[Senate Hearing 113-814]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-814

                  PAYDAY LENDING: SHORT-TERM SOLUTION
                         OR LONG-TERM PROBLEM?

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

                                 HEARING

                               BEFORE THE

                       SPECIAL COMMITTEE ON AGING

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 24, 2013

                               __________

                            Serial No. 113-9

         Printed for the use of the Special Committee on Aging
         
         
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                      SPECIAL COMMITTEE ON AGING

                     BILL NELSON, Florida, Chairman

RON WYDEN, Oregon                    SUSAN M. COLLINS, Maine
ROBERT P. CASEY JR, Pennsylvania     BOB CORKER, Tennessee
CLAIRE McCASKILL, Missouri           ORRIN HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island     MARK KIRK, Illinois
KIRSTEN E. GILLIBRAND, New York      DEAN HELLER, Nevada
JOE MANCHIN III, West Virginia       JEFF FLAKE, Arizona
RICHARD BLUMENTHAL, Connecticut      KELLY AYOTTE, New Hampshire
TAMMY BALDWIN, Wisconsin             TIM SCOTT, South Carolina
JOE DONNELLY Indiana                 TED CRUZ, Texas
ELIZABETH WARREN, Massachusetts


                              ---------- 
                              
                              
                  Kim Lipsky, Majority Staff Director
               Priscilla Hanley, Minority Staff Director
                                
                                
                                CONTENTS

                              ----------                              

                                                                   Page

Opening Statement of Chairman Bill Nelson........................     1
    Prepared Statement...........................................   120
Statement of Ranking Member Susan M. Collins.....................     2
    Prepared Statement...........................................   128

                           PANEL OF WITNESSES

David Silberman, Associate Director, Research, Markets, and 
  Regulations, Consumer Financial Protection Bureau..............     4
Mark Pearce, Director Division of Depositor and Consumer 
  Protection, Federal Deposit Insurance Corporation..............    11
Eric Wright, Staff Attorney, Maine Bureau of Consumer Credit 
  Protection.....................................................    18
Annette Smith, Deposit Advance Consumer/Social Security 
  Beneficiary....................................................    42
Rebecca Borne, Senior Policy Counsel, Center for Responsible 
  Lending........................................................    47
Dennis Shaul, CEO, Community Financial Services Association of 
  America........................................................    72
Richard Hunt, President and CEO, Consumer Bankers Association....    86

                                APPENDIX
        Prepared Witness Statements and Questions for the Record

David Silberman, Associate Director, Research, Markets, and 
  Regulations, Consumer Financial Protection Bureau..............     7
    Questions submitted to Mr. Silberman.........................   136
Mark Pearce, Director Division of Depositor and Consumer 
  Protection, Federal Deposit Insurance Corporation..............    13
Eric Wright, Staff Attorney, Maine Bureau of Consumer Credit 
  Protection.....................................................    20
Annette Smith, Deposit Advance Consumer/Social Security 
  Beneficiary....................................................    45
Rebecca Borne, Senior Policy Counsel, Center for Responsible 
  Lending........................................................    50
Dennis Shaul, CEO, Community Financial Services Association of 
  America........................................................    74
Richard Hunt, President and CEO, Consumer Bankers Association....    89

                  ADDITIONAL STATEMENTS FOR THE RECORD

Board of Governors of the Federal Reserve System.................   138
Consumer Financial Protection Bureau.............................   141
Federal Deposit Insurance Corporation............................   186
FDIC Quarterly, 2010, Volume 4, No. 2............................   208
Community Financial Services Association of America..............   222
Nick Bourke, Director, Safe Small-Dollar Loans Research Project, 
  The Pew Charitable Trusts......................................   225
Lisa McGreevy, President and CEO, Online Lenders Alliance........   229
Andrea Luquetta, Esq., Policy Advocate, California Reinvestment 
  Coalition......................................................   231

 
       PAYDAY LENDING: SHORT-TERM SOLUTION OR LONG-TERM PROBLEM?

                              ----------                              


                        WEDNESDAY, JULY 24, 2013

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:07 p.m., in 
Room SD-562, Dirksen Senate Office Building, Hon. Bill Nelson, 
Chairman of the Committee, presiding.
    Present: Senators Nelson, Wyden, Donnelly, Warren, Collins, 
and Heller.

       OPENING STATEMENT OF SENATOR BILL NELSON, CHAIRMAN

    The Chairman. Good afternoon. We have an important subject 
to discuss today, payday loans and other short-term lending 
products and how they impact seniors, and especially how they 
impact seniors' Social Security income.
    The marketplace for these products has evolved rapidly, 
just in the last several years. We have been aware of these 
storefront payday lenders, which have been around for some 
period of time, where people can bring a pay stub or proof of 
income into a store and get an advance on their next paycheck 
while paying a very high premium in fees for the privilege. But 
now there are additional players in this market. Some online 
lenders and even now big banks are offering seniors these 
short-term loans.
    The Center for Responsible Lending just released a report 
showing that one in four users of the bank payday loan known as 
a deposit advance, one in four, 25 percent is a Social Security 
recipient. Well, think about how the math works on this, or how 
it does not work for seniors with fixed income and fixed 
expenses.
    Seniors take one of these deposit advances out because they 
cannot make ends meet or they have some sort of emergency--
health issue, car problems, you name it. Then when their next 
Social Security check arrives, that amount they borrowed plus 
very high fees are automatically deducted before the money even 
hits their bank account. So how do these senior citizens get 
through the month when they still have all the same expenses 
but their income is cut, in some cases, we will hear in 
testimony, potentially cut in half, for the rest of that whole 
month?
    The answer in most cases is, what happens? The cycle 
repeats and they borrow again and again. And some people even 
borrow from a variety of different sources, from storefronts, 
from banks, and online lenders.
    Take the case of Annette Smith, who has traveled here and 
she will testify in the second panel. She has traveled here all 
the way from California to tell just how hard it is to get out 
from under this cycle of debt. She took out a $500 loan about 
five years ago, and in the same time since, she has gone back 
to her bank 63 times to secure a deposit advance, paying out a 
total of around $3,000 in fees and interest for a $500 loan.
    Or, consider the story of Donna Johnson, a grandmother. She 
is from Ocoee, Florida. She managed to break a two-year payday 
loan debt trap only after receiving insurance money associated 
with her husband's death.
    We are grateful to Ms. Smith for being here today, and she 
is going to talk about her financial struggle.
    And we also want to thank the regulators for joining us to 
talk about why they are considering stepping into this market. 
This is a critical time for these products, and we want to hear 
from the Consumer Financial Protection Bureau and the Federal 
Deposit Insurance Corporation about what they have seen from 
these loans and the regulatory power that they already have to 
protect these customers and these consumers.
    Well, one thing is clear. Millions of Americans with poor 
or no credit have a need for money in emergencies, and the 
focus of this committee clearly is our senior citizens who are 
in that position.
    But how can we make sure that the products available to 
these people, especially the seniors, will not trap them in the 
cycle of debt? We brought all the parties involved here this 
afternoon to see how we can answer this question. While 
everyone agrees payday lending and deposit advance products are 
many times necessary, and they are expensive forms of short-
term credit and borrowing, we must ensure that they are 
properly overseen with adequate consumer protections and 
safeguards against predatory lending.
    And so we have two very fine panels of witnesses today. 
Thank you all.
    I turn to our Ranking Member, Senator Collins.

         OPENING STATEMENT OF SENATOR SUSAN M. COLLINS

    Senator Collins. Thank you very much, Mr. Chairman, for 
holding this hearing to examine the impact of payday loans on 
American consumers and for assembling such an impressive group 
of witnesses.
    I am particularly pleased that the committee will be 
hearing today from Eric Wright, an attorney with the Maine 
Bureau of Consumer Credit Protection. Since the Bureau was 
first established in 1975, it has earned a well-deserved 
reputation as the leader in the field of consumer credit 
protection. Some two decades ago, I had the privilege of 
overseeing the Bureau when I served as Maine's Commissioner of 
the Department of Professional and Financial Regulation for 
five years. It was a wonderful experience and I am delighted to 
have a witness from the Department here today.
    Payday loans are typically unsecured, closed end, small 
dollar amount loans of short duration with high upfront cost. 
Repayment of the loan is typically structured as a single 
balloon payment tied to the borrower's next paycheck or some 
other regular source of income, such as a Social Security 
check. Payday loans are usually made without underwriting, in 
other words, without a credit check or any other attempt to 
determine the borrower's ability to repay.
    In years past, the borrower would simply give the lender a 
check to be cashed on the borrower's next payday, which 
explains why this kind of financial arrangement came to be 
known as a payday loan. Today, however, it is more likely that 
the borrower will authorize the lender to draw the funds 
directly out of the borrower's savings or checking account on a 
preset date.
    Studies show that payday loans are relied upon by low-and 
moderate-income customers who need the short-term flexibility 
that these loans provide or who have poor credit ratings and 
simply cannot get a traditional bank loan or a credit card. 
According to a study by the Federal Reserve, two-fifths of all 
households considered underbanked have used payday loans, and 
most of those households have done so in the past year. By 
contrast, only one out of 20 fully banked households has ever 
taken out a payday loan.
    While payday loans can provide consumers with a useful way 
to get cash quickly when they need it, the high cost built into 
the loan, the fees can make it difficult or impossible for low-
income borrowers to repay them. Too often, then, the consumer 
gets trapped into a cycle of debt and then may be subjected to 
aggressive, even abusive, collection practices.
    For many years, the Maine Bureau of Consumer Credit 
Protection has been able to protect my constituents from the 
worst of these abuses largely because Maine State law tightly 
regulates unsecured consumer debt and requires lenders who wish 
to provide these products to register with the State and abide 
by legal limits on fees and interest rates. For these reasons, 
Maine's experience with payday lenders differs from those of 
other States. Storefront payday lenders have not been much of a 
problem in Maine as they have been elsewhere. Banks also are 
not a source of abusive payday loans in the State of Maine. In 
fact, Will Lund, the longtime Superintendent of the Maine 
Bureau, who came to work at the same time I did for the 
Department, has told me that the Bureau has never fielded a 
consumer complaint over a payday loan when the lender was a 
State or Federally-licensed bank.
    But that does not mean that Mainers are not victims of 
abusive payday loan practices. With the advent of the Internet, 
online and offshore lenders have direct access to Maine 
consumers. Not a day goes by when the Bureau does not get a 
call from the victim of an unscrupulous online lender who has 
been trapped--who has trapped the consumer into paying off a 
loan that was never legal to offer in the State of Maine in the 
first place, and that is what is so frustrating. For Maine to 
try to protect consumers against these offshore or online 
lenders is very difficult.
    I understand that online payday loans still make up a 
minority of payday loan volume nationally, but I will predict 
right now that it will continue to grow and may eventually 
overtake storefront lending, particularly if States start 
following Maine's example and regulating payday lenders more 
closely.
    This raises troubling issues, since online lenders 
typically get authorization from their borrowers to draw funds 
directly from their bank accounts. Since so many of the abusive 
payday loans affecting Maine consumers were made by online 
lenders, this is a topic that I am particularly interested in 
exploring with our regulators today.
    Again, Mr. Chairman, thank you so much for calling this 
important hearing.
    The Chairman. Thanks for your personal perspective on this.
    All right. The first panel. First, we are going to hear 
from David Silberman. He is Associate Director for Research, 
Markets, and Regulations at the Consumer Financial Protection 
Bureau, what we refer to as CFPB.
    Then, Mark Pearce, the Director of the Division of 
Depositor and Consumer Protection at the FDIC.
    And then to hear our guest, our witness from Maine, Eric 
Wright, a Staff Attorney for the Bureau of Consumer Credit 
Protection for the State of Maine.
    So, Mr. Silberman.

