. Hensarling. Thank you, Mr. Chairman.
        Okay, Ms. Fox, I guess I have to bite on this one. I think
    I heard the chairman say, and I'm not sure I completely heard
    you make this definitive statement, but is it the position of
    your organization that payday lending should be banned?
        Ms. Fox. It is our position that consumers should be
    protected from triple-digit interest rates. They should not be
    exposed to writing checks without money in the bank as security
    for a loan, and they should have an affordable repayment
    schedule.
        Mr. Hensarling. Well, unfortunately, Ms. Fox, I have a
    short period of time.
        You would do well in this institution as well. We're not
    particularly good about giving yes or no answers either.
        [laughter]
        Mr. Hensarling. I am curious, and I'll throw this open to
    anybody on the panel. I believe that the best consumer
    protection is a competitive market. I have spent a number of
    years in the business world. I think I have history. I think I
    have evidence.
        If I did my own homework properly, I have seen studies that
    tell me that there are over 22,300 payday stores in America. I
    saw one study from a particular State that said there were more
    payday locations than McDonald's, Burger Kings, and Wendy's
    combined. I had my staff pull the ``Yellow Pages'' out of
    Dallas. I'm a Dallas resident, and there were over 125
    different payday locations: 46 locations of Ace Cash Express;
    25 of Cliff's Check Cashing; 14 Advance America; 13 Check and
    Go; 10 Easy; 7 Check Into Cash; 6 Federal Cash Advance; 4
    Speedy Cash; and too many Cash America locations to even count.
        To me, it seems like a fairly competitive market, and I am
    fearful that the underlying legislation might make it less
    competitive.
        Does anybody want to take the opposite view that there is a
    competitive marketplace?
        Seeing none, let's talk about what might happen if we lack
    competition in that market.
        The gentleman from North Carolina, who isn't here at the
    moment because I saw him speaking on the Floor out of the
    corner of my eye.
        Mr. Watt. One of them is.
        Mr. Hensarling. The gentleman who agrees with me is not!
        [laughter]
        Mr. Hensarling. The one who introduced the Federal Reserve
    study into the record, I would like to quote from that same
    Federal Reserve Study, which investigated how consumers fared
    after payday lending was essentially banned in Georgia and
    North Carolina.
        I'm sure the gentleman from North Carolina will have an
    opportunity to speak to that, but the Federal Reserve study
    concluded:
        ``Compared with households and states where payday lending
    is permitted, households in Georgia have bounced more checks,
    complained more to the Federal Trade Commission about lenders
    and debt collectors, filed for Chapter 7 Bankruptcy protection
    at a higher rate. North Carolina households have fared about
    the same. This negative correlation reduced payday credit
    supply, increased credit problems, contradicts the debt trap
    critique of payday lending, but is consistent with the
    hypothesis of payday credit is preferable to substitutes such
    as the bounced check protection sold by credit unions and banks
    or loans from pawn shops.''
        That is from the Federal Reserve.
        Does anybody on the panel wish to take issue with their
    conclusions?
        Ms. Fox. Yes.
        Mr. Hensarling. Ms. Fox, we will give you a short amount of
    time.
        Ms. Fox. Yes. When studies are done that look at actual
    payday loan borrowers, they find that they are better off
    without this product. For example, in a large Texas study,
    payday loan borrowers are twice as likely to end up in
    bankruptcy in the next 2 years, as people who applied for it
    and were turned down for the loan.
        Mr. Hensarling. Well, Ms. Fox, do you not believe the
    earlier testimony as far as various APRs? I think the gentleman
    from Louisiana talked about the average fee for bounced checks
    and reconnect fees.
        Do you doubt that evidence?
        Ms. Fox. Absolutely not, as we testified earlier in March.
    We think overdraft loans are the bank equivalent of payday
    lending, and this committee can deal with that by enacting
    Representative Maloney's H.R. 1456.
        Mr. Hensarling. Well, I cut into the remaining time I have.
    I'm going to try to get another question in here if at all
    possible. But I know we just had this debate on credit cards,
    and yes, credit card terms can be confusing. I have walked into
    a number of payday stores in Dallas, Texas. The fees are right
    there on a big board. It's not confusing to me. I talked to
    several customers. They seem to know exactly what they were
    doing and they were very happy to have that option versus a lot
    of other alternatives that were less so.
        Mr. McCullen, in Louisiana, are these hard-to-understand
    transactions?
        Mr. McCullen. No, sir, they are not.
        Chairman Gutierrez. 15 seconds, Mr. McCullen, to answer the
    question.
        Mr. McCullen. They are not. Everything is posted and listed
    on the promissory note and the customer understands exactly
    what the fees are. There are no hidden fees.
        Ms. Guzman. Is there any time for one additional, brief
    comment?
        Chairman Gutierrez. No, I'm sorry. A little later on, I'm
    sure we will come back to you Ms. Guzman.
        We have about 11\1/2\ or 12 minutes. I am going to stay and
    listen to the gentleman from North Carolina as it has already
    been kind of prepped up. We don't want to take a break.
        So the gentleman from North Carolina is recognized for 5
    minutes, and then we are going to go vote and come right back.
        Mr. Watt. Thank you, Mr. Chairman, because I might not be
    able to come back. And I appreciate you getting my questions in
    or comments in before I leave.
        First of all, I want to start by inviting all of my
    colleagues who say they believe in States' rights to come on
    back and join the States' rights caucus that I have been trying
    to remind them they have deserted. I have no problem with
    helping these 23 States, but when the chairman says that we
    can't ban payday lenders, that's exactly what we have done in
    North Carolina.
        Whether I agree with it or don't agree with it, we have a
    State legislature there. They have considered this issue. And I
    have been trying to decide, trying to review the bill to be
    clear on whether it does preempt State laws or whether it does
    not preempt State laws. To the extent that it preempts State
    laws, North Carolina's law, it may well be helping the 23
    States that the chairman said that it helps, but it's
    overriding North Carolina's law which says you can't do this in
    North Carolina.
        So unless we can write this bill in such a way that the
    provisions of it are a true floor as opposed to a preemption, I
    have serious problems with it and I don't read these provisions
    to do that.
        Chairman Gutierrez. Will the gentleman enter into colloquy
    with me?
        Mr. Watt. I'm happy to.
        Chairman Gutierrez. That is the intent of the bill--not to
    preempt.
        Mr. Watt. I have been told that.
        Chairman Gutierrez. And I look forward to working with you,
    because I know you're really good at the law and drafting
    legislation so we can make it as explicit as possible to make
    sure that we reach that goal.
        Mr. Watt. I just want to make clear that when you find all
    of these folks who are supporting this bill, when you make that
    clear, the room will get a lot more scarce than it is today. If
    this bill is a floor, and we are explicit that it is a floor,
    then I think we are moving the state of the law forward; but,
    if it is a preemption of State law, then in North Carolina, we
    haven't moved.
        Chairman Gutierrez. Would the gentleman yield?
        Mr. Watt. My legislators tell me they don't want payday
    lending in North Carolina.
