[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
ENDING DEBT TRAPS IN THE PAYDAY AND
SMALL DOLLAR CREDIT INDUSTRY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CONSUMER PROTECTION
AND FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
APRIL 30, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-20
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
37-519 PDF WASHINGTON : 2020
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California PETER T. KING, New York
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois ANDY BARR, Kentucky
JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado
DENNY HECK, Washington ROGER WILLIAMS, Texas
JUAN VARGAS, California FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
AL LAWSON, Florida BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio
KATIE PORTER, California TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
Subcommittee on Consumer Protection and Financial Institutions
GREGORY W. MEEKS, New York, Chairman
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri,
NYDIA M. VELAZQUEZ, New York Ranking Member
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DENNY HECK, Washington BILL POSEY, Florida
BILL FOSTER, Illinois ANDY BARR, Kentucky
AL LAWSON, Florida SCOTT TIPTON, Colorado, Vice
RASHIDA TLAIB, Michigan Ranking Member
KATIE PORTER, California ROGER WILLIAMS, Texas
AYANNA PRESSLEY, Massachusetts BARRY LOUDERMILK, Georgia
BEN McADAMS, Utah TED BUDD, North Carolina
ALEXANDRIA OCASIO-CORTEZ, New York DAVID KUSTOFF, Tennessee
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
C O N T E N T S
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Page
Hearing held on:
April 30, 2019............................................... 1
Appendix:
April 30, 2019............................................... 43
WITNESSES
Tuesday, April 30, 2019
Haynes, Reverend Dr. Frederick Douglass III, Senior Pastor,
Friendship-West Baptist Church................................. 6
McDonald, Todd O., Senior Vice President and Board Director,
Liberty Bank and Trust Company, on behalf of the National
Bankers Association............................................ 10
Peterson, Christopher L., John J. Flynn Endowed Professor of Law,
University of Utah, S.J. Quinney College of Law; and Director,
Financial Services, and Senior Fellow, Consumer Federation of
America........................................................ 12
Reeder, Garry L. II, Vice President, Center for Financial
Services Innovation............................................ 14
Sherrill, Robert, CEO, Imperial Cleaning Systems................. 15
Standaert, Diane M., Executive Vice President and Director of
State Policy, Center for Responsible Lending................... 9
Whittaker, Ken, Southeast Michigan Organizing Director, Michigan
United; and former payday loan consumer........................ 8
Zuluaga, Diego, Policy Analyst, Center for Monetary and Financial
Alternatives, Cato Institute................................... 17
APPENDIX
Prepared statements:
Haynes, Reverend Dr. Frederick Douglass III.................. 44
McDonald, Todd O............................................. 47
Peterson, Christopher L...................................... 51
Reeder, Garry L. II,......................................... 67
Sherrill, Robert,............................................ 78
Standaert, Diane M........................................... 80
Whittaker, Ken............................................... 94
Zuluaga, Diego............................................... 95
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written testimony of the Honorable Richard J. Durbin, a U.S.
Senator from the State of Illinois......................... 98
Written statement of the Maryland Consumer Rights Coalition.. 102
Written statement The Pew Charitable Trusts.................. 107
ENDING DEBT TRAPS IN THE PAYDAY AND
SMALL DOLLAR CREDIT INDUSTRY
----------
Tuesday, April 30, 2019
U.S. House of Representatives,
Subcommittee on Consumer Protection
and Financial Institutions,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 3:14 p.m., in
Room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks
[chairman of the subcommittee] presiding.
Members present: Representatives Meeks, Scott, Velazquez,
Clay, Foster, Tlaib, Pressley, Wexton; Luetkemeyer, Barr,
Tipton, Williams, Loudermilk, Budd, Kustoff, and Riggleman.
Ex officio present: Representatives Waters and McHenry.
Also present: Representatives Green of Texas and Hill of
Arkansas.
Chairman Meeks. The Subcommittee on Consumer Protection and
Financial Institutions will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing.
Today's hearing is entitled, ``Ending Debt Traps in the
Payday and Small Dollar Credit Industry.''
And I just want to apologize to my colleagues and to our
panelists for the late arrival. We had a codel that had some
problems, so we literally just landed and came here. I thank
you for your patience.
I now recognize myself for 4 minutes to give an opening
statement.
To Ranking Member Luetkemeyer and the members of the
subcommittee, welcome to this hearing on, ``Ending Debt Traps
in the Payday and Small Dollar Credit Industry.''
This hearing gets at the heart of the intersection between
Main Street and Wall Street. As was the case with our last
hearing on CRA modernization, this hearing offers us an
opportunity to consider the challenges faced by everyday
American families, far too many of which struggle to make ends
meet.
According to a recent Federal Reserve report on the
economic well-being of U.S. households, 10 percent of adults
experience hardship because of monthly changes in income. Four
in ten adults cannot cover an unexpected expense of $400
without selling something or borrowing money. Over one-fifth of
adults are not able to pay all of their current month's bills
in full, and over one-fourth of adults skip necessary medical
care due to financial hardship.
These numbers paint a stark picture of the financial health
and resilience of American households. Indeed, despite a
growing economy, the data shows that middle-class and lower-
middle-class American families are falling behind.
The financial vulnerability of such a large segment of
American households should not make them easy targets for
predatory lenders. Congress and relevant agencies have an
obligation to ensure access to financial products that do not
wreck the lives and finances of our constituents. American
workers deserve access to financial services products that can
serve as a foundation to building a better future for
themselves and their families. It is in this context that
today's hearing considers payday loans, car title loans, and
other small-dollar loan products.
Over a period of 5 years, engaging broadly with communities
and stakeholders and reviewing over one million comment
letters, the CFPB developed a payday rule aimed at curbing the
most abusive practices of the payday industry, including
requiring that payday lenders assess a borrower's ability to
repay.
There is ample research that shows that the ability to
repay, combined with amortizing loans, are key to protecting
consumers from falling into debt traps. As such, it was deeply
disappointing to see first, Mr. Mulvaney, and then Ms.
Kraninger, the current CFPB Director, move to rescind these key
provisions from the payday rule and delay the rule itself.
Congress established the Consumer Financial Protection
Bureau (CFPB) in the Dodd-Frank Wall Street Reform Act in the
wake of the greatest financial crisis since the Great
Depression, specifically so that financial services consumers
would know they have one agency tasked with the sole mission of
protecting consumer interests.
It is hard to see how the actions of the Bureau, under Mr.
Trump's leadership team, is fulfilling its core mission of
putting consumers first.
The testimony of the panel of experts today paints a
portrait of the health and vulnerability of average American
households and shines an important light on some of the worst
predatory practices in payday, car title, and small-dollar
lending, and puts forth policy recommendations for our
consideration.
Today's witnesses will also speak to the important role of
community banks and fintech. These are important issues that
need not be a partisan issue. All of us, as Members of
Congress, have constituents struggling to earn a living,
finding themselves in a growing banking desert and caught in
payday debt traps.
Today's hearing is an opportunity to consider how best to
serve these constituents. I very much look forward to
discussing these issues further today with the panel of
witnesses and members of the subcommittee.
And with that, I now recognize the ranking member of the
subcommittee, Mr. Luetkemeyer, for his opening statement.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Over the years, I have heard countless stories from my
constituents who rely on small-dollar, short-term loans in
times of financial hardship. When there is an unexpected auto
repair, a hospital bill, or a broken air conditioner, many
families simply have nowhere else to turn. Each year, more than
12 million Americans utilize small-dollar loans when they need
short-term financial assistance.
Unfortunately, the reputation of the entire small-dollar
lending industry has been sullied by a few bad actors
exercising deceptive lending practices. This small group has
caused an industry that provides access to credit for millions
of Americans to be villainized. In fact, under the previous
Administration, DOJ and FDIC officials specifically singled out
payday lenders under Operation Choke Point and attempted to cut
off these legally operating businesses from the financial
services industry.
My colleagues on the other side of the aisle will call for
the payday industry to be severely regulated on the Federal
level and are proposing legislation that will place additional
requirements on short-term loans. I would caution against this
approach.
History has shown that regulations have consequences. We
have seen over the years that traditional financial firms have
largely gotten out of the business of small-dollar, short-term
loans due to the cost of regulations.
This is clearly a demand for short-term lending products,
particularly to low- and moderate-income individuals.
According to the Federal Reserve, 4 in 10 adults in 2017
would be forced to borrow, sell possessions, or not be able to
pay if faced with a $400 emergency expense.
Before this committee considers any legislation related to
the requirements or regulations of short-term lending, we must
fully examine how it will impact the industry and the consumers
who depend on these products.
I am particularly concerned about a draft proposal before
the committee today which would cap the APR at 36 percent for
all consumer credit transactions.
First, an APR is not an effective tool to measure a loan
that typically lasts 2 to 4 weeks.
Second, the interest attached to these loans should be
viewed as a service fee. If a plumber comes to my house and
fixes one pipe in 30 minutes and then charges me $50, did I pay
him $100 an hour or did I pay him a $50 service fee?
There is no question consumers should be protected by
effective regulations that safeguard their financial wellbeing.
However, regulations that curb choice and stifle access to
credit have no place in our economy. According to CFPB's
February 2019 rulemaking on small-dollar lending, the
majority's hearing memo, 17 States and the District of Columbia
have either banned payday loans or have regulations that do not
allow payday lenders to sustain their business models.
Restricting the availability of short-term credit will not
solve the financial problems facing so many American families
but it will push them toward riskier and unregulated products.
If the Federal Government takes a similar approach to these
17 States, and small-dollar, short-term products are regulated
out of existence, where will the 12 million Americans who
utilize small-dollar loans go to to get the financial services
they need?
This is a question that this subcommittee and the witnesses
in front of us must focus on today.
Thank you, Chairman Meeks, for holding this hearing.
And I thank you, the panel, for appearing before us. I look
forward to a robust discussion.
And I yield back the balance of my time.
Chairman Meeks. Thank you. I now recognize the gentleman
from Georgia, Mr. Scott, for one minute.
Mr. Scott. Thank you, Mr. Chairman.
First of all, I want to welcome you back home. I understand
it was quite a challenging trip. It's good to have you back
safe and sound.
This is an important hearing as we try to grapple with ways
in which we can make sure everybody, regardless of where they
fit in the economic stream, can enjoy and participate
meaningfully in our grand economic system. Unfortunately, that
is not so true for those who fall at a certain level within the
lower income and middle income of having access.
And this is why I have, along with my Republican
colleagues, introduced a couple of very important bills: the
Improving Access to Traditional Banking Act of 2019; and the
FinTech Act, along with my colleague, Mr. Barry Loudermilk.
I look forward to getting into this very meaningful
hearing.
Thank you, Mr. Chairman.
Chairman Meeks. I now recognize the ranking member of the
full Financial Services Committee, the gentleman from North
Carolina, Mr. McHenry.
Mr. McHenry. Welcome back, Mr. Meeks. Thank you for being
here and thanks for holding this hearing. And thank you,
Ranking Member Luetkemeyer, for your leadership as well.
Research conducted by the Pew Charitable Trust found that
62 percent of payday loan customers will be forced to delay
bill payments if payday loans became unavailable. There are
real lives at stake, and access to credit is limited. So for
consumers with less than pristine credit or for those who are
credit invisible or underbanked, financial choices are severely
impaired and limited.
Misguided regulation--in fact, misguided law often limits
access to credit in a way that is not in the best interest of
borrowers.
We will hear firsthand today from Robert Sherrill, who is
the only person on the witness stand who has actually relied on
a payday loan. He has a story to tell and it's a very powerful
story.
Moreover, new technologies have emerged to foster greater
financial inclusion by helping customers through microloan
financing, advance payment alternatives, and data-driven
underwriting. Those are useful and good models. The truth is,
we need to help people save. And that is in our national
interest. But we also need folks who do fall behind to be able
to get short-term lending so they can get back into a stable
situation.
So with that, Chairman Meeks, thank you for your
leadership. And I yield back.
Chairman Meeks. Thank you.
I would now like to welcome our witnesses. And I think that
we have a great panel. I am looking forward to hearing from
them.
First, we have the Reverend Dr. Frederick Douglass Haynes
III, who is a pastor, a passionate leader, a social activist,
an orator, and an educator engaged in preaching the gospel,
fighting against racial injustice, and who is committed to
economic justice, empowerment in underserved communities, and
who has been touching and transforming the lives of the
disenfranchised for over 35 years. Dr. Haynes serves as Senior
Pastor of Friendship-West Baptist Church in Dallas, Texas.
Mr. Kenneth Whittaker is a community and political activist
who has spent the last 14 years fighting for racial justice for
the ``99 percent of us,'' to use his words. He currently serves
as the Southeast Michigan organizing director at Michigan
United and Michigan Peoples Campaign.
Mr. Whittaker has traveled the country training activists,
inspiring new leaders, and developing the skills of those
building the progressive movement. Mr. Whittaker is a lifelong
Detroiter, where he still proudly resides with his wife, his
partner in raising six young adults, including five college
students and one Navy seaman.
Ms. Diane Standaert is executive vice president and
director of state policy at the Center for Responsible Lending.