  STATEMENT OF DAVID SILBERMAN, ASSOCIATE DIRECTOR, RESEARCH, 
 MARKETS, AND REGULATIONS, CONSUMER FINANCIAL PROTECTION BUREAU

    Mr. Silberman. Chairman Nelson, Ranking Member Collins, and 
members of the committee, thank you for the opportunity to 
provide you with an overview of the Consumer Financial 
Protection Bureau's recently released white paper on payday 
loans and deposit advance products.
    This is perhaps the largest study to date on the short-term 
small dollar loan market. With this paper, the Bureau 
endeavored to provide all stakeholders with a shared set of 
facts on this market. What the Bureau found is precisely what 
Senator Nelson and Senator Collins were describing, that too 
often, consumers are finding themselves caught in a extended 
and costly period of debt, likely as a result of chronic cash 
flow shortages.
    A little bit of background. In January 2012, the Bureau 
added payday lenders to its supervision program. We held a 
field hearing that month, our first field hearing as a Bureau, 
to hear directly from consumers and lenders and we began to 
study these issues, resulting in our white paper issued in 
April.
    Our study found that payday and deposit advance loans lead 
many consumers into long-term expensive debt burdens. For far 
too many consumers, payday and deposit advance loans are traps. 
Returning every two weeks to reborrow the same dollar amounts 
at a high cost becomes a drag on the financial well-being of 
consumers already facing income shortfalls.
    The findings in our study were developed from information 
obtained from a number of storefront payday lenders covering a 
12-month period. For each account with activity in the first 
month of the study period, we then studied all activity over 
the full 12 months. Similarly, our deposit advance findings 
were developed from information obtained from a number of 
depository institutions offering this product. And for this 
group, we examined for a 12-month period a random sample of 
accounts that were eligible to receive a deposit advance during 
the first month of our study or during the previous quarter.
    So allow me to summarize some of our key findings. First, 
we found that a fairly small segment of consumers using payday 
loans or deposit advances do so on an occasional basis. For 
example, 13 percent of the borrowers in our study took out 
only--payday borrowers in our study took out only one or two 
loans over 12 months, and 18 percent of the deposit advance 
borrowers obtained total advances of $750 or less over 12 
months.
    However, a much larger group of consumers used payday or 
deposit advance on a sustained basis. Forty-eight percent of 
the borrowers in our study took out 11 or more loans over 12 
months, and 52 percent of deposit advance borrowers obtained 
advances totaling $3,000 or more. Fourteen percent of payday 
borrowers had 20 or more loans during that 12-month period, and 
the same percentage of deposit advance borrowers were advanced 
more than $9,000 over 12 months.
    Many of these loans are taken on a nearly continuous basis, 
particularly for consumers who take out seven or more payday 
loans or obtained more than $3,000 in deposit advances. Most 
frequently, new loans are extended the same day or within a 
week or two of a prior loan being paid back. These consumers 
are unable to get to the next paycheck or the next regular 
infusion of cash without borrowing again.
    While most consumers in our study report income from 
employment, 18 percent of the payday borrowers reported public 
assistance rather than employment as their source of income, 
and these consumers were more highly concentrated toward the 
lower end of the income range as compared to the borrowers with 
income from employment.
    Although payday loans and deposit advances are sometimes 
described as tools to enable consumers to avoid either 
incurring overdraft fees or bouncing a check, in our deposit 
advance study, we were able to observe the relationship between 
the use of deposit advances and the incidence of overdraft and 
non-sufficient funds, or NSF, fees. And what we found is that 
65 percent of those who took out a deposit advance also 
incurred at least one overdraft or NSF fee during the 12 months 
of the study. This percentage increased as the usage of deposit 
advance increased. It increased, going from 45 percent for 
light users to 83 percent of the heaviest users having one 
overdraft or NSF fee. And, similarly, the number of overdraft 
or NSF fees also increased with deposit advance usage, from an 
average of seven for light users to an average of 16 for the 
heaviest users.
    The Bureau is concerned that many consumers use these high-
cost products in a sustained way. Lenders do not currently 
assess whether a borrower can afford to repay a loan and the 
fees while meeting their other expenses. Because the entire 
loan is generally repaid or due to be repaid in each pay cycle, 
it appears to be hard for many consumers to repay the loan and 
meet other expenses without experiencing another shortfall, 
taking out another expensive loan, and/or overdrawing an 
account. Financial products that trigger a cycle of debt can 
exacerbate the precarious balance of consumers' financial 
lives.
    The Bureau's white paper underscored significant consumer 
protection issues in the small-dollar loan market, and as we 
have said, further attention to these products is clearly 
warranted. The Bureau intends to continue its inquiry into 
small-dollar loan products to better understand why some 
consumers are able to use these products in a light or moderate 
way while others seem to find themselves trapped in prolonged 
borrowing cycles. We also would like to better understand the 
effectiveness of limitations that have been put into place by 
State laws and by providers, limitations designed to curb the 
sustained use that can lead to adverse financial consequences.
    As the Bureau looks to next steps, we will determine how 
best to exercise our authorities to protect consumers while 
still enabling access to affordable credit. The Bureau will 
work to make sure that consumers can get the credit they need 
without jeopardizing or undermining their finances. As Director 
Cordray has said, debt traps should not be part of consumers' 
financial futures.
    In closing, I just would like to thank the committee for 
its continuing work to protect older Americans. Protecting 
older consumers' financial well-being is one of the Bureau's 
most important missions. Our Office of Older Americans is 
working to help the approximately 55 million consumers age 62 
and older lead safer and more productive financial lives. And 
as the older population dramatically increases the next two 
decades, we are likely to see an increase in the number of 
older consumers facing financial challenges, bringing 
substantial urgency to your work and to ours.
    So, again, thank you for the opportunity to share the 
Bureau's findings. I would be happy to respond to your 
questions.
    [The prepared statement of Mr. Silberman follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    The Chairman. And, Mr. Silberman, we want to know from you 
in the questions what are those next steps and when are we 
going to see some results by virtue of your regulatory power on 
the protections.
    Mr. Pearce.

 STATEMENT OF MARK PEARCE, DIRECTOR, DIVISION OF DEPOSITOR AND 
   CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Pearce. Chairman Nelson, Ranking Member Collins, and 
members of the committee, thank you for inviting the Federal 
Deposit Insurance Corporation to participate in today's hearing 
related to payday loans.
    I am pleased to have the opportunity to share our recently 
proposed guidance on deposit advance products, which are quite 
similar to payday loans, as well as to discuss the FDIC's 
research and perspective related to payday loans, small-dollar 
credit, and older Americans.
    Recent FDIC survey results show that in the previous 12 
months, almost six percent of households obtained credit from 
an alternative financial service provider, such as a payday 
lender or a pawn shop. For a household headed by someone 65 or 
older, the proportion was nearly two percent, and for 
households headed by a person between 55 and 64, the proportion 
was nearly four percent. Our research also indicates that among 
those who use alternative credit products, households headed by 
a person 55 or older account for 17.5 percent of all users of 
those products.
    In 2003 and again in 2005, the FDIC provided guidance to 
the institutions we supervise regarding the risks associated 
with offering payday loans. The guidance provided our 
supervisory expectations that institutions offering these 
products should monitor customers' use of payday loans and 
avoid making recurring short-term payday loans to customers 
with long-term credit needs and to take other steps to 
appropriately manage the risks of offering these loans.
    Recognizing that consumers need access to small-dollar 
loans to handle unexpected emergencies, the FDIC has sought 
opportunities to encourage financial institutions to offer 
responsible small-dollar loans. In 2007, the FDIC issued 
guidance to encourage financial institutions to offer 
affordable small-dollar loans. This guidance encourages 
institutions to offer products that are affordable and 
structured with payments that reduce principal rather than 
repayment in one immediate lump sum.
    In addition to this guidance, we initiated a pilot program 
to demonstrate the feasibility of small-dollar lending by 
financial institutions in a safe and a sound manner. The loans 
made part of this pilot program were for $2,500 or less and 
they met certain common standards. The loans had to be 90 days 
or longer in term. They had to have an Annual Percentage Rate 
of 36 percent or less. And in addition, banks utilized 
streamlined underwriting to establish that consumers could 
reasonably be expected to make their loan payments and have 
sufficient funds remaining to meet their basic living expenses 
and other obligations while still providing a loan decision to 
them typically within 24 hours.
    Twenty-eight financial institutions with assets ranging 
from $28 million to nearly $10 billion participated in our two-
year pilot. Participating banks made over 34,000 small-dollar 
loans for a total of approximately $40 million. The performance 
of these loans were shown to be in line with the performance of 
other unsecured consumer credit products, and the pilot 
concluded that it was feasible for banks to offer such loans in 
a safe and sound manner.
    Since we issued guidance on payday loans and affordable 
small-dollar loans, we have observed that a small but growing 
number of large financial institutions have begun to offer 
products that share characteristics with payday loans. These 
products, called deposit advances, are typically open-end lines 
of credit that have high fees, very short lump sum repayment 
terms, and limited or no analysis of the consumer's ability to 
repay the loan without subsequent borrowing.
    Our concern was heightened when we became aware that third 
parties had begun to market these deposit advance products to 
smaller community banks that had not traditionally offered 
payday loans or similar products.
    Although the products and practices appeared to be 
concentrated in a limited number of institutions, we thought it 
was important to be proactive to develop guidance to ensure 
that FDIC-supervised institutions that were considering 
offering these products were aware of the significant safety 
and soundness and consumer protection risks associated with 
these products.
    In April, the FDIC issued proposed guidance that outlines 
the credit, reputational, legal, third party, and compliance 
risks related to these products, as well as our expectations 
regarding how institutions can manage those risks. In 
particular, our proposed guidance details our expectation that 
institutions will engage in prudent underwriting to determine 
the borrower's ability to repay the loan without the need for 
recurring borrowing. We have received over 100 comments on our 
proposed guidance from a variety of stakeholders, including 
some members of this committee. We are carefully reviewing 
these comments as we work to finalize our guidance.
    Thank you again for the opportunity to testify today on 
this important topic. I would be happy to answer any questions 
you might have.
    [The prepared statement of Mr. Pearce follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    The Chairman. Be thinking about the question, since you 
started this with your pilot in 2007. It is like the camel's 
nose getting under the tent and it has blossomed into something 
that is not in the interest of the consumer, where they are 
paying 300 percent. You put a limit on the annual rate that you 
testified and here we are going to have testimony that some of 
these banks that you are one of the regulators are charging 
upwards of 300 percent in fees and interest. So we would like 
to know what you can do about that.
    Okay. Mr. Wright, please proceed, and welcome from Maine.

