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23–568 PDF 2017

SHORT-TERM, SMALL DOLLAR 

LENDING: THE CFPB’S ASSAULT 

ON ACCESS TO CREDIT AND 

TRAMPLING OF STATE AND 

TRIBAL SOVEREIGNTY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 11, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–73 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

RANDY NEUGEBAUER, Texas, Chairman 

STEVAN PEARCE, New Mexico, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

MIA LOVE, Utah 

TOM EMMER, Minnesota 

WM. LACY CLAY, Missouri, Ranking 

Member 

GREGORY W. MEEKS, New York 

RUBE ́ N HINOJOSA, Texas 

DAVID SCOTT, Georgia 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

MICHAEL E. CAPUANO, Massachusetts 

JOHN K. DELANEY, Maryland 

DENNY HECK, Washington 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 11, 2016 ............................................................................................ 1 

Appendix: 

February 11, 2016 ............................................................................................ 69 

WITNESSES 

THURSDAY, FEBRUARY 11, 2016 

Haynes, Frederick Douglass III, Senior Pastor, Friendship-West Baptist 

Church, Dallas, TX .............................................................................................. 48 

Miller, Thomas W., Jr., Visiting Scholar, Mercatus Center, George Mason 

University ............................................................................................................. 46 

Shaul, W. Dennis, Chief Executive Officer, Community Financial Services 

Association of America ......................................................................................... 42 

Sherill, Robert, consumer ........................................................................................ 45 

Silberman, David, Acting Deputy Director, Consumer Financial Protection 

Bureau ................................................................................................................... 8 

Simmons, Kelvin, testifying on behalf of the American Financial Services 

Association ............................................................................................................ 44 

Treppa, Hon. Sherry, Chairperson, Habematolel Pomo of Upper Lake .............. 6 

Zoeller, Hon. Greg, Attorney General, State of Indiana ....................................... 5 

APPENDIX 

Prepared statements: 

Haynes, Frederick Douglass III ...................................................................... 70 

Miller, Thomas W., Jr. ..................................................................................... 73 

Shaul, W. Dennis .............................................................................................. 80 

Sherill, Robert ................................................................................................... 91 

Silberman, David .............................................................................................. 94 

Simmons, Kelvin ............................................................................................... 103 

Treppa, Hon. Sherry ......................................................................................... 129 

Zoeller, Hon. Greg ............................................................................................ 135 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Tipton, Hon. Scott: 

Letter to CFPB Director Richard Cordray from Cynthia H. Coffman, 

Colorado Attorney General, dated October 15, 2015 ................................. 138 

Waters, Hon. Maxine: 

Written statement of Faith for Just Lending ................................................. 140 

Sherill, Robert: 

Written responses to questions for the record submitted by Representative Ellison ..................................................................................................... 142 

Silberman, David: 

Written responses to questions for the record submitted by Representative Ellison ..................................................................................................... 144 

Written responses to questions for the record submitted by Representative Sinema .................................................................................................... 145 

(1) 

SHORT-TERM, SMALL DOLLAR 

LENDING: THE CFPB’S ASSAULT 

ON ACCESS TO CREDIT AND 

TRAMPLING OF STATE AND 

TRIBAL SOVEREIGNTY 

Thursday, February 11, 2016 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 1:01 p.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Pearce, Lucas, 

Posey, Luetkemeyer, Stutzman, Mulvaney, Pittenger, Barr, 

Rothfus, Guinta, Tipton, Williams, Love, Emmer; Clay, Hinojosa, 

Scott, Maloney, Sherman, Heck, Sinema, and Vargas. 

Ex officio present: Representatives Hensarling and Waters. 

Also present: Representatives Stivers, Green, Carney, and Ellison. 

Chairman NEUGEBAUER. The Subommittee on Financial Institutions and Consumer Credit will come to order. Without objection, 

the Chair is authorized to declare a recess of the subcommittee at 

any time. 

Today’s hearing is entitled, ‘‘Short-term, Small Dollar Lending: 

The CFPB’s Assault on Access to Credit and Trampling of State 

and Tribal Sovereignty.’’ 

Before we begin, I would like to thank the witnesses for traveling 

to Washington, D.C., today for the hearing. Many of you had pretty 

long commutes, and we appreciate your time and your willingness 

to participate in this process. 

I now recognize myself for 5 minutes to give an opening statement. 

Today, we hold a hearing to exam the short-term, small dollar 

credit marketplace and examine the CFPB’s efforts to regulate the 

market for the first time at the Federal level. This hearing is especially timely given the Bureau’s efforts to put out a proposed rule 

in the next month or two. 

Short-term, small dollar credit is essential to millions of Americans. According to the FDIC, roughly 51 million American consumers are unbanked or underbanked, meaning they don’t have 

sufficient access to traditional banking services or products. 

2 

Short-term credit customers are disproportionality drawn from 

low- or moderate-income segments of the population. These individuals are more likely to have a limited discretionary income after 

necessities and to be much more vulnerable to unexpected expenses. Fortunately, these individuals have been able to access a 

variety of products from non-bank lenders, from payday loans, to 

vehicle title, installment lending, and the marketplace is evolving 

and, more importantly, it is becoming much more competitive. 

The characteristics that makes these sorts of loans distinctive is 

their availability to consumers who have difficulty qualifying for 

many types of credit. These loans may not fit the needs of all consumers in all circumstances, but they are often essential to forestall consumer harm. 

Last week, I had an opportunity to visit a small dollar lender in 

Virginia. In addition to seeing the sophisticated backroom underwriting process and understanding the diverse product offerings 

other than the credit products, I had the chance to actually talk to 

the very customers who use these products. 

One couple that I met with were taking out their very first payday loan. The husband told me he works nights and that public 

transportation was not reliable. His family’s car was in the shop, 

and he had to get it out so he could make it to work that night. 

He had two options—miss a day of work and risk losing his job, 

or take a short-term loan to get him through this emergency. 

This is the same story that is repeated over and over in letters 

that I get from my constituents in the 19th District of Texas. From 

the mother of five, to the disabled veteran, to the painter trying to 

get a truck repaired, a common theme emerges in all of these stories, and it is: Please don’t take away my choice and my availability to use these products. 

Unfortunately, the CFPB’s efforts are yet another example of 

Washington-knows-best mentality. Using behavioral economics— 

which very principles say policymakers should make choices for unsophisticated individuals—the CFPB has set down a road of paternalistic erosion of consumer product choices and access to credit. 

By its own analysis, the Bureau expects roughly a 60 percent to 

70 percent market contraction of these products. This is the type 

of behavior that people across this country are tired of seeing coming from Washington. 

Now my colleagues on the other side of the aisle will point out 

that there are high APRs associated with many of these products. 

But I must remind them the vast majority of these products aren’t 

annualized. The consumers we will hear from who use these products today aren’t thinking about using these products over a course 

of a year. They are in and out of the product to meet a short-term 

need, and paying a service charge to access those funds quickly. I, 

and many consumer-lending scholars, believe that APR is not the 

appropriate way for consumers to measure the cost of these products. 

Other constituencies that I have heard from regarding the Bureau’s efforts are States and tribal nations. Short-term, small dollar loans are historically State-regulated products. Yet, the Bureau 

explicitly states that proposals under consideration, if impleVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
3 

mented, would establish a Federal floor for consumer protection of 

covered loans. 

Despite this recognition, the Bureau has made no signs of showing that any State or Tribe lacks the authority to regulate these 

products, nor has it shown that any State or Tribe is incapable of 

adequately protecting its citizens from potential risks associated 

with using them responsibly. 

Of the 50 States, the legislatures of 35 have deliberately enacted 

small dollar lending laws of varying protections, including and up 

to outright bans. The remaining 15 States have also addressed this 

issue, either by affirmatively declining to enact an authorizing law 

to govern the industry or choosing to regulate through interest 

rates. 

Crucially, and contrary to the Bureau’s appeal to a greater moral 

obligation, no State lacks the authority to enact, repeal, or amend 

its own payday lending laws in order to provide greater protections 

to its consumers. In fact, we are going to hear in the Washington 

State example, that the State legislature amended its own law 

after realizing that the previous version had a problematic impact 

of decreasing credit availability. Unfortunately, the Bureau has ignored this reality. 

Acting Director Silberman, who is testifying today, told this committee last April that, ‘‘We have not thought about a State that 

doesn’t have the authority.’’ 

And in an effort to double down, Director Cordray has told this 

committee, ‘‘I am not thinking about it,’’ meaning the rule this way. 

As we hear testimony from this panel of witnesses, I hope everyone will remember the rulemaking in this case is discretionary and 

was not statutorily mandated. This is an example of the Executive 

Branch making the choice to preempt State laws without the direction of this Congress. This should give us all pause. 

In conclusion, I hope members will leave today’s hearing with a 

better understanding about the people who use the products, why 

they are important, and how they are already regulated. 

And with that, I now yield 5 minutes to my good friend, the 

ranking member of the subcommittee, Mr. Clay from Missouri. 

Mr. CLAY. Thank you, Chairman Neugebauer, and thank you to 

each of today’s witnesses for your testimony. 

Mr. Chairman, I realize that this issue does not find us in the 

same place. And I am sure that this hearing will highlight the reasons why. 

With the APR on small dollar loans in Missouri averaging 454 

percent, thousands of vulnerable Missourians continue to fall victim to costly small dollar loans. Even after reforms in Missouri law, 

payday lenders can still assess fees equally up to 1,950 percent 

APR. Equally problematic, vehicle title loans in Missouri have 

grown dramatically after Missouri’s so-called reforms, where in 

2014 alone, TitleMax repossessed 8,960 cars in Missouri. 

And last summer, Attorney General Chris Koster shut down 

eight online tribal lenders from operating in Missouri after finding 

that these lenders were not properly licensed in Missouri and 

charged illegal fees on their payday loans. 

Our experience in Missouri underscores the real need for minimum national standards for small dollar lending, and States simVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
4 

ply cannot be expected to adequately protect consumers and rein 

in a $46 billion industry acting alone. The CFPB should be commended for their work to date in seeking to develop minimum national standards that can coexist with current State laws, but that 

also ensure access to affordable credit. 

And central to the question of ensuring affordable access to credit is understanding what constitutes a fair interest rate for a payday loan. More specifically, I hope that today’s testimony can clarify why a 36 percent interest rate is good enough for military personnel but not for the thousands of Missourians who use small dollar products. 

I also hope that we can gain some clarity on the universe of more 

responsible alternatives that already strike the appropriate balance 

between access, affordability, and consumer protection. 

Thank you again, to each of today’s witnesses. 

And at this time, I would like to yield the balance of my time 

to the ranking member of the full Financial Services Committee, 

Ms. Waters. 

Ms. WATERS. Thank you very much, Mr. Clay. 

To Mr. Neugebauer, the chairman of this subcommittee, and 

Ranking Member Clay, I am very appreciative for this hearing 

today. And, Congressman Clay, I want to thank you for all the 

work that you have done. You have tried for some period of time 

now to work with the payday lenders and to come to some agreements about what is fair and what is predatory. And whether it is 

with regard to mortgages or credit cards or small dollar loans, we 

all agree on one thing: that access to credit is important. 

However, there is also an important distinction in what we believe. We are focused right now on what is happening in Flint, 

Michigan, where children are being poisoned because there is lead 

in the water. The residents of Flint have plentiful access to water. 

Surely all of my colleagues agree that access to water, any water, 

is not enough, if that water is contaminated with lead, or if that 

water is a vector for Legionnaire’s Disease. I am very concerned 

about what kind of water our citizens have access to, and I believe 

in access to clean, drinkable water. We all do. 

However, I also believe the same about mortgages and credit 

cards and payday loans. Consumer credit products shouldn’t be 

available if they hurt their customers. We depend on our State regulators and the CFPB to make sure that our constituents don’t 

have access to just any kind of credit, but to safe and fair credit 

products that won’t put them and their families at risk. 

Too many credit products are contaminated with predatory fees, 

reckless underwriting, and toxic fine print. I think my Republican 

colleagues should agree that access to loans, like access to water, 

should be safe. I believe our job and the job of the CFPB is to ensure access to safe, affordable credit to everyone. 

I look forward to discussing how we can support the CFPB and 

their mission. I yield back the balance of my time. 

Chairman NEUGEBAUER. Before we turn to our witnesses, I ask 

unanimous consent to allow non-subcommittee members to ask 

questions after all subcommittee members have finished. Without 

objection, it is so ordered. 

5 

Today, I would like to welcome our first panel of witnesses. We 

will introduce each panel separately, but in panel number one, we 

have the Honorable Greg Zoeller, the attorney general for the State 

of Indiana; the Honorable Sherry Treppa, chairperson of the 

Habematolel Pomo of Upper Lake; and Mr. David Silberman, acting Deputy Director of the CFPB. 

Mr. Zoeller, you are now recognized for 5 minutes. 

STATEMENT OF THE HONORABLE GREG ZOELLER, ATTORNEY 

GENERAL, STATE OF INDIANA 

Mr. ZOELLER. Thank you, Mr. Chairman, and members of the 

subcommittee. I am here really to thank you for the opportunity to 

speak today and really not talk so much on the policy side, which 

is really the focus of what a lot of the testimony will be on, but 

really about the role the attorneys general play in terms of our own 

efforts to regulate the credit space that you are focused on. 

I was involved when the legislature in Indiana had some of these 

same discussions about, how do you properly balance the access to 

credit with the protections against predatory lending? Some of the 

people who are engaged in this same hearing were involved with 

that. And we do have a difficult time. 

I will let others argue the policy side. I am here really to argue 

the role of the sovereign states. I will just stick with my own, but 

in Indiana, we have done a fairly competent job of regulating this 

space. And when there are problems, there are amendments to the 

regulations. There is legislation. And we passed a number of bills. 

In fact, a lot of it looks much like what the CFPB has proposed. 

So it is not that we are unfamiliar with the types of arguments or 

what has been put into our regulations, but really it is the fact that 

in Indiana we have a fairly competitive market. We have made the 

balancing as it relates to our own State. 

I have heard the complaints from different parts of the State. 

You get up near Chicago, near the lake, there are efforts about we 

should have looser regulations. We can go over into Chicago and 

get different kind of loans. You can cross the borders and get other 

loans. 

We have the same kind of pressures that, why do you have to 

regulate it out of the State when we could do these things on a 

more local level? But my argument to you today is that the States 

are free to choose. We have a legislature that has to make these 

same balancing arguments based on our own borders and our own 

people. It is not that we don’t care about the access to credit or the 

predatory lending. So we are doing these same things in our sovereignty. 

What I am here to argue is to let the States protect our own people. If we need your help, we will call. But I think the State of Indiana and other sister States are free to, let’s say, explore our own 

opportunities. This is a very diverse type of market, especially on 

the online space, so these are very fast moving types of products 

that we will regulate and see if we do it better than other States. 

If you can come in and solve all the problems in all 50 States, 

it would be surprising to me. So, again, I have worked with Director Cordray when he was an attorney general in Ohio. A lot of the 

people I have a lot of respect for. They have really not engaged in 

6 

each of the discussions with different States or they would have 

recognized that we don’t ask for their help. 

So, again, it is not that this is not space that shouldn’t be regulated. We do it in Indiana, and, again, it is not all that much different than what the CFPB is proposing. It is just a question of 

who is going to regulate and whether that is what the people of our 

State wish. 

The same arguments that I have heard about needing to protect 

people, I hear all the time that States can’t be expected to regulate 

in a big industry. You could essentially shut down all of the role 

of an attorney general with that kind of approach. We would no 

longer need State regulation if Washington would just regulate the 

country as a whole, like they do in Europe. They don’t have States 

that have their own sovereign. That is what makes us unique. 

We do have Federalism. And I am here to defend the Federalist 

principles that really allow the sovereignty of Indiana to stand up 

and to be responsible for protecting our own people, allowing access 

to credit. And if we make mistakes, we are free to do that, and we 

will fix it ourselves. We won’t come back to Washington and ask 

for little minor changes, because of the changing landscape of these 

very diverse products. We are much more flexible. We are much 

more able to address these things on an ongoing process. Coming 

back to Washington and trying to get something done to protect 

our consumers is not something I am anxious to do. 

We can do it much more pliably and flexibly at a State level than 

coming back here and asking this committee and the CFPB to engage in the local nuances that we are finding in our State. We had 

five complaints last year. We have handled those pretty efficiently. 

And if we need more help from Washington, I will call you. 

Thank you. 

[The prepared statement of Mr. Zoeller can be found on page 135 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. Ms. Treppa, you 

are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE SHERRY TREPPA, 

CHAIRPERSON, HABEMATOLEL POMO OF UPPER LAKE 

Ms. TREPPA. Chairman Neugebauer, Ranking Members Clay and 

Waters, and members of the subcommittee, thank you for the opportunity to testify at this important hearing. My name is Sherry 

Treppa, and I am the chairperson of the Habematolel Pomo of 

Upper Lake, a federally recognized Indian Tribe. 

I have served on the Tribe’s executive council for the past 11 

years and as Chair since 2008. I also am the vice chairperson of 

the Native American Financial Services Association, an intertribal 

organization advocating for tribal sovereignty and responsible business practices in e-commerce. 

Our Tribe owns online lending businesses. I want to share how 

we regulate these businesses and the considerable tools we use to 

protect consumers. I will also offer my thoughts on the CFPB’s effort to restrict this marketplace and the impact that it will have 

on consumers and Tribes. 

Our Tribe has resided in rural Upper Lake, California, since time 

immemorial. Our people flourished until migration and settlement 

7 

brought conflict and diseases, and in one generation, reduced the 

Pomo Indian population by nearly 95 percent. 

Flawed Federal policies further subjected our people to enslavement, internment, abuse, and slaughter. In 1956, the California 

Rancheria Act terminated our Federal recognition. Despite these 

efforts to destroy our Tribe, we persevered. From 1975 to 2004, we 

fought and succeeded in restoring our Federal recognition. The inherent sovereignty of Indian Tribes predates the United States and 

is memorialized in the Constitution and affirmed in numerous 

court decisions and statutes. 

Congress has consistently acknowledged a Tribe’s authority to 

govern its own jurisdiction. Indeed, the Dodd-Frank Act recognizes 

the Tribe’s role in consumer protection by granting it the same authority as both States and the CFPB in bringing legal actions. 

When our Tribe decided to enter the industry, we took thoughtful, 

measured steps based on our sovereign power to regulate the businesses that would operate within our jurisdiction. 

The lending ordinance we enacted requires lenders to be licensed. 

It also imposes ongoing compliance obligations. It prohibits tribal 

lenders from using practices that are unfair, deceptive, or misleading to customers, and established an independent regulatory 

authority to oversee lending operations. 

Pursuant to our ordinance, tribal lending entities may not charge 

consumers an application fee or penalize them for early repayment. 

Lenders also must maintain a system to ensure compliance with 

tribal and applicable Federal law, written policies that cover all aspects of lending, including underwriting and internal controls to 

ensure that their operations follow their policies. 

Our regulatory commission conducts regular audits. If deficiencies are identified or if a lender is non-compliant, the commission is empowered to issue fines, penalties, or revoke the lending 

license. The Tribe takes consumer protection seriously for an important reason—it receives 100 percent of the net income from 

loans made by these businesses. This allows us to fund important 

government services including elder care, education assistance, and 

vital social service programs. 

Our regulatory framework and loan products together successfully meet both the Tribes’ and consumers’ needs. We do not offer 

payday loans. Our lenders offer loans that are repaid in installments and are not eligible for rollovers. 

Our Tribe’s commitment to consumer protection is reflected in 

these following statistics. In 2015, only 2 percent of all applications 

submitted were approved and funded. Put another way, 98 percent 

of new customers are rejected in underwriting. Although loans 

have a 10-month schedule, most customers repay their loans in 4 

months. Customers have moderate borrowing patterns with an average of 1.6 loans in 2 years. 

Finally, our complaint volume in 2015 was less than 2 percent 

of all loans issued. Our statistics underscored that tribal self-regulation can successfully achieve responsible lending and consumer 

protection. Before the CFPB seeks to impose new regulations, I 

would first ask them to acknowledge the rigorous regulatory framework that our Tribe has created and that our lending businesses 

are operating within. The answer is clear—additional CFPB rules 

8 

are not necessary because all of the tools necessary to protect consumers already exist. 

From my perspective, the CFPB’s proposal would do nothing 

more than choke off consumer choice and access to needed credit, 

while destroying economic developments for opportunities for 

Tribes. 

Thank you for your time. And I am happy to answer questions 

at the end of the session. 

[The prepared statement of Ms. Treppa can be found on page 129 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. And now, Mr. Silberman, 

you are recognized for 5 minutes. 

STATEMENT OF DAVID SILBERMAN, ACTING DEPUTY 

DIRECTOR, CONSUMER FINANCIAL PROTECTION BUREAU 

Mr. SILBERMAN. Chairman Neugebauer, Ranking Members 

Waters and Clay, and members of the subcommittee, thank you for 

the opportunity to testify today. My name is David Silberman, and 

I serve as Associate Director of the Division of Research, Markets 

and Regulations at the Consumer Financial Protection Bureau. 

Last month, I also was named an acting Deputy Director. 

When the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, payday loans were a particular area of concern to many in Congress. Indeed, the Dodd-Frank Act gives the 

Bureau plenary authority to supervise any entity that offers payday loans, regardless of size. As a result, when the Bureau began 

supervising non-depository institutions in 2012, payday lending 

was the first industry that was brought into our supervisory program. 

At the same time, the Bureau decided to begin the process of 

fact-finding to assess whether there was a need for Federal regulations to prevent unfair, deceptive, or abusive acts or practices in 

this market, as those terms are defined within the Act. 

In January 2012, the Bureau held a field hearing in Birmingham, Alabama, in order to hear directly from stakeholders 

and the public about actual consumer experience with small dollar 

loans. During the year that followed, the Bureau engaged in an indepth study of the market, and based on that study, the Bureau 

issued a White Paper. 

That White Paper showed that making these short-term loans to 

low- and moderate-income consumers without assessing the consumer’s ability to repay puts many consumers at risk of turning 

short-term emergency loans into a long-term expensive debt trap. 

In 2014, the Bureau published a second report. In that report, we 

traced borrower sequences and found that only 35 percent of borrowers were able to repay the loan when due without quickly reborrowing, and that 15 percent of borrowers took out 10 or more 

loans in rapid succession. We found also that 50 percent of all 

loans went to consumers in these lengthy loan sequences. 

Looking at payday consumers who receive their incomes on a 

monthly basis, the report found that 1 out of 5 remained in debt 

for the entire 12 months of the Bureau’s study. The consumers who 

fall into this category include elderly Americans and persons reVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
9 

ceiving supplemental security income and Social Security disability. 

Finally, the Bureau found that over the course of a sequence of 

loans, 20 percent of consumers end up defaulting and finding themselves in the hands of debt collectors. The Bureau then held a government-to-government tribal consultation with tribal leaders interested in small dollar lending to hear their input as we were 

thinking about how best to proceed. And all this brings me to the 

outline of proposals that are currently under consideration. 

The Bureau released that outline in March of 2015, when it convened a small business review panel to gather input from small entity representatives. The goal of the proposals under consideration 

is to prevent consumers from being offered unaffordable loans 

while still preserving access to affordable credit. To do that, the 

proposals under consideration would require that before making a 

loan, lenders would be obligated to make a good-faith, reasonable 

determination that the consumer has the ability to repay the loan. 

That is to say, the lenders would have to reasonably determine 

that after repaying the loan, the consumer would have sufficient 

income left to pay major financial obligations such as rent or mortgage and also to cover their basic living expenses, such as food or 

transportation or childcare or medical care, without the need to reborrow in short order. 

As an alternative to the basic prevention requirement, the proposals under consideration also contain protection provisions. 

These provisions would allow lenders to extend certain short-term 

loans without considering the ability to repay, so long as the loan 

satisfies certain screening requirements and contain certain structural protections to prevent short-term loans from becoming longterm debt, turning into a collections nightmare for the consumer. 

Stakeholders on all sides of the issue have provided us with valuable feedback on the proposals under consideration. Consumer advocates have argued that the Bureau should not permit any lending which does not meet the basic ability-to-repay standard. Industry stakeholders argue that the protection alternative under consideration is too restrictive because these requirements would allow 

no more than three loans in a sequence or six loans in a year. State 

policymakers have urged the Bureau to both protect consumers 

across all small dollar lending markets and to seek feedback from 

the States on their regulation of small dollar lending products. 

After the Bureau released the proposals under consideration, we 

convened a second tribal consultation that was a frank discussion 

that allowed tribal leaders to share their views with the Bureau 

about the proposals. We continue to receive feedback from Congress, State, local and tribal officials, consumers, industry, and others. The Bureau’s next step will be to formally issue a proposed 

rule, a rule which will seek to balance access to affordable credit 

with protecting consumers from loans that are beyond their ability 

to repay. 

Once the proposal is issued, the public will have the opportunity 

to make written comments. The Bureau will carefully consider 

those comments before final regulations are issued. 

10 

Chairman Neugebauer, Ranking Members Waters and Clay, and 

members of the subcommittee, thank you for the opportunity to testify today. I look forward to your questions. 

[The prepared statement of Mr. Silberman can be found on page 

94 of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. Mr. Silberman, 

I want to ask you a question before I get started with our questions. Have you ever visited a small dollar credit store? 

Mr. SILBERMAN. Mr. Chairman, a number of members of my staff 

have done so. I personally have not. 

Chairman NEUGEBAUER. I didn’t ask about your staff. I said, 

have you ever personally visited a small dollar store? 

Mr. SILBERMAN. As I indicated, I have not. They have. 

Chairman NEUGEBAUER. Okay. I think that is a little disconcerting, because you are talking about a fairly major revamping 

of an industry that has been in place for a number of years and 

that millions of people are using on a daily basis to help manage 

the ups and downs of life. And for you to not go out and visit with 

people in the stores and visit the stores and understand better 

what is going on, doesn’t speak well. So I would encourage you to 

make that trip before you make any final decision. 

Last April, you told me, ‘‘We have not thought about a State that 

doesn’t have authority.’’ When moving forward this rule, have you 

done any more thinking about this issue? Specifically, which Tribe 

or State lacks the authority to regulate payday or small credit 

lending? Do you know of a State that does not have the authority 

to do that? 

Mr. SILBERMAN. Mr. Chairman, as I hope I said when I was last 

before you, our mandate from the Congress is to enforce Federal 

law and ensure that every citizen has the rights provided by Federal law. One of those rights— 

Chairman NEUGEBAUER. Do you know of any States or Tribes 

that aren’t enforcing the Federal law? 

Mr. SILBERMAN. The obligation to enforce the Federal law rests 

in the first instance on the Bureau. 

Chairman NEUGEBAUER. I know. But I am just saying that you 

would be enforcing them if nobody else was. Where is the gap in 

the—where is the hole in the system that you feel like that the 

CFPB has to fill? 

Mr. SILBERMAN. I think the gap is that the statute says that it 

is the obligation of the Bureau to issue rules to identify and prevent unfair, deceptive, and abusive acts and practices. Once we 

issue those rules, the States are free to enforce those rules, but it 

is in the first instance up to us to determine what rules are required to prevent such kind of unfair and abusive practices. 

That is why we have spent the last year studying this issue. 

That has led us to the determination that there is a problem that 

we need to address with respect to loans being made without regard to consumers’ ability to repay. 

Chairman NEUGEBAUER. I think a number of State attorneys 

general, including Mr. Zoeller, have said they think they are doing 

a pretty good job of regulating this space. They have been at it a 

lot longer than you have. Many of the States have had small credit 

or lending statutes on their books for a long time. They have had 

11 

an opportunity, as been mentioned here, to balance between making sure that people are protected, but also making sure that they 

have access to credit. 

Have you found a State that is not enforcing their laws? 

Mr. SILBERMAN. No, I think the States are enforcing their laws. 

And for the reasons you state, Mr. Chairman, what we are doing 

is establishing a Federal law floor, and the States will continue to 

be able to enforce their laws and their specific requirements in addition to the Federal floor that implements the obligation that has 

been placed upon the Bureau. 

Chairman NEUGEBAUER. Here is kind of the problem. It is really 

up to the Congress to determine if it is appropriate to preempt a 

State’s law; it is not up to the Bureau to do it. And to me, the fact 

that the Executive Branch has decided that they are going to preempt 50 States’ rights to govern an area of finance in their States 

isn’t up to the Bureau to do that. To me, that would be up to the 

Congress. 

One of the very things that people are very frustrated about 

right now, is they feel like that this Administration is trying to tell 

people how to run their lives. And I think when you are seeing this 

record turnout in some of these early primaries, both on the Democratic and Republican side, I think what you are seeing is an outrage at the direction of the country. 

So, Mr. Zoeller, what is your response to the fact that Mr. Silberman doesn’t think you are doing a good job? 

Mr. ZOELLER. I will leave it to the policymakers in our legislature 

to defend the weighing that they make. And I will defend their authority to do it. I guess there are a lot of things where States can’t 

do it ourselves. And we will look to Congress to service in those 

areas, and this is not one of them. 

The policy decisions and the weighing of these collective rights 

and the balancing for our protections, I do go to our legislatures 

and argue these same areas where consumers are not being treated 

fairly. But, again, a lot of it is not necessarily that the CFPB’s rule 

would, let’s say, be bad in Indiana. It is that we are much more 

flexible, so when there are things that we need to change, I can go 

upstairs to our legislature and they usually will recognize a problem in Indiana, and we can address it. 

There are so many things changing in this area that I think the 

snapshot that the CFPB is taking might be their best guess today, 

but the ability to come back and change things is much easier at 

the State level to protect our consumers and maintain access to 

credit. So we will keep our own authority, thank you. 

Chairman NEUGEBAUER. Last question. Yes or no? Are you enforcing the laws that your legislature had passed? 

Mr. ZOELLER. Yes, sir. 

Chairman NEUGEBAUER. Thank you. I now recognize the ranking 

member of the full Financial Services Committee, Ms. Waters, for 

5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. Before I ask 

this question, I would just like to give a little bit of the backdrop. 

I receive many calls in my district office about people who are 

in trouble, people who are oftentimes low-wage earners, some as 

desperate as has been described here, but the fact of the matter is, 

12 

they get hooked in the payday loan scenario. They start out by getting a loan. They can’t afford to pay it back on time, so it is rolled 

over. Then, it is rolled over again. And they are never able to get 

a hold on their finances, and they find themselves doing six, seven, 

eight of these loans a year on and on and on and on. So it is a 

problem. 

And for anybody who says it is not a problem, you are wrong. 

There is a problem that has been identified dealing with payday 

loans. I, of course, have not been in a payday loan and asked to 

go in their back room and see their criteria or anything like Mr. 

Neugebauer, but I have not been in JPMorgan Chase, I have not 

been in Bank of America, and I have not been in Wells Fargo, any 

of them. And I am sure if I did, they wouldn’t let me in their backroom, anyway. 

I just want to have it on record and to have us understand that 

the CFPB is not just venturing into something because they have 

nothing else to do. The fact of the matter is, it is a problem. There 

is a problem out there. And we are hearing about it from constituents. It seems to be spreading, you know, free money tree, get your 

money here, whatever those names are of these places are just 

springing up everywhere, particularly in poor communities. The 

poorer the community, the more of these street-level operations we 

have. 

While I normally do not believe in Federal preemption, I think 

we have a responsibility to step in when our constituents tell us 

they are hurting, that they think that they are not being treated 

fairly, that they think that they are being ripped off. We have a 

responsibility to do that. And we are seeing more of this kind of 

discussion from our constituents about the haves and the have-nots 

and the 1 percent. 

And they are hating government. They are hating corporations. 

They are hating the financial services community because even the 

middle class are not doing well. 

But I want to ask you, Attorney General Greg Zoeller, later today 

we are going to hear from financial services industry lobbyists on 

the second panel who will argue that the CFPB’s proposed payday 

lending rule will choke off access to needed credit for vulnerable 

consumers. These lobbyists made the exact same arguments when 

the Department of Defense was working on amendments to the 

Military Lending Act that sought to protect servicemembers from 

excessive interest rates and fees on short-term credit products. 

You wrote to the DOD asking them to strengthen, not weaken, 

their MLA rules in a latter with other State AGs from December 

2014. In essence, you rejected the industry’s arguments as crying 

wolf. Why don’t you think the industry is again getting it wrong 

when it comes to the CFPB’s rules? 

Mr. ZOELLER. I think that does help set this up, because we were 

working with Attorney General Beau Biden and a number of other 

people who were focused on the credit that is extended to military 

personnel who move throughout the State and throughout States. 

There may be more of a need for those consumers who aren’t always under the protection of a State the same way that others are. 

So we do think that there are certain consumers who aren’t residents, who may be transient. And I do think that the focus on the 

13 

vulnerability of military personnel is somewhat of, I would say, a 

unique group. 

But in the other areas that you are talking about, in California, 

if they have had a problem and the attorney general there has not 

addressed it or the legislature, they might call and ask for the 

State to focus on it. And, again, we were asking Congress to look 

at some of these things as it relates to a different kind of category. 

But the people in our State are protected. Some of the military men 

and women, I think were a unique case. 

Ms. WATERS. Let me just say this. We all know that it is politically powerful and safe to talk about protecting our military, because these are people who put their lives on the line for us, 

whether they are active or veterans or whatever. It is good politics 

to talk about helping veterans. 

But what is good for the goose is good for the gander. If you are 

willing to write letters to protect veterans from predatory lending 

practices, you ought to do that for everybody. 