Ms. Standaert directs CRL's State-level policy agenda to
advance responsible lending policy and practices across all of
CRL's issues. She also oversees CRL's work on issues of small-
dollar lending. She is a graduate of the Florida State
University and holds a JD degree from the University of North
Carolina School of Law.
Mr. Todd O. McDonald serves as senior vice president and
board director at Liberty Bank and Trust of New Orleans. He
began his career at Liberty Bank and Trust 13 years ago. He is
intimately involved in the company's high-level corporate
strategy decisions that ultimately affect the long-term growth
and sustainability of the bank.
In addition to his work at Liberty Bank and Trust, Mr.
McDonald is active in real estate, technology, and fast food.
He received his BS in Business Management from Morehouse
College and a Masters in Business Administration from
Northwestern Kellogg School of Management.
Next, we have Mr. Chris Peterson, the John J. Flynn Endowed
Professor of Law at the University of Utah, S.J. Quinney
College of Law, in Salt Lake City, Utah.
Professor Peterson was on leave from 2012 to 2016 serving
as Special Advisor in the Office of the Director at the
Consumer Financial Protection Bureau, and the Office of Legal
Policy in Personnel and Readiness in the United States
Department of Defense, and as Senior Counsel for the
Enforcement Policy and Strategy in the Consumer Financial
Protection Bureau Office's of Enforcement. Mr. Peterson is a
Senior Fellow of the American Bar Association's Consumer
Financial Services Committee.
Mr. Gary Reeder II is vice president for policy and
innovation at the Center for Financial Services Innovation.
Mr. Reeder sets the strategic direction and is responsible
for the execution of CFSI's innovation portfolio and policy
activity. He leads the Financial Solutions Lab, a community of
startups, financial services companies, and nonprofit
organizations building solutions to improve financial health in
America.
Mr. Reeder's broad experience in regulatory matters stems
from his work at the CFPB, the FDIC, the U.S. Treasury, and in
the asset management industry.
He holds a BA in history from Yale College, and an MBA from
Columbia Business School.
Mr. Robert Sherrill is the chief executive officer of
Imperial Cleaning Systems. A Nashville native, Mr. Sherrill has
overcome many challenges. As a young man, Mr. Sherrill served
time in a Federal penitentiary where he vowed to make a change
for his family and himself.
Upon his release, he opened Imperial Cleaning Services, a
commercial cleaning, restoration, and janitorial company based
in Nashville, Tennessee, where he serves as President and CEO.
He has been recognized as one of Nashville's ``40 under
40,'' and as the Black Chamber of Commerce's Rising Star. He is
also the president of Impact Youth Outreach, a nonprofit
organization working to combat youth crime.
And lastly, we have Mr. Diego Zuluaga, a policy analyst at
the Center for Monetary and Financial Alternatives in the Cato
Institute, where he covers financial technology and consumer
credit. Prior to joining Cato, he was the head of financial
services and tech policy at the Institute of Economic Affairs
in London.
Originally from Bilbao in Northern Spain, he holds a BA in
economics and history from McGill University, and an MSc in
financial economics from the University of Oxford.
Thank you, witnesses, for being here.
I want to remind you that your oral testimony will be
limited to 5 minutes. And without objection, your written
statements will be made a part of the record
I now recognize for 5 minutes, the Reverend Dr. Haynes.
STATEMENT OF THE REVEREND DR. FREDERICK DOUGLASS HAYNES III,
SENIOR PASTOR, FRIENDSHIP-WEST BAPTIST CHURCH
Mr. Haynes. Thank you, Chairman Meeks, Ranking Member
Luetkemeyer, and all of the distinguished members of this
subcommittee.
It would be iniquitous and immoral for someone who has been
knocked down to receive handcuffs when they have out of
desperation asked for a hand up. The payday loan industry is
guilty of such unjust and unethical practices. They prey upon
the desperation of the poor who are already disadvantaged.
Payday predators hijack the hopes of the vulnerable and
revictimize them by baiting them into a debt trap. These
hunters of the helpless are guilty of dealing bad hands with
bad plans, to use the language of Kendrick Lamar.
As Pastor of Friendship West in Dallas, I have heard too
many share their experience of being exploited and ensnared in
the payday debt trap. One of my members, a 74-year-old senior
citizen who is feisty and fiercely independent, discovered she
didn't have the money to pay a bill. She saw a commercial for a
payday loan and felt it was an answer to prayer.
Now she feels like the devil has answered her prayer. She
is on a fixed income, and when the repayment was due, she
didn't have enough and had to take out another loan to pay the
first one. She ended up with a dozen loans.
When she approached me for help one Sunday after church,
this once proud senior saint with good credit was ashamed and
tearful. She showed me the paperwork. I was appalled. The
interest rate was 620 percent. She was dealt a bad hand with a
bad plan. She was hurting for help. She took the bait of the
payday loan and became trapped in debt that made her bad
situation so much worse.
I could call the roll, but I will proceed.
Payday predators are a part of a hostile takeover of the
unbanked and underserved. This exploitive industry targets and
saturates communities already suffering from economic
apartheid. I am not exaggerating when I say that when the
vulnerable are drowning in desperation, the payday industry
throws a life preserver weighted with iron of usurious interest
rates. The average annual interest rate for payday loans in the
United States, 391 percent APR, is absurd and outrageous.
Payday and car title loans use a predatory business model
in order to create a long-term cycle of debt at triple-digit
interest rates. These short-term loans were never designed to
be paid back in a short period of time. A fact check of the
average number of payday loans per borrower in each State tells
this sinful story. It is oxymoronic that in the land of the
free, debt traps are set for the vulnerable.
Of course, the payday predators will put the spotlight on
the rare exceptions who have been able to dodge the debt trap.
But that should not blind us to the many who are in the shadows
of a financial nightmare that never seems to end as their bank
accounts are overwhelmed with overdraft fees or closed down.
Some fall into bankruptcy. Many lose their cars to
repossession. It is time for a new plan for those who have been
dealt a bad hand.
The 2017 CFPB rule is a plan that simply requires that
before payday and car title lenders make certain loans, they
assess whether potential customers can afford to pay them back
with the finance charges, given the customer's income and other
expenses. What a novel concept. This is a commonsense
foundation of responsible lending. The rule is a good plan that
protects many of our nation's families from the worst impacts
of triple-digit interest debt traps set by payday and car title
lenders.
A coalition of citizens committed to protecting consumers
have mobilized to push for strong reforms of predatory
practices. Included in this coalition of conscience of those
personal impacted by debt trap practices, advocates for low-
income families, veterans, the elderly, responsible businesses,
and faith-based groups. We are appalled that the CFPB would
propose ripping out the heart of the rule in favor of allowing
payday lenders to continue to exploit those who are struggling
and vulnerable.
We are calling for strong protections so those who
experience an emergency don't end up drowning in debt they
cannot repay. We are called to protect families from financial
predators, and a 36 percent rate cap would leave no one behind
and ensure that they cannot be preyed upon when life happens.
Friendship West has a credit union. We offer small-dollar
loans for those who are vulnerable at an interest rate of 28
percent. A business model that is just works for all.
Please, let's protect the vulnerable, lest we hear Jesus
say, ``I was hungry and you gave me a payday loan. I was given
a bad hand, and you gave me a bad plan.''
[The prepared statement of Reverend Haynes can be found on
page 44 of the appendix.]
Chairman Meeks. Thank you. And now I recognize Mr.
Whittaker, whom I understand also had received payday loans in
the past.
Mr. Whittaker, you are recognized for 5 minutes.
STATEMENT OF KEN WHITTAKER, SOUTHEAST MICHIGAN ORGANIZING
DIRECTOR, MICHIGAN UNITED; AND FORMER PAYDAY LOAN CONSUMER
Mr. Whittaker. Thank you, Chairman Meeks.
Chairwoman Waters, Ranking Member McHenry, Chairman Meeks,
thank you. Ranking Member Tipton and members of the
subcommittee, it is an honor to be here today.
My name is Ken Whittaker, and I am from Detroit, Michigan.
As Chairman Meeks said, I am a hardworking husband and a father
of six brilliant young adults, five of whom are college
students, and one of whom is waiting at home for me to return
so that he can go to MEPS to leave for the Navy of this great
country.
Years ago I was working in IT at the University of Michigan
when I withdrew money from my paycheck and proceeded to lose
that cash out of my pocket as I pulled out a $20 bill to buy a
hotdog for my young son. Unfortunately, I took out a payday
loan of $700 to cover that loss. That turned out to be a very
big mistake that truly altered the course of my life. I found
out that I could not pay off that first loan without
reborrowing to make ends meet until the next paycheck.
This began a cycle of debt which lasted over a year. Soon,
I was paying $600 a month in fees and interest. I eventually
closed my bank account to limit the payday lender's ability to
draw money directly from my account, leaving my family without
the cash for rent, for groceries, and for other essential
bills. This led to debt collection calls and a judgment. My tax
return was garnished, making things that much worse for my
family. All told, that original $700 loan cost me over $7,000.
I spoke out about my experience. At the time, the Consumer
Financial Protection Bureau was developing a rule that would
require lenders to make loans based on customers' ability to
repay and that they could afford. To me, that requirement only
makes sense, and that is how all lending should be.
Having been through this experience myself, I know how
devastating payday lending can be. It is quite disturbing to me
that the current leadership of the CFPB is threatening to
repeal the rule that we lobbied so hard for to protect us.
I strongly support keeping the 2017 CFPB rule. I also
support the proposal to cap annual interest rates at 36 percent
to stop predatory lenders from trapping customers into high-
cost loans that can ruin their financial lives.
Since the day I bought that hotdog for my son, we have
worked to make things better for working families. Coming full
circle, my son and his siblings are here today with me in D.C.,
as we have been fighting for fairness and justice.
Please support strong reform of predatory payday and car
title lending for people like me. We work hard to support our
families and make finances stable, and this kind of lending
only makes it harder.
Thank you for allowing me to share my story today, and I
urge you to protect working families and put people over
profits.
[The prepared statement of Mr. Whittaker can be found on
page 94 of the appendix.]
Chairman Meeks. Thank you.
Ms. Standaert, you are recognized for 5 minutes.
STATEMENT OF DIANE M. STANDAERT, EXECUTIVE VICE PRESIDENT AND
DIRECTOR OF STATE POLICY, CENTER FOR RESPONSIBLE LENDING
Ms. Standaert. Thank you, Chairman Meeks, Ranking Member
Luetkemeyer, and Ranking Member McHenry.
Thank you for the opportunity to testify today. My name is
Diane Standaert. I am the director of State policy and
executive vice president of the Center for Responsible Lending
(CRL).
The Center for Responsible Lending is a nonprofit,
nonpartisan policy and research organization dedicated to
building family wealth through the elimination of abusive
lending practices.
Our organization's nearly 20 years of research on payday
and car title loans show consistently two things: one, these
loans are a debt trap by design; and two, the harms of these
debt trap products further economic inequality and further the
racial wealth gap.
Payday and car title loans charge 300 percent annual
percentage rates and strip away around $8 billion in loan fees
from people typically earning about $25,000 a year. The bulk of
these fees are generated by the debt trap.
Seventy-five percent of all payday loan fees are due to
borrowers stuck in more than 10 loans a year. The typical car
title loan is refinanced 8 times. Low-income borrowers then
suffer a cascade of financial consequences, delinquency on
other bills, having their bank account closed, and even
bankruptcy. For car title lenders, an astonishing one in five
borrowers have their cars seized.
Borrowers have described this debt trap in their own words
as soul crushing, a hole you can't get out of, and a living
hell.
As borrowers suffer these harms, the role of private equity
has increased to fuel the engines of this industry. What people
see at the street level as a small lender storefront is
actually the tentacles of private equity extracting billions of
dollars a year from people already struggling to make ends
meet.
And research has shown time and time again that payday and
car title loan storefronts disproportionately locate in black
and Latino communities, even when they have the same or higher
income as white neighborhoods.
Thankfully, policy trends at the State and Federal level
for more than a decade have been to rein in the harms of these
unsafe loans, ranging from the 2006 passage of the 36 percent
rate cap for the Military Lending Act to protect our Active
Duty military families, to voter-affirmed rate caps of 36
percent in States like South Dakota, Colorado, Arizona,
Montana, and others.
Today, 16 States plus the District of Columbia enforce caps
of 36 percent or less covering nearly 100 million people with
this most effective protection against the harms of these
loans. Since 2005, no State has legalized payday lending.
Today, I would like to emphasize four important points.
Payday and car title lenders have situated themselves
intentionally to perpetuate our country's two-tiered financial
services system. The harms and consequences of these loans
exacerbate the wealth gap and disproportionately burden
communities of color. Older Americans and people on fixed
incomes are also particularly vulnerable.
To reduce these harms, the predatory nature must be
addressed head on. Competition and alternatives will not lower
the cost of 300 percent interest rate loans.
Finally, the States, Congress, and Federal regulators all
have a role to play in ensuring that people are not ensnared in
these debt traps.
We are thankful for Senator Durbin's leadership in
proposing a 36 percent rate cap that does not override strong
State laws. Congress and Federal regulators must reject any
proposal that in the name of innovation or otherwise preempts
stronger State law.