   STATEMENT OF ERIC WRIGHT, STAFF ATTORNEY, MAINE BUREAU OF 
                   CONSUMER CREDIT PROTECTION

    Mr. Wright. Chairman Nelson, Ranking Member Collins, and 
members of the Special Committee, thank you for your invitation 
to appear.
    We at the Bureau of Consumer Credit Protection in Maine 
deal with the brutal reality of Internet-based payday lenders 
every day. Early last week, a consumer from Monticello in 
Senator Collins' home county called us to say that she has 
eight payday lenders hot on her heels, most from Internet-based 
Tribal lenders. She is in a real pickle.
    Previously, another woman had called to say that she owed 
$16,000 on six loans. Another consumer may tell us--did tell us 
that having already paid, say, $750 on a $300 loan, she 
reported, ``now they are telling me that I still owe the $300 
that I borrowed.''
    A consumer in Gardiner, where my office is located, near 
Augusta, the State capital, recently complained, ``They have 
been harassing me, calling me at work. I have asked them to 
stop, but they will not.''
    For them, horrors. For us, another day at the office. When 
such calls are routine as they are, something is very wrong. 
Here is a snapshot.
    As Senator Collins pointed out, lenders in Maine must be 
licensed to make payday loans lawfully. The Internet-based 
payday lenders are never licensed and interest rates that they 
charge are excessive under Maine law, so their loans are 
illegal. This does not mean that the consumer has no obligation 
to pay back the principal borrowed. One has at least a moral 
obligation to do so. But it does mean under our unlicensed 
provisions of our law that the consumer does not owe any 
interest on the amount he or she has borrowed.
    Many callers--probably most--have multiple payday loans. 
They often take out one, then a second to pay off the first, 
then a third to pay off the second, and so on. These debts can 
go on endlessly, because all the money that is being paid if 
one does not pay back the loan fully on the first maturity date 
goes to paying interest and the loans just drive people deeper 
and deeper into debt.
    When the consumer has been paying--what the consumer has 
been paying, as I say, is only interest, associated fees, 
finance charges, and automatic rollover costs, whereby the 
lender asserts that the consumer has, often without knowing, 
obligated himself or herself to pay new loans.
    The consumers often have been bullied and tormented by 
collection calls and threatened with all manner of impending 
doom, and these are real examples. If they do not pay it now, a 
court action will be filed. If they do not pay it by credit 
card by 2:00 p.m., the caller will send someone to the 
consumer's home or workplace to deal with her to the fullest 
extent of the laws in her county. If they do not pay by 4:00 
p.m. today, they will be arrested. They are threatened with 
jail or fraud of a financial institution. They are told their 
wages will be garnished, or that their driving privileges will 
be suspended or revoked, or that their employer will be 
notified of their debt status, or that the lender will notify 
the credit bureaus, thus damaging their credit.
    Now, we deal with these situations in two primary ways, or 
two primary circumstances. One is often before the principal 
has been paid off and the other is after the principal has been 
paid off. In either event--or let me go back and talk about the 
first. The first is to make sure that the consumer understands 
that he or she must pay off the loan, and we tell the consumer 
how to do that, and it is certainly not to pay by personal 
check but rather by a bank check and tell the lender, this is 
how I will pay, and that gives the lender to refuse if they do 
not want to accept that method. And we direct the consumer to 
be sure that they are telling the lender that this is at the 
direction of State regulators.
    If consumers have paid back more than they borrowed, they 
should consider the debt satisfied and they should, at our 
advice, close the bank account, their bank account that the 
lender has been debiting. In Maine, no payday lender has ever 
brought suit against a borrower who refuses to continue to pay 
more and more. Legally, they cannot do so, because as foreign 
businesses--that is, out-of-State businesses--they are not 
registered to do business in the State and so cannot maintain, 
under Maine law, court actions. They cannot use Maine courts 
when they themselves are operating in violation of Maine law.
    I also assure individual consumers that as a practical 
matter, these companies cannot chase individuals here and there 
across the country to bring actions against all the people they 
think owe them still more and more money.
    None of this minimizes the fear that consumers feel and the 
almost self-loathing that consumers have for having put their 
families at financial risk.
    And, finally, whether or not we can locate the lenders, we 
issue cease and desist orders on our public Web site to warn 
away consumers, and we also attempt to get collectors to cease 
their efforts to collect by convincing them that the consumer 
knows their tactics and will not be paying any more.
    I welcome any questions you have.
    [The prepared statement of Mr. Wright follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    The Chairman. Understand that I come to the table having 
been involved in this issue with regard to payday loans to our 
active duty military and of which we had a witness table that 
was full of the Joint Chiefs of Staff, which included the 
Chairman and the Vice Chairman, years ago that said this thing 
had to stop with regard to their military members because they 
were getting fleeced right outside the gates of the military 
installation. And as a result, we passed a bill that set a cap 
of 36 percent APR on those payday loans made to active duty 
servicemembers and their dependents and, of course, granted the 
regulatory authority.
    Now, if we can do that and if we are dealing, as you all 
have testified--and I am going to turn the gavel over to 
Senator Collins because I am going to have to temporarily go 
and testify in front of another committee--if we can do that 
with active duty military and if, in fact, you all are the 
regulators of Federal institutions that have now gotten into 
this business, why can you not do the same, or do you need some 
kind of legislative authority? I cannot imagine. I would think 
that you have the regulatory authority. I would like to hear 
from you, Mr. Silberman and Mr. Pearce.
    Mr. Silberman. Thank you, Senator Nelson, for the question 
and for focusing our attention on the concerns of 
servicemembers, which, as you know, is a very large area of 
concern for the Bureau. Holly Petraeus, who runs our Office of 
Servicemember Affairs, has been an effective advocate for 
servicemembers and has helped sort of bring sensitivity to 
servicemembers' issues throughout the entire Bureau.
    We--last year, Congress amended the Military Lending Act to 
give the Bureau the authority to enforce the Military Lending 
Act for the first time and also a seat at the table in 
consulting with the Department of Defense around regulations 
under the Military Lending Act. And while that is a relatively 
new authority, I can assure you that we are actively engaged 
with the Defense Department in consultations around the 
regulations affecting the Military Lending Act and affecting 
servicemembers directly.
    The Chairman. All right. We did that. We passed that 
several years ago. I want to know, what about now, particularly 
with emphasis on these folks that we have just heard about here 
and that you are going to hear more of.
    Mr. Silberman. So, with respect to the very specific 
question you asked, the Dodd-Frank Act does expressly state 
that the Consumer Financial Protection Bureau cannot establish 
a usury cap. So, if it were Congress' judgment that the kind of 
legislation that was enacted for military borrowers should 
apply beyond the military sector, beyond protecting 
servicemembers, we would require additional Congressional 
authority.
    We do, however, have a large amount of authority. Our job 
is to assure that the laws that are on the books are 
implemented effectively and enforced effectively. We have large 
authority under that and we will use that authority to the full 
extent that we can to try and regulate practices to assure that 
these markets are, in the words of the Dodd-Frank Act, fair, 
transparent, and competitive.
    The Chairman. Mr. Pearce, I am not entirely satisfied with 
the confidence of what Mr. Silberman has just said that this is 
going to stop this fleecing of folks with 300 percent interest. 
You do have jurisdiction and so does the Comptroller of the 
Currency over these Federal institutions. So what can you do 
about it?
    Mr. Pearce. Right. So, first of all, I should probably say 
that, currently, to our knowledge, there are not any 
institutions that we directly regulate that are offering 
deposit advance products with the kind of interest rates that 
you are talking about, and Mr. Silberman is correct that the 
Military Lending Act is somewhat unique in that it establishes 
a Federal usury ceiling of 36 percent interest that we do not 
have in other areas. It is normally a State law matter as to 
what the interest rate for each State is.
    That having been said, that does not mean that we cannot 
take some action to address some of the problems with the 
product. As I mentioned in my opening statement, we have issued 
proposed guidance that takes a look at the deposit advance 
product which has those high fees, but also really short 
repayment which leads to that cycle, recurring cycle that you 
pointed out in your opening remarks. We can identify that there 
are some issues there that we can address and encourage 
institutions to make sure that they are underwriting the 
borrower so that they can repay the loan that they take out 
over time rather than in one single up-front lump sum.
    So that really--we do have authority to require 
institutions to operate in a safe and sound manner and make 
loans with prudent underwriting and we are currently working on 
that.
    The Chairman. Well, other banks outside the FDIC scope are 
offering these high interest loans, banks regulated by the OCC 
and the Fed. Do we need to go to them to get them to crack 
down?
    Mr. Pearce. Well, yes. So, I cannot speak for the OCC or 
the Federal Reserve. I would note that OCC, when we issued our 
proposed guidance, the OCC issued nearly identical guidance on 
the same day and the Federal Reserve also communicated that it 
had significant concerns with these products. So I would think 
it would be fair to say that all the regulators, those here and 
those who are not here today, have significant concerns with 
the deposit advance product.
    The Chairman. Senator Collins.
    Senator Collins [presiding]. Thank you, Mr. Chairman, and I 
remember your good work on the issue with our military 
personnel. I think you and Jim Talent worked hand in hand on 
that.
    I want to put this issue into a broader context just to 
illustrate how pervasive of problem it is. According to the Pew 
Charitable Trust, an estimated 12 million Americans take out 
payday loans. These borrowers spend about $7.4 billion in 
payday loans annually. Payday loans are obtained at more than 
20,000 storefronts and hundreds of Web sites. To me, most 
startling, the CFPB found that 22 percent of consumers secure 
these loans with public assistance or retirement income 
sources.
    So I think the picture that is painted is of lower-income 
individuals who are frantic for some short-term money spending 
enormous amounts in order to get these loans. And I would 
suspect that there is an educational program that is needed 
here to alert them to the downsides of these loans.
    I was thinking about--since I am in the midst of 
refinancing a mortgage--of how much paperwork you have to go 
through and how many disclosures there are. And that is one of 
the issues that I am going to raise, is what kind of 
disclosures do payday lenders have to provide, and we will go 
right down the panel. Mr. Silberman.
    Mr. Silberman. Senator Collins, with respect to under 
Federal law, which we are responsible for enforcing, a payday 
loan, a storefront payday loan or a closed-end payday loan is 
subject to disclosures with respect to the APR, so that the 
lender would have to disclose what the APR is to the consumer.
    The deposit advance product we have been discussing is 
structured as an open-end line of credit, and under the law as 
it currently stands, there is no comparable requirement for 
disclosure of an interest rate or an APR. The fees would be 
disclosed. And that is certainly one of the issues we will be 
looking at, is whether the disclosures that are currently 
required are effective to achieve the goal of assuring that 
consumers can understand, appreciate, and make judgments with 
respect to the cost and risks of this product.
    Senator Collins. Mr. Pearce.
    Mr. Pearce. Sure. I would agree with what Mr. Silberman 
said, but also, I would add to that that most of the research 
on these types of products indicate that people utilize them 
not for one time emergencies, but really to meet basic living 
expenses----
    Senator Collins. Good point.
    Mr. Pearce [continuing]. And when the disclosures in the 
marketing of these loans will often indicate that these loans 
are not appropriate for long-term use. And so there may be 
disclosures that they are expensive products, but they really 
target that they are for short-term use only.
    I think from our proposed guidance, we want to make sure 
that institutions that are marketing the products actually have 
the products line up with how they are marketing, so that if 
they are intended for short-term use, they actually are used 
for short-term use and not for this long-term recurring, as so 
many borrowers, as Mr. Silberman pointed out in his research, 
clearly use them.
    Senator Collins. Mr. Wright, you gave very vivid examples 
of consumers who had gotten into trouble, then often were 
harassed for repayments and who were paying exorbitant amounts 
on these loans despite the fact that Maine has a usury law that 
limits the interest rate and the fees. And I would note that 
usury laws usually are considered at the State, not the 
Federal, level. Do you think these consumers had any idea what 
they were getting into----
    Mr. Wright. No.
    Senator Collins. Have you taken a look at any of the online 
disclosures that they have----
    Mr. Wright. Yes. Beyond the--and I am speaking here today 
only about the online or Internet-based payday lenders----
    Senator Collins. Right.
    Mr. Wright [continuing]. Not the storefront folks, not the 
banks. We do not have problems, as you pointed out in your 
opening statement, with the banks. The storefront lenders obey 
the law. Those folks are licensed with us and those people do 
not give us any heartburn, or consumers, I should say.
    But these--the Internet-based payday lenders, like any 
lenders, are required to comply with Truth in Lending 
requirements. What they do not disclose is the true cost in 
dollars and cents of the loans that consumers are taking out, 
so that you can use any figure you want. You can put--inject 
into that any finance charge you want, and that is all done 
by--set by the lender at a rate or an amount that he or she 
thinks that they can get away with. You can calculate it all 
out and you can arrive at enormous, astronomical APRs, 1,800 
percent in some cases.
    What the consumer is not told--they are told--for instance, 
they are told the amount you are financing, say, $500. Here is 
the finance charge, say, $90, repayable in two weeks. Well, 
$590 does not sound bad, but, of course, the reality is that 
somebody who takes out one of these loans is not going to be in 
much of a financial position to repay $590 in two weeks when 
they had to two weeks earlier take out the loan to begin with. 
And so it does not get repaid, and then what happens is, 
because it is not repaid on time, these loans get rolled over. 
The interest rates fly away.
    And they might get--this is a real example that I have just 
given you. The annual APR--this is a real case--as calculated 
by the lender in the case I am speaking of, is about 469 
percent. Well, that sounds pretty awful, but also fairly 
abstract. The reality is that the true cost of that $500 loan, 
calculated by APR, is $2,300.
    Senator Collins. Gee.
    Mr. Wright. Over $2,300. And so I would say to you, yes, 
that there is room for improvement in disclosure by which the 
consumer has a better understanding of what he or she is really 
getting into.
    Senator Collins. Because, again, to think of a mortgage 
situation, you are told how much you will spend over the life 
of the loan, assuming the interest rate stays at a certain 
percentage, and it is always a wake-up call for me when I see 
how much I am going to end up actually spending for that 
mortgage.
    Mr. Wright. Yes.
    Senator Collins. So there is not that kind of disclosure in 
dollars and cents?
    Mr. Wright. No, that is right, and that is when people call 
us. I mean, I do not hear from anybody who has had a wonderful 
experience with Internet payday lenders.
    Senator Collins. I am sure you do not.
    Mr. Wright. What we hear about are the problems that I have 
described to you, and we try to deal with them in a very 
realistic way, a very reality-based way to help that consumer. 
But the common theme is they had no idea how much these loans 
were truly going to be costing.
    Senator Collins. And one final question before I turn to my 
colleagues. Is there anything that individual States can do to 
regulate online lenders that are domiciled outside of their 
States, or is that a matter of interstate commerce----
    Mr. Wright. I think it is largely a matter of interstate 
commerce. Our law, by its terms, reaches payday lenders 
wherever located. But the reality of these payday lenders is 
that, in many, many cases, they do not want the consumer, let 
alone the regulator, to know where they are located or who they 
are or what their name is. I heard of one the other day called 
cashinawink.com. It was a call yesterday morning that I took. 
That company may have a different name by next week for all I 
know.
    And so I think it really requires Federal action in terms 
of disclosure that I have just mentioned. There are some other 
things I think that Congress can do. Congress certainly has the 
authority, plenary authority in the area of interstate 
commerce. Nobody can deny that this is interstate commerce.
    The powers that we have, such as licensing and so on, while 
we would like to think them to be real, are largely ignored by 
these companies. So something, I think, more globally needs to 
be done at the Federal level.
    Senator Collins. Thank you.
    Senator Warren.
    Senator Warren. Thank you very much, Ranking Member 
Collins. Thank you again, and thank the Chairman for holding 
this hearing.
    I also want to say, your statement about the reputation of 
the Maine Consumer Credit Protection Bureau is spot on. They 
are known around the country for the great work that they have 
done and the great leadership you have shown.
    Mr. Wright. Thank you.
    Senator Warren. I also want to say that Mr. Pearce and I 
had a chance to work together when I was at the Consumer Agency 
and he was working for Chairman Bair on multiple consumer 
issues, including particularly mortgages, and so I know you 
have great experience and want to thank you for being here 
today.
    And, Mr. Silberman, whom I worked with at the Consumer 
Bureau and for whom I have great respect, has great knowledge 