        Chairman Gutierrez. It will be a lot easier, my friend,
    because if that isn't accomplished--and I know that you and I
    can get that done explicitly in this legislature--then the room
    won't be empty or full, because I'll simply withdraw the
    legislation as a sponsor and ask my colleagues. It will cease
    to exist as a bill, if we are not, and I look forward to
    working with you because I know the clarity with which you can
    write that legislation.
        Mr. Watt. I am glad to hear that from the Chair, and I hope
    everybody in the room heard it.
        Mr. Scott. Will the gentleman yield for one second?
        Mr. Watt. I am happy to yield to my gentleman friend from
    Georgia.
        Mr. Scott. Thank you very much, the gentleman from North
    Carolina. Our case is very similar in Georgia where we also
    have outlawed payday lending. And as a co-sponsor of this bill,
    I can assure you that we will make, if it is not clear as is,
    we certainly will make sure that it is clear, and the chairman
    has spoken.
        Mr. Watt. Well, I am reading the language on page 10,
    ``Requirements of this subsection regarding extended repayment
    plan shall supersede any repayment plan requirements under any
    State law.'' I don't know what that means. Perhaps we will be
    able to clarify it. I am reading that we preserved the
    enforcement authority of the attorneys general. That is on page
    16 of the bill.
        But, I am also reading, ``Scope of application: the
    provisions of the section apply to any person or entity that
    seeks to evade its applicability by any device, subterfuge, or
    pretense whatsoever.'' North Carolina has done it openly, not
    by pretense, subterfuge or device. They have done it openly.
        So, I mean, if your intent is that, and we can get there,
    I'll be right there with you.
        Chairman Gutierrez. Thank you.
        The time of the gentleman has expired.
        I wanted you to have the opportunity, and Mr. Royce has a
    question. So we will try to get that in.
        I would encourage people to go vote, and we will be right
    back.
        Mr. Royce. Thank you very much, Mr. Chairman.
        In light of the time, let me just ask this question of the
    witnesses. You know, some author referred to payday lending as
    predatory in nature, but on that topic, the New York Federal
    Reserve--and this was during the time that our current Treasury
    Secretary, Tim Geithner, was the bank's president--did a study
    entitled, ``Defining and Detecting Predatory Lending.'' And in
    that study, they come to this issue of payday lending, and they
    note:
        ``Our findings seem mostly inconsistent with the hypothesis
    that payday lenders prey on lower, for example, lower the
    welfare of households with uncertain income, or households with
    less education. Those types of households who happen to live in
    the States that allow unlimited payday loans are less likely to
    report being turned down for credit, but are not likely by and
    large to report higher debt levels, contrary to the
    overpowering prediction of our model.''
        So I was going to ask Mr. McCullen: Do you agree with the
    New York Fed's assessment of payday loans?
        Doesn't the presence of a robust short-term credit market
    in fact benefit some consumers by increasing the availability
    of credit to them: And I will also ask Ms. Flores that
    question.
        Mr. McCullen. Yes, sir, Mr. Royce.
        People use us for all kinds of different reasons, and it's
    a lot of credit almost that people can use at any point.
        Mr. Royce. And, Mr. Flores, your observations on that
    front?
        Mr. Flores. I am in full support of the fact that the
    availability of payday lending certainly assists those
    consumers.
        Chairman Gutierrez. We have 5 minutes to get over and vote.
    We will make sure you get all your time when we get back.
        Mr. Royce. Well, I'll just conclude then, Mr. Chairman, by
    saying, let's make sure in terms of that credit availability
    for people that try to access credit, let's make sure that
    they're allowed, you know, that we don't foreclose that option
    for them as we move forward.
        And, again, Mr. Chairman, thank you.
        Chairman Gutierrez. Yes. We are going to recess for the
    vote. I have an emergency meeting I need to go to. Mr. Ellison
    will be filling in for me when we get back.
        [recess]
        Mr. Ellison. [presiding] The hearing will be called back to
    order and reconvened. The Chair will recognize himself at this
    time for 5 minutes.
        Ms. Fox?
        Ms. Fox. Yes, sir.
        Mr. Ellison. In your testimony, you asserted that H.R. 1214
    could provide congressional approval for payday lending. I find
    this argument somewhat confusing. By not acting to curtail
    payday lending over the--oh, sorry.
        Ms. Fox, it is clear from your testimony that you are very
    much opposed to H.R. 1214, and any attempts to regulate the
    payday industry that would stop short of banning the product.
    Part of what you do for a living is to count votes.
        Is there legislation currently in the Congress that would
    ban payday lending that you believe has enough support to pass
    both Chambers, and be signed into law?
        Ms. Fox. We believe that consumers need protection from all
    forms of extremely expensive credit. Senator Durbin's S. 500
    and Representative Speier's H.R. 1608 would provide the
    traditional 36 percent small loan rate cap that would cover
    everything from bank overdraft loans to payday loans.
        President Obama ran on a platform supporting a 36 percent
    rate cap, and voters in America support that by 70 percent--
        Mr. Ellison. Reclaiming my time, Ms. Fox, does that piece
    of legislation you just cited have enough votes to pass?
        Ms. Fox. I am ever hopeful that Congress wants to support
    consumers caught up in a disastrous credit--
        Mr. Ellison. Thank you, Ms. Fox. Ms. Fox, you know, you
    have heard the testimony of Ms. Guzman. She did say that--
    believe her term was a necessary evil, something that people
    don't want, but--and I'll be the first to agree, that I tend to
    not have a lot of problems with payday lending.
        But if you just simply foreclose the option outright, what
    happens to people like, say, Ms. Guzman? Does she now have to
    bounce a check to get that water heater she needed? What about
    the situation where you just need some money, you don't have
    anybody to go to, and your options are to bounce a check or
    just suffer, I guess. What about that?
        Ms. Fox. We think consumers deserve better than payday
    lending, and in California--
        Mr. Ellison. Okay, Ms. Fox. Thank you. Thank you, Ms. Fox.
        So Ms. Guzman, your situation--I mean, do you think that
    the bill that we're talking about now balances the equities in
    a reasonable way? As you already pointed out, you're no big fan
    of payday lending either, but if you have to do something, and
    you're really in a jam, do you think it balances the equities?
        Ms. Guzman. I think it is offering a very realistic answer
    to payday lenders. It gives them the option and access, which
    is the American way. And at the same time, it protects the
    consumer, which is what we look traditionally from our
    government for, a minimal amount of protection, in this case
    from the situation getting out of control, or not having, you
    know, the certain protections you need to not continually live
    in this type of debt.
        Mr. Ellison. Thank you, Ms. Guzman.
        Mr. Flores, how could the payday product be improved to
    make it more useful to the consumer, in other words, eliminate
    the debt trap, and to make the loan easier to repay? Do you
    have any views on this?
        Mr. Flores. Yes, sir, I do. I have read the legislation,
    and I agree with the--certainly the disclosures. I'm not
    necessarily for the Truth in Lending disclosure, because I
    think that's misleading. I like the 6-month payment plan. That
    certainly offers relief to the consumer. And so I think those
    would be the key issues.
        One point I would like to make, though, on that
    legislation, is the $.15 per dollar cap. Philosophically, I'm
    against price caps or price controls, and not just from the
    business's profitability standpoint, but as businesses grow,
    and costs increase, be it salaries, overhead, whatever, there's
    no additional relief for that company to do something with
    pricing, short of trying to control expenses more.