Today, on behalf of more than 700 organizations
participating in the Stop the Debt Trap campaign, we call on
the Consumer Financial Protection Bureau to implement, not
delay, not repeal, its 2017 payday rule, which simply requires
lenders to verify that borrowers have the ability to repay the
loan.
This commonsense notion of ensuring a loan is affordable is
the bedrock of responsible lending, and it is strongly
supported by voters all across this country, with 75 percent
support among Republicans and Democrats alike. The fact that
payday and car title lenders resist such a notion confirms
everything we know about the lending business model.
In summary, policymakers have a choice, siding with the
vast majority of voters and borrowers who oppose the payday
loan debt trap or siding with the predatory lenders who charge
300 percent annual interest rates.
Thank you for your time.
[The prepared statement of Ms. Standaert can be found on
page 80 of the appendix.]
Chairman Meeks. Thank you.
I now recognize Mr. McDonald for 5 minutes.
STATEMENT OF TODD O. MCDONALD, SENIOR VICE PRESIDENT AND BOARD
DIRECTOR, LIBERTY BANK AND TRUST COMPANY, ON BEHALF OF THE
NATIONAL BANKERS ASSOCIATION
Mr. McDonald. Chairman Meeks, Ranking Member Luetkemeyer,
Ranking Member McHenry, and members of the subcommittee, good
afternoon and thank you for this opportunity to testify on the
small-dollar lending industry.
My name is Todd McDonald. I am a senior vice president and
board director at Liberty Bank and Trust Company. I am also a
board member of the National Bankers Association (NBA), the
leading trade association for the country's minority depository
institutions (MDIs).
The NBA's mission is to serve as an advocate for the
nation's MDIs on all legislative and regulatory matters
affecting our member institutions as well as the communities
they serve.
Small-dollar lending has become a fast-growing source of
consumer credit in the United States and a key to financial
inclusion, particularly for those underserved communities.
Unfortunately, existing Federal law does not limit the
interest rate nonbank lenders can charge on loans of $2,500 to
$10,000. This lack of interest rate cap has resulted in a
recent explosion of loans with annual interest rates in the
range of 100 percent to 225 percent and above.
While 35 States have imposed caps on nonbank lenders, there
is still a significant gap in protections for customers.
As a CDFI that serves a largely low- and moderate-income
consumer base that often utilizes these high-cost products,
Liberty often works to help our customers get out of these
predatory loans and into more manageable instruments. This
dynamic is one of many reasons why we have created our own
small-dollar loan product called the Freedom Fast Loan.
The Freedom Fast Loan was created in 2008 because we saw a
demand for a responsible small-dollar product in the markets
that we serve. Our customers use Freedom Fast Loans for
everything from funeral expenses to consolidation loans for
other high-interest debt like credit cards and payday loans.
The average loan is just over $6,000, and the average interest
rate is right at 12.6 percent. Our APR never exceeds 34.3
percent, and we serve customers with credit ranging from the
low 500s over to 700 Beacon scores. We also report payments to
the credit bureaus so our customers can build their credit
while using our product.
In order to scale our Freedom Fast product, and for
community banks to provide similar options, we believe that
there are steps Federal banking regulators and Congress must
take in order to facilitate the kind of robust marketplace
where community banks can compete with predatory small-dollar
lenders.
The Credit Union National Administration's PALS program and
the findings from the FDIC's Small-Dollar Loan Pilot Program
should provide the basis for regulators to consider a small-
dollar regulatory regime tailored to community banks like our
member institutions.
Even our Freedom Fast Loans attracted scrutiny in the past
from regulators, despite it meeting an obvious credit need in
the markets we serve. To that end, we believe that a sandbox
approach from banking regulators that allows community banks to
develop responsible small-dollar alternatives tailored to the
credit needs of our communities would be a welcome next step in
carving out a role for mission-oriented lenders to provide
responsible alternatives.
In addition to a sandbox for community banks, we would also
urge Congress to fully fund the Small Dollar Loan Program
authorizing grants for loan loss reserves for CDFIs seeking to
provide responsible small-dollar alternatives. Technical
assistance grants for CDFIs seeking to provide payday
alternatives for expenses like underwriting software and other
administrative costs would be definitely encouraged.
According to the OCC, U.S. consumers borrow nearly $90
billion every year in short-term debt, typically ranging from
$300 to $5,000. Due to the cost in the increasing regulations,
many banks have withdrawn from this market, resulting in
consumers turning to alternative lenders as a last resort.
Within the right environment, banks can provide affordable
short-term loan options that can help consumers with their
financial needs while establishing a path to more mainstream
financial products. However, it is very important that
policymakers create a regulatory atmosphere where these loans
are profitable for banks that take on this customer niche and
do not lead to additional regulatory burdens.
Policymakers should also create an environment where
community banks can partner with responsible nonbank lenders to
fill the obvious need in this lending space.
Thank you for your time.
[The prepared statement of Mr. McDonald can be found on
page 47 of the appendix.]
Chairman Meeks. Thank you.
Mr. Peterson, you are now recognized for 5 minutes.
STATEMENT OF CHRISTOPHER L. PETERSON, JOHN J. FLYNN ENDOWED
PROFESSOR OF LAW, UNIVERSITY OF UTAH, S.J. QUINNEY COLLEGE OF
LAW; AND DIRECTOR, FINANCIAL SERVICES, AND SENIOR FELLOW,
CONSUMER FEDERATION OF AMERICA
Mr. Peterson. Thank you, Chairman Meeks.
Also, thank you, Ranking Member Luetkemeyer and Ranking
Member McHenry. It is an honor to be here today. Thank you very
much for holding this hearing and also for attending the
hearing.
I would like to begin with two quick statistics to get
started. First, the average interest rate of the New York
City's so-called La Cosa Nostra organized crime families and
their organized loan sharking syndicates, at the height of
their power in 1960s, was 250 percent, a very high interest
rate.
But by way of comparison, the average interest rate
nationwide in storefront payday loan stores is probably about
420 percent APR, nearly twice as expensive as what the so-
called mob charged.
And all throughout the vast majority of American history,
for over 200 years, virtually every State in the Union did not
tolerate interest rates at those prices. We had usury limits in
all 13 original American colonies. All of the signatories to
the Declaration of Independence, every delegate to the
Constitutional Convention, all of those guys went straight back
to their States where they had interest rate limits of between
6 to 7 or 8 percent or thereabouts.
It wasn't until the beginning of the 20th century where we
started to raise those interest rate limits to about between 18
to 42 percent, and 36 percent was the tried and true interest
rate limit all throughout the Great Depression. The Greatest
Generation--the so-called Greatest Generation that went and
fought the second world war, they all came back to States that
had interest rate caps of about 36 percent, even on the
smallest, most expensive loans.
Without those interest rate caps, the problem is that
people fall into debt traps. If there is one thing I could get
you to look at, it is the screenshot that I have included in my
written testimony. This screenshot is from an auto title lender
that made a $1,971 loan to a woman. I have changed her name for
her privacy. She was a client. She borrowed this money because
she was behind on her bills. It had an interest rate of 300
percent.
She worked as a receptionist, made about $11 an hour as a
receptionist. Month after month, she kept paying back as much
money as she could. She made $400, $500, $480 payments.
Overall, she paid $4,635 on this original $1,900 loan. But
because of the simple power of a 300 percent interest rate, the
lender only applied $1.16 to the principal balance of her loan.
And then afterwards, the lender still continued to claim
that she owed another $2,422.05, even though she had paid back
over $4,000. This is money that she is making $11 an hour as a
receptionist. She was still deeper in debt than when she
originally began that loan. That is not freedom. That is a
trap. It is a debt trap.
And a second point I would like to make is that across this
nation, a supermajority of Americans, both Republicans and
Democrats, agree that we need to restore our traditional, old-
fashioned interest rate caps, our usury laws, that had
protected so many people from all across this country
throughout the vast majority of our history. That is about 3 in
4--about 73 percent of Americans in virtually every public
opinion poll that has ever been conducted. And every time there
has ever been a ballot initiative on a ballot where the public
actually got to vote, they have always voted in favor of usury
limits.
That means that in every one of your districts, a
supermajority of your constituents support imposing a
traditional interest rate cap, which leaves me with the
question of, are you going to go along with them, with what the
public wants, or are you going to vote as legislation comes up
in this Congress to protect the payday lenders that charge
triple-digit interest rate caps and have prices that are higher
than the New York City loan sharks charged?
And then I will end on one thing. I would urge you to
consider, as a template for moving forward--think about looking
at the Military Lending Act. You know, the people who defend
freedom in this country, the United States military, respected
on both sides of the aisle, their people were falling into
trouble because of these predatory debt traps, and they put a
stop to it. They got over, they lobbied, and they got Congress
to pass an interest rate limitation on loans to servicemembers.
That limitation is now in effect. And I am proud to say that I,
along with a number of other people, helped work on drafting
those regulations. And it has done a great job for our
servicemembers. They still have plenty of access to credit.
It is time for Congress to learn a little bit about what
freedom and free markets means from the people who defend our
freedom. Freedom is not the same thing as a debt trap. And in
Congress, we need to remember that and restore traditional,
old-fashioned commonsense usury laws to protect our citizens
all across this country.
Thank you for your time.
[The prepared statement of Mr. Peterson can be found on
page 51 of the appendix.]
Chairman Meeks. Thank you, Mr. Peterson.
Mr. Reeder, you are now recognized for 5 minutes.
STATEMENT OF GARRY L. REEDER II, VICE PRESIDENT, CENTER FOR
FINANCIAL SERVICES INNOVATION
Mr. Reeder. Chairman Meeks, Ranking Member Luetkemeyer, and
subcommittee members, thank you for allowing me the opportunity
to share some thoughts and insights on the small-dollar credit
industry and its impact on Americans' financial health.
Small-dollar credit has been a core part of my work for
over a decade and is deeply entwined with my experience growing
up in rural North Carolina. Some of my earliest memories
involve accompanying my grandmother in her brown 1973 Ford
Maverick every payday to pay her lenders. She, like so many
other people in my community, had limited access to mainstream
financial services.
As the son of a Baptist Minister, I also saw up close the
real-world needs of our most vulnerable brothers and sisters.
Nearly every week, someone came up after service seeking help
paying rent, buying diapers or getting gas.
Since my family, like many others, lived paycheck to
paycheck, our ability to help one another was limited by our
own lack of resources.
I ask that we keep these people and the millions of
Americans like them in mind as we bring our different
perspectives to the table in an effort to improve the financial
health of all Americans.
As we all know, financial services has the ability to
protect us from economic ruin and enable us to build better
lives for ourselves, our families, and our communities.
However, far too often financial services, particularly credit
and our antiquated payment system, make people's lives more
difficult.
I am the vice president of policy and innovation at the
Center for Financial Services Innovation, a leading authority
on consumer financial health. We are a trusted resource for
business leaders, policymakers, and innovators, united in a
mission to improve the financial health of their customers,
employees, and communities.
Our largest initiatives include the Financial Solutions Lab
and U.S. Financial Health Pulse. The Financial Solutions Lab is
a seed-stage fintech accelerator focused on advancing the
financial health of low- and moderate-income and historically
disadvantaged consumers.
The U.S. Financial Health Pulse is an annual snapshot of
how Americans manage their financial lives with actionable
insights to improve financial health.
Our research suggests that a variety of different needs and
use cases underlie the demand for small-dollar credit and that
many of them are symptomatic of one or more dimensions of poor
financial health.
Payday lenders, auto title lenders, pawn shops, and other
subprime lenders have dominated the provision of small-dollar
credit for much of the last 30 years. Many of the products they
have offered are rarely underwritten, rely on cycles of
continuous use, and harsh collection practices that both
exploit and perpetuate borrowers' financial distress. Auto
title loans are particularly concerning because of the
potential loss of a car in the event of default.
Fortunately, the consumer finance industry is in the midst
of a dramatic change as a result of the ever-increasing speed
of technological innovation and the broadening and deepening of
data availability.
Fintech startups and innovative incumbents are developing
and testing products that have the potential to meet the
financial needs of underserved households. However, innovation
must be tempered with appropriate standards and oversight.
In an attempt to address those standards, we have developed
our own compass principles for small-dollar credit. We believe
high-quality products have seven core characteristics: first,
the loan is underwritten; second, the loan amortizes; third,
lenders make money when the customer succeeds; fourth, payment
history should be reported to the credit bureaus; fifth, no
fine print; sixth, multiple channels for applications and
payment for customers; and seventh, customer service that meets
the needs of the customer and not just the lender.
In closing, I want to thank the committee for the
opportunity to share my thoughts on this important topic and
remind all of us that we are here to get this right for
consumers rather than to make each other wrong.
I look forward to your questions.
[The prepared statement of Mr. Reeder can be found on page
67 of the appendix.]
Chairman Meeks. Thank you, Mr. Reeder.
Mr. Sherrill, you are now recognized for 5 minutes.
STATEMENT OF ROBERT SHERRILL, CEO, IMPERIAL CLEANING SYSTEMS
Mr. Sherrill. Good afternoon, Chairman Meeks, Ranking
Member Luetkemeyer, and members of the subcommittee.
My name is Robert Sherrill, and I am grateful for the
opportunity to be able to speak to you about my experience with
payday and title loans.