of the industry and great judgment, and so I very much 
appreciate your being here today and appreciate the work that 
all of you are doing on behalf of our consumers.
    I thought what I would follow up on is where Ranking Member 
Collins started us, and that is on online lending, if I could. 
Payday lenders do not have a physical presence in 
Massachusetts, as well, but we remain very concerned about the 
growth of online payday lending. I understand from the Pew 
Charitable Trust that more than three million Americans 
received an online payday loan in 2010. The number is expected 
to increase significantly. It is now at about 35 percent of 
payday loans were online in 2011, and it is expected to be 
about 60 percent of all payday loans by 2016. That is a grim 
future to think about.
    So I am very pleased to have sponsored with Senator Merkley 
the Stopping Abuse and Fraud in Electronic Lending Act, with 
the acronym of SAFE Lending Act. It is an Act that would help 
close loopholes and better protect consumers in online lending 
and other forms of electronic lending.
    So, Mr. Wright, I wanted to ask you, if I could, to take, I 
think, what is the next question, and that is what things would 
be helpful at the Federal level in terms of making sure that 
consumers are better protected.
    Mr. Wright. Well, I appreciate that question. I have seen 
and familiarized myself in a general sense with the SAFE Act 
proposal that is being sponsored. We have a SAFE Act in Maine. 
Of course, the Federal Act from a few years ago mandated States 
to adopt SAFE Acts----
    Senator Warren. That is right.
    Mr. Wright [continuing]. In the area of mortgage lending, 
and we did that promptly. The proposal now, as I understand it, 
would be essentially to expand that same kind of licensing 
requirement and so on to the area of payday lending.
    In addition, as I read the proposals, and I may have not 
gathered them all, there is one point that I think that needs 
to be stressed here and that is meaningful--for instance, 
meaningful disclosure is one thing, and that may go to 
consumers not being bamboozled. But some are going to be, and 
so how do we get a handle on that?
    And I think the answer is, keeping in mind that these 
transactions these days now are not literally paychecks, post-
dated paychecks, or checks, but are all done by ACH debiting, I 
would propose to you consideration of requiring banks to be 
sure before debits are made to consumer accounts that those 
debits are compliant with State laws.
    Senator Warren. So, superb point, Mr. Wright, and, in fact, 
can I just expand the point a little bit in asking about this 
with remotely created checks, the notion that payday lenders 
are getting access, direct access to people's checking 
accounts----
    Mr. Wright. That is right.
    Senator Warren [continuing]. Whether or not better 
protection to give consumers control over their own checking 
accounts and the ability to stop the access and the withdrawals 
from their accounts when they see a problem. Would that be a 
useful tool?
    Mr. Wright. It is. I think some of that actually has 
already been done under the Electronic Fund Transfer Act at the 
Federal level, allowing consumers to stop payments and so on, 
but it obviously can be beefed up because, to the extent that 
it is already the law, perhaps that law has not been working as 
effectively as it might be.
    Senator Warren. Right. And then I think you mentioned 
earlier, and I just want to see if we can kind of go through a 
list here, the idea of making sure there is a level playing 
field, and that is that everyone must be compliant with local 
State laws on usury. So if someone is lending online in Maine, 
they must follow Maine law. If they are doing it online in 
Massachusetts, they must follow Massachusetts law. Would that 
be helpful?
    Mr. Wright. Yes. I think that is the real point at which 
these abuses can be pinched.
    Senator Warren. Good. Good. And then if I can ask you about 
one more, are you familiar at all with lead generators?
    Mr. Wright. Well, generally, yes. Somebody will go online 
and--and I always ask people, how did you find these folks, and 
they are up at 2:00 a.m. clicking away on their computers and 
hit a button. It does not necessarily go directly to a lender, 
but it goes to a lead generator and then the inquiry made by 
the consumer gets kind of farmed out, shipped out to one lender 
or another.
    And so while we do not deal directly with the lead 
generators, what we hear about--and, frankly, the consumers do 
not even know how the lead generation process is working. What 
we are dealing with and the complaints we take are about the 
payday lenders, you know, flybynight.com, cashforyou----
    Senator Warren. Right.
    Mr. Wright [continuing]. Or whatever. That is what we hear 
about.
    Senator Warren. So, I take it, more restriction on the lead 
generators, too----
    Mr. Wright. Oh, sure.
    Senator Warren [continuing]. Could be very helpful.
    Mr. Wright. Oh, absolutely.
    Senator Warren. Good.
    Mr. Wright. It goes hand in hand.
    Senator Warren. Good. Thank you very much, Mr. Wright.
    Mr. Silberman--may I have one more minute?
    Senator Collins. Absolutely.
    Senator Warren. Thank you.
    Mr. Silberman, could you comment on Mr. Wright's comments, 
since--not directly on the bill, I know that is not what you 
are here to do, but on Mr. Wright's comments about what might 
be helpful at the Federal level to deal with payday lending?
    Mr. Silberman. So, Senator Warren, I appreciate your 
understanding that the Bureau does not comment on particular 
pieces of legislation, but the principle of a level playing 
field is a sort of core bedrock principle on which the agency 
was founded. That applies with respect to depository and non-
depository institutions, but it certainly should apply equally 
with respect to lenders who take different forms, online 
versus--a marketplace cannot work--a competitive, fair 
marketplace cannot work if not everybody is governed by the 
same set of rules. So having consistent rules that all players 
have to abide by seems to me to just be a sort of first 
principle of consumer protection.
    Senator Warren. Thank you, Mr. Silberman. Very helpful.
    And, Mr. Pearce, would you like to add anything to that?
    Mr. Pearce. Sure, if I could. I think Mr. Wright makes an 
important point about banks being really the gatekeepers of the 
processing networks, and the FDIC has been active in this area, 
to remind banks about their responsibilities to do due 
diligence in monitoring of transactions that go through the 
payment system. Just last year, we issued guidance that really 
encouraged institutions to be careful and attentive to higher-
risk types of transactions, whether they are online payday 
lending or they could be online gambling or different other 
kinds of activities. They do have a role to monitor that and 
make sure that they are not illegal.
    Senator Warren. Good. Thank you very much, and thank you 
very much for your indulgence. I appreciate it.
    Senator Collins. Thank you, Senator.
    Senator Donnelly.
    Senator Donnelly. Thank you, Madam Chair.
    This is in regards to what was mentioned before about lead 
generators, that oftentimes online, the company advertising the 
loan--some are the lenders, but others are just selling the 
information to the highest bidder. So when you see that, my 
question would be, and this is to any of the three of you, what 
are the kind of things that you see out there that we can do to 
track the ones who are the bad actors who are not providing 
suitable financial products with this but are trying to prey on 
people in the online process?
    Mr. Silberman. Senator Donnelly, I think you point to a 
very large concern that we have about the online payday space. 
It was not the subject of our study, but is something we said 
we very much want to study.
    A concern we have is not simply that the lead generator is 
selling the lead to the highest bidder, but that they are 
either selling it to or at least distributing it to multiple 
would be bidders. And so a consumer provides financial 
information and potentially their Social Security number, a 
checking account number, and it is not--that that information 
then gets pinged across multiple number of unknown lenders. The 
consumer has no idea who that information is going to, and the 
risks of privacy invasions, even identity theft, these are all 
serious risks that we need to be addressing in as comprehensive 
a way as we can.
    Mr. Pearce. I do not have much to add. As the regulator of 
State chartered banks, they are not generally engaged in lead 
generation. It is really the question for banks is when they 
are processing these transactions, to make sure they are doing 
the due diligence with the processors and institutions the 
processors work with, on one hand, and also for the consumer's 
bank account, if a consumer goes into a bank and tries to stop 
payment, you know, make sure that the laws are followed in 
honoring a stop payment request when those transactions are 
unauthorized or the consumer does not want to make further 
payments.
    Senator Donnelly. Mr. Pearce, let me ask you, on the 
deposit advance payments, have any of the banks indicated that, 
at a 36 percent interest rate, that they would not be 
profitable, those products?
    Mr. Pearce. So, we have received comments as part of our 
proposed guidance on deposit advance from a few of the banks 
that do offer deposit advance and they do not specifically, to 
my recollection, speak to whether they would be profitable at 
36 percent interest.
    Senator Donnelly. The reason I ask that is, you know, is 
there a point where, when you look at, okay, maybe this will 
not get paid back, but you have deposit advance as a 
protection, as well. How is 36 percent not a significantly 
profitable enough operation on those kind of loans?
    Mr. Pearce. That is a good question. I do think that the 
cost structure----
    Senator Donnelly. Just picking that number, as opposed to 
33 or 39, I am not saying, but it is a pretty significant 
interest rate, and so how is that not enough of a compelling 
number for these companies to make these loans?
    Mr. Pearce. So, we did research just last year on bank 
efforts to serve the unbanked and underbanked, and one of the 
things from our findings, we asked banks, do you make loans of 
less than $2,500 that are repayable in 90 days or more, that 
have streamlined underwriting, that are 36 percent, you know, 
so we have asked them these questions. Sixty-five percent of 
the banks indicated that they offer those kinds of products. 
Our small-dollar loan pilot, which I mentioned earlier in my 
oral statement, you know, the institutions were able to make 
those loans and identified, three-quarters of them, that they 
were beneficial in establishing long-term relationships with 
their customers. So we think it can be done at 36 percent 
interest.
    Senator Donnelly. Okay. Well, then, one other question, and 
that would be this. I was privileged to talk to Ms. Smith 
earlier today, who will be on the second panel, and in talking 
to her, one of the things she mentioned is that on these 
deposit advance loans, they would not accept partial paydown 
each month, that if it is a $500 loan, they are not willing to 
take the interest plus $100 so that next month it is $400, and 
then you pay another $100 and so that the next month it is $300 
that you are paying on. You either pay the $500 or the whole 
thing rolls over. And this is with some well-known banks. I am 
wondering about your view at the FDIC of the appropriateness of 
not being able to make partial paydowns of the principal.
    Mr. Pearce. So, you point out one of the things that--one 
of the features of deposit advance that is very common and 
closely related to a payday loan, that it is sort of a lump 
sum, have to repay it in a very short time period, which then 
leads you to not have enough money to make the next month's 
expense, and then you roll it over and over and over. That is 
one of the concerns with the products that we have that led us 
to issue our proposed guidance on deposit advance products.
    Senator Donnelly. All right. Thank you very much. Thank 
you, Madam Chair--or Mr. Chair now.
    The Chairman [presiding]. Senator Wyden.
    Senator Wyden. Thank you very much, Mr. Chairman. I want to 
commend you, Mr. Chairman, and Senator Collins. I think this is 
a very important topic.
    Mr. Silberman, a question for you about installment loans, 
and particularly, I want to take a look at what you all can do 
to help seniors, clearly a vulnerable population, from 
installment lenders, because in many respects, they are quite 
similar to the payday lenders. In both cases, you have got both 
types of loans, in effect, offered by the same lender.
    And I particularly was struck by an investigation by the 
publication ProPublica into installment loans. I mean, this was 
a jaw-dropping drill showing how consumers, particularly 
seniors and others, are being ripped off by some of these 
unregulated installment loan companies that, in effect, are 
targeting seniors and those in the military. And you have got 
companies--they cite one like World Acceptance. It sets up shop 
outside of military bases, in low-income areas to provide loans 
that have interest rates attached to them that, in effect, are 
over 150 percent.
    And what ProPublica is saying is they are basically using a 
business model to get around interest rate caps, interest rate 
caps that are established in the law. We have one, for example, 
in Oregon, and they do this by wrapping in insurance products 
to the loans. And the model is to structure the loan payments 
so that the insurance premiums and the interest is paid up 
front and then they go out and chase the borrowers hither and 
yon and try to persuade them to refinance in order to trap them 
into this cycle, this cycle of just paying premiums and 
interest and never paying down principal. Evidently, they go 
out and harass them in their homes. They go out and harass them 
in the workplace.
    What are your thoughts about what the Consumer Financial 
Protection Bureau can do in this area to deal with these kinds 
of practices that you see utilized by World Acceptance and 
similar companies?
    Mr. Silberman. Well, Senator, to begin with, the Federal 
consumer protection laws which we are charged with enforcing 
apply--are product agnostic, if you will. They apply to all 
forms of products, and one of our jobs is to regulate in a 
consistent manner. So we are attempting to take a holistic 
approach to the small-dollar credit market, which is why our 
first report was on both payday loans and deposit advances, 
followed shortly thereafter with a report on overdraft, so that 
we would intend to look holistically at all products and make 
sure that we are not simply squeezing air in the balloon from 
one place to another. That would not serve anybody's interest.
    With respect to the practice that was reported of selling, 
I guess we would call, add-on products in conjunction with 
installment loans, that, as you know, has been an area in which 
the Bureau has been particularly active. Our first enforcement 
action was around add-on products in the credit card market and 
there have been several of those. We recently brought an action 
which involved products being sold to servicemembers, and one 
piece of that was add-on products that were not clearly 
transparently disclosed.
    So we have ample authority to assure that in that sort of 
situation, the products--that consumers understand what is 
being sold, they are not finding themselves that they have 
bought a product without even realizing that they actually had 
bought it, without ever saying yes to it, without understanding 
the terms of the product. That is a very important part of what 
we are all about.
    Senator Wyden. So what can be done about World Acceptance? 
I mean, this is evidently an important investigation by a 
credible consumer rights group, something that has been an 
ongoing problem. Is there anything else that you need to do, 
that the Congress needs to do, that regulators need to do?
    Mr. Silberman. Well, Senator, we have the authority to 
supervise both depository institutions and non-depository 
institutions. For non-depository institutions, Congress 
actually gave us plenary authority over payday lenders. But for 
other types of lenders, we first have to--our authority is 
limited to larger participants, which we have to define by 
rule. So that would be something we would have to do before we 
could engage in our supervisory activity.
    Senator Wyden. So you would need to pass a rule to go after 
people like World Acceptance?
    Mr. Silberman. Not quite, Senator. I said that we have--in 
order for us to be able to do a supervisory exam, that would be 
true. But our enforcement authority is not so limited. We have 
the authority to investigate and enforce the consumer 
protection laws against any non-depository institution. 
Obviously, I am not at liberty to talk about any particular 
investigations that may or may not be going on.
    Senator Wyden. Well, why do we not do this. I would like 
you to get back to me in writing with what the tools you have 
are with respect to World Acceptance, A, and what your take is 
of the urgency of this matter, because this looks to me like--
and I thought you were spot on with respect to how you want to 
look at this holistically--that this looks like another way to 
get around efforts by some who are pro-consumer, like in our 
State of Oregon you get around limits on payday lenders and so 
you try to tuck this kind of approach in and you basically can 
accomplish the same thing. So get back to me in writing on both 
of those points, okay?
    Mr. Silberman. I would be delighted to do so, Senator.
    Senator Wyden. How long will that take? Can you have that 
done within, say, two weeks?
    Mr. Silberman. I would--I would think so, but let me just--
yes.
    Senator Wyden. Very good. Thank you.
    [Laughter.]
    Thank you, Mr. Chair.
    The Chairman. Your minders behind you suggested that two 
weeks was sufficient time.
    Mr. Silberman. I am mindful, Senator, that Director Cordray 
is out of the country and I am sure he would want to be able to 
review anything we sent on a topic as important as this, so I 
just wanted to double-check on that one.
    The Chairman. I want to invite each of the three of you to 
remain and hear the second panel, because I think it is 
important testimony that you hear. And so may I invite up the 
second panel, please. And as you hear, Mr. Silberman and Mr. 
Pearce, as you hear this testimony, just think about what we 
are trying to accomplish in this committee in stopping some of 
these egregious cases.
    All right. First, we are going to hear from Annette Smith. 
She will share her personal experience as a deposit advance 
customer and the difficulties she has had in getting out of 
this cycle of debt.
    And then Rebecca Borne, who serves as the Senior Policy 
Counsel of the Center for Responsible Lending.
    And then Dennis Shaul, CEO of the Community Financial 
Services Association of America.
    And then Richard Hunt, population and CEO of the Consumer 
Bankers Association.
    And I might tell everyone, in 25 minutes, the Senate will 
take and observe a moment of silence in the memory of Officer 
Jacob J. Chestnut and Detective John M. Gibson of the U.S. 
Capitol Police, who were killed 15 years ago in the line of 
duty defending the Capitol, defending the people who work here 
and the visitors against an armed intruder, and they paid for 
that defense and protection with their lives. So we will stop 
for a moment at 3:40.
    So, Ms. Smith.