I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the vice chairman of the subcommittee, Mr. Pearce 

from New Mexico, is recognized for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Mr. Zoeller, Ms. Treppa, I think you might be better qualified to 

answer. You heard Mr. Silberman’s testimony that 20 percent of 

the loans default. Do you find 20 percent default on your loans? 

Mr. ZOELLER. No. 

Mr. PEARCE. I was asking Ms. Treppa. Sorry. 

Ms. TREPPA. Thank you for that question. No, we have quite far 

less than that kind of a default rate. 

Mr. PEARCE. Okay. And, Mr. Zoeller, do you think that institutions across an industry would be able to stay in business if they 

had a default rate of 20 percent? 

Mr. ZOELLER. Not in Indiana. 

Mr. PEARCE. Yes. Mr. Silberman, I see in your testimony also 

that you declare that APR is 391 percent to 521 percent. What is 

a fair percent to where the CFPB wouldn’t declare it to be extortion 

or abusive? 

Mr. SILBERMAN. Thank you, Congressman. The CFPB has no authority to regulate interest rates. 

Mr. PEARCE. I didn’t say regulate. I said, when do you believe, 

as the CFPB, that it becomes abusive? Because you say you are 

after the abusive techniques. So when does a rate become abusive? 

Mr. SILBERMAN. The CFPB views the abusiveness not about the 

rate, but about the practice of making a loan— 

Mr. PEARCE. Why did you put the rate in your testimony if it 

does not apply to what you are trying to tell us today? Why did you 

put that in there? I find that offensive. Because you come in here 

and you try to mislead us on that, and then you tell me when I 

ask you that you have no opinion, that it is not your purview, that 

you don’t even have an opinion. What is your personal opinion 

about when it is too high? 

Mr. SILBERMAN. Congressman, I don’t believe it would be appropriate for me to offer you my personal opinion. 

Mr. PEARCE. You are the Deputy Director. 

14 

Mr. SILBERMAN. And so therefore, I am here to represent the Bureau. 

Mr. PEARCE. Why did you put it in your testimony then? 

Mr. SILBERMAN. Because we thought—that portion of the testimony was describing a report we issued. We are a data-driven— 

Mr. PEARCE. Why did you issue a report on something you have 

no interest in? You said it is not right for the agency to take a position on that, so why did you issue a report on it? It is obvious that 

you have an opinion about it as an agency. 

Mr. SILBERMAN. Congressman, we did not issue a report about 

that. We issued a report about the practice of making unaffordable 

loans. As part of that report, we thought it was important to describe the facts as we understood them so we could— 

Mr. PEARCE. Okay. 

Mr. SILBERMAN. And that was one of many, many facts, but not 

what the subject of the report was. 

Mr. PEARCE. But let me give you a contrast, sir. So let’s say 15 

percent is a higher rate of interest. You can go to a bank today and 

get a loan for 6 percent, 15 percent, you go in, you borrow $100 for 

a month, at a 15 percent rate of interest, which is $1.50 for the 

year, just roughly speaking. I know it would come out a little bit 

different. You divide that by 30 days, and you get 75 cents. 

Now, I am asking you, would you loan $100 for a month for 75 

cents rate of return? And that is what you, the agency, are doing 

by putting numbers like this in reports. And you are going to an 

industry where I have two letters today that come from constituents who this past week walked into places where one says, I had 

a medical emergency, I have a disabled daughter. I just needed 

help to make it to the end of the month. And you are going to shut 

down 70 percent of these people, you. You, Mr. Silberman, are 

going to shut down 70 percent of these people if you put this rule 

into place. 

Now, if the industry is so profitable, 391 percent to 521 percent 

are your numbers, if it is that profitable, how come all institutions 

are not flocking into it? Do you as an agency consider that? 

Mr. SILBERMAN. Congressman, actually that goes to the question 

you asked Ms. Treppa. 

Mr. PEARCE. No, it does not. I am asking you. So, Mr. Silberman, 

you used to work for Kessler Financial. 

Mr. SILBERMAN. I did indeed. Yes, sir. 

Mr. PEARCE. And Mr. Kessler is one of the richest men in America by far in the 1 percent, $300 million net worth. Did you ever 

suggest that maybe he ought to get into this lucrative market that 

is down here and is ripping people off? This industry leader of 

Kessler could get into here and we could clean it up by ourselves 

by competitive advantage that we are offering. Did you ever once 

as executive vice president of that operation suggest that to Mr. 

Kessler that he might increase his rate of return by taking out 

these bad actors that you are trying to take out as an agency? 

Mr. SILBERMAN. Mr. Kessler did not need my advice as to how 

to make more money. 

Chairman NEUGEBAUER. The time of the gentleman— 

Mr. PEARCE. But you, I would note, are avoiding the answer of 

whether you took a moral position at that company on whether or 

15 

not you all were supporting an industry that does far more to the 

poor. Thank you. I yield back. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, the ranking member of the subcommittee, Mr. Clay, for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. And this question is to Ms. 

Treppa. In March of 2015, Missouri Attorney General Rich Koster 

announced that eight online lenders acting through business entities operating from a Native American reservation in South Dakota 

could no longer operate in Missouri, finding that, ‘‘These predatory 

lending businesses operated in the shadows, taking advantage of 

Missourians through outrageous fees and unlawful garnishments.’’ 

Given that a majority of tribal lenders’ businesses occur off tribal 

land, could you elaborate on how you advertise and acquire customers like those in Missouri who were the subject of the AG’s enforcement action, and specifically what marketing channels do tribal leaders utilize? 

Ms. TREPPA. Certainly, Congressman. Thank you for the question. I can’t speak to the specifics of that issue. However, we originate loans on tribal lands. They are accessed via the Internet by 

customers. We acquire customers online through various ways: 

search engine optimization; lead generation; and paper click, all of 

the standard access opportunities. 

Mr. CLAY. Does your Tribe have its own tribal usury rate? And 

if so, what is your usury rate? 

Ms. TREPPA. We don’t have a usury rate, per se. The cost of the 

product is commensurate with the cost of customer acquisition, as 

well as the cost of underwriting and the cost to regulate. 

Mr. CLAY. What would be a normal rate of short-term loans? 

Ms. TREPPA. The rates for our installment loans—and they are 

not payday products—are dependent upon the customer’s cycle to 

repay, whether it is semi-monthly or biweekly. 

Mr. CLAY. So the longer it takes to repay, then the higher the 

interest rate? 

Ms. TREPPA. Congressman, the installment loans are up to 10 

months. However, the majority of our customers pay it off within 

4 months. 

Mr. CLAY. What percentages goes into default of those loans? Do 

you have any idea? 

Ms. TREPPA. Default rates are under 16 percent, typically. We 

have a high rate of satisfaction with our customers, 98 percent. 

And as I mentioned, default rates are relatively low. 

Mr. CLAY. Let me ask you, why do you think people come to companies like yours and others for these products, for the loans? 

Ms. TREPPA. Because they have an immediate need, and there is 

a lack of supply in the market. 

Mr. CLAY. So maybe a bank that they have a regular account 

with or a checking account would deny them outright and so they 

look for alternatives? Is that it? 

Ms. TREPPA. Congressman, typically banks don’t loan small dol- lar amounts. Our loans are $1,200 or less. 

Mr. CLAY. You fill a niche, then, correct? 

Ms. TREPPA. Sure. There is a need and we— 

Mr. CLAY. People need the money, apparently. 

16 

Ms. TREPPA. —provide a badly needed product to our consumers. 

Mr. CLAY. Would you not agree that State AGs like Attorney 

General Zoeller and my attorney general had the right to protect 

their own citizens from lenders in whatever way they see fit, including through State licensing requirements or State usury caps? 

Ms. TREPPA. As I had mentioned earlier, the consumers access 

our product via the Internet. And the loans are originated on tribal 

lands. We have a robust internal compliance department, as well 

as a regulatory commission that oversees and licenses all of our 

lenders that operate on our tribal lands. 

Mr. CLAY. Yes, but these are people from different States, too, 

correct? 

Ms. TREPPA. Correct. 

Mr. CLAY. Okay. I will wait for the next round. Thank you. I 

yield back. 

Chairman NEUGEBAUER. I thank the gentleman. Now, the gentleman from Missouri, Mr. Luetkemeyer, the chairman of our 

Housing and Insurance Subcommittee, is recognized for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Zoeller, I certainly appreciate your, ‘‘don’t call us, we will call 

you’’ attribute. I think that is what we all would hope that the people from the States would be having, because I think that is how 

we as a country should operate. We are not the country of America. 

We are the country of the United States of America, which means 

emphasis on ‘‘States.’’ We are all a group of States that are as one 

country. And therefore, the States have the ability to make these 

rules and regulations, and that needs to be allowed for you to continue. I certainly appreciate your testimony along those lines. To 

me, this is extremely important. 

Mr. Silberman, you made the comment a while ago that your job 

was to enforce the law. And then you turn around and make a rule 

and intend for that to be the law. It is very disconcerting to me to 

have that statement made and turn around and you by rule can 

change law and/or make law. That seems to be going on, on a regular basis in this Administration. 

Would you like to elaborate and give your position on it again? 

Mr. SILBERMAN. Thank you, Congressman. Yes. The job of our 

Bureau, like many administrative agencies, is to particularize, if 

you will, laws that are passed by Congress. Congress defined ‘‘prohibited, unfair, deceptive, and abusive practices.’’ 

We think we have an obligation—we could go in, you are right, 

and just start enforcing that rule and suing people without giving 

them any notice that here is what we understand that to mean. We 

think that would be bad practice, so what we have tried to do is 

to do careful research and study— 

Mr. LUETKEMEYER. Mr. Silberman, you are going through the 

rulemaking process here, but it certainly gives me pause—if you 

make this same rule the way you did others, you are not going to 

listen to what everybody says. I had a group of bankers one time 

come into my office and they told me that they had just left the 

CFPB. They were mad as the dickens. They said, you know what, 

we were told that we were the 42nd group that was talking to the 

CFPB over this issue of qualified mortgages. 

17 

And they were told, we appreciate you being here, but you don’t 

know anything about what you are talking about. Now, you have 

a lot of responses and going to get a lot of responses on this issue. 

I hope you consider all that very carefully, because those are the 

consumers that you are going to be hurting by what you are doing. 

Mr. Zoeller, quick question: You made the comment a little ago 

that you only had five complaints with regards to payday lending 

in your State? 

Mr. ZOELLER. That is correct. 

Mr. LUETKEMEYER. Is that correct? 

Mr. ZOELLER. That was 2015’s number. 

Mr. LUETKEMEYER. How many transactions did you have over 

the course of that year? Do you know offhand? 

Mr. ZOELLER. I am not part of the industry. I know it is a lot, 

though. 

Mr. LUETKEMEYER. Thousands and thousands, no doubt. 

Mr. ZOELLER. Yes, sure. 

Mr. LUETKEMEYER. I can tell you from being a financial Services 

chairman back in Missouri, my good friend, Mr. Clay, I followed 

him in the legislature, and we put the model legislation in place 

for payday lending. And one of the jobs as chairman of the committee was to see once how it worked. And we actually had fewer 

complaints on our payday lending folks than we did with the banks 

themselves. 

Mr. Silberman, by your own admission, the CFPB’s admission, 

and taking the statement from the chairman, 60 percent or 70 percent of the payday loan folks are going out of business, which is 

going to restrict the ability to have access to credit for lots and lots 

of folks. What is your solution? 

Mr. SILBERMAN. Thank you, Congressman. We have not said that 

60 percent or 70 percent of companies— 

Mr. LUETKEMEYER. Whoa, that is pretty well in print lots of 

places. Mr. Cordray has actually said that in this committee. In 

fact, I think in this committee, he made the statement of 80 percent. But we will take 60 percent or 70 percent, and give you the 

benefit of the doubt. 

Mr. SILBERMAN. If I can finish, Congressman, what we have said 

is not that. What we have said is that of the loans that are made 

today, 60 percent to 70 percent go to consumers who have received 

more than 6 loans in the course of a year, and that if nothing 

changed and if industry simply said what they are going to do is 

stop making loans after 6, that would mean 60 percent or 70 percent of the loans would stop. 

We have also been very clear to say that is not at all what we 

expect to happen, that we expect to see changes, and in that regard, I would indicate that what we have said is actually no different than what the industry had said long before we issued our 

proposals. 

Mr. LUETKEMEYER. I have one more quick question. I am about 

out of time here. I asked the question originally, what are you 

going to do about the alternative? What are people going to be able 

to do? I didn’t get an answer. 

In the President’s budget, he has a line item in there, in the community development financial institutions fund program account 

18 

for $10 million. The program will support broad-based access to 

safe and affordable financial products and provide an alternative to 

predatory lending by encouraging CDFIs to establish and maintain 

small dollar loan programs, $10 million. So the President is going 

to set up his own payday lending business? Is that what is going 

on? 

Mr. SILBERMAN. Well, Congressman— 

Mr. LUETKEMEYER. Mr. Silberman, I realize we have left you 

speechless here. But the bottom line of this is, we have the Administration that is going to get in the payday lending business, and 

they know they can’t make money at it, and they are going to subsidize it by $10 million. You know what? How about if we just go 

give them grants? Every time you need a set of new tires on your 

car, just go to the government to get a grant to get $500 to go get 

a new set of tires. Okay. How about if your kids need new braces? 

Go to the government and get a grant for $2,000. That is what you 

are talking about here. That is wrong. I yield back. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Hinojosa, 

for 5 minutes. 

Mr. HINOJOSA. Thank you, Chairman Neugebauer and Ranking 

Member Clay, for holding this hearing. I also want to thank our 

distinguished panelists for their appearance here today and for 

sharing their insights with us. 

Time and time again, we hear about hardworking families being 

exploited by predatory, small dollar, short-term lenders such as 

payday lenders. While these loans are meant to help unbanked and 

underbanked individuals in need of quick cash, far too many times 

the borrower ends up trapped in a vicious cycle of rollovers of fees 

and more debt. 

We sell our families short when we accept that high-interest 

loans are the best we can do for our communities. Payday and auto 

title loans with uncapped annual percentage rates have long enticed families in moments of desperation, offering short-term fast 

cash at the cost of long-term debt at rates averaging $500 annual 

percentage rates. 

Let me share with you that in Texas, an average $500 payday 

loan costs an astounding $1,100 or more to repay in a period of just 

a few months. In Texas, payday and auto title loan businesses have 

the second highest number of consumer complaints by their regulator. In addition, payday and auto title lending is a top reason 

why scores of families end up at the doors of social services agencies in my State. 

Let me go to the first question. Mr. Silberman, can you tell us 

about what the CFPB research has found regarding the payday 

and auto title lending industry? What are the consumers being 

harmed by in this industry? 

Mr. SILBERMAN. Thank you, Congressman. Our research which 

we have done over—as I indicated—a period of several years 

through several studies, field hearings and the like, confirms very 

much what you have indicated, that for a significant number of 

consumers, they enter into these loans and then find that they had 

a need, but when it comes due, they can’t afford to make the payment. 

19 

Some of them default and wind up in a collections experience, 

perhaps having their wages garnished. Some wind up in bankruptcy. But many wind up borrowing again, and then 2 weeks later 

the same thing happens and they borrow again and again. 

The analogy that I found quite helpful is, the CFSA on their 

website talks about—analogizes to taxis and says that taxis are 

useful as a ride—if you are going a short distance, a taxi is a good 

way to get there. But if you are going on a long trip, taxis can be 

very expensive. 

And what our research really shows is that if you open the door 

to the taxi without assessing whether consumers have the ability 

to repay, consumers think they are taking a short ride and wind 

up taking a very long, long journey at great cost. 

Mr. HINOJOSA. With response to that, listening to your answer, 

will the result from the Bureau’s rulemaking allow consumers to 

continue to be able to borrow short-term loans? 

Mr. SILBERMAN. Thank you. The result from the Bureau’s rulemaking—and I should emphasize that right now, we have not yet 

even proposed a rule. We have outlined proposals under consideration. But our goal would be that consumers would have the opportunity to get affordable loans. Whether they are short-term loans 

or not, that is harder to say. 

One of the problems is that for folks who need these loans but 

can’t actually repay them in the short-term, longer-term loans may 

be a better solution. But affordable loans are very much what we 

are trying to ensure will be available to consumers. 

Mr. HINOJOSA. Tell me about the 5 percent option included in the 

proposed rule. Will it be included in the final rule? 

Mr. SILBERMAN. Congressman, I can’t answer that question at 

this time. I can’t even answer the question of whether it will be in 

the proposed rule. We indicated that was one of the options we 

were considering as a streamlined way of enabling assessments of 

whether consumers have the ability to repay. But it would be premature for me to speculate what would be in the proposal or the 

final rule. 

Mr. HINOJOSA. Thank you. Ms. Treppa, you note that your Tribe 

and others have developed lending businesses that have constructed strong regulatory frameworks. How often has your Tribe 

brought enforcement actions for unfair, deceptive, or fraudulent 

practices in connection with the transactions that do not occur on 

trust land? 

Ms. TREPPA. Congressman, first, all of the transactions occur on 

trust land. 

Mr. HINOJOSA. Okay. 

Ms. TREPPA. Currently, we have a very robust internal compliance regime that ensures that consumers are protected and it is— 

to date, there have been no enforcement actions against the tribal 

lenders that we have licensed. 

Mr. HINOJOSA. My time has run out. I yield back. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

And the Chair now recognizes the gentleman from Colorado, Mr. 

Tipton, for 5 minutes. 

20 

Mr. TIPTON. Thank you, Mr. Chairman. And I would like to ask 

unanimous consent to submit a letter from our AG, Cynthia Coffman, for the record. 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

Mr. TIPTON. Thank you. Mr. Silberman, I would like to be able 

to follow up, frankly, on the chairman’s question. When we were 

talking about what gap is to be filled, what need do we have to 

have your rules issued, I am not sure I heard an answer. What is 

the gap? 

Mr. SILBERMAN. Thank you, Congressman. The gap is that—as 

I indicated, our research indicates that loans that are made without assessing a consumer’s ability to repay wind up creating a 

great deal of harm for consumers. And we believe there is a need 

at this point for a Federal regulation which establishes that it is 

an unfair or abusive practice to make a loan of this type without 

regard to the consumer’s ability to repay. 

Mr. TIPTON. So you want to have fairness, but you aren’t able to 

specifically point to anything; it is basically just to be able to write 

rules as filling the gap? 

Mr. SILBERMAN. No, I think quite to the contrary we have pointed to a great deal of evidence in two reports and other studies to 

identify the harm that we are seeing, and so we think there is a 

need to establish a principle that— 

Mr. TIPTON. Let’s look at some of the solutions. You have held 

roundtables, forums with States, I think you had indicated, seeking 

it out. You are familiar with what has happened in Colorado? 

Mr. SILBERMAN. Yes, sir. 

Mr. TIPTON. They have done a good job. 

Mr. SILBERMAN. Colorado has made a set of choices. 

Mr. TIPTON. Is it good? 

Mr. SILBERMAN. It is not appropriate— 

Mr. TIPTON. Have they fulfilled those requirements you are talking about? 

Mr. SILBERMAN. It would be quite inappropriate for us as a Federal agency to judge what States are good or bad. 

Mr. TIPTON. Well, aren’t you judging if you are going to start 

writing rules to preempt them? 

Mr. SILBERMAN. We will—Congressman, the rules that we are 

considering proposing would not preempt what Colorado has done, 

or what any other State has done. It would add an additional requirement that—the requirement that the assessment be made of 

the consumer’s ability to repay. So that Colorado has said, for example, that the minimum— 

Mr. TIPTON. Effectively, we need the Federal Government to step 

in because Mr. Zoeller and Ms. Treppa don’t care about the people 

who live in their States. Is that what you are telling us? 

Mr. SILBERMAN. I am saying, Congressman, that we have an obligation to enforce Federal law. The Federal law provides consumers, 

all consumers in every State, with protections against unfair and 

abusive practices. And that is our role, to try and provide that protection which would sit as a floor on which States could add their 

own rules, like the rules that Colorado has added. 

Mr. TIPTON. Like the rules that Colorado has added. Now I 

would like to be able to cite our attorney general, Cynthia Coffman, 

21 

in regards to the rules that you want to be able to put forward. She 

states in her letter to you, ‘‘Colorado’s extensive experience with 

these types of measures tells us that such proposals—your proposals—will not work in the real world, if the intent is to preserve 

access to credit.’’ 

That is feedback from the States. That is what they are telling 

you. You are overreaching. You are overregulating. You are overpromising. But the States are the ones that are actually performing. 

Mr. Zoeller, I would like to be able to go and visit with you just 

a little bit in terms of what you are seeing out of the State of Indiana. In your own experience, do you think that the CFPB, their 

proposal requires significant changes and that they are going to 

have a chance of really succeeding for the State of Indiana? 

Mr. ZOELLER. Quite frankly, we do have a focus on consumer’s 

ability to pay. And we have kind of a monthly income as the basis 

of that. So we may not be as, let’s say, may not have as much impact. 

We do a lot better job than other States, so I defend our State 

every day. I will say we have stronger consumer laws and some of 

the space might be better regulated in Indiana, but we are still 

willing to look and see if we can do it better and— 

Mr. TIPTON. Since you are here—I would love to have our attorney general here—tell me, has the CFPB reached out and asked for 

your advice? 

Mr. ZOELLER. We have submitted letters. And they did have a 

field hearing in Indianapolis on auto loans. But I would say not 

enough. We really wanted to have much more of a dialogue on 

what areas in which we are lacking. And I think the chairman’s 

point and other points about where is the gap in coverage is what 

is missing. 

And, again, if there are gaps where we don’t have authority, we 

may need some help, but quite frankly, in Indiana we don’t. 

Mr. TIPTON. They haven’t really had a dialogue with you, as they 

have indicated that they said they did. I would be interested to 

know, have they used your personal expertise or data concerning 

small dollar loans in their proposals? 

Mr. ZOELLER. I can’t say whether they modeled theirs after mine. 

Our legislature did have similar hearings, though, and talked 

about these same areas, and came up with a focus on consumer’s 

ability to pay. But, again, that was our choice, the legislatures that 

are elected to make those policies. I will always just defend their 

decisions. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

The Chair now recognizes the gentlewoman from New York, Mrs. 

Maloney, for 5 minutes. 

Mrs. MALONEY. I thank the gentleman for yielding. I would like 

to thank all of the panelists for their testimony. 

Before I ask my questions, I would like to yield as much time as 

Mr. Silberman would like in order to finish some of the questions. 

Regrettably, we are under a 5-minutes rule, and I have noticed 

that many times you have been cut off because the time is just not 

sufficient. 

22 

I do understand you have quite considerable experience and research in this area, and if there were some points that you were 

cut off and you could not make, or some statements you would like 

to make about your research, I would like to yield you as much 

time as you would like to consume of my 5 minutes. 

Mr. SILBERMAN. Well, thank you very much, Congresswoman. 

I really think there are three or four points I just wanted to 

make sure I have made as clearly as I can. The first is that the 

Bureau has been engaged in a very thoughtful, extensive, datadriven research effort with respect to this product. We have held 

three field hearings. We have done two research reports. We have 

had extensive outreach. We have read—I think it is safe to say— 

the entire academic literature that exists. We have met with scholars in order to come to the place that we are. 

Second, as I hope I have made clear, what all that has told us 

is that if you make a loan like this without assessing a consumer’s 

ability to repay, consumers are put in harm’s way, and many consumers wind up in dire situations. 

As a result, what we think is needed is a very simple principle, 

which is really a principle that is pretty well settled and standard 

practice in most lending industries, that before you make a loan, 

you should assess whether the consumer has the ability to repay 

that loan. That is standard practice. 

And I would like to just point out that a couple of years ago, 21⁄2

years ago, I had the privilege of testifying on the Senate side, and 

with me that day was Dennis Shaul, the CEO of the CFSA, the 

trade association for the payday lending industry. And Mr. Shaul 

said at that time something with which I profoundly agree. He said 

that based on his conversations, his members recognize that payday loans as we know them are not likely to survive another 5 

years. And that is a quote. And he also said that, ‘‘what we need 

to do is a different and better form of underwriting so we can catch 

people much earlier who might end up in a cycle of indebtedness.’’ 

That is a quote. And that is really the heart of what we are trying to do here. And the final point I would make, Congresswoman, 

is that we are still in an early stage of this process, not the early 

stage for research, but the early stage of the rulemaking process. 

We have put a proposal—an outline of proposals out for consideration. We spent the last 10 or 11 months listening to feedback. We 

will put forward a proposal, and that will start another round of 

communication, and we will take all that into account in finalizing 

whatever rule we finalize. 

Mrs. MALONEY. Thank you. I quite frankly found the research 

from the Bureau absolutely staggering. One out of every five consumers who takes out a short-term payday loan ends up being in 

debt for an entire year. I would hardly call that a short-term loan. 

But the most interesting finding to me was that only 35 percent 

of payday borrowers were able to repay the loan when it was due 

without reborrowing. And I want to ask, is that roughly the percentage of payday borrowers who would be able to borrow under 

the Bureau’s proposed ability-to-repay standard? And has the Bureau to your knowledge done any analysis of what percentage of 

current payday loans would likely be prohibited under the abilityto-repay standard? 

23 

Mr. SILBERMAN. Congresswoman, I think that is somewhat difficult to do, because the lenders today are not getting the information, because they are making loans without regard to ability to 

repay. It is hard for anyone to know what they would decide if they 

actually asked that question. 

So the fact that 30 percent of the people are able to repay, certainly that would suggest that those people are able to pay. There 

are also alternatives, such as the kinds of products that Chair 

Treppa was talking about, which have a longer term, which would 

allow more people to be able to repay. 

Mrs. MALONEY. Your research basically focused on what you 

called debt traps, which are currently the most abusive practices. 

But it does not really focus on other practices that might be termed 

abusive that may not rise to the level of a debt trap. 

What is your response to the argument that some people have 

made that you put too much emphasis on focus on the debt trap 

as opposed to other traps that are out there that might be causing 

problems to consumers? 

And I for one feel that to catch someone in a neverending circle 

of debt is one of the most painful things I have ever seen in a person’s life. And anything we can do to help them avoid that, I feel 

is important to quality of life and really economic strength of people in our communities. 

Chairman NEUGEBAUER. The time of the gentlewoman has expired. The Chair now recognizes the gentlewoman from Utah, Mrs. 

Love, for 5 minutes. 

Mrs. LOVE. Thank you. I just have a few questions. Mr. Silberman, to what extent did the Bureau analyze the regulation of 

short-term credit products in the States before designing its own 

plan or rules to regulate these small dollar products at a Federal 

level? 

Mr. SILBERMAN. Congresswoman, we have reviewed, I think, the 

laws of all of the States and understand what those States provide. 

As I have indicated, our obligation, of course, is to assess what is 

required to implement Federal law, but we certainly are aware of 

what the State laws provide. 

Mrs. LOVE. Okay. So what was it about your analysis of State 

law that made the Bureau think that State legislators and regulators like those in my home State of Utah were doing a bad job 

of protecting Utah residents? 

Mr. SILBERMAN. What our analysis has told us is that there is 

a problem, that there are a large number of consumers who are 

getting loans that they cannot afford to repay, and that is leading 

to harm, and that there is a need—it is appropriate and indeed 

necessary to implement Federal law which we are obligated to enforce to make clear that— 

Mrs. LOVE. So you did actually look at Utah State laws also and 

you found problems in our State, also? 

Mr. SILBERMAN. We have found a problem in the market. We are 

trying to address the problem in the market by implementing the 

Federal law that prohibits unfair and abusive and deceptive acts 

and practices. 

Mrs. LOVE. Okay. So it is my understanding that the CFPB’s 

rulemaking would eliminate some of the commonsense Utah laws 

24 

and that the Federal law would likely eliminate these important 

short-term credit options for my constituents. Is that— 

Mr. SILBERMAN. The rule that is under consideration—and, 

again, this is just an outline of proposals, not a proposed rule— 

would not eliminate any State law, including a law of Utah. We 

also do not believe it would drive lenders out of business. It would 

create a level playing field in which affordable loans could be made. 

Mrs. LOVE. Okay. I believe that you are only telling—and I think 

that everyone else here can sense it—part of the story. You are telling one side of the story and you are not telling the other side of 

the story. 

For instance, a young, hardworking, single mom comes home 

from work—and this is a true story—late at night to find out that 

her babysitter ran out of formula for her daughter 3 hours ago. She 

uses her last resort option, goes to her payday loan place, goes to 

the store, and buys formula for her daughter. What would you suggest that she do? Knock on everybody’s door? What would you suggest that she do? Because there are other actors that have used 

this as a last resort and it has worked for them. 

And I’m sorry, but I find it offensive that you would say that people aren’t smart enough to make decisions for themselves. And so 

you have to go into States, you have to go into cities, you have to 

go into all of these other places to say, trust Washington. We know 

what is best for you. Trust Washington to make the decisions for 

you. We know what is best. Don’t worry. Your States aren’t doing 

a great job. They don’t understand what your needs are. We understand more than anybody else. Have you ever been to Saratoga 

Springs? Do you know where that is, in Utah? 

Mr. SILBERMAN. Oh, no, I’m sorry. I have been to Saratoga 

Springs in New York, but not in Utah. 

Mrs. LOVE. Okay, in New York. Well, have you ever been to 

Utah? 

Mr. SILBERMAN. Yes. 

Mrs. LOVE. Yes? Skiing? 

Mr. SILBERMAN. No, ma’am. 

Mrs. LOVE. No, just visiting? Do you know the people in my districts? Do you know the people who actually use it who have said, 

thank goodness it was there as a last resort? 

Mr. SILBERMAN. We have had the opportunity during the course 

of our work to hear from many consumers who use these products. 

Mrs. LOVE. Have you heard—okay, let me ask you this question. 

How many people have you heard from who actually have used 

these products and said they have worked for us, it has gotten us 

out of a terrible situation, thank goodness it was there? 

Mr. SILBERMAN. I’m sorry. I don’t know the number offhand. 

Mrs. LOVE. You have met with some, right? But I have yet to 

hear you talk about their stories. 

Mr. SILBERMAN. Congresswoman, I think we did indicate from 

our research which was confirmed by our experiences that there 

are 30 percent of the people for whom this product works exactly 

as it was intended, and it enables them to bridge emergency and 

to get to—and they have the ability to repay. 

It is the other two-thirds who don’t have the ability to repay for 

whom we want to create a market in which there are options for 

25 

them so they don’t have to take out the loan and then 2 weeks 

later find they have to take out another loan because they don’t 

have the money to repay the first loan. 

Mrs. LOVE. Okay, so I am going to—I am running out of time. 

But this is a fair question to ask. And maybe you could just keep 

it in the back of your head. But is the CFPB doing anything to 

make sure that consumers of these small dollar credit products 

have the option at credit unions or community banks to be able to 

have some of these options, also? Or is it just rulemaking? 

Mr. SILBERMAN. Mr. Chairman, may I answer the question? I see 

that time is up. 

Chairman NEUGEBAUER. Yes, the time of the gentlewoman is— 

Mrs. LOVE. Yes or no? I just need a yes or no. 

Mr. SILBERMAN. Yes. 

Mrs. LOVE. Yes? Okay. 

Chairman NEUGEBAUER. Okay, thank you. The Chair now recognizes the gentleman from Washington, Mr. Heck, for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. I would like to direct a 

couple of questions as time allows to Deputy Director Silberman. 

I noted that last week your boss gave an interview in The Wall 

Street Journal in which he indicated that he would encourage credits and credit unions to make short-term loans. I know that NCUA 

has some longstanding experience actually setting rules for encouraging payday advance loans and on the banking side, FDIC and 

OCC, another product, deposit advance product. 

What I am actually interested in is understanding a little bit 

about your conversations at the Bureau with other regulators, what 

you think of their rules, and what changes, if any, you contemplate 

to how it is they have structured their approach and yours? 

Mr. SILBERMAN. Thank you, Congressman. And you are absolutely right that the National Credit Union Administration (NCUA) 

has adopted provisions for what they call a payday alternative loan 

to enable credit unions to make a loan that they think works. The 

evidence is that a significant number of credit unions are taking 

advantage of that. In the outlines of the proposals under consideration, we indicated that we would allow that to continue as essentially an exception to the general rule. 

Mr. HECK. So you would not preempt their approach? 

Mr. SILBERMAN. Correct. We have—as you indicated, Director 

Cordray—we believe that there is an opportunity here for community banks and credit unions who know their customers, don’t have 

the same kinds of expenses that others might have to provide safe, 

affordable products to their customers and that we are encouraging 

them— 

Mr. HECK. Excuse me, Deputy Director. I apologize for interrupting. But I want to get to the banking side of that question, too, 

because I think the experience has been a little bit different or the 

perception in the industry has been a little different than it is on 

the credit union side. Could you answer the question for them, as 

well? Or did you mean for it to cover both NCUA and the other regulators? 

Mr. SILBERMAN. The proposals that we indicated we are considering would allow any institution, a depository or non-depository, 

26 

a credit union or a bank, to take advantage, to make payday alternative loans within the parameters of their regulation. 

Mr. HECK. And your proposed rule will be explicit in that regard? 

Mr. SILBERMAN. I don’t want to speculate on what our proposed 

rule will do. I can say that is what the outline of proposals under 

consideration says. 

Mr. HECK. Secondly, probably lastly, it is my belief that we have 

a lot of legal products out there that are well used by the vast majority of the population in some instances. But on occasion, there 

can be a small slice or a slice—I don’t want to get into splitting 

hairs here—whom for whatever circumstances have not used that 

product well, whether it is their fault or anybody else’s fault. 