        And so I think that is an issue that I would take with
    this. Otherwise, I think the bill will strike the balance that
    you're looking for.
        Mr. Ellison. Mr. Flores, in your testimony you also
    indicate that, ``the legacy cost structures of banks inhibit
    their ability to offer short-term low-dollar credits in a
    profitable manner.''
        Could you elaborate on what you mean by that?
        Mr. Flores. Banks have a huge investment in what we call
    brick and mortar, branch offices around the country that have
    huge operation centers, information technology centers, and
    personnel. And the way they are designed--the cost for them--
    and we looked at this many years ago, and a lot of banks, we
    said, you cannot make an individual loan under $5,000.
        The resource it needs, the individual resource, the systems
    resources, the compliance costs, the documentation cost, to
    make a $5,000 loan, is the same that would make a $500 loan.
    And they cannot--and they just don't have the cost structure to
    efficiently offer that product.
        Mr. Ellison. The gentleman from Minnesota's time has
    expired, and the Chair will recognize Mr. McHenry from Texas.
        Mr. McHenry. Thank you, Mr. Chairman.
        Ms. Fox, a basic question for you: If payday loans were
    prohibited nationwide, let's say we did that legislatively,
    what do you think would replace it?
        Ms. Fox. If payday loans were prohibited nationwide,
    consumers would save billions of dollars in repeat lending.
        Mr. McHenry. Yes, but what would replace it?
        Ms. Fox. Consumers would use traditional small loan
    companies. That's what happened in North Carolina, when payday
    lending was expelled--
        Mr. McHenry. I'm from North Carolina, and that's not truly
    the case. They travel to South Carolina, they use other
    mechanisms. I mean, people need short-term lending, and what
    you're saying is, in essence, people just bounce a check.
        Ms. Fox. Very few consumers deliberately write a check to
    bounce, whenever they don't have sufficient money. That tends
    to be something that catches you by surprise when your bank
    lets your debit card--
        Mr. McHenry. Sure, unless--
        Ms. Fox. --transaction go through. But there are--
        Mr. McHenry. Reclaiming my time, let's reference the
    Federal Reserve report that is submitted for the record.
        The Federal Reserve report expresses that in States like
    Georgia and North Carolina, there are--the example they use in
    the report--you have more complaints to the Federal Trade
    Commission about lenders and debt collectors, you have more
    bounced checks in that State, you have higher bankruptcy rates
    in that State, and they don't allow for payday lending.
        So explain to me how this is a rational argument you're
    making. Because human nature--there is obviously a need for
    this type of short-term lending. Do you disagree that there is
    a need for it?
        Ms. Fox. There is a need for small dollar lending. The
    short term is part of the problem. The Federal Reserve report
    you're referring to is one staff member's draft report. It's
    not an official report from the New York Federal Reserve Bank.
    They looked at aggregate data; they did not look at individual
    consumer experiences.
        For example, during that period of time, there were more
    complaints from D.C. consumers about debt collection to the
    Federal Trade Commission than there were from Georgia, so the
    standards that he used to try to describe what was going on--
        Mr. McHenry. So you just--
        Ms. Fox. --are too--
        Mr. McHenry. I'm trying to talk about--
        Ms. Fox. --aggregate. They aren't a good description.
        Mr. McHenry. Okay.
        Ms. Fox. If you look at research done, looking at actual
    consumers who use payday lending, every one of them shows it is
    harmful.
        Mr. McHenry. Okay, great. So you are saying that there is
    just simply--there is a demand for it, but you don't think it
    is good for consumers to have this option.
        Ms. Fox. We think there's a demand for small dollar loans
    that are served by credit unions, by credit card cash advances,
    by traditional small loan companies that make installment loans
    to consumers. This market can be served and is being served--
        Mr. McHenry. What if you don't have a credit card?
        Ms. Fox. --and a third of the people live in a State where
    payday lending is not permitted, and they get small dollar
    loans.
        Mr. McHenry. Sure, and you know what they do? They travel
    across State lines in North Carolina. I have seen the effects
    in North Carolina--
        Ms. Fox. In New England--
        Mr. McHenry. Pardon me?
        Ms. Fox. In New England--
        Mr. McHenry. Well, I'm not from New England. I'm giving you
    the North Carolina experience--
        Ms. Fox. Yes.
        Mr. McHenry. --and, you know, you have mentioned that
    basically, in North Carolina, we haven't suffered based on a
    prohibition of payday loans.
        Ms. Fox. That's what the banking commissioner's survey of
    North Carolina consumers found, that they were--they didn't
    miss it. They were glad to see it go.
        Mr. McHenry. Certainly, in terms of who they deal with, and
    the regulated--you are saying that one person's opinion is
    invalid from the Federal Reserve, which I think the American
    people know is pretty valid, and another person's is very
    valid, based on your political perspective.
        Ms. Fox. Well, the North Carolina bank--
        Mr. McHenry. Mr. Flores?
        Ms. Fox. --had an--
        Mr. McHenry. Let me actually go on to someone else, Ms.
    Fox. I don't have much time, and we obviously know your
    perspective on this, that you just--you understand the demand,
    but you don't think it's possible or necessary to fill that
    demand with regulated means.
        Mr. Flores, you do a lot of work on this, and the question
    is, do you have an opinion on whether consumers are better off,
    or not better off, to have a regulated payday alternative?
        Mr. Flores. Sir, they're much better off. It's a $40
    billion demand annually--
        Mr. McHenry. Why are they better off?
        Mr. Flores. --for this type of credit. That $40 billion
    would have to be met with other vehicles. And right now, that
    other vehicle is basically an overdraft or a credit card
    advance.
        A credit card advance is very expensive. You have an
    advance fee of 3 to 5 percent. And in these cases, you are
    going to have APRs well north of 20 percent. Most people will
    make minimum payments, and they will never get out from under
    it, versus a payday loan, which they fully plan to pay off in
    that 1-week or 2-week period.
        Mr. McHenry. Well, thank you, Mr. Flores. And what I would
    say is you're missing a third option, which is the illegal
    option. And Mr. Chairman, if you will give me 15 additional
    seconds.
        There is a third option, which is the illegal option,
    which--instead of charging a high interest rate, the experience
    I have had with individuals I knew and worked with in my
    family's business, that they could get lending, and it was
    dollar-for-dollar lending. If you wanted $20, you paid $20.
        Mr. Ellison. The gentleman's time has expired.
        Mr. McHenry. And if you didn't pay, you got your legs
    broken.
        Mr. Ellison. The gentleman's time--
        Mr. McHenry. That's the illegal option, and that's
    unfortunately what Ms. Fox is really trying to put people into.
        Mr. Ellison. The gentleman's time has expired.
        The Chair will recognize the gentleman from Georgia, Mr.
    Scott.
        Mr. Scott. Thank you, Mr. Chairman.
        Let me begin by going over a little bit here. First, let me
    deal with the State's preemption issue. It certainly is the
    intent of this legislation not to interfere with those States
    who already have laws on the books of whatever nature they may
    be. And I think when we get to my colleague from New York, Mrs.
    McCarthy, she's going to go into a little more detail with
    this, because there are varying understandings of that.