STATEMENT OF ANNETTE SMITH, DEPOSIT ADVANCE CONSUMER AND SOCIAL 
                      SECURITY BENEFICIARY

    Ms. Smith. Good afternoon, Mr. Chairman and Mrs. Collins. 
Thank you for having me here.
    My name is Annette Smith. I am a 69-year-old widow. I live 
in a small town outside of Sacramento, California, and I am a 
longtime customer of Wells Fargo. I was once a business owner 
and a land owner, but an identity theft scam left me without 
assets or credit. The thieves were prosecuted, but I was not 
compensated and was never able to rebuild from that experience.
    Many years later, I am still poor. I have received Social 
Security as my only source of income for the last seven years. 
My Social Security check is for about $1,200 a month. That is 
the only income I have to pay all of my expenses.
    Five-and-a-half years ago, I asked my local branch for a 
small personal loan, just enough to fix my car so it would pass 
California's smog test requirement. They told me they did not 
offer those but that I could get a direct deposit advance 
online. I went home and with just a few clicks I had $500 in my 
account.
    A couple of weeks later when my Social Security check was 
electronically deposited to my account, the bank withdrew the 
$500 plus a $50 fee. Back then, my monthly Social Security 
check was far less than the $1,200, and the $550 that Wells 
Fargo took was half of my monthly income. Without it, I could 
not pay my rent and other bills and expenses. So a few days 
later, I took out another $500. But the same thing happened the 
next month. The bank withdrew the entire amount plus a fee 
again. I could not pay the advance in full and all of my bills 
and expenses. I had to take another loan, again and again, to 
my surprise, for five years.
    A few times, I tried not to take another advance, but to do 
that, I had to let other bills go. The next month, those bills 
were behind and harder to pay. I never made it two full months 
without having to borrow after paying the last advance. A few 
other times, I tried taking out less than $500, maybe only $200 
or $300, but I still could not stretch my Social Security check 
to pay the whole advance and make ends meet. Any time that I 
tried to not borrow again or to borrow less, the bills and 
expenses I could not pay would catch up a month or two later 
and I was back where I started.
    It was horrible, but I thought there was no way out. I did 
not have a credit card. I am sorry. I do not want to cry. I did 
not have a credit card. Wells Fargo had already told me that 
they would not give me a personal loan. I could not borrow from 
my kids, who were themselves struggling. And I never considered 
going to one of those payday loan stores because I knew they 
had a reputation for charging really high interest rates and 
those are things I could not afford. In fact, I thought that 
since banks were required to follow certain laws, they could 
not do what those payday loan people were doing.
    I thought that the problem was me, that I just could not 
figure a way out, even though I tried everything I could think 
of. I recently learned that Wells Fargo has installment plans. 
If I had known that then, I would have been really happy. In 
fact, I tried to set up an installment plan recently, but they 
told me it was impossible.
    Finally, I talked to someone at the California Reinvestment 
Coalition who was looking for people who borrowed a Wells Fargo 
direct deposit advance. I described my situation and answered 
their questions. They looked into my bank statements and helped 
me figure out how much this was costing me. In total, I got 63 
advances from Wells Fargo in five years and the fees I paid 
totaled almost $3,000. I was shocked, but mostly deeply 
embarrassed.
    But then I realized that I could not be the only one that 
this had happened to in this situation. That is when I agreed 
to tell my story, so that other seniors would not think like I 
did, that borrowing a direct deposit advance was safe and you 
could end up paying your Social Security on a loan that is so 
hard to get out of.
    With CRC's support, I even went to the Wells Fargo 
shareholder meeting to tell CEO John Stumpf about my situation. 
He told me that someone from the bank would work with me. A few 
days later, I went with CRC to my local branch to ask for an 
installment plan. I wanted to pay the money I owed in small 
amounts that I could afford. CRC had told the bank we were 
coming, so when we got there, the branch manager and the 
district manager were there waiting for me. They also had 
someone from the corporate office on the phone.
    We asked for an installment plan so that I could pay the 
advance over time like you would other loans. The bank people 
said their system was automated, that there was no way to stop 
the next withdrawal or fix it so that I could pay in small 
installments that I could afford. Instead, they offered to 
forgive my last advance as long as I never borrowed an advance 
again from them. I agreed.
    A few days later, I saw that after they withdrew the 
payment, they credited me the same amount with a label marked 
``Customer Satisfaction Credit.'' It was finally over. It feels 
good not to owe Wells Fargo anymore, but I know that there are 
others like me who have not had their loans forgiven and are 
still struggling with the direct deposit advance.
    I am asking you today to please do something, whatever you 
can, to stop banks from doing this to other seniors across the 
country. Thank you.
    [The prepared statement of Ms. Smith follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    The Chairman. That is one of the reasons for this 
committee, Ms. Smith, is to learn from senior citizens such as 
yourself about your real world experience and to try to change 
the system so that this does not happen to other people.
    Ms. Smith. Thank you.
    The Chairman. Now, you paid $50 a pop in fees 63 times.
    Ms. Smith. The first few years. Lately, it has been $37.50. 
A couple of years ago, it got lowered----
    The Chairman. The total amount----
    Ms. Smith [continuing]. But a total of $3,000.
    The Chairman. Okay. Ms. Borne, tell me what you think about 
this.

 STATEMENT OF REBECCA BORNE, SENIOR POLICY COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Ms. Borne. Good afternoon, Chairman Nelson, Ranking Member 
Collins, and members of the committee. Thank you for the 
opportunity to testify today.
    I would like to begin by sharing a couple of comments from 
former payday lenders about borrowers receiving Social Security 
or other Federal benefits. One former manager of payday loan 
stores described the industry's affection for these borrowers, 
saying, ``These people always get paid, rain or shine. They 
will always have money every 30 days.''
    A former employee of Advance America, the nation's largest 
payday lender, said, ``Borrowers receiving Social Security or 
disability payments would come in for a small loan and write a 
check to the company dated the third of the month, when their 
government checks would arrive. All the Advance America 
employees were required to come in early on that day so we 
could quickly cash their checks and wipe out their checking 
accounts.''
    Older Americans are particularly attractive to payday 
lenders because of their steady stream of benefit income. It is 
not surprising that a study commissioned by the Wall Street 
Journal found that payday loan stores clustered around 
subsidized, disability, and senior housing.
    Payday loans are aggressively marketed as a short-term 
loan, a quick solution, but in reality, they quickly engulf 
most borrowers in an expensive cycle of long-term debt. Though 
their loan is typically technically repaid on the due date, the 
repayment of the loan plus the fee does not leave borrowers 
enough money to pay for necessities, like rent or food, for the 
rest of the pay period or month, so borrowers are forced to 
renew their loan or reborrow before the end of the next pay 
period, paying a new fee each time with no reduction in 
principal.
    CRL's research has found that payday borrowers remained in 
debt an average of 212 days of the year, and that 76 percent of 
all payday loans are made within two weeks of a previous payday 
loan being repaid. Eighty-two percent of all payday loans made 
within one month of the previous loan being repaid. And these 
findings include data from States that have implemented so-
called best practices or safeguards that purport to stop the 
debt trap but clearly do not. Ultimately, about half of payday 
borrowers eventually default, many after spending months or 
years in debt and paying fees that far exceed the principal 
borrowed.
    Research has shown that payday loans cause serious 
financial harm to borrowers, delayed medical care, paying other 
bills late, increased likelihood of bankruptcy, and these harms 
are particularly acute for older Americans, many of whom are 
already struggling with a decline in the value of their home 
and retirement assets and who often have less income and a 
shorter time horizon to recover from financial shortfalls.
    In a disturbing trend, a few banks have now joined the 
ranks of the payday lenders. We know of six: Regions Bank, 
Fifth Third Bank, Wells Fargo Bank, Bank of Oklahoma, U.S. 
Bank, and Guarantee Bank. These banks make payday loans even in 
States where laws clearly prohibit payday lending by non-banks. 
Banks call these deposit advances, but they are designed to 
function just like any other payday loan. Bank payday borrowers 
end up with 13 loans a year and spend large portions of the 
year in debt, even as the banks claim the loans are intended 
for occasional emergencies.
    Our research found a striking number, over one-quarter, of 
bank payday borrowers were Social Security recipients. On 
average, banks repaid themselves 33 percent of the borrower's 
next Social Security check to repay the loan.
    Though only a few banks make payday loans today, the threat 
that payday lending by banks becomes the norm is very real. We 
are at a tipping point. As already noted today, the OCC and 
FDIC, recognizing that this product poses both safety and 
soundness and consumer protection concerns, recently proposed 
guidance that would address the central problems with bank 
payday lending. We urge these agencies to issue finalized 
guidance that preserves their proposals' key provisions.
    The Federal Reserve Board, the prudential regulator for 
Regions Bank and Fifth Third Bank, did not issue the same 
proposed guidance. We continue to urge the Federal Reserve to 
do so. The Board did, however, issue a supervisory statement, 
the content of which should compel Regions and Fifth Third to 
make meaningful changes to the product that eliminate the debt 
trap it has been shown to cause. To our knowledge, the banks 
have not indicated plans to do so.
    The CFPB's recent extensive study of storefront and bank 
payday loan data both confirmed and expanded on prior research 
finding that payday lending puts borrowers in a debt trap. The 
CFPB has indicated it will use its authority to address this 
problem and we urge it to do so.
    Twenty-two States, home to over 40 percent of all 
Americans, have decided they do not want unfettered payday 
lending for their residents. As mentioned earlier, Congress, 
with the leadership of Chairman Nelson and at the urging of the 
Department of Defense, decided seven years ago that payday 
lenders should be prohibited from making payday loans to 
members of the military.
    Payday loans affirmatively harm rather than help older 
Americans. They affirmatively harm rather than help Americans 
of all ages.
    We thank you for holding this hearing today and we ask that 
you support ending the payday lending debt trap by banks and 
non-banks alike. Thank you.
    [The prepared statement of Ms. Borne follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    The Chairman. Thank you, Ms. Borne.
    Okay, Mr. Shaul. We want your perspective as the Community 
Financial Services Association, and you have longstanding 
experience in this position, having been a member of the staff 
of the Banking Committee under Chairman Barney Frank for years. 
So give us your perspective and what can we do about this, and 
in States that prohibit, as Ms. Borne said, payday lending, 
what is, in essence, the same thing that she has testified, 
tell us if that is what is occurring, and if so, what can be 
done about it.