But we have this approach to regulation. You can have a casino, 

but we have 1-800-BETS-OFF. You can have a bar, but you can’t 

serve somebody if they are clearly inebriated. In some States—Colorado, Washington—you can have a marijuana dispensary, but we 

have a lot of restrictions on how you can engage in that industry. 

And I don’t know if this is a fair analogy. I am interested in your 

response. Are short-term small dollar loans a fair analogy where 

you have some percent of the population for whom that becomes a 

problematic usage? And if so, what have we learned from those 

other industries where we have mechanisms for intervening and 

helping and the like? 

Mr. SILBERMAN. Congressman, the distinction I would draw is 

that the first question we want to ask is whether that product is 

safe for its intended use. What our research indicates here is that 

we have a product that is really not safe for its intended use. It 

is not simply a handful of people abusing the product, and that we 

have to deal with that as that kind of problem. It is really we have 

a product that when this product is made without assessing ability 

to repay, it is not safe for its intended use. And that raises a very 

different kind of problem for lawmakers and regulators. 

Mr. HECK. Very good. Thank you very much, sir. I yield back the 

balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman. And now, the 

Chair recognizes the small businessman from Texas, Mr. Williams, 

for 5 minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

Mr. Silberman, in full disclosure, you need to know that I am a 

car dealer. So you know how I feel about you and your agency, 

okay? 

Mr. SILBERMAN. I remember from the last time I was here, Congressman. 

Mr. WILLIAMS. Let’s move on, all right? First of all, you keep saying that you have done careful work, but if I heard you correctly 

when you talked to the chairman earlier, you have never visited a 

store. Now, how can you claim to understand the market or a business if you have never visited it before? 

Mr. SILBERMAN. Congressman— 

Mr. WILLIAMS. Make it short, because I have other questions. 

Mr. SILBERMAN. I have met with many store operators. My staff 

has visited many, many stores. We as a Bureau had a consumer 

advisory board meeting last summer where the entire consumer advisory board, including the Director— 

27 

Mr. WILLIAMS. You went on a field trip. 

Mr. SILBERMAN. —went to visit a store. 

Mr. WILLIAMS. I did that in the sixth grade. Now, I get it. Okay. 

The other thing is, you talked about how scholars have helped you 

make these decisions. What the heck is a scholar on payday lending? Who is that person? 

Mr. SILBERMAN. There are— 

Mr. WILLIAMS. Someone like you who has never been there? 

Mr. SILBERMAN. There are many economists who have studied 

this industry, some funded by industry to do research, some funded 

by consumer advocates to do research, some independent. We have 

read all of their research. 

Mr. WILLIAMS. I got it. Okay. Let me move on. Section 1022 of 

the Dodd-Frank Act under standards for rulemaking reads, ‘‘The 

Bureau shall consider the potential benefits and costs to consumers 

and covered persons, including the potential reduction of access by 

consumers to consumer financial products or services resulting 

from such a rule.’’ And, in fact, Mr. Silberman, the Bureau has explicit authority under 1022 to exempt any class of covered persons, 

service providers or consumer financial products or services from 

the requirements if statutes are implementing regulations that you 

are implementing, okay? 

In fact, I must tell you, I am proud that, along with those two, 

I have offered legislation last year that would have helped 

strengthen that exemption. So my question is straightforward. Do 

you believe the CFPB has used Section 1022 exemption adequately? 

Mr. SILBERMAN. Yes, sir. 

Mr. WILLIAMS. Okay. Has the CFPB taken into account the impact of all these new regulations have on financial institutions like 

community banks, credit unions, and auto dealers? 

Mr. SILBERMAN. Yes, sir. 

Mr. WILLIAMS. Okay. What about studies that show how these 

rules like the upcoming payday rule, how they affect the service 

these institutions are able to give their customers? Have you looked 

at those studies and seen that customers—the very people you are 

trying to save—you are hurting them? Do you understand that? 

Mr. SILBERMAN. Congressman, we have carefully evaluated the 

practices in the industry, the effects on consumers, what happens 

to consumers when you make loans without assessing whether they 

are affordable, without assessing their ability to repay, and done 

our best to project the consequences of the proposals that we are 

considering. We continue to receive feedback and think about that 

and refine our thinking based on what we are learning. 

Mr. WILLIAMS. Okay, question to you. Do you—you and the Bureau—know better than the individual people making the loans? 

Are you just smarter than they are? 

Mr. SILBERMAN. Congressman, we believe that the people making 

the loans have the capacity and should exercise the capacity to assess whether the consumers have the ability to repay those loans. 

Mr. WILLIAMS. Okay, but are you just smarter than they are? 

Mr. SILBERMAN. No, not—as I say, we are trying to— 

Mr. WILLIAMS. You are advising them? 

28 

Mr. SILBERMAN. We are—actually, I would say—obligating them 

to—before making a loan to assess whether the consumer has the 

ability to repay. We have complete confidence that is something 

that can be done efficiently, effectively, and will produce a better 

world for consumers. 

Mr. WILLIAMS. You will help make a better deal for them? 

Mr. SILBERMAN. We are not, as I have indicated, trying to affect 

the price of the product. 

Mr. WILLIAMS. Let me just say this to you. I am a business guy. 

And let me tell you, government—I am telling you, government 

doesn’t create a good deal like you think you are helping your customer. It just doesn’t happen. Do you know what makes a good 

deal? It is competition. It is reputation. It is the private sector that 

makes the deal. 

And the strength of the economy and the ability to realize that 

we all talk about the American Dream—it is not delivered by you, 

okay? It is delivered by the people that you actually are hurting. 

You know, I would tell them, trust the people. Trust yourself. Don’t 

trust the Bureau. Don’t trust the government. You see? 

All I am saying to you is, I can tell you, because I am living this 

dream 24/7 in my industry, it would be great if you would back off 

a little bit and realize that consumers actually know better and the 

private sector can create the competition, create the reputation 

that will fix these problems without you all even being involved. 

I yield back, Mr. Chairman. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. And now the 

Chair recognizes the gentleman from Georgia, Mr. Scott, for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Silberman, I am having a bit of trouble understanding why 

you are trying to destroy small dollar loans. They are much needed. 

We have 75 percent of the American people who live paycheck-topaycheck. Americans have emergencies. They have a need for being 

able to acquire money to fix those emergencies. We have 62 million 

unbanked and underbanked Americans who do not use the traditional banking system. 

These small loans are highly transparent. They require heavy 

disclosures and compliance with Federal law. They have all received positive feedback from our borrowers. They are monitored by 

the bank first to determine whether they have sufficient regular 

cash flow to repay the loan. They have built-in controls to limit the 

use of the loan. They even have a cooling off period so that customers and consumers do not become overly reliant. 

The banks provide clear disclosure of the products. They limit 

the size of the loan to ensure that the consumer can repay that 

loan and that they don’t get into a cycle of debt. They provide consumers with access to short-term credit, all positive things that are 

controlled. 

Yet, you and the OCC and the FDIC appear to be trying to kill 

these loans, leaving the consumers with less choice and more expensive options, because without access to these short-term, small 

dollar loans, it creates a number of consumers who will be pushed 

out from access. 

29 

I have to ask you, with all of this, why? Why are you and other 

regulators, trying to make it even harder for consumers to make 

ends meet, to deal with some of these emergencies, by effectively 

regulating out of business those small dollar loans? Why are you 

doing that to the American people? 

Mr. SILBERMAN. Thank you, Congressman. We are not doing 

that. What we are trying to do is to make sure that the loans that 

consumers get are affordable loans, that this is a loan that somebody can repay and still meet their other obligations, continue to 

put food on the table, continue to pay their medical expenses, and 

not having to continue to borrow and reborrow and reborrow, because that is what our research tells us is happening today, that 

a large percentage of consumers who take out these loans—and it 

is not surprising, if you need this loan, that 2 weeks later, you are 

not going to be able to repay and walk away. 

We are trying to ensure that consumers can get loans that they 

can afford to repay, and not wind up either in the hands of debt 

collectors or in the spiral of continuing indebtedness. 

Mr. SCOTT. Why are you making the rules or regulations so complex, so complicated? See, the whole point is that, why not make 

it more convenient? Why are we getting all of this push-back that 

you are trying to deny Americans from these small loans and that 

you are doing it by very skillfully putting forward very complex, 

hard-to-understand, complicated understandings of the rules? 

My whole point, Mr. Silberman, is that we as a government oftentimes tend to overextend our efforts in regulation and we wind 

up hurting the very people who need the help the most. Can you 

see some room here where you may need to—with all of these complaints, with all of these concerns that we are raising here—that 

maybe, Mr. Silberman, the CFPB stands back, takes a look, and 

says, well, no, like you told me, you are not wanting to kill them 

and put it out of business and stop the American people from doing 

it, but unfortunately this is the results that is happening. And too 

many people feel like this, that maybe we can move to address this 

issue. 

Are you willing to do that? 

Mr. SILBERMAN. Mr. Chairman, may I briefly respond? 

Chairman NEUGEBAUER. Briefly. 

Mr. SILBERMAN. We have spent the last 11 months since we put 

our outlines, our proposals under consideration listening to precisely those concerns, and we are continuing to think about how to 

best balance achieving our objectives in a way that is cost-effective 

and that achieves the maximum good. 

Mr. SCOTT. Thank you, sir. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Hampshire, 

Mr. Guinta, for 5 minutes. 

Mr. GUINTA. Thank you, Chairman Neugebauer, and I also want 

to thank the panel for being here today. 

I would like to ask a few questions on the impending rulemaking 

for payday vehicle title and similar loans. I am concerned because 

as outlined by the Bureau in March of just last year, 2015, there 

was an acknowledgement that this rulemaking would reduce revenue by up to 70 percent of these short-term, small dollar, commuVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
30 

nity-based credit providers, and potentially even put them out of 

business. 

As we know from the FDIC, 51 million people in our country are 

either underbanked or have no banking options at all. That is 

roughly 7 percent of American households who rely on a shortterm, small dollar, community-based product to meet their day-today, week-to-week, and month-to-month needs. 

My question I guess is, how would a hardworking American family manage their money if they don’t belong to an institution, if 

they don’t have access to a credit union or community-based bank 

or larger institution? They rely on products that short-term lenders 

offer. So that can essentially help them meet their weekly or daily 

or monthly obligations and hopefully get them in a place where 

they have greater self-sufficiency. 

Pew Charitable Trust recognizes in its research that these products—on these products, most borrowers that leverage these shortterm credit products do so because they have no alternative. And 

that is I think the crux of the issue here. There is no alternative 

for them. 

As I understand it, this rulemaking would restrict millions of 

Americans’ access to the credit on which they rely. I want to ask 

Mr. Silberman, you started out your testimony and you said the 

Dodd-Frank Act gives the CFPB plenary authority—you used the 

term ‘‘plenary authority.’’ Plenary means absolute, complete, unlimited authority. 

So my question to you is, in Dodd-Frank Title 10, Section 1011, 

it states that the Bureau exists to ensure that all consumers have 

access to credit and financial products. I would like to follow up on 

Mr. Pearce’s line of questioning. Can you explain to me on what 

basis is the CFPB justified and empowered to take steps that are 

clearly designed to eliminate the access to credit that we are talking about? 

Mr. SILBERMAN. Thank you for your question, Congressman. Section 1011 of Dodd-Frank, to which you referred, says that the Bureau’s goals are to ensure that consumers have access to financial 

products and services and that the markets for those services are 

fair, transparent, and competitive. That is a goal of the Bureau to 

ensure that these markets are fair. Section 1031 states that we 

have the authority to identify and prevent unfair, deceptive, and 

abusive acts and practices. 

We are considering exercising that authority based on the research that we have done as provided for in Section 1022, which 

has identified a market failure, if you will, a problem in which consumers are getting loans that they cannot afford to repay. 

Mr. GUINTA. Okay, so how does that line up with Title 10, Section 1027, which—and I have it here—says no authority to impose 

usury limit. And I will read it very quickly: ‘‘No provision of this 

title shall be construed as conferring authority on the Bureau to establish a usury limit applicable to any extension of credit offered 

or made by a covered person to a consumer.’’ 

That would suggest that you can’t set an APR limit, yet that is 

exactly what this rule establishes. But right here, it says you can’t 

do it. 

31 

Mr. SILBERMAN. Congressman, with all due respect, the outline 

under consideration does not establish a limit. We agree completely 

that we cannot do so. We have not proposed doing so. We have not 

contemplated doing so. We will not do so. 

Mr. GUINTA. Repeat that. You will not do what? 

Mr. SILBERMAN. We will not establish a usury cap, an interest 

rate limit for these or any other lending products. 

Mr. GUINTA. You are not looking to establish a 36 percent APR? 

Mr. SILBERMAN. No, sir. 

Mr. GUINTA. And you are saying that the CFPB will not under 

any circumstances move to establish that? 

Mr. SILBERMAN. Correct. 

Mr. GUINTA. Okay. So despite that, I appreciate that, and I hope 

that you will hear that, because the concern here is that very issue, 

that the rule exactly does that. And let’s assume for the sake of the 

argument that does happen. Where do people who are underbanked 

or are not banked at all, what is their alternative for banking and 

financial stability? 

Mr. SILBERMAN. Mr. Chairman, may I answer? I see— 

Chairman NEUGEBAUER. Briefly. 

Mr. SILBERMAN. Congressman, the products we are talking about 

are actually only available to people who are banked. And the goal 

of this rule is to ensure that there are affordable products available 

to them, rather than products— 

Mr. GUINTA. All right, I appreciate that. But 51 million people 

are utilizing this who are underbanked or have no banking ability 

whatsoever. And I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman. And the Chair 

now recognizes the gentleman from Texas, Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking 

member and the witnesses for appearing today. 

I find it quite interesting to say the very least that when we enacted laws in 2007 with reference to our military, the payday lenders were concerned. The argument was that you can’t cap interest 

rates at 36 percent. People can think for themselves. They ought 

to be able to borrow money at whatever rate we would like to 

charge. 

But Congress decided otherwise. We capped the interest rate for 

loans to military personnel and their families—2007—people said, 

payday lenders, we are going to go out of business. You are going 

to run out of business. If you do this, we won’t be able to make 

loans, and we will go out of business. Congress thought otherwise, 

apparently. We passed the law that limits what payday lenders can 

do. 

As a matter of fact, there were people who were saying that you 

can’t pass laws that prohibit us from using the car title as some 

sort of collateral. People can do whatever they want with their 

property. It is their car. It is their title. Let them do what they 

may. Why would you do this, Congress? You can’t do it. 

Congress thought otherwise. Congress did it. You can’t do to a 

serviceperson what you can do to that mom whose child needs 

milk. You can’t do it, Mr. Attorney General, and you know it. Am 

32 

I correct? Could you speak a little louder, please? This has to be 

on the record. 

Mr. ZOELLER. That is right. For military personnel. 

Mr. GREEN. Yes, for military personnel. You can’t do it. Military 

personnel, they are good people. I support them. I fight for them. 

I don’t think we ought to send them into war and spend billions 

of dollars and then when they come back home we have to find 

money to make sure that they get good health care or find money 

to make sure that they get proper housing. I think that if we can 

spend billions to put them into war, trillions literally, we can spend 

that on when they come back. 

But I have friends who want to find other places to cut so that 

we can help them when they come home. I support the military. 

But I also support people who live in the streets of life who find 

themselves in need of money and find themselves being taken advantage of. If they are not loan sharks, they are putting a lot of 

loan sharks out of business, payday lenders. 

You are in here. I know you are. I know you are listening. Someone talked about the moral hazard associated with some of the 

things that we would do to regulate. Where was the moral hazard 

argument when we did this for our military? Are these folks who 

are being taken advantage of with these loans that roll over and 

over and over and over again, paying these extremely high rates, 

are they not decent red-blooded Americans, too? Do they not deserve the same kind of legislation from this Congress that we did 

for the military? 

No, I don’t think the CFPB has to do it. We have the responsibility to do it. And we are not. I don’t think the CFPB is engaged 

in making laws. They make rules to enforce existing laws. Is that 

a fair statement, sir, Mr. Silberman? 

Mr. SILBERMAN. Yes, sir. 

Mr. GREEN. Thank you. So now, let’s just be real, as we say back 

in my neck of the hood. Let’s just be real. Here is what is going 

on. You have people on this side who want to protect the consumer. 

And you have—not everybody, but a lot of people on the other side 

who want to protect payday lenders. And by the way, they are 

doing a pretty good job of it. 

Payday lenders can and should be regulated. It really is that 

simple. If we can do it for the military—good, loyal, red-blooded 

Americans—we can do it for other good, loyal, red-blooded Americans. 

I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman. The Chair recognizes the gentleman from Kentucky, Mr. Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. And I appreciate my colleague talking about the need to regulate small dollar, short-term 

lenders. 

In my congressional district, at least, I know that many of these 

lenders are regulated under Federal law by the Bank Secrecy Act, 

the Electronic Funds Transfer Act, the Equal Credit Opportunity 

Act, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, 

the Truth in Lending Act, the Fair and Accurate Credit Transaction Act, the Electronic Signatures in Global and National ComVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
33 

merce Act, the Servicemember Civil Relief Act, and the registration 

requirement for money service businesses with FinCEN. 

In 2010, in Kentucky, our split legislature—Democrat and Republican—bipartisan, working together, in conjunction with a 

Democratic governor, modernized a consumer lending law, and that 

was in 2010. The result was the following. A regulation that required a license, limits on rollovers, disclosure requirements, a 

bond requirement, financial requirements for licensing, capped 

fees, limits on advanced terms, a maximum loan amount, exam and 

audit requirements by the Office of Financial Institutions, headed 

by a regulator appointed by the Democratic governor, Commissioner Charles Weis, who I know who is a very excellent regulator. 

Limits on—no, allowance for fines against lenders, a prohibition on 

lender prosecution of customers, and finally, a requirement of background checks and industry experience requirements for those 

lenders. 

Those are the requirements at minimum that apply to these entities in my district. So my question to Mr. Silberman is this: What 

about these statutes, Federal and State requirements, are inadequate to protect consumers? 

Mr. SILBERMAN. Thank you, Congressman. These statutes—all 

the provisions you cited would continue to be in full force and effect 

in protecting consumers in your district if the proposals under consideration were finalized. What we would do is add one more requirement, along the lines of what I indicated and Mr. Shaul said 

we need to do. We need to ensure that in addition, an assessment 

is made as to whether consumers have the ability to repay the 

loan. 

Mr. BARR. Yes. And do you not believe that the regulators in 

Kentucky, Commissioner Weis, is he unable to do that under the 

Kentucky law? Have you analyzed the Kentucky law? And was 

there anything wrong with the process of a bipartisan general assembly with a Democratic governor passing an update to the consumer protection laws in Kentucky? 

Mr. SILBERMAN. I spent last week with Commissioner Weis when 

we had our field hearing in Louisville on a different subject, and 

I am sure he is entirely capable of enforcing Kentucky law. We are 

not talking about enforcing—we are establishing an additional requirement— 

Mr. BARR. Right, so I understand, what justifies the Federal Bureau canceling the collective judgment of Kentucky legislators, a 

governor, and a regulator in Kentucky? 

Mr. SILBERMAN. Again, Congressman, we are not canceling that 

judgment. We are saying that as a matter of a Federal law, there 

is an additional requirement— 

Mr. BARR. I’m sorry, Mr. Silberman. You are a Harvard Law 

graduate. You understand the concept of conflict preemption. You 

are canceling the collective judgment of the general assembly of 

Kentucky. 

Mr. SILBERMAN. No, Congressman. What I learned in law school 

is that we are not doing that at all. If we were to say, for example, 

that Kentucky cannot require the disclosures that they now require, that would be preempting and canceling. We are not doing 

34 

that. We are saying there is an additional requirement in addition 

to— 

Mr. BARR. Right. And to the extent— 

Mr. SILBERMAN. And that is—that is part of— 

Mr. BARR. —the general assembly has passed a law that is inconsistent with that, it is conflict preemption. Let me move on very 

quickly to the SBREFA process. A constituent of mine felt that 

their input was completely disregarded in the course of the 

SBREFA process and that your regulators failed to demonstrate a 

comprehension of the current very stringent State regulator structure. That constituent wrote you a joint letter and asked—with 

consent, I would like to submit this letter to the record—my question— 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

Mr. BARR. —to you, Mr. Silberman, is how significant of the 

input from the SBREFA process has been included in the rulemaking process? Because based on a FOIA-produced record, it indicates that all of the small business feedback as required by law 

was completely dismissed out of hand in formulating your rule. 

Mr. SILBERMAN. Congressman, we are carefully considering the 

feedback we received through the SBREFA process. I have read 

many of the submissions. I attended much of the hearing. Our staff 

has carefully digested it. That is a valuable input into our decisionmaking process. Anybody who says that we have not considered 

that cannot make that statement because we have been spending 

11 months deliberating since that process, so no one has any basis 

to say that we are not considering it. We are doing precisely that. 

Mr. BARR. It would be very disappointing if this was just checking the box and that their feedback was not incorporated into the 

final rulemaking. 

Thank you. I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman. Now, the gentleman from Minnesota, Mr. Ellison, is recognized for 5 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman, and Mr. Ranking Member. 

We all know that competitive markets by their very nature 

spawn deception and trickery. I am not quoting Bernie Sanders 

here. I am actually quoting two Nobel Prize-winning economists, 

Robert Shiller and George Akerlof. 

In their new book, ‘‘Phishing for Phools: The Economics of Manipulation and Deception’’—I recommend that book, by the way— 

they explain how financial transactions can target people for fraud. 

And we see it all the time, hidden commissions, illegal kickbacks, 

steering to higher-cost products. We know that criminals who perpetuate mortgage fraud and price-fixing schemes try to exploit the 

gaps between Federal and State enforcement to target innocent 

consumers. 

Now, Attorney General Zoeller, on the screen is a quote from a 

State attorney general, a very wise man. He said, ‘‘One of the 

things that we have learned from a wave of mortgage fraud, pricefixing schemes, and other scams is that white-collar crimes don’t 

occur neatly within a single jurisdiction. They cross State lines and 

international borders, and the criminals try to exploit the gaps beVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
35 

tween Federal and State enforcement to target innocent consumers.’’ 

The same AG, very sharp guy, said that to fight the ingenuity 

of these criminals, Federal and State and law enforcement agencies 

must operate seamlessly without jurisdictional disputes, bureaucratic roadblocks, or inertia. Do you recognize these words, sir? 

Mr. ZOELLER. I will pass. 

Mr. ELLISON. Well, I do. They are your words. 

Mr. ZOELLER. All right. 

Mr. ELLISON. You said those things. 

Mr. ZOELLER. I wrote them. I didn’t say them. 

Mr. ELLISON. Yes, well, said them, wrote them. 

Mr. ZOELLER. All right. 

Mr. ELLISON. You communicated them to the world. 

Mr. ZOELLER. No, I will stand by that. I think that is a healthy 

approach to it. No, it is exactly— 

Mr. ELLISON. You are not running from those words, are you? 

Mr. ZOELLER. No, absolutely not. 

Mr. ELLISON. Good. Because I agree with those words. They are 

from your November 2009 statement on the interagency task force 

on fighting white-collar criminals. Now, I just thought I would pull 

that out to light. Why should—could you just share with me your 

take, why should abuses in small dollar lending industry not be 

subject to the same national standard you advocated in 2009? What 

is the difference? 

Mr. ZOELLER. There is a major difference in the markets here. 

When we are talking about mortgage lending and some of the big 

banks and the enterprises like that, you are really talking about 

a different type of consumer. There were some difficulties there. 

In the small market, I think what is really missing is you are 

already talking about people who are underbanked or nonbanked. 

They are in a different financial position. They may be in stress already. And right next to me is the representative of the loan 

sharks. So they are not here today, but if we close out this market, 

that is where people will go. 

Mr. ELLISON. Let me ask you this. Thank you for your answer. 

Mr. Silberman, I wonder, is there any overlap between the person 

who might go to a payday lender and a person who might have gotten a mortgage on a no-doc, low-doc, ninja loan and gotten defrauded and had false terms put before them before they signed 

up? Is there overlap between these two different markets? Or are 

they pretty much mutually exclusive? 

Mr. SILBERMAN. Congressman, in truth, I really don’t know the 

answer to the question. 

Mr. ELLISON. That is too bad. Okay. You know what? You may 

not know the answer to the question. I have a feeling that there 

is a very large degree of overlap to those two bodies of people. I 

can say that based as a politician who knocks on doors and talks 

to citizens every single day that when the mortgage foreclosure crisis was banging, a lot of those people who were facing foreclosure 

actually did go to payday lenders, and there is a tremendous 

amount of overlap. And I don’t agree that there is much of a difference. 

36 

Let me just ask you if you know this, Mr. Silberman. I want to 

thank you and your staff for your important work and the work 

you are doing to improve the financial marketplace. Specifically, I 

want to applaud you for considering the rule in payday lending 

traps. And I hear from constituents, both borrowers and the pastors and imams who serve them, and rabbis, as well, the faith community is in this space and wants to protect people, about the damage of these short-term, high-cost loans. 

On the screen is a map of the state of payday loan laws which 

show great gaps in consumer protections. And I want to urge you 

to move forward with the proposed rule. I discussed the agency’s 

March statement with my constituents, and we want to ensure that 

borrowers can realistically be able to repay the loan. 

The outline of your payday lending proposal suggests that the 

rulemaking will include a process for verifying a borrower’s income. 

Could you provide some insight into what that process could look 

like for small dollar lenders, particularly those with respect to borrowers that are paid primarily in cash? And I think we are low on 

time. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

If Mr. Silberman would respond in writing to the gentleman’s final 

question? 

Mr. SILBERMAN. I would be happy to do so, Mr. Chairman. 

Chairman NEUGEBAUER. The Chair now recognizes the gentleman from Pennsylvania, Mr. Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

For Mr. Silberman, borrowers have diverse credit needs. To meet 

those needs, there should be a vibrant market with many choices 

for short-term, small dollar credit. These choices should include 

credit cards, installment loans, single payment loans, deposit advance loans, and debit overdraft protection services. 

Given the small amounts and short terms of loans, banks and 

other institutions need a simple, streamlined processes to evaluate 

and provide credit in a manner convenient for customers. I have 

significant concerns that the Bureau’s proposed small dollar lending framework will choke off the ability of banks and others to 

meet their customers’ needs for short-term loans. 

Will the Bureau’s proposed rule allow banks and other institutions to continue offering short-term loans using simple streamlined procedures? 

Mr. SILBERMAN. Thank you, Congressman. Again, I don’t want to 

get ahead of ourselves and speculate as to what the final rule or 

even proposal will say. What I can say to you is that we have been 

meeting very closely with representatives of community banks and 

credit unions. It is not our intention to disrupt the kind of thoughtful, relationship lending that they do, and we will be carefully trying to make sure that we issue a proposal that is respectful of 

loans that they are making to consumers that are affordable loans 

for those consumers. 

Mr. ROTHFUS. Can you tell me, is there anything wrong with the 

way that Florida regulates its payday lending industry? 

Mr. SILBERMAN. I’m sorry. Could you repeat the question, Congressman? 

37 

Mr. ROTHFUS. Is there anything wrong with the way Florida regulates its payday lending industry? And I ask that because the entire Florida delegation, both Republicans and Democrats, across 

the ideological spectrum, from conservative to liberal, wrote the 

CFPB expressing concerns about the CFPB rulemaking. 

Mr. SILBERMAN. Thank you, Congressman. We have actually 

looked separately at data from Florida and we find the very same 

pattern that we find in reports on the Nation as a whole, which is 

to say a significant percentage of consumers getting loans they cannot afford ending up in long-term cycles of indebtedness so that we 

believe there is a need to add on top of the rules that Florida has 

adopted another rule. 

Mr. ROTHFUS. Let me ask you this. The cozy relationship between the Bureau and the Center for Responsible Lending has 

been widely reported. Employees have moved between the Bureau 

and the CRL during the rulemaking process. There has been extensive communication and coordination between staff. And at one 

point, the CRL provided the CFPB with an outline of their proposal 

to regulate small dollar lending so that the CFPB could work to improve it. 

In fact, there were so many meetings between the Bureau and 

the CRL that in an April 2014 e-mail, you remarked that it had 

been almost 3 weeks since you communicated and that you were 

‘‘starting to have withdrawal pains.’’ 

I think most people would consider this intimate type of relationship to be inappropriate. How do you respond to that? 

Mr. SILBERMAN. Thank you, Congressman, for the opportunity to 

respond. We have throughout this process engaged extensively with 

stakeholders across the spectrum with advocates, with representatives— 

Mr. ROTHFUS. Were there others that you started to have withdrawal pains for not being in touch with them? 

Mr. SILBERMAN. I would—if I did not have regular input from 

any side of the debate, I would certainly feel that I was not doing 

my job. I have been particularly careful, since I came to this job 

from an industry perspective, having worked for 12 years, as Congressman Pearce noted, for a financial services firm, I have been 

particularly careful to make sure that I hear perspectives that are 

different from the perspectives that I was used to coming to this 

job— 

Mr. ROTHFUS. Do you know whether the Center for Responsible 

Lending has any affiliates that would provide services that would 

compete with payday loans? 

Mr. SILBERMAN. I understand the Center for Responsible Lending does have an affiliate which is a credit union. From what I am 

told by the payday loan industry representatives I have spoken to, 

they don’t believe that products of that kind would be competitive 

with—the credit union product would not be competitive with their 

product, but they do have products— 

Mr. ROTHFUS. You are taking a proposal from the Center for Responsible Lending, where they are in that space of short-term loans 

or they have an affiliate is, correct? 

38 

Mr. SILBERMAN. Congressman, we received proposed outlines 

suggesting what our proposal should be from many different people 

from all sides of the issue. 

Mr. ROTHFUS. Do you know whether the affiliate of the Center 

for Responsible Lending does any business in Florida? 

Mr. SILBERMAN. I do not. 

Mr. ROTHFUS. I yield back, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from South Carolina, Mr. Mulvaney, is 

recognized for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Mr. Silberman, let’s stay on this same topic. In 2006, our neighbors to the north, North Carolina, banned payday lending outright. 

Do you think they were right to do so? 

Mr. SILBERMAN. Congressman, I don’t really feel it is my place 

to make a judgment of that sort here representing the Bureau. 

Mr. MULVANEY. Okay. Neither do I. In 2014, South Carolina 

passed some laws dealing with payday lending. We allowed it to 

exist and put certain restrictions on it. Were we wrong to do so? 

Mr. SILBERMAN. Congressman, again, I would not want to make 

those judgments. As I have tried to emphasize, our role is to make 

sure that all citizens and all States have the benefit of Federal law. 

Mr. MULVANEY. I only wish that your Director agreed with you. 

I just got a letter today from Mr. Cordray that says the exact opposite. It says you do have an opinion. It says, ‘‘While these markets 

are in many jurisdictions subject to State regulation, like South 

Carolina, we remain concerned that consumers across the country 

face risk from practices in these markets.’’ So clearly, the CFPB 

does have an opinion as to whether or not we were right or wrong, 

for example, to put a 2-day cooling off period in our law in 2013. 

Earlier today, you said in response to Mrs. Love that you would 

not eliminate any State law. You remember that, right? 

Mr. SILBERMAN. Correct. 

Mr. MULVANEY. You then told Mr. Luetkemeyer that you did not 

seek to preempt anything and that you are only creating a floor. 

Do you remember that, as well? 

Mr. SILBERMAN. Yes, sir. 

Mr. MULVANEY. Okay. The proposal that you have made, at least 

on your website, is for a 60-day cooling-off period. We have a 2-day 

cooling-off period in South Carolina. Would you still consider a 60- 

day cooling off period to act as a floor in South Carolina vis-a-vis 

our 2-day rule? 

Mr. SILBERMAN. Congressman, let me first say that the outline 

of the proposals under consideration said that after 3 loans in succession, there then would be a 60-day cooling-off period. We would 

not have— 

Mr. MULVANEY. That is fine. And ours says after a certain number as well; I think it is eight. But go ahead. Keep going. 

Mr. SILBERMAN. We would view that as a floor. You could add 

on top of that. You could— 

Mr. MULVANEY. A floor. Well, let’s think that through. So if I am 

there in South Carolina and I have taken my third loan, you would 

now require a 60-day wait period before my fourth and we would 

39 

require a yes-or 2-day. Do you still think your 60 day is a floor? 

Or is my 2-day the floor? 

Mr. SILBERMAN. I think our 60 day is a floor on which you could 

add additional protections, yes. 

Mr. MULVANEY. Really? Do you really believe that? Or is that 

just what you were told to say? Come on, now. Because nobody believes that is a floor. It is a ceiling, isn’t it? 

Mr. SILBERMAN. No, sir. 

Mr. MULVANEY. We have a lower threshold than you are suggesting. 

Mr. SILBERMAN. It is certainly not a ceiling, since you could have 

a 61-day or a 70-day. 

Mr. MULVANEY. Yes. 

Mr. SILBERMAN. It is a floor. 

Mr. MULVANEY. And it would be a floor if ours was 61 and yours 

was 60. Ours is 2. Yours is 60. This is just the English language, 

Mr. Silberman. It is okay to admit that either you are wrong or you 

are taking a different position, but you can’t call it a floor when 

your requirement is more restrictive than ours is. If you were to 

pass a regulation that requires a 60-day cooling off period, wouldn’t 

that preempt my 2-day cooling-off period? 