        But certainly this legislation is a targeted piece of
    legislation that targets 23 States that do not have any
    regulatory reform on payday lenders. It is also an effort by
    this body to get a bill passed that will provide some major
    protections for consumers and our constituents who want this
    service. Whether we may want it, or may use it or not, there is
    a niche and a market that is there that consumers want and
    need.
        Let me just very briefly--Ms. Fox, are you aware that this
    legislation caps interest rates and fees for short-term loans
    at a combined 15 percent, and at the same time gives borrowers
    liberal, very liberal, repayment loans that are structured in a
    way that will not take them into this cycle of unending debt?
        Ms. Fox. I'm glad you have asked about that, because there
    are some States that have tried using an extended repayment
    plan, and it hasn't worked to prevent payday loans from being a
    debt trap.
        In those States, they have the same average number of loans
    for customers as the rest of the States that authorize payday
    lending. And that's because the payday lender whose profit is
    based on getting consumers to renew loans one after another,
    has no incentive to encourage people to use the repayment plan.
    You have to ask for it.
        So in the States that have tried it, only 2 to 3 percent of
    the eligible loans end up going into the repayment plan. We
    have the same problem with the renewal ban. It prohibits
    renewals. Well, all but five of the States that permit payday
    lending prohibit renewals in one way or the other.
        But consumers just come in on payday, pay off the loan, and
    now they don't have enough money to make it for the rest of the
    pay cycle. So they write a new check, they take out a new loan.
    It's not counted as a renewal, it's a back-to-back loan. And
    that's how people get trapped in the debt trap.
        Mr. Scott. All right. But what I'm saying is you support
    the measure that we have in the bill, or do you not support in
    this legislation, our language that will regulate and will
    impose balanced criterion on these loans, which specifically
    address the cycle of debt and excessive interest rates that
    result from continually refinancing or rolling over these
    loans? That is the crucible of the issue--
        Ms. Fox. Right.
        Mr. Scott. --that this bill addresses and stops, which is
    the most egregious point in payday lending.
        Ms. Fox. We think this bill authorizes egregious lending.
    It authorizes writing unfunded checks to get loans. It
    authorizes a payback term of as little as 2 days. It authorizes
    back-to-back loans, one right after the other.
        Mr. Scott. All right.
        Ms. Fox. And it does not serve as your intended consumer
    protection.
        Mr. Scott. All right. Well do you believe, Ms. Fox, that
    for these 23 States that have nothing, this bill will offer
    some help, and a regulated form is needed?
        Ms. Fox. It doesn't offer much of a reduction in the rates.
    For example, in California, payday loans cost--
        Mr. Scott. But my question is--and I agree. We have to
    fashion measures to try to respond to constituents' needs, and
    measures that we can develop the coalitions and alliances of
    thought, that we can get through this body.
        Ms. Fox. Well, we--
        Mr. Scott. And so the point I'm saying is, would not these
    23 States be better off with this effort of bringing some
    relief and some reform into regulatory reform? Just yes or no,
    that's all I wanted to--
        Ms. Fox. No, they would not be better off, because of all
    the loopholes in the bill.
        Mr. Scott. All right.
        Ms. Guzman, let me ask you this, because I only have one
    question. I understand, I believe, you have used payday
    lending, is that correct?
        Ms. Guzman. Yes, I have.
        Mr. Scott. So I think that your comments will be very
    important. May I just ask--
        Mr. Ellison. The gentleman's time has expired.
        Mr. Scott. All right.
        Mr. Ellison. Mr. Marchant from Texas.
        Mr. Marchant. Thank you. First of all, my position on this,
    after serving 18 years in the State legislature, and dealing
    with this issue every single session for 18 years, is that this
    is an issue that very much deserves to be debated and decided
    in the State houses.
        I do not believe this is a Federal issue. I'm with Mr.
    Watts on this issue. I do not believe that you can write
    legislation on this kind of a subject at the Federal level, and
    try to force it down on States who have clearly had the
    opportunity.
        Probably every year they meet, these 23 States have had the
    opportunity to take this subject up. So that--I'm not for the
    legislation simply because of that.
        As far as trying to set Federal lending limits and
    Federal--and actually have the Federal Government set rates on
    a private transaction, a legal private transaction, that also
    is something that I'm not interested in.
        Perhaps there's some venue--because there is Federal
    insurance on the banks, there may be some case to be made for
    preemptive rights of the Federal Government to go down and
    talk--and pass ordinances and laws for banks.
        In Texas, we were the last State in the Union to have
    branch banking, because we felt like it was a States' rights
    issue. We were the last State to pass home equity loans,
    because we felt like it was a States' rights issue.
        So I'm very much a States' rights issue guy on this here. I
    do not believe that the Federal Government can effectively
    regulate this industry.
        I represent a district that--throughout my career, I always
    felt like the payday lending industry was an industry that I
    would see in districts where there were a lot of working class
    people, or a lot of people who live from paycheck-to-paycheck.
        But my district is a suburban district near Dallas. And if
    you walk into one of the payday lenders in my district, you're
    going to find housewives, you're going to find school teachers,
    you're going to find factory workers, you're going to find
    people who work for the city, and you're going to find people
    that I don't think that we have given enough credit to.
        These are people who can add and subtract and multiply.
    They know that bouncing the check at the bank is not a good
    thing. They know that it is costlier to go to the bank and
    bounce a check, than it is to go to the payday lender. They
    know that it could hurt their credit rating if they make a
    credit card payment late. They know that the credit card late
    payment is probably going to be more expensive than the payday
    lending rate.
        So I, like the testimony the gentleman from Louisiana--we
    think that our system in Texas is working very well. I would
    like to give the other 23 States that have decided to not do
    anything about it, or still haven't decided what kind of laws
    they want to make, to continue to have that--those rights, and
    to continue with that.
        For that reason, I am going to be against the bill, and
    thank you, Mr. Chairman.
        Mr. Ellison. The gentleman yields back. The Chair will
    recognize the gentlelady from New York, Mrs. McCarthy.
        Mrs. McCarthy of New York. Thank you, Mr. Chairman, I
    appreciate it, and I appreciate this hearing.
        First let me say, and join my colleagues from North
    Carolina and Georgia--that, you know, in the State of New York,
    we do not have payday lending, but we do. It's just a different
    form of what you're talking about. What is defined and
    regulated by the State as a payday loan, they have operations
    that offer similar products, but don't meet all the principles
    of a payday loan, so they're unregulated, and that is a grave
    concern.
        And I think that's what, you know, we're trying to get at.
    Now I know CFSA has best practices for the payday advance
    industry. A lot of that has been put into this bill. The only
    difference will be that within this bill, there will be teeth,
    where we can actually--do regulate that, if that's what is
    going to come down on the road.
        So to say that, you know, some of the States don't have any
    form of payday, I find not true. But the other thing is too, in
    my area where we have ``payday lenders,'' we don't have any
    banks.
        So where are those people who live in those particular
    areas--there is no banking. The other thing is, in almost all
    the banks I know, you have to have an account to go in and cash
    a check.
        So again, we're finding problems with that. You know, if
    it's a paycheck from a--whatever the job is, and they have an
    account there, maybe the bank will cash that check, but
    otherwise, you can't cash a check there.
