[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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