Mr. SILBERMAN. Congressman, I don’t mean to be splitting hairs, 

but I think there is a— 

Mr. MULVANEY. I don’t want you to split hairs. I just want you 

to answer the question. 

Mr. SILBERMAN. That is what I am going to try and do, sir. I 

think there is a well-understood definition of what preemption 

means and that the answer is, no, that we would be establishing 

a floor. You are certainly right that if a State had a less restrictive 

rule, our floor would take precedence in that sense. But it would— 

Mr. MULVANEY. So if I am not preempted, then I am still allowed 

in South Carolina—you pass a Federal rule on a 60-day wait period, I have a State rule at a 2-day period. You are taking the position you are not preempting me. It would still be legal for me as 

a payday lender in South Carolina to acknowledge and abide by the 

2-day rule? 

Mr. SILBERMAN. You would be obligated under Federal law to 

comply with Federal law, of course. 

Mr. MULVANEY. And it is still your position, as you sit here, that 

that is not preempting the State law? Do you really—when people 

look back at your Harvard degree, is that really what you want 

them to look at? 

Mr. SILBERMAN. Yes, Congressman. 

Mr. MULVANEY. Okay, good. That is fine. All right. Let me ask 

you a different question. You said earlier in response to Mrs. Love 

that in your research, you actually had talked to people who had 

benefited from, and then other people who had been negatively impacted by, the payday lending system. And you said it was roughly 

two-thirds, a third in your analysis. I will assume that is the same 

roughly from State to State. It may be different from various 

States, but let’s just assume for sake of discussion it is the same. 

As between you and the legislature of the State of Ohio, who is 

better suited to balance the interests of those two-thirds versus the 

third? 

40 

Mr. SILBERMAN. Congressman, we have an obligation under the 

Dodd-Frank Act, under the statute Congress passed to protect all 

consumers in all States from practices that are unfair or abusive. 

Mr. MULVANEY. So it is your belief that you are better suited 

than the legislature of Ohio to do that balancing act? 

Mr. SILBERMAN. It is my belief, our belief that we have an obligation to protect all— 

Mr. MULVANEY. So you don’t believe that you are better suited? 

Mr. SILBERMAN. Congressman, as I said, it is my belief— 

Mr. MULVANEY. I am just trying to—I mean, do you believe or 

don’t you believe? Which one? 

Mr. SILBERMAN. I believe we have an obligation—we don’t make 

judgments about who is better suited. We make judgments about 

what our obligations are, and our obligation is to provide the protections that Congress has given. 

Mr. MULVANEY. I will look forward to continuing this another 

day. 

Thank you, Mr. Silberman. 

Chairman NEUGEBAUER. I thank the gentleman. Mr. Pittenger is 

recognized for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Mr. Silberman, I am on your right. Welcome. You are the man 

of the house. And reasonably so. You have a very impressive background. Graduate of Brandeis University, graduate of Harvard Law 

School, you clerked for Justice Thurgood Marshall. You are esteemed in every respect. You have worked for the AFL-CIO as their 

general counsel. You are the acting Deputy Director of the largest 

agency ever created in the history of this country, funded at $600 

million a year, with no accountability to anybody. 

It is pretty remarkable, your background and really the power 

that you have. Do you believe, Mr. Silberman, that Big Brother is 

a good thing? 

Mr. SILBERMAN. I’m sorry, Congressman, I missed—I was listening to the biography and I missed the question. 

Mr. PITTENGER. It sounded good and it is very impressive. Do 

you believe in Big Brother? 

Mr. SILBERMAN. Do I believe in Big Brother? I am not sure how 

to answer that question, Congressman. 

Mr. PITTENGER. Do you believe that there are those who know 

best, who are better educated, have more background, better expertise than the common guy and really can help them direct their 

lives better? 

Mr. SILBERMAN. I do not believe that is our role, sir. 

Mr. PITTENGER. Do you believe that your policies would convey 

that? Do you believe—let me ask you this—when you see a Snickers commercial on TV, do you believe people are being exploited 

when they see that commercial and they want to go eat a candy 

bar, and maybe that might lead them to a health problem, perhaps 

diabetes or some other concern? 

Mr. SILBERMAN. That is far outside our jurisdiction, sir. 

Mr. PITTENGER. But let’s follow the train of thought. I wish you 

would have known my dad, Mr. Silberman. He was a very funny 

guy. My dad, we grew up in central Texas. And he loved his barbecue, and he loved his fried catfish and his Jimmy Dean sausage 

41 

with biscuit. Or he would trade off and maybe have pancakes with 

a lot of syrup and butter. And he lived his life. 

And he was told by my sisters occasionally when they could get 

a word in that, ‘‘That is not good for you, Dad. You really need to 

not be eating those things.’’ And Dad said, ‘‘You know, I am really 

not interested in that. I like the quality of my life. I am not worried 

about quantity.’’ Dad lived until he was 91. 

But he made his choices. And that is what freedom is all about. 

Do you believe that the American people are entitled to make 

choices? 

Mr. SILBERMAN. Congressman, again, I believe that surely they 

are entitled to make choices so long as they are protected from situations where they are unaware of the risks, the costs, and they 

are able to protect themselves. That is what Dodd-Frank tells us— 

Mr. PITTENGER. From your opinion, from your point of view, isn’t 

that correct? 

Mr. SILBERMAN. No, we try and—that is— 

Mr. PITTENGER. No, that is an opinion. That is your opinion, isn’t 

it? 

Mr. SILBERMAN. No. 

Mr. PITTENGER. That is your opinion? Yes, sir, that is my point. 

Then you do believe in Big Brother. And I think that is the disconnect between Washington and outside this beltway. The people 

really want to live their lives. And they are tired of—if I can say 

this respectfully—elites in Washington who know best how to lead 

their lives. 

And there is an enormous reaction to that today. It is a very 

compelling statement that is being made. I don’t know if you have 

been out there in the hinterlands to sense that, but people are allowed to make choices with what they want to do with their lives. 

And what you are saying is, we want to limit your choices because 

we know what is best for you. 

And I think that is the problem, the current—the real fundamental problem that we are dealing with. People have needs in 

their lives or desires in their lives, and whatever it is, it is their 

choice. And don’t you think people should be allowed the freedom 

to make choices? When I grew up, I left the umbrella of my family. 

I wanted to make my own choices. Some were good, and some were 

bad. But I wanted to make my own choices. Did you have that experience when you grew up and you were ready to live your life? 

Did you want to make your own choices? 

Mr. SILBERMAN. Yes, sir. 

Mr. PITTENGER. Okay. Well, let’s allow people to make their 

choices. And that is a fundamental American freedom. And what 

you are saying is, no, you really aren’t allowed to have that freedom because there is a group of us who live up here who really do 

know what is best for you. And let us determine that for you. That 

is the mentality that is repugnant to the American people. 

Thank you. I yield back. 

Mr. PEARCE [presiding]. The Chair would like to thank each one 

of the witnesses. You have been very gracious with your time and 

your answers. And you will be excused. We will take a 5-minute 

recess while we bring the next panel up. Mr. Silberman, if you feel 

42 

like we have not asked you enough, please feel free to stay into the 

second panel. Thank you very much. 

[laughter] 

Mr. SILBERMAN. Can’t get too much of a good thing, Mr. Chairman. 

[recess] 

Chairman NEUGEBAUER. For our second panel of witnesses, we 

have Mr. Dennis Shaul, chief executive officer of the Community 

Financial Services Association of America; Mr. Kelvin Simmons, 

who is testifying on behalf of the American Financial Services Association; Mr. Robert Sherill, a consumer; Dr. Thomas Miller, Jr., 

a visiting scholar at the Mercatus Center at George Mason University; and Dr. Frederick Douglass Haynes III, senior pastor at the 

Friendship-West Baptist Church in Dallas, Texas. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, each of your 

written statements will be made a part of the record. 

Mr. Shaul, you are now recognized for 5 minutes. 

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

AMERICA 

Mr. SHAUL. I thank you for the opportunity to speak this afternoon on behalf of my membership and I hope also on behalf of the 

customers whom we serve. 

If I were to sum up our position in a single sentence, it would 

be that regulation is not decimation. And by any standard that one 

chooses to look at, whether it is the printed material given out to 

us on SBREFA or the Charles River study that we have done, this 

is an intention on the CFPB’s part to decimate this industry and 

lay it to waste. 

Now, if the proposal turns out to be less than that, so much the 

better. In his written testimony, Mr. Silberman is quoted on page 

8 as saying—as going on—I know that they are honest, dedicated, 

hard working individuals, but we have a deep and profound difference with regard to where they are going. 

And to put it in perspective, it is a difference both on substance 

and on procedure. The difference in procedure is what might be 

called for any athletic fan the ‘‘shifting goalposts.’’ When we first 

met with them, we were told that the object was to do a better disclosure and that would cover things. Obviously, that didn’t work. 

Then we were told that if we came up with a set of discussions 

with them, perhaps we could iron things up. Those discussions 

came to nothing. Then we went through the SBREFA panel, and 

though Mr. Silberman thinks that it is still being considered, there 

is not one person who came through that SBREFA panel who believed that their words which went to the question of their continued existence found any hearing from those who represented the 

CFPB. 

And then when we finally get to the point of the complaints that 

were supposed to be the guiding star, we were told, with regard to 

payday lending, we find two things—there are very, very few of 

them, and those that come through are often from States that do 

not have payday lending, suggesting a couple of things, that the 

43 

complaint portal is a not very reliable guide, and that people find 

a way when they don’t have legal payday lending in their State to 

still get the loan. 

And, by the way, as an asterisk to that last point, the Administration’s late effort to enter into some form of subsidy for private 

entities that are already partially subsidized, to enter into this 

field, is not a workable solution for any number of reasons that we 

cannot get into today, but it establishes one central fact. They finally recognize that this is a demand-driven product, and that is 

important. 

Now, we heard a lot about the ability to repay. Do you really believe that there is anybody who loans money that doesn’t seek an 

ability to repay? The question is this: Is the ability to repay that 

is outlined in the proposal anything but a sheet that covers up 

other aspects of what they want to do? Or as one of the writers of 

the impending rule said to us, you don’t understand. The object of 

what we are doing with ability to repay is to make sure there isn’t 

a second loan. That is not a second loan too close to the first; that 

is to make sure there is not a second loan at all. 

And we heard a lot about how many sequences and so on. Let 

me show you—and I will make sure that you all get a copy of 

this—this is from the pages of the CFPB proposal or paper of last 

March, sequences: 3 loans or less, 64 percent; 6 loans or more, 25 

percent; 17 percent for 8 loans or more. 

I ask you, when you heard the testimony this morning, did you 

get a sense that was what we were talking about? Of course we are 

all concerned about change. This is a dynamic industry, and there 

will always be change. There will be problems to be fixed, and 

there are always answers for customers who are not well-served. 

But there is not a ready substitute for what we provide. And one 

of the problems we face with the Bureau is they make no distinction between unlicensed payday lenders, people who are in the 

business of giving payday lenders online, tribal lenders, storefront 

lenders. And the differences are profound. We have a set of best 

business practices and we have lost members because of it. 

It is not fair to any of us to equate us with those who go through 

no regulation at all. And where is the pending rule for those who 

operate illegally without any regulation at all? It is nonexistent. 

I know that I have to wrap up, Mr. Chairman, in a quick way, 

but let me just say this. The ability to repay construct affords one 

and only one thing that I think could be construed as novel in looking at the field of how to do an ability to repay, and that is a greater attention to the obligations than individual borrower might have 

besides his obviously to pay off the payday loan. 

Yes, that should be contemplated, that should be made a part of 

our analysis of ability to repay. But first of all— 

Chairman NEUGEBAUER. Mr. Shaul, I am going to have to ask 

you to wrap up. 

Mr. SHAUL. Yes, I will wrap it up. But it is, I think, amazing that 

anyone at the Bureau believes that our operators do not do a rather rigorous job of working out an ability to repay. They don’t continue in business unless people pay off these loans. 

Thank you, Mr. Chairman. 

44 

[The prepared statement of Mr. Shaul can be found on page 80 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Simmons, you are now recognized for 5 minutes. 

STATEMENT OF KELVIN SIMMONS, TESTIFYING ON BEHALF 

OF THE AMERICAN FINANCIAL SERVICES ASSOCIATION 

Mr. SIMMONS. Good afternoon, Mr. Chairman, Ranking Member 

Clay, and Ranking Member Waters. 

My name is Kelvin Simmons, and I am here on behalf of the 

American Financial Services Association (AFSA) and the millions 

of traditional installment loan customers that AFSA member companies serve and they have served over the last 100 years. 

Thank you so much for giving me the opportunity to talk about 

the Consumer Financial Protection Bureau’s proposal for small dollar loans and the impact it could have on deserving consumers. 

I ask that my full statement be submitted for the record so that 

I can focus on three basic issues: one, the need for small dollar 

credit; two, the fact that depository institutions are not equipped 

to address that need; and three, the demonstrated ability of traditional installment lenders to offer safe and affordable access to 

small dollar loans. 

On my first point, there is a need for small dollar credit. And let 

me paint a picture of my experience in the community that I come 

from. I was born and raised in Kansas City, Missouri. I am a 

former State Director of economic development for the State of Missouri, and during my tenure, the State’s banks, credit unions, and 

financial services divisions were under my executive authority. 

I was president and CEO of one of the largest community development corporations in Missouri, and also vice president of one of 

the largest FQHCs in the State of Missouri. I also was elected 

twice to serve on the Kansas City City Council. 

In the community that I came from, particularly in the ZIP Code 

that I came from, there were no locations in that area where I grew 

up that offered safe, reliable, affordable, small dollar loans. I characterize this as living in a community that had a financial services 

desert. 

To further illustrate my financial services desert point, I served 

as the commissioner of administration for the State of Missouri 

from 2009 to 2012. In that role, I had dual signatory authority with 

the Missouri State treasurer to issue all checks on behalf of the 

State of Missouri. Even though my name appeared on all of those 

checks, there was not one bank in my hometown ZIP Code where 

I could even deposit those checks. 

There is a need for small dollar credit because it is inevitable 

that a car will break down, things will happen, emergencies will 

occur. There is also a national need that has been recognized by 

CFPB Director Richard Cordray who testified last fall about preserving the ability of installment lenders and others to continue to 

make responsible loan products. 

On my second point, depository institutions are not equipped to 

make those small dollar loans. And despite their effort, there have 

been studies, there have been pilot programs to encourage banks 

45 

to lend in this space. The FDIC found that banks do not see small 

dollar loans as a profitable business line. 

I have had an opportunity to work with one of the largest African-American-owned banks in Kansas City that is based out of 

New Orleans, Louisiana, Liberty Bank. They do a wonderful job of 

loaning to their customers. But this is one of the issues that they 

said was very difficult and they participated in the pilot program 

with the FDIC. They contended that it is difficult: They could do 

it, but it would require subsidization in order to be able to do that. 

And so it made it very difficult, even as it is a very good community bank. 

So the question is, who is best suited to meet the need of highquality small dollar loans? My answer is the third point, traditional 

installment lenders that offer safe and affordable small dollar 

loans. What are the installment loans, traditional installment 

loans? They are fixed-rate, fully amortized, small dollar loans repaid equally in monthly and payment installments. These loans are 

affordable and they basically give an opportunity for the borrower 

to meet their monthly budgets. 

There are plain-vanilla loans, transparent, easy to understand 

terms, due dates and payment amounts. Installment lenders underwrite the loans based on consumer credit reports and other factors. 

The Center for Financial Services Innovation has published a guide 

outlining the characteristics of high-quality loans. Those characteristics which include ability to repay, opportunity to improve a borrower’s financial health, transparency, accessibility, those are the 

kinds of characteristics. 

I was in Los Angeles in December of 2015, and the National 

Black Caucus of State Legislators adopted a resolution, which is 

also in my full statement, endorsing the development of responsible 

underwritten small dollar loans. 

We understand the CFPB concerns about trapping borrowers in 

the cycle of debt, but traditional installment loans, again, are fully 

amortized loans and paid off in equal payments in principal and interest over a period of time. I see that my time is coming to the 

end, so I will go to the conclusion. 

In conclusion, I hope that I show to the members of this committee that there is a great need for high-quality, small dollar 

loans in communities like the one that I came from. Traditional installment lenders meet the definition of that high-quality, small 

dollar loan, and I hope that more importantly, the CFPB will be 

careful to preserve the ability of installment lenders to offer these 

responsible loan products. 

Thank you. I look forward to any questions that you may have. 

[The prepared statement of Mr. Simmons can be found on page 

103 of the appendix.] 

Chairman NEUGEBAUER. Mr. Sherill, you are recognized for 5 

minutes. 

STATEMENT OF ROBERT SHERILL, CONSUMER 

Mr. SHERILL. Good afternoon, Mr. Chairman, and members of the 

committee. My name is Robert Sherrill, and I am here to give a 

consumer’s perspective on this policies and stuff. I am not a policy 

46 

guy or I am not a lobbyist or anything like that. I am just coming 

from the ground where it is really happening. 

I have used these loans before. I went to prison, made some mistakes. Nothing violent, but I chose to get money in an illegal way. 

I got out. And when you are a felon, the odds are stacked against 

you. You can’t get jobs. My family doesn’t have money like that. So 

to call someone that I am related to, to get money is out of the 

question. 

The alternative to that scenario is going to payday loans. I know 

a lot of people who utilize this service to cash their checks. I did 

it myself. I still do it from time to time. I have utilized getting the 

loans when I didn’t have the means to get money. And my concern 

is, when they take it away, what are we going to do? Because from 

the looks of it, I don’t see anybody here who looks like they need 

a loan from a payday place. 

So me personally, I am on the ground. We need it. When the 

odds are stacked against you and you don’t have anybody to call, 

what do you do? Has anybody here ever experienced that feeling? 

Because it is not a good feeling when, no matter where you turn, 

you have nowhere to go. And so, those places offer an alternative 

for us. And I will continue to use them, as will a lot of people I 

know use them, as well. 

[The prepared statement of Mr. Sherill can be found on page 91 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Miller, you are now recognized for 5 minutes. 

STATEMENT OF THOMAS W. MILLER, JR., VISITING SCHOLAR, 

MERCATUS CENTER, GEORGE MASON UNIVERSITY 

Mr. MILLER. Chairman Neugebauer, Ranking Member Clay, and 

members of the subcommittee, thank you for the opportunity to appear today. 

A heated debate has surrounded consumer credit for many decades. Because banks do not make small dollar loans to consumers 

with damaged credit, the marketplace has responded with an array 

of small dollar loans. Americans who rely on these products are not 

wealthy and many live from uncertain paycheck to uncertain paycheck. 

People who make regulatory decisions on behalf of these consumers are likely well-intentioned, but sometimes they might not 

fully understand how small dollar loans can help borrowers who 

are facing difficult financial circumstances. In my scholarly work 

on consumer credit, I seek to understand how small dollar loan 

markets work and how to restructure regulations to improve borrower welfare. 

Access to credit is a fundamental freedom for all Americans. But 

our research shows that consumer credit regulation often reduces 

this freedom. 

My testimony contains three main points: one, the small dollar 

loan market is diverse because consumers have diverse needs; two, 

eliminating credit supply does not eliminate credit demand; and 

three, States can provide more credit options for consumers by increasing or even eliminating interest rate caps. 

47 

Point one, the small dollar loan market is diverse because consumers have diverse needs. As noted in my written testimony, consumers generally know how to obtain small dollar loans and they 

generally understand the terms of these loans. In my experience, 

however, many people with good credit are not familiar with small 

dollar loans. It is incumbent, therefore, on anyone regulating, advocating, or studying any small dollar credit product to know the differences among them. My written testimony explains the basic 

workings of four types of small dollar loans. Importantly, these 

loans are not perfect substitutes for one another. These loans differ 

significantly in terms of loan size, length of loan, cost, repayment 

method, and underwriting processes. 

Point two, eliminating credit supply does not eliminate credit demand. The CFPB is currently exploring new payday loan rules that 

could dramatically reduce the number of payday loans. Without a 

thorough exploration of why some consumers often use payday 

loans, the CFPB proposes to set a limit of six payday loans per consumer per year. Such an arbitrary rule would eliminate 60 percent 

to 80 percent of payday loans made. Where will payday borrowers 

go for credit? 

Eliminating so many payday loans does not mean that consumers will magically stop borrowing or suddenly begin to borrow 

from other legal lenders. Instead, such a regulation could force 

some consumers already in desperate situations toward illegal 

lenders. Where is the compelling and convincing independent, rigorous research that shows repeated payday borrowing is, in fact: 

one, harmful to consumer welfare; and two, that a limit of six payday loans per consumer per year will do more good than harm? 

Point three, States can provide more credit options for consumers 

by increasing or even eliminating interest rate caps. In the early 

1900s, consumer credit reformers battled illegal loan sharks by appealing to legitimate capital. At the time, reformers decided that 

costs and risks of making small dollar loans merited an APR of 

about 36 percent, which was six times higher than prevailing interest rates at the time. By 1940, most States had adopted a form of 

the uniform small loan law of 1916. 

The model law had urged that any rate cap set ‘‘should be reconsidered after a reasonable period of experience with it.’’ Clearly, the 

succeeding 100 years exceeds a reasonable period. 

Figure three of my written testimony, however, shows that 37 

States still have rate caps at or below 36 percent. Nine have no 

rate cap. Policymakers of today would be wise to follow the innovative thinking of reformers in the early 1900s by dramatically revising or eliminating the 36 percent interest rate cap. 

Figure one of my written testimony shows the results of a low 

interest rate cap. A legal loan desert can exist. There is demand 

but no supply. In 1916, installment lenders could make a profit on 

a much smaller loan than they can today. Why? For any set of loan 

terms, the revenue is the same now as it was then, but production 

costs are much higher. Figure two of my written testimony shows 

the CPI is about 20 times higher today than it was in 1916. 

Let’s look at a $500 loan. To bring installment lenders into this 

loan space, the allowable APR would likely have to be at least 

twice as high—that is, 72 percent—or even higher perhaps. APRs 

48 

of 36 percent and 72 percent sound jarring, so let me put them in 

dollar terms. 

Increasing the APR from 36 percent to 72 percent on a $500 6- 

month installment loan results in a monthly payment increase of 

$9.38, or $2.35 per week, the price of one big regular coffee. Consumers would willingly pay this small amount if the alternative is 

no loan or a loan product that does not suit their needs. Having 

more freedom of choice benefits consumers. 

Thank you. I stand ready to answer any questions. 

[The prepared statement of Dr. Miller can be found on page 73 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. And, Dr. 

Haynes, you are now recognized for 5 minutes. 

STATEMENT OF FREDERICK DOUGLASS HAYNES III, SENIOR 

PASTOR, FRIENDSHIP-WEST BAPTIST CHURCH, DALLAS, TX 

Mr. HAYNES. Thank you so much. Thank you, Mr. Chairman. 

And to all of you, our public servants and Ranking Member 

Waters. 

My name is Frederick Douglass Haynes, III. Several of my colleagues in pastoral ministry and I became alarmed as buildings 

once occupied by thriving restaurants and bank branches were 

taken over by payday and auto title loan stores. In the last 10 

years, right there in Dallas, 20 payday and auto title loan shops 

opened within a 5-mile radius of our churches. Many of these 

stores are located right next to each other. 

A community that was already suffering as a food, job, and opportunity desert was and is being overrun by these predatory 

stores. It appeared that our underserved and underbanked community was being intentionally targeted for these high-cost, debt trap 

loans. 

Our concern was confirmed as we heard from members of our 

churches and residents in the community who were financially held 

hostage by these ‘‘loans.’’ They confessed that in a situation of desperation they had sought to get a loan that eventually became a 

trap. They made payments, every other week or monthly, only to 

get deeper in debt. They were in a financial hole, and upon getting 

a payday or car title loan, received a shovel instead of a rope. 

As a pastor, my heart went out to many who were victimized by 

these predatory practices. I will give you two case studies that are 

testimonies of persons who experienced this debt trap. A recently 

widowed 70-year-old grandmother took out a $300 loan. She ended 

up paying $800. She has always been fiscally responsible, but as 

you know, life happens, and she had to take out this loan. She paid 

back the loan in full, but she had to roll over the loan several 

times, ultimately paying much more in interest than she borrowed. 

I am representing a 23-year-old college student. Both of his parents passed away, but he is determined to get his education in 

honor of his parents. He needed to purchase books for his classes. 

What was a $300 loan ended up costing him over $600. I could go 

on and on. 

Suffice it to say, all of them were hoping for a life preserver, but 

they received shackles instead. Payday loans in Texas carry rates 

of 500 percent annualized interest. Car title loans are in the range 

49 

of 250 percent to 300 percent APR range. The Texas Office of Consumer Credit shows that 61 percent of balloon payday loans are refinance loans that are taken in order to repay the previous 

unaffordable loan. Every week, car title loans result in 847 car repossessions. That is immoral and unethical and unacceptable. 

A resident of our community shared with me that he had a car 

title loan that began as a $4,000 loan. The car was repossessed 

when he couldn’t escape the debt trap, but ended up paying $8,200 

in the process, and he still doesn’t have a car. A coalition of churches and community groups sought to close the loophole in the State 

usury law in Texas that allows these businesses to charge over 500 

percent in interest, but we were unsuccessful. 

We were undaunted and determined to free our community from 

these predatory practices, and so as a consequence we petitioned 

the city government in Dallas to rein in the destructive dealings of 

the payday and car title lenders. Our church has taken a step to 

be a solution to the problem, which is symptomatic of a larger problem of greed and economic exploitation, which has produced a widening wealth gap that threatens the fabric and future of our nation. 

We have launched a credit union, partnering with another 

church in our community, that held a Federal credit union charter. 

We now have several years of banking experience, and we now 

offer Liberty Loans, microcredit to members in need who are able 

to afford small dollar loans. We offer loans of up to $500 for 6 

months at 28 percent annual interest, and 19 percent interest for 

members with a reasonable application fee. 

The good news is there has not been one defaulted loan, and all 

of those who are benefitting from this loan are paying the loan 

back on schedule, because they can afford it. A novel concept. It is 

good business. It has empowered the powerless. And it is moral. 

We are taking strides toward economic freedom in Dallas, but we 

still have a long way to go, not only in Dallas, but across the Nation. We want access to credit. But it must be quality credit. Anything less adds to the stress of the desperate and the needy. 

Well-crafted and compassionate legislation can weed out the 

predators and enable responsible and reputable lenders to thrive 

while rendering a helpful service to communities in need. We don’t 

want Jesus to say in the judgment, I was hungry and thirsty and 

you gave me a payday loan. 

[The prepared statement of Dr. Haynes can be found on page 70 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. They have just 

now called votes, so I think what we are going to do, now that the 

panel has given their opening statements, is we are going to ask 

you to be patient here. I am not sure exactly how many votes; we 

have one vote. And so, I would ask Members to go over and vote 

as quickly as you can, and then we will come back and reconvene. 

So at this time, we are in recess subject to the call of the Chair. 

[recess] 

Chairman NEUGEBAUER. The hearing will come to order. Before 

I close, I want to make a correction here for the record. Mr. Simmons is testifying today on behalf of the American Financial ServVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
50 

ices Association and not the law firm, Dentons. So for the record, 

we are correcting that. Thank you. 

I now recognize myself for 5 minutes to question the panel. And 

first of all, panel, thank you for your patience. Every once in a 

while, we have this little constitutional responsibility across the 

way there that we have to go over and do, and people that we represent kind of appreciate that. 

Well, Mr. Sherill, you have a great story to share. Your testimony was very compelling. You mentioned you had a tough time 

accessing credit when you got out of jail. When you got out of jail, 

they didn’t send you a credit card? 

Mr. SHERILL. No, sir. They gave me about $30 and sent me on 

my way. 

Chairman NEUGEBAUER. When you said, okay, I have to have 

some money, I have to get my life started here, kind of share with 

me, how did you go shopping for different places that made these 

kind of loans looking for the best deal or the good terms? Or can 

you kind of just walk us briefly through that? 

Mr. SHERILL. I went to a traditional bank, like a Regions, and 

tried to open up an account. I was really there for a loan, not an 

account. But they didn’t give me a loan. They said they don’t offer 

short-term lending and things like that. 

So I went to another bank, tried them out. I went to a credit 

union, and they didn’t do it. You have to have an account with 

them. I didn’t have time for that. I needed it right then. And so 

in my city, I went to one of the bigger payday lending places, and 

they gave me a loan. 

Chairman NEUGEBAUER. And did you look at the conditions of 

the product? Did you think the product was fair? You asked them 

what the terms—it was very transparent what your costs were? 

Mr. SHERILL. With the place that I go, they are strenuous. You 

just don’t go in there and say, hey, I need a loan and they give it 

to you. You have to—it is protocol that you have to meet. It is criteria. And it is a protocol that is followed after you meet that criteria. 

You know, make sure you aren’t this, make sure you are that. 

Sign here. Are you clear on what they explain to you, and you sign 

it. So after that, then you understand what they are giving you. 

And if you choose to accept, then you choose to accept. 

Chairman NEUGEBAUER. Yes. I think you shared something with 

our folks when we were interviewing you, and I think one of the 

questions that was asked of you was, what would have happened 

if you couldn’t have gotten a payday loan? 

Mr. SHERILL. Like I said, I had no other option. It is different 

when you have options. So people who sat around—I could have 

called my grandparents or something like that, I had no other option. And if I wouldn’t have taken that alternative, then I would 

have maybe had to go back to the streets, because that is what I 

knew. And I knew I could get it that way. But I am trying to 

change my life, and that isn’t the way I wanted to go. 

Chairman NEUGEBAUER. You have heard some of the testimony 

in the first panel that—did you feel like that you were being taken 

advantage of? 

51 

Mr. SHERILL. Not at all. I am 32 years old, and I am very competent. So I went in, and they explained it to me: You pay this. If 

you don’t, then the interest rates are going to go up, if you don’t 

pay back on time. And I understood that. I needed to borrow it for 

a while. Two weeks later, I paid it back. Probably I think one of 

the first time I borrowed like $250. I paid like around about $280 

back, maybe somewhere in there, which wasn’t bad, because it met 

my need at the time, so I needed it. So I would do that today if 

I had to. 

Chairman NEUGEBAUER. I think in one of the comments—I don’t 

know if it was in your testimony or not—but you have started your 

own business now. Is that correct? 

Mr. SHERILL. Yes, I am a minority-certified company with the 

governor’s office of diversity, with the Better Business Bureau, and 

I am with the National Chamber of Commerce now. I started my 

company from the ground up, due to loans from these type of 

places. So it works for me. 

Chairman NEUGEBAUER. And I think you mentioned that you 

even from time to time still have used that to supplement your 

working capital in your business. Is that right? 

Mr. SHERILL. Yes, I currently use that now. I employ 20 people 

now. And some of them use the payday loan places to cash their 

checks and get money orders and pay their bills. 

Chairman NEUGEBAUER. You heard the gentleman from the 

CFPB say that this product is hazardous. Did you find it hazardous? 

Mr. SHERILL. No, because I heard all the testimony today, and 

no one is producing a better alternative. It is easy to come in here 

and say, this isn’t going to work, that isn’t going to work, but not 

one person has said, okay, we are going to implement this instead 

of that and it would be better. No one is doing that. So, no, it is 

not hazardous. 

Chairman NEUGEBAUER. Dr. Miller, you have written extensively 

on consumer demand. Does the demand go away if the product goes 

away? 

Mr. MILLER. No, sir. Demand will still stay for credit. And people 

will seek out sources for credit. 

Chairman NEUGEBAUER. I see my time has expired. I now yield 

to the gentleman from Missouri, the ranking member, for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. And let me thank all of the 

witnesses for being here. In the interests of full disclosure, let me 

mention that I have known Mr. Simmons for over 25 years, so it 

is good to see you. 

In part of your testimony, you talked about the need, Mr. Simmons, for high-quality small investment lenders, and the need was 

there. What has been the experience of people in your community 

when they go to a traditional bank? What do you think happens 

to them that the industry that you represent is able to fill this 

void? What are you— 

Mr. SIMMONS. Congressman, there are a couple of different 

things with that question. One is the traditional installment lending industry has certain characteristics that are different than the 

other industries and the other products that have been discussed. 

52 

With respect to the traditional installment lending industry, 

again, it is a fixed-rate, fully amortized, small dollar loan paid off 

equally in monthly installments over a period of time. So that is 

a different product than what was discussed with respect to payday 

a loan or a title loan, which in some of the cases you are looking 

at collateral either being bank account or the vehicle itself. And so 

that is vastly different. 

What I have found in my experience in the community that I 

come from that I talked about in my testimony is that there are 

oftentimes where those establishments are not in the community. 

And what that is simply saying is, in some cases, they may be outside of the ZIP Code that I was discussing with you. I am from 

64130 in Kansas City, Missouri. 

Interestingly enough, we have a municipal ordinance that does 

not allow certain products to be in certain places within the community. Kansas City is one of those places that has a municipal ordinance that does not allow payday, title, or installment loan places 

to locate there if you are not already there. 

Mr. CLAY. I see. 

Mr. SIMMONS. And so, it cuts that off. 

Mr. CLAY. Thank you for your response. Reverend Haynes, if I 

may, the core of the CFPB small dollar loan proposal is to require 

a lender to check if the borrower has the ability to repay the loan. 

This seems like commonsense and standard practice in all other 

types of lending. Since some lenders seem alarmed by this rule, we 

can only assume that some of them are not doing this now. Can 

you share your experience and impact on communities around your 

churches when loans are given without considering an ability to 

repay it? 

