[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
SHORT-TERM, SMALL DOLLAR
LENDING: THE CFPB'S ASSAULT
ON ACCESS TO CREDIT AND
TRAMPLING OF STATE AND
TRIBAL SOVEREIGNTY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 11, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-73
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_________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
RANDY NEUGEBAUER, Texas, Chairman
STEVAN PEARCE, New Mexico, Vice WM. LACY CLAY, Missouri, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida RUBEN HINOJOSA, Texas
MICHAEL G. FITZPATRICK, DAVID SCOTT, Georgia
Pennsylvania CAROLYN B. MALONEY, New York
LYNN A. WESTMORELAND, Georgia NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
MARLIN A. STUTZMAN, Indiana STEPHEN F. LYNCH, Massachusetts
MICK MULVANEY, South Carolina MICHAEL E. CAPUANO, Massachusetts
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANDY BARR, Kentucky DENNY HECK, Washington
KEITH J. ROTHFUS, Pennsylvania KYRSTEN SINEMA, Arizona
FRANK GUINTA, New Hampshire JUAN VARGAS, California
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
MIA LOVE, Utah
TOM EMMER, Minnesota
C O N T E N T S
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Page
Hearing held on:
February 11, 2016............................................ 1
Appendix:
February 11, 2016............................................ 69
WITNESSES
Thursday, February 11, 2016
Haynes, Frederick Douglass III, Senior Pastor, Friendship-West
Baptist Church, Dallas, TX..................................... 48
Miller, Thomas W., Jr., Visiting Scholar, Mercatus Center, George
Mason University............................................... 46
Shaul, W. Dennis, Chief Executive Officer, Community Financial
Services Association of America................................ 42
Sherill, Robert, consumer........................................ 45
Silberman, David, Acting Deputy Director, Consumer Financial
Protection Bureau.............................................. 8
Simmons, Kelvin, testifying on behalf of the American Financial
Services Association........................................... 44
Treppa, Hon. Sherry, Chairperson, Habematolel Pomo of Upper Lake. 6
Zoeller, Hon. Greg, Attorney General, State of Indiana........... 5
APPENDIX
Prepared statements:
Haynes, Frederick Douglass III............................... 70
Miller, Thomas W., Jr........................................ 73
Shaul, W. Dennis............................................. 80
Sherill, Robert.............................................. 91
Silberman, David............................................. 94
Simmons, Kelvin.............................................. 103
Treppa, Hon. Sherry.......................................... 129
Zoeller, Hon. Greg........................................... 135
Additional Material Submitted for the Record
Tipton, Hon. Scott:
Letter to CFPB Director Richard Cordray from Cynthia H.
Coffman, Colorado Attorney General, dated October 15, 2015. 138
Waters, Hon. Maxine:
Written statement of Faith for Just Lending.................. 140
Sherill, Robert:
Written responses to questions for the record submitted by
Representative Ellison..................................... 142
Silberman, David:
Written responses to questions for the record submitted by
Representative Ellison..................................... 144
Written responses to questions for the record submitted by
Representative Sinema...................................... 145
SHORT-TERM, SMALL DOLLAR
LENDING: THE CFPB'S ASSAULT
ON ACCESS TO CREDIT AND
TRAMPLING OF STATE AND
TRIBAL SOVEREIGNTY
----------
Thursday, February 11, 2016
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 1:01 p.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Pearce, Lucas,
Posey, Luetkemeyer, Stutzman, Mulvaney, Pittenger, Barr,
Rothfus, Guinta, Tipton, Williams, Love, Emmer; Clay, Hinojosa,
Scott, Maloney, Sherman, Heck, Sinema, and Vargas.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representatives Stivers, Green, Carney, and
Ellison.
Chairman Neugebauer. The Subommittee on Financial
Institutions and Consumer Credit will come to order. Without
objection, the Chair is authorized to declare a recess of the
subcommittee at any time.
Today's hearing is entitled, ``Short-term, Small Dollar
Lending: The CFPB's Assault on Access to Credit and Trampling
of State and Tribal Sovereignty.''
Before we begin, I would like to thank the witnesses for
traveling to Washington, D.C., today for the hearing. Many of
you had pretty long commutes, and we appreciate your time and
your willingness to participate in this process.
I now recognize myself for 5 minutes to give an opening
statement.
Today, we hold a hearing to exam the short-term, small
dollar credit marketplace and examine the CFPB's efforts to
regulate the market for the first time at the Federal level.
This hearing is especially timely given the Bureau's efforts to
put out a proposed rule in the next month or two.
Short-term, small dollar credit is essential to millions of
Americans. According to the FDIC, roughly 51 million American
consumers are unbanked or underbanked, meaning they don't have
sufficient access to traditional banking services or products.
Short-term credit customers are disproportionality drawn
from low- or moderate-income segments of the population. These
individuals are more likely to have a limited discretionary
income after necessities and to be much more vulnerable to
unexpected expenses. Fortunately, these individuals have been
able to access a variety of products from non-bank lenders,
from payday loans, to vehicle title, installment lending, and
the marketplace is evolving and, more importantly, it is
becoming much more competitive.
The characteristics that makes these sorts of loans
distinctive is their availability to consumers who have
difficulty qualifying for many types of credit. These loans may
not fit the needs of all consumers in all circumstances, but
they are often essential to forestall consumer harm.
Last week, I had an opportunity to visit a small dollar
lender in Virginia. In addition to seeing the sophisticated
backroom underwriting process and understanding the diverse
product offerings other than the credit products, I had the
chance to actually talk to the very customers who use these
products.
One couple that I met with were taking out their very first
payday loan. The husband told me he works nights and that
public transportation was not reliable. His family's car was in
the shop, and he had to get it out so he could make it to work
that night. He had two options--miss a day of work and risk
losing his job, or take a short-term loan to get him through
this emergency.
This is the same story that is repeated over and over in
letters that I get from my constituents in the 19th District of
Texas. From the mother of five, to the disabled veteran, to the
painter trying to get a truck repaired, a common theme emerges
in all of these stories, and it is: Please don't take away my
choice and my availability to use these products.
Unfortunately, the CFPB's efforts are yet another example
of Washington-knows-best mentality. Using behavioral
economics--which very principles say policymakers should make
choices for unsophisticated individuals--the CFPB has set down
a road of paternalistic erosion of consumer product choices and
access to credit.
By its own analysis, the Bureau expects roughly a 60
percent to 70 percent market contraction of these products.
This is the type of behavior that people across this country
are tired of seeing coming from Washington.
Now my colleagues on the other side of the aisle will point
out that there are high APRs associated with many of these
products. But I must remind them the vast majority of these
products aren't annualized. The consumers we will hear from who
use these products today aren't thinking about using these
products over a course of a year. They are in and out of the
product to meet a short-term need, and paying a service charge
to access those funds quickly. I, and many consumer-lending
scholars, believe that APR is not the appropriate way for
consumers to measure the cost of these products.
Other constituencies that I have heard from regarding the
Bureau's efforts are States and tribal nations. Short-term,
small dollar loans are historically State-regulated products.
Yet, the Bureau explicitly states that proposals under
consideration, if implemented, would establish a Federal floor
for consumer protection of covered loans.
Despite this recognition, the Bureau has made no signs of
showing that any State or Tribe lacks the authority to regulate
these products, nor has it shown that any State or Tribe is
incapable of adequately protecting its citizens from potential
risks associated with using them responsibly.
Of the 50 States, the legislatures of 35 have deliberately
enacted small dollar lending laws of varying protections,
including and up to outright bans. The remaining 15 States have
also addressed this issue, either by affirmatively declining to
enact an authorizing law to govern the industry or choosing to
regulate through interest rates.
Crucially, and contrary to the Bureau's appeal to a greater
moral obligation, no State lacks the authority to enact,
repeal, or amend its own payday lending laws in order to
provide greater protections to its consumers. In fact, we are
going to hear in the Washington State example, that the State
legislature amended its own law after realizing that the
previous version had a problematic impact of decreasing credit
availability. Unfortunately, the Bureau has ignored this
reality.
Acting Director Silberman, who is testifying today, told
this committee last April that, ``We have not thought about a
State that doesn't have the authority.''
And in an effort to double down, Director Cordray has told
this committee, ``I am not thinking about it,'' meaning the
rule this way.
As we hear testimony from this panel of witnesses, I hope
everyone will remember the rulemaking in this case is
discretionary and was not statutorily mandated. This is an
example of the Executive Branch making the choice to preempt
State laws without the direction of this Congress. This should
give us all pause.
In conclusion, I hope members will leave today's hearing
with a better understanding about the people who use the
products, why they are important, and how they are already
regulated.
And with that, I now yield 5 minutes to my good friend, the
ranking member of the subcommittee, Mr. Clay from Missouri.
Mr. Clay. Thank you, Chairman Neugebauer, and thank you to
each of today's witnesses for your testimony.
Mr. Chairman, I realize that this issue does not find us in
the same place. And I am sure that this hearing will highlight
the reasons why.
With the APR on small dollar loans in Missouri averaging
454 percent, thousands of vulnerable Missourians continue to
fall victim to costly small dollar loans. Even after reforms in
Missouri law, payday lenders can still assess fees equally up
to 1,950 percent APR. Equally problematic, vehicle title loans
in Missouri have grown dramatically after Missouri's so-called
reforms, where in 2014 alone, TitleMax repossessed 8,960 cars
in Missouri.
And last summer, Attorney General Chris Koster shut down
eight online tribal lenders from operating in Missouri after
finding that these lenders were not properly licensed in
Missouri and charged illegal fees on their payday loans.
Our experience in Missouri underscores the real need for
minimum national standards for small dollar lending, and States
simply cannot be expected to adequately protect consumers and
rein in a $46 billion industry acting alone. The CFPB should be
commended for their work to date in seeking to develop minimum
national standards that can coexist with current State laws,
but that also ensure access to affordable credit.
And central to the question of ensuring affordable access
to credit is understanding what constitutes a fair interest
rate for a payday loan. More specifically, I hope that today's
testimony can clarify why a 36 percent interest rate is good
enough for military personnel but not for the thousands of
Missourians who use small dollar products.
I also hope that we can gain some clarity on the universe
of more responsible alternatives that already strike the
appropriate balance between access, affordability, and consumer
protection.
Thank you again, to each of today's witnesses.
And at this time, I would like to yield the balance of my
time to the ranking member of the full Financial Services
Committee, Ms. Waters.
Ms. Waters. Thank you very much, Mr. Clay.
To Mr. Neugebauer, the chairman of this subcommittee, and
Ranking Member Clay, I am very appreciative for this hearing
today. And, Congressman Clay, I want to thank you for all the
work that you have done. You have tried for some period of time
now to work with the payday lenders and to come to some
agreements about what is fair and what is predatory. And
whether it is with regard to mortgages or credit cards or small
dollar loans, we all agree on one thing: that access to credit
is important.
However, there is also an important distinction in what we
believe. We are focused right now on what is happening in
Flint, Michigan, where children are being poisoned because
there is lead in the water. The residents of Flint have
plentiful access to water. Surely all of my colleagues agree
that access to water, any water, is not enough, if that water
is contaminated with lead, or if that water is a vector for
Legionnaire's Disease. I am very concerned about what kind of
water our citizens have access to, and I believe in access to
clean, drinkable water. We all do.
However, I also believe the same about mortgages and credit
cards and payday loans. Consumer credit products shouldn't be
available if they hurt their customers. We depend on our State
regulators and the CFPB to make sure that our constituents
don't have access to just any kind of credit, but to safe and
fair credit products that won't put them and their families at
risk.
Too many credit products are contaminated with predatory
fees, reckless underwriting, and toxic fine print. I think my
Republican colleagues should agree that access to loans, like
access to water, should be safe. I believe our job and the job
of the CFPB is to ensure access to safe, affordable credit to
everyone.
I look forward to discussing how we can support the CFPB
and their mission. I yield back the balance of my time.
Chairman Neugebauer. Before we turn to our witnesses, I ask
unanimous consent to allow non-subcommittee members to ask
questions after all subcommittee members have finished. Without
objection, it is so ordered.
Today, I would like to welcome our first panel of
witnesses. We will introduce each panel separately, but in
panel number one, we have the Honorable Greg Zoeller, the
attorney general for the State of Indiana; the Honorable Sherry
Treppa, chairperson of the Habematolel Pomo of Upper Lake; and
Mr. David Silberman, acting Deputy Director of the CFPB.
Mr. Zoeller, you are now recognized for 5 minutes.
STATEMENT OF THE HONORABLE GREG ZOELLER, ATTORNEY GENERAL,
STATE OF INDIANA
Mr. Zoeller. Thank you, Mr. Chairman, and members of the
subcommittee. I am here really to thank you for the opportunity
to speak today and really not talk so much on the policy side,
which is really the focus of what a lot of the testimony will
be on, but really about the role the attorneys general play in
terms of our own efforts to regulate the credit space that you
are focused on.
I was involved when the legislature in Indiana had some of
these same discussions about, how do you properly balance the
access to credit with the protections against predatory
lending? Some of the people who are engaged in this same
hearing were involved with that. And we do have a difficult
time.
I will let others argue the policy side. I am here really
to argue the role of the sovereign states. I will just stick
with my own, but in Indiana, we have done a fairly competent
job of regulating this space. And when there are problems,
there are amendments to the regulations. There is legislation.
And we passed a number of bills. In fact, a lot of it looks
much like what the CFPB has proposed. So it is not that we are
unfamiliar with the types of arguments or what has been put
into our regulations, but really it is the fact that in Indiana
we have a fairly competitive market. We have made the balancing
as it relates to our own State.
I have heard the complaints from different parts of the
State. You get up near Chicago, near the lake, there are
efforts about we should have looser regulations. We can go over
into Chicago and get different kind of loans. You can cross the
borders and get other loans.
We have the same kind of pressures that, why do you have to
regulate it out of the State when we could do these things on a
more local level? But my argument to you today is that the
States are free to choose. We have a legislature that has to
make these same balancing arguments based on our own borders
and our own people. It is not that we don't care about the
access to credit or the predatory lending. So we are doing
these same things in our sovereignty.
What I am here to argue is to let the States protect our
own people. If we need your help, we will call. But I think the
State of Indiana and other sister States are free to, let's
say, explore our own opportunities. This is a very diverse type
of market, especially on the online space, so these are very
fast moving types of products that we will regulate and see if
we do it better than other States.
If you can come in and solve all the problems in all 50
States, it would be surprising to me. So, again, I have worked
with Director Cordray when he was an attorney general in Ohio.
A lot of the people I have a lot of respect for. They have
really not engaged in each of the discussions with different
States or they would have recognized that we don't ask for
their help.
So, again, it is not that this is not space that shouldn't
be regulated. We do it in Indiana, and, again, it is not all
that much different than what the CFPB is proposing. It is just
a question of who is going to regulate and whether that is what
the people of our State wish.
The same arguments that I have heard about needing to
protect people, I hear all the time that States can't be
expected to regulate in a big industry. You could essentially
shut down all of the role of an attorney general with that kind
of approach. We would no longer need State regulation if
Washington would just regulate the country as a whole, like
they do in Europe. They don't have States that have their own
sovereign. That is what makes us unique.
We do have Federalism. And I am here to defend the
Federalist principles that really allow the sovereignty of
Indiana to stand up and to be responsible for protecting our
own people, allowing access to credit. And if we make mistakes,
we are free to do that, and we will fix it ourselves. We won't
come back to Washington and ask for little minor changes,
because of the changing landscape of these very diverse
products. We are much more flexible. We are much more able to
address these things on an ongoing process. Coming back to
Washington and trying to get something done to protect our
consumers is not something I am anxious to do.
We can do it much more pliably and flexibly at a State
level than coming back here and asking this committee and the
CFPB to engage in the local nuances that we are finding in our
State. We had five complaints last year. We have handled those
pretty efficiently. And if we need more help from Washington, I
will call you.
Thank you.
[The prepared statement of Mr. Zoeller can be found on page
135 of the appendix.]
Chairman Neugebauer. I thank the gentleman. Ms. Treppa, you
are recognized for 5 minutes.
STATEMENT OF THE HONORABLE SHERRY TREPPA, CHAIRPERSON,
HABEMATOLEL POMO OF UPPER LAKE
Ms. Treppa. Chairman Neugebauer, Ranking Members Clay and
Waters, and members of the subcommittee, thank you for the
opportunity to testify at this important hearing. My name is
Sherry Treppa, and I am the chairperson of the Habematolel Pomo
of Upper Lake, a federally recognized Indian Tribe.
I have served on the Tribe's executive council for the past
11 years and as Chair since 2008. I also am the vice
chairperson of the Native American Financial Services
Association, an intertribal organization advocating for tribal
sovereignty and responsible business practices in e-commerce.
Our Tribe owns online lending businesses. I want to share
how we regulate these businesses and the considerable tools we
use to protect consumers. I will also offer my thoughts on the
CFPB's effort to restrict this marketplace and the impact that
it will have on consumers and Tribes.
Our Tribe has resided in rural Upper Lake, California,
since time immemorial. Our people flourished until migration
and settlement brought conflict and diseases, and in one
generation, reduced the Pomo Indian population by nearly 95
percent.
Flawed Federal policies further subjected our people to
enslavement, internment, abuse, and slaughter. In 1956, the
California Rancheria Act terminated our Federal recognition.
Despite these efforts to destroy our Tribe, we persevered. From
1975 to 2004, we fought and succeeded in restoring our Federal
recognition. The inherent sovereignty of Indian Tribes predates
the United States and is memorialized in the Constitution and
affirmed in numerous court decisions and statutes.
Congress has consistently acknowledged a Tribe's authority
to govern its own jurisdiction. Indeed, the Dodd-Frank Act
recognizes the Tribe's role in consumer protection by granting
it the same authority as both States and the CFPB in bringing
legal actions. When our Tribe decided to enter the industry, we
took thoughtful, measured steps based on our sovereign power to
regulate the businesses that would operate within our
jurisdiction.
The lending ordinance we enacted requires lenders to be
licensed. It also imposes ongoing compliance obligations. It
prohibits tribal lenders from using practices that are unfair,
deceptive, or misleading to customers, and established an
independent regulatory authority to oversee lending operations.
Pursuant to our ordinance, tribal lending entities may not
charge consumers an application fee or penalize them for early
repayment. Lenders also must maintain a system to ensure
compliance with tribal and applicable Federal law, written
policies that cover all aspects of lending, including
underwriting and internal controls to ensure that their
operations follow their policies.
Our regulatory commission conducts regular audits. If
deficiencies are identified or if a lender is non-compliant,
the commission is empowered to issue fines, penalties, or
revoke the lending license. The Tribe takes consumer protection
seriously for an important reason--it receives 100 percent of
the net income from loans made by these businesses. This allows
us to fund important government services including elder care,
education assistance, and vital social service programs.
Our regulatory framework and loan products together
successfully meet both the Tribes' and consumers' needs. We do
not offer payday loans. Our lenders offer loans that are repaid
in installments and are not eligible for rollovers.
Our Tribe's commitment to consumer protection is reflected
in these following statistics. In 2015, only 2 percent of all
applications submitted were approved and funded. Put another
way, 98 percent of new customers are rejected in underwriting.
Although loans have a 10-month schedule, most customers repay
their loans in 4 months. Customers have moderate borrowing
patterns with an average of 1.6 loans in 2 years.
Finally, our complaint volume in 2015 was less than 2
percent of all loans issued. Our statistics underscored that
tribal self-regulation can successfully achieve responsible
lending and consumer protection. Before the CFPB seeks to
impose new regulations, I would first ask them to acknowledge
the rigorous regulatory framework that our Tribe has created
and that our lending businesses are operating within. The
answer is clear--additional CFPB rules are not necessary
because all of the tools necessary to protect consumers already
exist.
From my perspective, the CFPB's proposal would do nothing
more than choke off consumer choice and access to needed
credit, while destroying economic developments for
opportunities for Tribes.
Thank you for your time. And I am happy to answer questions
at the end of the session.
[The prepared statement of Ms. Treppa can be found on page
129 of the appendix.]
Chairman Neugebauer. Thank you. And now, Mr. Silberman, you
are recognized for 5 minutes.
STATEMENT OF DAVID SILBERMAN, ACTING DEPUTY DIRECTOR, CONSUMER
FINANCIAL PROTECTION BUREAU
Mr. Silberman. Chairman Neugebauer, Ranking Members Waters
and Clay, and members of the subcommittee, thank you for the
opportunity to testify today. My name is David Silberman, and I
serve as Associate Director of the Division of Research,
Markets and Regulations at the Consumer Financial Protection
Bureau. Last month, I also was named an acting Deputy Director.
When the Dodd-Frank Wall Street Reform and Consumer
Protection Act was enacted, payday loans were a particular area
of concern to many in Congress. Indeed, the Dodd-Frank Act
gives the Bureau plenary authority to supervise any entity that
offers payday loans, regardless of size. As a result, when the
Bureau began supervising non-depository institutions in 2012,
payday lending was the first industry that was brought into our
supervisory program.