        So I guess my feeling is that--I guess I want to go to Mrs.
    Fox. It's my understanding that the Consumer Financial Services
    Association of America has a list of best practices that their
    members must follow, and that the legislation reforming payday
    loans, H.R. 1214, puts a cap on interest rates that is lower
    than the fees allowed, again, in 23 States that allow payday
    lending.
        Could you explain how a payday loan could be worse than the
    consequences of not being able to obtain a short-term loan from
    a financial institute, forcing an individual to bounce a check,
    as we have heard from many of my colleagues? And I think that's
    something that we have to take into consideration.
        There is no one here--Republican or Democrat--who wants to
    condone anyone who is ripping off any of our constituents,
    nobody does. But the fact of life is that we need to have
    people--when they want to cash their check, or have a short-
    term loan, they need to have a place to go.
        To me, it's almost like an ATM machine. Here are your
    prices. If you want to borrow or take money out with your
    credit card, you're going to pay an upfront fee. And if we can
    do that with some sort of regulation, I think that it's better
    than what it is today.
        Ms. Fox. In New York, your 25 percent criminal usury cap
    prohibits payday lending, and although you have check cashing
    outlets where people pay a fee to turn a paper check into cash,
    that's not a credit transaction. I know you do have refund
    anticipation loans that are expensive in New York, because
    those are offered by banks, and New York can't regulate those
    interest rates.
        But there are other options. Everybody who gets a payday
    loan is a bank customer. You have to have a checking account
    open in order to write a check. You can apply to your bank for
    real overdraft protection at a lower cost. A lot of credit
    unions offer low-cost, small loans to their members. And in
    Pennsylvania, the treasurer of the State puts deposits into
    credit unions to encourage them to make very-low-cost loans
    available in Pennsylvania. There are other options.
        Mrs. McCarthy of New York. I agree with you on that. But
    I'm saying to you, I know in certain districts--part of my
    district, they don't have a credit union. They don't have a
    bank. Where are they supposed to go? They also probably don't
    have a car. So where do they go?
        Ms. Fox. Most people, when they have a $100 or $200
    shortfall, turn to their family and friends. They deal with
    whatever the credit emergency is. They call the utility company
    and ask for extended payments. They ask the landlord for more
    time.
        Mrs. McCarthy of New York. Ms. Fox, I'm not trying to give
    you--
        Ms. Fox. Paying 400 percent interest doesn't help.
        Mrs. McCarthy of New York. Ms. Fox, I'm not trying to give
    you a hard time, but we're talking about people who are
    probably on the very lower end of income. And most likely their
    family members are not going to have money.
        But with that--I saw that--Mr. Flores, you wanted to say
    something?
        Mr. Flores. Yes, I would like to respond to that. When you
    go to the bank to apply for a traditional overdraft line of
    credit, which would be akin to a credit card, many banks that I
    have dealt with, who have actually formalized these overdraft
    programs, have limited or eliminated offering the traditional
    overdraft line of credit because there is very little revenue
    associated with that product. The revenue is all in this
    overdraft protection program.
        So I think it's very difficult to say that people have the
    option to go in and get this. Because banks have looked at the
    profitability of all these products, and given the interest
    margin squeeze they are all facing right now, they are looking
    for the most profitable products they can offer.
        Mrs. McCarthy of New York. Thank you. With that, I yield
    back my time.
        Chairman Gutierrez. Thank you. We're going to go to him, I
    just want to alert the members that when we begin these
    hearings, there are 10 minutes per side, by unanimous consent,
    for opening statements. And if people want time, they will be
    allotted that time on the basis of their seniority in the
    committee, so that everybody has ample time to be able--the
    gentleman on my right takes care of that side, and sometimes
    people don't get to speak.
        I assure you when I was here 17 years ago, and I was way
    down there on the fourth row, I would have hoped these kinds of
    rules would have been in place.
        Mr. Cleaver, you are recognized for 5 minutes.
        Mr. Cleaver. Mr. Chairman, this is one of those times--I
    know people assume that we come here with all--with the
    positions already in concrete, which is not true for me,
    certainly not today. Most of the assumptions I came in here
    with have dramatically changed, although I am not a fan of
    payday lending, not at all.
        But I am concerned about--and I'm not sure anyone has
    addressed, a way in which we can provide necessary services to
    the unbanked. And it is--the unbanked represents an untapped
    market, and I'm not--I'm a federalist, so I'm not interested in
    supplanting Federal legislation--of supplanting State
    legislation with Federal legislation.
        And so I'm really struggling with exactly where I am. The
    only thing I know for sure is that I don't like payday lending,
    because I think some of the practices, frankly--when you have
    fees of 300 percent, as happens in some places, that can't
    possibly be good. But on the other hand, what do we do to
    provide service to the unbanked? Can anybody--yes, sir, Mr.
    Flores?
        Mr. Flores. Mr. Cleaver, I have worked with clients in the
    past who have tried to address the unbanked situation. And the
    key to the unbanked is that the first product they need is the
    checking account.
        And one of the strategies that has been employed is what is
    called a checkless checking account, where direct deposit is
    made to eliminate any potential fraud on the deposit side, or
    returned items on the deposit side. And no checks are
    permitted, only the debit card for ATM withdrawals and point-
    of-sale transactions, which would eliminate any potential for
    overdrawing this type of account. Once somebody establishes
    that, and over a period of time has a track record, then they
    go that next step in developing the appropriate credit--
        Mr. Cleaver. Well, the problem is--thank you. I hate to cut
    you off, except my time is running out.
        And the problem with that is, when you go into the urban
    core, there is no gradualization, because there is no bank. You
    know--I mean, you can ride around in the urban core for miles
    and miles, and not come across a bank, or a grocery store, for
    that matter. But so--Ms. Guzman?
        Ms. Guzman. Congressman, let me say that going back to my
    statement of an evil, but a necessary evil. When we deal with
    evil, we try to minimize the impact. And I think this
    legislation, and legislation like it that permits payday
    lending establishments, however regulates or caps the fees to
    protect the consumer, is the only answer.
        Addressing Mrs. Fox, many of my neighbors do not have
    family members they can turn to for a payday lender situation.
    We have a transient population right now with the economy,
    where people move from community to community, State to State
    to find jobs. Many of them are first generation Americans,
    native born Americans. They do not have a family support base
    or safety net here.
        So as I stated, payday lenders, there is a market for them.
    There is a need for them, and I would just be very grateful if
    we--
        Mr. Cleaver. Yes, but the--where I'm trying to go--thank
    you. Where I'm trying to go is, and maybe I'm inarticulate--
        Ms. Guzman. What is the answer?
        Mr. Cleaver. What happens to the people who live in areas
    where there are no banks?
        Ms. Fox. There are--may I?
        Mr. Cleaver. Ms. Fox?
        Ms. Fox. There is a program that has been launched in a lot
    of large cities. It is called ``Bank On,'' where the mayors and
    local civic leaders are working with banks to encourage them to
    provide the basic entry level banking services that the
    communities that you're describing need.