I am not sure if I am the only person on this panel who has
actually used these products, but I hope that with my testimony
I can shed some light on how important they were for me at the
time when I had no other options.
Payday and title loans helped me when I had nowhere to else
to turn. I might not be here if these forms of credit were not
available to me.
In your invitation letter to me, you asked me to discuss
research describing the various harms consumers may suffer when
utilizing these products. I cannot talk about research, but I
can talk about my personal experience.
When I took out my payday loan, I knew what it would cost
me. While I have not taken out a payday loan recently, I still
know what they cost. Given my circumstances at the time and the
lack of other options, I determined that this basic small loan
was the best option for me. In fact, it was a cheaper and
easier solution than the available alternatives. I am lucky
that there was a lender available that would loan to someone
like me in my circumstances.
But let me get back to the beginning of my story. When I
was young, nobody taught me about money and finances, which is
a situation not uncommon to many people. Because of family
issues and hard times, I ended up raising myself and getting
involved in selling drugs, which ultimately led to me going to
prison. I am not proud of this, but it is an important part of
my experience.
When I got out of prison, the deck was stacked against me.
I was a felon with no credit, no education, and very little
income.
I would ask you to put yourself in a lender's shoes. Would
you have made a loan to me? Would you have offered me a
lifeline? Would you have given me credit with nothing to prove
I was creditworthy but my word?
Due to my release and probation requirements, I found a job
as a food busser at a local Italian restaurant. I worked very
hard day-to-day to make ends meet. After a year, I was given a
10-cent raise. It was then I knew I had to make a change in my
life.
When I started my business, no one would give me a loan. I
knew this because I applied and I was rejected several times.
Most banks wouldn't even let me open an account. The only
account I could get was with the credit union, because I pled
my case.
Because of my history, the only company willing to front me
the money I needed was a local payday lender in Nashville
called Advance Financial. If Advance Financial had not been an
option, I would likely not be here testifying to you today.
It is unfair for anyone to assume that everyday people
don't know what they are getting into or what repayment terms
of a loan are going to be. That assumption is based on the
conclusion that ordinary people are uneducated or too
unsophisticated to make smart financial decisions.
In my situation, I was tracking every dollar I had. I knew
when money was coming in and I knew when it was going out. I
knew that I would have to repay the loans that I took out.
When I went to Advance Financial, every part of the process
was explained clearly and fairly, including when payments were
due, how much they would be, and how much it would cost me for
the loan.
Today, the business that I started with a payday loan is
Nashville's premier construction and commercial cleaning
service. I am a minority certified business belonging to the
Chamber of Commerce, the Better Business Bureau, and
Nashville's Rotary Club. Now, I qualify for lines of credit and
other types of loans. I have developed a solid business
foundation. But it is all because of the lifeline that Advance
Financial gave me when no one else would give me the time of
day.
I have also come to learn from being in business that
sometimes a market determines what things cost. Many today will
probably ask if I would like these types of loans to be
cheaper. Well, there are a lot of things in life that I wish
were cheaper. But forcing these lenders out of business would
not make loans cheaper; it would only hurt people in a
situation like I was in.
I want to repeat what I said at the beginning of this
statement. I understood what a payday loan was going to cost me
when I took it out, and I understood when I had to pay it back.
The best consumer protection that I got was to have someplace
to go that was willing to make a loan to me, and to explain the
loan I got.
I can also tell you that if I had not had that option--
[audio malfunction].
Chairman Meeks. The microphone must have gone out.
Give him 30 seconds to wrap up.
Mr. Sherrill. If you eliminate these loans and these
lenders, where do you expect people to turn for a lifeline? I
had tried everything else. For many people like me, these
products are a first step towards getting things back together.
People choose them because they are better than the
alternatives. If they weren't, they wouldn't exist.
We should trust people to choose what is best for their own
situations, not take options away from them, because the most
expensive credit is the credit you cannot get when you need it.
Thank you.
[The prepared statement of Mr. Sherrill can be found on
page 78 of the appendix.]
Chairman Meeks. Thank you.
And Mr. Zuluaga, you are recognized for 5 minutes.
STATEMENT OF DIEGO ZULUAGA, POLICY ANALYST, CENTER FOR MONETARY
AND FINANCIAL ALTERNATIVES, CATO INSTITUTE
Mr. Zuluaga. Thank you, Chairman Meeks, Ranking Member
Luetkemeyer, and members of the subcommittee for the
opportunity to testify before you this afternoon.
My name is Diego Zuluaga, and I am a policy analyst at the
Cato Institute Center for Monetary and Financial Alternatives.
Creating the conditions for a dynamic and competitive
market for short-term credit is essential to promoting
financial security and financial inclusion.
At a time when 24 percent of American families and 50
percent of low-income families lack enough liquid savings to
cover a $400 emergency expense, broad and immediate access to
credit is a matter of great urgency.
Furthermore, with 8.4 million households unbanked and
another 24 million underbanked, a share of that emergency
credit is bound to come from nonbanks, including payday and
vehicle title lenders.
Payday loans are often one of very few options available to
cash-strapped households. Sixteen percent of payday borrowers
use these loans to cover emergencies, while 69 percent borrow
to pay for recurring items, such as rent and utility bills.
Payday loans offer a way to cope with unexpected events and
month-to-month income volatility, which is a reality for more
than a third of low-income households.
While the media often describe payday loans as predatory,
the evidence suggests otherwise. Professor Ronald Mann of
Columbia Law School, in a study quoted extensively by the
Consumer Financial Protection Bureau, finds that 60 percent of
payday borrowers accurately estimate the time it will take them
to repay the loan. And importantly, there is no systematic bias
in their predictions of repayment, so borrowers overestimate
roughly as much as they underestimate the time it will take
them to repay.
Professor Mann's results contradict the assertion that
payday borrowers are misled by predatory lenders or that they
suffer from some behavioral bias. The academic literature, in
fact, on payday lending finds that these loans are helpful to
borrowers and that payday loan bans are harmful, at least as
often as it finds the opposite.
Payday borrowers make the best of limited options. As
Professor Lisa Servon of the University of Pennsylvania writes,
``The question is whether expensive credit is better than no
credit at all.'' Like Professor Servon, I worry that placing an
interest cap on short-term credit would altogether remove
access to emergency funds for the most vulnerable Americans.
Now, I have had the opportunity to study in detail the
impact of payday loan interest rate caps in the United Kingdom.
While U.K. regulators expected loan volume to decline by just
11 percent after the introduction of an interest cap, it
dropped by 56 percent. That is 5 times what regulators
estimated within 18 months. The number of borrowers dropped by
53 percent, versus 21 percent, which was the estimate.
Now, given that the regulators' forecast aimed for the
``optimal amount of payday borrowing,'' this miscalibration of
the cap's impact almost surely left hundreds of thousands of
payday borrowers worse off.
I worry that the Bureau's payday rule, which predicts loan
volume to drop by up to 68 percent, but expects most borrowers
to retain access to payday facilities, will actually prove
similarly overly optimistic and the consequences of regulatory
error could be very damaging, as the U.K. case demonstrates.
Low usury caps were once widespread across American credit
markets. But progressive reformers in the early 1900s
recognized that caps harm low-income people by throwing them
into the hands of loan sharks. Gradually, they persuaded
legislators to lift or remove interest caps, helping a formal
market for short-term credit to flourish.
Placing a cap on small-dollar loans today risks leaving
vulnerable households at the mercy of either family members or
unscrupulous providers, or otherwise forcing them to go without
basic necessities.
Policymakers can, however, do more to promote financial
inclusion, and I welcome efforts to bring a greater focus on
underserved households to financial regulators. For example, I
think the CFPB and the Federal Deposit Insurance Corporation
should conduct a joint review of the regulatory costs to banks
of maintaining deposit accounts. This will permit them to
compare the cost of regulation with its benefits and to
determine whether financial regulation excludes low-income and
minority borrowers who are overwhelmingly represented among the
ranks of the unbanked.
But I wouldn't limit this work to fostering access to
depository institutions, important as such access is. Financial
innovations like mobile money accounts have delivered
impressive results around the world. And with 94 percent of
Americans now owning a cellphone, mobile accounts could bring
essential financial services to households which, for reasons
related to cost or trust or both, do not own a bank account.
Mobile payments could therefore help low-income consumers
avoid account fees and gradually gain access to other financial
services and build a credit record.
Thank you. I would be happy to answer any questions.
[The prepared statement of Mr. Zuluaga can be found on page
95 of the appendix.]
Chairman Meeks. Thank you.
And I now recognize myself for 5 minutes to ask questions.
Let me first say that I listened very intently to everyone on
this panel, and I did not hear one person say that those who
are in low-income areas, et cetera, should not have access to
some financial services, not one.
What I did hear is some say that we do have basically--they
didn't use these words, but we have some who will con people;
we have some who will just come and try to confuse people for
their own benefit, for their own basis. And so they don't mind
whether or not someone gets trapped in a loan that they can't
get out of because that is not their interest, not that
individual. Their interest is to make as much money as they can
at the expense of someone else.
And so when we had the Dodd-Frank Act, what we did was, we
said we were going to create the Consumer Financial Protection
Bureau so that somebody can review this, because we know we
have good people, we have bad people, so that somebody could
review it and make an impartial, if you will, determination, to
make sure that you could continue to do business, if that is
what you wanted to do, but to also serve someone who needed a
loan.
Now, one of the things--and one of the reasons why we are
here is that immediately the CFPB, after the change of
Administrations, got rid of the unfair, deceptive, or abusive
acts or practices and how that was defined. So if you get rid
of that, you have a fixed game, because you have a situation
where on one side--and yes Mr. Sherrill, I agree with you that
some people know how to manage their money and some don't. That
is a fact. And as a matter of public policy, we have to look
out and protect those who don't.
I would also say--and my question would go to Mr. McDonald,
because one of the basic tests would be ability to pay. If
somebody comes--and I would now ask you this question later,
Mr. Sherrill--and I have no ability to pay--I have no idea how
I am going to pay you back, no because nobody is going to give
you any money, not if they are serious. But you have to show
some ability to pay it back.
That is how we got in the financial crisis, the worst
financial crisis since the Great Depression, in 2008, when
people were giving no-doc loans, and it almost brought our
financial institutions, our financial services and this country
to its knees.
Mr. McDonald, you work in these communities and you have a
financial institution. What is the best way you would think to
make sure that someone has the ability to pay when you make a
loan at your facility?
Mr. McDonald. So we follow a couple of different
guidelines, but we definitely ask for verification of income,
via a copy of their paystub or a W-2 or 1099.
Chairman Meeks. So you do check to make sure that they have
a job or some kind of way to pay?
Mr. McDonald. Absolutely.
Chairman Meeks. All right. Now, Mr. Reeder, in my limited
time, because I listened--your testimony was so riveting, I had
to take up my time earlier with that comment.
But I want to make sure--I wear this suit now, but I come
from public housing. My parents were poor, okay? And I can
remember that they had loan sharks back then. And so it wasn't
money; they'd take your limb, too. But I also could know when
they were getting ripped off.
I am looking at ways to make sure that we have some ability
for financial services in the community. Fintechs have been
talked about, but fintechs unregulated have the same problems.
Can you give us some ideas on how fintechs should be
regulated or how they could be helpful in this industry?
Mr. Reeder. Sure. Thank you, Mr. Chairman.
In terms of regulation, obviously a number of financial
institutions are regulated at the State level. But it is true,
for purposes of Dodd-Frank, that many institutions in what
people broadly call fintech are not covered persons under Dodd-
Frank for the CFPB. So one piece there is that the CFPB would
need to write a larger participant rule for a number of these
institutions in order to supervise them. And for many people
who have been regulators, supervision is a very powerful tool
to both understand what the institutions are doing, but more
importantly what are the outcomes for the consumer.
So I think that is a capability that the Federal Government
has today, if the CFPB were to write a larger participant rule.
Chairman Meeks. Thank you. I am out of time, and I
recognize the ranking member of the subcommittee, Mr.
Luetkemeyer, for 5 minutes for questions.
Mr. Luetkemeyer. Thank you, Mr. Chairman. I think most of
the testimony today has centered around the cap, the APR of 36
percent or higher rates that we are talking about. And to me it
is a little difficult to accept the arguments from the
standpoint that when you are looking at a short-term loan, to
me, that is very similar to a service charge.
In my testimony, in my opening comment, I said, look, if
you have a plumbing problem at your house, you call the
plumber. And he comes and he fixes it within 30 minutes and
charges you 50 bucks. Did he charge you 50 bucks or did he
charge you $100 bucks an hour. To me, he charged me 50 bucks
because it took him that long to get there, he had to pay for
his tools, pay for his insurance, he had to pay for his
workmen's comp, he had to pay for his gas and oil to get there.
It is a service charge to provide that product.
And so I think today when we use APR on short-term lending,
it is a disservice to everybody. To me, personally, I don't
think you need to be using an APR unless it is an annual--
unless you are over 12 months. If it is a 12-month loan or
more, you use an APR. Anything less than that has to be a
service charge.
What does it cost to put the loan on the books? Mr.