At the same time, the Bureau decided to begin the process
of fact-finding to assess whether there was a need for Federal
regulations to prevent unfair, deceptive, or abusive acts or
practices in this market, as those terms are defined within the
Act.
In January 2012, the Bureau held a field hearing in
Birmingham, Alabama, in order to hear directly from
stakeholders and the public about actual consumer experience
with small dollar loans. During the year that followed, the
Bureau engaged in an in-depth study of the market, and based on
that study, the Bureau issued a White Paper.
That White Paper showed that making these short-term loans
to low- and moderate-income consumers without assessing the
consumer's ability to repay puts many consumers at risk of
turning short-term emergency loans into a long-term expensive
debt trap.
In 2014, the Bureau published a second report. In that
report, we traced borrower sequences and found that only 35
percent of borrowers were able to repay the loan when due
without quickly reborrowing, and that 15 percent of borrowers
took out 10 or more loans in rapid succession. We found also
that 50 percent of all loans went to consumers in these lengthy
loan sequences.
Looking at payday consumers who receive their incomes on a
monthly basis, the report found that 1 out of 5 remained in
debt for the entire 12 months of the Bureau's study. The
consumers who fall into this category include elderly Americans
and persons receiving supplemental security income and Social
Security disability.
Finally, the Bureau found that over the course of a
sequence of loans, 20 percent of consumers end up defaulting
and finding themselves in the hands of debt collectors. The
Bureau then held a government-to-government tribal consultation
with tribal leaders interested in small dollar lending to hear
their input as we were thinking about how best to proceed. And
all this brings me to the outline of proposals that are
currently under consideration.
The Bureau released that outline in March of 2015, when it
convened a small business review panel to gather input from
small entity representatives. The goal of the proposals under
consideration is to prevent consumers from being offered
unaffordable loans while still preserving access to affordable
credit. To do that, the proposals under consideration would
require that before making a loan, lenders would be obligated
to make a good-faith, reasonable determination that the
consumer has the ability to repay the loan. That is to say, the
lenders would have to reasonably determine that after repaying
the loan, the consumer would have sufficient income left to pay
major financial obligations such as rent or mortgage and also
to cover their basic living expenses, such as food or
transportation or childcare or medical care, without the need
to reborrow in short order.
As an alternative to the basic prevention requirement, the
proposals under consideration also contain protection
provisions. These provisions would allow lenders to extend
certain short-term loans without considering the ability to
repay, so long as the loan satisfies certain screening
requirements and contain certain structural protections to
prevent short-term loans from becoming long-term debt, turning
into a collections nightmare for the consumer.
Stakeholders on all sides of the issue have provided us
with valuable feedback on the proposals under consideration.
Consumer advocates have argued that the Bureau should not
permit any lending which does not meet the basic ability-to-
repay standard. Industry stakeholders argue that the protection
alternative under consideration is too restrictive because
these requirements would allow no more than three loans in a
sequence or six loans in a year. State policymakers have urged
the Bureau to both protect consumers across all small dollar
lending markets and to seek feedback from the States on their
regulation of small dollar lending products.
After the Bureau released the proposals under
consideration, we convened a second tribal consultation that
was a frank discussion that allowed tribal leaders to share
their views with the Bureau about the proposals. We continue to
receive feedback from Congress, State, local and tribal
officials, consumers, industry, and others. The Bureau's next
step will be to formally issue a proposed rule, a rule which
will seek to balance access to affordable credit with
protecting consumers from loans that are beyond their ability
to repay.
Once the proposal is issued, the public will have the
opportunity to make written comments. The Bureau will carefully
consider those comments before final regulations are issued.
Chairman Neugebauer, Ranking Members Waters and Clay, and
members of the subcommittee, thank you for the opportunity to
testify today. I look forward to your questions.
[The prepared statement of Mr. Silberman can be found on
page 94 of the appendix.]
Chairman Neugebauer. I thank the gentleman. Mr. Silberman,
I want to ask you a question before I get started with our
questions. Have you ever visited a small dollar credit store?
Mr. Silberman. Mr. Chairman, a number of members of my
staff have done so. I personally have not.
Chairman Neugebauer. I didn't ask about your staff. I said,
have you ever personally visited a small dollar store?
Mr. Silberman. As I indicated, I have not. They have.
Chairman Neugebauer. Okay. I think that is a little
disconcerting, because you are talking about a fairly major
revamping of an industry that has been in place for a number of
years and that millions of people are using on a daily basis to
help manage the ups and downs of life. And for you to not go
out and visit with people in the stores and visit the stores
and understand better what is going on, doesn't speak well. So
I would encourage you to make that trip before you make any
final decision.
Last April, you told me, ``We have not thought about a
State that doesn't have authority.'' When moving forward this
rule, have you done any more thinking about this issue?
Specifically, which Tribe or State lacks the authority to
regulate payday or small credit lending? Do you know of a State
that does not have the authority to do that?
Mr. Silberman. Mr. Chairman, as I hope I said when I was
last before you, our mandate from the Congress is to enforce
Federal law and ensure that every citizen has the rights
provided by Federal law. One of those rights--
Chairman Neugebauer. Do you know of any States or Tribes
that aren't enforcing the Federal law?
Mr. Silberman. The obligation to enforce the Federal law
rests in the first instance on the Bureau.
Chairman Neugebauer. I know. But I am just saying that you
would be enforcing them if nobody else was. Where is the gap in
the--where is the hole in the system that you feel like that
the CFPB has to fill?
Mr. Silberman. I think the gap is that the statute says
that it is the obligation of the Bureau to issue rules to
identify and prevent unfair, deceptive, and abusive acts and
practices. Once we issue those rules, the States are free to
enforce those rules, but it is in the first instance up to us
to determine what rules are required to prevent such kind of
unfair and abusive practices.
That is why we have spent the last year studying this
issue. That has led us to the determination that there is a
problem that we need to address with respect to loans being
made without regard to consumers' ability to repay.
Chairman Neugebauer. I think a number of State attorneys
general, including Mr. Zoeller, have said they think they are
doing a pretty good job of regulating this space. They have
been at it a lot longer than you have. Many of the States have
had small credit or lending statutes on their books for a long
time. They have had an opportunity, as been mentioned here, to
balance between making sure that people are protected, but also
making sure that they have access to credit.
Have you found a State that is not enforcing their laws?
Mr. Silberman. No, I think the States are enforcing their
laws. And for the reasons you state, Mr. Chairman, what we are
doing is establishing a Federal law floor, and the States will
continue to be able to enforce their laws and their specific
requirements in addition to the Federal floor that implements
the obligation that has been placed upon the Bureau.
Chairman Neugebauer. Here is kind of the problem. It is
really up to the Congress to determine if it is appropriate to
preempt a State's law; it is not up to the Bureau to do it. And
to me, the fact that the Executive Branch has decided that they
are going to preempt 50 States' rights to govern an area of
finance in their States isn't up to the Bureau to do that. To
me, that would be up to the Congress.
One of the very things that people are very frustrated
about right now, is they feel like that this Administration is
trying to tell people how to run their lives. And I think when
you are seeing this record turnout in some of these early
primaries, both on the Democratic and Republican side, I think
what you are seeing is an outrage at the direction of the
country.
So, Mr. Zoeller, what is your response to the fact that Mr.
Silberman doesn't think you are doing a good job?
Mr. Zoeller. I will leave it to the policymakers in our
legislature to defend the weighing that they make. And I will
defend their authority to do it. I guess there are a lot of
things where States can't do it ourselves. And we will look to
Congress to service in those areas, and this is not one of
them.
The policy decisions and the weighing of these collective
rights and the balancing for our protections, I do go to our
legislatures and argue these same areas where consumers are not
being treated fairly. But, again, a lot of it is not
necessarily that the CFPB's rule would, let's say, be bad in
Indiana. It is that we are much more flexible, so when there
are things that we need to change, I can go upstairs to our
legislature and they usually will recognize a problem in
Indiana, and we can address it.
There are so many things changing in this area that I think
the snapshot that the CFPB is taking might be their best guess
today, but the ability to come back and change things is much
easier at the State level to protect our consumers and maintain
access to credit. So we will keep our own authority, thank you.
Chairman Neugebauer. Last question. Yes or no? Are you
enforcing the laws that your legislature had passed?
Mr. Zoeller. Yes, sir.
Chairman Neugebauer. Thank you. I now recognize the ranking
member of the full Financial Services Committee, Ms. Waters,
for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. Before I ask
this question, I would just like to give a little bit of the
backdrop.
I receive many calls in my district office about people who
are in trouble, people who are oftentimes low-wage earners,
some as desperate as has been described here, but the fact of
the matter is, they get hooked in the payday loan scenario.
They start out by getting a loan. They can't afford to pay it
back on time, so it is rolled over. Then, it is rolled over
again. And they are never able to get a hold on their finances,
and they find themselves doing six, seven, eight of these loans
a year on and on and on and on. So it is a problem.
And for anybody who says it is not a problem, you are
wrong. There is a problem that has been identified dealing with
payday loans. I, of course, have not been in a payday loan and
asked to go in their back room and see their criteria or
anything like Mr. Neugebauer, but I have not been in JPMorgan
Chase, I have not been in Bank of America, and I have not been
in Wells Fargo, any of them. And I am sure if I did, they
wouldn't let me in their backroom, anyway.
I just want to have it on record and to have us understand
that the CFPB is not just venturing into something because they
have nothing else to do. The fact of the matter is, it is a
problem. There is a problem out there. And we are hearing about
it from constituents. It seems to be spreading, you know, free
money tree, get your money here, whatever those names are of
these places are just springing up everywhere, particularly in
poor communities. The poorer the community, the more of these
street-level operations we have.
While I normally do not believe in Federal preemption, I
think we have a responsibility to step in when our constituents
tell us they are hurting, that they think that they are not
being treated fairly, that they think that they are being
ripped off. We have a responsibility to do that. And we are
seeing more of this kind of discussion from our constituents
about the haves and the have-nots and the 1 percent.
And they are hating government. They are hating
corporations. They are hating the financial services community
because even the middle class are not doing well.
But I want to ask you, Attorney General Greg Zoeller, later
today we are going to hear from financial services industry
lobbyists on the second panel who will argue that the CFPB's
proposed payday lending rule will choke off access to needed
credit for vulnerable consumers. These lobbyists made the exact
same arguments when the Department of Defense was working on
amendments to the Military Lending Act that sought to protect
servicemembers from excessive interest rates and fees on short-
term credit products.
You wrote to the DOD asking them to strengthen, not weaken,
their MLA rules in a latter with other State AGs from December
2014. In essence, you rejected the industry's arguments as
crying wolf. Why don't you think the industry is again getting
it wrong when it comes to the CFPB's rules?
Mr. Zoeller. I think that does help set this up, because we
were working with Attorney General Beau Biden and a number of
other people who were focused on the credit that is extended to
military personnel who move throughout the State and throughout
States. There may be more of a need for those consumers who
aren't always under the protection of a State the same way that
others are. So we do think that there are certain consumers who
aren't residents, who may be transient. And I do think that the
focus on the vulnerability of military personnel is somewhat
of, I would say, a unique group.
But in the other areas that you are talking about, in
California, if they have had a problem and the attorney general
there has not addressed it or the legislature, they might call
and ask for the State to focus on it. And, again, we were
asking Congress to look at some of these things as it relates
to a different kind of category. But the people in our State
are protected. Some of the military men and women, I think were
a unique case.
Ms. Waters. Let me just say this. We all know that it is
politically powerful and safe to talk about protecting our
military, because these are people who put their lives on the
line for us, whether they are active or veterans or whatever.
It is good politics to talk about helping veterans.
But what is good for the goose is good for the gander. If
you are willing to write letters to protect veterans from
predatory lending practices, you ought to do that for
everybody.
I yield back the balance of my time.
Chairman Neugebauer. I thank the gentlewoman.
And now the vice chairman of the subcommittee, Mr. Pearce
from New Mexico, is recognized for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
Mr. Zoeller, Ms. Treppa, I think you might be better
qualified to answer. You heard Mr. Silberman's testimony that
20 percent of the loans default. Do you find 20 percent default
on your loans?
Mr. Zoeller. No.
Mr. Pearce. I was asking Ms. Treppa. Sorry.
Ms. Treppa. Thank you for that question. No, we have quite
far less than that kind of a default rate.
Mr. Pearce. Okay. And, Mr. Zoeller, do you think that
institutions across an industry would be able to stay in
business if they had a default rate of 20 percent?
Mr. Zoeller. Not in Indiana.
Mr. Pearce. Yes. Mr. Silberman, I see in your testimony
also that you declare that APR is 391 percent to 521 percent.
What is a fair percent to where the CFPB wouldn't declare it to
be extortion or abusive?
Mr. Silberman. Thank you, Congressman. The CFPB has no
authority to regulate interest rates.
Mr. Pearce. I didn't say regulate. I said, when do you
believe, as the CFPB, that it becomes abusive? Because you say
you are after the abusive techniques. So when does a rate
become abusive?
Mr. Silberman. The CFPB views the abusiveness not about the
rate, but about the practice of making a loan--
Mr. Pearce. Why did you put the rate in your testimony if
it does not apply to what you are trying to tell us today? Why
did you put that in there? I find that offensive. Because you
come in here and you try to mislead us on that, and then you
tell me when I ask you that you have no opinion, that it is not
your purview, that you don't even have an opinion. What is your
personal opinion about when it is too high?
Mr. Silberman. Congressman, I don't believe it would be
appropriate for me to offer you my personal opinion.
Mr. Pearce. You are the Deputy Director.
Mr. Silberman. And so therefore, I am here to represent the
Bureau.
Mr. Pearce. Why did you put it in your testimony then?
Mr. Silberman. Because we thought--that portion of the
testimony was describing a report we issued. We are a data-
driven--
Mr. Pearce. Why did you issue a report on something you
have no interest in? You said it is not right for the agency to
take a position on that, so why did you issue a report on it?
It is obvious that you have an opinion about it as an agency.
Mr. Silberman. Congressman, we did not issue a report about
that. We issued a report about the practice of making
unaffordable loans. As part of that report, we thought it was
important to describe the facts as we understood them so we
could--
Mr. Pearce. Okay.
Mr. Silberman. And that was one of many, many facts, but
not what the subject of the report was.
Mr. Pearce. But let me give you a contrast, sir. So let's
say 15 percent is a higher rate of interest. You can go to a
bank today and get a loan for 6 percent, 15 percent, you go in,
you borrow $100 for a month, at a 15 percent rate of interest,
which is $1.50 for the year, just roughly speaking. I know it
would come out a little bit different. You divide that by 30
days, and you get 75 cents.
Now, I am asking you, would you loan $100 for a month for
75 cents rate of return? And that is what you, the agency, are
doing by putting numbers like this in reports. And you are
going to an industry where I have two letters today that come
from constituents who this past week walked into places where
one says, I had a medical emergency, I have a disabled
daughter. I just needed help to make it to the end of the
month. And you are going to shut down 70 percent of these
people, you. You, Mr. Silberman, are going to shut down 70
percent of these people if you put this rule into place.
Now, if the industry is so profitable, 391 percent to 521
percent are your numbers, if it is that profitable, how come
all institutions are not flocking into it? Do you as an agency
consider that?
Mr. Silberman. Congressman, actually that goes to the
question you asked Ms. Treppa.
Mr. Pearce. No, it does not. I am asking you. So, Mr.
Silberman, you used to work for Kessler Financial.
Mr. Silberman. I did indeed. Yes, sir.
Mr. Pearce. And Mr. Kessler is one of the richest men in
America by far in the 1 percent, $300 million net worth. Did
you ever suggest that maybe he ought to get into this lucrative
market that is down here and is ripping people off? This
industry leader of Kessler could get into here and we could
clean it up by ourselves by competitive advantage that we are
offering. Did you ever once as executive vice president of that
operation suggest that to Mr. Kessler that he might increase
his rate of return by taking out these bad actors that you are
trying to take out as an agency?
Mr. Silberman. Mr. Kessler did not need my advice as to how
to make more money.
Chairman Neugebauer. The time of the gentleman--
Mr. Pearce. But you, I would note, are avoiding the answer
of whether you took a moral position at that company on whether
or not you all were supporting an industry that does far more
to the poor. Thank you. I yield back.
Chairman Neugebauer. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, the
ranking member of the subcommittee, Mr. Clay, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman. And this question is to
Ms. Treppa. In March of 2015, Missouri Attorney General Rich
Koster announced that eight online lenders acting through
business entities operating from a Native American reservation
in South Dakota could no longer operate in Missouri, finding
that, ``These predatory lending businesses operated in the
shadows, taking advantage of Missourians through outrageous
fees and unlawful garnishments.''
Given that a majority of tribal lenders' businesses occur
off tribal land, could you elaborate on how you advertise and
acquire customers like those in Missouri who were the subject
of the AG's enforcement action, and specifically what marketing
channels do tribal leaders utilize?
Ms. Treppa. Certainly, Congressman. Thank you for the
question. I can't speak to the specifics of that issue.
However, we originate loans on tribal lands. They are accessed
via the Internet by customers. We acquire customers online
through various ways: search engine optimization; lead
generation; and paper click, all of the standard access
opportunities.
Mr. Clay. Does your Tribe have its own tribal usury rate?
And if so, what is your usury rate?
Ms. Treppa. We don't have a usury rate, per se. The cost of
the product is commensurate with the cost of customer
acquisition, as well as the cost of underwriting and the cost
to regulate.
Mr. Clay. What would be a normal rate of short-term loans?
Ms. Treppa. The rates for our installment loans--and they
are not payday products--are dependent upon the customer's
cycle to repay, whether it is semi-monthly or biweekly.
Mr. Clay. So the longer it takes to repay, then the higher
the interest rate?
Ms. Treppa. Congressman, the installment loans are up to 10
months. However, the majority of our customers pay it off
within 4 months.
Mr. Clay. What percentages goes into default of those
loans? Do you have any idea?
Ms. Treppa. Default rates are under 16 percent, typically.
We have a high rate of satisfaction with our customers, 98
percent. And as I mentioned, default rates are relatively low.
Mr. Clay. Let me ask you, why do you think people come to
companies like yours and others for these products, for the
loans?
Ms. Treppa. Because they have an immediate need, and there
is a lack of supply in the market.
Mr. Clay. So maybe a bank that they have a regular account
with or a checking account would deny them outright and so they
look for alternatives? Is that it?
Ms. Treppa. Congressman, typically banks don't loan small
dollar amounts. Our loans are $1,200 or less.
Mr. Clay. You fill a niche, then, correct?
Ms. Treppa. Sure. There is a need and we--
Mr. Clay. People need the money, apparently.
Ms. Treppa. --provide a badly needed product to our
consumers.
Mr. Clay. Would you not agree that State AGs like Attorney
General Zoeller and my attorney general had the right to
protect their own citizens from lenders in whatever way they
see fit, including through State licensing requirements or
State usury caps?
Ms. Treppa. As I had mentioned earlier, the consumers
access our product via the Internet. And the loans are
originated on tribal lands. We have a robust internal
compliance department, as well as a regulatory commission that
oversees and licenses all of our lenders that operate on our
tribal lands.
Mr. Clay. Yes, but these are people from different States,
too, correct?
Ms. Treppa. Correct.
Mr. Clay. Okay. I will wait for the next round. Thank you.
I yield back.
Chairman Neugebauer. I thank the gentleman. Now, the
gentleman from Missouri, Mr. Luetkemeyer, the chairman of our
Housing and Insurance Subcommittee, is recognized for 5
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. Zoeller, I certainly appreciate your, ``don't call us,
we will call you'' attribute. I think that is what we all would
hope that the people from the States would be having, because I
think that is how we as a country should operate. We are not
the country of America. We are the country of the United States
of America, which means emphasis on ``States.'' We are all a
group of States that are as one country. And therefore, the
States have the ability to make these rules and regulations,
and that needs to be allowed for you to continue. I certainly
appreciate your testimony along those lines. To me, this is
extremely important.
Mr. Silberman, you made the comment a while ago that your
job was to enforce the law. And then you turn around and make a
rule and intend for that to be the law. It is very
disconcerting to me to have that statement made and turn around
and you by rule can change law and/or make law. That seems to
be going on, on a regular basis in this Administration.
Would you like to elaborate and give your position on it
again?
Mr. Silberman. Thank you, Congressman. Yes. The job of our
Bureau, like many administrative agencies, is to particularize,
if you will, laws that are passed by Congress. Congress defined
``prohibited, unfair, deceptive, and abusive practices.''
We think we have an obligation--we could go in, you are
right, and just start enforcing that rule and suing people
without giving them any notice that here is what we understand
that to mean. We think that would be bad practice, so what we
have tried to do is to do careful research and study--
Mr. Luetkemeyer. Mr. Silberman, you are going through the
rulemaking process here, but it certainly gives me pause--if
you make this same rule the way you did others, you are not
going to listen to what everybody says. I had a group of
bankers one time come into my office and they told me that they
had just left the CFPB. They were mad as the dickens. They
said, you know what, we were told that we were the 42nd group
that was talking to the CFPB over this issue of qualified
mortgages.