        My organization, Consumer Federation of America, is working
    on America Saves campaigns across the country, to try to help
    low- and moderate-income consumers become savers. We have new
    data out from the Federal Reserve that compares people who use
    payday loans with people who don't. And the folks who don't use
    them are twice as likely to be savers than the folks who end up
    at a payday loan outlet.
        So there are creative programs being worked on to bank the
    unbanked. The problem is, once you get these consumers banked,
    now they are the prime market for payday lenders, since having
    a checking account is a prerequisite, but they don't have
    enough money to be able to pay the loan back all at one time on
    their next payday.
        Chairman Gutierrez. Yes. Thank you very much. Your time has
    expired.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Chairman Gutierrez. Ten seconds to go out of order.
    Unanimous consent--I would like to ask Mr. McCullen a question
    before we go any further. Hearing no objection, it is so
    ordered.
        I have your statement here, the last paragraph:
        ``I respectfully request that you defeat this bill in its
    current form, or alter it to mirror the Louisiana law, which
    allows $20--which allows $.20 and a dollar--a dollar plus''--
    per dollar, sorry--``and a documentation fee.''
        So you're against the bill in its current form, is that
    correct?
        Mr. McCullen. Yes, sir.
        Chairman Gutierrez. Thank you.
        The gentlelady, Ms. Speier, is recognized for 5 minutes.
        Ms. Speier. Thank you, Mr. Chairman.
        Ms. Guzman, I have a question for you. If you could get a
    payday loan for 36 percent instead of 300 percent, would you
    like that?
        So would you support a bill that had an interest cap of 36
    percent, instead of 300 percent?
        Ms. Guzman. I would support any loan that would--
        Ms. Speier. Would you put your microphone on, please?
        Ms. Guzman. I apologize. I would support anything that
    would minimize the negative impact to consumers or my
    neighbors.
        Ms. Speier. So there--yes, Mr. Flores?
        Mr. Flores. I would like to--
        Ms. Speier. Would you support that?
        Mr. Flores. Well, it sounds good. But the issue is, when
    you do a 36 percent annual percentage rate, that means it boils
    down to a $1.38 fee for a $100.00 advance. And no one can--
    there's not a business model that will allow anyone to even
    cover their costs and offer that product.
        So while yes, it sounds good, and it is--36 percent on a
    traditional installment loan makes sense, for this type of fee
    product, it does not make sense, because no one--you would put
    the industry out of business, and you have--
        Ms. Speier. Well, maybe--maybe some of us think that the
    industry has overstayed its welcome.
        Mr. Flores. Well, yes, ma'am, but--
        Ms. Speier. That's--Mr. Flores, that's all I have to ask
    for you.
        It appears that the payday lending industry is losing some
    of its momentum. In fact, there hasn't been an initiative that
    they brought before a State since 2005, that has actually
    passed. Because the people in our communities recognize that
    300 percent interest rate is not a good interest rate. And in
    D.C., as I understand it, it has been prohibited--payday loans
    are now prohibited, as is they are in New York and other
    places.
        And I have to believe, that in huge communities like that,
    where there are a high percentage of low-income people, they
    are finding other ways to get credit when they need it.
        The question I have for you, Ms. Fox, is the following:
    What are the loopholes in this bill?
        Ms. Fox. The bill defines a covered payday loan as only
    closed end, so it leaves out all the payday lenders who have
    turned their product into an open-end product. For example, in
    Virginia, Advance America makes open-end loans--same cost
    structure, same term for the loan. It's just they called it
    open end. It would not be subject to this bill.
        Any loan that was for longer than the 90-day definition,
    would not be covered by this bill. And payday lenders have
    already changed the term of their loans, in order to get around
    that kind of definition as well.
        We are also concerned that the credit services organization
    model, which is used widely in Texas--Texas has never passed a
    payday loan industry bill to allow payday lending. The Texas
    Finance Commission rules would permit it under their regular
    small loan law, but most lenders in Texas call themselves
    credit services organizations, and charge a high fee for
    arranging a loan with some third party lender. It's not clear
    to me that they would be subject.
        So we have a bill that would leave out almost all the
    payday lending in Illinois, probably all of it in Texas, a big
    chunk of it in Virginia, and it would be very easy for lenders
    in 10 of the 23 States that permit higher than the 390 percent
    cap in this bill, to just change their product into an
    installment product, because there's no rate cap on installment
    lending.
        So it would be very easy to get around the definitions in
    this bill, and keep right on charging 500, 600 percent, without
    violating this bill.
        Ms. Speier. So what would improve the bill?
        Ms. Fox. It would improve the bill to prohibit holding
    personal checks as security for the loan, to make these loans
    on the basis of a contract.
        Ms. Speier. Let me ask you a question on that. It seems to
    me almost illegal, because you're not supposed to provide a
    check if you don't have sufficient funds.
        Ms. Fox. You would think so, wouldn't you?
        Ms. Speier. So you are basically--they are basically asking
    the person to conduct themselves in an illegal manner by
    offering up that check, that they don't have sufficient funds
    to use.
        Ms. Fox. That's true. And in some States, the payday loan
    law has to exempt these customers from being subject to the
    criminal bad check law, because otherwise they would be.
        But the lender knows you don't have money in the bank when
    they take the check. But they hold it, and that adds costs for
    consumers. In Virginia, people paid, in 2007, about $5 million
    to their own banks in bounced check fees, because their payday
    loan checks were returned.
        Ms. Speier. Okay, so that would improve the bill. What else
    would improve the bill?
        Ms. Fox. A longer loan repayment term. If you gave people 5
    months to repay your payday loan as structured here, at $15 per
    hundred. That gets it down to 36 percent APR. We know from the
    chart I included in my testimony, that the typical family
    making $35,000 a year cannot pay all of this back out of one
    paycheck.
        Chairman Gutierrez. The time of the gentlelady has expired.
        Ms. Speier. Thank you.
        Chairman Gutierrez. Congresswoman Maxine Waters from
    California.
        Ms. Waters. Thank you very much. I'm going to yield to the
    gentlelady from California. I just came in. Her line of
    questioning is exactly what I looked forward to doing, so Ms.
    Speier, would you continue your line of questioning, please?
        Ms. Speier. Thank you.
        So we had so far established that if you would not require
    them to hold a blank check, that would be an improvement to the
    bill. If you could provide within this bill a longer repayment
    period, that would improve the bill.
        What else would you--
        Ms. Fox. And a reasonable small loan rate cap. Competition
    does not drive down the cost of payday lending. You may have a
    payday lender on every corner, but they are all typically
    charging the legal rate. It takes a rate cap to bring down the
    costs of loans to consumers who have little power in the
    market.
        And the traditional small loan rate cap of 36 percent is a
    reform that consumers say they want to have. In polling that
    was released just this last week, 70 percent of Americans want
    a rate cap of 36 percent or less to protect consumers from rate
    gouging. And that's the rate cap that was upheld in voting at
    the polls in both Ohio and Arizona last fall.
        Consumers don't think that creditors should be allowed to
    charge 400 percent.
        Ms. Speier. Ms. Fox, just to point out to you, when I
    introduced the bill that would create a usury rate of 36
    percent, I had people in my district calling me saying,
    ``That's too high,'' so they would find this particular
    conversation particularly interesting, I think. I yield back.
        Chairman Gutierrez. The gentlelady yields back.