 STATEMENT OF DENNIS SHAUL, CHIEF EXECUTIVE OFFICER, COMMUNITY 
           FINANCIAL SERVICES ASSOCIATION OF AMERICA

    Mr. Shaul. Thank you, Mr. Chairman. Thank you, Ranking 
Member Collins and members of the committee. I am Dennis Shaul. 
I am the Chief Executive Officer of the Community Financial 
Services Association of America.
    CFSA's member companies represent more than half of all 
traditional payday loan storefronts across the country. We are 
regulated at the Federal level and by the individual States 
where we operate. Also, CFSA members adhere to a strict code of 
best practices that cover everything from advertising to 
collection practices. We believe in providing consumers with a 
product that is fully disclosed and easy to understand if the 
structure of a payday loan is simple and clear to the borrower. 
Members have left our organization and others have not joined 
CFSA because they are unwilling to comply with these best 
practices.
    There are unregulated offshore entities and other illegal 
or unscrupulous lenders who prey on the most vulnerable, and 
here I would say it is important to note that not everyone who 
is online is either unregulated or preying on the vulnerable. 
We share your commitment to protecting consumers from those 
that engage in such practices.
    Payday loans serve those who need to borrow relatively 
small sums to meet critical short-term expenses. Eliminating 
access to storefront payday does not eliminate their needs. 
Borrowers turn to unregulated lenders. The protections States 
want to extend to their citizens are not in force for those 
loans.
    Today's hearing looks specifically at the use of payday 
loans by senior citizens, which is an extremely small set of 
payday loan borrowers, about eight percent from storefronts, a 
figure that is verified by Clarity, a quasi-credit examining 
organization that collects data across the country, and also by 
Veritech, which does the same thing. Payday loans' usage among 
senior citizens is even lower than their use of other forms of 
credit.
    We recognize that payday loans are just one of many tools 
in a consumer's financial toolbox. Our member stores are 
friendly and convenient and typically provide a wide range of 
financial services. Our member companies work extremely hard to 
ensure that their consumers take payday loans that meet but do 
not exceed their individual needs.
    It hurts both the lender and the customer when a loan is 
not repaid. If a customer is unable to pay back a loan, we will 
work with them to find the best solution. One option is an 
extended payment plan, which is a part of our best practices. 
The plan offers customers more time to repay a loan without 
additional fees or interest.
    We know from experience that educated borrowers are our 
members' best customers. Access to clear, consistent, unbiased 
information benefits both the lender and the borrower.
    Here, Senator, I would like to say that it is not usual for 
a person of my background to take the position I have had. 
Neither did I see it in my future nor would our members have 
readily chosen someone with my political disposition. What is 
clear is that our members recognize what has been, I think, 
well pronounced during this hearing. Payday loans as we have 
known them are not likely to survive another five years. Each 
member that I talk to realizes that not only is reform 
necessary, but a greater product variety.
    To speak specifically of things that need to be done, first 
of all, we need to do a different and better form of 
underwriting so that we catch people much earlier who might 
wind up in a cycle of debt.
    Secondly, we need to offer installment loans that are truly 
installment loans and not a way of making further profit, but 
are geared to the customer who cannot make a payment within two 
weeks.
    Third, we need to register all companies that are making 
loans, whether they are Internet or storefront lenders, so that 
we have greater access to supervision of them.
    And, fourth, I think we need--and I am here campaigning 
with the CFPB--I think we need to make our code of business 
practices, of best business practices, a part of the rulemaking 
process and make sure that it is enforced across the board. 
Many of the examples, anecdotal examples that we hear from 
people who have been abused stem from those who do not accept 
or practice the kind of best business practices that we demand.
    Finally, I would say that one thing that is very important, 
and we say this over and over again to the CFPB, is that we 
readily accept supervision both at the Federal and State level. 
But the States provide us with a dynamic, multi-faceted 
approach toward lending in this sector. I hope that there is 
not a form of preemption that occurs, but I do think there is a 
need for a Federal presence such as the Bureau has. We gain 
much from the experience that each State has. Your State of 
Florida is very different from the State of Illinois, which is 
different from Michigan, which is different from California. 
There are good and bad aspects in all those States and we have 
yet to come up with a perfect solution to what will work in 
terms of regulation or what would be the perfect product.
    But what we surely know is that the product availability 
that we now have is not enough to meet the needs of the 
customers in this sector. Installment lending will help. We 
also know that we need to be vigilant in not forcing people 
into a less good situation, and we see the numbers crawling up 
dramatically on those who go offshore to unregulated entities.
    I am grateful for the opportunity to be here and 
particularly eager to answer any questions you might have.
    [The prepared statement of Mr. Shaul follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    The Chairman. This committee is not assaulting payday 
loans. I stated very clearly in the opening comments that there 
is a need for those kind of advance payments. It is the cases 
that this committee is interested in of the egregious examples 
of abuse and where someone is paying 300 percent interest when 
a State's law says that the max is 36 percent interest. Then we 
have an interest in seeing that those kind of practices are 
stopped.
    You also bring up very cogently and timely the fact that we 
are going to have another creature out there to try to protect 
seniors from, and that is the online offshore kind of lending. 
We have been involved in some of that offshore scam stuff that 
is going on among seniors. So we want to work with you, Mr. 
Shaul.
    Mr. Hunt, tell us, as CEO of the Consumer Bankers 
Association, what can we do.
    I am going to stop right here. It is 3:40. All across 
Capitol Hill, there is now a moment of silence for Officer 
Jacob Chestnut and Detective John Gibson, killed 15 years ago 
in the line of duty.
    [Moment of silence observed.]
    And thank you all very much.
    Okay. Mr. Hunt, you are the CEO of the Consumer Bankers 
Association. Tell us what you think is the problem and how can 
we go about correcting it with your members.