And they were told, we appreciate you being here, but you
don't know anything about what you are talking about. Now, you
have a lot of responses and going to get a lot of responses on
this issue. I hope you consider all that very carefully,
because those are the consumers that you are going to be
hurting by what you are doing.
Mr. Zoeller, quick question: You made the comment a little
ago that you only had five complaints with regards to payday
lending in your State?
Mr. Zoeller. That is correct.
Mr. Luetkemeyer. Is that correct?
Mr. Zoeller. That was 2015's number.
Mr. Luetkemeyer. How many transactions did you have over
the course of that year? Do you know offhand?
Mr. Zoeller. I am not part of the industry. I know it is a
lot, though.
Mr. Luetkemeyer. Thousands and thousands, no doubt.
Mr. Zoeller. Yes, sure.
Mr. Luetkemeyer. I can tell you from being a financial
Services chairman back in Missouri, my good friend, Mr. Clay, I
followed him in the legislature, and we put the model
legislation in place for payday lending. And one of the jobs as
chairman of the committee was to see once how it worked. And we
actually had fewer complaints on our payday lending folks than
we did with the banks themselves.
Mr. Silberman, by your own admission, the CFPB's admission,
and taking the statement from the chairman, 60 percent or 70
percent of the payday loan folks are going out of business,
which is going to restrict the ability to have access to credit
for lots and lots of folks. What is your solution?
Mr. Silberman. Thank you, Congressman. We have not said
that 60 percent or 70 percent of companies--
Mr. Luetkemeyer. Whoa, that is pretty well in print lots of
places. Mr. Cordray has actually said that in this committee.
In fact, I think in this committee, he made the statement of 80
percent. But we will take 60 percent or 70 percent, and give
you the benefit of the doubt.
Mr. Silberman. If I can finish, Congressman, what we have
said is not that. What we have said is that of the loans that
are made today, 60 percent to 70 percent go to consumers who
have received more than 6 loans in the course of a year, and
that if nothing changed and if industry simply said what they
are going to do is stop making loans after 6, that would mean
60 percent or 70 percent of the loans would stop.
We have also been very clear to say that is not at all what
we expect to happen, that we expect to see changes, and in that
regard, I would indicate that what we have said is actually no
different than what the industry had said long before we issued
our proposals.
Mr. Luetkemeyer. I have one more quick question. I am about
out of time here. I asked the question originally, what are you
going to do about the alternative? What are people going to be
able to do? I didn't get an answer.
In the President's budget, he has a line item in there, in
the community development financial institutions fund program
account for $10 million. The program will support broad-based
access to safe and affordable financial products and provide an
alternative to predatory lending by encouraging CDFIs to
establish and maintain small dollar loan programs, $10 million.
So the President is going to set up his own payday lending
business? Is that what is going on?
Mr. Silberman. Well, Congressman--
Mr. Luetkemeyer. Mr. Silberman, I realize we have left you
speechless here. But the bottom line of this is, we have the
Administration that is going to get in the payday lending
business, and they know they can't make money at it, and they
are going to subsidize it by $10 million. You know what? How
about if we just go give them grants? Every time you need a set
of new tires on your car, just go to the government to get a
grant to get $500 to go get a new set of tires. Okay. How about
if your kids need new braces? Go to the government and get a
grant for $2,000. That is what you are talking about here. That
is wrong. I yield back.
Chairman Neugebauer. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Hinojosa, for 5 minutes.
Mr. Hinojosa. Thank you, Chairman Neugebauer and Ranking
Member Clay, for holding this hearing. I also want to thank our
distinguished panelists for their appearance here today and for
sharing their insights with us.
Time and time again, we hear about hardworking families
being exploited by predatory, small dollar, short-term lenders
such as payday lenders. While these loans are meant to help
unbanked and underbanked individuals in need of quick cash, far
too many times the borrower ends up trapped in a vicious cycle
of rollovers of fees and more debt.
We sell our families short when we accept that high-
interest loans are the best we can do for our communities.
Payday and auto title loans with uncapped annual percentage
rates have long enticed families in moments of desperation,
offering short-term fast cash at the cost of long-term debt at
rates averaging $500 annual percentage rates.
Let me share with you that in Texas, an average $500 payday
loan costs an astounding $1,100 or more to repay in a period of
just a few months. In Texas, payday and auto title loan
businesses have the second highest number of consumer
complaints by their regulator. In addition, payday and auto
title lending is a top reason why scores of families end up at
the doors of social services agencies in my State.
Let me go to the first question. Mr. Silberman, can you
tell us about what the CFPB research has found regarding the
payday and auto title lending industry? What are the consumers
being harmed by in this industry?
Mr. Silberman. Thank you, Congressman. Our research which
we have done over--as I indicated--a period of several years
through several studies, field hearings and the like, confirms
very much what you have indicated, that for a significant
number of consumers, they enter into these loans and then find
that they had a need, but when it comes due, they can't afford
to make the payment.
Some of them default and wind up in a collections
experience, perhaps having their wages garnished. Some wind up
in bankruptcy. But many wind up borrowing again, and then 2
weeks later the same thing happens and they borrow again and
again.
The analogy that I found quite helpful is, the CFSA on
their website talks about--analogizes to taxis and says that
taxis are useful as a ride--if you are going a short distance,
a taxi is a good way to get there. But if you are going on a
long trip, taxis can be very expensive.
And what our research really shows is that if you open the
door to the taxi without assessing whether consumers have the
ability to repay, consumers think they are taking a short ride
and wind up taking a very long, long journey at great cost.
Mr. Hinojosa. With response to that, listening to your
answer, will the result from the Bureau's rulemaking allow
consumers to continue to be able to borrow short-term loans?
Mr. Silberman. Thank you. The result from the Bureau's
rulemaking--and I should emphasize that right now, we have not
yet even proposed a rule. We have outlined proposals under
consideration. But our goal would be that consumers would have
the opportunity to get affordable loans. Whether they are
short-term loans or not, that is harder to say.
One of the problems is that for folks who need these loans
but can't actually repay them in the short-term, longer-term
loans may be a better solution. But affordable loans are very
much what we are trying to ensure will be available to
consumers.
Mr. Hinojosa. Tell me about the 5 percent option included
in the proposed rule. Will it be included in the final rule?
Mr. Silberman. Congressman, I can't answer that question at
this time. I can't even answer the question of whether it will
be in the proposed rule. We indicated that was one of the
options we were considering as a streamlined way of enabling
assessments of whether consumers have the ability to repay. But
it would be premature for me to speculate what would be in the
proposal or the final rule.
Mr. Hinojosa. Thank you. Ms. Treppa, you note that your
Tribe and others have developed lending businesses that have
constructed strong regulatory frameworks. How often has your
Tribe brought enforcement actions for unfair, deceptive, or
fraudulent practices in connection with the transactions that
do not occur on trust land?
Ms. Treppa. Congressman, first, all of the transactions
occur on trust land.
Mr. Hinojosa. Okay.
Ms. Treppa. Currently, we have a very robust internal
compliance regime that ensures that consumers are protected and
it is--to date, there have been no enforcement actions against
the tribal lenders that we have licensed.
Mr. Hinojosa. My time has run out. I yield back.
Chairman Neugebauer. The time of the gentleman has expired.
And the Chair now recognizes the gentleman from Colorado, Mr.
Tipton, for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman. And I would like to
ask unanimous consent to submit a letter from our AG, Cynthia
Coffman, for the record.
Chairman Neugebauer. Without objection, it is so ordered.
Mr. Tipton. Thank you. Mr. Silberman, I would like to be
able to follow up, frankly, on the chairman's question. When we
were talking about what gap is to be filled, what need do we
have to have your rules issued, I am not sure I heard an
answer. What is the gap?
Mr. Silberman. Thank you, Congressman. The gap is that--as
I indicated, our research indicates that loans that are made
without assessing a consumer's ability to repay wind up
creating a great deal of harm for consumers. And we believe
there is a need at this point for a Federal regulation which
establishes that it is an unfair or abusive practice to make a
loan of this type without regard to the consumer's ability to
repay.
Mr. Tipton. So you want to have fairness, but you aren't
able to specifically point to anything; it is basically just to
be able to write rules as filling the gap?
Mr. Silberman. No, I think quite to the contrary we have
pointed to a great deal of evidence in two reports and other
studies to identify the harm that we are seeing, and so we
think there is a need to establish a principle that--
Mr. Tipton. Let's look at some of the solutions. You have
held roundtables, forums with States, I think you had
indicated, seeking it out. You are familiar with what has
happened in Colorado?
Mr. Silberman. Yes, sir.
Mr. Tipton. They have done a good job.
Mr. Silberman. Colorado has made a set of choices.
Mr. Tipton. Is it good?
Mr. Silberman. It is not appropriate--
Mr. Tipton. Have they fulfilled those requirements you are
talking about?
Mr. Silberman. It would be quite inappropriate for us as a
Federal agency to judge what States are good or bad.
Mr. Tipton. Well, aren't you judging if you are going to
start writing rules to preempt them?
Mr. Silberman. We will--Congressman, the rules that we are
considering proposing would not preempt what Colorado has done,
or what any other State has done. It would add an additional
requirement that--the requirement that the assessment be made
of the consumer's ability to repay. So that Colorado has said,
for example, that the minimum--
Mr. Tipton. Effectively, we need the Federal Government to
step in because Mr. Zoeller and Ms. Treppa don't care about the
people who live in their States. Is that what you are telling
us?
Mr. Silberman. I am saying, Congressman, that we have an
obligation to enforce Federal law. The Federal law provides
consumers, all consumers in every State, with protections
against unfair and abusive practices. And that is our role, to
try and provide that protection which would sit as a floor on
which States could add their own rules, like the rules that
Colorado has added.
Mr. Tipton. Like the rules that Colorado has added. Now I
would like to be able to cite our attorney general, Cynthia
Coffman, in regards to the rules that you want to be able to
put forward. She states in her letter to you, ``Colorado's
extensive experience with these types of measures tells us that
such proposals--your proposals--will not work in the real
world, if the intent is to preserve access to credit.''
That is feedback from the States. That is what they are
telling you. You are overreaching. You are overregulating. You
are overpromising. But the States are the ones that are
actually performing.
Mr. Zoeller, I would like to be able to go and visit with
you just a little bit in terms of what you are seeing out of
the State of Indiana. In your own experience, do you think that
the CFPB, their proposal requires significant changes and that
they are going to have a chance of really succeeding for the
State of Indiana?
Mr. Zoeller. Quite frankly, we do have a focus on
consumer's ability to pay. And we have kind of a monthly income
as the basis of that. So we may not be as, let's say, may not
have as much impact.
We do a lot better job than other States, so I defend our
State every day. I will say we have stronger consumer laws and
some of the space might be better regulated in Indiana, but we
are still willing to look and see if we can do it better and--
Mr. Tipton. Since you are here--I would love to have our
attorney general here--tell me, has the CFPB reached out and
asked for your advice?
Mr. Zoeller. We have submitted letters. And they did have a
field hearing in Indianapolis on auto loans. But I would say
not enough. We really wanted to have much more of a dialogue on
what areas in which we are lacking. And I think the chairman's
point and other points about where is the gap in coverage is
what is missing.
And, again, if there are gaps where we don't have
authority, we may need some help, but quite frankly, in Indiana
we don't.
Mr. Tipton. They haven't really had a dialogue with you, as
they have indicated that they said they did. I would be
interested to know, have they used your personal expertise or
data concerning small dollar loans in their proposals?
Mr. Zoeller. I can't say whether they modeled theirs after
mine. Our legislature did have similar hearings, though, and
talked about these same areas, and came up with a focus on
consumer's ability to pay. But, again, that was our choice, the
legislatures that are elected to make those policies. I will
always just defend their decisions.
Chairman Neugebauer. The time of the gentleman has expired.
The Chair now recognizes the gentlewoman from New York, Mrs.
Maloney, for 5 minutes.
Mrs. Maloney. I thank the gentleman for yielding. I would
like to thank all of the panelists for their testimony.
Before I ask my questions, I would like to yield as much
time as Mr. Silberman would like in order to finish some of the
questions. Regrettably, we are under a 5-minutes rule, and I
have noticed that many times you have been cut off because the
time is just not sufficient.
I do understand you have quite considerable experience and
research in this area, and if there were some points that you
were cut off and you could not make, or some statements you
would like to make about your research, I would like to yield
you as much time as you would like to consume of my 5 minutes.
Mr. Silberman. Well, thank you very much, Congresswoman.
I really think there are three or four points I just wanted
to make sure I have made as clearly as I can. The first is that
the Bureau has been engaged in a very thoughtful, extensive,
data-driven research effort with respect to this product. We
have held three field hearings. We have done two research
reports. We have had extensive outreach. We have read--I think
it is safe to say--the entire academic literature that exists.
We have met with scholars in order to come to the place that we
are.
Second, as I hope I have made clear, what all that has told
us is that if you make a loan like this without assessing a
consumer's ability to repay, consumers are put in harm's way,
and many consumers wind up in dire situations.
As a result, what we think is needed is a very simple
principle, which is really a principle that is pretty well
settled and standard practice in most lending industries, that
before you make a loan, you should assess whether the consumer
has the ability to repay that loan. That is standard practice.
And I would like to just point out that a couple of years
ago, 2\1/2\ years ago, I had the privilege of testifying on the
Senate side, and with me that day was Dennis Shaul, the CEO of
the CFSA, the trade association for the payday lending
industry. And Mr. Shaul said at that time something with which
I profoundly agree. He said that based on his conversations,
his members recognize that payday loans as we know them are not
likely to survive another 5 years. And that is a quote. And he
also said that, ``what we need to do is a different and better
form of underwriting so we can catch people much earlier who
might end up in a cycle of indebtedness.''
That is a quote. And that is really the heart of what we
are trying to do here. And the final point I would make,
Congresswoman, is that we are still in an early stage of this
process, not the early stage for research, but the early stage
of the rulemaking process.
We have put a proposal--an outline of proposals out for
consideration. We spent the last 10 or 11 months listening to
feedback. We will put forward a proposal, and that will start
another round of communication, and we will take all that into
account in finalizing whatever rule we finalize.
Mrs. Maloney. Thank you. I quite frankly found the research
from the Bureau absolutely staggering. One out of every five
consumers who takes out a short-term payday loan ends up being
in debt for an entire year. I would hardly call that a short-
term loan.
But the most interesting finding to me was that only 35
percent of payday borrowers were able to repay the loan when it
was due without reborrowing. And I want to ask, is that roughly
the percentage of payday borrowers who would be able to borrow
under the Bureau's proposed ability-to-repay standard? And has
the Bureau to your knowledge done any analysis of what
percentage of current payday loans would likely be prohibited
under the ability-to-repay standard?
Mr. Silberman. Congresswoman, I think that is somewhat
difficult to do, because the lenders today are not getting the
information, because they are making loans without regard to
ability to repay. It is hard for anyone to know what they would
decide if they actually asked that question.
So the fact that 30 percent of the people are able to
repay, certainly that would suggest that those people are able
to pay. There are also alternatives, such as the kinds of
products that Chair Treppa was talking about, which have a
longer term, which would allow more people to be able to repay.
Mrs. Maloney. Your research basically focused on what you
called debt traps, which are currently the most abusive
practices. But it does not really focus on other practices that
might be termed abusive that may not rise to the level of a
debt trap.
What is your response to the argument that some people have
made that you put too much emphasis on focus on the debt trap
as opposed to other traps that are out there that might be
causing problems to consumers?
And I for one feel that to catch someone in a neverending
circle of debt is one of the most painful things I have ever
seen in a person's life. And anything we can do to help them
avoid that, I feel is important to quality of life and really
economic strength of people in our communities.
Chairman Neugebauer. The time of the gentlewoman has
expired. The Chair now recognizes the gentlewoman from Utah,
Mrs. Love, for 5 minutes.
Mrs. Love. Thank you. I just have a few questions. Mr.
Silberman, to what extent did the Bureau analyze the regulation
of short-term credit products in the States before designing
its own plan or rules to regulate these small dollar products
at a Federal level?
Mr. Silberman. Congresswoman, we have reviewed, I think,
the laws of all of the States and understand what those States
provide. As I have indicated, our obligation, of course, is to
assess what is required to implement Federal law, but we
certainly are aware of what the State laws provide.
Mrs. Love. Okay. So what was it about your analysis of
State law that made the Bureau think that State legislators and
regulators like those in my home State of Utah were doing a bad
job of protecting Utah residents?
Mr. Silberman. What our analysis has told us is that there
is a problem, that there are a large number of consumers who
are getting loans that they cannot afford to repay, and that is
leading to harm, and that there is a need--it is appropriate
and indeed necessary to implement Federal law which we are
obligated to enforce to make clear that--
Mrs. Love. So you did actually look at Utah State laws also
and you found problems in our State, also?
Mr. Silberman. We have found a problem in the market. We
are trying to address the problem in the market by implementing
the Federal law that prohibits unfair and abusive and deceptive
acts and practices.
Mrs. Love. Okay. So it is my understanding that the CFPB's
rulemaking would eliminate some of the commonsense Utah laws
and that the Federal law would likely eliminate these important
short-term credit options for my constituents. Is that--
Mr. Silberman. The rule that is under consideration--and,
again, this is just an outline of proposals, not a proposed
rule--would not eliminate any State law, including a law of
Utah. We also do not believe it would drive lenders out of
business. It would create a level playing field in which
affordable loans could be made.
Mrs. Love. Okay. I believe that you are only telling--and I
think that everyone else here can sense it--part of the story.
You are telling one side of the story and you are not telling
the other side of the story.
For instance, a young, hardworking, single mom comes home
from work--and this is a true story--late at night to find out
that her babysitter ran out of formula for her daughter 3 hours
ago. She uses her last resort option, goes to her payday loan
place, goes to the store, and buys formula for her daughter.
What would you suggest that she do? Knock on everybody's door?
What would you suggest that she do? Because there are other
actors that have used this as a last resort and it has worked
for them.
And I'm sorry, but I find it offensive that you would say
that people aren't smart enough to make decisions for
themselves. And so you have to go into States, you have to go
into cities, you have to go into all of these other places to
say, trust Washington. We know what is best for you. Trust
Washington to make the decisions for you. We know what is best.
Don't worry. Your States aren't doing a great job. They don't
understand what your needs are. We understand more than anybody
else. Have you ever been to Saratoga Springs? Do you know where
that is, in Utah?
Mr. Silberman. Oh, no, I'm sorry. I have been to Saratoga
Springs in New York, but not in Utah.
Mrs. Love. Okay, in New York. Well, have you ever been to
Utah?
Mr. Silberman. Yes.
Mrs. Love. Yes? Skiing?
Mr. Silberman. No, ma'am.
Mrs. Love. No, just visiting? Do you know the people in my
districts? Do you know the people who actually use it who have
said, thank goodness it was there as a last resort?
Mr. Silberman. We have had the opportunity during the
course of our work to hear from many consumers who use these
products.
Mrs. Love. Have you heard--okay, let me ask you this
question. How many people have you heard from who actually have
used these products and said they have worked for us, it has
gotten us out of a terrible situation, thank goodness it was
there?
Mr. Silberman. I'm sorry. I don't know the number offhand.
Mrs. Love. You have met with some, right? But I have yet to
hear you talk about their stories.
Mr. Silberman. Congresswoman, I think we did indicate from
our research which was confirmed by our experiences that there
are 30 percent of the people for whom this product works
exactly as it was intended, and it enables them to bridge
emergency and to get to--and they have the ability to repay.
It is the other two-thirds who don't have the ability to
repay for whom we want to create a market in which there are
options for them so they don't have to take out the loan and
then 2 weeks later find they have to take out another loan
because they don't have the money to repay the first loan.
Mrs. Love. Okay, so I am going to--I am running out of
time. But this is a fair question to ask. And maybe you could
just keep it in the back of your head. But is the CFPB doing
anything to make sure that consumers of these small dollar
credit products have the option at credit unions or community
banks to be able to have some of these options, also? Or is it
just rulemaking?
Mr. Silberman. Mr. Chairman, may I answer the question? I
see that time is up.
Chairman Neugebauer. Yes, the time of the gentlewoman is--
Mrs. Love. Yes or no? I just need a yes or no.
Mr. Silberman. Yes.
Mrs. Love. Yes? Okay.
Chairman Neugebauer. Okay, thank you. The Chair now
recognizes the gentleman from Washington, Mr. Heck, for 5
minutes.
Mr. Heck. Thank you, Mr. Chairman. I would like to direct a
couple of questions as time allows to Deputy Director
Silberman. I noted that last week your boss gave an interview
in The Wall Street Journal in which he indicated that he would
encourage credits and credit unions to make short-term loans. I
know that NCUA has some longstanding experience actually
setting rules for encouraging payday advance loans and on the
banking side, FDIC and OCC, another product, deposit advance
product.
What I am actually interested in is understanding a little
bit about your conversations at the Bureau with other
regulators, what you think of their rules, and what changes, if
any, you contemplate to how it is they have structured their
approach and yours?
