Payday Lending Is Focus of Consumer Bureau Alabama Field Hearing
U.S. Consumer Financial Protection
Bureau officials, holding their first public hearing since
Richard Cordray was installed as director, gathered information
on so-called payday lending as they plan oversight of firms
faulted for taking unfair advantage of low-income borrowers.
“The purpose of all our research and analysis and outreach
on these issues is to help us figure out how to determine the
right approach to protect consumers and ensure that they have
access to a small-loan market that is fair, transparent and
competitive,” Cordray said at the field hearing today in
Birmingham, Alabama.
The consumer bureau, created by Congress under the Dodd-
Frank Act, will oversee payday lenders as part of its nonbank
supervision authority, which took effect when Cordray was seated
by President Barack Obama in a recess appointment on Jan. 4. The
bureau’s work will be driven by research and supervision, and
its enforcement efforts will target practices that pose
“immediate risk to consumers and are clearly illegal,” Cordray
said at the hearing, where officials heard testimony from the
industry, consumer groups and the public.
Action by the consumer bureau could hit big payday lenders
such as Advance America Cash Advance Centers Inc. (AEA), the nation’s
largest, and QC Holdings Inc. (QCCO) It could also affect companies
that are mainly pawnbrokers but offer payday loans, such as Cash
America International Inc. (CSH), EZCORP Inc. (EZPW) and First Cash Financial
Services Inc. (FCFS)
New Regulations
Cordray, 52, made no mention of new regulations or any idea
that payday lending should be explicitly restricted. “We are
thinking hard about these issues, and we do not have all the
answers worked out by any means,” said Cordray, a former Ohio
attorney general who served as the consumer bureau’s enforcement
director before taking the top job.
The goal should be that “we all look to develop a more
vibrant, competitive market for small consumer loans,” he said.
In an interview, Cordray cautioned people concerned about
payday lending against the view that “now that we have a
federal bureau, everybody can sit in their easy chair and count
on everybody else to work everything out.” Activists should
work with local and state officials, and each other, he said.
Payday lending is a form of short-term borrowing in which a
customer typically leaves as collateral a post-dated check for
the amount of the loan, plus a fee. Loans generally range from
$100 to $400, and are paid back in a few weeks. Banks including
Regions Financial Corp. (RF), Fifth Third Bancorp (FITB), U.S. Bancorp (USB) and
Wells Fargo Co. offer similar products in which loans are paid
back through direct debits.
JMP Securities LLC, a San Francisco-based investment bank,
estimated in a Jan. 9 report that the annual payday loan volume
is $32 billion and growing slowly. Lenders collect about $7
billion in fees each year, Cordray said.
Truth in Lending
When calculated as an annual percentage rate — as required
under the Truth in Lending Act — interest on payday loans can
range as high as 521 percent, according to the consumer bureau.
This has led groups such as the Consumer Federation of America
to compare payday lenders to loan sharks.
Consumer advocates have expressed particular concern over
repeat borrowers who may fall into a “debt trap” driven by the
high annual rates on payday loans. Understanding that issue will
be a key step for the agency, Cordray said.
“We plan to dig deep on this topic to understand what
consumers know when they take out a loan and how they are
affected by long-term use of these products,” he said.
Underserved Population
In defending their business practices, payday lenders say
they provide credit to an underserved population that can’t get
it anywhere else and the costs are lower than bank-overdraft or
utility-cutoff fees borrowers might otherwise face.
The consumer bureau’s supervisory authority will play a key
role in its work on payday lending, in part by enhancing
understanding of how the industry functions, Cordray said.
“Our examination authority is an important tool that will
allow us to inspect their books, ask tough questions, and work
with them to fix any problems we uncover,” Cordray said in his
prepared remarks. “This includes looking at the materials and
strategies that are used to market the loans.”
In the enforcement area, Cordray said that the bureau will
look particularly at the issue of unauthorized debits to
consumers’ accounts and “aggressive debt collection.”
To contact the reporter on this story:
Carter Dougherty in Washington at
cdougherty6@bloomberg.net.
To contact the editor responsible for this story:
Lawrence Roberts at
lroberts13@bloomberg.net.
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Article source: http://www.bloomberg.com/news/2012-01-19/payday-lending-is-focus-of-consumer-bureau-alabama-field-hearing.html
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