McDonald, you are in the banking business, what does it cost
you to put a loan on the books, a small-dollar loan? Does it
cost 15 bucks? Is that going to cover it?
Mr. McDonald. I don't have that exact number. However, it
does cost money to market to those individuals and also use our
back office to book those loans, yes.
Mr. Luetkemeyer. So there is a cost there that has to be
covered, otherwise that service is not going to be provided. So
you get into the situation of, well, we don't have any services
or the loans are misused or abused. The CFPB in the fall of
2018, their own members, so that is 7/10th of 1 percent were
the complaints received by CFPB on smaller loans or payday
loans, which is consistently one of the lowest of the various
financial products according to CFPB.
When I was in the State House in Missouri, as a State rep,
my committee oversaw--I was the chairman of the Financial
Services Committee, and what I always did every year was go
look at the complaints with regards to banks, payday lending,
and all the different services that were seen by the division
of finance. Payday lending was always the lowest number of
complaints of any of the financial groups.
So I think we are looking at something here that is a
worthwhile service. Mr. Sherrill, you tell a compelling story.
Where would you have gone if you wouldn't have had the
opportunity to have that loan? What was your next step if you
didn't get the loan?
Mr. Sherrill. Coming from where I come from, my next step
was going back to the streets. The only thing that stands
between the streets and the pawn shop is payday lending, that
is it, that is all we have, so you have to do what you have to
do.
Mr. Luetkemeyer. So what we need to do in your mind would
be help folks have more access to credit. If we need to tweak
the laws, need to improve it, that would be the way to go
rather than trying to dismiss it. And you talked about the APR
as well, you had some compelling testimony. Can you elaborate
on that a little bit?
Mr. Sherrill. Yes. I mean, the payday loan I got was just
for a couple of weeks. It wasn't for a year. I have never known
anyone to receive a payday loan for a year. So I would be
confused when people say APR, I kind of think about buying a
car or something like that, but--
Mr. Luetkemeyer. I know when I was in the House in
Missouri, we redid the payday lending laws. We were actually
model legislation for the whole country for a long time. And
one of the things that we did was put a box on the form that
showed what the actual cost of the loan was going to be, how
much you were actually going to pay with interest and charges.
So there was a disclosure. To me, that is helpful to you, to
actually see the costs. You said you looked at it, and you knew
what it was going to cost you.
Mr. Sherrill. Yes, when I went in there they explained to
me, this is what we are giving you. This is what we expect back
at this time. If you don't pay it back, then this is what
happens. You sign something that you understand this before
they give you any money.
Mr. Luetkemeyer. Mr. Reeder, in your testimony you note
that an annualized percentage rate is a very poor tool for the
small-dollar lending market. Would you like to explain that a
little bit?
Mr. Reeder. Sure. APR was really created to compare like
financial products to one another, so it is a shopping tool. If
I were to get a 30-year fixed-rate mortgage from Bank A, and a
30-year fixed-rate mortgage from Bank B, I would be able to
take the APR and compare to understand what were the interest
rates and the charges. So that is what it was designed for. The
problem becomes, as the term gets shorter and shorter, the APR
becomes geometric, so it increases rapidly.
Mr. Luetkemeyer. Okay. I have one more quick question. Mr.
Zuluaga, you talked about the UK and how they estimated that
the loan volume would decline slightly and it went over 56
percent. Where did those people go who no longer have access to
credit?
Mr. Zuluaga. Mostly to family members, from the research
that has been done afterwards. But those are the people who
have access to alternative options. A lot of people just go
without.
Mr. Luetkemeyer. They go without. What about some of the
unscrupulous folks on the streets or on offline lending, which
is unregulated. Is that possible as well?
Mr. Zuluaga. It could be possible, it's very hard to
monitor, or course, and that is one of the challenges. At least
now we can monitor a lot of these lenders and they are in the
open. Thank you.
Mr. Luetkemeyer. Thank you. Thank you Mr. Chairman.
Chairman Meeks. The gentleman's time has expired. I now
recognize the Chair of the full Financial Services Committee,
the Honorable Maxine Waters, for 5 minutes.
Chairwoman Waters. Thank you very much, Mr. Chairman. Dr.
Haynes, as Senior Pastor at Friendship-West Baptist Church, you
moderated a panel I convened of interfaith leaders to address
predatory lending in American communities, and working with
members of your community in Dallas, Texas, many of whom have
been targeted by predatory payday loan and auto title loan
stores.
You stated that, ``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 more
responsible and reputable lenders to thrive while rendering a
helpful service to communities.''
Can you tell us about the terrible consequences of falling
into payday debt traps, and your efforts as a faith leader to
help these vulnerable consumers?
Mr. Haynes. Thank you, Madam Chairwoman. First and
foremost, of course, when you fall into the debt trap, one of
the things that accelerates the downward spiral are the
overdraft fees, not to mention the fact that I have had a
number of persons come to me, and along with their overdraft
fees, some have just basically had their bank accounts wiped
out. They were pressured. They were called on-the-job. Not to
mention, family members were harassed. And so this is something
that is predatory.
And so what we are calling for is a system. One of the
things that I have heard repeatedly from the opposition is that
we have some who do well because they had no other option. And
my point is, you always have some who are good enough to beat
the system. But if the system is broken, you want to correct
the system. Tupac Shakur talked about a rose out of concrete.
Well, if one rose can burst through the concrete, we salute
that rose. But what about the rest of the seeds who don't make
it? And that is why we are concerned about a predatory industry
that continues to harass individuals into deeper and deeper
debt.
And so, again, they are asking for a life preserver and
they end up with one made of iron that causes them to sink
further and further in debt.
Chairwoman Waters. Wow. Well, Pastor, let me ask you this.
As we have wrestled with this very, very troubling problem in
this country, and as we have fought off the payday lending
industry, et cetera, we have had people come to us with
different ideas and different proposals. One of them that seems
to be emerging is, what about limiting payday lending interest
rates to 36 percent the way they do for veterans?
Mr. Haynes. Right.
Chairwoman Waters. Have you had a chance to think about
that?
Mr. Haynes. Oh, without question. Not only that, but even
in our church, we have a credit union, a Federal credit union,
and we offer micro loans, small-dollar loans. And our interest
rate is 28 percent. It is a great business model because it is
moral and just. Thirty six percent is a moral and just interest
rate. It is a model that will work as opposed to prey on
individuals. It is a model that will help them to do what the
payday industry claims they want to do, and that is is to get
out of debt--get out of the debt trap, and at the same time,
move forward in their lives. And so 36 percent, I think, is not
only moral, it is just, and it is doable.
Chairwoman Waters. Wow. Well, I thank you for sharing that
with us because some of us who were not thinking about anything
but trying to stop the payday loan industry because of all of
the trauma and the pain that was experienced by people who were
desperate who needed some help and would go to them, but yet
get caught in that debt trap that you talked about, we had not
thought a lot about doing what we do for the veterans.
Mr. Haynes. Yes.
Chairwoman Waters. And when I began to think about that, I
thought I wanted you here to ask what you thought about it, to
get your opinion because of the work that you have put into it,
the work that your community has done, the work that the church
has done. And I know that you have had to run some out of
Dallas basically who were exploiting. And so now we have these
proposals, and you have given me something to think deeper
about. Because what you are doing in your church were with your
loans at 28 percent, it is working, and what we have been doing
with the veterans at 36 percent, it means that perhaps we can
do the same with the entire industry.
So I want to thank you for coming, I know on short notice,
but you are so appreciated. And I certainly appreciate you, and
thank you.
And I yield back the balance of my time. Thank you so much,
Mr. Chairman.
Chairman Meeks. Thank you, Madam Chairwoman. I now
recognize the gentleman from Colorado, Mr. Tipton, for 5
minutes.
Mr. Tipton. Thank you, Mr. Chairman. And I thank the panel
for taking the time to be here. Obviously, I think all of us
want to make sure that people are treated fairly, but we also
have regulations, ability to repay that need to be addressed.
And I don't want to put anybody on the spot here, but Mr.
McDonald, you listened to Mr. Sherrill's testimony. Would you
have made him a loan coming out of prison?
Mr. McDonald. That depends on several factors, and
obviously, we look at credit history, we look at repayment
capacity--
Mr. Tipton. Out of prison with no job, probably couldn't
have made the loan at that time.
Mr. McDonald. I believe he said he had a job. And we
certainly have lent money to individuals who come from
unfortunate backgrounds, who may not have a long history of
income, but we have certainly made loans.
Mr. Tipton. I am just a little interested in your model,
you are a CDFI, right?
Mr. McDonald. Yes.
Mr. Tipton. All right. Do you make $100 loans?
Mr. McDonald. No, our minimum is $500.
Mr. Tipton. So if Mr. Sherrill needs $100, $200, to be able
to fix his car, you won't cover that loan?
Mr. McDonald. No, sir, not at this time.
Mr. Tipton. Where do they go?
Mr. McDonald. They would go to a payday lender.
Mr. Tipton. Is that their only option?
Mr. McDonald. In some cases.
Mr. Tipton. Probably in most cases. Please understand, I am
not trying to put you on the spot. It is just we do have
regulations in place, and it is part of the only purpose of the
committee in terms of what we are doing in terms of
accountability on the banks and the institutions. And when you
are talking about the interest rate that you do charge on the
Freedom Fast loan, how does that compare to somebody with an
800 credit score?
Mr. McDonald. It is a tiered scale based on--
Mr. Tipton. What would you charge for that same loan, $600,
for somebody who has an 800 credit score?
Mr. McDonald. Unfortunately, I don't have our rate matrix
memorized.
Mr. Tipton. It probably would be a lot less, though,
wouldn't it?
Mr. McDonald. So just in general, our short-term loan
products will cap at 19.9 on the interest rate side, but I am
not really sure how that will calculate out into the APR. But
as the example that I used earlier, we have an average APR of
34.6 percent, I believe.
Mr. Tipton. Okay. Well, I guess the point I am trying to
make is this obviously is a challenge for people with low
income to be able to deal with. Mr. Sherrill, you have lived
that life. But it is going to be some actual access to some
capital at the times when people need it to be able to address
that.
In my home State of Colorado, we went through several
iterations. In November of 2018, we passed, by referendum, a
new law, that is going to be capping that at 36 percent
effectively. And that was the balance that was struck to be
able to address that in terms of a challenge for short-term
credit products that we have.
Mr. Sherrill, maybe you could address this a little bit
more. In terms of the availability of payday lending, where do
people go in the case of--if they only need that $200, $300 to
be able to get a loan? If payday lending, as an example,
doesn't exist, what do they do?
Mr. Sherrill. Go back to the streets or go ask a family
member. But I come from a low-income family. My family doesn't
have any money. So, if it wasn't for me getting the payday
loan, I would have gone back to the streets. That is just
realistic.
It sounds good in testimony for people to get up here and
say what is being said right now, but in reality, where I am
from, it affects many people. I am not the only one with this
story. There are many people who use these services and use
them responsibly, and we need to spotlight that, and then you
would understand because there are no other options.
Mr. Tipton. Well, Mr. Sherrill, in 2013, the Fed, the OCC,
and the FDIC issued guidance because most banks--to stop making
or providing products to the customers in terms of short-term
small-dollar loans. These are institutions that are well-
regulated and have to make sure that you have the ability to
repay, as Mr. McDonald was talking about.
What is a good solution to be able to fill that gap for the
short-term loans? Should we extend that to more banks or just--
Mr. Sherrill. I really don't know what the answer--the
magic bullet should be. But I know taking this option away from
low-income people or people who don't have access to credit or
who don't have a history of credit, will be doing a disservice
to the community.
Mr. Tipton. Mr. Zuluaga?
Mr. Zuluaga. Just quickly, I think banks are now very
concerned about coming back into this because of that guidance.
And unless there are very strong and clear signals that these
products are going to be tolerated and accepted and not
prosecuted, I think we will run out of options if we don't
continue to allow payday loans.
Chairman Meeks. The gentleman's time has expired. I now
recognize the gentleman from Georgia, Mr. Scott, for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. We have 56 million
unbanked and underbanked consumers in this country. So many of
them are victims, as has been pointed out. I think the good
Reverend Dr. Frederick Douglass, love that name, and Frederick
Douglass, as you may know. And your comments were right on
target--all of your comments are.
I have introduced two major pieces of legislation that I
want to kind of get the witnesses' reaction on. The first one
is the Improving Access to Traditional Banking Act of 2019. And
what this Act would do, is it would create an office that is
specifically tasked with examining factors contributing to
households that are unbanked and underbanked, identifying them,
their status, and developing the best business practices for
improving that situation.
Mr. Sherrill, you are right. Where else do they have to go?
But to some of these people, if we don't provide a way and get
that information to them. Another bill that I have is the
Fintech Act. And as you know, and I want to get comments from
you. Some of these fintech companies are dealing with this area
because they are developing partnerships with some of the
traditional banks that will not even deal with some of the
unbanked and underbanked. So what I am saying is that there are
things out there that we are trying to work with to get that.
So let me just ask you, Mr. McDonald, you are from the
National Bankers Association, tell me about this. What about
the impact of these fintechs helping some of these people that
traditional banks won't help? Are you aware of some of those
partnerships there?