Mr. Silberman. Thank you, Congressman. And you are
absolutely right that the National Credit Union Administration
(NCUA) has adopted provisions for what they call a payday
alternative loan to enable credit unions to make a loan that
they think works. The evidence is that a significant number of
credit unions are taking advantage of that. In the outlines of
the proposals under consideration, we indicated that we would
allow that to continue as essentially an exception to the
general rule.
Mr. Heck. So you would not preempt their approach?
Mr. Silberman. Correct. We have--as you indicated, Director
Cordray--we believe that there is an opportunity here for
community banks and credit unions who know their customers,
don't have the same kinds of expenses that others might have to
provide safe, affordable products to their customers and that
we are encouraging them--
Mr. Heck. Excuse me, Deputy Director. I apologize for
interrupting. But I want to get to the banking side of that
question, too, because I think the experience has been a little
bit different or the perception in the industry has been a
little different than it is on the credit union side. Could you
answer the question for them, as well? Or did you mean for it
to cover both NCUA and the other regulators?
Mr. Silberman. The proposals that we indicated we are
considering would allow any institution, a depository or non-
depository, a credit union or a bank, to take advantage, to
make payday alternative loans within the parameters of their
regulation.
Mr. Heck. And your proposed rule will be explicit in that
regard?
Mr. Silberman. I don't want to speculate on what our
proposed rule will do. I can say that is what the outline of
proposals under consideration says.
Mr. Heck. Secondly, probably lastly, it is my belief that
we have a lot of legal products out there that are well used by
the vast majority of the population in some instances. But on
occasion, there can be a small slice or a slice--I don't want
to get into splitting hairs here--whom for whatever
circumstances have not used that product well, whether it is
their fault or anybody else's fault.
But we have this approach to regulation. You can have a
casino, but we have 1-800-BETS-OFF. You can have a bar, but you
can't serve somebody if they are clearly inebriated. In some
States--Colorado, Washington--you can have a marijuana
dispensary, but we have a lot of restrictions on how you can
engage in that industry.
And I don't know if this is a fair analogy. I am interested
in your response. Are short-term small dollar loans a fair
analogy where you have some percent of the population for whom
that becomes a problematic usage? And if so, what have we
learned from those other industries where we have mechanisms
for intervening and helping and the like?
Mr. Silberman. Congressman, the distinction I would draw is
that the first question we want to ask is whether that product
is safe for its intended use. What our research indicates here
is that we have a product that is really not safe for its
intended use. It is not simply a handful of people abusing the
product, and that we have to deal with that as that kind of
problem. It is really we have a product that when this product
is made without assessing ability to repay, it is not safe for
its intended use. And that raises a very different kind of
problem for lawmakers and regulators.
Mr. Heck. Very good. Thank you very much, sir. I yield back
the balance of my time.
Chairman Neugebauer. I thank the gentleman. And now, the
Chair recognizes the small businessman from Texas, Mr.
Williams, for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman.
Mr. Silberman, in full disclosure, you need to know that I
am a car dealer. So you know how I feel about you and your
agency, okay?
Mr. Silberman. I remember from the last time I was here,
Congressman.
Mr. Williams. Let's move on, all right? First of all, you
keep saying that you have done careful work, but if I heard you
correctly when you talked to the chairman earlier, you have
never visited a store. Now, how can you claim to understand the
market or a business if you have never visited it before?
Mr. Silberman. Congressman--
Mr. Williams. Make it short, because I have other
questions.
Mr. Silberman. I have met with many store operators. My
staff has visited many, many stores. We as a Bureau had a
consumer advisory board meeting last summer where the entire
consumer advisory board, including the Director--
Mr. Williams. You went on a field trip.
Mr. Silberman. --went to visit a store.
Mr. Williams. I did that in the sixth grade. Now, I get it.
Okay. The other thing is, you talked about how scholars have
helped you make these decisions. What the heck is a scholar on
payday lending? Who is that person?
Mr. Silberman. There are--
Mr. Williams. Someone like you who has never been there?
Mr. Silberman. There are many economists who have studied
this industry, some funded by industry to do research, some
funded by consumer advocates to do research, some independent.
We have read all of their research.
Mr. Williams. I got it. Okay. Let me move on. Section 1022
of the Dodd-Frank Act under standards for rulemaking reads,
``The Bureau shall consider the potential benefits and costs to
consumers and covered persons, including the potential
reduction of access by consumers to consumer financial products
or services resulting from such a rule.'' And, in fact, Mr.
Silberman, the Bureau has explicit authority under 1022 to
exempt any class of covered persons, service providers or
consumer financial products or services from the requirements
if statutes are implementing regulations that you are
implementing, okay?
In fact, I must tell you, I am proud that, along with those
two, I have offered legislation last year that would have
helped strengthen that exemption. So my question is
straightforward. Do you believe the CFPB has used Section 1022
exemption adequately?
Mr. Silberman. Yes, sir.
Mr. Williams. Okay. Has the CFPB taken into account the
impact of all these new regulations have on financial
institutions like community banks, credit unions, and auto
dealers?
Mr. Silberman. Yes, sir.
Mr. Williams. Okay. What about studies that show how these
rules like the upcoming payday rule, how they affect the
service these institutions are able to give their customers?
Have you looked at those studies and seen that customers--the
very people you are trying to save--you are hurting them? Do
you understand that?
Mr. Silberman. Congressman, we have carefully evaluated the
practices in the industry, the effects on consumers, what
happens to consumers when you make loans without assessing
whether they are affordable, without assessing their ability to
repay, and done our best to project the consequences of the
proposals that we are considering. We continue to receive
feedback and think about that and refine our thinking based on
what we are learning.
Mr. Williams. Okay, question to you. Do you--you and the
Bureau--know better than the individual people making the
loans? Are you just smarter than they are?
Mr. Silberman. Congressman, we believe that the people
making the loans have the capacity and should exercise the
capacity to assess whether the consumers have the ability to
repay those loans.
Mr. Williams. Okay, but are you just smarter than they are?
Mr. Silberman. No, not--as I say, we are trying to--
Mr. Williams. You are advising them?
Mr. Silberman. We are--actually, I would say--obligating
them to--before making a loan to assess whether the consumer
has the ability to repay. We have complete confidence that is
something that can be done efficiently, effectively, and will
produce a better world for consumers.
Mr. Williams. You will help make a better deal for them?
Mr. Silberman. We are not, as I have indicated, trying to
affect the price of the product.
Mr. Williams. Let me just say this to you. I am a business
guy. And let me tell you, government--I am telling you,
government doesn't create a good deal like you think you are
helping your customer. It just doesn't happen. Do you know what
makes a good deal? It is competition. It is reputation. It is
the private sector that makes the deal.
And the strength of the economy and the ability to realize
that we all talk about the American Dream--it is not delivered
by you, okay? It is delivered by the people that you actually
are hurting. You know, I would tell them, trust the people.
Trust yourself. Don't trust the Bureau. Don't trust the
government. You see?
All I am saying to you is, I can tell you, because I am
living this dream 24/7 in my industry, it would be great if you
would back off a little bit and realize that consumers actually
know better and the private sector can create the competition,
create the reputation that will fix these problems without you
all even being involved.
I yield back, Mr. Chairman. Thank you.
Chairman Neugebauer. I thank the gentleman. And now the
Chair recognizes the gentleman from Georgia, Mr. Scott, for 5
minutes.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Silberman, I am having a bit of trouble understanding
why you are trying to destroy small dollar loans. They are much
needed. We have 75 percent of the American people who live
paycheck-to-paycheck. Americans have emergencies. They have a
need for being able to acquire money to fix those emergencies.
We have 62 million unbanked and underbanked Americans who do
not use the traditional banking system.
These small loans are highly transparent. They require
heavy disclosures and compliance with Federal law. They have
all received positive feedback from our borrowers. They are
monitored by the bank first to determine whether they have
sufficient regular cash flow to repay the loan. They have
built-in controls to limit the use of the loan. They even have
a cooling off period so that customers and consumers do not
become overly reliant.
The banks provide clear disclosure of the products. They
limit the size of the loan to ensure that the consumer can
repay that loan and that they don't get into a cycle of debt.
They provide consumers with access to short-term credit, all
positive things that are controlled.
Yet, you and the OCC and the FDIC appear to be trying to
kill these loans, leaving the consumers with less choice and
more expensive options, because without access to these short-
term, small dollar loans, it creates a number of consumers who
will be pushed out from access.
I have to ask you, with all of this, why? Why are you and
other regulators, trying to make it even harder for consumers
to make ends meet, to deal with some of these emergencies, by
effectively regulating out of business those small dollar
loans? Why are you doing that to the American people?
Mr. Silberman. Thank you, Congressman. We are not doing
that. What we are trying to do is to make sure that the loans
that consumers get are affordable loans, that this is a loan
that somebody can repay and still meet their other obligations,
continue to put food on the table, continue to pay their
medical expenses, and not having to continue to borrow and
reborrow and reborrow, because that is what our research tells
us is happening today, that a large percentage of consumers who
take out these loans--and it is not surprising, if you need
this loan, that 2 weeks later, you are not going to be able to
repay and walk away.
We are trying to ensure that consumers can get loans that
they can afford to repay, and not wind up either in the hands
of debt collectors or in the spiral of continuing indebtedness.
Mr. Scott. Why are you making the rules or regulations so
complex, so complicated? See, the whole point is that, why not
make it more convenient? Why are we getting all of this push-
back that you are trying to deny Americans from these small
loans and that you are doing it by very skillfully putting
forward very complex, hard-to-understand, complicated
understandings of the rules?
My whole point, Mr. Silberman, is that we as a government
oftentimes tend to overextend our efforts in regulation and we
wind up hurting the very people who need the help the most. Can
you see some room here where you may need to--with all of these
complaints, with all of these concerns that we are raising
here--that maybe, Mr. Silberman, the CFPB stands back, takes a
look, and says, well, no, like you told me, you are not wanting
to kill them and put it out of business and stop the American
people from doing it, but unfortunately this is the results
that is happening. And too many people feel like this, that
maybe we can move to address this issue.
Are you willing to do that?
Mr. Silberman. Mr. Chairman, may I briefly respond?
Chairman Neugebauer. Briefly.
Mr. Silberman. We have spent the last 11 months since we
put our outlines, our proposals under consideration listening
to precisely those concerns, and we are continuing to think
about how to best balance achieving our objectives in a way
that is cost-effective and that achieves the maximum good.
Mr. Scott. Thank you, sir.
Chairman Neugebauer. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Hampshire, Mr.
Guinta, for 5 minutes.
Mr. Guinta. Thank you, Chairman Neugebauer, and I also want
to thank the panel for being here today.
I would like to ask a few questions on the impending
rulemaking for payday vehicle title and similar loans. I am
concerned because as outlined by the Bureau in March of just
last year, 2015, there was an acknowledgement that this
rulemaking would reduce revenue by up to 70 percent of these
short-term, small dollar, community-based credit providers, and
potentially even put them out of business.
As we know from the FDIC, 51 million people in our country
are either underbanked or have no banking options at all. That
is roughly 7 percent of American households who rely on a
short-term, small dollar, community-based product to meet their
day-to-day, week-to-week, and month-to-month needs.
My question I guess is, how would a hardworking American
family manage their money if they don't belong to an
institution, if they don't have access to a credit union or
community-based bank or larger institution? They rely on
products that short-term lenders offer. So that can essentially
help them meet their weekly or daily or monthly obligations and
hopefully get them in a place where they have greater self-
sufficiency.
Pew Charitable Trust recognizes in its research that these
products--on these products, most borrowers that leverage these
short-term credit products do so because they have no
alternative. And that is I think the crux of the issue here.
There is no alternative for them.
As I understand it, this rulemaking would restrict millions
of Americans' access to the credit on which they rely. I want
to ask Mr. Silberman, you started out your testimony and you
said the Dodd-Frank Act gives the CFPB plenary authority--you
used the term ``plenary authority.'' Plenary means absolute,
complete, unlimited authority.
So my question to you is, in Dodd-Frank Title 10, Section
1011, it states that the Bureau exists to ensure that all
consumers have access to credit and financial products. I would
like to follow up on Mr. Pearce's line of questioning. Can you
explain to me on what basis is the CFPB justified and empowered
to take steps that are clearly designed to eliminate the access
to credit that we are talking about?
Mr. Silberman. Thank you for your question, Congressman.
Section 1011 of Dodd-Frank, to which you referred, says that
the Bureau's goals are to ensure that consumers have access to
financial products and services and that the markets for those
services are fair, transparent, and competitive. That is a goal
of the Bureau to ensure that these markets are fair. Section
1031 states that we have the authority to identify and prevent
unfair, deceptive, and abusive acts and practices.
We are considering exercising that authority based on the
research that we have done as provided for in Section 1022,
which has identified a market failure, if you will, a problem
in which consumers are getting loans that they cannot afford to
repay.
Mr. Guinta. Okay, so how does that line up with Title 10,
Section 1027, which--and I have it here--says no authority to
impose usury limit. And I will read it very quickly: ``No
provision of this title shall be construed as conferring
authority on the Bureau to establish a usury limit applicable
to any extension of credit offered or made by a covered person
to a consumer.''
That would suggest that you can't set an APR limit, yet
that is exactly what this rule establishes. But right here, it
says you can't do it.
Mr. Silberman. Congressman, with all due respect, the
outline under consideration does not establish a limit. We
agree completely that we cannot do so. We have not proposed
doing so. We have not contemplated doing so. We will not do so.
Mr. Guinta. Repeat that. You will not do what?
Mr. Silberman. We will not establish a usury cap, an
interest rate limit for these or any other lending products.
Mr. Guinta. You are not looking to establish a 36 percent
APR?
Mr. Silberman. No, sir.
Mr. Guinta. And you are saying that the CFPB will not under
any circumstances move to establish that?
Mr. Silberman. Correct.
Mr. Guinta. Okay. So despite that, I appreciate that, and I
hope that you will hear that, because the concern here is that
very issue, that the rule exactly does that. And let's assume
for the sake of the argument that does happen. Where do people
who are underbanked or are not banked at all, what is their
alternative for banking and financial stability?
Mr. Silberman. Mr. Chairman, may I answer? I see--
Chairman Neugebauer. Briefly.
Mr. Silberman. Congressman, the products we are talking
about are actually only available to people who are banked. And
the goal of this rule is to ensure that there are affordable
products available to them, rather than products--
Mr. Guinta. All right, I appreciate that. But 51 million
people are utilizing this who are underbanked or have no
banking ability whatsoever. And I yield back the balance of my
time.
Chairman Neugebauer. I thank the gentleman. And the Chair
now recognizes the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the ranking
member and the witnesses for appearing today.
I find it quite interesting to say the very least that when
we enacted laws in 2007 with reference to our military, the
payday lenders were concerned. The argument was that you can't
cap interest rates at 36 percent. People can think for
themselves. They ought to be able to borrow money at whatever
rate we would like to charge.
But Congress decided otherwise. We capped the interest rate
for loans to military personnel and their families--2007--
people said, payday lenders, we are going to go out of
business. You are going to run out of business. If you do this,
we won't be able to make loans, and we will go out of business.
Congress thought otherwise, apparently. We passed the law that
limits what payday lenders can do.
As a matter of fact, there were people who were saying that
you can't pass laws that prohibit us from using the car title
as some sort of collateral. People can do whatever they want
with their property. It is their car. It is their title. Let
them do what they may. Why would you do this, Congress? You
can't do it.
Congress thought otherwise. Congress did it. You can't do
to a serviceperson what you can do to that mom whose child
needs milk. You can't do it, Mr. Attorney General, and you know
it. Am I correct? Could you speak a little louder, please? This
has to be on the record.
Mr. Zoeller. That is right. For military personnel.
Mr. Green. Yes, for military personnel. You can't do it.
Military personnel, they are good people. I support them. I
fight for them. I don't think we ought to send them into war
and spend billions of dollars and then when they come back home
we have to find money to make sure that they get good health
care or find money to make sure that they get proper housing. I
think that if we can spend billions to put them into war,
trillions literally, we can spend that on when they come back.
But I have friends who want to find other places to cut so
that we can help them when they come home. I support the
military. But I also support people who live in the streets of
life who find themselves in need of money and find themselves
being taken advantage of. If they are not loan sharks, they are
putting a lot of loan sharks out of business, payday lenders.
You are in here. I know you are. I know you are listening.
Someone talked about the moral hazard associated with some of
the things that we would do to regulate. Where was the moral
hazard argument when we did this for our military? Are these
folks who are being taken advantage of with these loans that
roll over and over and over and over again, paying these
extremely high rates, are they not decent red-blooded
Americans, too? Do they not deserve the same kind of
legislation from this Congress that we did for the military?
No, I don't think the CFPB has to do it. We have the
responsibility to do it. And we are not. I don't think the CFPB
is engaged in making laws. They make rules to enforce existing
laws. Is that a fair statement, sir, Mr. Silberman?
Mr. Silberman. Yes, sir.
Mr. Green. Thank you. So now, let's just be real, as we say
back in my neck of the hood. Let's just be real. Here is what
is going on. You have people on this side who want to protect
the consumer. And you have--not everybody, but a lot of people
on the other side who want to protect payday lenders. And by
the way, they are doing a pretty good job of it.
Payday lenders can and should be regulated. It really is
that simple. If we can do it for the military--good, loyal,
red-blooded Americans--we can do it for other good, loyal, red-
blooded Americans.
I yield back the balance of my time.
Chairman Neugebauer. I thank the gentleman. The Chair
recognizes the gentleman from Kentucky, Mr. Barr, for 5
minutes.
Mr. Barr. Thank you, Mr. Chairman. And I appreciate my
colleague talking about the need to regulate small dollar,
short-term lenders.
In my congressional district, at least, I know that many of
these lenders are regulated under Federal law by the Bank
Secrecy Act, the Electronic Funds Transfer Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act, the
Gramm-Leach-Bliley Act, the Truth in Lending Act, the Fair and
Accurate Credit Transaction Act, the Electronic Signatures in
Global and National Commerce Act, the Servicemember Civil
Relief Act, and the registration requirement for money service
businesses with FinCEN.
In 2010, in Kentucky, our split legislature--Democrat and
Republican--bipartisan, working together, in conjunction with a
Democratic governor, modernized a consumer lending law, and
that was in 2010. The result was the following. A regulation
that required a license, limits on rollovers, disclosure
requirements, a bond requirement, financial requirements for
licensing, capped fees, limits on advanced terms, a maximum
loan amount, exam and audit requirements by the Office of
Financial Institutions, headed by a regulator appointed by the
Democratic governor, Commissioner Charles Weis, who I know who
is a very excellent regulator. Limits on--no, allowance for
fines against lenders, a prohibition on lender prosecution of
customers, and finally, a requirement of background checks and
industry experience requirements for those lenders.
Those are the requirements at minimum that apply to these
entities in my district. So my question to Mr. Silberman is
this: What about these statutes, Federal and State
requirements, are inadequate to protect consumers?
Mr. Silberman. Thank you, Congressman. These statutes--all
the provisions you cited would continue to be in full force and
effect in protecting consumers in your district if the
proposals under consideration were finalized. What we would do
is add one more requirement, along the lines of what I
indicated and Mr. Shaul said we need to do. We need to ensure
that in addition, an assessment is made as to whether consumers
have the ability to repay the loan.
Mr. Barr. Yes. And do you not believe that the regulators
in Kentucky, Commissioner Weis, is he unable to do that under
the Kentucky law? Have you analyzed the Kentucky law? And was
there anything wrong with the process of a bipartisan general
assembly with a Democratic governor passing an update to the
consumer protection laws in Kentucky?
Mr. Silberman. I spent last week with Commissioner Weis
when we had our field hearing in Louisville on a different
subject, and I am sure he is entirely capable of enforcing
Kentucky law. We are not talking about enforcing--we are
establishing an additional requirement--
Mr. Barr. Right, so I understand, what justifies the
Federal Bureau canceling the collective judgment of Kentucky
legislators, a governor, and a regulator in Kentucky?
Mr. Silberman. Again, Congressman, we are not canceling
that judgment. We are saying that as a matter of a Federal law,
there is an additional requirement--
Mr. Barr. I'm sorry, Mr. Silberman. You are a Harvard Law
graduate. You understand the concept of conflict preemption.
You are canceling the collective judgment of the general
assembly of Kentucky.
Mr. Silberman. No, Congressman. What I learned in law
school is that we are not doing that at all. If we were to say,
for example, that Kentucky cannot require the disclosures that
they now require, that would be preempting and canceling. We
are not doing that. We are saying there is an additional
requirement in addition to--
Mr. Barr. Right. And to the extent--
Mr. Silberman. And that is--that is part of--
Mr. Barr. --the general assembly has passed a law that is
inconsistent with that, it is conflict preemption. Let me move
on very quickly to the SBREFA process. A constituent of mine
felt that their input was completely disregarded in the course
of the SBREFA process and that your regulators failed to
demonstrate a comprehension of the current very stringent State
regulator structure. That constituent wrote you a joint letter
and asked--with consent, I would like to submit this letter to
the record--my question--
Chairman Neugebauer. Without objection, it is so ordered.