Mr. HAYNES. Yes, thank you very much. First of all, to have— 

as I shared earlier—some 20 car title and payday loan stores in the 

last 10 years to literally target and saturate our community and 

then to see the impact upon members of the community who in a 

desperate situation applied for such a loan and then found themselves 7 months—I have even seen one for 10 months they were 

trying to pay back a loan because of rollovers. 

And so, of course, that has an impact on the family. It has an 

impact on the community. And let’s be honest, if you were driving 

through our community and you saw payday loan stores next to 

each other, and you were looking to invest in that community, it 

is highly unlikely that you are going to see that as a wise investment. 

So in a real sense, the predatory nature of it has a tendency to 

not only impact in a negative way those families, but worse than 

that, the community becomes not only a food and job desert, but 

now it is an opportunity desert. 

Mr. CLAY. What does that say about the banking industry? Apparently, there are obstacles here for people to get checking accounts. What does that say about the U.S. banking industry? 

Mr. HAYNES. That the banking industry has a lot of work to do 

to expand options. One of the things that Brother Sherill said was 

that he had no other options. That is a sad statement on our democracy that he has no other options. And I think that justice is 

about expanding options, as opposed to narrowing options, espeVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
53 

cially to options that are the same principles that got us into the 

financial crisis that we as a Nation just got out of. And the sad reality is, these are the same principles going on, but they are targeting communities that historically have been denied opportunity. 

Mr. CLAY. Thank you. My time is up. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Mexico, Mr. 

Pearce, the vice chairman of the subcommittee. 

Mr. PEARCE. Thank you, Mr. Chairman. I appreciate each of you 

being here. 

Dr. Haynes, I found myself earlier in your testimony wondering 

why you all didn’t offer the product yourselves. And so then I was 

deeply gratified when you got to that point of the discussion that 

you did expand and go into doing the loans, which is the key to expanding opportunities, is competition. 

So my question is, have you seen a decrease in the number of 

payday lenders in the neighborhood? In other words, you mentioned the 20 in the 5 square miles around the church. Has that 

decreased as people choose the lower interest and the better service 

with the church there? 

Mr. HAYNES. I can say that the payday loan store that opened 

5 years ago down the street from the church is closed now. So that 

is a good sign for me. As a matter of fact, it is going to be a restaurant now. 

Mr. PEARCE. Just how many loans would you say that you are 

servicing now through your church program? 

Mr. HAYNES. Oh, wow. 

Mr. PEARCE. A hundred, a thousand, ten thousand? In other 

words, what kind of expansion of the market have you seen for— 

Mr. HAYNES. Again, we are new in the microloan department, 

and as a consequence, I would say it is in the number of about 100 

to 150. 

Mr. PEARCE. That is fair enough. That is pretty significant in a 

new start-up. And I am serious to think other churches should be 

looking at this as a way—it really is a problem when you start 

passing laws. You get rid of the good as well as the bad. And when 

you offer competition, then the bad will go away because there is 

a better alternative. And so I worry about—you had said that justice is expanding the options, not limiting them, and yet the thing 

that the CFPB is set on doing is going to limit the opportunities 

and—so I think that the better option is the competition drives the 

bad ones out of business. So, again, I compliment you. 

Just one small note. I noticed that you talk about the 20 percent 

annual interest rate. And when you are talking about the payday 

lenders, you talk in terms of APR. Now, how much is the origination fee that you mentioned there? 

Mr. HAYNES. The origination fee? 

Mr. PEARCE. Yes, you say there is an administrative fee with 

your 28 percent. So what would that be? 

Mr. HAYNES. Oh, that is very minimal. I don’t have that figure 

with me right now. 

Mr. PEARCE. About $20 bucks? 

Mr. HAYNES. Pardon me? 

Mr. PEARCE. Ten bucks or twenty bucks? 

54 

Mr. HAYNES. Ten bucks max. 

Mr. PEARCE. Okay. But you see the difference there. Your APR suddenly went from 28 percent to 38 percent if it is $10, and so 

that is, again, from this side, it could be considered a minor point. 

But just compare apples to apples, if you would. 

Mr. Sherill, you heard earlier in the previous testimony the abusive practices that the one witness kept bringing up. Did you find 

those abusive practices that tried to string you out if you borrowed 

$500? I don’t know what you borrowed, and I am not really interested. Did that string out to where you ended up paying back 

$10,000 for a $500 loan? You have heard that kind of— 

Mr. SHERILL. Well, those are exceptions. There are a lot of people 

who use this product responsibly, like myself. You know, I wouldn’t 

be here. 

I feel that if you borrow money, it has to be a need. So if you 

borrow it, you already have the means to an end, because you are 

thinking, okay, I have to pay it back. So me, I am thinking when 

I get paid, I am going to pay it back. And that is the only reason 

I think you should get one. 

Now, if you get one with no end in mind, then you are asking 

for the hiked fees and stuff like that. It is not meant for a longterm way of life. It is meant for a quick fix, you pay it back, and 

you move on. 

Mr. PEARCE. So to an extent, you are saying that personal responsibility says that the product works pretty well if I use it responsibly, but if I don’t take care of my obligations, then, sure, it 

can string out and out and out. But you didn’t find it to be some 

guy sitting there with a green eyeshade on stringing you out and 

keeping you where you couldn’t quite reach the goal. 

Mr. SHERILL. I relate that to anything in life. If you use it responsibly, then it is a good thing. But you can abuse anything. We 

can abuse alcohol. We can abuse whatever—anything that is usable, we can abuse, basically. And this is just one of those things. 

If you use it responsibly, it will work for you. 

Mr. PEARCE. And, by the way, I compliment you on your story, 

because it is a story that needs to be told to the Nation. We have 

a lot of people out there who have made mistakes and never recover from it. They don’t have your drive and discipline. So my hat 

is off to you. 

Thank you very much. I yield back, Mr. Chairman. 

Mr. SHERILL. Thank you, sir. 

Chairman NEUGEBAUER. I thank the gentleman. And now, the 

gentlewoman from California, Ms. Waters, the ranking member of 

the full Financial Services Committee, is recognized. 

Ms. WATERS. Thank you very much. I first would like to take a 

moment to thank Dr. Haynes for being here. I know how busy you 

are and how you are in demand all over the country, and that you 

were in California last night, and you flew in here and you have 

waited all day. And I want you to know, I truly appreciate that and 

the work that you are doing with the other ministers in this country who are focused on this issue and who are creating opportunities. 

I have been to Dallas. I visited one of your community days. And 

I saw how you brought all the resources from all over to be at the 

55 

community day where people can have access to information about 

services, and I know how hard you work. I am very appreciative 

for you. Thank you so very much. 

Just quickly, when I first started today to talk about setting the 

tone and helping to create the picture of what we are dealing with, 

I will just quickly go through again the pain that is being fostered 

on certain communities and certain people in this country. Predatory lending almost destroyed many communities. And the home 

foreclosure problem was terrible. And these people who were victims of predatory lending were trying to live the American Dream, 

only to discover that they had signed on the dotted line for mortgages they could not afford. And when the devil came due, and the 

interest rates were increased, on and on and on, they lost their 

homes. 

We are still dealing with that. And the hedge funds are coming 

in and they are buying them up, and now we have a lot of people 

who are paying 50 percent of their income for rent because a lot 

of the foreclosed properties have been bought up by hedge funds 

and speculators. And they are not selling them; they are renting 

them and raising the rents, et cetera. Homelessness in the Los Angeles area alone increased by 12 percent, and in the overall county, 

about 20 percent, and it is exploding all over the country. 

In addition to that, we are fighting these private, post-secondary 

schools who advertise on television that you can get degrees and 

diplomas and they could help people have careers, and people take 

out these loans only to find out the schools are just ripoffs. We 

closed down Corinthian. There are a lot of others that we have to 

go after. But we are confronted with that. 

In addition to that, when you pile on top of that, the payday 

loans that are in targeted communities, the rent-to-owns where 

people are losing their cars, it is overwhelming almost. And so for 

each of these, those of us who work very hard on these issues are 

determined that we are going to create some change. 

Now, we never said we were trying to put people out of business. 

We raised the question, why can’t you, Mr. Simmons, have loans 

at 36 percent, as we are doing with veterans? Why do we have 400 

percent, 500 percent, 1,000 percent in these loans? Why can’t you 

do 36 percent? 

Mr. SIMMONS. Congresswoman, with the testimony that I provided earlier, when the FDIC had its pilot program with respect to 

bringing the banking institutions into this particular space, a number of those banking institutions, as you will find with other financial institutions, said the 36 percent was very difficult to lend, 

given the numerous things that they have to deal with, the cost, 

the labor issues, a number of those issues. And so, credit unions 

were in some cases asked to do the same thing. And it was very 

difficult to do. 

Ms. WATERS. Okay, I don’t want to cut you off, because I know 

that story about the overhead being so much that they could not 

afford to do it. But just as they have done it with the veterans, 

they are making out. They are making money. And we are experimenting with some credit unions. Kinecta, for example, has joined 

with payday loan operation in Los Angeles where people get inVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
56 

volved. They are banking the people. They are charging less. They 

are doing some financial literacy, on and on and on. 

So I and many others are not saying we want to put you out of 

business, but we are not going to stand by and allow yet another 

what I consider unfair ripoff to people who can least afford it. And 

so I want you guys to think about it. I want you to think about 

why—for example, you said that in your own community, they 

don’t allow payday loans. Why do you think they don’t allow payday loans? 

Mr. SIMMONS. Congresswoman, in the community that I come 

from, the municipal ordinance that was put in place was to stop 

the proliferation of what the council at that time considered predatory practices. 

Ms. WATERS. Okay, that is good. And that is why 15 other States 

have basically either said you can do no more than 36 percent and 

if you don’t, if you can’t live with that, get out, we don’t want you 

at all. But there is a reason why your municipality has prohibited 

the proliferation, as you would call it, and there is a reason why 

15 States are denying payday loans the opportunity to operate in 

the way that they do. 

So with that— 

Chairman NEUGEBAUER. The time of the gentlewoman has expired. 

Ms. WATERS. My message is, drop the interest rates. Look at 36 

percent or so. Pastor is doing it with 28 percent. We believe it can 

be done. Create the opportunity for this gentleman and don’t gouge 

him. 

Chairman NEUGEBAUER. The time of the gentlewoman has expired. 

Ms. WATERS. I yield back the balance of my time. 

Chairman NEUGEBAUER. I now recognize the gentleman from 

North Carolina, Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. Mr. Shaul, I would 

just like to get a better handle on the borrower and what must he 

provide to obtain a loan from one of your associated members? 

What are the best practice efforts that they have to follow to this 

potential client? 

Mr. SHAUL. It begins with proof of employment. They must have 

a checking account. They must have a credit history, which is 

looked up. And basically, that is what is required. 

Mr. PITTENGER. So you are talking to people who have an understanding of the practice of credit, who have a credit history, they 

are aware of what they are doing, these are thoughtful, knowledgeable people who have already been through the credit process before? You are not just— 

Mr. SHAUL. That is correct. I would make one addition, that we 

have increasingly—and partly under regulatory oversight—also 

looked at the schedule of obligations that the borrower would have 

so that we know that the ability to repay doesn’t crowd out the 

other obligations like rent, food, et cetera, that he or she has. 

Mr. PITTENGER. So the perception, really, in some of the testimony is if you grab people off the street and you have exploited 

them and taken advantage of them, and they blindly don’t even 

know what they are getting involved in. And on the contrary, they 

57 

already have a credit history. It has to be a good, solid history. You 

wouldn’t be loaning the money to begin with. 

Mr. SHAUL. We have had a very difficult time, Congressman, getting people to understand that this is a business. And if you are 

loaning money and you don’t get it back, you are not in business 

very long. Contrary to some people’s thinking, if you look at the 

schedule that the CFPB has put out on sequence of loans, there is 

only about 17 percent of people who are over 6 loans in a year. 

That 17 percent I would submit to you is a problem. And it usually is one of two things. Either that person shouldn’t have had a 

loan in the first place, or in the second place, something happened 

between the time the person took out a loan and the time the payment was due. 

Our best practice requires that if a person cannot repay the loan 

at the third time it is due, then he is allowed to go into a program 

where he gets no further interest charge and he gets a longer term 

to pay. I hear these stories, and I am as horrified by some of the 

outrageous things I hear as anybody else is. The question then becomes, who made that loan? And almost always when we run them 

down, we find that it is not someone who is a member in our association or anyone reputable. 

There is a myth that there are States that don’t have payday 

lending. Every State has payday lending. The question is, is it regulated payday lending? Or is it payday lending that you can take 

off the net? And if you just go to your home computer and you look 

up the State of Washington, or Idaho, or whatever State you 

choose, even including New York State, and you have the patience 

to go through New York State payday lending, you will see the opportunity to get a loan, even though that is not regulated. Those 

are dangerous. 

And we have for a long time said to the CFPB, you ought to get 

at this question by requiring universal registration of everybody 

who makes a loan, and then you ought to ask every State to pass 

a law that says, if you are not registered, you can’t collect. That 

will put a stop to this illegal lending, and then we will see how 

many of these anecdotes are left, because I believe that most of 

these anecdotes stem from illegal vendors. 

Mr. PITTENGER. Thank you very much. It is a very good answer. 

Mr. Simmons, you have extensive background, experience in economic development and oversight of financial matters. Do you believe that these loan practices are predatory? 

Mr. SIMMONS. I can only speak for the traditional installment 

lending industry. And in answering your question, we believe that 

there is an opportunity for these loans to be options, additional 

loans for individuals because we believe that they are safe, they 

are affordable, they are over a period of time, that an individual 

would know exactly what their loan payment would be over a period of time in monthly installment loans. 

Our position would be that as you look at the potential rule and 

the proposal, that consider the other options that are available. 

And we believe that a traditional installment loan and the lending 

industry that has been around for 100 years, different than other 

products, is an opportunity to be choice given to individuals that 

is not predatory in nature. 

58 

Mr. PITTENGER. Thank you very much. I yield back. 

Chairman NEUGEBAUER. And now the gentleman from Texas, 

Mr. Green, is recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank these witnesses 

for appearing, as well. 

Dr. Haynes, let me thank you for the stellar job that you have 

done. I want to go beyond this question of payday lending for just 

a moment and mention your THRIVE program, where you have 

had over 100 young Black males to work with you between the 

ages of 16 and 19, paid them not minimum wage, but $10 an hour, 

and they are getting mentoring and they are getting tutored. And 

you are doing a good job in helping people to find their way in life. 

And I want you to take just a moment, if you would, so that people 

will know who you are and tell us a little bit about the things that 

you are doing at your church. 

Mr. HAYNES. Okay, thank you so much. The THRIVE program 

was in response to the murder of Treyvon Martin, and the outrage 

in our community had to be harnessed for good. So on the one 

hand, we wanted to stand against injustice in the justice system, 

and at the same time provide opportunities for empowerment. 

And so for the last 2 summers, we have partnered with other corporate entities, our church has, and we have recruited, we have 

trained, and we have mentored young brothers for the purpose of 

helping them to secure employment in some of the corporations in 

Dallas. 

And the program has gone well. This year, we are going to expand it to include young ladies within that same age range. And 

so it is our hope always to on the one hand address the injustices 

in the system, and at the same time to empower those who are 

powerless. 

Mr. GREEN. And you hope to help the Mr. Sherills of the world, 

people who may find themselves in his position, such that they 

don’t have to go to payday lenders. Is that a fair statement? 

Mr. HAYNES. That is a fair statement. I admire his testimony 

and his strength. And it is my determination that he will have 

other options other than a predatory loan. Though he has made 

good on his—and I think that is wonderful—it is just that in many 

instances, he is the exception to the rule. And so we need to be concerned about those who suffer from the rule. 

Mr. GREEN. Mr. Sherill, let me compliment you, as well. I think 

that you have done well with your life and I wish you the very 

best. But there are lots of folks who haven’t been as successful, and 

they have been victims. And I speak for the victims. 

Those who have been in a position to make it through these payday loans, wonderful. And, by the way, I don’t want to put payday 

lenders out of business, either. 

So let’s just go through some questions quickly. If you believe, as 

Mr. Shaul does, that you can regulate payday lenders, raise your 

hand. So, Mr. Sherill, you don’t think that you should regulate payday lenders? 

Mr. SHERILL. Well, I don’t get into the politics into it, so I really 

don’t understand the question. 

59 

Mr. GREEN. I don’t want you to get into the politics of it. You got 

into the politics of it when you decided to come to this hearing, Mr. 

Sherill, just so you know. 

Mr. SHERILL. Yes. 

Mr. GREEN. Now, let’s try it again. If you believe, as Mr. Shaul 

does, that you can regulate payday lenders—by the way, they are 

regulated across the country so that you all know—do you believe 

you can regulate them? Raise your hand. All right. Everybody has 

raised their hand. Let the record reflect—I want you to be on the 

record. The record has reflected that you believe they can be regulated. 

If you believe that it was appropriate for the military to be regulated, payday lending to the military to be regulated, raise your 

hand. So now, Mr. Simmons, you don’t think that we should have 

regulated the military. Mr. Sherill, you don’t think that we should 

have regulated the military. And, Mr. Miller, you don’t think we 

should have regulated the military. 

Do you think that the military folks ought to be treated the same 

way other people are being treated and taken advantage of to the 

same extent. Is that a fair statement, you don’t think they should 

be regulated? I will ask you again so that you can be on the record. 

You have to be on the record now. You are talking about the military of the United States of America. If you believe that we should 

have regulated military payday lending, raise your hand. All right. 

Let the record reflect again that the same three persons do not believe that this should be done. 

Mr. SHAUL. Congressman, can I at least— 

Mr. GREEN. There are no halfway answers right now, because I 

only have 20 seconds left. I apologize, okay? If I had more time, I 

would work with you. See, here is the problem. And I respect the 

three of you for taking the positions that you have taken. But here 

is the problem. A person today not in the military can be victimized 

by some of these payday lenders. Not all, but some. But if the next 

day he gets in the military, he can’t be victimized. What happened 

to him to make him a person who shouldn’t be a victim overnight? 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

Mr. GREEN. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. The Chair now recognizes the gentleman from Colorado, Mr. Tipton, for 5 minutes. 

Mr. TIPTON. Thank you, Mr. Chairman. I would like to thank the 

panel for taking the time to be here today and to be able to hear 

your individual stories. And I know in my district in Colorado—in 

fact, we have well over 200 letters that have been sent to our office, 

constituents out of my district who have taken the time to be able 

to just write in and be able to express their support for having the 

freedom to be able to go out and meet their financial needs, to be 

able to have some choices in some very specific circumstances. 

A constituent out of Alamosa wrote us saying that they used one 

of these short-term loans to be able to pay for unexpected car repairs, and another in Monte Vista to be able to catch up on a couple of bills, and yet another for medical bills. 

What they are concerned about is the overreaching hand of the 

Federal Government. And you have had to sit here a long time, so 

maybe a little exercise is a great idea. How many of you here think 

60 

that the Federal Government is the sole embodiment of good 

choices for how to be able to run a business in this country? Let 

the record show not one person raised their hand. 

What we have is our colleagues have pointed out is an industry 

that is regulated and creates some opportunity in those hometown 

communities to be able to provide access in a time of some specific 

need to be able to do that. But, Mr. Simmons, I would like to be 

able to maybe get a couple of comments from you. When you were 

giving your testimony, you had talked about a financial service 

desert in your community. 

Mr. SIMMONS. Yes. 

Mr. TIPTON. And just really kind of a couple of points. I think 

that I would like to be able to hear you address on this. The importance of that access and, in your community, when it was effectively outlawed, people were told to go away from providing some 

of the service to the community, did the need go away, and where 

did they go? 

Mr. SIMMONS. I would like to say that, Congressman, the need 

is there. The need is great. It is demonstrated by the fact that in 

the State of Missouri last year, I believe there were 180,000 traditional installment loans that are made. 

With respect to small dollar loans made in the entire State, that 

is well over a million that is made on an annual basis. So there 

is significant need that is there. My testimony today was to talk 

about the traditional installment lending and what it is as an option with respect to that need. 

And so I commend the gentleman, Dr. Haynes, who talks about 

giving the options in the community that allows the community to 

have additional options. I commend him for that. I commend individuals that try to find different ways and different options. 

At the same time, I am very familiar with the fact there is still 

great need and there are at times cracks that often people will slip 

into, and they won’t be able to get one loan versus the other. And 

so for those that are doing that yeoperson’s job like he is doing, we 

commend them. 

At the same time, I think it was said earlier, giving the options 

where you have the opportunity to say here are other products that 

are in the marketplace and given competition and given the opportunity to have other products is something that is still needed 

within the community. 

I didn’t have that within the community that I grew up in. I see 

what transpires in a community where there is a financial services 

desert. That need is still there. If there are not people like Dr. 

Haynes filling that gap and filling that role or having safe and reliable loans like I talked about with traditional installment lenders, 

it is very difficult because the banks don’t do this. 

Mr. TIPTON. And then it will move into a completely unregulated 

market, which is probably going to be a lot more punitive? 

Mr. SIMMONS. I would say that is what we hear in the community often is, I am going to find a way to deal with my needs. 

Mr. TIPTON. To be able to help your family. 

Mr. SIMMONS. To be able to help. 

Mr. TIPTON. I apologize. I am a little short on time, and I did 

want to get Dr. Miller in. Does it raise concerns for you that we 

61 

are seeing the CFPB, where it has done no analysis of existing 

State regulatory structures or practices, now trying to be able to 

set the bar nationwide? 

Mr. MILLER. Yes, it does. I think having 50 States try regulations 

gives us 50 opportunities to see what works and see what doesn’t 

work. And the States do have various regulatory methods that they 

have employed in the past. 

My question is, on research, let’s see independent research that 

is done that is not a position but it is independent by academics 

who look at the data and ask questions and draw conclusions and 

publish the results in peer-reviewed journals. 

Mr. TIPTON. Thank you so much. My time has expired. 

Chairman NEUGEBAUER. Time has expired. The Chair now recognizes the gentleman from Kentucky, Mr. Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. And thanks to our witnesses. And, first, to Dr. Haynes, let me just thank you and commend you for stepping in and providing through your church opportunities for credit, for folks in your community. And I think there 

is certainly a role for that in the faith-based community to do that. 

And also, as we have seen so many times, faith-based institutions and institutions of private society, frankly, doing a much better job than the government in offering financial literacy to the 

people of this country. 

To Mr. Sherill, I wanted to ask you, in your compelling personal 

story of redemption and accessing a payday loan to build a business and take advantage of a second chance that was given to you 

in your life and really be the embodiment of the American Dream, 

at that time in your life, did you have access to a faith-based 

church or organization that could have given you credit? 

Mr. SHERILL. No, I had access to nothing. And that is why I 

chose to go to the payday lending. There is nothing out there. Like, 

again, I said, I commend Dr. Haynes for that. If he had one in my 

city, I am pretty sure there would be a lot of people like me going 

to see him. 

We are looking for something. We have nothing. And that is why 

I chose to go to payday lending. 

Mr. BARR. And I think that spells it out right there. Sometimes, 

there aren’t as many choices as we need. And I think your story 

demonstrates that the greatest protection for consumers, the greatest consumer protection is competition and choices. And if we had 

more choices, we would have better opportunities for people to do 

what you did and achieve the American Dream. And I commend 

you for that. 

Let me just ask you, Mr. Sherill, if you didn’t have that opportunity for that payday loan to build that business, where would you 

be today? 

Mr. SHERILL. Possibly back in prison, because we revert back to 

what we are used to. And if I am used to the streets and getting 

money from the streets, then I would most likely go back to that, 

because it is survival of the fittest. If you don’t have it, then you 

have to go get it some type of way. 

Mr. BARR. Again, I appreciate the fact that your story is one of 

redemption and second chances and taking a risk and the hard 

work that it takes to do what you have done. There has been a lot 

62 

of talk today in this hearing about predatory lenders and making 

people victims. Mr. Sherill, do you view yourself as a victim? 

Mr. SHERILL. No, sir. Not at all. 

Mr. BARR. So if you don’t view yourself as a victim of your business partner advance, describe that relationship that you have with 

your lender? 

Mr. SHERILL. Well, my lender—I got to know them. They are basically a pillar of our community in Nashville. They give back a lot. 

I am here solely because of me and my reasons. But they are—in 

our community, they give back a lot. And they gave me an opportunity when nobody else would. 

Mr. BARR. To Mr. Simmons and Mr. Shaul, I think, Mr. Simmons, you made the point that banks don’t do this. And I want to 

explore that issue, because, again, as I said before, I think competition and choice is the best way to protect consumers, in addition 

to State-based regulation, consumer protection laws. Kentucky has 

one of the most advanced consumer protection laws in this area, 

and unfortunately the Bureau would cancel out what our general 

assembly and our regulator and our governor have done in that 

area. 

But let me just explore why banks don’t do this. The CFPB, the 

OCC, and the FDIC, they have issued rules that have limited 

banks’ abilities to compete in the overdraft space, in deposit advance, in short-term lending, with only a few banks left even offering such products. 

So it looks to me like the regulators in Washington are squeezing 

both sides of this. And as Mr. Sherill says, they are going to go— 

you are going to go get a loan—I think your testimony, Mr. Sherill, 

was I can say that there other places I could have gone for a loan. 

You don’t want me to tell you about those places or those people, 

but they are out there. 

If we are denying the American people access to credit from 

banks and traditional lenders, and then the Bureau comes in on 

this side and denies people like Mr. Sherill opportunities here, and 

there are not great people like Dr. Haynes in the community and 

the faith-based community, where are these people going to go? Mr. 

Simmons, Mr. Shaul? 

Mr. SHAUL. May I say, Congressman, the Bureau has adopted a 

policy that is simply this: The easiest way to protect consumers is 

to deny them credit. There is no problem then with whether there 

is any misuse. But that is precisely a recipe for disaster, because 

contrary to what the Bureau seems to be willing to propone, ask 

yourself how many Americans have advanced economically or socially without the use of credit. 

The people to whom we loan money have a more desperate need 

often for that credit than anybody else does. The failure to appreciate that the reasons that banks have moved out of neighborhoods 

has a lot to do with simple economics. The cost of complying with 

the post-2001 disaster in New York City, the cost of that, the compliance cost for most banks has tripled since in that 15 years. 

Banks look upon everybody who comes through the door as to 

whether or not they are a profit center. That means that they have 

very little interest in those individuals who don’t look at that moment in time as though they will continue to be a profit center. 

63 

That means that we have a much larger non-depository base than 

we used to have. Regulating it is very important, but having it 

there is even more important than the regulation. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

Mr. BARR. Thank you. I yield back. 

Chairman NEUGEBAUER. The gentleman from Texas, Mr. Williams, is recognized for 5 minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman. And I want to thank 

all of you for taking time today. It has been a great dialogue. I appreciate it. 

I am a small-business owner in Texas. And I may be one of the 

few on this committee who actually is a lender. I deal in credit. 

And I just cannot believe, as I go through my life every day up 

here, how people want to bash and condemn small-business people 

who are trying to employ people, trying to make things better. 

Mr. Sherill, I know that we talked about victims today. And I 

hope that the victims who are out there, whomever they are, are 

looking at you as someone they can look up to and get themselves 

out of that status and get into where you are and own a business 

and employ people and do great things. And I know everybody is 

proud of you. 

And I want to just say this really quickly to you, Mr. Sherill. Tell 

me about—we talked about the place you borrowed the money. But 

I believe that Mike and Tina Hodges own that business. And what 

kind of people are they? 

Because here is the deal. All of us who employ people, who own 

businesses, we just get hammered by this Administration, just nonstop, every single day. I want to know what kind of people you do 

business with. These are good people, I bet. 

Mr. SHERILL. Yes, they are stand-up, honest people who give people opportunities. Like I said, they do a lot in the community. I 

could go on and on about the stuff that they do. They are great people. They are wholesome people. They are family people. I have 

known them for about 4 or 5 years now, and I have built a rapport 

with them over the years. 

It started out as business. And then later on, we created a rapport. Initially it was strictly, hey, I didn’t know them, and then as 

years went to—as years developed, I got to know them personally. 

Mr. WILLIAMS. That is the same story across the country about 

people who invest and try to help folks. And I am glad to hear 

about that. And just that story in itself, Mr. Chairman, I would say 

is another story of the American Dream. 

Mr. SHERILL. Yes, sir. 

Mr. WILLIAMS. And so I hope we don’t destroy that, which it 

seems like we are trying to every single day up here. 

Now, Mr. Simmons, my question to you is, after listening to your 

testimony today, I believe it is safe to say that the need for small 

dollar lending is real. Now, you note in your testimony that traditional installment lenders make traditional installment loans or to 

make high-quality small dollar loans. But I don’t think the CFPB 

believes that. 

What the CFPB doesn’t understand is the importance of providing service to customers. They don’t deal in service. They have 

no idea on how to give service to their customers, which is all of 

64 

us. Most of the people I deal with in my business, the car business, 

and the people you are here to represent are folks that we can really make a difference for. We try to improve things, whether they 

need a new car to drive or a used car to drive to get to work or 

a small loan to get through a tough month. We are there to support 

them, because they are valued members of our community. The experience can be personal. And, frankly, again, we get back to the 

consumer and the people know better than the Federal Government. 

So let me ask you, Mr. Simmons and Mr. Shaul, these questions. 

As we discussed earlier, in 2008 the FDIC conducted a small dollar 

loan pilot program to see if banks would participate in this space: 

31 banks participated, with 446 locations in 26 States. I think what 

the FDIC program showed was that it didn’t save customers any 

money. In his budget release this week, the President requested 

$10 million for the small dollar lending program to be administered 

by community development financial institutions. This, of course, 

would be funded by the customer, i.e., the taxpayer. 

So can you elaborate, either one of you, more on this program 

and why it will or won’t work, to really save the consumer any 

money at all? 

Mr. SHAUL. It won’t work. Bluntly put, the FDIC experiment did 

not work. And it did not work because you cannot subsidize your 

way or artificially control rates and believe that the market will respond. 

This is a problem because, first of all, it will bring to full measure something we have all feared, and that is the CFPB runs always the risk of becoming an allocator of credit, picking winners 

and losers. And this is the direct attempt to do that. Second, this is the nose inside the tent. If it is $10 million today, it could be $100 million or $1 billion soon. Third, and most importantly, anyone can make loans, provided they know that their 

losses are going to be floored by another entity, and that is what 

is being talked about here. 

There is a contingent who believes that you can do away with 

what is now being offered by the private sector, and you can get 

at that either by Operation Chokepoint or you can get at by rules 

that make it impossible for us to operate. Having done that, then 

the solution becomes to put in an artificial resuscitation effort 

which would be this kind of program. 

Mr. WILLIAMS. Thank you. I have 4 seconds. Does anybody want 

to comment on the President’s request in funding for a loan loss 

reserves in this year’s budget? I am out of time. 

Mr. Chairman, I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. And I now recognize the gentleman from Missouri, Mr. Luetkemeyer, the chairman of our Housing and Insurance Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. And welcome, Mr. 

Simmons, a fellow Missourian. It’s good to see you again, sir. 

Mr. SIMMONS. Thank you. 

Mr. LUETKEMEYER. Dr. Miller, kind of a quick couple of questions 

for you here. Do you know off the top of your head what the average loan loss ratio is, of an average payday loan company? 

Mr. MILLER. I do not. 

65 

Mr. LUETKEMEYER. Okay. Do you know what the rate of complaints are average across the country for per thousand transactions, something like that? 

Mr. MILLER. No, sir, I don’t know exactly. I think it is low, but 

I don’t think—I don’t know exactly. 

Mr. LUETKEMEYER. Mr. Shaul, do you know that number off the 

top of your head? 

Mr. SHAUL. I would like to make two comments about that. Historically, State by State, it is very low. Director Cordray said to us 

that he would be driven by the complaint data. If you look at the 

complaint data, two things are apparent. The payday loan complaints are very, very low. They are at either the first or second 

lowest in all of the categories that are measured by complaints. 

Second, when you analyze those complaints, they contain two 

other kinds of categories within them, loans that are complained 

about, denominated as payday loans in States that don’t have payday lending, which means that people who took a non-regulated online loan are complaining about the fact that they are being serviced poorly, paying too much, one thing or another. 

That problem the CFPB has had no willingness, no appetite for 

tackling at all, although it is obviously one that should be tackled, 

because it impedes the businesses that do have reputations to protect, and it is disastrous for the consumers. 

The second thing about the complaint portal is that it is irrational. If someone writes in and says, I didn’t get a loan, that is 

my complaint, we get a ding as an operator as though there were 

a legitimate complaint. It is baffling to me that the single exercise 

that was meant, we were told, to guide the question of examination, compliance and rulemaking shows us to be not a category of 

problems, but we are the ones that are first out of the box and 

being set upon by a rule, and yet the rule does nothing about the 

real complaints that are there and about the real victims who are 

not being in any way brought to a situation where they will be 

compensated. 

Mr. LUETKEMEYER. In my experience, when I was a financial 

services chairman back in Missouri for a few years, and actually 

worked on at that time a landmark piece of payday lending legislation, so it became the model for a while of how you address this 

issue, I checked every year with our consumer protection folks in 

the State there. And the payday loan folks per thousand transactions, their rate was always less than banks and credit unions. 

Mr. SHAUL. Yes. 

Mr. LUETKEMEYER. It was across-the-board. That is not even 

close. 

Mr. SHAUL. That is the nationwide experience. 

