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., the nation’s largest, and QC Holdings Inc. It could also affect companies that are mainly pawnbrokers but offer payday loans, such as Cash America International Inc., EZCORP Inc. and First Cash Financial Services Inc.
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., Fifth Third Bancorp, U.S. Bancorp 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.
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.”