Mr. Barr. --to you, Mr. Silberman, is how significant of
the input from the SBREFA process has been included in the
rulemaking process? Because based on a FOIA-produced record, it
indicates that all of the small business feedback as required
by law was completely dismissed out of hand in formulating your
rule.
Mr. Silberman. Congressman, we are carefully considering
the feedback we received through the SBREFA process. I have
read many of the submissions. I attended much of the hearing.
Our staff has carefully digested it. That is a valuable input
into our decision-making process. Anybody who says that we have
not considered that cannot make that statement because we have
been spending 11 months deliberating since that process, so no
one has any basis to say that we are not considering it. We are
doing precisely that.
Mr. Barr. It would be very disappointing if this was just
checking the box and that their feedback was not incorporated
into the final rulemaking.
Thank you. I yield back the balance of my time.
Chairman Neugebauer. I thank the gentleman. Now, the
gentleman from Minnesota, Mr. Ellison, is recognized for 5
minutes.
Mr. Ellison. Thank you, Mr. Chairman, and Mr. Ranking
Member.
We all know that competitive markets by their very nature
spawn deception and trickery. I am not quoting Bernie Sanders
here. I am actually quoting two Nobel Prize-winning economists,
Robert Shiller and George Akerlof.
In their new book, ``Phishing for Phools: The Economics of
Manipulation and Deception''--I recommend that book, by the
way--they explain how financial transactions can target people
for fraud. And we see it all the time, hidden commissions,
illegal kickbacks, steering to higher-cost products. We know
that criminals who perpetuate mortgage fraud and price-fixing
schemes try to exploit the gaps between Federal and State
enforcement to target innocent consumers.
Now, Attorney General Zoeller, on the screen is a quote
from a State attorney general, a very wise man. He said, ``One
of the things that we have learned from a wave of mortgage
fraud, price-fixing schemes, and other scams is that white-
collar crimes don't occur neatly within a single jurisdiction.
They cross State lines and international borders, and the
criminals try to exploit the gaps between Federal and State
enforcement to target innocent consumers.''
The same AG, very sharp guy, said that to fight the
ingenuity of these criminals, Federal and State and law
enforcement agencies must operate seamlessly without
jurisdictional disputes, bureaucratic roadblocks, or inertia.
Do you recognize these words, sir?
Mr. Zoeller. I will pass.
Mr. Ellison. Well, I do. They are your words.
Mr. Zoeller. All right.
Mr. Ellison. You said those things.
Mr. Zoeller. I wrote them. I didn't say them.
Mr. Ellison. Yes, well, said them, wrote them.
Mr. Zoeller. All right.
Mr. Ellison. You communicated them to the world.
Mr. Zoeller. No, I will stand by that. I think that is a
healthy approach to it. No, it is exactly--
Mr. Ellison. You are not running from those words, are you?
Mr. Zoeller. No, absolutely not.
Mr. Ellison. Good. Because I agree with those words. They
are from your November 2009 statement on the interagency task
force on fighting white-collar criminals. Now, I just thought I
would pull that out to light. Why should--could you just share
with me your take, why should abuses in small dollar lending
industry not be subject to the same national standard you
advocated in 2009? What is the difference?
Mr. Zoeller. There is a major difference in the markets
here. When we are talking about mortgage lending and some of
the big banks and the enterprises like that, you are really
talking about a different type of consumer. There were some
difficulties there.
In the small market, I think what is really missing is you
are already talking about people who are underbanked or
nonbanked. They are in a different financial position. They may
be in stress already. And right next to me is the
representative of the loan sharks. So they are not here today,
but if we close out this market, that is where people will go.
Mr. Ellison. Let me ask you this. Thank you for your
answer. Mr. Silberman, I wonder, is there any overlap between
the person who might go to a payday lender and a person who
might have gotten a mortgage on a no-doc, low-doc, ninja loan
and gotten defrauded and had false terms put before them before
they signed up? Is there overlap between these two different
markets? Or are they pretty much mutually exclusive?
Mr. Silberman. Congressman, in truth, I really don't know
the answer to the question.
Mr. Ellison. That is too bad. Okay. You know what? You may
not know the answer to the question. I have a feeling that
there is a very large degree of overlap to those two bodies of
people. I can say that based as a politician who knocks on
doors and talks to citizens every single day that when the
mortgage foreclosure crisis was banging, a lot of those people
who were facing foreclosure actually did go to payday lenders,
and there is a tremendous amount of overlap. And I don't agree
that there is much of a difference.
Let me just ask you if you know this, Mr. Silberman. I want
to thank you and your staff for your important work and the
work you are doing to improve the financial marketplace.
Specifically, I want to applaud you for considering the rule in
payday lending traps. And I hear from constituents, both
borrowers and the pastors and imams who serve them, and rabbis,
as well, the faith community is in this space and wants to
protect people, about the damage of these short-term, high-cost
loans.
On the screen is a map of the state of payday loan laws
which show great gaps in consumer protections. And I want to
urge you to move forward with the proposed rule. I discussed
the agency's March statement with my constituents, and we want
to ensure that borrowers can realistically be able to repay the
loan.
The outline of your payday lending proposal suggests that
the rulemaking will include a process for verifying a
borrower's income. Could you provide some insight into what
that process could look like for small dollar lenders,
particularly those with respect to borrowers that are paid
primarily in cash? And I think we are low on time.
Chairman Neugebauer. The time of the gentleman has expired.
If Mr. Silberman would respond in writing to the gentleman's
final question?
Mr. Silberman. I would be happy to do so, Mr. Chairman.
Chairman Neugebauer. The Chair now recognizes the gentleman
from Pennsylvania, Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
For Mr. Silberman, borrowers have diverse credit needs. To
meet those needs, there should be a vibrant market with many
choices for short-term, small dollar credit. These choices
should include credit cards, installment loans, single payment
loans, deposit advance loans, and debit overdraft protection
services.
Given the small amounts and short terms of loans, banks and
other institutions need a simple, streamlined processes to
evaluate and provide credit in a manner convenient for
customers. I have significant concerns that the Bureau's
proposed small dollar lending framework will choke off the
ability of banks and others to meet their customers' needs for
short-term loans.
Will the Bureau's proposed rule allow banks and other
institutions to continue offering short-term loans using simple
streamlined procedures?
Mr. Silberman. Thank you, Congressman. Again, I don't want
to get ahead of ourselves and speculate as to what the final
rule or even proposal will say. What I can say to you is that
we have been meeting very closely with representatives of
community banks and credit unions. It is not our intention to
disrupt the kind of thoughtful, relationship lending that they
do, and we will be carefully trying to make sure that we issue
a proposal that is respectful of loans that they are making to
consumers that are affordable loans for those consumers.
Mr. Rothfus. Can you tell me, is there anything wrong with
the way that Florida regulates its payday lending industry?
Mr. Silberman. I'm sorry. Could you repeat the question,
Congressman?
Mr. Rothfus. Is there anything wrong with the way Florida
regulates its payday lending industry? And I ask that because
the entire Florida delegation, both Republicans and Democrats,
across the ideological spectrum, from conservative to liberal,
wrote the CFPB expressing concerns about the CFPB rulemaking.
Mr. Silberman. Thank you, Congressman. We have actually
looked separately at data from Florida and we find the very
same pattern that we find in reports on the Nation as a whole,
which is to say a significant percentage of consumers getting
loans they cannot afford ending up in long-term cycles of
indebtedness so that we believe there is a need to add on top
of the rules that Florida has adopted another rule.
Mr. Rothfus. Let me ask you this. The cozy relationship
between the Bureau and the Center for Responsible Lending has
been widely reported. Employees have moved between the Bureau
and the CRL during the rulemaking process. There has been
extensive communication and coordination between staff. And at
one point, the CRL provided the CFPB with an outline of their
proposal to regulate small dollar lending so that the CFPB
could work to improve it.
In fact, there were so many meetings between the Bureau and
the CRL that in an April 2014 e-mail, you remarked that it had
been almost 3 weeks since you communicated and that you were
``starting to have withdrawal pains.''
I think most people would consider this intimate type of
relationship to be inappropriate. How do you respond to that?
Mr. Silberman. Thank you, Congressman, for the opportunity
to respond. We have throughout this process engaged extensively
with stakeholders across the spectrum with advocates, with
representatives--
Mr. Rothfus. Were there others that you started to have
withdrawal pains for not being in touch with them?
Mr. Silberman. I would--if I did not have regular input
from any side of the debate, I would certainly feel that I was
not doing my job. I have been particularly careful, since I
came to this job from an industry perspective, having worked
for 12 years, as Congressman Pearce noted, for a financial
services firm, I have been particularly careful to make sure
that I hear perspectives that are different from the
perspectives that I was used to coming to this job--
Mr. Rothfus. Do you know whether the Center for Responsible
Lending has any affiliates that would provide services that
would compete with payday loans?
Mr. Silberman. I understand the Center for Responsible
Lending does have an affiliate which is a credit union. From
what I am told by the payday loan industry representatives I
have spoken to, they don't believe that products of that kind
would be competitive with--the credit union product would not
be competitive with their product, but they do have products--
Mr. Rothfus. You are taking a proposal from the Center for
Responsible Lending, where they are in that space of short-term
loans or they have an affiliate is, correct?
Mr. Silberman. Congressman, we received proposed outlines
suggesting what our proposal should be from many different
people from all sides of the issue.
Mr. Rothfus. Do you know whether the affiliate of the
Center for Responsible Lending does any business in Florida?
Mr. Silberman. I do not.
Mr. Rothfus. I yield back, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from South Carolina, Mr. Mulvaney, is
recognized for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
Mr. Silberman, let's stay on this same topic. In 2006, our
neighbors to the north, North Carolina, banned payday lending
outright. Do you think they were right to do so?
Mr. Silberman. Congressman, I don't really feel it is my
place to make a judgment of that sort here representing the
Bureau.
Mr. Mulvaney. Okay. Neither do I. In 2014, South Carolina
passed some laws dealing with payday lending. We allowed it to
exist and put certain restrictions on it. Were we wrong to do
so?
Mr. Silberman. Congressman, again, I would not want to make
those judgments. As I have tried to emphasize, our role is to
make sure that all citizens and all States have the benefit of
Federal law.
Mr. Mulvaney. I only wish that your Director agreed with
you. I just got a letter today from Mr. Cordray that says the
exact opposite. It says you do have an opinion. It says,
``While these markets are in many jurisdictions subject to
State regulation, like South Carolina, we remain concerned that
consumers across the country face risk from practices in these
markets.'' So clearly, the CFPB does have an opinion as to
whether or not we were right or wrong, for example, to put a 2-
day cooling off period in our law in 2013.
Earlier today, you said in response to Mrs. Love that you
would not eliminate any State law. You remember that, right?
Mr. Silberman. Correct.
Mr. Mulvaney. You then told Mr. Luetkemeyer that you did
not seek to preempt anything and that you are only creating a
floor. Do you remember that, as well?
Mr. Silberman. Yes, sir.
Mr. Mulvaney. Okay. The proposal that you have made, at
least on your website, is for a 60-day cooling-off period. We
have a 2-day cooling-off period in South Carolina. Would you
still consider a 60-day cooling off period to act as a floor in
South Carolina vis-a-vis our 2-day rule?
Mr. Silberman. Congressman, let me first say that the
outline of the proposals under consideration said that after 3
loans in succession, there then would be a 60-day cooling-off
period. We would not have--
Mr. Mulvaney. That is fine. And ours says after a certain
number as well; I think it is eight. But go ahead. Keep going.
Mr. Silberman. We would view that as a floor. You could add
on top of that. You could--
Mr. Mulvaney. A floor. Well, let's think that through. So
if I am there in South Carolina and I have taken my third loan,
you would now require a 60-day wait period before my fourth and
we would require a yes-or 2-day. Do you still think your 60 day
is a floor? Or is my 2-day the floor?
Mr. Silberman. I think our 60 day is a floor on which you
could add additional protections, yes.
Mr. Mulvaney. Really? Do you really believe that? Or is
that just what you were told to say? Come on, now. Because
nobody believes that is a floor. It is a ceiling, isn't it?
Mr. Silberman. No, sir.
Mr. Mulvaney. We have a lower threshold than you are
suggesting.
Mr. Silberman. It is certainly not a ceiling, since you
could have a 61-day or a 70-day.
Mr. Mulvaney. Yes.
Mr. Silberman. It is a floor.
Mr. Mulvaney. And it would be a floor if ours was 61 and
yours was 60. Ours is 2. Yours is 60. This is just the English
language, Mr. Silberman. It is okay to admit that either you
are wrong or you are taking a different position, but you can't
call it a floor when your requirement is more restrictive than
ours is. If you were to pass a regulation that requires a 60-
day cooling off period, wouldn't that preempt my 2-day cooling-
off period?
Mr. Silberman. Congressman, I don't mean to be splitting
hairs, but I think there is a--
Mr. Mulvaney. I don't want you to split hairs. I just want
you to answer the question.
Mr. Silberman. That is what I am going to try and do, sir.
I think there is a well-understood definition of what
preemption means and that the answer is, no, that we would be
establishing a floor. You are certainly right that if a State
had a less restrictive rule, our floor would take precedence in
that sense. But it would--
Mr. Mulvaney. So if I am not preempted, then I am still
allowed in South Carolina--you pass a Federal rule on a 60-day
wait period, I have a State rule at a 2-day period. You are
taking the position you are not preempting me. It would still
be legal for me as a payday lender in South Carolina to
acknowledge and abide by the 2-day rule?
Mr. Silberman. You would be obligated under Federal law to
comply with Federal law, of course.
Mr. Mulvaney. And it is still your position, as you sit
here, that that is not preempting the State law? Do you
really--when people look back at your Harvard degree, is that
really what you want them to look at?
Mr. Silberman. Yes, Congressman.
Mr. Mulvaney. Okay, good. That is fine. All right. Let me
ask you a different question. You said earlier in response to
Mrs. Love that in your research, you actually had talked to
people who had benefited from, and then other people who had
been negatively impacted by, the payday lending system. And you
said it was roughly two-thirds, a third in your analysis. I
will assume that is the same roughly from State to State. It
may be different from various States, but let's just assume for
sake of discussion it is the same.
As between you and the legislature of the State of Ohio,
who is better suited to balance the interests of those two-
thirds versus the third?
Mr. Silberman. Congressman, we have an obligation under the
Dodd-Frank Act, under the statute Congress passed to protect
all consumers in all States from practices that are unfair or
abusive.
Mr. Mulvaney. So it is your belief that you are better
suited than the legislature of Ohio to do that balancing act?
Mr. Silberman. It is my belief, our belief that we have an
obligation to protect all--
Mr. Mulvaney. So you don't believe that you are better
suited?
Mr. Silberman. Congressman, as I said, it is my belief--
Mr. Mulvaney. I am just trying to--I mean, do you believe
or don't you believe? Which one?
Mr. Silberman. I believe we have an obligation--we don't
make judgments about who is better suited. We make judgments
about what our obligations are, and our obligation is to
provide the protections that Congress has given.
Mr. Mulvaney. I will look forward to continuing this
another day.
Thank you, Mr. Silberman.
Chairman Neugebauer. I thank the gentleman. Mr. Pittenger
is recognized for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
Mr. Silberman, I am on your right. Welcome. You are the man
of the house. And reasonably so. You have a very impressive
background. Graduate of Brandeis University, graduate of
Harvard Law School, you clerked for Justice Thurgood Marshall.
You are esteemed in every respect. You have worked for the AFL-
CIO as their general counsel. You are the acting Deputy
Director of the largest agency ever created in the history of
this country, funded at $600 million a year, with no
accountability to anybody.
It is pretty remarkable, your background and really the
power that you have. Do you believe, Mr. Silberman, that Big
Brother is a good thing?
Mr. Silberman. I'm sorry, Congressman, I missed--I was
listening to the biography and I missed the question.
Mr. Pittenger. It sounded good and it is very impressive.
Do you believe in Big Brother?
Mr. Silberman. Do I believe in Big Brother? I am not sure
how to answer that question, Congressman.
Mr. Pittenger. Do you believe that there are those who know
best, who are better educated, have more background, better
expertise than the common guy and really can help them direct
their lives better?
Mr. Silberman. I do not believe that is our role, sir.
Mr. Pittenger. Do you believe that your policies would
convey that? Do you believe--let me ask you this--when you see
a Snickers commercial on TV, do you believe people are being
exploited when they see that commercial and they want to go eat
a candy bar, and maybe that might lead them to a health
problem, perhaps diabetes or some other concern?
Mr. Silberman. That is far outside our jurisdiction, sir.
Mr. Pittenger. But let's follow the train of thought. I
wish you would have known my dad, Mr. Silberman. He was a very
funny guy. My dad, we grew up in central Texas. And he loved
his barbecue, and he loved his fried catfish and his Jimmy Dean
sausage with biscuit. Or he would trade off and maybe have
pancakes with a lot of syrup and butter. And he lived his life.
And he was told by my sisters occasionally when they could
get a word in that, ``That is not good for you, Dad. You really
need to not be eating those things.'' And Dad said, ``You know,
I am really not interested in that. I like the quality of my
life. I am not worried about quantity.'' Dad lived until he was
91.
But he made his choices. And that is what freedom is all
about. Do you believe that the American people are entitled to
make choices?
Mr. Silberman. Congressman, again, I believe that surely
they are entitled to make choices so long as they are protected
from situations where they are unaware of the risks, the costs,
and they are able to protect themselves. That is what Dodd-
Frank tells us--
Mr. Pittenger. From your opinion, from your point of view,
isn't that correct?
Mr. Silberman. No, we try and--that is--
Mr. Pittenger. No, that is an opinion. That is your
opinion, isn't it?
Mr. Silberman. No.
Mr. Pittenger. That is your opinion? Yes, sir, that is my
point. Then you do believe in Big Brother. And I think that is
the disconnect between Washington and outside this beltway. The
people really want to live their lives. And they are tired of--
if I can say this respectfully--elites in Washington who know
best how to lead their lives.
And there is an enormous reaction to that today. It is a
very compelling statement that is being made. I don't know if
you have been out there in the hinterlands to sense that, but
people are allowed to make choices with what they want to do
with their lives. And what you are saying is, we want to limit
your choices because we know what is best for you.
And I think that is the problem, the current--the real
fundamental problem that we are dealing with. People have needs
in their lives or desires in their lives, and whatever it is,
it is their choice. And don't you think people should be
allowed the freedom to make choices? When I grew up, I left the
umbrella of my family. I wanted to make my own choices. Some
were good, and some were bad. But I wanted to make my own
choices. Did you have that experience when you grew up and you
were ready to live your life? Did you want to make your own
choices?
Mr. Silberman. Yes, sir.
Mr. Pittenger. Okay. Well, let's allow people to make their
choices. And that is a fundamental American freedom. And what
you are saying is, no, you really aren't allowed to have that
freedom because there is a group of us who live up here who
really do know what is best for you. And let us determine that
for you. That is the mentality that is repugnant to the
American people.
Thank you. I yield back.
Mr. Pearce [presiding]. The Chair would like to thank each
one of the witnesses. You have been very gracious with your
time and your answers. And you will be excused. We will take a
5-minute recess while we bring the next panel up. Mr.
Silberman, if you feel like we have not asked you enough,
please feel free to stay into the second panel. Thank you very
much.
[laughter]
Mr. Silberman. Can't get too much of a good thing, Mr.
Chairman.
[recess]
Chairman Neugebauer. For our second panel of witnesses, we
have Mr. Dennis Shaul, chief executive officer of the Community
Financial Services Association of America; Mr. Kelvin Simmons,
who is testifying on behalf of the American Financial Services
Association; Mr. Robert Sherill, a consumer; Dr. Thomas Miller,
Jr., a visiting scholar at the Mercatus Center at George Mason
University; and Dr. Frederick Douglass Haynes III, senior
pastor at the Friendship-West Baptist Church in Dallas, Texas.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. And without objection,
each of your written statements will be made a part of the
record.
Mr. Shaul, you are now recognized for 5 minutes.
STATEMENT OF W. DENNIS SHAUL, CHIEF EXECUTIVE OFFICER,
COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA
Mr. Shaul. I thank you for the opportunity to speak this
afternoon on behalf of my membership and I hope also on behalf
of the customers whom we serve.
If I were to sum up our position in a single sentence, it
would be that regulation is not decimation. And by any standard
that one chooses to look at, whether it is the printed material
given out to us on SBREFA or the Charles River study that we
have done, this is an intention on the CFPB's part to decimate
this industry and lay it to waste.
Now, if the proposal turns out to be less than that, so
much the better. In his written testimony, Mr. Silberman is
quoted on page 8 as saying--as going on--I know that they are
honest, dedicated, hard working individuals, but we have a deep
and profound difference with regard to where they are going.