Mr. McDonald. Yes, I am. And as an organization, we
actually do encourage partnerships with fintechs, obviously, to
a certain extent. But coupled with the technology and the know-
how of a traditional bank, it could actually bring down the
costs and make the costs more efficient and product and service
more efficient and effective. And so that is how we have been
leveraging our experience.
Mr. Scott. Very good. Now, Mr. McDonald, let me ask you,
from the banker's standpoint, can you tell us the importance of
financial inclusion in the traditional banking sector, and in
particular, how increased safety and affordability and
convenience of financial services can have a positive impact on
low- and moderate-income consumers?
How can this bill--what we are trying to do with this bill
is to try to identify the problem, bring it together, and then
apply the necessary resources of coordination to really get to
the heart of the matter, and make these--and try to put an end
or at least slow down these predatory lenders. They have
nowhere else to go because they don't have a checking account,
they don't have a banking account. We have to create this--does
that make sense to you?
Mr. McDonald. Absolutely. And the National Bankers
Association will be--open doors and we are definitely willing
to speak further in terms of ideas and strategies around
solving that problem. It is not an easy problem, obviously, but
we definitely welcome ideas and strategies.
Mr. Scott. All right. Now, Mr. Reeder, you are the
president of the Innovation--I think--what is that, the
technological innovation and--
Mr. Reeder. The Center for Financial Services Innovation?
Mr. Scott. Yes. And that is what we are trying to do. We
are trying to use these innovators, the fintechs, the other
areas to try to create some answers and solutions to this. Are
we making some progress with the fintechs, what our initiatives
would be doing, what our bill would be doing in terms of trying
to find ways that we can increase the access of capital to
these people, lending to them?
Mr. Reeder. Mr. Chairman, should I answer another time, I
know the time has expired?
Chairman Meeks. I am going to let you finish. Go ahead. I
have my own judgment here.
Mr. Reeder. Yes, I think there is enormous opportunity. We
work with companies that do things such as allowing people
access to wages that they have already earned. We live in a
country where people work and they are not paid for their work
for some period of time, sometimes 2 weeks, sometimes a month.
So we work with people to allow people access to assets that
they already have.
There is obviously a lot of work to help understand who is
credit-worthy. Because of a long history of discrimination in
this country, credit scores and other traditional means have
biases that are embedded in them, they are very difficult to
undue. And so there are opportunities for us to do that. So in
my testimony, I list a number of companies that--
Chairman Meeks. Thank you. The gentleman's time has
expired.
Mr. Scott. Thank you, Mr. Chairman, for the time, I
appreciate it.
Chairman Meeks. I now recognize the gentleman from
Kentucky, Mr. Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. Mr. Zuluaga, a question
for you. Many small banks and credit unions in my congressional
district in central Kentucky have told me that overly zealous
supervision, over-regulation, and higher compliance costs
stemming from the Dodd-Frank Act and other regulations have
forced those lenders out of the small-dollar lending business,
and out of the consumer lending space altogether. This has had
the impact of pushing many borrowers to payday lenders and
other forms of nonbank and noncredit union lenders.
Is the answer for unbanked credit-challenged borrowers more
regulation and banning higher-cost products? Or is the answer
more competition and choice through financial deregulation? And
as you answer that question, keep in mind the testimony from
Ms. Standaert, who said that competition is not the answer.
Mr. Zuluaga. Thank you for the question, Congressman. I
think the answer is clearly more competition and more choice,
because that drives prices down for consumers, it creates
options that are more well-adjusted to exactly what it is that
they need and want, and it also encourages continued innovation
so that whatever negative features are in a financial product
are no longer present there.
In the particular case of small-dollar lending, it was
mentioned before that there was a 2013 guidance from the OCC
and the FDIC that led banks to retreat entirely from the small-
dollar lending market, and this is in keeping with the general
retreat of banks, as you suggested, since passage of the Dodd-
Frank Act.
Mr. Barr. So you are telling me that banks and credit
unions have retreated from this space after Dodd-Frank?
Mr. Zuluaga. The evidence that I have seen for banks,
decidedly yes, but for credit unions, I will have to get back
to you, because they do some different types of--they offer
some types of alternative products, but obviously they don't
reach everybody.
Mr. Barr. I can tell you the credit unions and community
banks have told me that they exited consumer lending post-Dodd-
Frank, because of an avalanche of regulations. But let me
explore this idea of an APR rate cap. In 2018, a major super
regional bank in the United States began offering small-dollar
short-term loans. The program has a limited scope to those
customers with a current banking account. And even with the
pricing advantages of lower capital costs and additional risk
mitigation employed by that bank, in order for the program to
be sustainable, the bank is charging interest rates between
about 71 percent and 88 percent APR, more than double the 36
percent APR rate cap that has been advocated by some.
If a large super regional institution with all of its
market advantages and economies of scale can't make a 36
percent APR work, why is it realistic to think that a State-
licensed or nonbank lender could do that?
Mr. Zuluaga. I don't think it is realistic, Congressman.
And in fact, I think we need to think about the small-dollar
lender space, it is something of a spectrum, that are products
for prime borrowers that carry low rates because they have a
credit history and they have a record of paying back their
debts. Some people, for various different reasons, don't
necessarily have access to such low rates. In removing the
options that they have, the people that will accept them as
borrowers doesn't make them better off it. It makes it
difficult for them to build a credit record. It makes it
difficult for them to survive emergencies and so on.
Mr. Barr. Reverend Dr. Haynes, thank you for your advocacy
and work to empower people who are credit-challenged and are
struggling financially. Let me ask you this, in the course of
your advocacy, have you ever engaged those populations that you
minister to, that you serve in financial literacy, specifically
on payday loans, to say, educate those vulnerable populations
about the difference between the interest rate if the product
is used as it is designed, meaning that it is paid off in 2
weeks or 4 weeks, as opposed to rolling it over, in order to
avoid that triple digit APR, which it is never designed to be?
Mr. Haynes. Well, yes, we have--to answer your question, we
do have, not only financial literacy classes for those who find
themselves in that predicament, but we also, again, offer the
small-dollar, 28 percent loan, micro loan for those persons who
are struggling. And a part of their getting the loan is going
through the class.
Mr. Barr. And Mr. McDonald, I appreciate your sandbox
approach, and I also appreciate your advocacy for clarifying
true lender to create liquidity in the secondary market with
fintech. Let me ask you this, without the small-dollar loan
program, without technical assistance grants, could you offer
small-dollar loans, or is taxpayer assistance essential in
order to originate and service small-dollar loans with interest
rates below 36 percent?
Mr. McDonald. I would not say it is essential. This is a
specific business model that we have chosen as an organization.
And a lot of organizations within the MBA have chosen to do so
as well. So our profits are not at peer group levels. We have
sort of--
Mr. Barr. Yes, and I am sorry, my time has expired. But
what I worry about is that without taxpayer assistance, Mr.
Sherrill doesn't have an alternative, and he has testified to
that today.
And so the only model that works is having the government
compete, and compete with private businesses and put them out
of business. And there is a limit to the amount that taxpayers
can provide, and so we do need private capital to provide
access to credit for some folks. And I yield back.
Chairman Meeks. The gentleman's time has expired. I have
now evened it up, I gave Mr. Scott 40 seconds extra and I have
given Mr. Barr 40 seconds extra. So now, I will go back to my
5-minute rule. And the gentlewoman from Massachusetts, Ms.
Pressley, is recognized for 5 minutes.
Ms. Pressley. Thank you, Chairman Meeks. And I welcome this
opportunity to examine the practices of this industry, which it
seems more often than not, instead of offering a life raft has
offered dead weight, wreaking financial havoc in any community
that it touches. I am, however, thankful for the protections of
my home State of Massachusetts, which has guarded against these
debt traps. Payday loans are not allowed in my State, and my
constituents, anywhere, are not exactly clambering for a 400
percent interest loan.
In fact, according to the Center for Responsible Lending
report, consumers in Massachusetts saved more than $248 million
in 2017 as a result of these protections.
Ms. Standaert, can you tell me, based on your
organization's research, how big of a role the State's rate cap
has in creating these savings?
Ms. Standaert. Thank you, Representative Pressley, for the
question. A rate cap such as what Massachusetts has in place is
the most effective protection against the debt trap, it is due
to the rate cap that has garnered the millions of dollars of
savings for your own residents, and it is the same rate cap
that is saving over $5 billion a year to residents across the
country in similar States.
Ms. Pressley. And so where consumers do not have these
protections, payday and small-dollar lenders have preyed on the
desperation of the working poor, turning their need for a
dollar today into a profit of $2 tomorrow. But as we examine
this industry, I would be remiss if I did not acknowledge its
disparate impact on communities of color.
So, open to anyone on the panel who would care to comment,
very briefly, just to better understand the common threads of
these intrenched inequities, what is the profile of a typical
payday loan borrower?
Mr. Whittaker. Thank you, Representative Pressley. The
typical profile, I think if you look on this panel you can see
the extremes of the profile. Mr. Sherrill has spoke about not
having access to credit, and not having an opportunity to seek
help in his situation. But when you provide a tool, a debt tool
like this that is marketed as easy, accessible, and safe,
people begin to stop looking for other options. There are many
other options.
People say that--well, Mr. Sherrill said that he didn't
have family who could help him or there wasn't--they are low
income, so there was no income. Well, there is family, there
are friends, there is the sweat of your brow, if you need to go
buy some clothes and sell them on eBay, there are many other
options that are available. But when you put the easy solution
in front of somebody and you say that this is safe, why
continue to look for harder options?
Ms. Pressley. Thank you, Mr. Whittaker. And picking up on
that, since you said the magic word, ``marketing,'' I am
curious about the marketing of these debt traps since the
prevalence of them is in low-income communities and communities
of color.
So, Ms. Standaert, can you elaborate on where payday
lenders are located and how they compete for businesses in
these communities?
Ms. Standaert. Yes. Thank you. Payday lenders explicitly
state that they compete on factors such as location,
convenience of service, and other things. Notably missing from
the list is competition based on price. Everywhere that payday
lenders operate, they charge the maximum rate allowed by law.
So 300 to 400 percent interest rates, despite a bunch of them
being clustered together. Then we also see that payday lenders
disproportionately concentrate in communities of color.
In California, for example, we see payday lenders locating
at over 2 times the rate in black and Latino communities, than
other similarly situated white communities. And this pattern
exists all throughout the country: Michigan; Georgia; Florida;
Louisiana; and Colorado, all have been documented. And so this
combination of the importance of payday lending locations and
their ability to get customers in the door.
Ms. Pressley. Thank you. Reclaiming my time. Thank you. And
then picking up on the Reverend's point about people, instead
of getting a hand up, getting handcuffed. Mr. Peterson, I know
you have done quite a bit of work on the industry's reliance on
small claims courts, particularly in States like Utah that do
not have interest rates or protections. So what happens when
people can't repay? Are there criminal charges? What happens?
Mr. Peterson. Well, I have a study coming out, it is not
out yet, but we have been looking at collection efforts in
small claims courts and we have been surprised to find that
there are a lot of small claims borrowers who end up getting
bench warrants issued for their arrest.
Ms. Pressley. Thank you. Reclaiming my time. This is what
is clear. In the universe with payday lending, is one answering
the question of how to make poverty a sustainable profitable
enterprise? A lot of people are getting rich off of keeping
people poor. And so how do we reform anything that is based on
that premise? The short answer is we don't.
Thank you. I yield back.
Chairman Meeks. The gentlelady's time has expired. I now
recognize the gentleman from Georgia, Mr. Loudermilk, for 5
minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. I appreciate the
panel, there are quite a few of you up here. But I do
appreciate this, this is a very sensitive issue. Mr. Sherrill,
I have to say, I am inspired. Your story is incredible. I think
you saw that your story doesn't exactly fit in the narrative
that some would like to paint, but I am particularly inspired,
not just by you seeing the opportunity that this nation can
give you, but by you finding a way around the obstacles and the
hurdles. That is what makes this country great.
The other aspect of it is I have been where you were. I
have been in situations where early in my life after I left the
military, I was trying to get a small business started, and I
didn't find anyplace just to buy groceries for my family, I
mean, it is--I just needed it for a short time. I knew the next
check was coming from a job I did, but I didn't have anything
to fill the gap. So sometimes people just don't know where it
is coming from, and I am not defending the industry, but I am
saying, any business exists where there is a need to fill.
And often we create the problem ourselves, being
government, by overregulating areas to where we can't fulfill
some of those needs, and that is one of the concerns I have.
And the chairman in his opening remarks brought up the
statistic that 40 percent of U.S. adults could not cover a $400
emergency without selling property. I agree with Mr. Whittaker,
maybe that is what you need to be doing to cover an emergency,
if you have property.
The problem I ran into in my situation was, I had just
moved across the country and I had sold most everything I had
to relocate to this new location. So we sometimes try to paint
with a broad brush something that is--each individual person
has a unique situation, and a lot of times these businesses
exist to actually fulfill that need. Yes, they are charging a
large amount--sometimes too much amount in interest, but yet,
they are loaning to are folks who couldn't get the loan
anywhere else.