Mr. LUETKEMEYER. So it tells you that there are a lot of satisfied 

customers out there. And we have heard some testimony today 

about some who are not happy. And every industry has that kind 

of a situation. I don’t care whether you are selling cars like Mr. 

Williams is or whatever your industry is, if you are selling toothpaste. Somebody is not going to be happy with your product and 

misuse it somewhat. 

One of the concerns I have is—it really is kind of interesting, we 

have—the government took over the student loans, and we conVerDate Nov 24 2008 15:24 Aug 18, 2017 Jkt 023568 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 K:\DOCS\23568.TXT TERI
66 

tinue to increase the student loan data, get more students in debt 

over their heads than can actually ever get out, and today we are 

worried about the problem with payday loans when we have hundreds of thousands of dollars that some of our students are getting 

into and haven’t heard a whimper out of the other side on that. It 

is amazing. 

But I would like to talk for just a second about Chokepoint. Mr. 

Shaul, you brought that up. Obviously, you are probably aware 

that I am the sponsor of the Chokepoint bill here in Congress, and 

my colleagues helped me pass that last week and sent it to the 

Senate to try and stop the nonsense. I have an e-mail address in 

my office that takes Chokepoint stories. I had one last week, and 

it was a payday lending one. Two weeks before that, it was a credit 

bureau in California. And 2 weeks before that, it was a tobacco 

shop in Florida. 

I have about a minute left here. Can you quickly give a couple 

of stories about Chokepoint? 

Mr. SHAUL. I had one in my e-mail today from the State of California, a small operator in a very small town. This has not stopped. 

We still feel that the examiners have not been given sufficient disciplinary action from the top that they will stop advising people, 

banks, institutions, to cut off those of us who fall in the category 

that by their taste they don’t like, not by the law, not by any guidance, but by their taste. 

And I must tell you, I was extremely disappointed by the President’s statement. Evidently, we have come to this point with regard 

to due process in this country where it is justified to go after those 

who are regulated and innocent by virtue of the statement he 

issued because it could interfere with getting at some of those who 

are actually guilty of crime. 

Were we to take that standard into the criminal law or were we 

to do anything else with it, we would have repudiated most of the 

Anglo-Saxon and United States history as far as rights go. 

Mr. LUETKEMEYER. I appreciate your comments, sir, and I appreciate the indulgence of the chairman. I think this is a key point 

that your members are being deprived of their livelihood without 

due process. 

Mr. SHAUL. No due process. 

Mr. LUETKEMEYER. It is a Constitutionally protected right. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

The gentleman from Minnesota, Mr. Ellison, is recognized for 5 

minutes. 

Mr. ELLISON. Let me thank the chairman and the ranking member. 

For anybody who might be watching these proceedings, I want to 

say thank you and welcome for being here today. I would like to 

point out just as a matter of rule that the reason that of the five 

people who are offering testimony today, four sound like they are 

taking a Republican position, is because that is the way the rules 

work. The Republicans get to choose, well, four—the majority of the 

witnesses and the Democrats get to pick just one. 

So anybody who just doesn’t know how it works around here, this 

is not representative of how people feel about this issue. It is just 

67 

the Republicans have the majority, so they get to pick four people 

who agree with them. 

Anyway, Dr. Haynes, it is always a pleasure to see you. I want 

to thank you for your tireless fighting for people all the time. You 

are always at the forefront of standing with people. And you remind me of some dear friends I have in Minneapolis where I am 

from. We also have strong faith-based movement working in predatory payday lending in our communities. 

And by that, I don’t mean all payday lenders are always predatory, but there is predatory payday lending and we should try to 

stop it. And I would hope everybody on this panel would agree with 

me about that. 

I work with at home friends of mine, Reverend Paul Slack of 

New Creation Church, Reverend Grant Stevenson, Pastor Billy 

Russell, Greater Friendship Missionary Baptist Church. I could fill 

them up with this room, and I guarantee you I would have more 

people complaining about the way payday loans are abused than 

people on the other side of the fence, if this were a true representative sample of how people feel about this issue. 

Can you tell us why faith-based leaders, yourself and others who 

you work with, and institutions are involved with this small dollar 

lending issue? What brings you to it? 

Mr. HAYNES. Number one, it is a moral issue in that in our faith 

tradition, as in most faith traditions, we believe that God is concerned about those who cannot do for themselves. And as a consequence, we have a responsibility to address those structures and 

systems that reinforce that situation of being dispossessed and left 

behind. 

Mr. ELLISON. Now, Doctor, you don’t just preach from the pulpit. 

You actually go one-on-one with people. 

Mr. HAYNES. Right. 

Mr. ELLISON. In your experience, do most people understand the 

terms that they are getting into? Is there sufficient time for them 

to—do the lenders take time for them to really know what they are 

getting into? Or are these desperate people in a desperate situation? 

Mr. HAYNES. Thank you. They are desperate. And when you are 

in a desperate predicament, and this is what is marketed to you 

through the airwaves, and it is all you see on your streets, again, 

you make choices within the confinement of your options. And so 

they make those choices out of desperation, and they are not going 

to take the time to read the whole thing. And most of us don’t take 

time to read our whole loan piece whenever we apply for a loan. 

So to judge them I think is inappropriate and unfair. So you are 

talking about desperate people in desperate situations who want to 

do the right thing, but they are being set up by predatory practices. 

Mr. ELLISON. So one of the things that some of the folks who engage in these predatory payday loans—and, again, by saying—I use 

the predatory not to modify all payday loans, but the predatory 

ones—and sadly there are too many. And I would hope that everyone in the industry would want to hold up a high standard. 

A lot of times, these folks who advocate for just predatory lenders 

doing whatever, they say that they have to be allowed to do it or 

there would be no other alternative. Do you agree with that? 

68 

Mr. HAYNES. Not at all. As a matter of fact, again, our microloan 

fund that we are offering at the church through our credit union 

is there and it is doing well. The people are paying back well. As 

a matter of fact—and I meant to correct the gentleman earlier— 

if you are paying well on the loan, it goes from 28 percent to 19 

percent. So we are still doing well. And I believe that there are 

those out there who would like to offer these kinds of opportunities. 

Mr. ELLISON. Yes, and do you find that other congregations are 

looking into the same thing? I know in Minnesota there are a lot 

of congregations thinking about this stuff. They would even try to 

buy back people’s payday loans and then set them on a more moral 

framework. 

Mr. HAYNES. Oh, without question. As a matter of fact, there are 

several churches in the area that I referenced earlier, where we 

had this inundation of a community targeted by the industry. And 

as a consequence, there are several of us who are trying to pick up 

on this model. I am even partnering with the church across town 

that is a white Southern Baptist Church, because, again, they are 

against this kind of predatory practice. 

Mr. ELLISON. So it is moral and right to stand up for consumers. 

Your churches offer alternatives. And there are other people 

around the world in the country doing the same thing. 

Mr. HAYNES. No question. 

Mr. ELLISON. Thank you, sir. It is an honor to see you again. 

Mr. HAYNES. Thank you. 

Chairman NEUGEBAUER. The time of the gentleman has expired. 

I would like to thank our witnesses for their testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And with that, this hearing is adjourned. 

[Whereupon, at 6:02 p.m., the hearing was adjourned.] 

(69) 

A P P E N D I X 

February 11, 2016 

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I am the Rev. Dr. Frederick Douglass Haynes, Ill. 

I serve as the Senior Pastor of Friendship-West Baptist Church in Dallas, Texas and Chairman of the 

Board of the Samuel DeWitt Proctor Conference, a nationwide movement of pastors and community 

activists fighting for spiritual renewal and social justice. I am pleased to represent Friendship-West as 

well as othe churches in Dallas and across the nation whose communities have been targeted, 

oversaturated and economically overwhelmed with payday loan and auto title loan stores. 

Several of my colleagues in pastoral ministry and I became alarmed as buildings once occupied by 

thriving restaurants and bank branches were taken over by payday and auto title loan stores. In the last 

10 years, 20 payday and auto title loan shops opened within a five mile radius of our churches. Many of 

these stores are located next door to each other. A community that was already suffering as a food and 

job desert was and is being overrun by these predatory stores. It appeared that our underserved and 

under banked community was being intentionally targeted for these high cost, debt trap loans. Our 

concern was confirmed as we heard from members of our churches and residents in the community 

who were financially held hostage by these "loans." They confessed that in a situation of desperation 

they had sought to get a loan that eventually became a trap. They made payments, every other week or 

monthly, only to get deeper in debt. They were in a financial hole and upon getting a payday or car title 

loan, received a shovel instead of a rope. 

As a pastor my heart went out to many who were victimized by these predatory practices. Here are 

some of the unfortunate experiences shared by members of our churches and citizens in our 

communities. A recently widowed 70 year old grandmother took out a $300 loan. She ended up paying 

$800. She's always been fiscally responsible but "life happened" and she had to take out this loan. She 

paid back the loan in full but she had to roll the loan over several times, ultimately paying much more in 

interest than she had borrowed. I'm representing the 23 year old college student, whose parents are 

deceased, but he was determined to get his education. He needed to purchase books for his classes and 

what was a $300 loan ended up costing him over $600. I could go on with other heartbreaking 

experiences that have been shared with me, but suffice it to say all of them were hoping for a life 

preserver, but they were given shackles. 

Payday loans in Texas carry rates of 500% annualized interest. Car title loans are in the range of 250-

300% APR range. The Texas Office of Consumer Credit shows that 61% of balloon payday loans are 

refinance loans that are taken in order to repay the previous unaffordable loan. Every week car title 

loans result in 847 car repossessions. A resident of our community shared with me that he had a car title 

loan that began as a $4000 loan. The car was repossessed when he couldn't escape the debt trap but he 

had paid $8200 in the process. 
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A coalition of churches and community groups sought to close the loophole in the state usury law in 

Texas that allows these businesses to charge over 500% in interest but we were unsuccessful and the 

shackles disguised as a life preserver remain in place. Undaunted and determined to free our community 

from these predatory practices we petitioned the city government in Dallas to rein in the destructive 

dealings of the payday and car title lenders. The Dallas City Council enacted an ordinance that 

established a limit on the number of times a loan can be rolled over and requires significant principal to 

be paid down with each renewal. More than 30 municipalities in Texas have followed this model of 

justice and relief, reflecting the serious concerns held by many Texans about payday and car title loans. 

Friendship-West has sought to be a solution to this problem, which is symptomatic of a larger problem 

of greed and economic exploitation which has produced a widening wealth gap that threatens the fabric 

and future of our nation, by launching a credit union and partnering with another church in our 

community that held a federal credit union charter. We now have several years of banking experience 

and we now offer Uberty Loans, microcredit to members in need who are able to afford a small dollar 

loan. We offer loans of up to $500 for terms of 6 months and 28% annual interest, 19% interest for 

members, with a reasonable application fee. There has not been one defaulted loan and all of those 

who are benefitting from this loan are paying the loan back on schedule because they can afford it. It's 

good business. It has empowered the powerless it is moral. 

We have taken a stride toward economic freedom in Dallas, but we still have a long way to go. The City 

ordinances have been helpful but they can't cap the rates on these burdensome loans. Furthermore, 

these ordinances in Dallas don't cover all Texans, not to mention citizens throughout our country who 

find themselves trapped in underserved communities with limited opportunities that are preyed upon 

and inundated with payday and car title loans as their only options. 

I maintain that it is vitally important for this committee to be morally outraged and attend to the 

devastating harm caused by payday and car title lenders who have preyed upon the vulnerable and in 

the process they have financially trapped individuals, stressed families while economically crippling 

communities. This is immoral and an affront to faith that demands that we protect "the least of these" 

and stand against all forms of usury. 

Nationally, in states that permit these loans, payday loans average 322% APR, typically due two weeks 

later, while auto title loans average 300% APR, usually due in one month. The bait is marketed as a life 

saver but it is a debt trap. We can't excuse this as the practice of a few bad apples who are greedy; this 

is the industry standard. Three-fourths of all payday loans are from borrowers with more than 10 loans 

per year. They are trapped in an economic snare. The average payday borrower spends seven months of 

the year trapped in these loans that are supposed to be for two weeks. The downward cycle of debt has 

long term economic harm. Payday borrowers are more likely to lose their checking account due to 

overdrafts, fall behind on medical and other expenses, and even file bankruptcy. This is immoral and 
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unacceptable. To respond to a desperate person and give them a loan that takes them from bad to 

worse is a slap in the face to human decency and dignity. 

I am especially appalled by the harm done to communities of color that have been historically exploited 

and suffer from a lack of economic opportunity. Payday loan borrowers are disproportionately AfricanAmerican. The research reveals, sadly, that payday lenders target these disadvantaged communities. 

This predatory industry adds to the problem of the racial wealth gap in this nation. I recognize that some 

have been helped by this industry but they are the exceptions. Too many are imprisoned. If there's not 

justice for all we don't have justice at all. 

The CFPB's proposal protects against loan rollovers that perpetuate the debt trap. These protections are 

desperately needed because of the very nature of payday and car title loans. lenders have direct access 

to the borrower's checking account allowing the lender to be repaid without regard for other 

responsibilities the borrower may have. This is a depraved business model that cannot go on. L 

We want access to credit, but it must be quality credit. Anything less adds to the stress of the desperate 

and 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 in need. 

We must end the debt traps, protect the vulnerable and eliminate the predators so that all can 

experience "life, liberty and the pursuit of happiness." 
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MERCATUS CENTER 

George Mason University 

Bridging the gap between academic ideas and real-world problems 

TESTIMONY 

PRESERVING AND EXPANDING CONSUMER ACCESS TO CREDIT 

PRODUCTS ALONG THE NONBANK-SUPPLIED SMALL-DOLLAR 

LOAN LANDSCAPE 

THOMAS MILLER, JR. 

Professor of Finance and Jack R, Lee Chair in Financial Institutions and Consumer Finance, Mississippi State University 

Visiting Scholar, Mercatus Center at George Mason University 

House Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit 

Hearing: Short-term, Small Dollar Lending: The CFPB's Assault on Access to Credit and Trampling of State and Tribal Sovereignty 

February 11, 2016 

Chairman Neugebauer, Ranking Member Clay, and members of the subcommittee-thank you for the opportunity to appear before you today. Consumer credit has been a hotly debated topic for decades, if not centuries. 

Historically, banks do not fulfill small-dollar credit needs of subprime borrowers. As a result, the marketplace has 

responded with an array, or landscape, of nonbank-supplied small-dollar credit. Americans who rely on nonbanksupplied small-dollar loans are not wealthy, and many live from uncertain paycheck to uncertain paycheck. Today, 

few Americans have rainy day funds big enough to cover unexpected bills, paycheck shortfalls, or unplanned work 

absences.' People who make regulatory decisions on behalf of these borrowers are well intentioned. In many 

cases, however, they do not fully understand how small-dollar credit products help subprime borrowers who are 

in difficult financial circumstances. 

In my scholarly work on consumer credit, I seek to understand how small-dollar loan markets work and how best 

to restructure regulation to improve borrower welfare. Access to credit is a fundamental freedom for all Americans. The research that I and others have done shows that regulation along the consumer credit landscape often 

impinges upon this freedom. 

1. See Annamaria Lusardi, Daniel Schneider, and Peter Tufano, "Financially Fragile Households: Evidence and Implications" (Brookings 

Papers on Economic Activity, Brookings Institution, Washington, DC, Spring 2011). 

For more information or to meet with the scholar, contact 

Chad Reese, 

Mercatus Center at George Mason University, 

The ideas presented in this document do not represerlt official positions of th~ Mercatus Cet)lt:r or George Mason Universit~ 
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My testimony contains three main points: 

A. The small-dollar credit market is diverse because consumers' needs are diverse. 

B. Eliminating credit supply does not eliminate credit demand. 

C. States have a long experience regulating small-dollar credit products-enabling us to judge the performance of regulatory restrictions. 

A. THE SMALL-DOLLAR LOAN MARKET IS DIVERSE BECAUSE CONSUMERS' NEEDS ARE DIVERSE 

A common form of consumer credit is the personal credit card. Both prime and subprime borrowers use credit 

cards. Policymakers are likely less familiar with other common small-dollar consumer credit products, which I 

will focus on. These products have different loan structures in terms of size, length, cost, and repayment. 

It is incumbent on anyone legislating, regulating, advocating, or studying any small-dollar credit product to know 

the differences among these products. There are significant differences among nonbank-supplied consumer credit 

products. Differences in their structure and underwriting processes mean that these products are not perfect 

substitutes for one another. 

Nonrecourse Credit Products 

1. Pawnbroker loans "are among the oldest forms of credit, stretching back to antiquity."' To my knowledge, pawnbrokers operate in every state. Their products have a simple structure. A consumer who owns something of value, 

say a stuffed moose head, exchanges the moose head for cash' At the end of the term, generally 30 days, the consumer has three options: a) extend for another term by paying a fee, generally 20-25 percent; b) reclaim the moose 

head by repaying the loan and the fee; or c) walk away and abandon the property. If the consumer chooses the 

third option, the pawnbroker has no recourse-the borrower owes nothing and the pawnbroker now owns the 

moose head. Accordingly, the only thing that matters to the pawnshop is the value of the object presented and the 

borrower's legitimate ownership of the item. 

2. Vehicle title loans operate in a manner nearly identical to pawn loans. To my knowledge, these loans emerged in 

the 1990s and, by law, title lenders operate in only 17 states. In these transactions, a consumer uses a clear car title 

as collateral. Importantly, the consumer keeps possession of the vehicle during the term of the loan-generally 

30 days. The title lender places a lien on the car. The lender may also ask the borrower to provide references and 

proof of income.' At the end of the term, the consumer has the same three options as the consumer who borrows 

from a pawnbroker. If the consumer chooses to abandon the car, which happens only about 8 percent of the time,' 

the title lender sells the car and keeps the proceeds, but may not pursue the borrower for the difference if the Joan 

exceeds the proceeds from selling the car. State Jaws governing vehicle title loans vary, but typically govern the 

maximum amount that can be borrowed and the maximum interest rate.6 

2. Tom Durkin, Gregory Elliehausen, Michael Staten, and Todd Zywicki, Consumer Cred;t and the American Economy, Oxford University Press, 2014. 

3. For more detail on pawn lending, see Marieke Bas. Susan Carter, and Paige Marta Skiba. '"The Pawn Industry and Its Customers: 

The United States and Europe" (law & Economics Research Paper Number 12-26, Vanderbilt University law School, September 

2012). For a sample pawn statute. see Mississippi's Pawn Shop Act§ 75-67-313 (2013), which limits fees to 25 percent of the principal 

amount of the cash advanced. 

4. Jim Hawkins, "Credit on Wheels: The Law and Business of Auto-Title Lending," Washington and Lee Law Review 69, no. 2 (2012). 

5. Todd Zywicki and Gabriel Okolski, "Potential Restrictions on Title Lending" (Mercatus on Policy, Mercatus Center at George Mason 

University, Arlington, VA. November 2009). 

6. For an example, see Mississippi Code§ 75-67-413 (2013). 

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Recourse Credit Products 

3. Payday loans, available at brick-and-mortar stores and online, are lump sum loans with interest and principal 

due at the end of the term, generally 14 days. To my knowledge, these loans emerged in the 1990s and these lenders 

operate legally in 33 states. These loans have a simple form. Payday lenders typically require the borrower to have 

a checking account, provide proof of income, show identification, and be at least 18 years old. About 80 percent 

of those who apply for a loan receive one. Payday lenders collect a signed Automated Clearing House authorization or a postdated check from the borrower in the amount of the principal plus interest. States limit the values of 

these loans and the fees a lender may charge, and they regulate other aspects of the loans.' Although regulations 

vary, a typical maximum amount lent is $500, with a typical fee of about $20 per $100 borrowed. 

4. Traditional installment loans are available through finance companies. The history of these loans stretches to 

the Uniform Small Loan Law of 1916-a model law that emerged from extensive study of small-dollar lending in 

the early 1900s. To my knowledge, no state bans this credit product, but because of laws capping interest rates, 

installment lenders only operate in about 32 states.' There is a wide range of allowable interest rates. Consumers 

pay back installment loans with equal payments over time. Each payment consists of principal and interest. These 

loans amortize; that is, the amount owed decreases over time. Depending on the size of the loan, a typical term is 

6 to 24 months. Due in part to this structure, installment lenders must conduct extensive underwriting-that is, 

assess the borrower's financial condition and gauge their ability to repay the loan. Depending on overall economic 

conditions, installment lenders turn down 40 to 60 percent ofloan applicants. 

Consumers generally know how to navigate the small-dollar landscape. I recently surveyed 400 randomly chosen Mississippians.' In my study, I asked two questions. The first was, "Do you know where to go to get a loan to 

suit your needs? ;• and 53 percent of the respondents strongly agreed, while 11.5 percent strongly disagreed. The 

second question was, "Do you understand the terms of the loans you have taken out?;' and 60.5 percent of the 

respondents strongly agreed, while 8.3 percent strongly disagreed. 

B. ELIMINATING CREDIT SUPPLY DOES NOT ELIMINATE CREDIT DEMAND 

Economic research shows that in American history, banning products outright, or effectively banning them 

through regulatory restrictions, does not eliminate the demand for these products. Instead, the effect is a restriction in the honest supply of these products. The 18th Amendment to the US Constitution is an instructive example 

of the unintended effects of banning legitimate businesses. Banning the production, sale, and transportation of 

alcohol drove those businesses underground. People were still (illegally) making and transporting alcohol, but 

buyers paid a premium to cover the added legal risk that producers and transporters faced. 

Recent rigorous academic research documents the importance ofkeepingnonbank-supplied credit products available to consumers. For example, Zywicki and Okolski conclude: "The bottom line is that restrictions on auto title 

lending will eliminate an important funding option for many consumers, especially those of! ower income, and 

will incentivize the use of more risky or dangerous credit channels."10 In addition, Fritzdixon, Hawkins, and Skiba 

conclude: "Instead of banning title lending, policymakers should foster a market with information that will help 

customers understand the true cost of title loans.''" Morse studies the payday loan market and finds that "communities with payday lenders show greater resiliency to natural disasters," and her estimates of welfare measures 

"suggest that payday lending enhances the welfare of communities."" 

7. For an example, see Mississippi Code§ 75~67-501 (2013). For a list of other types of state regulations. see Alex Kaufman, "Payday 

Lending Regulation" (Finance and Economics Discussion Series 2013-62, Federal Reserve Board, Washington, DC, August 2013). 

8. For an example, see Mississippi Code§ 75-17-21 {2013). 

9. Thomas Miller, Jr., "'Differences in Consumer Credit Choices Made by Banked and Unbanked Mississippians," Journal of Law, Economics & Policy 11, no. 3 (2015). 

10. Zywicki and Okolski, "Potential Restrictions on Title Lending." 

11. Kathryn Fritzdixon, Jim Hawkins, and Paige Marta Skiba, "Dude, Where's My Car Title?: The Law, Behavior, and Economics of Title 

Lending Markets," University of Illinois Law Review 2014. no. 4 (2014). 

12. Adair Morse, "Payday Lenders: Heroes or VIllains?," Journal of Financial Economics 102, no. 1 (2011). 

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The Consumer Financial Protection Bureau (CFPB), armed with five years of experience, stands ready to make 

new consumer credit rules. The CFPB has the power to distort or destroy consumer credit markets under the 

guise of protecting consumers from "unfair, deceptive, or abusive acts or practices.n For example, based only on 

established patterns of use, the CFPB is currently exploring new restrictions on payday loans. Observing that some 

payday loan customers use payday loan products frequently, the CFPB seemingly concludes that payday loans are 

"unaffordable." Without exploring other possible reasons why some payday borrowers use the product, or documenting harm to consumers, the CFPB is seeking to limit the number of payday loans made to any consumer in a 

year to six. My preliminary investigation into this matter suggests that such a limit could eliminate 60 percent of 

the payday loans made each year. Other research suggests that the comprehensive CFPB proposal will eliminate 

80 percent of the number of payday loans made in a year." Where will these borrowers go for credit? 

Eliminating payday loans does not mean that borrowers will magically stop borrowing or simply begin to borrow from other legal lenders. Director Richard Cordray has testified to the effect that the CFPB plans to preserve 

access to some small-dollar loan products. In my opinion, the traditional installment loan makes a good candidate 

because it has a long history of being a safe and affordable pathway out of debt. Traditional installment lenders, 

however, do not and will not loan to everyone. Such regulation could force some consumers, already in desperate 

situations, into the arms of illegal lenders. Loan sharks love credit deserts-places that are uninhabited by legitimate lenders because of ill-considered regulation (see attached figure 1).14 

Rather than conducting careful research of its own and drawing from the research others have done, the CFPB 

appears poised to act without adequate independent empirical support. If so, the CFPB could radically alter the 

small-dollar loan landscape to the detriment of consumers. The CFPB would be wise to base its decisions on compelling academic research-and the CFPB should be actively encouraging such research. These decisions could 

include leaving regulation entirely to the states. As an academic, I believe in conducting thorough and extensive 

research before making public policy decisions. In the example above, I want to see considerable rigorous empirical evidence that: a) repeated payday borrowing is, in fact, harmful to consumer welfare, b) such a proposed limit 

of six loans in a year will do more good than harm, and c) no existing state regulatory structure is adequate to 

address the perceived overuse problem. 

C. THE PERFORMANCE OF STATE REGULATORY RESTRICTIONS ON SMALL-DOLLAR LOANS 

The CFPB cannot impose interest rate caps. This power belongs to the states. The various states have made many 

regulatory choices along the landscape for the last century and have been setting interest rate caps since colonial 

times. Binding usury laws, since colonia} times, reduce credit and economic activity. 15 

The Progressive Era of the early 20th century brought many social reform movements, including efforts focused 

on temperance, women's suffrage, child labor laws, and credit reform. The credit reform movement, spearheaded 

by Arthur Hamm of the Russell Sage Foundation, sought to expand credit for workers. Credit reformers understood that the needs ofborrowers and lenders had to be satisfied to create a sustainable market-based alternative 

to illegal loan sharks. These reformers sought to pass state laws allowing licensed lenders to make small-dollar 

loans at rates above state-imposed interest rate ceilings, which were then typically 6 percent. Loan sharks have 

no respect for interest rate caps-or sometimes, more disturbingly, for kneecaps. 

13. Charles River Associates, "Economic Impact on Small Lenders of the Payday Lending Rules under Consideration by the CFPB" 

(unpublished manuscript, 2015). This estimate of the reduction is after the application of the comprehensive scheme of debt protection proposed in the rulemaking. 

14. For an illustration of a credit desert due to a 17 percent cap on installment loans, see figure 2 in Onyumbe Lukongo and Thomas 

Miller, Jr., "Some Consequences of the Constitutional Interest Rate Cap in the State of Arkansas" (forthcoming working paper, Missis~ 

sippi State University, 2016). 

15. See Efraim Benmelech and Tobias J. Moskowitz. "The Political Economy of Financial Regulation: Evidence from US Usury Laws in 

the 19th Century," Journal of Finance 65, no. 3 (2010). 

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In partnership with lenders willing to risk capital by making loans repaid in equal installment payments, reformers 

framed the model Uniform Small Loan Law of1916. Through rigorous studies, the reformers determined that the 

costs and risks of small-dollar lending merited an annual interest rate of about 36 percent. The reformers set this 

rate to spur "aggressive competition by licensed lenders" and thus "to drive unlicensed lenders out of business:'" 

A traditional installment lender can make money at a 36 percent APR-if the dollar amount borrowed is large 

enough to generate enough interest income to cover the costs and risks of making the loan. In 1916, regulators 

declared a small-dollar loan to be $300 or less (about $6,900 in 2015 dollars). A $300, 12-month, 36 percent APR 

installment loan generates $61.66 in interest income. A $300 installment loan might have been profitable in 1916, 

but the loan production costs, including wages, benefits, rent, insurance, and utilities have dramatically increased 

over the past 100 years. 

The consumer price index is about 20 times higher in 2015 than it was in 1916 (see attached figure 2). Today, a 

$300 installment loan is simply not profitable at a 36 percent interest rate. A recent study showed that a $2,100 (in 

2013 dollars) loan has a break-even of 42 percent APR17 Thirty-seven states currently have rate caps at or below 

36 percent (see attached figure 3).18 

Numbers like 36 percent and 42 percent sound jarring, so it helps to put them into a dollar context. If you go to an 

ATM that is not connected to your bank on Friday and withdraw $50 for a $3 charge, you are effectively borrowing $50 (of your own money) until Monday, when your transaction and fee hits your account. Your cost is $1 per 

day, but your APR is a whopper: 730 percent. Now, would you be happy if a well-meaning regulator prohibited 

you from paying such an exorbitant APR and you were cashless for the weekend? 

Consider a 12-month $1,000 installment loan. At a 36 percent APR, the borrower's monthly payment is $100.46. 

At a 72 percent APR, the payment is $!!9.28. The difference is $18.82 per month, or about $4.70 per week. This 

weekly cost is less than the cost of one pack of cigarettes. A two-pack-per-day smoker can finance this higher rate 

by smoking 13 instead of14 packs of cigarettes per week. Installment lenders would likely be willing to make loans 

of this size under this higher rate. More importantly, a would-be borrower might gladly pay an interest rate above 

any existing interest rate cap if the alternative were no loan at all. 

The result of outdated interest rate caps is that legal loan deserts exist in the small-dollar loan landscape. There 

is demand, but no supply. Policymakers !00 years ago recognized that they might need to update the interest rate 

cap. The Uniform Small Loan Law of 1916 states that a rate established by legislators "should be reconsidered 

after a reasonable period of experience with it:' Clearly, the succeeding 100 years exceeds "a reasonable period:' 

Policymakers of today would be wise to follow the lead of reformers in the early 1900s and reconsider the outdated 36 percent interest rate cap. 

D. CONCLUDING THOUGHTS 

Conversations about consumer credit often reflect utopian visions of the world. Many people imagine that a 

few tweaks to regulations can ensure that everyone bas the money needed to feed, clothe, and shelter the family. According to this logic, if households need to borrow money, lenders will treat them fairly, charge little, and 

always be repaid. But no matter how hard we all try, a well-crafted regulatory framework cannot bring us this 

utopia. Deliberate, empirically informed regulators, however, can do much to preserve and expand consumers' 

options along the nonbank-supplied small-dollar loan landscape. 

Thank you. I am ready to answer any questions. 

16. See F. R Hubachek, "The Development of Regulatory Small Loan Laws," Law and Contemporary Problems 8, no. 1 (1941): appendix 

C, note 14. 

17. Tom Durkin, Gregory E!liehausen, and Min Hwang, "Rate Ceilings and the Distribution of Small Dollar Installment Loans from Consumer Finance Companies: Results of a New Survey of Small Dollar Cash Lenders" (working paper. December 2014). 

18. Harold Black and Thomas Miller, Jr., "Examining Some Arguments Made by Interest Rate Cap Advocates" {forthcoming book chap~ 

ter, Mercatus Center at George Mason University, Arlington, VA, 2016). For a survey of state interest rate caps in effect in 1935, see 

William Trufant Foster. "The Personal Finance Business under Regulation," Law and Contemporary Problems 8, no. 1 (1941). 

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FIGURE 1. A LOAN DESERT EXAMPLE 

Source: Lukongo and Miller, "Some Consequences of the Constitutional Interest Rate Cap in the State of Arkansas." 

Note: Arkansas has a 17 percent interest rate cap. Loan production costs exceed revenue. No traditional installment lenders operate in Arkansas. Arkansas 

residents have to go to other states to obtain a traditional installment loan. It is too far to go for most Arkansas residents. Number of traditional installment loans (in sample) per 10,000 population, in Arkansas and border counties, September 2013. 

FIGURE 2. SOME REPRESENTATIVE PRICES, 1913 VS. 2013 

Annual 

Growth Percentage 

1913 2013 Rate Change 

Loaf of Bread $0.06 $1.42 3.2% 2436% 

Pound of Coffee $0.30 $5.90 3.0% 1874% 

Pound of Sugar $0.06 $0.68 2.5% 1078% 

One Dozen Eggs $0.37 $1.93 1.6% 418% 

Pound, Sirloin Steak $0.24 $5.71 3.2% 2297% 

Hourly Wage Rate~ Teamster $0.21 $21.63 4.7% 10451% 

(1-Horse vs. 18-Wheels) 

Typical Rate Cap, Small 36% 0.0% 0% 

Dollar Installment Loan 

(1916 and 2016) 

Consumer Price Index 9.9 233.0 3.2% 2258% 

Sources: Tim M<:Mahon, "Food Price Inflation Since 19"3: !nflatl()nData.com, March 21, 2013; Rick Suttle, "Union Truck Driver Pay Scales," Houston Chronicle, accessed February 8, 2016. 

MERCATUS CENTER AT GEORGE MASON UNIVERSITY 
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FIGURE 3. STATE INTEREST RATE CAPS BY SIZE FOR TRADITIONAL INSTALLMENT LOANS, 2016 

23 

14 

9 

4 

RATE CAP < 36% RATE CAP ;:: 36% RATE CAP 

I > 36% NO RATE I CAP 

Source; Black and Miller, "Examinmg Some Arguments Made by tnterest Rate Cap Advocates." 

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TESTIMONY OF W. DENNIS SHAUL 

CHIEF EXECUTIVE OFFICER 

COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA 

BEFORE THE HOUSE FINANCIAL SERVICES SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT 

FEBRUARY 11, 2016 

Good afternoon, Chairman Neugebauer, Representative Clay, and other 

members of the Subcommittee. My name is Dennis Shaul, and I am Chief Executive 

Officer ofthe Community Financial Services Association of America (CFSA), the 

national organization for small-dollar, short-term lending, including payday loans. 