And to put it in perspective, it is a difference both on
substance and on procedure. The difference in procedure is what
might be called for any athletic fan the ``shifting
goalposts.'' When we first met with them, we were told that the
object was to do a better disclosure and that would cover
things. Obviously, that didn't work.
Then we were told that if we came up with a set of
discussions with them, perhaps we could iron things up. Those
discussions came to nothing. Then we went through the SBREFA
panel, and though Mr. Silberman thinks that it is still being
considered, there is not one person who came through that
SBREFA panel who believed that their words which went to the
question of their continued existence found any hearing from
those who represented the CFPB.
And then when we finally get to the point of the complaints
that were supposed to be the guiding star, we were told, with
regard to payday lending, we find two things--there are very,
very few of them, and those that come through are often from
States that do not have payday lending, suggesting a couple of
things, that the complaint portal is a not very reliable guide,
and that people find a way when they don't have legal payday
lending in their State to still get the loan.
And, by the way, as an asterisk to that last point, the
Administration's late effort to enter into some form of subsidy
for private entities that are already partially subsidized, to
enter into this field, is not a workable solution for any
number of reasons that we cannot get into today, but it
establishes one central fact. They finally recognize that this
is a demand-driven product, and that is important.
Now, we heard a lot about the ability to repay. Do you
really believe that there is anybody who loans money that
doesn't seek an ability to repay? The question is this: Is the
ability to repay that is outlined in the proposal anything but
a sheet that covers up other aspects of what they want to do?
Or as one of the writers of the impending rule said to us, you
don't understand. The object of what we are doing with ability
to repay is to make sure there isn't a second loan. That is not
a second loan too close to the first; that is to make sure
there is not a second loan at all.
And we heard a lot about how many sequences and so on. Let
me show you--and I will make sure that you all get a copy of
this--this is from the pages of the CFPB proposal or paper of
last March, sequences: 3 loans or less, 64 percent; 6 loans or
more, 25 percent; 17 percent for 8 loans or more.
I ask you, when you heard the testimony this morning, did
you get a sense that was what we were talking about? Of course
we are all concerned about change. This is a dynamic industry,
and there will always be change. There will be problems to be
fixed, and there are always answers for customers who are not
well-served.
But there is not a ready substitute for what we provide.
And one of the problems we face with the Bureau is they make no
distinction between unlicensed payday lenders, people who are
in the business of giving payday lenders online, tribal
lenders, storefront lenders. And the differences are profound.
We have a set of best business practices and we have lost
members because of it.
It is not fair to any of us to equate us with those who go
through no regulation at all. And where is the pending rule for
those who operate illegally without any regulation at all? It
is nonexistent.
I know that I have to wrap up, Mr. Chairman, in a quick
way, but let me just say this. The ability to repay construct
affords one and only one thing that I think could be construed
as novel in looking at the field of how to do an ability to
repay, and that is a greater attention to the obligations than
individual borrower might have besides his obviously to pay off
the payday loan.
Yes, that should be contemplated, that should be made a
part of our analysis of ability to repay. But first of all--
Chairman Neugebauer. Mr. Shaul, I am going to have to ask
you to wrap up.
Mr. Shaul. Yes, I will wrap it up. But it is, I think,
amazing that anyone at the Bureau believes that our operators
do not do a rather rigorous job of working out an ability to
repay. They don't continue in business unless people pay off
these loans.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Shaul can be found on page
80 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Simmons, you are now recognized for 5 minutes.
STATEMENT OF KELVIN SIMMONS, TESTIFYING ON BEHALF OF THE
AMERICAN FINANCIAL SERVICES ASSOCIATION
Mr. Simmons. Good afternoon, Mr. Chairman, Ranking Member
Clay, and Ranking Member Waters.
My name is Kelvin Simmons, and I am here on behalf of the
American Financial Services Association (AFSA) and the millions
of traditional installment loan customers that AFSA member
companies serve and they have served over the last 100 years.
Thank you so much for giving me the opportunity to talk
about the Consumer Financial Protection Bureau's proposal for
small dollar loans and the impact it could have on deserving
consumers.
I ask that my full statement be submitted for the record so
that I can focus on three basic issues: one, the need for small
dollar credit; two, the fact that depository institutions are
not equipped to address that need; and three, the demonstrated
ability of traditional installment lenders to offer safe and
affordable access to small dollar loans.
On my first point, there is a need for small dollar credit.
And let me paint a picture of my experience in the community
that I come from. I was born and raised in Kansas City,
Missouri. I am a former State Director of economic development
for the State of Missouri, and during my tenure, the State's
banks, credit unions, and financial services divisions were
under my executive authority.
I was president and CEO of one of the largest community
development corporations in Missouri, and also vice president
of one of the largest FQHCs in the State of Missouri. I also
was elected twice to serve on the Kansas City City Council.
In the community that I came from, particularly in the ZIP
Code that I came from, there were no locations in that area
where I grew up that offered safe, reliable, affordable, small
dollar loans. I characterize this as living in a community that
had a financial services desert.
To further illustrate my financial services desert point, I
served as the commissioner of administration for the State of
Missouri from 2009 to 2012. In that role, I had dual signatory
authority with the Missouri State treasurer to issue all checks
on behalf of the State of Missouri. Even though my name
appeared on all of those checks, there was not one bank in my
hometown ZIP Code where I could even deposit those checks.
There is a need for small dollar credit because it is
inevitable that a car will break down, things will happen,
emergencies will occur. There is also a national need that has
been recognized by CFPB Director Richard Cordray who testified
last fall about preserving the ability of installment lenders
and others to continue to make responsible loan products.
On my second point, depository institutions are not
equipped to make those small dollar loans. And despite their
effort, there have been studies, there have been pilot programs
to encourage banks to lend in this space. The FDIC found that
banks do not see small dollar loans as a profitable business
line.
I have had an opportunity to work with one of the largest
African-American-owned banks in Kansas City that is based out
of New Orleans, Louisiana, Liberty Bank. They do a wonderful
job of loaning to their customers. But this is one of the
issues that they said was very difficult and they participated
in the pilot program with the FDIC. They contended that it is
difficult: They could do it, but it would require subsidization
in order to be able to do that. And so it made it very
difficult, even as it is a very good community bank.
So the question is, who is best suited to meet the need of
high-quality small dollar loans? My answer is the third point,
traditional installment lenders that offer safe and affordable
small dollar loans. What are the installment loans, traditional
installment loans? They are fixed-rate, fully amortized, small
dollar loans repaid equally in monthly and payment
installments. These loans are affordable and they basically
give an opportunity for the borrower to meet their monthly
budgets.
There are plain-vanilla loans, transparent, easy to
understand terms, due dates and payment amounts. Installment
lenders underwrite the loans based on consumer credit reports
and other factors. The Center for Financial Services Innovation
has published a guide outlining the characteristics of high-
quality loans. Those characteristics which include ability to
repay, opportunity to improve a borrower's financial health,
transparency, accessibility, those are the kinds of
characteristics.
I was in Los Angeles in December of 2015, and the National
Black Caucus of State Legislators adopted a resolution, which
is also in my full statement, endorsing the development of
responsible underwritten small dollar loans.
We understand the CFPB concerns about trapping borrowers in
the cycle of debt, but traditional installment loans, again,
are fully amortized loans and paid off in equal payments in
principal and interest over a period of time. I see that my
time is coming to the end, so I will go to the conclusion.
In conclusion, I hope that I show to the members of this
committee that there is a great need for high-quality, small
dollar loans in communities like the one that I came from.
Traditional installment lenders meet the definition of that
high-quality, small dollar loan, and I hope that more
importantly, the CFPB will be careful to preserve the ability
of installment lenders to offer these responsible loan
products.
Thank you. I look forward to any questions that you may
have.
[The prepared statement of Mr. Simmons can be found on page
103 of the appendix.]
Chairman Neugebauer. Mr. Sherill, you are recognized for 5
minutes.
STATEMENT OF ROBERT SHERILL, CONSUMER
Mr. Sherill. Good afternoon, Mr. Chairman, and members of
the committee. My name is Robert Sherrill, and I am here to
give a consumer's perspective on this policies and stuff. I am
not a policy guy or I am not a lobbyist or anything like that.
I am just coming from the ground where it is really happening.
I have used these loans before. I went to prison, made some
mistakes. Nothing violent, but I chose to get money in an
illegal way. I got out. And when you are a felon, the odds are
stacked against you. You can't get jobs. My family doesn't have
money like that. So to call someone that I am related to, to
get money is out of the question.
The alternative to that scenario is going to payday loans.
I know a lot of people who utilize this service to cash their
checks. I did it myself. I still do it from time to time. I
have utilized getting the loans when I didn't have the means to
get money. And my concern is, when they take it away, what are
we going to do? Because from the looks of it, I don't see
anybody here who looks like they need a loan from a payday
place.
So me personally, I am on the ground. We need it. When the
odds are stacked against you and you don't have anybody to
call, what do you do? Has anybody here ever experienced that
feeling? Because it is not a good feeling when, no matter where
you turn, you have nowhere to go. And so, those places offer an
alternative for us. And I will continue to use them, as will a
lot of people I know use them, as well.
[The prepared statement of Mr. Sherill can be found on page
91 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Miller, you are now recognized for 5 minutes.
STATEMENT OF THOMAS W. MILLER, JR., VISITING SCHOLAR, MERCATUS
CENTER, GEORGE MASON UNIVERSITY
Mr. Miller. Chairman Neugebauer, Ranking Member Clay, and
members of the subcommittee, thank you for the opportunity to
appear today.
A heated debate has surrounded consumer credit for many
decades. Because banks do not make small dollar loans to
consumers with damaged credit, the marketplace has responded
with an array of small dollar loans. Americans who rely on
these products are not wealthy and many live from uncertain
paycheck to uncertain paycheck.
People who make regulatory decisions on behalf of these
consumers are likely well-intentioned, but sometimes they might
not fully understand how small dollar loans can help borrowers
who are facing difficult financial circumstances. In my
scholarly work on consumer credit, I seek to understand how
small dollar loan markets work and how to restructure
regulations to improve borrower welfare.
Access to credit is a fundamental freedom for all
Americans. But our research shows that consumer credit
regulation often reduces this freedom.
My testimony contains three main points: one, the small
dollar loan market is diverse because consumers have diverse
needs; two, eliminating credit supply does not eliminate credit
demand; and three, States can provide more credit options for
consumers by increasing or even eliminating interest rate caps.
Point one, the small dollar loan market is diverse because
consumers have diverse needs. As noted in my written testimony,
consumers generally know how to obtain small dollar loans and
they generally understand the terms of these loans. In my
experience, however, many people with good credit are not
familiar with small dollar loans. It is incumbent, therefore,
on anyone regulating, advocating, or studying any small dollar
credit product to know the differences among them. My written
testimony explains the basic workings of four types of small
dollar loans. Importantly, these loans are not perfect
substitutes for one another. These loans differ significantly
in terms of loan size, length of loan, cost, repayment method,
and underwriting processes.
Point two, eliminating credit supply does not eliminate
credit demand. The CFPB is currently exploring new payday loan
rules that could dramatically reduce the number of payday
loans. Without a thorough exploration of why some consumers
often use payday loans, the CFPB proposes to set a limit of six
payday loans per consumer per year. Such an arbitrary rule
would eliminate 60 percent to 80 percent of payday loans made.
Where will payday borrowers go for credit?
Eliminating so many payday loans does not mean that
consumers will magically stop borrowing or suddenly begin to
borrow from other legal lenders. Instead, such a regulation
could force some consumers already in desperate situations
toward illegal lenders. Where is the compelling and convincing
independent, rigorous research that shows repeated payday
borrowing is, in fact: one, harmful to consumer welfare; and
two, that a limit of six payday loans per consumer per year
will do more good than harm?
Point three, States can provide more credit options for
consumers by increasing or even eliminating interest rate caps.
In the early 1900s, consumer credit reformers battled illegal
loan sharks by appealing to legitimate capital. At the time,
reformers decided that costs and risks of making small dollar
loans merited an APR of about 36 percent, which was six times
higher than prevailing interest rates at the time. By 1940,
most States had adopted a form of the uniform small loan law of
1916.
The model law had urged that any rate cap set ``should be
reconsidered after a reasonable period of experience with it.''
Clearly, the succeeding 100 years exceeds a reasonable period.
Figure three of my written testimony, however, shows that
37 States still have rate caps at or below 36 percent. Nine
have no rate cap. Policymakers of today would be wise to follow
the innovative thinking of reformers in the early 1900s by
dramatically revising or eliminating the 36 percent interest
rate cap.
Figure one of my written testimony shows the results of a
low interest rate cap. A legal loan desert can exist. There is
demand but no supply. In 1916, installment lenders could make a
profit on a much smaller loan than they can today. Why? For any
set of loan terms, the revenue is the same now as it was then,
but production costs are much higher. Figure two of my written
testimony shows the CPI is about 20 times higher today than it
was in 1916.
Let's look at a $500 loan. To bring installment lenders
into this loan space, the allowable APR would likely have to be
at least twice as high--that is, 72 percent--or even higher
perhaps. APRs of 36 percent and 72 percent sound jarring, so
let me put them in dollar terms.
Increasing the APR from 36 percent to 72 percent on a $500
6-month installment loan results in a monthly payment increase
of $9.38, or $2.35 per week, the price of one big regular
coffee. Consumers would willingly pay this small amount if the
alternative is no loan or a loan product that does not suit
their needs. Having more freedom of choice benefits consumers.
Thank you. I stand ready to answer any questions.
[The prepared statement of Dr. Miller can be found on page
73 of the appendix.]
Chairman Neugebauer. I thank the gentleman. And, Dr.
Haynes, you are now recognized for 5 minutes.
STATEMENT OF FREDERICK DOUGLASS HAYNES III, SENIOR PASTOR,
FRIENDSHIP-WEST BAPTIST CHURCH, DALLAS, TX
Mr. Haynes. Thank you so much. Thank you, Mr. Chairman. And
to all of you, our public servants and Ranking Member Waters.
My name is Frederick Douglass Haynes, III. Several of my
colleagues in pastoral ministry and I became alarmed as
buildings once occupied by thriving restaurants and bank
branches were taken over by payday and auto title loan stores.
In the last 10 years, right there in Dallas, 20 payday and auto
title loan shops opened within a 5-mile radius of our churches.
Many of these stores are located right next to each other.
A community that was already suffering as a food, job, and
opportunity desert was and is being overrun by these predatory
stores. It appeared that our underserved and underbanked
community was being intentionally targeted for these high-cost,
debt trap loans.
Our concern was confirmed as we heard from members of our
churches and residents in the community who were financially
held hostage by these ``loans.'' They confessed that in a
situation of desperation they had sought to get a loan that
eventually became a trap. They made payments, every other week
or monthly, only to get deeper in debt. They were in a
financial hole, and upon getting a payday or car title loan,
received a shovel instead of a rope.
As a pastor, my heart went out to many who were victimized
by these predatory practices. I will give you two case studies
that are testimonies of persons who experienced this debt trap.
A recently widowed 70-year-old grandmother took out a $300
loan. She ended up paying $800. She has always been fiscally
responsible, but as you know, life happens, and she had to take
out this loan. She paid back the loan in full, but she had to
roll over the loan several times, ultimately paying much more
in interest than she borrowed.
I am representing a 23-year-old college student. Both of
his parents passed away, but he is determined to get his
education in honor of his parents. He needed to purchase books
for his classes. What was a $300 loan ended up costing him over
$600. I could go on and on.
Suffice it to say, all of them were hoping for a life
preserver, but they received shackles instead. Payday loans in
Texas carry rates of 500 percent annualized interest. Car title
loans are in the range of 250 percent to 300 percent APR range.
The Texas Office of Consumer Credit shows that 61 percent of
balloon payday loans are refinance loans that are taken in
order to repay the previous unaffordable loan. Every week, car
title loans result in 847 car repossessions. That is immoral
and unethical and unacceptable.
A resident of our community shared with me that he had a
car title loan that began as a $4,000 loan. The car was
repossessed when he couldn't escape the debt trap, but ended up
paying $8,200 in the process, and he still doesn't have a car.
A coalition of churches and community groups sought to close
the loophole in the State usury law in Texas that allows these
businesses to charge over 500 percent in interest, but we were
unsuccessful.
We were undaunted and determined to free our community from
these predatory practices, and so as a consequence we
petitioned the city government in Dallas to rein in the
destructive dealings of the payday and car title lenders. Our
church has taken a step to be a solution to the problem, which
is symptomatic of a larger problem of greed and economic
exploitation, which has produced a widening wealth gap that
threatens the fabric and future of our nation.
We have launched a credit union, partnering with another
church in our community, that held a Federal credit union
charter. We now have several years of banking experience, and
we now offer Liberty Loans, microcredit to members in need who
are able to afford small dollar loans. We offer loans of up to
$500 for 6 months at 28 percent annual interest, and 19 percent
interest for members with a reasonable application fee.
The good news is there has not been one defaulted loan, and
all of those who are benefitting from this loan are paying the
loan back on schedule, because they can afford it. A novel
concept. It is good business. It has empowered the powerless.
And it is moral.
We are taking strides toward economic freedom in Dallas,
but we still have a long way to go, not only in Dallas, but
across the Nation. We want access to credit. But it must be
quality credit. Anything less adds to the stress of the
desperate and the needy.
Well-crafted and compassionate legislation can weed out the
predators and enable responsible and reputable lenders to
thrive while rendering a helpful service to communities in
need. We don't want Jesus to say in the judgment, I was hungry
and thirsty and you gave me a payday loan.
[The prepared statement of Dr. Haynes can be found on page
70 of the appendix.]
Chairman Neugebauer. I thank the gentleman. They have just
now called votes, so I think what we are going to do, now that
the panel has given their opening statements, is we are going
to ask you to be patient here. I am not sure exactly how many
votes; we have one vote. And so, I would ask Members to go over
and vote as quickly as you can, and then we will come back and
reconvene.
So at this time, we are in recess subject to the call of
the Chair.
[recess]
Chairman Neugebauer. The hearing will come to order. Before
I close, I want to make a correction here for the record. Mr.
Simmons is testifying today on behalf of the American Financial
Services Association and not the law firm, Dentons. So for the
record, we are correcting that. Thank you.
I now recognize myself for 5 minutes to question the panel.
And first of all, panel, thank you for your patience. Every
once in a while, we have this little constitutional
responsibility across the way there that we have to go over and
do, and people that we represent kind of appreciate that.
Well, Mr. Sherill, you have a great story to share. Your
testimony was very compelling. You mentioned you had a tough
time accessing credit when you got out of jail. When you got
out of jail, they didn't send you a credit card?
Mr. Sherill. No, sir. They gave me about $30 and sent me on
my way.
Chairman Neugebauer. When you said, okay, I have to have
some money, I have to get my life started here, kind of share
with me, how did you go shopping for different places that made
these kind of loans looking for the best deal or the good
terms? Or can you kind of just walk us briefly through that?
Mr. Sherill. I went to a traditional bank, like a Regions,
and tried to open up an account. I was really there for a loan,
not an account. But they didn't give me a loan. They said they
don't offer short-term lending and things like that.
So I went to another bank, tried them out. I went to a
credit union, and they didn't do it. You have to have an
account with them. I didn't have time for that. I needed it
right then. And so in my city, I went to one of the bigger
payday lending places, and they gave me a loan.
Chairman Neugebauer. And did you look at the conditions of
the product? Did you think the product was fair? You asked them
what the terms--it was very transparent what your costs were?
Mr. Sherill. With the place that I go, they are strenuous.
You just don't go in there and say, hey, I need a loan and they
give it to you. You have to--it is protocol that you have to
meet. It is criteria. And it is a protocol that is followed
after you meet that criteria.
You know, make sure you aren't this, make sure you are
that. Sign here. Are you clear on what they explain to you, and
you sign it. So after that, then you understand what they are
giving you. And if you choose to accept, then you choose to
accept.
Chairman Neugebauer. Yes. I think you shared something with
our folks when we were interviewing you, and I think one of the
questions that was asked of you was, what would have happened
if you couldn't have gotten a payday loan?
Mr. Sherill. Like I said, I had no other option. It is
different when you have options. So people who sat around--I
could have called my grandparents or something like that, I had
no other option. And if I wouldn't have taken that alternative,
then I would have maybe had to go back to the streets, because
that is what I knew. And I knew I could get it that way. But I
am trying to change my life, and that isn't the way I wanted to
go.
Chairman Neugebauer. You have heard some of the testimony
in the first panel that--did you feel like that you were being
taken advantage of?
Mr. Sherill. Not at all. I am 32 years old, and I am very
competent. So I went in, and they explained it to me: You pay
this. If you don't, then the interest rates are going to go up,
if you don't pay back on time. And I understood that. I needed
to borrow it for a while. Two weeks later, I paid it back.
Probably I think one of the first time I borrowed like $250. I
paid like around about $280 back, maybe somewhere in there,
which wasn't bad, because it met my need at the time, so I
needed it. So I would do that today if I had to.
Chairman Neugebauer. I think in one of the comments--I
don't know if it was in your testimony or not--but you have
started your own business now. Is that correct?