   STATEMENT OF RICHARD HUNT, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, CONSUMER BANKERS ASSOCIATION

    Mr. Hunt. Sure. Thank you very much, and good afternoon to 
you, Mr. Chairman and Ranking Member Collins and members of the 
committee.
    I am President of the Consumer Bankers Association. We 
represent the retail section of a bank. We appreciate the 
opportunity to be here today.
    Unfortunately, 75 percent of today's consumers in this 
economy live paycheck to paycheck, meaning many times they need 
help to pay their mortgage or rent, hospital bills, or an 
automobile repair. When an existing customer walks into one of 
our banks, we can do one of two things. We can help them or we 
can turn our back on them.
    If we try to assist, and remember, we only have six banks 
in this country that offer a deposit advance product--we 
represent four of those six--if we try to assist them and they 
qualify, they have the option to use something called a deposit 
advance product. It is important to highlight for this 
committee, this product is a short-term line of credit. It is 
not a loan. It has been widely used by consumers to meet their 
short-term liquidity needs. It is a very popular product.
    A deposit advance is absolutely not a payday loan. Banks do 
not participate in any payday lending, as the costs and terms 
are very different.
    Deposit advance products are consumer driven and driven by 
demand. One can eliminate the product, but unfortunately, 
cannot eliminate the demand. We try and do everything we can to 
keep customers in a heavily regulated entity, such as we are. 
In many instances, deposit advance product is one-half the cost 
of a traditional payday loan and much cheaper than that versus 
other industries such as pawn shops and unregulated online 
lenders.
    There are very stringent requirements that must be met for 
one to receive a deposit advance product. A customer must be in 
good standing with a bank. That means they have an established 
relationship with their bank from two to six months, no 
extensive negative actions against their account, and have a 
history of recurring direct deposit.
    If the customer qualifies for this product, they must then 
review the bank's transparent and easy to understand 
disclosure, which includes fee structure details, an agreement 
to pay off the balance of this line of credit with the next 
direct deposit, and importantly, each bank clearly highlights 
and discloses to the consumer this is a short-term product. 
Then, and only then, will a customer receive access to a 
deposit advance product.
    I would like to point out, our four banks do not spend one 
penny marketing this product. Of the four banks, three percent 
participation of all checking account holders. Fifteen percent 
of those three percent are seniors.
    So a quick review. There are 7,000 banks in this country. 
Only six banks present this product. Only three percent of the 
account holders participate in a deposit advance product, and 
15 percent are seniors. So it is 15 percent of the three 
percent are seniors.
    Customers must review the terms and disclosure each time 
they access this line of credit.
    These four banks have worked with regulators, customers, 
and consumer groups to improve this product to make it as 
transparent and less costly as possible. Over the years, we 
have changed our product to include cooling off periods, 
installment repayment options, lower credit amounts, and 
lowered the cost. We also do not charge for any late fee a 
customer may have.
    The other option we have when a customer walks into the 
bank wanting assistance is to turn our back on that customer 
and tell them the most heavily regulated industry in the 
country cannot help you in your time of need, in a time where 
the number of underbanked and unbanked customers are rapidly 
increasing. We do not think this is in the best interest of the 
consumer.
    If we do not choose to help them, they have several 
choices. They can go to the traditional online payday lending, 
which is expensive, the pawn shop, which is even more 
expensive, or, as the Wall Street Journal pointed out recently, 
they will turn to the Tony Sopranos, rest in peace, of the 
world. That is the most expensive alternative.
    One thing you may have seen over the last couple of weeks 
is something we called regulatory olympics in this country. 
There are now four regulators, numerous States, and now this 
body overseeing this product. We understand. We appreciate the 
jurisdiction all may have. However, this is an inefficient and 
ineffective way to regulate. In this town, we call it 
regulatory olympics. We think it fits the situation well.
    We urge another cooling off period. Let us let the CFPB 
conduct its comprehensive analysis before any agency takes 
further action.
    I would like to close with a quote from a prominent member 
of banking, the newly confirmed Director of the CFPB, Richard 
Cordray, who said, and I quote, ``I want to be clear about one 
thing. We recognize there is a need and demand in this country 
for emergency credit.'' January 19, 2012. We align ourselves 
with that comment.
    We want to improve this product. Any suggestions you may 
have will be taken seriously. We want to make sure customers 
are happy with their banks.
    With that, Mr. Chairman, I will yield for any questions you 
may have.
    [The prepared statement of Mr. Hunt follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    The Chairman. Well, some of the suggestions were made by 
Mr. Shaul, which I would encourage you to share with your 
member banks.
    Mr. Hunt. Sure.
    The Chairman. Instead of the three alternatives that you 
listed, installment loans for up to two weeks, extended pay 
plan so they would not get into the cycle on a limited income, 
such as Social Security that Ms. Smith made. So we will discuss 
that later.
    Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Mr. Shaul, today in your testimony, you gave a number of 
constructive suggestions for tightening the regulation of 
payday lenders. That seems very much at odds with the tone that 
your organization took when you sent a comment letter to the 
CFPB on its white paper on payday loans, and I am going to read 
specifically what your organization said.
    You wrote, ``The tone, conclusions, and specific language 
within the report seem aligned with the type of rhetoric that 
more often comes from advocacy groups that are not always 
driven by facts but rather are driven by agendas and 
unsupported anecdotal information.''
    I am trying to reconcile your constructive approach today 
and at least conceding the need for codifying best practices, 
taking steps to clean up the industry, with your indictment of 
the paper done by the CFPB on payday loans.
    Mr. Shaul. Perhaps I can help you, Senator. The indictment 
of the white paper is not an indictment of the Bureau or those 
who work within it. I should say that we were surprised by its 
timing because the data collection was not complete, a fact 
that they themselves acknowledge.
    We were disturbed by the methodology because I think, as 
our critique would show, it gives an unrealistic and 
unwarranted sample to those who are frequent users of the 
product as opposed to taking the body of those who use the 
product across the whole field, the whole field of users.
    And then, perhaps most importantly, there is a speculation 
on consumer welfare that is a part of the end of the paper 
which draws no factual research to support it.
    Now, it is important to say a number of things. First, we 
recognize that the Bureau is here to stay and we wish to 
cooperate with it. As a matter of fact, one of the great 
disappointments here was, as you can imagine, in a trade 
association, it is not always easy to convince the members to 
give up their data to a regulatory agency. We took that step, 
and it was not an easy one to convince our members to do. 
Therefore, when we found that though the data was not complete, 
the conclusions had been reached, it was a moment of some 
seriousness within the trade association.
    Secondly, we do feel, and we have seen it here today, and 
this is such a disappointment to me, I thought that when I took 
this position, the one thing that would be extremely helpful 
was to do or have at my disposal research that would be 
extremely useful in getting at how many on a spectrum of 100 
customers are really led into a poverty situation--into a 
greater poverty situation by their use of the loan, how many 
are well served, how many are left neutral. I do not find that 
research.
    Moreover, as you have seen today, there is a dispute about 
the research. In my judgment, the one place in which that 
research can be conducted in a way that neutrally will affect 
all parties and where there will be a respect for it is within 
the Bureau.
    Senator Collins. Well, what advocacy groups that are not 
driven by facts are you referring to?
    Mr. Shaul. I thought that the Pew paper was not--the Pew 
research paper was not a well-done paper, and I would be happy 
to augment my statement with some detailed criticism.
    Senator Collins. Mr. Shaul, I am just curious, were you 
involved in drafting the Dodd-Frank bill which created the 
Bureau?
    Mr. Shaul. Yes, in its later stages, I was, but I was not 
involved in the creation of the Bureau itself.
    Senator Collins. Did you support the creation of the 
Bureau?
    Mr. Shaul. Yes.
    Senator Collins. Do you support increased disclosure 
requirements for lenders such as Mr. Wright and I discussed, so 
that they know the actual dollar amount that they are going to 
end up paying?
    Mr. Shaul. Not only do I support greater disclosure, but 
one of the first things I did in January of this year as a part 
of a staff effort was to revise our disclosure to say that the 
payday loan is denominated or marked as a short-term loan. 
Experience shows that many borrowers use it longer than that.
    I think if you read our disclosure, it is a very 
comprehensive thing as it is now. I would say most----
    Senator Collins. Does it say the amount that the consumer 
is going to have to pay back, or does it just give the interest 
rate----
    Mr. Shaul. It gives the APR and it depends----
    Senator Collins. Well, the APR is pretty hard for people to 
calculate----
    Mr. Shaul. Right.
    Senator Collins [continuing]. If you do not give them the 
amount the way you get with a mortgage disclosure.
    Mr. Shaul. I am with you on greater disclosure and I would 
go one step further. It is not just greater disclosure, but it 
is also a form of education that we need for people in this 
sector of the economy so that they really understand what they 
are getting into.
    So I am completely open to greater disclosure and I think 
we have done a great deal on it. And I think your suggestion 
about denominated dollars is one that I would be happy to 
discuss with my membership, yes.
    Senator Collins. Thank you, Mr. Chairman.
    The Chairman. Senator Warren.
    Senator Warren. Thank you very much, Mr. Chairman.
    So, Mr. Hunt, I heard you say most emphatically that 
deposit advance is not payday lending. So, I just want to go 
over the specific example we have here from Ms. Smith. She says 
an installment loan was not available, that she asked for it 
and could not get it. Partial payment was not available. Once 
she had taken this out, she had to come up with all of the 
money, which is, I think, how it usually works with payday. 
That she rolled this over, Ms. Smith, did you say 67 times?
    Ms. Smith. Sixty-three times.
    Senator Warren. Sixty-three times over the space of five 
years. By my calculation, just back of the envelope, I think it 
is about 200 percent annual interest that she paid. She was 
given this when she had--evidently, it was verified that she 
would have a Social Security check coming in every month, which 
means, in effect, repayment was virtually guaranteed.
    Ms. Smith. They took it.
    Senator Warren. They took the money out----
    Ms. Smith. I did not----
    Senator Warren [continuing]. Did not even wait for someone 
to show up with a check. And it was all handled electronically, 
so there was no need even to have a storefront and a clerk to 
process this.
    So, I understand ways in which it is more effective than a 
payday loan, but what I do not understand is your statement 
about how this is not a payday loan, so maybe you could just 
explain that better to me.
    Mr. Hunt. Sure, Senator Warren. Sure. Thank you very much. 
I appreciate the question. As you know, Senator, we cannot get 
into the specifics of an individual case for privacy matters. I 
do not know the exact relationship between the witness and the 
bank in question. We cannot ask those questions.
    I would tell you generically and from a 30,000-foot 
standpoint, you do have an opportunity for installment loans.
    Senator Warren. I am sorry, Mr. Hunt----
    Mr. Hunt. You do have an opportunity----
    Senator Warren. Let me stop right there. Are you saying 
that Ms. Smith misunderstood Wells Fargo when she asked for an 
installment loan and was told that she could not get it?
    Mr. Hunt. I do not know what transpired between two 
individuals. I do not even know when it was. I am just telling 
you today----
    Senator Warren. Ms. Smith?
    Ms. Smith. It is a matter of record that they forgave my 
loan about a month ago when I went in and asked for an 
installment loan.
    Senator Warren. Mr. Hunt?
    Ms. Smith. They said they were not equipped to do that.
    Mr. Hunt. Senator Warren, I am just going to tell you, 
Wells Fargo today offers an installment loan, that if a person 
cannot meet their needs on the next direct deposit, they have 
an opportunity to have an installment loan. Now, when that 
happens----
    Senator Warren. Mr. Hunt, I am just saying to you, we have 
Ms. Smith here saying that that is not so.
    Ms. Borne, did you want to weigh in?
    Ms. Borne. I just wanted to point out that the installment 
option that Wells Fargo has and that other banks making payday 
loans have are notoriously hard to obtain. For example, Wells, 
even after having changed its policy, still requires the 
borrower to be in debt for three consecutive months before they 
can qualify for an installment plan.
    Another bank only lets you get an installment plan if you 
ask for it by calling the bank before you take out the loan. So 
once you actually have the loan, no installment option. This is 
consistent with the experience in the storefront arena, where 
the extended payment plan that Mr. Shaul mentioned has 
notoriously low pick-up rates. In other settings, the industry 
has admitted that it is a lot less profitable and they do not 
want borrowers doing it.
    Senator Warren. Thank you, Ms. Borne.
    Mr. Hunt, I am still trying to understand how the deposit 
advance is not a payday loan.
    Mr. Hunt. Well, I will tell you how exactly that is not a 
payday loan. One, you have to have an established relationship 
with the bank. We have to have a history with the bank. You 
cannot just walk into a bank and receive a deposit advance 
product. You have to have a history of a direct deposit, as 
well. And you cannot have any negative consequences happen to 
your bank. That is our form of underwriting.
    Senator Warren. So----
    Mr. Hunt. That is completely different.
    Senator Warren. So let me----
    Mr. Hunt. And the cost----
    Senator Warren. Let me make sure I understand this, then.
    Mr. Hunt. The costs are completely different.
    Senator Warren. Let me understand, make sure I understand 
this, Mr. Hunt.
    Mr. Hunt. Sure.
    Senator Warren. So you only want to do these loans for your 
established customer base when, in the case like Ms. Smith, 
when you know that you are going to have effectively a 100 
percent chance of repayment here, and that is how you 
distinguish yourself from being a payday loan?
    Mr. Hunt. That is one of the ways we distinguish ourself. I 
think it is a positive thing, we have an established 
relationship with our customer. I think it is a positive thing 
that only certain people qualify to get a deposit advance 
product. I think it is a positive thing that we charge half of 
what a payday lender charges. I think those are positive 
bodies. I think it is also positive, Senator Warren, that we 
keep people within the regulated entity and not the under-
regulated. I think we can all agree we are one of the most 
heavily regulated industries.
    Senator Warren. Mr. Hunt, I see that I am out of time, but 
if I might, Mr. Chairman----
    The Chairman. You can----
    Senator Warren. No, no, I just want to say here that to 
describe yourselves as being part of a heavily regulated entity 
when it is the case that by her direct testimony we have 
someone here who received loans that were rolled over for five 
years. She paid an average of 200 percent interest on a loan 
that cost the bank very little to administer, since it was 
electronic, and was effectively 100 percent guaranteed that the 
bank would be repaid.
    So I appreciate that the bank is a regulated entity, but I 
am afraid I just cannot understand the distinction between how 
deposit advance has somehow improved Ms. Smith's life over that 
of going to a storefront, where she could have also gotten a 
payday loan.
    So, thank you. Thank you, Mr. Chairman.
    Mr. Hunt. Do I get a chance, Mr. Chairman, to respond?
    The Chairman. Of course.
    Mr. Hunt. Okay, great. Thank you very much.
    As you know, Senator Warren, banks offer cooling off 
periods, so if a customer has this product for five to six 
months, they are shut off. For one solid month, they cannot 
access their line of credit. It is up to the customer, then, to 
say, hey, I need this line of credit once again.
    The customer also, Ms. Warren, Senator Warren, has an 
extensive process for application, something you have always 
been in favor of, easy and transparent disclosures. So if you 
apply for a deposit advance product, you will see right here it 
says that deposit direct advance is a line of credit designed 
for short-term borrowing needs. It says the service is 
expensive. You have to understand the fees. Advances are 
automatically deposited into the checking account. Advances 
will automatically be repaid from your checking account. And on 
and on and on.
    Senator Warren. Mr. Hunt----
    Mr. Hunt. And the customer has to voluntarily sign off on 
this.
    Senator Warren. Mr. Hunt, I am afraid what I was looking 
for here is how your product--I just started with your 
statement that a deposit advance is not a payday loan----
    Mr. Hunt. It is not.
    Senator Warren [continuing]. And that is what I am trying 
to understand----
    Mr. Hunt. It is not a loan.
    Senator Warren [continuing]. And you are telling me--you 
are telling me that there are extensive paperwork that you had 
her sign off on, you had Ms. Smith sign off, and actually, Ms. 
Smith is shaking her head no. Ms. Smith?
    Ms. Smith. It was all done online, point and click, and----
    Senator Warren. So I am back in my original position. If 
the concern we have is about a product that is designed to 
ensnare people in repeat loans over time so that it is possible 
to extract from them 200 percent interest, then it seems to me 
that Ms. Smith is describing such a product from Wells Fargo.
    Ms. Smith. May I make a statement?
    Senator Warren. Of course, Ms. Smith. I am sorry, Mr. 
Chairman.
    [Laughter.]
    Sorry, Mr. Chairman.
    Ms. Smith. I do not quite understand where he said that I 
was eligible. I walked into the bank and asked for a small 
loan. They said they did not have them, but they had a service 
called a direct deposit advance. The only thing that made me 
eligible was I had a Social Security check in there that they 
could just take the money out. I did not have to buy a stamp in 
five years to mail it in. I was never late. I was never 
defaulted.
    Senator Warren. Thank you, Ms. Smith.
    Mr. Hunt. And just to finish up, I did make a mistake when 
I said sign off. In today's terminology, that also means you 
check off a box. Much like you do with iTunes, you can do 
services now online, as well. And it is true that many of our 
banks do this. But it is the same principle. You still have to 
check off on these boxes to do it. And again, this is a 