But, on the same hand, we are creating a situation because
we have pretty much, through regulation, prohibited the banking
community from making these small-dollar short-term loans. And
I think that is part of the problem, we could relieve some of
this if we could just allow these businesses to make these
loans. I wrote a letter to the Federal Reserve asking and the
FDIC last year, asking for both of them to join the OCC in
allowing, banks, once again, to make these small-dollar short-
term loans to constituents.
So, quickly, Mr. McDonald, the FDIC recently accepted
comments from stakeholders on small-dollar lending. And if the
Federal Reserve and the FDIC explicitly stated that these loans
are allowed, as the OCC did last year, would that encourage
banks to get back into small-dollar lending?
Mr. McDonald. I would certainly hope so.
Mr. Loudermilk. Yes, I would, too. I think it would resolve
some of the concerns that we have to give at least some folks
an alternative. Mr. Reeder, as you know, Georgia is a hub for
fintech and payment processing, and I also co-Chair, with my
colleague from Georgia, Mr. Scott, the Fintech and Payments
Caucus. When a bank or credit union partners with a fintech
company to make these loans, do the same consumer protection
requirements apply if the consumer got the loan directly from
the bank?
Mr. Reeder. If the consumer received it directly from the
bank, yes, the OCC or the FDIC or whomever is the examiner in
charge would have the same authority over that--
Mr. Loudermilk. Even if there is a fintech involved
somewhere in that process?
Mr. Reeder. Yes. The complication here is how the product
is structured. The other avenue for regulators is third-party
vendor management, which is a tool that bank regulators have,
even in the event that the legal entity is a nonbank, the
examiner in charge usually requires third-party vendor
management to ensure that certain protections are in place.
Mr. Loudermilk. Okay. Thank you. Last question. Mr.
McDonald, in your testimony you discussed a regulatory sandbox,
which I am highly in favor of, for banks to test small-dollar
consumer loan products. Can you elaborate in the few seconds I
have left?
Mr. McDonald. Sure. So if regulatory bodies sort of allowed
us to take on more risk without identifying them as high-risk
loans, and that is sort of the problem that we had initially a
few years back when we started doing this specific product. The
scrutiny came where these loans were given to individuals with
significantly lower interest rates, and they were identified as
those high-risk loans.
Now, over the years our regulators have become more
comfortable with us managing a portfolio like that within a
much larger portfolio. So to your point, yes, a sandbox
approach where other community banks can operate in a very
comfortable manner would definitely be helpful.
Chairman Meeks. The gentleman's time has expired. I now
recognize the gentlewoman from Virginia, Ms. Wexton, for 5
minutes.
Ms. Wexton. Thank you, Mr. Chairman. I was glad to hear
some testimony about the Military Lending Act (MLA), because
that is something that really has impacted the people in my
district in Virginia, which is the State I am from. It was
enacted in 2007, and it imposes a 36 percent interest rate cap
for payday loans for Active Duty servicemembers and their
dependents. However, with the arrival of Mick Mulvaney, and
now, Director Kraninger, the CFPB has decided to suspend MLA
compliant supervision even though Federal law clearly directs
that they conduct this supervision.
Now, this is a big deal for us in Virginia because we have
military bases. We don't really have payday lending, but as a
result we have twice as many car title lenders, and they set up
their shops near military bases, especially Quantico Marine
Base, and the Norfolk Naval Base.
Mr. Peterson, while you were at the CFPB, you worked with
the Pentagon to help design MLA regulations. Is that correct?
Mr. Peterson. Yes, Representative Wexton.
Ms. Wexton. Okay. And can you describe what you were seeing
in terms of predatory practices that were going on that you
needed to guard against?
Mr. Peterson. Sure. We saw a lot of evasion of the interest
rate cap with companies that would redesign their products to
get in the nooks and crannies of the rule to try to make triple
digit and straight loans to our military servicemembers in ways
that Congress had not intended, and that is why it was so
important that we had a tight, well-drafted regulation, and
also rigorous supervision and enforcement follow up.
Ms. Wexton. So if CFPB is not enforcing these regulations,
who is?
Mr. Peterson. Well, they are claiming to enforce it. They
are not doing preventative supervisory examinations, but the
other prudential regulators also have supervisory authority.
The Federal Trade Commission also has some enforcement
authority. And also, servicemembers themselves can bring
private causes of action to enforce that law. But it is very
troubling that the only Federal regulator that has supervisory
preventative examination authority over payday lenders is not
conducting Military Lending Act compliance over those payday
lenders and car title lenders that you just mentioned. That is
a troubling development.
Ms. Wexton. Thank you very much.
Ms. Standaert, I was looking at the new Center for
Responsible Lending updated report about payday car title
lenders draining nearly $8 billion in fees every year. Is that
an accurate amount for the fees that they are collecting
annually?
Ms. Standaert. Yes, that is correct.
Ms. Wexton. So this is a very lucrative business model for
these operators. Is that correct?
Ms. Standaert. Yes, again 75 percent of these collected are
due to borrowers stuck in more than 10 loans a year. So the
bulk is due to the debt trap.
Ms. Wexton. Now, there are a number of States that have
State protections against these payday or car title borrowing
debt traps. Most of New England has enacted such legislation,
as well as Pennsylvania, New York, and New Jersey. What do
people do in those States? Are they able to get credit?
Ms. Standaert. Most importantly, consumers in those States
are not stuck in the quicksand of the debt trap, and so they
have--they are protected from these dangers, they have other
options for addressing financial shortfalls, and they are able
to move more quickly to pathways of building assets and wealth
for their future.
Ms. Wexton. And have you observed that the market has
responded and that these folks still have access to credit,
even though they are not caught in the debt trap?
Ms. Standaert. Yes, that is correct.
Ms. Wexton. Thank you very much. I yield back.
Chairman Meeks. Thank you. I will now recognize the
gentleman from North Carolina, Mr. Budd, for 5 minutes.
Mr. Budd. Thank you, Chairman Meeks, for yielding, and for
hosting this hearing. I also want to thank all of the witnesses
for sticking around.
I am particularly taken, Mr. Sherrill, by your story, and
not just because of your background, but also because of the
industry that you are in, and that is my family's business that
I grew up in. And so I appreciate what you do day-in and day-
out, and the customers and their issues and the challenges you
face, not from a background perspective, but from the business
perspective. And custodial and janitorial work is a tough
business, it is a noble business, and I appreciate what you do.
My family's business started around 1963, and it is now in its
third generation. So you might have a legacy on your hands. I
wish the best to you. So thanks for what you do.
Mr. McDonald, in 2013 the OCC and the FDIC issued guidance
placing strict restrictions on a bank's ability to offer
deposit advanced products. So how has this decision by the
regulators, coupled with the current regulatory environment,
affected your bank's ability to offer small-dollar loans to
consumers?
Mr. McDonald. Over the years, we have become more
comfortable in sharing our experience with small-dollar loan
products with our regulators. And as a business model, we
actually are okay with doing less than peer group numbers. And
so with their approval and with their oversight, we are okay
with doing small-dollar loans within a certain perimeter.
Mr. Budd. I want to expand this to all of the panelists.
Would you agree that it is good for consumers in an unforeseen
situation where they are in immediate need of funds to allow
highly regulated or what we think of as normal banks to offer a
small-dollar lending product? And if we could just start from
the right and go this way--my right.
Mr. Zuluaga. I think it is absolutely right for that to be
the case. My only caveat is that banks generally require a
credit history and an experience of the borrower. So they will
be able to help out a lot of people if the environment is
created for that, but that doesn't mean that some people won't
rely on alternative options because they are unbanked or
because they do not have a credit score that is sufficient to
obtain a loan from the bank.
Mr. Budd. Mr. Sherrill?
Mr. Sherrill. Can you repeat the question for me?
Mr. Budd. Sure. So we are asking if your regular normal
bank should be able to offer these small-dollar loans. It seems
that since 2013, they haven't be able to due to the regulators
making a lot of rules where they can't.
If anybody has an opinion? If you want to weigh in, great,
if you would like to not weigh in, that is okay as well. But if
you have any thoughts, please?
Mr. Sherrill. I think that if they could ,they would be
doing it by now. Payday lending in my city is the only thing
that is going. I don't see any other alternatives. I keep
hearing that word though, but I don't know of any. I am a
businessman. I am smart. I can find the money if it is there.
It is not there.
Mr. Budd. Thank you.
Mr. Reeder. I would support that with the one caveat of the
relationship between overdraft and the small-dollar credit
offered by a bank and sort of how those two interact. But our
organization helped design the U.S. Bank product, and I have
been a long time supporter of small-dollar credit that is bank-
issued.
Mr. Budd. Thank you.
Mr. Peterson. It is simply not accurate to say that banks
or credit unions are not offering small-dollar loans. In fact,
every credit card in America can be used to expand small-dollar
credit; you just borrow a little bit of money on your credit
card. And every credit card in America also includes a free
payday loan for borrowers who are not maintaining a balance, a
monthly balance, during the grace period. So you can borrow
$100, $150, $200, $300 on your credit card and then repay that.
Now, not everybody has access to credit cards, but banks have
done a pretty good job of increasing availability for credit,
and have a variety of credit cards that are available out there
for people with subprime credit histories, especially if they
are willing to put down a deposit on the card. It is one
alternative; there are lots of others out there.
So I think there are plenty of credit opportunities out
there across the country, and that is just factually driven at
interest rates that are below 36 percent.
Mr. Budd. All right. Thank you.
Ms. Standaert. Yes, banks should not start acting like the
payday lenders on the corner. At the time before the 2013
regulations, those direct deposit advance loans trapped people,
on average, in 19 loans in a year at effective rates of 200 to
300 percent. And those borrowers were also experiencing the
harm of the overdraft. So banks should not be in the business
of offering harmful small-dollar credit and should stay under
the 36 percent rate cap.
Mr. Budd. Thank you. My time has nearly expired. I will
finish with this. Continued innovations and financial
technology will, in my view, also create more credit
opportunities for the consumer offering them a product at a
lower price point.
And I hope this committee can continue to support further
development in this space because it should play a continued
role in the small-dollar space, along with banks and payday
lenders.
I yield back. Thank you all.
Mr. Meeks. Thank you. I now recognize the gentlelady from
New York, Ms. Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman, and Ranking Member
Luetkemeyer. Reverend, you mentioned that you provide micro
loans?
Mr. Haynes. Yes.
Ms. Velazquez. Have you partnered with the SBA?
Mr. Haynes. Pardon me?
Ms. Velazquez. Have you partnered with the Small Business
Administration?
Mr. Haynes. No, we have not.
Ms. Velazquez. And why is that? Would you--so the Small
Business Administration has a micro loan program, and they
provide money to intermediaries like you so that you could
provide technical assistance to the borrowers, because it is
not only about providing access to capital, but making sure
that these individuals will succeed in their enterprises. So I
will suggest to you that maybe you should explore that option.
Mr. Haynes. Okay. Thank you.
Ms. Velazquez. And so for the Republicans who are concerned
about providing access to capital to low-income communities,
they should advise the President not to zero-out the micro
lending program that we have under SBA.
Mr. Reeder, online lenders, so-called fintech lenders,
originated almost $23 billion in small-dollar consumer and
small business loans in 2015, according to one estimate. And as
you know, expansion in this area has been rapid, growing 163
percent between 2011 and 2015.
Do you think the current regulatory environment is doing an
appropriate job balancing investor protections and access to
capital? What possible changes would you make?
Mr. Reeder. Thank you for the question.
A couple of things. One, I would note that small business
credit has unique features in that it does not have the same
protections as consumer credit. So in the case of consumer
credit, the Truth in Lending Act applies, which requires a set
of disclosures and requires a computation of an APR.
That does not apply to small business credit. I think that
is something that should be considered. On a positive note, the
Equal Credit Opportunity Act does apply to small business
credit. One distinction I would make in this space, which is
very important, is that there are lenders and there are
merchant cash advance businesses.
Lenders are subject to the same laws as others on the State
level as being lenders. Merchant cash advance businesses in
general are not considered lenders for State law, and that
creates a set of issues from a regulatory standpoint.
Ms. Velazquez. Thank you.
Mr. Peterson, would you like to comment?
Mr. Peterson. Could you repeat the question, please?
Ms. Velazquez. Is there anything we should do in the
regulatory climate to provide investor protections and access
to capital? What changes would you make to the current
regulatory environment?
Mr. Peterson. I would recommend expanding the Military
Lending Act that is currently functioning and doing a great job
for our active duty servicemembers right now, and expanding
those protections to all Americans all across the country.
There will still be plenty of access to credit and that will
crowd out some of the worst predatory abuses.
Ms. Velazquez. Thank you.
Mr. Reeder, reports indicate that the average online loan
carries an interest rate that is much higher than compared to a
traditional bank loan. Why would a consumer or small business
owner use an online lender even when the interest rate exceeds
that of a traditional bank loan?
Mr. Reeder. There are a couple of answers. Obviously, once
again, small business and consumer are different. But I would
say one of the issues in credit in general is just the ability
for consumers to shop. Often, consumers don't have the
opportunity to compare alternatives, so sometimes that is an
issue.
The other is that the online channel in general is faster,
and so many people find that convenient, something that they
are willing to pay for.
Ms. Velazquez. So are you concerned about the possible
predatory nature of these high-interest online loans?