We are pleased to be here today to discuss the Consumer Financial Protection 

Bureau's rule making process for small-dollar, short-term loans. 

Your hearing today takes a look at the Bureau's rule making from two 

important perspectives: its effect on state regulation of these practices, and its 

impact on consumers. CFSA is concerned with both of these elements, especially its 

potential impact on consumers. Over the last two decades, CFSA members have 

worked for and embraced reforms at the state level to achieve a range of specific 

credit products that will serve our customers well by answering their credit needs 

and affording them better consumer protection. The customer is at the center of 

everything we do, and we have a vested interest in seeing them succeed with our 

products. We believe the Bureau's current proposals will do very little in the way of 

enhancing consumers' financial well-being, and will cut off an important credit 
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source for millions of Americans. Indeed, consumers will be worse off if these 

proposals were enacted in their current form. 

The Community Financial Services Association of America 

CFSA was created in 1999 as a national organization for small-dollar, shortterm lenders committed to best business practices that balance strong consumer 

protections with access to short-term credit for millions of Americans. CFSA 

member companies represent more than half of all non-bank storefronts in the 

United States offering payday and installment loans and vehicle title loans, among 

many other valued financial products and services, and serving more than 19 

million American households that use small-dollar, short-term credit as a tool to 

manage their personal and family finances. 

CFSA member companies are licensed and regulated, and they adhere to a 

code of Best Practices (attached to this statement), which include full disclosure; 

compliance with all applicable laws; truthful advertising; appropriate collection 

practices; and pledge to take no criminal action against borrowers for bounced 

checks or failure to repay. Our members display a list of these 13 Best Practices in 

all their stores, and also provide consumer guides to all customers regarding the 

responsible use of small-dollar, short-term credit. 

CFSA members fill a vital role in Americans' access to financial services. The 

FDIC estimates that 51 million Americans, or 20% of all households, are 

underbanked, and not served by traditional banking products. As many as 76% of 

Americans are living paycheck to paycheck, without resources to cover unexpected 

2 
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3 

expenses or disruptions in income. Small-dollar, short-term loans of the type our 

members provide are an essential option for these households - one option among 

several, which may include incurring late fees, bouncing checks, or allowing services 

to be cancelled and reconnected at a later date. Compared to these alternatives, 

payday loans are often not only the most convenient but also the least expensive 

option. 

Loans offered by CFSA members are simple, transparent, cost-competitive 

and regulated. Eliminating or restricting access to our members' products will not 

encourage new lenders to enter the marketplace, but rather will force consumers 

into alternatives that are more complex, less transparent, less cost-competitive and 

potentially unregulated. 

Payday Loans in the Consumer Financial Marketplace 

The typical payday loan is a two-week loan for a fee that varies according to 

state law, but averages $15 per $100 borrowed. The average amount of a payday 

loan is $355. These are small-dollar loans, typically used to meet expenses, such as a 

medical bill, rent, or perhaps a late car payment, when income flow is interrupted or 

additional expenses make the borrower short on funds. 

To obtain a payday loan from one of our members, a borrower needs an 

active checking account, proof of regular income, and proper identification. The loan 

application process consists of submitting a simple form that contains Truth in 

Lending (TILA) disclosures and a personal check for the amount of the loan plus a 

fee. The lender advances the funds, but holds the check for an agreed-upon period 
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(usually two to four weeks). At the end of that time, the borrower returns to the 

store with cash to redeem the check, or in some instances, the lender cashes the 

check. 

More than 20,000 payday loan stores operate across the United States, 

making approximately $38.5 billion in loans annually to borrowers in 19 million 

households. The majority of these borrowers repay the loans on time, without 

needing to renew them. 

4 

Since payday loans emerged in their current form in the early 1990s, thirtyfive states have set up licensing, regulatory and supervisory structures for these 

products. State laws include limits on the amount of an advance; maximum fees and 

interest rates; limits on the number of times a borrower can renew a loan; a right of 

rescission; and various additional disclosure requirements. State and federal laws 

also govern collection practices. In addition, some states have put structures in place 

to let customers repay these loans under a no-cost extended payment plan. These 

structures often mirror CFSA's Extended Payment Plan, as mandated by our Best 

Practices. 

Individual states have taken different approaches to the regulation of payday 

loans, based on the specific needs of their consumers and markets. As each state has 

tried to strike its own balance between preserving access to small-dollar, short-term 

credit and enhancing consumer protections, they have learned from the experiences 

of other states. For instance, state laws differ in maximum loan amounts: all states 

set a ceiling, usually under $500, but many also tie the maximum loan amount to a 

percentage of the borrower's income. Some states limit consumers to one or two 
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5 

simultaneous loans. Indiana prohibits renewals, and requires a "cool-off' period of 

seven days after five consecutive loans. Florida and 13 other states have a statewide 

database that keeps track of borrowers. Utah allows loans for terms of up to 10 

weeks, with a no-cost payment plan available once every 12 months. 

Where states have chosen to effectively ban payday lending through the 

imposition of a rate cap that makes lending unprofitable, the evidence shows that 

consumers suffer. A study by the Federal Reserve Bank of New York found that both 

Georgia and North Carolina saw higher incidences of returned checks, bankruptcy 

filings and complaints to the Federal Trade Commission about collection practices 

after those states banned payday lending. Consumers who do not have access to 

payday loans turn to costlier sources of credit and often to the Internet, where 

lending may be entirely unregulated. 

Payday lenders meet a need in the American economy that traditional 

lenders are unable or unwilling to provide. Banks that once provided small-dollar, 

short-term loans no longer do so. Banks find these loans unprofitable and 

unsustainable largely because bank's personnel and real estate costs, the principal 

drivers of the cost of a payday loan, are much higher on a unit basis than that of a 

payday lender. The FDIC's Small Dollar Loan Pilot Program, launched in 2008, set a 

36% interest rate cap on small-dollar, short-term loans. However, participating 

banks quickly found that these loans were not practical or profitable. Furthermore, 

a recent national study commissioned by the American Bankers Association 

demonstrated that only one percent of banks surveyed currently offer small dollar 

loans of $500 or less. 
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6 

In discussing the role of payday loans in the American economy, it is 

important to recognize that these loans are demand-driven products, and that the 

demand for these products reflects fundamental economic shifts. Thirty-one percent 

of Americans do not have a constant, predictable income source, according to a 

recent report from the Federal Reserve. The nature of credit in our consumer 

economy has changed over the past two decades. While credit is still a tool used to 

advance households socially and economically- through mortgages, car loans, 

student loans and the like- it is also, increasingly, a financial management tool for 

households struggling to keep afloat. 

Payday loans, perhaps once used more often to meet emergency expenses, 

are now used to offset income disruptions as welL Households with two incomes 

may have once provided a financial cushion; today, however, two-earner 

households may also double a household's financial risk Tools for managing this 

uncertainty may include overdrafts, late fees, and, yes, payday loans. The vast 

majority of funds borrowed through payday loans go directly to pay other debts. 

The availability of small-dollar, short-term credit is a benefit to the consumer that 

cannot easily be replaced, if at all. 

CFPB Regulation of Short-Term, Small Dollar Loans 

The Dodd-Frank Act of 2010 authorized the Consumer Financial Protection 

Bureau to regulate small-dollar, short-term loans, including payday loans. The 

Bureau has held several different field hearings on payday lending. The CFPB also 

opened its consumer complaint portal in late 2013, and more recently began to 
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release monthly complaints reports, including data about payday lending practices. 

Bureau Director Richard Cordray has said that these complaints are the agency's 

"compass," helping the Bureau identify prioritize areas for action. 

7 

Of the hundreds of thousands of consumer complaints the Bureau has 

received, only 1.5 percent- 12,193, to be exact- have concerned payday loans. 

The CFPB's monthly updates also report that payday lending is the only industry 

area that has seen a regular DECREASE in consumer complaint submissions. 

Nevertheless, the CFPB is pursuing a course that will decimate the industry and 

leave consumers in need at the mercy of unregulated lenders. Charged with 

regulating payday loans, the Bureau released a rule outline of proposals in March 

2015 that ignores a long history of legislative and regulatory work at the state level, 

and opts instead for an end to payday lending. 

The CFPB's outline, which is still under review by its small business advisory 

panel. seems entirely disconnected from the reality of how consumers use payday 

loans, and how the states currently regulate these products. 

The stated goals of the CFPB's proposals are to prevent borrowers from 

becoming trapped by insurmountable, unaffordable debt- the so-called "debt trap" 

- and to restrict harmful payment collection practices. While these are laudable 

goals, the CFPB's objectives are based on assumptions that are not valid and seem 

based on little to no evidence. 

Despite nearly 20 years of experimentation and experience at the state level, 

the CFPB seems to have conducted no analysis of existing state regulatory 

structures or practices, and has offered no information about how its proposals 
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would interact with state law. The CFPB's outline leaves no room for continuing 

state experiments or innovations. 

8 

Even more importantly, however, the CFPB seems to have conducted no costbenefit analysis of payday loan products at all. The Bureau seems unaware that 

these products emerged because customers have urgent needs, and that those needs 

will not disappear even if the lenders offering those products do. 

Any federal regulatory process should begin with a general welfare analysis 

that looks at how users of payday loans have been helped or harmed by the 

products. Field hearings and complaints have provided some anecdotal evidence, 

but the systemic statistical analyses we have seen, such as the New York Federal 

Reserve's study, argue against the Bureau's assumptions. 

The CFPB seems to assume that the suppliers of payday loans push these 

products on uneducated and unwary borrowers who do not understand the nature 

of their obligations. Instead, the academic research on this question shows that the 

opposite is true. The need for these small-dollar, short-term loans is real. Where 

people cannot find these loans in their communities, they seek them out online. A 

majority of the states have recognized that payday loans are a demand-driven 

product, and have determined that these services ought to be available to their 

citizens. 

The CFPB's duty is to balance access to credit with consumer protection, not 

cut off all access to credit This is not the public policy outcome Dodd-Frank 

envisioned or requires, and it harms the consumer. Because the Bureau has not 

acknowledged the need for or the benefits of these small-dollar, short-term loans, 
88 


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9 

they cannot effectively weigh the potential harm of fees, interest rates, and payment 

terms. 

Addressing Ability to Repay 

CFSA's members make loans with the expectation of repayment, and take 

steps to make sure that borrowers can repay. In developing and implementing our 

Best Practices, CFSA's members recognize that payday loans are not appropriate 

products for all borrowers, and that they can become inappropriate products for 

borrowers who have used them successfully in the past. Unfortunately, some 

borrowers do seek loans they will never be able to repay. Others customers borrow 

wisely, but become victims of adverse circumstances. 

CFSA's members acknowledge the obligation to give these borrowers a 

solution. Where state law permits, CFSA's Best Practices provide for an extended 

payment plan for borrowers who are unable to repay their loans. 

The Consumer Financial Protection Bureau's outline would impose an overly 

restrictive and unworkable new standard for the ability to repay. No available 

evidence justifies this new standard, which would require the lender to collect 

additional information from the borrower and make an underwriting decision that 

payday loans currently do not involve. These new underwriting requirements, 

combined with a proposed 60-day cooling off period and limits on additional 

consumer debt, would effectively end payday lending as it currently exists. 

With responsible payday lenders out of the market, who will meet those 

borrowers' needs? Where will those borrowers go? Experience tells us that they will 
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go online, and to lenders that operate outside regulatory structures and the 

boundaries of law. Borrowers, and those who seek to protect them, will find 

themselves in uncharted territory. 

Moving Forward on Responsible Reforms 

10 

CFSA urges the CFPB to look closely at recent state initiatives to protect 

consumers while ensuring continued access to small-dollar, short-term credit. State 

laws in Indiana, Michigan, Utah, South Carolina, Florida and Kentucky, among 

others, enhance consumer protections while allowing responsible lenders to 

continue to offer credit. Any federal initiative should not only look to the states as 

models, but should also preserve the opportunity for states to experiment with new 

approaches to consumer protection and credit availability. 

We also urge the CFPB to make its decisions based on empirical data rather 

than anecdotal information, and carefully weigh the real benefits of these products 

against their potential harm. 

Since the CFPB opened its doors, the Community Financial Services 

Association and its members have stood ready to help inform and educate 

stakeholders about the industry and to assist with the rulemaking process. We 

remain dedicated to advancing financial empowerment for consumers, while 

supporting and encouraging responsible lending practices. Thank you for the 

opportunity to share our views. I look forward to any questions the Committee may 

have. 
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23568.021

COMMUNITY FINANCIAL SERVICES ~nONOFAMEmCA 

A COMMUNITY OF RESPONSIBLE LENDERS 

BEST PRACTICES FOR THE 

PAYDAY LOAN INDUSTRY 

CFSA Members must abide by the following Best Practices: 

1. FULL DISCLOSURE. A member will comply with the disclosure requirements of the state in which the payday advance 

office is located and with federal disclosure requirements including the Federal Truth in Lending Act A contract between 

a member and the customer must fully outline the terms of the 

payday advnnce transaction. Members agree to disclose the 

cost of the service fee both as a dollar amount and as an annual percentage rate ("APR"). A member, in compliance with 

CFSA guidelines where they do not conflict with applicable 

federal. state or local requirements, will further ensure full 

disclosure by making rates clearly visible to customers before 

they enter into the transaction process. 

2. COMPLIANCE.. A member will comply with all applicable 

laws. A member will not charge a fee or rate for a payday ad~ 

vance that is not authorized by state or federal law. 

3. TRUTHFUL ADVERTISING. A member will not advertise the payday advance service in any false, misleading, or 

deceptive manner, and will promote only the responsible use of 

the payday advance service. 

4. ENCOURAGE CONSUMER RESPONSIBILITY. A 

member will implement procedures to inform consumers of the 

intended use of the payday advance service. These procedures 

will include the placement of a "Customer Notice" on all mar~ 

keting materials, including all television, print. radio and on~line 

advertising, direct mail and m-store promotional materials. 

S. ROLLOVERS. Members shall not allow customers to 

rollover a payday advance (the extension of an outstanding advance by payment of only a fee) unless expressly authorized by 

state law, but in such cases where authorized the member will 

limit ro!lovers to four (4) or the state limit, whichever is less. 

6. RIGHT TO RESCIND. A member will give its customers 

the right to rescind, at no cost. a payday advance transaction 

on or before the dose of the following business day. 

7. APPROPRIATE COLLECTION PRACnCES. A member must collect past due accounts in a professional, fair and 

lawful manner. A member will not use unlawful threats, intimidation, or harassment to collect accounts. CFSA believes that the 

collection limitations contained in the Fair Debt Collection Prac~ 

tices Act (FDCPA) should guide a member's practice in this area. 

8.. NO CRIMINAL ACTION. A member will not threaten 

or pursue criminal action against a customer as a result of the 

customer's check being returned unpaid or the customer's account not being paid. 

9. ENFORCEMENT. A member will participate in self-policing of the industry. A member wm be expected to report violations of these Best Practices to CFSA, which will investigate the 

matter and take appropriate action. Each member company 

agrees to maintain and post its own toll-free consumer hotline 

number in each of its outlets. 

10. SUPPORT BALANCED LEGISLATION. A member 

will work with state legislators and regulators to support responsible legislation of the payday advance industry that incorporates these Best Practices. 

11. EXTENDED PAYMENT PLAN•. Each member will 

provide customers who are unable to repay a payday advance 

according to their original contract the option of repaying the 

advance over a longer period of time. Such an extended payment plan will be offered in compliance with any requirement 

in state law to provide an extended payment plan or, in the 

absence of such a requirement in state law, in compliance with 

the Best Practice "'Guidelines for Extended Payment Plans." 

A member Will adequately disclose the availability of the Extended Payment Plan to its customers in compliance with any 

requirement in state law for such a disclosure or, in the absence 

of such a requirement in state law, in compliance With the Best 

Practice "Guidelines for Extended Payment Plans." 

12. INTERNET LENDING. A member that offers payday 

advances through the Internet shall be licensed in each state 

where its payday advance customers reside and shall comply 

with the disclosure, rollover, rate, and other requirements imposed by each such state, unless such state does not require 

the lender to be licensed or to comply w1th such provisions, or 

the state licensing requirements and other applicable laws are 

preempted by federal law. 

13. DISPLAY OF THE CFSA MEMBERSHIP SEAL. A 

member company shall prominently display the CFSA Membership Seal in all stores to alert customers to the store's affm~ 

ation with the association and adherence to the association's 

Best Practices. 

SUPPLEMENTAL GUIDEUNES FOR MEMBER COMPANY IMPLEMENTA110N OF CFSA BEST PRACTICES ARE INCORPORATED HEREIN BY REFERENCE AND ARE AVAILABLE UPON REQUEST • 

• LAWS IN SOME STATES DO NOT PERMIT IM!'LEMENTATION OF CFSA'S EXTENDED PAYMENT PLAN (EPP), CFSA IS WORKING WITH REGULATORS !N THESE STATES TO 

OBTAIN APPROVAL OF CFSA"S EPP AND WITH LEGISLATORS TO PROMOTE IT$ ADOPTION INTO STATE LAW 

(P) 888.572.9329 (F>703.684.1219 (E MAl-) MEMBERSHIPaCFSAA.COM (\1~8> CFSAA.COM 
91 


23568.022

Good afternoon Mr. Chairman and members of the 

Committee. 

My name is Robert Sherrill and I thank you for letting me 

come here today to tell you about my life and how payday 

and title loans have helped me when I had nowhere else to 

tum. I have been told that the type of small loans that I got 

may no longer be available to me under new regulations 

coming from Washington. 

My story is simple. When I was young no one taught me 

about money and finances. I didn't know what I was doing 

and I made mistakes. I got into trouble. When I needed 

money I sold drugs and I went to prison. 

I was in prison for several years. My offenses were not 

violent. I am not proud of this but my time in prison made 

me a better man. 

When I got out of prison the deck was stacked against me. I 

could not get a job, no matter how hard I tried. No one 

would give me a loan. No bank would give me an account. 

Since no one would give me a job I decided to try to start my 

own business. 

I turned to a local company in Nashville near where I am 

from. This company was a payday lender called Advance 

Financial. When I told my story to Advance, they agreed to 

make me a loan. I also used Advance Financial to cash my 

checks, buy money orders and pay bills. I used Advance for 

payday loans and title loans. 
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When I got my loans, I knew I had to pay them back. The 

loans were explained to me. When someone is lending you 

their money they make sure you know you have to pay it 

back, and when. And how much it costs. 

The payday loan I got from Advance was a lifeline. It 

enabled me to start a business. I started a janitorial business. 

Advance also gave me the opportunity to some work for 

them, cleaning the stores. 

Today, my business is growing. I am a minority certified 

business. I belong to the Chamber of Commerce and the 

Better Business Bureau. 

I have continued to use payday and title loans from Advance. 

Where I am from many people use the services of Advance 

Financial. When I am on a job, the people on that job don't 

think about going to a bank when they get paid. They think 

about going to Advance. 

Some of you are probably going to ask me whether I would 

like for these loans to be cheaper. My answer is there are a 

lot of things in life that I wish were cheaper. I don't see the 

government stepping in anywhere else to tell a business what 

it can charge for their products. 

I understood what a payday loan cost me. I understood when 

it had to be paid back. The loan worked for me. I can also 

say that there are other places that I could have gone for a 

loan. You do not want me to tell you about those places or 
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23568.024

those people. But they are out there. Since Advance was 

there I had an established place to go. Everything was open 

and up front. 

Thank you. 
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23568.025

Testimony of David Silberman 

Acting Deputy Director and 

Associate Director of Research, Markets, and Regulations 

Consumer Financial Protection Bureau 

Before the House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

February 11, 2016 

Chairman Neugebauer, Ranking Member Clay, and Members of the Subcommittee, thank you 

for the opportunity to testify today about the Consumer Financial Protection Bureau's (Bureau or 

CFPB) extensive and ongoing work related to payday lending. My name is David Silberman, 

and I serve as Associate Director for Research, Markets, and Regulations at the CFPB, a position 

I have held since 2011. Last month I also was named as Acting Deputy Director. 

In November 2010, I joined the Bureau as part of the implementation team. Prior to the Bureau, 

I served as General Counsel and Executive Vice President of Kessler Financial Services, a 

privately-held company focused on creating and supporting credit card and other financial 

services to membership organizations. My involvement in consumer financial services began 

when I was Deputy General Counsel of the AFL-CIO. While at the AFL-CIO, I helped to create 

an organization to provide financial services to union members and the first AFL-CIO credit card 

program. I began my career as a law clerk to Justice Thurgood MarshalL 

As you know, the CFPB is the nation's first federal agency with a sole focus on protecting 

consumers in the consumer financial marketplace. Through fair rules, grounded on evidencebased findings and stakeholder input, consistent oversight, appropriate enforcement, and broadbased consumer engagement, the Bureau is working to restore consumer trust in the financial 

marketplace and to level the regulatory playing field for honest businesses. To date, our 

enforcement actions have helped secure approximately $11.2 billion in relief for millions of 

consumers victimized by violations of Federal consumer financial laws. 

Since 2011, I have led the Research, Markets, and Regulations Division. The division is 

responsible for articulating a research-driven, evidence-based perspective on consumer financial 

markets, consumer behavior, and regulations, informing Bureau thinking on priority areas, 

identifying areas where Bureau intervention may improve market outcomes, and supporting 

efforts to reduce outdated, unnecessary, or unduly burdensome regulations. Where our research 

and analysis suggests the need for regulatory intervention, the Bureau seeks to develop 

regulations which will protect consumers without unintended consequences or unnecessary costs. 

As part of the rulemaking process, the Bureau carefully assesses the benefits and costs that the 

regulations we consider may have on consumers and financial institutions. Balanced regulations 

are essential for protecting consumers from harmful practices and ensuring that consumer 

financial markets function in a fair, transparent, and competitive manner. 

1 
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Since the subject oftoday's hearing is the Bureau's work with respect to short-term, small dollar 

lending, Jet me begin by tracing the Bureau's work in this area. 

When the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was 

enacted, payday loans were a particular area of concern to Congress. Indeed, the Dodd-Frank 

Act gives the Bureau plenary authority to supervise any entity that offers payday loans regardless 

of size. As a result, when the Bureau began supervising non-depository institutions in 2012, 

payday lending was the first industry that was brought into our supervisory program. To that 

end, the Bureau developed examination procedures for small dollar lenders that were published 

as part of the Bureau's Supervision and Examination Manual, 1 which is available on our website, 

consumerfinance.gov. 

Bureau examiners use the examination procedures in the Manual to make sure payday lendersdepositories and non-depositories are complying with Federal consumer financial law. 

Specifically, the Short-Term, Small Dollar Lending Procedures describe the types of information 

that the agency's examiners will gather to evaluate payday lenders' compliance management 

systems (CMS), assess whether lenders are in compliance with Federal consumer financial laws, 

and identify risks to consumers throughout the lending process. The procedures track key 

payday lending activities, from initial advertisements and marketing to collection practices. 

At the same time, the Bureau decided to begin the process of fact gathering to assess whether 

there was a need for federal regulations to prevent unfair, deceptive, or abusive acts or practices. 

In January 2012, the Bureau held a field hearing in Birmingham, Alabama to hear directly from 

stakeholders and the public about actual consumer experience with small dollar loans, including 

both loans offered by non-depository institutions and loans offered by certain banks and credit 

unions. Alabama is a state with one of the highest number of payday lenders per capita in the 

country. The field hearing included testimony from consumer and civil rights groups, industry 

representatives, and members of the public and provided the CFPB with insight into the payday 

lending market. The Bureau invited the Alabama Congressional delegation to that event and was 

honored to have Congresswoman Terri Sewell attend and participate in the event as well. 

During the year that followed the Birmingham field hearing, the Bureau obtained data from a 

number of payday lenders and banks making short-term, small-dollar loans and engaged in an indepth study of the market. Based on that study, in April 2013 the Bureau issued a report entitled, 

Payday Loans and Deposit Advance Products- A White Paper of Initial Data Findings (White 

Paper). 2 The White Paper was one of the most comprehensive studies ever undertaken of the 

market. It was an important step toward bringing more clarity to the complicated markets for 

payday lending and deposit advance products. The White Paper also provided market 

participants with insight into Bureau concerns based on our findings as of that time. 

The White Paper found that most payday loans are for several hundred dollars and have finance 

charges of$15 or $20 for each $100 borrowed. For the two-week term typical of a payday loan, 

these fees equate to an Annual Percentage Rate (APR) ranging from 391 percent to 521 percent. 

1 Available at http://www.consumerfinance.govlguidance/supervisionlmanual/. 2 Available at http://files.consumerfinance.gov/f!20 1304_ cfi>b _payday-dap-whitepaper.pdf. 

2 
96 


23568.027

If a consumer does not repay the loan in full by the due date or agree to extend the loan for an 

additional two weeks, the loan agreement typically permits the lender to directly access the 

consumer's deposit account, such as with the consumer's post-dated check or Automated 

Clearing House (ACH) 3 authorization, to obtain repayment. 

Typically, a consumer's ability to repay the loan while meeting other debts and ordinary living 

expenses is not taken into account. Eligibility to qualify for a payday loan generally requires 

proper identification, proof of income, and a personal checking account. No collateral is held for 

the loan, although the consumer does provide the lender with a personal check or authorization to 

debit her deposit account for repayment. Credit score are also generally not taken into account. 

The median borrower studied in the Bureau's analysis reported $22,000 in income. 

The White Paper showed that making these short-term loans to low and moderate income 

consumers without any assessment of the consumer's ability to repay put many consumers at risk 

oftuming short-term, emergency loans into a long-term, expensive debt burden. Additionally, 

the Bureau found that payday loans and the deposit advance loans offered by a small but thengrowing number of depository institutions were generally similar in structure, purpose, and the 

consumer protection concerns they raise. 

Specifically, fue White Paper traced over a period of 12 monfus the experience of borrowers who 

had a payday loan in the first month covered by the data. It found that the median borrower 

took out I 0 loans over the course of the year and was in debt for 199 days out offue year. The 

median borrower thus paid over $150 in fees for every $100 borrowed. Moreover, almost a third 

of the borrowers took out more than 20 loans, paying twice that amount. 

During the year following the publication of the White Paper, the Bureau continued its research 

and analysis as well as its supervisory activities. Also in 2013, the Bureau announced two 

important updates to its Supervision and Examination Manual. The Bureau informed supervised 

entities that Bureau examiners may examine a range of products offered by the supervised entity, 

including title loans, installment loans, and money services. Additionally, the Bureau released 

guidelines for examiners to identify consumer harm and risks related to Military Lending Act 

(MLA) violations when supervising payday lenders.4 

In November 2013, the Bureau took another important step to gain insight into the payday loan 

market by beginning to take consumer complaints regarding payday lending. Consumer 

complaints can be an important source of information about problems consumers experience 

with different financial products and thus play a vital role in the Bureau's work, especially in 

targeting its supervisory and enforcement activities to companies that appear to pose the greatest 

risk to consumers. As of January 1, 2016, the Bureau has handled approximately 37,000 

complaints related to payday lending, 12,000 were identified by the consumer as payday 

3 ACH stands for Automated Clearing House, which is an electronic network for processing credit and debit 

transactions, such as direct deposits and consumer payments, such as those pre-authorized when a consumer applies 

for a payday loan. 4 Available at: http://files.consumerfinance.gov/f/201309 _ cfpb _payday_ manual _revisions.pdf. 

3 
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complaints and 24,000 were identified by the consumer as debt collection complaints related to a 

payday loan. 

The next step in the Bureau's study occurred in March 2014 with the publication of a second 

report, entitled CFPB Data Point: Payday Lending (Data Point), 5 which further analyzed the 

data used in the White Paper. In response to feedback about the methodology used in the 

Bureau's first report, the Data Point looked at consumers at the start of a borrowing cycle and 

traced their experience until they paid off their loan and went two weeks without reborrowing. 

The Bureau found that only 35 percent of borrowers were able to repay the loan when due 

without quickly reborrowing, and that 15 percent of borrowers took out I 0 or more loans in rapid 

succession. Indeed, the Bureau found that 50 percent of all loans went to consumers in these 

lengthy loan sequences. 

Looking at payday consumers who receive their incomes on a monthly basis, the Data Point 

found one out of five who took out a payday loan remained in debt for the entire year of the 

Bureau's study. Payday consumers who fell into this category include elderly Americans and 

those persons receiving Supplemental Security Income and Social Security Disability. 

The Bureau also found that very few consumers managed to reduce the amount they owed over 

the course of the loan sequence. The more typical pattern was that consumers paid only the fees 

due and reborrowed the full amount of the principal time after time. Indeed, over 80 percent of 

consumers owed at least as much on the last loan as they had borrowed initially. 

In states with mandated cooling-off periods, where lenders are not permitted to immediately relend to consumers paying off a prior loan, the Bureau found that the 14-day renewal rates are 

nearly identical to the rates in states without these limitations. In other words, these short 

cooling off periods did not have any material effect in breaking the cycle of indebtedness. 

Finally, the Bureau found that over the course of a sequence of loans, 20 percent of consumers 

ended up defaulting and thus became the object of collections activity. While most of the 

defaults occurred early in a sequence of loans, a significant percentage of consumers defaulted 

after having paid substantial fees to continue to roll over or renew their loans. 

The Bureau released its second report in conjunction with a second field hearing on payday 

lending, this one in Nashville, Tennessee. Like the Birmingham hearing, the Nashville hearing 

gave Bureau staff the opportunity to hear first-hand from consumers, lenders, advocates, and 

faith leaders about consumer experiences with these products. 

Shortly after the release of the Data Point and the Nashville hearing, the Bureau released an 

edition of its periodic Supervisory Highlights, which described findings that the Bureau had 

made in its payday lending examinations. 6 Specifically, the Bureau reported that examinations 

had found that a number of payday lenders had not implemented effective compliance 

5 Available at http://files.consumerfinance.gov/17201403 _cJpb _report..J>ayday-lending.pdf. 6 See Supervisory Highlights: Spring 2014, available at 

http:/ /files.consumerfinance.gov/f720 1405 _ cJpb _supervisory-highlights-spring-20 14. pdf. 

4 
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23568.029

management systems. Generally, CMS concerns covered a range of issues, including lack of 

oversight of compliance management, ineffective oversight of third-party service providers, 

inadequate complaint management, failure to adopt appropriate written policies and procedures, 

failure to adequately train staff, and lack of effective compliance audit programs. At several 

short-term, small-dollar lenders, Bureau examiners found inadequate compliance management 

systems for collection activity. Lenders did not adequately monitor collections calls, attempt to 

understand the root causes of complaints arising from collections practices, provide training for 

collectors, and properly oversee third-party service providers. As a result of poor recordkeeping, some payday lenders have been unable to fully respond to Bureau information requests 

or examiner inquiries on-site. 

Bureau examinations have also found deceptive practices at payday lenders. Upon a borrower's 

default, payday lenders frequently will initiate one or more preauthorized ACH transactions 

pursuant to the loan agreement for repayment from the borrower's checking account. At one or 

more lenders, the Bureau cited a deceptive practice when communications with consumers 

threatened ACH transactions that were contrary to the agreement, and that the lender did not 

intend to initiate. 

Finally, in October 2014, the Bureau held a government-to-government Tribal Consultation with 

tribal leaders interested in the subject of small-dollar lending to hear their input as the Bureau 

was in the process of formulating its proposals. This Consultation, as well as the Bureau's other 

engagements with tribal nations, are discussed later in this testimony. 

All of this brings me to the outline of proposals under consideration which the Bureau released in 

March 2015, as the first formal step in the rulemaking process. 

As outlined above, over the course of three years the Bureau engaged in intensive analysis of the 

short-tenn and longer-term credit markets for personal loans. The Bureau considered the history 

of the demand for such loans and the conditions that create such demand. The Bureau focused 

carefully on how people are affected by the kinds of credit products that have evolved to meet 

this demand. After much study and analysis, in March 2015, the Bureau outlined the proposals 

under consideration 7 designed to protect borrowers from the risks the Bureau's research has 

identified. The proposals released for consideration would cover payday, vehicle title loans, 

deposit advance products, and certain high-cost installment loans and open-end loans. 

To collect feedback on the approach from small lenders, the Bureau published the outline of the 

proposals under consideration in preparation for convening a Small Business Review Panel, and 

obtaining feedback from Small Entity Representatives pursuant to Regulatory Flexibility Act. 

The proposals under consideration cover both short-term and longer-term credit products that are 

marketed heavily to financially vulnerable consumers. The Bureau recognizes consumers' need 

for affordable credit, and is concerned that the practices often associated with these products, 

such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing 

7 Available at http://files.consumerfinance.gov/£'20 1503 _ cfpb_outline-of-the-proposals-from-small-businessreview-panel.pdf. 

5 
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23568.030

loans, holding a security interest in a vehicle as collateral, accessing the consumer's account for 

repayment, and performing costly withdrawal attempts, can trap consumers in debt. These debt 

traps can also leave consumers vulnerable to deposit account fees and closures, vehicle 

repossession, and other financial difficulties. 

The core of the proposals under consideration is aimed at ending debt traps with a requirement 

that, before making a covered loan, lenders would be obligated to make a good-faith, reasonable 

determination that the consumer has the ability to repay the loan. That is, the lender would have 

to determine that after repaying the loan, the consumer would have sufficient income to pay 

major financial obligations, including a rent or mortgage payment and other debt, and also to pay 

basic living expenses, such as food, transportation, childcare or medical care, without the need to 

reborrow in short order. 