Mr. Sherill. Yes, I am a minority-certified company with
the governor's office of diversity, with the Better Business
Bureau, and I am with the National Chamber of Commerce now. I
started my company from the ground up, due to loans from these
type of places. So it works for me.
Chairman Neugebauer. And I think you mentioned that you
even from time to time still have used that to supplement your
working capital in your business. Is that right?
Mr. Sherill. Yes, I currently use that now. I employ 20
people now. And some of them use the payday loan places to cash
their checks and get money orders and pay their bills.
Chairman Neugebauer. You heard the gentleman from the CFPB
say that this product is hazardous. Did you find it hazardous?
Mr. Sherill. No, because I heard all the testimony today,
and no one is producing a better alternative. It is easy to
come in here and say, this isn't going to work, that isn't
going to work, but not one person has said, okay, we are going
to implement this instead of that and it would be better. No
one is doing that. So, no, it is not hazardous.
Chairman Neugebauer. Dr. Miller, you have written
extensively on consumer demand. Does the demand go away if the
product goes away?
Mr. Miller. No, sir. Demand will still stay for credit. And
people will seek out sources for credit.
Chairman Neugebauer. I see my time has expired. I now yield
to the gentleman from Missouri, the ranking member, for 5
minutes.
Mr. Clay. Thank you, Mr. Chairman. And let me thank all of
the witnesses for being here. In the interests of full
disclosure, let me mention that I have known Mr. Simmons for
over 25 years, so it is good to see you.
In part of your testimony, you talked about the need, Mr.
Simmons, for high-quality small investment lenders, and the
need was there. What has been the experience of people in your
community when they go to a traditional bank? What do you think
happens to them that the industry that you represent is able to
fill this void? What are you--
Mr. Simmons. Congressman, there are a couple of different
things with that question. One is the traditional installment
lending industry has certain characteristics that are different
than the other industries and the other products that have been
discussed.
With respect to the traditional installment lending
industry, again, it is a fixed-rate, fully amortized, small
dollar loan paid off equally in monthly installments over a
period of time. So that is a different product than what was
discussed with respect to payday a loan or a title loan, which
in some of the cases you are looking at collateral either being
bank account or the vehicle itself. And so that is vastly
different.
What I have found in my experience in the community that I
come from that I talked about in my testimony is that there are
oftentimes where those establishments are not in the community.
And what that is simply saying is, in some cases, they may be
outside of the ZIP Code that I was discussing with you. I am
from 64130 in Kansas City, Missouri.
Interestingly enough, we have a municipal ordinance that
does not allow certain products to be in certain places within
the community. Kansas City is one of those places that has a
municipal ordinance that does not allow payday, title, or
installment loan places to locate there if you are not already
there.
Mr. Clay. I see.
Mr. Simmons. And so, it cuts that off.
Mr. Clay. Thank you for your response. Reverend Haynes, if
I may, the core of the CFPB small dollar loan proposal is to
require a lender to check if the borrower has the ability to
repay the loan. This seems like commonsense and standard
practice in all other types of lending. Since some lenders seem
alarmed by this rule, we can only assume that some of them are
not doing this now. Can you share your experience and impact on
communities around your churches when loans are given without
considering an ability to repay it?
Mr. Haynes. Yes, thank you very much. First of all, to
have--as I shared earlier--some 20 car title and payday loan
stores in the last 10 years to literally target and saturate
our community and then to see the impact upon members of the
community who in a desperate situation applied for such a loan
and then found themselves 7 months--I have even seen one for 10
months they were trying to pay back a loan because of
rollovers.
And so, of course, that has an impact on the family. It has
an impact on the community. And let's be honest, if you were
driving through our community and you saw payday loan stores
next to each other, and you were looking to invest in that
community, it is highly unlikely that you are going to see that
as a wise investment.
So in a real sense, the predatory nature of it has a
tendency to not only impact in a negative way those families,
but worse than that, the community becomes not only a food and
job desert, but now it is an opportunity desert.
Mr. Clay. What does that say about the banking industry?
Apparently, there are obstacles here for people to get checking
accounts. What does that say about the U.S. banking industry?
Mr. Haynes. That the banking industry has a lot of work to
do to expand options. One of the things that Brother Sherill
said was that he had no other options. That is a sad statement
on our democracy that he has no other options. And I think that
justice is about expanding options, as opposed to narrowing
options, especially to options that are the same principles
that got us into the financial crisis that we as a Nation just
got out of. And the sad reality is, these are the same
principles going on, but they are targeting communities that
historically have been denied opportunity.
Mr. Clay. Thank you. My time is up.
Chairman Neugebauer. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, the vice chairman of the subcommittee.
Mr. Pearce. Thank you, Mr. Chairman. I appreciate each of
you being here.
Dr. Haynes, I found myself earlier in your testimony
wondering why you all didn't offer the product yourselves. And
so then I was deeply gratified when you got to that point of
the discussion that you did expand and go into doing the loans,
which is the key to expanding opportunities, is competition.
So my question is, have you seen a decrease in the number
of payday lenders in the neighborhood? In other words, you
mentioned the 20 in the 5 square miles around the church. Has
that decreased as people choose the lower interest and the
better service with the church there?
Mr. Haynes. I can say that the payday loan store that
opened 5 years ago down the street from the church is closed
now. So that is a good sign for me. As a matter of fact, it is
going to be a restaurant now.
Mr. Pearce. Just how many loans would you say that you are
servicing now through your church program?
Mr. Haynes. Oh, wow.
Mr. Pearce. A hundred, a thousand, ten thousand? In other
words, what kind of expansion of the market have you seen for--
Mr. Haynes. Again, we are new in the microloan department,
and as a consequence, I would say it is in the number of about
100 to 150.
Mr. Pearce. That is fair enough. That is pretty significant
in a new start-up. And I am serious to think other churches
should be looking at this as a way--it really is a problem when
you start passing laws. You get rid of the good as well as the
bad. And when you offer competition, then the bad will go away
because there is a better alternative. And so I worry about--
you had said that justice is expanding the options, not
limiting them, and yet the thing that the CFPB is set on doing
is going to limit the opportunities and--so I think that the
better option is the competition drives the bad ones out of
business. So, again, I compliment you.
Just one small note. I noticed that you talk about the 20
percent annual interest rate. And when you are talking about
the payday lenders, you talk in terms of APR. Now, how much is
the origination fee that you mentioned there?
Mr. Haynes. The origination fee?
Mr. Pearce. Yes, you say there is an administrative fee
with your 28 percent. So what would that be?
Mr. Haynes. Oh, that is very minimal. I don't have that
figure with me right now.
Mr. Pearce. About $20 bucks?
Mr. Haynes. Pardon me?
Mr. Pearce. Ten bucks or twenty bucks?
Mr. Haynes. Ten bucks max.
Mr. Pearce. Okay. But you see the difference there. Your
APR suddenly went from 28 percent to 38 percent if it is $10,
and so that is, again, from this side, it could be considered a
minor point. But just compare apples to apples, if you would.
Mr. Sherill, you heard earlier in the previous testimony
the abusive practices that the one witness kept bringing up.
Did you find those abusive practices that tried to string you
out if you borrowed $500? I don't know what you borrowed, and I
am not really interested. Did that string out to where you
ended up paying back $10,000 for a $500 loan? You have heard
that kind of--
Mr. Sherill. Well, those are exceptions. There are a lot of
people who use this product responsibly, like myself. You know,
I wouldn't be here.
I feel that if you borrow money, it has to be a need. So if
you borrow it, you already have the means to an end, because
you are thinking, okay, I have to pay it back. So me, I am
thinking when I get paid, I am going to pay it back. And that
is the only reason I think you should get one.
Now, if you get one with no end in mind, then you are
asking for the hiked fees and stuff like that. It is not meant
for a long-term way of life. It is meant for a quick fix, you
pay it back, and you move on.
Mr. Pearce. So to an extent, you are saying that personal
responsibility says that the product works pretty well if I use
it responsibly, but if I don't take care of my obligations,
then, sure, it can string out and out and out. But you didn't
find it to be some guy sitting there with a green eyeshade on
stringing you out and keeping you where you couldn't quite
reach the goal.
Mr. Sherill. I relate that to anything in life. If you use
it responsibly, then it is a good thing. But you can abuse
anything. We can abuse alcohol. We can abuse whatever--anything
that is usable, we can abuse, basically. And this is just one
of those things. If you use it responsibly, it will work for
you.
Mr. Pearce. And, by the way, I compliment you on your
story, because it is a story that needs to be told to the
Nation. We have a lot of people out there who have made
mistakes and never recover from it. They don't have your drive
and discipline. So my hat is off to you.
Thank you very much. I yield back, Mr. Chairman.
Mr. Sherill. Thank you, sir.
Chairman Neugebauer. I thank the gentleman. And now, the
gentlewoman from California, Ms. Waters, the ranking member of
the full Financial Services Committee, is recognized.
Ms. Waters. Thank you very much. I first would like to take
a moment to thank Dr. Haynes for being here. I know how busy
you are and how you are in demand all over the country, and
that you were in California last night, and you flew in here
and you have waited all day. And I want you to know, I truly
appreciate that and the work that you are doing with the other
ministers in this country who are focused on this issue and who
are creating opportunities.
I have been to Dallas. I visited one of your community
days. And I saw how you brought all the resources from all over
to be at the community day where people can have access to
information about services, and I know how hard you work. I am
very appreciative for you. Thank you so very much.
Just quickly, when I first started today to talk about
setting the tone and helping to create the picture of what we
are dealing with, I will just quickly go through again the pain
that is being fostered on certain communities and certain
people in this country. Predatory lending almost destroyed many
communities. And the home foreclosure problem was terrible. And
these people who were victims of predatory lending were trying
to live the American Dream, only to discover that they had
signed on the dotted line for mortgages they could not afford.
And when the devil came due, and the interest rates were
increased, on and on and on, they lost their homes.
We are still dealing with that. And the hedge funds are
coming in and they are buying them up, and now we have a lot of
people who are paying 50 percent of their income for rent
because a lot of the foreclosed properties have been bought up
by hedge funds and speculators. And they are not selling them;
they are renting them and raising the rents, et cetera.
Homelessness in the Los Angeles area alone increased by 12
percent, and in the overall county, about 20 percent, and it is
exploding all over the country.
In addition to that, we are fighting these private, post-
secondary schools who advertise on television that you can get
degrees and diplomas and they could help people have careers,
and people take out these loans only to find out the schools
are just ripoffs. We closed down Corinthian. There are a lot of
others that we have to go after. But we are confronted with
that.
In addition to that, when you pile on top of that, the
payday loans that are in targeted communities, the rent-to-owns
where people are losing their cars, it is overwhelming almost.
And so for each of these, those of us who work very hard on
these issues are determined that we are going to create some
change.
Now, we never said we were trying to put people out of
business. We raised the question, why can't you, Mr. Simmons,
have loans at 36 percent, as we are doing with veterans? Why do
we have 400 percent, 500 percent, 1,000 percent in these loans?
Why can't you do 36 percent?
Mr. Simmons. Congresswoman, with the testimony that I
provided earlier, when the FDIC had its pilot program with
respect to bringing the banking institutions into this
particular space, a number of those banking institutions, as
you will find with other financial institutions, said the 36
percent was very difficult to lend, given the numerous things
that they have to deal with, the cost, the labor issues, a
number of those issues. And so, credit unions were in some
cases asked to do the same thing. And it was very difficult to
do.
Ms. Waters. Okay, I don't want to cut you off, because I
know that story about the overhead being so much that they
could not afford to do it. But just as they have done it with
the veterans, they are making out. They are making money. And
we are experimenting with some credit unions. Kinecta, for
example, has joined with payday loan operation in Los Angeles
where people get involved. They are banking the people. They
are charging less. They are doing some financial literacy, on
and on and on.
So I and many others are not saying we want to put you out
of business, but we are not going to stand by and allow yet
another what I consider unfair ripoff to people who can least
afford it. And so I want you guys to think about it. I want you
to think about why--for example, you said that in your own
community, they don't allow payday loans. Why do you think they
don't allow payday loans?
Mr. Simmons. Congresswoman, in the community that I come
from, the municipal ordinance that was put in place was to stop
the proliferation of what the council at that time considered
predatory practices.
Ms. Waters. Okay, that is good. And that is why 15 other
States have basically either said you can do no more than 36
percent and if you don't, if you can't live with that, get out,
we don't want you at all. But there is a reason why your
municipality has prohibited the proliferation, as you would
call it, and there is a reason why 15 States are denying payday
loans the opportunity to operate in the way that they do.
So with that--
Chairman Neugebauer. The time of the gentlewoman has
expired.
Ms. Waters. My message is, drop the interest rates. Look at
36 percent or so. Pastor is doing it with 28 percent. We
believe it can be done. Create the opportunity for this
gentleman and don't gouge him.
Chairman Neugebauer. The time of the gentlewoman has
expired.
Ms. Waters. I yield back the balance of my time.
Chairman Neugebauer. I now recognize the gentleman from
North Carolina, Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman. Mr. Shaul, I would
just like to get a better handle on the borrower and what must
he provide to obtain a loan from one of your associated
members? What are the best practice efforts that they have to
follow to this potential client?
Mr. Shaul. It begins with proof of employment. They must
have a checking account. They must have a credit history, which
is looked up. And basically, that is what is required.
Mr. Pittenger. So you are talking to people who have an
understanding of the practice of credit, who have a credit
history, they are aware of what they are doing, these are
thoughtful, knowledgeable people who have already been through
the credit process before? You are not just--
Mr. Shaul. That is correct. I would make one addition, that
we have increasingly--and partly under regulatory oversight--
also looked at the schedule of obligations that the borrower
would have so that we know that the ability to repay doesn't
crowd out the other obligations like rent, food, et cetera,
that he or she has.
Mr. Pittenger. So the perception, really, in some of the
testimony is if you grab people off the street and you have
exploited them and taken advantage of them, and they blindly
don't even know what they are getting involved in. And on the
contrary, they already have a credit history. It has to be a
good, solid history. You wouldn't be loaning the money to begin
with.
Mr. Shaul. We have had a very difficult time, Congressman,
getting people to understand that this is a business. And if
you are loaning money and you don't get it back, you are not in
business very long. Contrary to some people's thinking, if you
look at the schedule that the CFPB has put out on sequence of
loans, there is only about 17 percent of people who are over 6
loans in a year.
That 17 percent I would submit to you is a problem. And it
usually is one of two things. Either that person shouldn't have
had a loan in the first place, or in the second place,
something happened between the time the person took out a loan
and the time the payment was due.
Our best practice requires that if a person cannot repay
the loan at the third time it is due, then he is allowed to go
into a program where he gets no further interest charge and he
gets a longer term to pay. I hear these stories, and I am as
horrified by some of the outrageous things I hear as anybody
else is. The question then becomes, who made that loan? And
almost always when we run them down, we find that it is not
someone who is a member in our association or anyone reputable.
There is a myth that there are States that don't have
payday lending. Every State has payday lending. The question
is, is it regulated payday lending? Or is it payday lending
that you can take off the net? And if you just go to your home
computer and you look up the State of Washington, or Idaho, or
whatever State you choose, even including New York State, and
you have the patience to go through New York State payday
lending, you will see the opportunity to get a loan, even
though that is not regulated. Those are dangerous.
And we have for a long time said to the CFPB, you ought to
get at this question by requiring universal registration of
everybody who makes a loan, and then you ought to ask every
State to pass a law that says, if you are not registered, you
can't collect. That will put a stop to this illegal lending,
and then we will see how many of these anecdotes are left,
because I believe that most of these anecdotes stem from
illegal vendors.
Mr. Pittenger. Thank you very much. It is a very good
answer.
Mr. Simmons, you have extensive background, experience in
economic development and oversight of financial matters. Do you
believe that these loan practices are predatory?
Mr. Simmons. I can only speak for the traditional
installment lending industry. And in answering your question,
we believe that there is an opportunity for these loans to be
options, additional loans for individuals because we believe
that they are safe, they are affordable, they are over a period
of time, that an individual would know exactly what their loan
payment would be over a period of time in monthly installment
loans.
Our position would be that as you look at the potential
rule and the proposal, that consider the other options that are
available. And we believe that a traditional installment loan
and the lending industry that has been around for 100 years,
different than other products, is an opportunity to be choice
given to individuals that is not predatory in nature.
Mr. Pittenger. Thank you very much. I yield back.
Chairman Neugebauer. And now the gentleman from Texas, Mr.
Green, is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank these witnesses
for appearing, as well.
Dr. Haynes, let me thank you for the stellar job that you
have done. I want to go beyond this question of payday lending
for just a moment and mention your THRIVE program, where you
have had over 100 young Black males to work with you between
the ages of 16 and 19, paid them not minimum wage, but $10 an
hour, and they are getting mentoring and they are getting
tutored. And you are doing a good job in helping people to find
their way in life. And I want you to take just a moment, if you
would, so that people will know who you are and tell us a
little bit about the things that you are doing at your church.
Mr. Haynes. Okay, thank you so much. The THRIVE program was
in response to the murder of Treyvon Martin, and the outrage in
our community had to be harnessed for good. So on the one hand,
we wanted to stand against injustice in the justice system, and
at the same time provide opportunities for empowerment.
And so for the last 2 summers, we have partnered with other
corporate entities, our church has, and we have recruited, we
have trained, and we have mentored young brothers for the
purpose of helping them to secure employment in some of the
corporations in Dallas.
And the program has gone well. This year, we are going to
expand it to include young ladies within that same age range.
And so it is our hope always to on the one hand address the
injustices in the system, and at the same time to empower those
who are powerless.
Mr. Green. And you hope to help the Mr. Sherills of the
world, people who may find themselves in his position, such
that they don't have to go to payday lenders. Is that a fair
statement?
Mr. Haynes. That is a fair statement. I admire his
testimony and his strength. And it is my determination that he
will have other options other than a predatory loan. Though he
has made good on his--and I think that is wonderful--it is just
that in many instances, he is the exception to the rule. And so
we need to be concerned about those who suffer from the rule.
Mr. Green. Mr. Sherill, let me compliment you, as well. I
think that you have done well with your life and I wish you the
very best. But there are lots of folks who haven't been as
successful, and they have been victims. And I speak for the
victims.
Those who have been in a position to make it through these
payday loans, wonderful. And, by the way, I don't want to put
payday lenders out of business, either.
So let's just go through some questions quickly. If you
believe, as Mr. Shaul does, that you can regulate payday
lenders, raise your hand. So, Mr. Sherill, you don't think that
you should regulate payday lenders?
Mr. Sherill. Well, I don't get into the politics into it,
so I really don't understand the question.
Mr. Green. I don't want you to get into the politics of it.
You got into the politics of it when you decided to come to
this hearing, Mr. Sherill, just so you know.
Mr. Sherill. Yes.
Mr. Green. Now, let's try it again. If you believe, as Mr.
Shaul does, that you can regulate payday lenders--by the way,
they are regulated across the country so that you all know--do
you believe you can regulate them? Raise your hand. All right.
Everybody has raised their hand. Let the record reflect--I want
you to be on the record. The record has reflected that you
believe they can be regulated.
If you believe that it was appropriate for the military to
be regulated, payday lending to the military to be regulated,
raise your hand. So now, Mr. Simmons, you don't think that we
should have regulated the military. Mr. Sherill, you don't
think that we should have regulated the military. And, Mr.
Miller, you don't think we should have regulated the military.
Do you think that the military folks ought to be treated
the same way other people are being treated and taken advantage
of to the same extent. Is that a fair statement, you don't
think they should be regulated? I will ask you again so that
you can be on the record. You have to be on the record now. You
are talking about the military of the United States of America.
If you believe that we should have regulated military payday
lending, raise your hand. All right. Let the record reflect
again that the same three persons do not believe that this
should be done.
Mr. Shaul. Congressman, can I at least--
Mr. Green. There are no halfway answers right now, because
I only have 20 seconds left. I apologize, okay? If I had more
time, I would work with you. See, here is the problem. And I
respect the three of you for taking the positions that you have
taken. But here is the problem. A person today not in the
military can be victimized by some of these payday lenders. Not
all, but some. But if the next day he gets in the military, he
can't be victimized. What happened to him to make him a person
who shouldn't be a victim overnight?
Chairman Neugebauer. The time of the gentleman has expired.
Mr. Green. Thank you, Mr. Chairman.
Chairman Neugebauer. The Chair now recognizes the gentleman
from Colorado, Mr. Tipton, for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman. I would like to thank
the panel for taking the time to be here today and to be able
to hear your individual stories. And I know in my district in
Colorado--in fact, we have well over 200 letters that have been
sent to our office, constituents out of my district who have
taken the time to be able to just write in and be able to
express their support for having the freedom to be able to go
out and meet their financial needs, to be able to have some
choices in some very specific circumstances.
A constituent out of Alamosa wrote us saying that they used
one of these short-term loans to be able to pay for unexpected
car repairs, and another in Monte Vista to be able to catch up
on a couple of bills, and yet another for medical bills.