voluntary item that the customer chooses to do, and you do have 
to meet certain requirements in order to get this product.
    Senator Warren. Yes, Mr. Hunt, I think you are right. It is 
the same principle.
    The Chairman. There are customers and there are customers, 
and some of your customers, probably a good percent of them, do 
not know all the different products that are offered by a bank, 
and maybe that is one of the responsibilities of a bank, to 
present to them all the alternatives, particularly when it 
comes to a senior citizen that is on just Social Security and 
depends on that check for everything.
    Now, for the life of me, I cannot understand why your 
member banks would want to take the negative aura that is 
created by these kinds of circumstances that Ms. Smith has 
testified to, and there have been others that have been 
mentioned here today, in order to insist on a technical point 
of this or that. The bank ought to be helping the customer and 
we are going to follow up on this.
    Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman.
    And, Ms. Smith, it was a pleasure to have you stop by the 
office this morning. Thank you very much.
    Did you ever discuss your situation with anyone at Wells in 
regards to paying it back in installments?
    Ms. Smith. Just recently.
    Senator Donnelly. Okay.
    Ms. Smith. I did not think I had any choice. It was not an 
option for me.
    Senator Donnelly. Okay. Mr. Hunt, from the way these loans 
are repaid, would you agree they--or lines of credit, as you 
put it--would you agree they are fairly minimal risk?
    Mr. Hunt. Minimum risk for the customer or minimum risk for 
the bank?
    Senator Donnelly. For the bank.
    Mr. Hunt. Yes, only because----
    Senator Donnelly. If there is direct deposit.
    Mr. Hunt. I do, only because of the requirements you have 
to meet before a person gets access to a deposit advance 
product. We have done our homework on the customer.
    Senator Donnelly. Okay. And now, the average amount the 
bank is paying for the money--a lot of savings accounts are one 
percent now, somewhere in that neighborhood. Say the average 
rate that the bank is paying for their funds, one percent, 
maybe two percent. How is 36 percent not a fair interest rate 
on these deposits?
    Mr. Hunt. Yes. So, Senator, as you well know, we do not 
charge interest rate or APR. It is a fee. It is a fee for 
service for people who need this assistance. And I think it is 
very simple in the disclosure. It says it is $7.50 for every 
$100, $2 for $20, $1.75 for $20. So it is not interest rate. I 
concur with Senator Collins' statement----
    Senator Donnelly. So your fee rate----
    Mr. Hunt. It is a fee rate.
    Senator Donnelly [continuing]. Comes out to be 200 percent 
a year.
    Mr. Hunt. Well, it depends, sir. It depends if you are 
doing it over a two-day loan. Is it a 35-day loan--I am sorry, 
line of credit? It depends on the line of credit. It is a fee 
for it.
    Senator Donnelly. Yes, Ms. Borne. Thank you for raising 
your hand.
    [Laughter.]
    Ms. Borne. If I could just interject quickly on this, so 
the fee per $100 that the banks charge is a finance charge. It 
is a charge in exchange for credit. Through a loophole by which 
the banks claim that their loans are open-end, they are not 
currently disclosing an APR, but an APR is the best way to 
compare the cost of credit across credit products.
    The studies have shown that they average 225 to 300 percent 
in APR terms, and even the CFPB, when it looked at deposit 
advance recently in its report, it did use APR as a manner of 
comparing the cost of bank payday loans to loans by other 
lenders.
    Mr. Hunt. And I would just say about APR, I think they are 
the most confusing item out there. The Fed, when they were 
looking at overdraft services, dismissed using APR because, A, 
they could not explain it, and B, customers could not 
understand it.
    Senator Donnelly. Well, it gives you a fairly ballpark idea 
what you are paying for----
    Mr. Hunt. Well, I will tell you this. You are about to vote 
on a student lending bill and the Federal Government does not 
put an APR on Federal student loans because they know they 
cannot explain it nor can it be understood, either. And these 
are lines of credit, not for the whole year. There is nothing 
annual about a line of credit----
    Senator Donnelly. Well, it is simple math, though. Here is 
the fees, or whatever you want to call it. You know, you can 
call it a motorcycle or a motorsickle. You can call it about 
anything you want.
    Mr. Hunt. Right.
    Senator Donnelly. And one of the things you commented on, 
you said you want to make this the least costly possible for 
Ms. Smith. And I guess I would say, if you look at this product 
that comes out 200-plus percent, are you meeting that goal?
    Mr. Hunt. I think any time we meet the goals of the 
customer, and this is a demand-driven product----
    Senator Donnelly. Well, but the goal----
    Mr. Hunt. It is two for 20----
    Senator Donnelly [continuing]. But you said the least 
costly possible way to do it.
    Mr. Hunt. I am sorry. Say that again, please.
    Senator Donnelly. You had mentioned in your statement the 
least costly possible way to do it.
    Mr. Hunt. Sure. Sure. And we think the charges--the line of 
credit fees that we charge are very competitive.
    Senator Donnelly. Well, I----
    Mr. Hunt. And I will tell you, sir----
    Senator Donnelly. I do not disagree, I mean, in terms of 
other products for those people. But is it not profitable 
enough for these banks to, instead of here is your fee for this 
money, to use a 36 percent interest rate, or 37, or 35, or 34? 
I mean, they are paying one percent for the money.
    Mr. Hunt. Well, Senator, I am not going to get into a 
debate whether we should use percentages or fees. We think, for 
the customer, it is much easier to understand it is $2 for 
every $20, or $10 for every $100.
    And I would tell you, if you really want to have 
competition, why do we not encourage banks to get into this 
process for more competition and have people stay in the 
regulated industry? The worst thing we can do is increase the 
underbanked numbers and unbanked numbers. We get criticized, 
sir, for having people pay their lines of credit on time. I 
think that is wrong.
    Senator Donnelly. I am not criticizing you. I am just 
asking you. Do you think that it is appropriate for some of the 
most respected banking names to be making 200 percent plus off 
of their customers?
    Mr. Hunt. First off, I do not accept that it is 200 percent 
because it is a line of credit. It is not a loan. If we were 
charging 200 percent for a home mortgage, I am with you.
    Senator Donnelly. No, that is----
    Mr. Hunt. That is too much.
    Senator Donnelly. You know----
    Mr. Hunt. But this is not a loan. This is a line of credit.
    Senator Donnelly. You know that is not what we are talking 
about. I mean, this is a woman who paid, on average, 200 
percent plus. You can call it a fee. You can call it whatever 
you want. But that is about what the extra funds that were paid 
on this averaged out to for the amount that was loaned. And all 
I am asking is, in regards to the institutions that are doing 
this, do you not think they could do better?
    Mr. Hunt. I really do not think we ought to get in the 
business of price setting. We saw what happened on----
    Senator Donnelly. I am not asking you to set prices.
    Mr. Hunt [continuing]. I mean, that has gotten worse.
    Senator Donnelly. I am just asking you, do you not think 
they can do better than having fees and such add up to over 200 
percent plus on the money?
    Mr. Hunt. Again, Senator, I am not trying to be difficult, 
but we do not charge a percentage. It is a line of credit that 
the customer must pay off before they have an opportunity to 
have another line of credit. This is their choice.
    Senator Donnelly. I----
    Mr. Hunt. It has to be reasonable. It has to be 
proportionate. There are UDAP violations if we are taking 
advantage of a customer. We work with regulators all the time 
on this product and other products, as well.
    Senator Donnelly. My time is up, Mr. Chairman. I will 
pass--no, I guess the question is reasonable. We have different 
views on what is reasonable.
    Mr. Hunt. Sure. Thank you, though.
    Mr. Shaul. Mr. Chairman, may I correct myself?
    The Chairman. Please.
    Mr. Shaul. I am unable to exit the office without a brain 
trust behind me and my brain trust, I am sure, after hearing 
from some of our members, wants to make clear that our 
disclosure does include a dollar amount as well as an APR. So I 
misspoke to Senator Collins.
    The Chairman. How is that different from Mr. Hunt's? He--
you represent the Community Financial Services Association and 
Mr. Hunt represents the Consumer Bankers Association.
    Mr. Shaul. Correct.
    The Chairman. So yours does have that----
    Mr. Shaul. We have an APR.
    The Chairman. APR----
    Mr. Shaul. And then we have an actual dollar amount that is 
paid, as well.
    The Chairman. And your members, Mr. Hunt, do not?
    Mr. Hunt. Ours is a line of credit. It is not a loan. And 
we show $2 for $20, $10 for $100, however you want to slice and 
dice it. It is clear. It is transparent. It is up front.
    The Chairman. Well, let me ask you, how does someone--and 
chime in, Senator Donnelly, if you have any other questions--
how does someone who is on Social Security ever get out from 
under this loan when the whole amount must be paid back out of 
their next Social Security check?
    Mr. Hunt. Yes, Mr. Chairman, I appreciate the question very 
much on it. It is a great debate. Do we have people pay this 
loan--this line of credit back immediately or do we let them 
finance it over months? I thought in this country it was always 
better to pay off your debt, and now we are getting in trouble 
for having consumers pay off their debt. They have to pay off 
that line of credit before they get access to another.
    Now, hearing from consumers, hearing from regulators, 
hearing from members of Congress, some of these banks have now 
said, okay, even though we do believe a person should pay this 
off as they agreed to, we are going to give them the option to 
pay longer, over three to four months' period of time. But, if 
we give them the opportunity, we are not going to allow them to 
access their line of credit.
    So we get criticized for asking people to pay their 
agreement on time and then we get criticized for making them 
have a longer opportunity, as well. So we give them the best. 
We can say, you are going to get paid--you are going to have to 
pay this off at your next direct deposit or an extension. The 
choice is now yours.
    The Chairman. If they have that choice.
    Mr. Hunt. That is correct. But remember, now, before they 
get a line of credit----
    The Chairman. We have an example here with Ms. Smith that 
she did not have that choice. She was never told that.
    Mr. Hunt. Every consumer has a choice not to extend the 
line of credit. They also cannot get another line of credit, 
sir, until they pay that line of credit off. It has to be paid 
off before they get access to another line of credit.
    The Chairman. Well----
    Mr. Hunt. And a cooling off period, sir.
    The Chairman. Here is what I do not understand. Banks like 
their customers to think that they are there to help them as 
financial advisors. What is the best product for you? Now, if 
you know that someone on Social Security, that the whole amount 
is going to be paid the next time they get their Social 
Security payment, and you know that is what they are living on, 
would that not trigger the bank to say, this might not be the 
right product for you, that there is a different product?
    Mr. Hunt. So, Mr. Chairman, we have a right and 
responsibility to give the facts to the consumer. We always 
tell them through financial literacy there may be less 
expensive products. It is clear as day in the disclosures that 
this is an expensive product, that it must be paid back, and it 
will be paid back with the next direct deposit, assuming it was 
reoccurring, and they must qualify for it.
    We are not going to be the parents of customers. We think 
they have the right to choose the product they so desire. If we 
present it in a clear and transparent manner, back that up with 
financial literacy that we do--we text people, we mail people, 
we do everything but fly a helium balloon over saying there 
could be less expensive items--we do everything we can to make 
sure we act in a responsible way for the consumer. But at the 
end of the day, sir, it is up to the consumer to choose which 
product they want to have.
    Some of the biggest criticisms we receive from people who 
use this product is why is there a cooling off period, when we 
have done everything we have been taught from the second grade 
to pay off our debt, and here we go, paying off our debt, and 
you are taking something away from us. And it is a very popular 
product until that occurrence happens, sir.
    The Chairman. Mr. Shaul, did all of this advance payment 
thing, did this really start when the use of electronics and 
electronic payments--of which almost all Social Security 
payments now are made by electronic payment instead of by paper 
checks, therefore, it is an easy thing for the banks to access 
to pay off the advance payment--did all of this just start when 
Social Security started making electronic checks?
    Mr. Shaul. I do not think so, Senator. I mean, what had 
been the traditional mode before that was that we would take a 
check that would be deposited on the payday and often--in 
nearly all instances--the person would be called in advance to 
be sure that the check would be good. Within the bank itself, I 
suspect the situation would be different because they would 
have accurate knowledge of the high and low points of the 
account at all times.
    The Chairman. This committee has a responsibility to the 
elderly and the senior citizens of this country, and I want to 
ask both of you--Ms. Borne, as well--if we have a system like 
this, are we not setting up Social Security recipients to fail? 
What do you think, Ms. Borne?
    Ms. Borne. You know, I think I would just point out that, 
as has already been remarked on here today, it is very unlikely 
that a Social Security recipient on a fixed income is going to 
be able to repay an expensive loan in full in two weeks. It is 
extremely likely they will end up in a long-term cycle of debt 
and that that cycle will leave them worse off than they were 
before they ever took out their initial loan.
    Mr. Shaul. If I may, Senator----
    The Chairman. Please.
    Mr. Shaul [continuing]. Three points. As I have indicated, 
the percentage of our borrowers who are senior citizens 
actually is less than their average across the population.
    The second point is, it is true that there is a danger 
here, no question about it. If you track expenditures of those 
who are elderly, they tend to be more fixed than those who are 
younger because their aspirational goals and so on are a little 
less. But the danger is a real one, no question about it.
    I think it goes to this question that I feel strongly about 
that is a difficult one for us to do, both in terms of 
profitability and also in terms of the customer himself. Part 
of underwriting has to be to look at the person's condition in 
detail. And, obviously, if you are doing underwriting and you 
are looking at a Social Security recipient, you have a 
different case than if you were looking at someone who has a 
wide variety of incomes.
    The Chairman. That is exactly right, and what is the risk 
to the bank when there is a guaranteed Social Security payment 
coming in the next month? And that has got to be taken into 
account here.
    Mr. Shaul. Yes. That is different from our storefronts, of 
course, but I grasp the point that it is not different in the 
sense that if that person has written us a check and so forth, 
we are in the same position in that sense.
    The Chairman. Do you all have any further questions?
    Mr. Hunt. Senator, if I can just add on to that----
    The Chairman. Yes, please.
    Mr. Hunt. We do not want an unhappy customer. That is not 
good for the banking institution. It is not good for the bank. 
We want to do everything we can to make sure the customer 
receives the right product at the right price with the right 
disclosures.
    The Chairman. I believe that you believe that.
    Mr. Hunt. Yeah.
    [Laughter.]
    The Chairman. But, Mr. Hunt, you have got some unhappy 
customers and you have got some unhappy Senators who represent 
those unhappy customers----
    Mr. Hunt. And, Mr. Chairman, I----
    The Chairman [continuing]. That are trying to straighten 
this thing out.
    Mr. Hunt. And we want to help them if there is some--but I 
would tell you this, sir. The vast, vast, vast customers, 
seniors, pay off their obligation. They do it. I do not want 
people to think that seniors are not paying it or they cannot. 
The vast majority are doing it. They are----
    The Chairman. That is not the question here, and in terms--
again, I just repeat myself. In terms of risk to the bank, what 
risk is there? You have got the Social Security. As long as 
there is the United States Social Security Administration, you 
have got that coming in.
    So, I want to thank everybody. It has been a good 
discussion. I do not want you two to think that we picked on 
you, even though we have.
    [Laughter.]
    Mr. Hunt. And probably will again.
    The Chairman. Not if we get this thing straightened out.
    Mr. Hunt. We look forward to working with you.
    The Chairman. Well, that is going to depend on really what 
you do, go back to your member banks, and I see some of them 
out here in the audience, some of them that are dear friends of 
mine. And I want you all to address this, because this is not 
right on what has been testified here today.
    Ms. Smith.
    Ms. Smith. I just have one thing to say to some of his 
comments about paying off your debt. Someone asked me recently, 
why did you not just take your money out of Wells Fargo and go 
somewhere else? What would they do to you? And there is not 
probably much they could do to me because I do not have 
anything to take. They could harass me a long time with credit, 
you know.
    But I did come from the generation of where you do pay your 
debts and that is why I stayed and allowed this to continue, 
because I did owe the debt. I did make the loan. And I did pay 
it. They took it. So, I am a little insulted about that, you 
know, because I could have done that.
    The Chairman. You know, you mentioned that you are part of 
that generation. Let us hope that that passes to every 
generation.
    Ms. Smith. Yes.
    The Chairman. We are a nation of laws. That is what sets us 
apart from other countries on the face of Planet Earth, is that 
we respect the rule of law. Now, we just need to make sure, and 
I am looking at the CFPB and I am looking at the FS--I cannot 
even say it, there are so many acronyms--Federal Deposit 
Insurance Corporation--I am talking about the Comptroller of 
the Currency and others--to make sure that the laws are being 
effectively administered. And then if there is inadequacy in 
the law, we need to know about it so that we can address that 
through the making of laws.
    Well, it has been a robust discussion. I want to thank 
everybody. And I would suggest that we have, as a result of 
this discussion, I suggest that the financial community be 
proactive on a going forward basis. And I would ask you all to 
provide all disclosures for each of your banks offering these 
products to this committee by the close of business next 
Wednesday.
    I want to continue to encourage the FDIC and the OCC to 
move forward with the guidance that they have proposed and 
finalize those rules to protect the consumers, such as we have 
heard today. Some of us on this committee have already filed a 
public comment in support of the work that is being done by the 
FDIC as well as the OCC.
    And so for all of you who have been very patient and 
participated in this robust discussion, thank you and the 
meeting is adjourned.
    [Whereupon, at 4:24 p.m., the committee was adjourned.]

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