        Mr. Paulsen?
        Ms. Waters. The gentlelady is yielding back her time to me.
    Let me just say, Mr. Chairman, that the payday lending has
    always been a real concern of mine. And you're right, I happen
    to have a portion of my district where we have a lot of
    lenders, and the argument is made that, you know, people depend
    on this kind of lending. But I just think that 300 or 400
    percent is way too high.
        Let me tell you what I began to think about payday lending.
    We have been dealing with subprime loans, and we refer to many
    of the deals as exotic lending, where we had Alt-A loans, that
    they didn't do verification on employment.
        We had adjustable rate loans that were just outrageous in
    the amount of money that it costs the taxpayer when they reset
    with these high margins, and on and on and on. And we're
    calling for regulation, and we want tighter regulation.
        The same thing is going on here. We have products that are
    injurious to our consumers, and we need to crack down on this.
    Just as we're looking at the subprime loans, and the mess that
    was created, we have a problem here with people making very
    little money, who will never be able to get out from under this
    kind of debt, unless we do something to crack down. Now this
    has been going on for a long time.
        And so, Mr. Chairman, just let me say that no matter what
    the intent is, the fact of the matter is we have to resist any
    attempt to make it look as if we are cracking down, when in
    fact we are opening the door for more abuse.
        And I will yield back the balance of my time.
        Chairman Gutierrez. The gentlelady yields back her time.
        Mr. Paulsen, you are recognized for 5 minutes.
        Mr. Paulsen. Thank you, Mr. Chairman. And I know a lot of
    the questions I had have already been asked. But I wanted to
    ask Mr. McCullen first, perhaps, how would the legislation,
    H.R. 1214, really impact your business? If you could just
    describe how the legislation would impact what you do.
        Mr. McCullen. The legislation that's being discussed here
    today, if it had been in place in Louisiana last year, I would
    have ended in the negative. That's why I'm here not to support
    this bill.
        I ask in my testimony that you implement the Louisiana
    bill, because I am listening to all these different things
    being said here. We don't have these problems in Louisiana,
    because it's against the law. We had 24 complaints last year,
    and we have over 4 million transactions.
        We have a very tight, succinct bill that we're able to
    operate under, and it protects the consumers. So that is why I
    was against this bill.
        Mr. Paulsen. I'm just curious, Mr. McCullen, then, I mean,
    who would really benefit from this law if that's the case? Is
    there another product that's similar to yours that you offer,
    and I had mentioned this in my opening statement, but, you
    know, on a widespread basis, is there any other product that's
    offered that really substantially is available at a lower cost
    for people?
        Mr. McCullen. Not to my knowledge, no.
        Mr. Paulsen. And coming from Minnesota, Mr. Chairman, it is
    the case where I have talked to people in this industry, too,
    that their average interest rate that they'll charge is only
    9\1/2\ percent, and so a very reasonable level. Ms. Fox had
    mentioned earlier her concern about triple digit APRs. And I'm
    just curious, what do you think of a 99 percent APR, Ms. Fox?
        Ms. Fox. It's still high. It sure beats 520 percent, which
    is what they can charge in Louisiana for a single payment loan.
    We think that the traditional small loan rate cap in States has
    been around 36 percent. It provides for loans to consumers who
    don't have a perfect credit rating under an affordable
    repayment schedule. And we think that would be more beneficial
    than what's being proposed here.
        Mr. Paulsen. Well, and I think it's also important to point
    out that it would be very beneficial for consumers down the
    road to not necessarily rely on the description of an APR. I
    don't think consumers understand what APR means, necessarily,
    and just regulating not having that triple digit APR, that is
    going to be much more easier for consumers if they understand
    what real fees are. We have seen that in the credit card
    industry.
        Mr. McCullen, do you have a comment on that?
        Mr. McCullen. I appreciate that comment, because I wanted
    to bring that to the table. Most Americans do not understand
    APR. I have lots of friends of mine who are personal friends of
    mine, they do not understand what we do, and how we do it. When
    I explain it to them, they understand that this is a flat fee.
        And I also want to make a comment about APR. The American
    Banking Association testimony that was before the subcommittee
    on March 19th, said with regard to applying APR to overdraft
    fees, and other short-term credit product, ``Any time an annual
    percentage rate is calculated for a term of less than a year,
    the inclusion of a fixed fee, even a modest one, will distort
    and overstate the APR. The shorter the repayment period, the
    greater the APR will appear in instances where there is a fixed
    fee. This means that the sooner the consumer repays, the
    greater the calculated APR, a difficult concept to explain to
    consumers, as it appears they are paying--that paying earlier
    actually increased the cost of credit.''
        Mr. Paulsen. Well, and Mr. Chairman, it just points out, I
    think there are some States that have done some good things,
    and have some good models. And Minnesota and Louisiana might be
    another case too, and I hope we consider that as the
    legislation moves forward. Thank you. I yield back.
        Chairman Gutierrez. Thank you.
        Mr. Sherman, you are recognized for 5 minutes.
        Mr. Sherman. Thank you. I'm a bit confused about using APR
    as a way to determine the fairness of the fee.
        Ms. Fox, I was once at my bank an hour before it opened.
    Usually I would go inside to get a couple hundred bucks out of
    my account, but I wanted the money an hour sooner than I could
    get because, like, they were closed. And so I went to the
    machine. I paid--my bank was good. They only charged me a $1
    fee to get my $200 an hour early, $1 to get my $200 an hour
    early.
        Now that's 186,000 percent APR. Am I an idiot for paying
    186,000 percent APR to pay that $1 fee just for an hour?
        Ms. Fox. Was the $1 fee to borrow the money, or just a fee
    for accessing it through the ATM rather than in person?
        Mr. Sherman. It's a time value of money. I was going to get
    the same money sooner, whether it constituted a loan for the
    hour, which was then repaid to the bank without further cost or
    otherwise. I mean, it's--I got my money an hour early, time
    value of money, 1 hour, $200, it is 186,000 percent APR.
        Ms. Fox. Well, I would never say that a Member of Congress
    was an idiot, so--
        Mr. Sherman. Everyone else does.
        Ms. Fox. Well, I would never say that.
        Mr. Sherman. Okay.
        Ms. Fox. But I would say--
        Mr. Sherman. Should that transaction be banned because it's
    186,000 percent APR?
        Ms. Fox. Well, that's not the product we're talking about
    today.
        Mr. Sherman. I'm asking you a question.
        Ms. Fox. Okay.
        Mr. Sherman. You don't get to confine your responses just
    to what we're talking about today.
        Ms. Fox. Truth in Lending has been the law of America for 4
    decades. It requires that credit be quoted with a comparable
    price, so you can compare a 1-month pawn transaction, a 2-week
    payday loan, a 6-month installment loan, and a cash advance on
    a credit card, and that's the price tag.
        Mr. Sherman. But when you are doing things for a short
    period of time, I mean--
        Ms. Fox. That's right.
        Mr. Sherman. --if one payday lender charges $30 to use the
    money for 2 weeks, and another one charges $40 to use the money
    for 3 weeks, you don't necessarily say that the higher fee is
    the better deal. Time value of money is something I understand,
    I'm a CPA.
        Ms. Fox. Yes.