Mr. Reeder. Any credit product that ends with a consumer
worse off than where they started is a problem.
Ms. Velazquez. Are you concerned that providing loans of
this nature fosters an environment similar to the build-up of
the subprime mortgage crisis of 2008?
Mr. Reeder. I do think that the mortgage crisis is unique
in both its scale and its impact. However, I will say that
having large amounts of credit that are not regulated from a
Federal level in the case of the Truth in Lending Act could be
problematic.
Ms. Velazquez. Mr. Peterson?
Mr. Peterson. Yes, I think that online loans, in particular
the online payday lending market, is one of the most abusive
and problematic markets in the country. The average interest
rates in the online payday loan market are actually higher than
they are in the storefront market.
Ms. Velazquez. Thank you.
Ms. Standaert and Mr. Reeder, some have noted that online
marketplace lending could fail as an industry because these
lenders often fail to fully inform borrowers of the terms of
the loan and their high interest rates.
How can we achieve transparency? How can we make sure that
people who are getting money, borrowing money, they know the
APR, know the terms of the loan? Would you support a borrower's
bill of rights? What provisions would you seek to include?
Ms. Standaert. We are most concerned with the underlining
terms of the products and whether or not they are properly
priced, properly underwritten, and whether or not they comply
with State laws. One of the concerning developments in the
marketplace industry is their partnership with out-of-State
banks to make loans that are at rates higher than what is
otherwise allowed by law.
Chairman Meeks. Thank you. The gentlelady's time has
expired.
I now recognize the gentlewoman from the great State of
Michigan, Ms. Tlaib, for 5 minutes.
Ms. Tlaib. Thank you, Mr. Chairman.
I want to thank all of you so much for being here.
About three-fourths of payday borrowers make about $40,000
a year. In my district, that is about 60 percent of the
residents essentially being targeted by predatory lenders. Many
of my neighbors who are single moms, veterans, and young
professionals are burdened by immense student loans, teachers
and so forth, all throughout my Wayne County community.
And one of the things that we are seeing is that payday
loan establishments pop up on the corners of my district, but
literally at the doorsteps of communities, and especially
communities of color, where there is concentrated poverty.
Mr. Sherrill, when you talk about how there was no other
option, I just want you to know that I think government is
about people and it is about us creating those options that are
better than this.
But, also, ensuring that there is some sort of regulation
and oversight of practices that are ready fed through corporate
greed. Corporate greed leads to unjust practices that hurt
residents, especially when they are pushed more into poverty.
And every time I see my residents kind of stuck, and they have
these flashy signs, and come on in, we will take care of you,
at the end as soon as the sign--they don't take care of them.
They don't help them.
Not like credit unions and not like the Reverend's services
through, you know, incredible service that you are doing
through residents. So it is really important that when we talk
about how there are no other options, it is our job to create
those options for you.
My question, and really, you know, the CFPB has decided to
aid in what I call legal robbery by proposing a rule that will
drain our communities of their hard-earned savings, instead of
developing a system that helps the most vulnerable. And, as you
know, so in 2007, the payday lending rule--they prevented that
trap that we are talking about, and this is something that I
really want to focus on in this committee hearing. We should
not be subjecting families to that.
Mr. Reeder, what kind of harm could low- and moderate-
income consumers, particularly communities, be exposed to if
CFPB's current proposal is finalized?
Mr. Reeder. In full disclosure, I was at the CFPB, and I
was Chief of Staff during a period in which the rulemaking was
underway. So I want to be very clear about that. I do think
that the rule offers enormous opportunity, probably once in a
decade, or maybe once in a generation, to put protections in
place that really do weigh access and protection. And that
without that, many of us will be back in this room 10 years
from now or 20 years from now having the same discussion when
many of the opportunities we have in front of us are quite
evident, and we spent almost a decade here in Washington
working this out.
Mr. Peterson here would know better than me, he helped
write the rule. But that is something where it would be a great
missed opportunity if we were unable to move forward.
Ms. Tlaib. Thank you. Mr. Whittaker, you and I have worked
on grassroots advocacy on just the amount of what poverty from
water shut-offs to ensuring that we have a right to breathe
clean air and so forth.
One of the things that, you know--we are government, the
public, I always feel like is stuck subsidizing the cycle of
poverty that is created by practices like that. Does that make
sense?
So when we don't do our job on this end in preventing folks
to be chained, as the Reverend called it, or being held back,
and that is what it is by not creating alternative options, we,
the public, is subsidizing that poverty.
Can you talk a little bit about--because you are from the
city I grew up in. You talk about what that looks like from the
ground up, because I see it in our school system, I see it in
so many ways of how poverty is costing us more money on the
other end in trying to provide all these other services.
Mr. Whittaker. Thank you, Representative Tlaib.
When we divest resources from these communities, we don't
support our schools. We close down community banks. We divest
in community development, and then we seed these institutions
throughout our community, and then we say that this is most
affordable and safest option.
Well, I would challenge you, Representatives, that if this
is the most affordable and safest option, then I would say that
it is evidence of decades of failure by the people that we
elect to make decisions for us.
I agree with you, Representative Tlaib, that it is your job
to create these options as this country moves forward. If you
look and you see that there is nobody at the wheel, then you
take the wheel.
I will end this by saying that if you continue to keep the
lights off, the roaches will continue to feast on the crumbs of
this country that you have created.
Ms. Tlaib. Thank you so much. And I just would end with
this: Close to 80 percent of Americans live paycheck to
paycheck. And many of you at this table know that.
I have the third poorest congressional district in the
country, and one in every two households will face some sort of
burden of unexpected financial emergency. And this should not
be their last option. We should be, again, working together to
provide alternatives and supporting what you are doing,
Reverend, in Texas. So I, again, really appreciate it.
And I yield back the rest of my time. Thank you.
Chairman Meeks. Thank you.
I now recognize the gentleman from Texas, Mr. Green, who is
the Chair of our Subcommittee on Oversight and Investigations,
for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
Mr. Chairman, this hearing has been informative, but it has
also been painful. And it has been painful because you and I
know that most poor people who cannot get a payday loan do not
take to the streets. That is highly inflammatory language. It
is designed to say to white people that black people who don't
get payday loans are likely to engage in criminal conduct.
Poor people across the length and breadth of this country
suffer in poverty without committing crimes. And to imply that
if you can't get a payday loan, you are likely to take to the
streets, that is a painful thing to hear. And it is
regrettable, to be quite candid with you, that it has been
said.
So, Mr. Sherrill, since you want to play this game, let me
play with you.
Did you get your pardon from Donald Trump yet?
Mr. Sherrill. Are you asking me a question?
Mr. Green. Yes, sir.
Mr. Sherrill. I wish.
Mr. Green. You did request one, didn't you?
Mr. Sherrill. I am working on it.
Mr. Green. That is right. You are working on a pardon. And
there is a reason for that. How many felonies did you have?
Mr. Sherrill. State or Federal? I have both.
Mr. Green. This call--
Mr. Sherrill. I don't know.
Mr. Green. You determine.
Mr. Sherrill. I need to understand.
Mr. Green. Let me just share this with you. Ordinarily, I
would not do this. But for you to do what you have done--
Mr. Sherrill. What is that?
Mr. Green. To imply that people of color--because you
happen to be a person of color--to imply that if you can't get
a payday loan, you will take to the streets.
Mr. Sherrill. That was my circumstance, sir.
Mr. Green. That is for you. But don't imply that that is
the only option for people.
Mr. Sherrill. That is for most of the people that I know.
Mr. Green. Well, but not for most of the people in this
country. That is what you have done.
Mr. Sherrill. I can only speak from my experience, sir.
That is why I am here.
Mr. Green. Well, you can speak from your experience, but
you ought not try to put that experience on other people.
Mr. Sherrill. They know it, too.
Mr. Green. What you have done, sir, is shameful.
Mr. Sherrill. The truth can never be shameful.
Mr. Green. The truth is shameful when you exaggerate and
you try to pretend that it is more than what it is. Poor people
are not criminals just because they are poor.
Mr. Sherrill. I didn't say that.
Mr. Green. But that is what the implication is. If you
can't get the loan, you are going to take to the streets.
Mr. Sherrill. That is what I would have done.
Mr. Green. Well, that is why you went to jail.
Mr. Sherrill. Exactly.
Mr. Green. Well, look--don't speak for other poor people.
Mr. Sherrill. And I have changed my life, too, sir.
Mr. Green. Well, I am glad you did. Let me commend you for
that. I commend you for changing your life, and I commend you
for getting the pardons.
But I would ask you, dear sir, don't use that highly
inflammatory language in such a general way.
Mr. Sherrill. I am just trying to--
Mr. Green. Well, but what you are doing is causing white
people to believe that black people are going to take to the
streets if they can't get a payday loan.
Mr. Sherrill. Everybody--
Mr. Green. Therefore, we should not regulate payday
lending.
Mr. Sherrill. Everybody uses this product--
Mr. Green. Excuse me. Let me go on to something else.
We don't want to see this invidious discrimination that
takes place with reference to these loans. These lenders locate
in black communities, they charge black communities more for
their loans than they do in other communities.
If you walk into a payday lender's shop, one person black
and one white, both equally qualified, would you expect them to
get the same type of treatment, Mr. Sherrill?
Mr. Sherrill. Of course.
Mr. Green. Okay. And if one is discriminated against, would
you condone that?
Mr. Sherrill. Of course not.
Mr. Green. All right. Then that is one of the things that
we are talking about, how these lenders discriminate and they
charge black people more in fees and products than they charge
white people. That happens.
So if you locate on one side of town and you charge more
than you charge on another side of town, that, too, is a
problem. I am not saying to you that all payday lenders are
loan sharks, but a good many are. They have found a way to
feast on the poor, the underprivileged, and people who are
trying to make it, who do not take to the streets.
Thank you, Mr. Chairman. I yield back my time.
Chairman Meeks. The gentleman's time has expired.
Let me take this opportunity to really thank all of our
panel members. I know Mr. Whittaker had to step out for an
emergency.
But I did want to get into the record--when I listened to
all of the witnesses, I think that we have extremely diverse
ideas and thought patterns and moving forward to try to figure
out how do we remedy this problem.
I didn't hear anyone, as I stated in my opening, say that
we need to get rid of payday lenders. We say we need to get rid
of the predatory payday lenders, those that are doing things
that are ripping people off, where you get caught into the
never ending debt.
And I think that there is a lesson to be learned. And I
think this is not whether you are a Democrat or a Republican,
that we need to do and make sure that we take care of all
consumers.
I heard someone talk about how we take care of the military
and we cap it at 36 percent. I heard Reverend Haynes say that
he thought that might be reasonable in response to a question
from Chairwoman Waters. I think that is something that we need
to look at and be able to figure out in a bipartisan way.
I think, Mr. Sherrill, the fact that you were able to turn
your life around is admirable.
I also think that Mr. Whittaker is admirable for what he
has done with his kids, trying to fight for them and to make a
better life, and from his experience, never forgetting who he
is, going around the country, fighting for equality and racial
justice, organizing people, because it could have been very
easy that he could have just given up and said nothing.
So I want to thank particularly the two individuals who
have had different experiences with payday lending, Mr.
Whittaker and Mr. Sherrill.
But I would not let this go without Mr. Whittaker being
thanked personally also because of who he is, his background,
and his children with him, who clearly he wants to make sure
that they have a better life.
I want to thank the experts.
And, Reverend, what you do on a regular basis is important.
And for what you have been doing, Ms. Standaert, Mr.
McDonald, Mr. Peterson, Mr. Reeder, and Mr. Zuluaga, thank you.
It is what makes us who we are.
Ending debt traps in the payday and small-dollar credit
industry is important. It is ensuring that our constituents
have access to affordable--I think that is what we are talking
about--nonpredatory financial products, because I believe that
is essential.
Members of the subcommittee and witnesses today have
pointed to several datapoints that confirm what many us know
from our daily engagement with constituents and families we
represent. The scope of unbanked and underbanked Americans is
grave and should concern us all.
The growth of banking deserts should worry us all. And the
extent of financial vulnerability for the American households
is on the top of the minds of this subcommittee, and I know
also of the full Financial Services Ccommittee under the
leadership of Chairwoman Maxine Waters.
Today, in addition to the testimony of the panel of
witnesses, we have considered a discussion draft of legislation
to set a national usury rate at 36 percent, legislation
introduced by Mr. Scott to establish an office for underbanked
and unbanked and underserved consumers at the CFPB, and a
letter to appropriators, which I led, requesting funding for
the Small Dollar Loan Program under Section 1206 of the Dodd-
Frank Act.
These are important issues for us to consider, ensuring
access to fair and affordable financial products and protecting
consumers from debt traps is and should be a priority. And I
look forward to working with all of you on these critical
issues.
I also, without objection, will submit for the record
letters from the American Financial Services Association and
from Mastercard in support of the letter to Appropriations to
advance the loan loss reserves, to enable more than 1,000 CDS
to participate.
Without objection, it is so ordered.
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.
I ask our witnesses to please respond as promptly as you
are able.
This hearing is now adjourned.
[Whereupon, at 5:26 p.m., the hearing was adjourned.]
A P P E N D I X
April 30, 2019
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