What they are concerned about is the overreaching hand of
the Federal Government. And you have had to sit here a long
time, so maybe a little exercise is a great idea. How many of
you here think that the Federal Government is the sole
embodiment of good choices for how to be able to run a business
in this country? Let the record show not one person raised
their hand.
What we have is our colleagues have pointed out is an
industry that is regulated and creates some opportunity in
those hometown communities to be able to provide access in a
time of some specific need to be able to do that. But, Mr.
Simmons, I would like to be able to maybe get a couple of
comments from you. When you were giving your testimony, you had
talked about a financial service desert in your community.
Mr. Simmons. Yes.
Mr. Tipton. And just really kind of a couple of points. I
think that I would like to be able to hear you address on this.
The importance of that access and, in your community, when it
was effectively outlawed, people were told to go away from
providing some of the service to the community, did the need go
away, and where did they go?
Mr. Simmons. I would like to say that, Congressman, the
need is there. The need is great. It is demonstrated by the
fact that in the State of Missouri last year, I believe there
were 180,000 traditional installment loans that are made.
With respect to small dollar loans made in the entire
State, that is well over a million that is made on an annual
basis. So there is significant need that is there. My testimony
today was to talk about the traditional installment lending and
what it is as an option with respect to that need.
And so I commend the gentleman, Dr. Haynes, who talks about
giving the options in the community that allows the community
to have additional options. I commend him for that. I commend
individuals that try to find different ways and different
options.
At the same time, I am very familiar with the fact there is
still great need and there are at times cracks that often
people will slip into, and they won't be able to get one loan
versus the other. And so for those that are doing that
yeoperson's job like he is doing, we commend them.
At the same time, I think it was said earlier, giving the
options where you have the opportunity to say here are other
products that are in the marketplace and given competition and
given the opportunity to have other products is something that
is still needed within the community.
I didn't have that within the community that I grew up in.
I see what transpires in a community where there is a financial
services desert. That need is still there. If there are not
people like Dr. Haynes filling that gap and filling that role
or having safe and reliable loans like I talked about with
traditional installment lenders, it is very difficult because
the banks don't do this.
Mr. Tipton. And then it will move into a completely
unregulated market, which is probably going to be a lot more
punitive?
Mr. Simmons. I would say that is what we hear in the
community often is, I am going to find a way to deal with my
needs.
Mr. Tipton. To be able to help your family.
Mr. Simmons. To be able to help.
Mr. Tipton. I apologize. I am a little short on time, and I
did want to get Dr. Miller in. Does it raise concerns for you
that we are seeing the CFPB, where it has done no analysis of
existing State regulatory structures or practices, now trying
to be able to set the bar nationwide?
Mr. Miller. Yes, it does. I think having 50 States try
regulations gives us 50 opportunities to see what works and see
what doesn't work. And the States do have various regulatory
methods that they have employed in the past.
My question is, on research, let's see independent research
that is done that is not a position but it is independent by
academics who look at the data and ask questions and draw
conclusions and publish the results in peer-reviewed journals.
Mr. Tipton. Thank you so much. My time has expired.
Chairman Neugebauer. Time has expired. The Chair now
recognizes the gentleman from Kentucky, Mr. Barr, for 5
minutes.
Mr. Barr. Thank you, Mr. Chairman. And thanks to our
witnesses. And, first, to Dr. Haynes, let me just thank you and
commend you for stepping in and providing through your church
opportunities for credit, for folks in your community. And I
think there is certainly a role for that in the faith-based
community to do that.
And also, as we have seen so many times, faith-based
institutions and institutions of private society, frankly,
doing a much better job than the government in offering
financial literacy to the people of this country.
To Mr. Sherill, I wanted to ask you, in your compelling
personal story of redemption and accessing a payday loan to
build a business and take advantage of a second chance that was
given to you in your life and really be the embodiment of the
American Dream, at that time in your life, did you have access
to a faith-based church or organization that could have given
you credit?
Mr. Sherill. No, I had access to nothing. And that is why I
chose to go to the payday lending. There is nothing out there.
Like, again, I said, I commend Dr. Haynes for that. If he had
one in my city, I am pretty sure there would be a lot of people
like me going to see him.
We are looking for something. We have nothing. And that is
why I chose to go to payday lending.
Mr. Barr. And I think that spells it out right there.
Sometimes, there aren't as many choices as we need. And I think
your story demonstrates that the greatest protection for
consumers, the greatest consumer protection is competition and
choices. And if we had more choices, we would have better
opportunities for people to do what you did and achieve the
American Dream. And I commend you for that.
Let me just ask you, Mr. Sherill, if you didn't have that
opportunity for that payday loan to build that business, where
would you be today?
Mr. Sherill. Possibly back in prison, because we revert
back to what we are used to. And if I am used to the streets
and getting money from the streets, then I would most likely go
back to that, because it is survival of the fittest. If you
don't have it, then you have to go get it some type of way.
Mr. Barr. Again, I appreciate the fact that your story is
one of redemption and second chances and taking a risk and the
hard work that it takes to do what you have done. There has
been a lot of talk today in this hearing about predatory
lenders and making people victims. Mr. Sherill, do you view
yourself as a victim?
Mr. Sherill. No, sir. Not at all.
Mr. Barr. So if you don't view yourself as a victim of your
business partner advance, describe that relationship that you
have with your lender?
Mr. Sherill. Well, my lender--I got to know them. They are
basically a pillar of our community in Nashville. They give
back a lot. I am here solely because of me and my reasons. But
they are--in our community, they give back a lot. And they gave
me an opportunity when nobody else would.
Mr. Barr. To Mr. Simmons and Mr. Shaul, I think, Mr.
Simmons, you made the point that banks don't do this. And I
want to explore that issue, because, again, as I said before, I
think competition and choice is the best way to protect
consumers, in addition to State-based regulation, consumer
protection laws. Kentucky has one of the most advanced consumer
protection laws in this area, and unfortunately the Bureau
would cancel out what our general assembly and our regulator
and our governor have done in that area.
But let me just explore why banks don't do this. The CFPB,
the OCC, and the FDIC, they have issued rules that have limited
banks' abilities to compete in the overdraft space, in deposit
advance, in short-term lending, with only a few banks left even
offering such products.
So it looks to me like the regulators in Washington are
squeezing both sides of this. And as Mr. Sherill says, they are
going to go--you are going to go get a loan--I think your
testimony, Mr. Sherill, was I can say that there other places I
could have gone for a loan. You don't want me to tell you about
those places or those people, but they are out there.
If we are denying the American people access to credit from
banks and traditional lenders, and then the Bureau comes in on
this side and denies people like Mr. Sherill opportunities
here, and there are not great people like Dr. Haynes in the
community and the faith-based community, where are these people
going to go? Mr. Simmons, Mr. Shaul?
Mr. Shaul. May I say, Congressman, the Bureau has adopted a
policy that is simply this: The easiest way to protect
consumers is to deny them credit. There is no problem then with
whether there is any misuse. But that is precisely a recipe for
disaster, because contrary to what the Bureau seems to be
willing to propone, ask yourself how many Americans have
advanced economically or socially without the use of credit.
The people to whom we loan money have a more desperate need
often for that credit than anybody else does. The failure to
appreciate that the reasons that banks have moved out of
neighborhoods has a lot to do with simple economics. The cost
of complying with the post-2001 disaster in New York City, the
cost of that, the compliance cost for most banks has tripled
since in that 15 years.
Banks look upon everybody who comes through the door as to
whether or not they are a profit center. That means that they
have very little interest in those individuals who don't look
at that moment in time as though they will continue to be a
profit center. That means that we have a much larger non-
depository base than we used to have. Regulating it is very
important, but having it there is even more important than the
regulation.
Chairman Neugebauer. The time of the gentleman has expired.
Mr. Barr. Thank you. I yield back.
Chairman Neugebauer. The gentleman from Texas, Mr.
Williams, is recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman. And I want to thank
all of you for taking time today. It has been a great dialogue.
I appreciate it.
I am a small-business owner in Texas. And I may be one of
the few on this committee who actually is a lender. I deal in
credit. And I just cannot believe, as I go through my life
every day up here, how people want to bash and condemn small-
business people who are trying to employ people, trying to make
things better.
Mr. Sherill, I know that we talked about victims today. And
I hope that the victims who are out there, whomever they are,
are looking at you as someone they can look up to and get
themselves out of that status and get into where you are and
own a business and employ people and do great things. And I
know everybody is proud of you.
And I want to just say this really quickly to you, Mr.
Sherill. Tell me about--we talked about the place you borrowed
the money. But I believe that Mike and Tina Hodges own that
business. And what kind of people are they?
Because here is the deal. All of us who employ people, who
own businesses, we just get hammered by this Administration,
just nonstop, every single day. I want to know what kind of
people you do business with. These are good people, I bet.
Mr. Sherill. Yes, they are stand-up, honest people who give
people opportunities. Like I said, they do a lot in the
community. I could go on and on about the stuff that they do.
They are great people. They are wholesome people. They are
family people. I have known them for about 4 or 5 years now,
and I have built a rapport with them over the years.
It started out as business. And then later on, we created a
rapport. Initially it was strictly, hey, I didn't know them,
and then as years went to--as years developed, I got to know
them personally.
Mr. Williams. That is the same story across the country
about people who invest and try to help folks. And I am glad to
hear about that. And just that story in itself, Mr. Chairman, I
would say is another story of the American Dream.
Mr. Sherill. Yes, sir.
Mr. Williams. And so I hope we don't destroy that, which it
seems like we are trying to every single day up here.
Now, Mr. Simmons, my question to you is, after listening to
your testimony today, I believe it is safe to say that the need
for small dollar lending is real. Now, you note in your
testimony that traditional installment lenders make traditional
installment loans or to make high-quality small dollar loans.
But I don't think the CFPB believes that.
What the CFPB doesn't understand is the importance of
providing service to customers. They don't deal in service.
They have no idea on how to give service to their customers,
which is all of us. Most of the people I deal with in my
business, the car business, and the people you are here to
represent are folks that we can really make a difference for.
We try to improve things, whether they need a new car to drive
or a used car to drive to get to work or a small loan to get
through a tough month. We are there to support them, because
they are valued members of our community. The experience can be
personal. And, frankly, again, we get back to the consumer and
the people know better than the Federal Government.
So let me ask you, Mr. Simmons and Mr. Shaul, these
questions. As we discussed earlier, in 2008 the FDIC conducted
a small dollar loan pilot program to see if banks would
participate in this space: 31 banks participated, with 446
locations in 26 States. I think what the FDIC program showed
was that it didn't save customers any money. In his budget
release this week, the President requested $10 million for the
small dollar lending program to be administered by community
development financial institutions. This, of course, would be
funded by the customer, i.e., the taxpayer.
So can you elaborate, either one of you, more on this
program and why it will or won't work, to really save the
consumer any money at all?
Mr. Shaul. It won't work. Bluntly put, the FDIC experiment
did not work. And it did not work because you cannot subsidize
your way or artificially control rates and believe that the
market will respond.
This is a problem because, first of all, it will bring to
full measure something we have all feared, and that is the CFPB
runs always the risk of becoming an allocator of credit,
picking winners and losers. And this is the direct attempt to
do that.
Second, this is the nose inside the tent. If it is $10
million today, it could be $100 million or $1 billion soon.
Third, and most importantly, anyone can make loans, provided
they know that their losses are going to be floored by another
entity, and that is what is being talked about here.
There is a contingent who believes that you can do away
with what is now being offered by the private sector, and you
can get at that either by Operation Chokepoint or you can get
at by rules that make it impossible for us to operate. Having
done that, then the solution becomes to put in an artificial
resuscitation effort which would be this kind of program.
Mr. Williams. Thank you. I have 4 seconds. Does anybody
want to comment on the President's request in funding for a
loan loss reserves in this year's budget? I am out of time.
Mr. Chairman, I yield back.
Chairman Neugebauer. I thank the gentleman. And I now
recognize the gentleman from Missouri, Mr. Luetkemeyer, the
chairman of our Housing and Insurance Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman. And welcome, Mr.
Simmons, a fellow Missourian. It's good to see you again, sir.
Mr. Simmons. Thank you.
Mr. Luetkemeyer. Dr. Miller, kind of a quick couple of
questions for you here. Do you know off the top of your head
what the average loan loss ratio is, of an average payday loan
company?
Mr. Miller. I do not.
Mr. Luetkemeyer. Okay. Do you know what the rate of
complaints are average across the country for per thousand
transactions, something like that?
Mr. Miller. No, sir, I don't know exactly. I think it is
low, but I don't think--I don't know exactly.
Mr. Luetkemeyer. Mr. Shaul, do you know that number off the
top of your head?
Mr. Shaul. I would like to make two comments about that.
Historically, State by State, it is very low. Director Cordray
said to us that he would be driven by the complaint data. If
you look at the complaint data, two things are apparent. The
payday loan complaints are very, very low. They are at either
the first or second lowest in all of the categories that are
measured by complaints.
Second, when you analyze those complaints, they contain two
other kinds of categories within them, loans that are
complained about, denominated as payday loans in States that
don't have payday lending, which means that people who took a
non-regulated online loan are complaining about the fact that
they are being serviced poorly, paying too much, one thing or
another.
That problem the CFPB has had no willingness, no appetite
for tackling at all, although it is obviously one that should
be tackled, because it impedes the businesses that do have
reputations to protect, and it is disastrous for the consumers.
The second thing about the complaint portal is that it is
irrational. If someone writes in and says, I didn't get a loan,
that is my complaint, we get a ding as an operator as though
there were a legitimate complaint. It is baffling to me that
the single exercise that was meant, we were told, to guide the
question of examination, compliance and rulemaking shows us to
be not a category of problems, but we are the ones that are
first out of the box and being set upon by a rule, and yet the
rule does nothing about the real complaints that are there and
about the real victims who are not being in any way brought to
a situation where they will be compensated.
Mr. Luetkemeyer. In my experience, when I was a financial
services chairman back in Missouri for a few years, and
actually worked on at that time a landmark piece of payday
lending legislation, so it became the model for a while of how
you address this issue, I checked every year with our consumer
protection folks in the State there. And the payday loan folks
per thousand transactions, their rate was always less than
banks and credit unions.
Mr. Shaul. Yes.
Mr. Luetkemeyer. It was across-the-board. That is not even
close.
Mr. Shaul. That is the nationwide experience.
Mr. Luetkemeyer. So it tells you that there are a lot of
satisfied customers out there. And we have heard some testimony
today about some who are not happy. And every industry has that
kind of a situation. I don't care whether you are selling cars
like Mr. Williams is or whatever your industry is, if you are
selling toothpaste. Somebody is not going to be happy with your
product and misuse it somewhat.
One of the concerns I have is--it really is kind of
interesting, we have--the government took over the student
loans, and we continue to increase the student loan data, get
more students in debt over their heads than can actually ever
get out, and today we are worried about the problem with payday
loans when we have hundreds of thousands of dollars that some
of our students are getting into and haven't heard a whimper
out of the other side on that. It is amazing.
But I would like to talk for just a second about
Chokepoint. Mr. Shaul, you brought that up. Obviously, you are
probably aware that I am the sponsor of the Chokepoint bill
here in Congress, and my colleagues helped me pass that last
week and sent it to the Senate to try and stop the nonsense. I
have an e-mail address in my office that takes Chokepoint
stories. I had one last week, and it was a payday lending one.
Two weeks before that, it was a credit bureau in California.
And 2 weeks before that, it was a tobacco shop in Florida.
I have about a minute left here. Can you quickly give a
couple of stories about Chokepoint?
Mr. Shaul. I had one in my e-mail today from the State of
California, a small operator in a very small town. This has not
stopped. We still feel that the examiners have not been given
sufficient disciplinary action from the top that they will stop
advising people, banks, institutions, to cut off those of us
who fall in the category that by their taste they don't like,
not by the law, not by any guidance, but by their taste.
And I must tell you, I was extremely disappointed by the
President's statement. Evidently, we have come to this point
with regard to due process in this country where it is
justified to go after those who are regulated and innocent by
virtue of the statement he issued because it could interfere
with getting at some of those who are actually guilty of crime.
Were we to take that standard into the criminal law or were
we to do anything else with it, we would have repudiated most
of the Anglo-Saxon and United States history as far as rights
go.
Mr. Luetkemeyer. I appreciate your comments, sir, and I
appreciate the indulgence of the chairman. I think this is a
key point that your members are being deprived of their
livelihood without due process.
Mr. Shaul. No due process.
Mr. Luetkemeyer. It is a Constitutionally protected right.
Thank you, Mr. Chairman.
Chairman Neugebauer. The time of the gentleman has expired.
The gentleman from Minnesota, Mr. Ellison, is recognized
for 5 minutes.
Mr. Ellison. Let me thank the chairman and the ranking
member.
For anybody who might be watching these proceedings, I want
to say thank you and welcome for being here today. I would like
to point out just as a matter of rule that the reason that of
the five people who are offering testimony today, four sound
like they are taking a Republican position, is because that is
the way the rules work. The Republicans get to choose, well,
four--the majority of the witnesses and the Democrats get to
pick just one.
So anybody who just doesn't know how it works around here,
this is not representative of how people feel about this issue.
It is just the Republicans have the majority, so they get to
pick four people who agree with them.
Anyway, Dr. Haynes, it is always a pleasure to see you. I
want to thank you for your tireless fighting for people all the
time. You are always at the forefront of standing with people.
And you remind me of some dear friends I have in Minneapolis
where I am from. We also have strong faith-based movement
working in predatory payday lending in our communities.
And by that, I don't mean all payday lenders are always
predatory, but there is predatory payday lending and we should
try to stop it. And I would hope everybody on this panel would
agree with me about that.
I work with at home friends of mine, Reverend Paul Slack of
New Creation Church, Reverend Grant Stevenson, Pastor Billy
Russell, Greater Friendship Missionary Baptist Church. I could
fill them up with this room, and I guarantee you I would have
more people complaining about the way payday loans are abused
than people on the other side of the fence, if this were a true
representative sample of how people feel about this issue.
Can you tell us why faith-based leaders, yourself and
others who you work with, and institutions are involved with
this small dollar lending issue? What brings you to it?
Mr. Haynes. Number one, it is a moral issue in that in our
faith tradition, as in most faith traditions, we believe that
God is concerned about those who cannot do for themselves. And
as a consequence, we have a responsibility to address those
structures and systems that reinforce that situation of being
dispossessed and left behind.
Mr. Ellison. Now, Doctor, you don't just preach from the
pulpit. You actually go one-on-one with people.
Mr. Haynes. Right.
Mr. Ellison. In your experience, do most people understand
the terms that they are getting into? Is there sufficient time
for them to--do the lenders take time for them to really know
what they are getting into? Or are these desperate people in a
desperate situation?
Mr. Haynes. Thank you. They are desperate. And when you are
in a desperate predicament, and this is what is marketed to you
through the airwaves, and it is all you see on your streets,
again, you make choices within the confinement of your options.
And so they make those choices out of desperation, and they are
not going to take the time to read the whole thing. And most of
us don't take time to read our whole loan piece whenever we
apply for a loan.
So to judge them I think is inappropriate and unfair. So
you are talking about desperate people in desperate situations
who want to do the right thing, but they are being set up by
predatory practices.
Mr. Ellison. So one of the things that some of the folks
who engage in these predatory payday loans--and, again, by
saying--I use the predatory not to modify all payday loans, but
the predatory ones--and sadly there are too many. And I would
hope that everyone in the industry would want to hold up a high
standard.
A lot of times, these folks who advocate for just predatory
lenders doing whatever, they say that they have to be allowed
to do it or there would be no other alternative. Do you agree
with that?
Mr. Haynes. Not at all. As a matter of fact, again, our
microloan fund that we are offering at the church through our
credit union is there and it is doing well. The people are
paying back well. As a matter of fact--and I meant to correct
the gentleman earlier--if you are paying well on the loan, it
goes from 28 percent to 19 percent. So we are still doing well.
And I believe that there are those out there who would like to
offer these kinds of opportunities.
Mr. Ellison. Yes, and do you find that other congregations
are looking into the same thing? I know in Minnesota there are
a lot of congregations thinking about this stuff. They would
even try to buy back people's payday loans and then set them on
a more moral framework.
Mr. Haynes. Oh, without question. As a matter of fact,
there are several churches in the area that I referenced
earlier, where we had this inundation of a community targeted
by the industry. And as a consequence, there are several of us
who are trying to pick up on this model. I am even partnering
with the church across town that is a white Southern Baptist
Church, because, again, they are against this kind of predatory
practice.
Mr. Ellison. So it is moral and right to stand up for
consumers. Your churches offer alternatives. And there are
other people around the world in the country doing the same
thing.
Mr. Haynes. No question.
Mr. Ellison. Thank you, sir. It is an honor to see you
again.
Mr. Haynes. Thank you.
Chairman Neugebauer. The time of the gentleman has expired.
I would like to thank our witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, this hearing is adjourned.
[Whereupon, at 6:02 p.m., the hearing was adjourned.]
A P P E N D I X
February 11, 2016
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