        Mr. Sherman. I also understand it just doesn't make any
    sense to evaluate a fee like transaction.
        Ms. Fox. Well, we disagree.
        Mr. Sherman. Okay. The other point I'll make is, I deal
    with my constituents. They know I'm a CPA. They ask me all
    kinds--the only financial transaction they do understand is
    they payday loan.
        Ms. Fox. Well--
        Mr. Sherman. None of them understand just about anything
    else, but you say, okay, you use your credit card, and you pay
    most of it off, and then you use it some more. How much is that
    going to cost you? They have no idea. You use your overdraft
    protection. How much is that going to cost? Nobody knows.
        Ms. Fox. Well, if this subcommittee would enact
    Representative Maloney's overdraft bill, consumers would get
    Truth in Lending cost disclosures for those loans as well, and
    we think that would have a great benefit on the banks.
        Mr. Sherman. Well, what I'm questioning is whether Truth in
    Lending makes any sense at all for loans of less than a month
    or 2 months. What you think of as great information, to my
    constituents is gobbledy-gook or misleading.
        Ms. Fox. Well, requiring loans to be repaid in less than
    several months also doesn't make very good sense for consumers
    in the income bracket who use payday loans.
        Mr. Sherman. Some people only want to--I see my home girl
    from the San Gabriel valley, where I grew up, Aztecs--
        Ms. Guzman. Yay.
        Mr. Sherman. --and I mean, were there occasions where you
    needed the money for only a month, or did you always have a
    need for the money for 3 months or 4 months, or longer?
        Ms. Guzman. No, on that particular occasion that I
    discussed earlier, I did only need it actually for 30 days.
    What I did was I paid it back, because I'm not allowed to
    rollover, and literally borrowed it back at that moment, again,
    paying another fee, because I couldn't pay it back for 30 days.
    But, you know, I was able to pay it back.
        Mr. Sherman. But you only held the money for a grand total
    of 30 days?
        Ms. Guzman. Yes.
        Mr. Sherman. Okay. So if we forced you to take the money
    for 60 days, but we charged you just a little bit more, would
    that help you?
        Ms. Guzman. Well, it would at least give me the option of
    not having to pay it back in 2 weeks. I'm just saying in my--
    Congressman, in my experience, everyone's situation is
    different. I do have very well-intended neighbors who would
    need the loan--
        Chairman Gutierrez. The gentleman's time has expired.
        Ms. Guzman. Oh, I'm sorry.
        Mr. Sherman. Okay. I just ask the witness not to tell
    anybody in the San Fernando Valley that I actually grew up in
    the San Gabriel Valley. I yield back.
        Ms. Guzman. My lips are sealed.
        Chairman Gutierrez. Yes. We ban rollovers in this
    particular bill, and we give you 90 days to pay the money back,
    so you wouldn't have had to pay the fee again.
        Mr. Childers is recognized for 5 minutes.
        Mr. Childers. Thank you, Mr. Chairman, and I have been
    following between votes, and the earlier part of the panel, I
    want to thank you all for being here from my office. And I
    think this has really been touched on today, but I really
    wanted to address the issue, Mr. Chairman, of regulating by the
    States. And I just want to go ahead and say this.
        I am from Mississippi. Mississippi is no different from all
    the other States. We have varying degrees of people in need of
    various amounts of loans and sizes. I come from a State, quite
    frankly, that does a good job of regulating. They do a good job
    of regulating banks, they do a good job of regulating consumer
    loans, and they do a good job of regulating payday loans, if
    that's what it is to be called.
        Now at my age, I have survived many errors, let me just say
    that. And there are times that I needed a little bit of money,
    and there were times that I needed a lot of money. And I'm not
    so sure that this is really the avenue for us to take on this.
    And I will say this. I'll use my own State as an example there.
        It is my belief that customer John Doe will go to the place
    where he can borrow money--or Jane Doe--will go to the place
    they can borrow money, for the least amount. I believe that. I
    have done that in my life.
        There are times that my own hometown banker probably
    charged me more than my neighbor, but there were a lot of
    factors. Maybe my credit wasn't as good as that time. Maybe he
    thought I already owed too much money. I just--I wanted to make
    that just as a statement really and--to the panel. And I
    understand each of your interests, and I appreciate that. I
    read what you delivered to us and I have listened to you while
    in my office, in between these votes today.
        But my State does a good job, and I really have nothing but
    compliments for my own State. And in my State, the payday loan
    companies seem to be the target, if you will, of maybe this
    discussion today. The people there--and don't get me wrong, I'm
    certain that there have been instances where people have been
    aggrieved. It is like any industry. There are always some who
    have been wronged, or believe to have been wronged.
        By the same token, I saw this industry in my State, and
    regardless of what I personally think about the industry, I
    will say this. They stepped up and worked with the State of
    Mississippi to regulate themselves to a degree, or to accept
    regulation, so they could stay in business.
        I'm anxious--you know, I welcome any comment from the panel
    back, but I just wanted to speak, I guess, on behalf of State
    regulation.
        Mr. Flores. Congressman, I was just looking at my study,
    and for the State of Mississippi, since you do allow payday
    lending--
        Chairman Gutierrez. Mr. Flores, could you put your
    microphone on?
        Mr. Flores. I'm sorry. The State of Mississippi, the
    average consumer who has a checking account, pays $163 in
    overdraft in NSF charges, compared to the national average of
    over $300. So again, according to my opening statement, is
    there a direct correlation? I don't think there's enough data
    yet, but there's certainly an indication that we ought to look
    at it in more detail.
        And so the consumers in your State are paying less in
    overdraft charges than consumers in many other States.
        Mr. Childers. I would agree there probably isn't enough
    data to say that is it, but it is--if it's a fact, it just is
    what it is.
        Thank you, Mr. Chairman.
        Chairman Gutierrez. You're welcome.
        A couple of quick questions to Ms. Fox. You said--is it
    your testimony that competition will not drive down the price
    of payday loans?
        Ms. Fox. It has not, no.
        Chairman Gutierrez. Okay. So supply and demand works
    everywhere else except the payday industry.
        Ms. Fox. That's right.
        Chairman Gutierrez. I just wanted to make sure that was
    your testimony. I can tell where you're at. And then your
    testimony is that the bill would force payday lenders to change
    their product.
        Ms. Fox. It would give them an incentive to change their
    product.
        Chairman Gutierrez. So while it has nothing to do with the
    driving down the price, it will change their behavior in terms
    of changing their product to installment loans.
        Ms. Fox. From past experience, that is likely to happen.
        Chairman Gutierrez. From past experience. So it does have
    on one, but not on the other.
        Everyone has had an opportunity.
        I would ask unanimous consent that a letter supporting the
    goals of this legislation from the National Association of
    Federal Credit Unions be entered into the record. Hearing no
    objection, it is so ordered.
        I want to thank the witnesses and the members for their
    participation in this hearing. The Chair notes that some
    members may have additional questions for the witnesses, which
    they may wish to submit in writing. Therefore, without
    objection, the hearing record will remain open for 30 days for
    members to submit written questions to the witnesses, and to
    place their responses in the record.
        This subcommittee hearing is now adjourned.
        [Whereupon, at 4:56 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 April 2, 2009

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