Until recently, a bedrock principle of all consumer lending was that before a loan was made, the 

lender would first assess the consumers' capacity to repay the loan. In a healthy credit market, 

both the consumer and the lender succeed when the transaction succeeds - the consumer meets 

his or her need and the lender gets repaid. This proposal seeks to address consumer harm caused 

by unaffordable loan payments due in a short period of time. 

The proposals under consideration to require lenders who make short-term, small dollar loans to 

assess a prospective borrower's ability to repay and avoid making loans with unaffordable 

payments parallels a rule adopted by the Federal Reserve Board in 2008, in the wake of the 

financial crisis. That rule requires lenders making subprime mortgages to assess the borrower's 

ability to repay. The proposals under consideration also parallel ability to repay requirements 

that Congress enacted in the Credit Card Accountability Responsibility and Disclosure Act 

(CARD Act) in 2009 for credit card issuers, and in the Dodd-Frank Act in 20 I 0, for all mortgage 

lenders. 

As an alternative to the basic prevention requirements of assessing a borrower's ability to repay, 

the proposals under consideration also contain what we have called protection requirements. 

These requirements would allow lenders to extend certain short-term loans without conducting 

the ability to repay determination outlined above, so long as the loans satisfy certain screening 

requirements and contain certain structural protections to prevent short-term loans from 

becoming long-term debt. Under this proposal, lenders would have the option of either 

satisfying the ability to repay requirements or satisfying the alternative requirements. 

The protection requirements the Bureau outlined for consideration would allow lenders to make 

up to three loans in succession, with a maximum of six total loans or a total of 90 total days of 

indebtedness over the course of a year. The loans would be permitted only if the lender offers 

the consumer an affordable way out of debt. The Bureau is considering two options for paths out 

of debt either by requiring that the principal decrease with each loan, so that it is repaid after the 

third loan, or by requiring that the lender provide a no-cost "off-ramp" after the third Joan, to 

allow the consumer to pay the loan off over time without further fees. For each loan under these 

alternative requirements, the debt could not exceed $500, carry more than one finance charge, or 

require the consumer's vehicle as collateral. After a sequence of three loans, a lender could not 

take advantage of the protection requirements again for a period of 60 days. 

6 
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The Bureau's proposals under consideration raised the question of whether offering such an 

alternative for lenders, including small lenders that may have difficulty conducting an ability to 

repay determination with a residual income analysis, may be helpful in providing access to credit 

to consumers who have a genuine short-term borrowing need, while still protecting consumers 

from harms resulting from long-term cycles of debt. This alternative would also reduce the 

compliance costs for lenders. 

Stakeholders on all sides of the issue have provided valuable feedback on the proposals under 

consideration. Consumer advocates, for example, have argued that the Bureau should not permit 

any lending which does not meet the basic ability to repay standard. They argue that consumers 

need prevention and protection -not either, or. Industry stakeholders, on the other hand, argue 

that the protection requirements under consideration are too restrictive because those 

requirements would allow no more than three loans in a row and no more than six loans per year. 

Industry stakeholders want to be able to continue making many more loans to consumers without 

regard to their ability to repay. State policymakers have urged the Bureau to both protect 

consumers across all small dollar lending markets and to seek feedback from the states on their 

regulation of small dollar lending products. Tribal governments have urged the Bureau to 

consider the impact of any regulation on the revenue the tribes receive from these products. 

The Bureau released the outline of the proposals under consideration at a field hearing held in 

Richmond, Virginia. Like the prior two field hearings on this subject, the Richmond event 

provided the Bureau with a rich and wide-ranging set of perspectives from consumers, lenders, 

advocates, and faith leaders. 

In over I 0 months since the Bureau formally released the outline of proposals under 

consideration, the Bureau has engaged in further outreach and engagement with a wide variety of 

stakeholders. That process began by convening a Small Business Review Panel and meeting 

with 27 Small Entity Representatives, including not only storefront payday and vehicle title 

lenders, but also banks and credit unions, tribal lenders, and online lenders. The Small Business 

Review Panel submitted its report to the Bureau last June, and the Bureau is continuing to 

consider those recommendations. 

In addition to participating in the Small Business Review Panel, the Bureau has continued to 

seek input through formal meetings between Bureau staff and various stakeholders and through 

many more informal meetings and discussions. From October 14, 2014 to September 15, 2015, 

the Bureau conducted over 30 meetings on consumer lending with nonprofit groups, including 

consumer advocacy, faith-based, and civil rights organizations. In the same period, the Bureau 

met to discuss consumer lending with state, municipal and Tribal officials a total of 17 times, and 

with representatives from industry and trade associations and over 30 times. A group of lenders 

and advocates also joined together to discuss areas of agreement, and the Bureau met with this 

group three times to obtain its consensus recommendations as well as to hear areas of discussion. 

7 
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Additionally, the Bureau has taken special care to acknowledge and respect the unique legal 

relationship between the federal government and tribal nations. This relationship is a critical 

one, and its importance is reflected in the Bureau's Tribal Consultation Policy, 8 as well as the 

Bureau's extensive outreach and engagement with the tribes. 

The Bureau finalized its Tribal Consultation Policy in April2013. Since the Policy went into 

effect, the Bureau has conducted two Tribal Consultations on the CFPB's potential rulemakings 

for payday, vehicle title, and similar loans and welcomes input on ways that we can improve our 

Tribal Consultation Policy. In both the drafting of the Tribal Consultation Policy and the 

execution of the two Consultations, the Bureau conferred with other federal agencies, including 

the U.S. Department oflnterior, to draw on their experiences and incorporate their best practices 

for effective Tribal Consultation. The Bureau is committed to ensuring that our Tribal 

Consultation policy provides a meaningful opportunity for the Bureau to consult with tribes on 

policies that affect them. 

Specifically, the Bureau invited all 566 federally recognized tribes 9 to two Consultations related 

to the Bureau's small-dollar lending rulemaking proposals. These Consultations were frank 

discussions that allowed tribal leaders to share their views about the proposals with the Bureau. 

The first of these Consultations took place in November 2014, before the Bureau had formulated 

the outline of proposals under consideration. The second took place in June 2015 to discuss the 

Bureau's outline. The Bureau also has held a number of other meetings with tribes at the 

Bureau's headquarters and across the country. 10 The tribe's feedback is being considered as the 

Bureau moves forward on a Notice of Proposed Rulemaking. 

The Bureau also spoke directly to state and federal regulators and policy makers at field hearings 

and in other settings across the country. In June 2015, the Bureau's Office of Consumer 

Advisory Board and Councils, which is charged with managing the Bureau's advisory groups 

and serving as the liaison between advisory group members and the Bureau, held meetings and 

field events associated with the Bureau's Consumer Advisory Board (CAB) in Omaha, Nebraska 

about payday, vehicle title, and similar loans. The CAB advises and consults with the Bureau in 

the exercise of its functions under the Federal consumer financial laws, and provides information 

on emerging practices in the consumer financial products and services industry, including 

regional trends and other relevant information. The events included a community roundtable, 

welcome reception with community leaders and representatives, an industry and community 

engagement panel, a community tour including a visit to a payday lending store, CAB committee 

meetings, and a day-long public session, which focused on the Bureau's proposals under 

consideration, trends in payday and auto-title lending, and mortgages. In addition to the Omaha 

8 Available at http:/lfiles.consumerfinance.gov/f/201304_ ctpb_ consultations. pdf. 9 The Bureau is aware that the U.S. Department of the Interior recognized a 567th tribe on July 2, 2015 and intends 

to include this additional tribe in all future tribal engagements. See Interior Department Issues Final Determination 

for Two Federal Acknowledgement Petitioners, Dept. oflnterior, July 2, 2105, available at 

www.indianaffairs.gov/cslgroupslpublicldocumentsltextlidcl-030832.pdf. 

10 Associate Director Zixta Martinez addressed a plenary session of the 2014 National Congress of American Indians 

(NCAI) Annual Meeting, and Bureau leadership met with the NCAI Executive Committee during that event. In 

addition, the Bureau has partnered with tribes on key consumer education and engagement programs related to K-1 2 

financial education and the Bureau's Your Money Your Goals initiative. 

8 
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meetings, the Consumer Advisory Board convened six discussions on consumer lending, the 

Community Bank Advisory Council held two discussions, and the Credit Union Advisory 

Council conducted one discussion. 

Since October 2014, Bureau staff has held meetings and roundtables with over 40 entities from 

industry, including 13 national trade associations and over 30 of their member businesses. The 

entities represented small dollar lenders operating in communities and online, vehicle/title 

lenders, installment lenders, retail banks, community banks and credit unions. The meetings 

were open forums for industry groups to share their knowledge of small dollar lending 

operations, underwriting processes, state laws, and anticipated regulatory impact. 

The Bureau's Office of Research has reviewed numerous industry-sponsored, advocatesponsored and independent research reports on payday, auto title and similar lending in the 

United States. It has invited several of the authors to share their methods and data via follow-up 

teleconferences or in-person visits here in Washington. 

Bureau leaders, including Director Cordray, have also spoken at events and met with industry 

representatives. In February 2015, Bureau leaders met with the Board of Directors ofthe 

Community Financial Services Association of America. These meetings have provided the 

Bureau with opportunities to hear the industry's insight and suggestions for how to craft a 

proposed rule that would preserve access to small dollar lending in underserved communities. 

***** 

The Bureau continues to receive feedback from Congress, State, Local and Tribal officials, 

consumers, industry, and others on its proposal under consideration. The Bureau's next step will 

be to formally issue a proposed rule. Once the proposal is issued, the public will be invited to 

submit written comments. The Bureau will carefully consider those comments before final 

regulations are issued. The Bureau will move as quickly as reasonable, recognizing the 

importance and the complexity of the subject, and will be thoughtful and thorough as we 

continue this work. 

In the end, the Bureau intends for consumers to have a marketplace that works both for shortterm and longer-term credit products. For lenders that sincerely intend to offer responsible 

options for consumers who need such credit to deal with emergency situations, the Bureau is 

making conscious efforts to keep those options available. There should be opportunities 

available for loans with affordable payments that will enable the consumer to repay the loan and 

still meet their other obligations and pay their living expenses. Lenders that rely on fees and 

profits from consumers in long-term debt traps, however, will not be able to continue business as 

usual. Consumers should be able to meet their needs without finding themselves stuck in an 

extended debt trap. 

Chairman Neugebauer, Ranking Member Clay, and Members of the Subcommittee, thank you 

for helping us to achieve that goal and for the opportunity to testify today. I look forward to your 

questions. 

9 
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American Financial Services Association 

United States House of Representatives 

Subcommittee on Financial Institutions and Consumer 

Credit 

Hearing on: 

Short-term, Small-Dollar Lending: The CFPB's Assault on 

Access to Credit and Trampling of State and Tribal 

Sovereignty 

* 

Thursday, February 11, 20 16 

* 

Statement for the Record 

by the 

American Financial Services Association 
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Good Afternoon, Mr. Chairman, Ranking Member Clay, and Members of the Subcommittee. My 

name is Kelvin Simmons J am here today on behalf of the American Financial Services 

Association (AFSA) and the millions of traditional installment loan (TIL) customers that 

AFSA's member companies have served over the last I 00 years. 

Thank you very much for this opportunity to talk to you today about the Consumer Financial 

Protection Bureau's (Bureau) proposal for small-dollar loans and the impact that it will have on 

deserving consumers. 

I ask that my full statement be submitted for the record so I can focus on three basic issues: (I) 

the need for small-dollar credit; (2) the fact that depository institutions are not equipped to 

address that need; and (3) the demonstrated ability of traditional installment lenders to offer safe 

and affordable access to small-dollar loans. This ability has been recognized by the Center for 

Financial Services Innovation, the National Black Caucus of State Legislators (NBCSL) and the 

National Hispanic Caucus of State Legislators. But first, let me paint a picture of my own 

experience and how I see the issue from the perspective of the community where I was born and 

raised- Kansas City, Missouri. 

I am a former state director of economic development in Missouri. During my tenure as the 

director, the state's banks, credit unions and financial services divisions were under my 

executive authority. I was President/CEO of one of the largest community development 

corporations in Missouri and I was twice elected to the Kansas City Council in the very 

community where I was born and raised. The zip code where I was born and raised (64130) lies 

in Missouri's 5th Congressional District. My parents and I lived and owned homes in that zip 

code for over 50 years. 

A study done between 2006- 2012 by Dr. Rickey Keys for NBCSL in key urban cities across 

the United States, including Kansas City, showed that in that same zip code there were no banks, 

one credit union, a substantial numbers of check cashing outlets, and a significant number of 

payday loans and title loan stores. There were no locations that offered a choice for safe, reliable 

and affordable small-dollar loans. I characterized this as living in a community that had a 

financial services desert. 

To further illustrate my financial services desert point, I served as Commissioner of 

Administration for the state of Missouri from 2009 - 2012. In that role, I had dual 

signatory authority with the Missouri State Treasurer to issue all checks on behalf of the state of 

Missouri. My name appeared on every check issued by the state. Even though my name 

appeared on all the state checks, there was not a bank where I could deposit that check in my 

hometown zip code. 

In that same zip code, the average credit score was 606, which meant it was harder to 

obtain credit for car loans, mortgages, and items for which credit was needed. As you 

may have concluded, a number of citizens in this community were unbanked or 

underbanked. It is an understatement to say that in a financial services desert it is very 

difficult to obtain safe and affordable small-dollar loan products. It is concerning because it 

is inevitable that a car will break down, children will need school supplies, and emergencies 

will happen. The need for a safe, affordable small-dollar loan product is significant. 

2 
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Last year in Missouri, there were over two million small-dollar loans made to Missouri citizens. 

Missouri has a population of just over five million people. The need is definitely demonstrated. 

These loans come in a variety of products, but after reviewing a number of those products, I 

believe one of the safest and most affordable small-dollar loan products is a TIL. I fear that if the 

TILs are not available because they become harder to obtain, the community will struggle with 

more predatory products or be left with no choices at all. This could be an unintended 

consequence to a well-meaning proposal. 

I believe that there is a very obvious need that my former community and others like it have for 

high-quality, small-dollar credit products. The national need has been recognized by the Director 

of the Bureau, Richard Cordray, who testified last fall about preserving the ability of installment 

lenders and others to continue to make responsible loan products. Additionally the Federal 

Deposit Insurance Corporation (FDIC) undertook a pilot program to get banks to lend in this 

space. 

However, despite years of effort, the FDIC has found that banks do not see small-dollar loans as 

a profitable business line. To illustrate my point even further, Liberty Bank, one of the nation's 

largest African-American owned banks, and one which has a location in Kansas City, 

participated in the FDIC pilot program. I worked with Liberty Bank in Kansas City and they do a 

terrific job of lending in the community. But in the pilot program, they concluded that despite 

their desire to meet the small-dollar lending need, it was difficult to make those loans work over 

time without some form of a subsidy. I commend them for their attempts to work with their 

customers because this is difficult. 

So the obvious question is who is best suited to meet the need for high-quality, small-dollar 

loans? The answer is traditional installment lenders making TILs. What are TILs? TILs arc 

fixed-rate, fully-amortizing, small-dollar loans repaid in equal monthly payments or installments. 

The industry average loan is for $1,500. The average monthly payment is $120 and the average 

term is 15 months. The average loan amount, monthly payment, and average term vary by 

lender. TILs are affordable to each borrower's monthly budget. They are "plain vanilla" loans 

with transparent, easy-to-understand terms, due dates and payment amounts. Installment lenders 

underwrite loans based on consumers' credit reports and other factors. At the time of origination, 

each and every loan is made with the highest confidence and expectation that it will be paid back 

in full and on time. 

As I mentioned earlier, the Center for Financial Services Innovation has published a Compass 

Guide to Small Dollar Credit that I have ineluded in my full statement, which outlines high 

quality characteristics that reflect T!Ls. 

A high-quality small-dollar loan as one that: 

I. Is made with a high confidence in the borrower's ability to repay; 

2. Is structured to support repayment; 

3. Is priced to align profitability for the provider with success for the borrower; 

4. Creates opportunities for upward mobility and greater financial health; 

3 
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5. Has transparent marketing, communications, and disclosures; 

6. Is accessible and convenient; and 

7. Provides support and rights for borrowers. 

In 2014, the Missouri legislature passed SB 866 to separate and distinguish TILs as a high 

quality product distinct from payday and title loans. In December of 2015, the NBCSL adopted a 

resolution, also in my full statement, endorsing the development of responsibly underwritten 

small-dollar installment loans. The resolution identifies the key structural qualities of safe and 

affordable loans as being a schedule for repayment in substantially equal installments, and the 

lenders' assessment of the borrower's stability, ability, and willingness to repay. 

The resolution also addresses the issue of the cost of the loan, pointing out that the annual 

percentage rate (APR), a required disclosure to borrowers, is not always the best indicator of 

actual cost. It affirms the importance of ensuring consumers' access to low-cost, rather than lowrate, loans. Historically, APR rate caps have been a favored means of regulation, despite not 

differentiating between loan types. 

The resolution states that lenders should examine factors such as a borrower's credit history, 

monthly disposable income available to service the debt, employment and existing debt as a 

condition of making a loan. It also recommends that lenders be community-based, licensed and 

audited by the state, and actively participate in community and charitable activities, particularly 

those relating to financial literacy. 

The Bureau's stated objective of the small-dollar proposal is to protect consumers from the 

harmful characteristics of payday, title loans, and similar short-term loans. These types of loans 

all have repayment schedules that are typically three months or less consisting of one to three 

payments and may include a balloon payment. 

We understand tl1e Bureau's concerns about these loans. We agree that some loans may trap 

borrowers in a cycle of debt. And we agree that the Bureau should enact common sense 

protections to ensure that consumers have access to credit that helps, not harms them. As l have 

pointed out, TILs are safe and affordable loans that serve many purposes, including helping 

consumers out of debt traps. 

Unfortunately, the proposal is so broad that it covers all payday, title loans, and many TTLs. How 

are TILs different from payday loans? Unlike payday loans, TILs do not have prepayment 

penalties or large, one-time balloon payments. They are fully-amortizing loans. TILs arc paid off 

through equal monthly payments of principal and interest that provide a clear roadmap out of 

debt. 

If the Bureau does not limit the rulemaking to payday and title loans, lenders may choose not to 

make loans above 36% at!-in APR. This will cut-off access to loans below $4,000 for two main 

reasons. 

First, traditional installment lenders have worked tirelessly to distinguish themselves from 

payday lenders. They cannot afford the reputational risk of being associated with payday lenders. 

4 
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To avoid being seen as anything resembling payday or title, they may choose not to offer a 

product that is labeled by the Bureau as a "covered loan" under a payday and title rule. This will 

leave consumers with limited options. Consumers will have to borrow more to stay under 36% 

ali-in APR set by the Bureau, provided they qualify. Or, more likely, consumers will go to 

disreputable "lenders" (or loan sharks) to get the money they need. 

The second reason that lenders may decide against offering covered loans is that they simply will 

not be able to make small-dollar loans, especially with onerous and unnecessary income 

verification standards, at 36% ali-in APR. According to a study done by three academics using 

industry data, in order to make a break-even loan at 36% APR, the loan would have to be made 

for at least $2,600. For a loan to be made profitably at 36% ali-in APR, the loan would have to 

be for around $4,000. In a Bureau field hearing on military lending, almost all the panelists told 

Bureau staff that it was impossible to make such loans. As I mentioned previously, the FDIC 

pilot study on small-dollar loans also showed that banks could only make these loans as lossleaders. 

In conclusion, I hope that I have shown the members of the subcommittee that: (I) there is a 

great need for high-quality, small-dollar loans in many communities, like the one in which I was 

raised; (2) TILs meet the definition of high-quality, small-dollar loans and are meeting the need 

in many of these communities; and (3) most importantly, the Bureau must be careful to preserve 

the ability of installment lenders to offer these responsible loan products as Director Cordray 

indicated in his testimony before this committee last September. 

Thank you and I look forward to answering any questions the Subcommittee members may have. 

5 
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APPENDIX I 
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BUSINESS AND ECONOMIC DEVELOPMENT 

Resolution BED-16-21 

A RESOLUTION PROMOTING SAFE AND AFFORDABLE LENDING PRACTICES 

WHEREAS, the National Black Caucus of State Legislators (NBCSL) has always been committed to 

financial empowerment through improved access to capital as well as a marketplace that offers safe 

and affordable lending products and services; 

WHEREAS, in 1998, the United Nations defined poverty as the lack of access to certain essential 

goods and services, including access to credit; 

WHEREAS, the need for small-dollar closed end credit exists in every community throughout the 

country; 

WHEREAS, not all loan types are equally safe and affordable, and the structure of certain loans 

significantly increases the likelihood of borrowers falling into a cycle of debt; 

WHEREAS, responsibly structured credit is essential to support a household's ability to save, build a 

sound credit history, and facilitate crucial investments that can provide a foundation for other 

wealth-building activities; 

WHEREAS, the key structural qualities of closed end loans that are safe and affordable are that the 

lender makes a good faith effort to assess the borrower's ability to repay the loan and that the loan is 

repayable in substantially equal installments, with no balloon payments; 

WHEREAS, it is the intention of this body to ensure access to loans that are low cost rather than low 

rate, since consumers buy goods with dollars and cents and not with annual percentage rates; 

WHEREAS, NBCSL passed Resolution BFI-13-14, "PROMOTING SAFE AND AFFORDABLE 

LENDING PRACTICES," among the 2013 Ratified Resolutions and that resolution promotes 

adequate safeguards to protect the general community from abusive financial services; 

WHEREAS, this resolution maintains that responsibly structured credit is an essential part of the 

wealth-building ecosystem, that includes building a sound credit history, as well as saving and wise 

investment; 

NBCSL RATIFIED RESOLUTIONS 10 
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BUSINESS AND ECONOMIC DEVELOPMENT 

Resolution BED-16-21 

WHEREAS, all small-dollar closed end credit should be "fully amortized," meaning that the Total of 

Payments defined under the Federal Truth in Lending Act, is repaid in substantially equal multiple 

installments at fixed intervals to fulfill the consumer's obligation; 

WHEREAS, small-dollar closed end credit, when used prudently by consumers, may help establish, 

re-establish or improve credit scores; 

WHEREAS, all small-dollar closed end credit should be reported to at least one of the three major 

credit agencies: Equifax, Experian and TransUnion; 

WHEREAS, all small-dollar closed end credit should provide that the Total of Payments as defined 

in the Truth in Lending Act be repaid over at least a 120 day period in substantially equal payments; 

and 

WHEREAS, Traditional Installment Loan Lenders offering amortizing small-dollar closed end credit, 

may prevent cycle of debt issues inherent with non-amortizing balloon payment loans. 

THEREFORE, BE IT RESOLVED, that the NBCSL supports small-dollar closed end credit in the 

form of traditional installment loans; 

BE IT FURTHER RESOLVED, that Traditional Installment Loan Lenders should be reasonably 

protected; 

BE IT FURTHER RESOLVED, that the NBCSL supports the expansion of Traditional Installment 

Loans as an affordable means for borrowers to establish and secure small dollar closed end credit 

while preventing cycle of debt issues inherent with non-amortizing balloon payment loans; and 

BE IT FINALLY RESOLVED, that a copy of this resolution be transmitted to the President of the 

United States, Vice President of the United States, members of the United States House of 

Representatives and the United States Senate, and other federal and state government officials as 

appropriate. 

SPONSOR: RepreMntative Karia May (MO) 

Committee of Jurisdiction: Business and Economic Development Policy Committee 

Certified by Committee Co..Chairs: Senator Jeffery Hayden (MN) and Representative Angela Williams (CO) 

Ratified in Plenary Session: Ratification Date is December 4, 2015 

Ratification is certified by: Senator Catherine Pugh {MD}, President 

NBCSL RATIFIED RESOLUTIONS 11 
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APPENDIX II 
112 


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The Compass Guide to Small-Dollar Credit 
113 


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COMPASS PRINCIPLE.).: The Compass Guide to Small-Dollar Credit 

Table of Contents 

ACKNOWLEDGMENTS ............................................. . .......................................................... 3 

OVERVIEW. 

Why a Guide on Small-Dollar Credit?. 

Background on the Compass Principles .... 

Scope of the Guide ... 

Definition of Quality 

HOW TO USE THE GUIDE ..•.......... 

Purpose and Audience ......... . 

Structure of the Guide ....... . 

How Not to Use the Guide. 

COMPASS GUIDELINES AND PRACTICES FOR SMALl-DOLLAR CREDIT .. 

Made with a high confidence in the borrower's ability to repay 

Structured to support repayment ... 

Priced to align profitability for the provider with success for the borrower ..... 

Creates opportunities for upward mobility and greater financial health 

Transparent marketing, communications and disclosures. 

Accessible and convenient 

Provides support and rights for borrowers .. 

. ..................... .4 

. .... .4 

. ... .4 

. .............. .5 

.. 6 

. ............ 8 

.8 

. ... 8 

. .... 8 

. ................. 9 

....... 9 

.10 

. .... 12 

.. 13 

. ......................... 14 

........ 15 

. ........ 16 
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COMPASS PR!NCIPU.S: I he Compass Guide to Small-Dollar Credit 

1. ACKNOWLEDGEMENTS 

This Guide was developed by CFSI, with the support of the Ford Foundation and the Omidyar Network, and in 

consultation with a wide range of advisors from industry, consumer advocacy organizations, nonprofits and academia. 

These include: 

Appleseed 

Aspen Institute 

Bill Float 

Brundage Management Company 

Capital One 

Center for Responsible lending 

Clarifi 

Community Development Finance 

Consumer Federation of America 

Consumers Union 

Core Innovation Capital 

Corporation for Enterprise Development (CFED) 

Credit Builders Alliance 

Enova 

Float Money 

Ford Foundation 

Guaranty Bank 

Key Bank 

Kinecta Federal Credit Union 

l2C, Inc. 

LendUp 

lexisNexis Risk Solutions 

MasterCard 

Meta Bank/Meta Payment Systems 

Metlife foundation 

Mission Asset Fund 

National Consumer Law Center 

National Council of La Raza 

National Federation of Community Development Credit 

Unions 

National Urban league 

Neighborhood Housing Services of Greater Cleveland 

NetSpend 

New America Foundation, Asset Building Program 

North Carolina State Employees' Federal Credit Union 

Omidyar Network 

One PacificCoast Bank 

One PacificCoast Foundation 

Progreso Financiero 

Regions Bank 

San Francisco Office of Financial Empowerment 

Self-Help Federal Credit Union 

Sunrise Banks 

Texas Appleseed 

The Leadership Conference on Civil and Human Rights 

The Pew Charitable Trusts 

Think Finance 

UNC Center for Community Capital 

Urban Institute 

Visa 

ZestFinance 

We are grateful for the wisdom and guidance of our advisors in this process. However, the Guide does not necessarily 

reflect the individual views of these advisors. CFS! takes full responsibility for the end product, and a!l comments, 

questions or suggestions should be directed to CFSI. 
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COMPASS PRlNOPU:S: The Compass Guide to Smafi·Doffar Credit 

2. OVERVIEW 

Why a Guide on Small-Dollar Credit? 

Access to high-quality small-dollar credit is a key 

component of a successful financial life for many 

Americans. Millions of people use small-dollar credit 

products every year; in 2012, consumers spent an 

estimated $41.2 billion on such products (see Box 1). 

Having the ability to borrow relatively small sums, on 

reasonable terms, can help individuals weather a financial 

shock, smooth income fluctuations, build a positive 

credit history, and facilitate a wealth-building purchase. 

However, millions of Americans do not have access to 

small-dollar credit or only have access to high-cost, lowquality small-dollar credit products that too often lead 

them into a cycle of repeat usage and mounting debt. 

The Center for Financial Services Innovation (CFSI) 

believes the opportunity and need are great to improve 

the marketplace for small-dollar credit. Well-designed 

products have the potential to help people turn a 

momentary credit need into an opportunity to improve 

their financial well-being. Voluntary standards for quality 

in the small-dollar credit marketplace can facilitate 

innovation by providing a road map for lenders who seek 

to meet consumers' credit needs in a responsible and 

sustainable way. With the support of the Ford Foundation 

and the Omidyar Network, CFSI convened a network of 

expert advisors to develop this set of specific guidelines 

and best practices for high-quality small-dollar credit as 

part of our Compass Principles program. 

Background on the Compass Principles 

The Compass Principles are aspirational guidelines to 

assure quality innovation and execution in financial 

services- services that enable people to transact, borrow, 

save and plan in ways that are beneficial to the consumer 

and profitable for industry. The Principles reflect the 

belief that the U.S. financial services marketplace can 

actively contribute to improving people's lives, and 

deliver sustainable value to all consumers and providers. 

.Wl2 J:,ina:niiiilly u,n~rServed,~aik~ ,~,z~:~tyd)4 ~~nter: lor Ff1!arlc;:i~t Servk~'}nnovatiQniJ?e<:emQer f<?-13~ 

The four Compass Principles are: 

Embrace Inclusion: Responsibly expand access. 

Consumers, including those from traditionally 

underserved groups or communities, are creatively 

reached and well-served with a relevant suite of 

quality, affordable financial services that promote 

consumer choice and are provided in a safe, dignified 

and convenient manner. 
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COMPASS PRINCIPlES: The Compass Guide to Sma/1-DoflarCredlt 

Build Trust: Develop mutually beneficial products For additional information on the Compass Principles, 

that deliver clear and consistent value. Consumers please visit www.compassprinciples.com. 

can clearly understand and derive value, without 

pitfalls or unwelcome surprises, from financial 

products designed to align provider and consumer 

goals. 

Promote Success: Drive positive consumer behavior 

through smart design and communication. Consumers 

are empowered to make wise money choices via smart 

product design and guidance that is relevant to their 

specific concerns and financial situations, coincides 

in a timely fashion with key life events or decisions, 

and is immediately actionable. 

Create Opportunity: Provide options for upward 

mobility. Consumers have appropriate options 

that create opportunities for increased financial 

prosperity, and they are encouraged to pursue those 

opportunities. 

The Compass Principles are guided by the following six 

values: 

Profitability and Scalability: The Compass Principles 

provide a framework that is pragmatic, achievable, 

financially sustainable and scalable. 

Deep Customer Knowledge: The Compass Principles 

are formulated and must be implemented with a solid 

understanding of real consumer needs. 

Safety: The Compass Principles support and build 

upon consumer protections. 

Variation and Choice: The Compass Principles allow 

for judgment on the part of individual providers, 

because there is no one right way to meet all customer 

needs. 

Relationships: The Compass Principles focus on 

success for both consumers and providers and 

encourage viewing each customer interaction as an 

opportunity for a long-term relationship. 

Cross-Sector Participation: The Compass Principles 

incorporate the perspectives of a range of practitioners 

and experts. 

Scope of the Guide 

This Guide seeks to define characteristics of a high- quality 

small-dollar credit product. It does not assume, however, 

that credit is the answer for every consumer. For most 

people, the ability to borrow is an essential tool -along 

with the ability to transact1 to save and to plan - for 

successfully managing their financial lives. Access to 

credit can help weather a financial shock, smooth income 

fluctuations, build a positive credit history, and facilitate a 

wealth-building purchase- all of which are keys to overall 

financial health. 

For some people, however, access to credit might only 

worsen their financial situation. When people who face a 

chronic income shortfall or who already have debts they 

cannot manage use credit to meet their basic needs, they 

put themselves at risk of falling into a dangerous cycle of 

debt Absent some significant change in their short-term 

financial situation, they will likely need to borrow again 

to repay the loan while still meeting their basic needs and 

other financial obligations in the next period. Mounting 

fees and interest can quickly spiral out of control, creating 

a new financial strain on the individual who is already 

struggling. 

This Guide emphasizes responsible underwriting as a key 

component of a high-quality small-dollar credit product. 

As lenders' underwriting capability improves, due in part 

to the increased availability and utility of new data sources, 

some consumers who are currently accessing credit may 

no longer qualify. 

It is difficult to estimate with certainty how many 

consumers might no longer qualify with more responsible 

underwriting. Research shows that some current sma!ldollarcredit borrowers have expenses that regularly exceed 

their income; these are likely many of the same borrowers 

who find themselves in a destructive cycle of debt when 

they cannot repay their loans. 1 For these individuals, 

non-credit solutions such as job training, income support 

programs, budgeting help or savings tools might be more 

1 CFSI's re:oearch suggests that approximately 30% of smal!-doUar credit borrowers have expenses that regularly ext:eed their income, according to their self-reported reasons for 

seeking tredit. Regression analyses also found that borrowers who report this reason for seeking credit are nwre likely than other borrowers to roRover or extend their payday, 

pawn, auto title or deposit advai'\Ce loan. "A Complex Portrait: An E~mination of SmaU·OoUar Credit Consumers.~ Center for financial Sef\lices Innovation, August 2012. 
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COMPASS PR!NC1PlFS: The Compass Gwde to Small-Dollar Credit 

appropriate. Adequate consumer protections are also 

needed to shield vulnerable individuals against lending 

practices that are harmful or deceptive. While finding ways 

to support and protect the most vulnerable consumers is 

critically important, it is outside of the scope of this Guide. 

Definition of Quality 

This Guide defines a high-quality small-dollar loan as 

one that: 

1. Is made with a high confidence in the borrower's 

ability to repay 

2. Is structured to support repayment 

3. Is priced to align profitability for the provider with 

success for the borrower (see Box 2} 

4. Creates opportunities for upward mobility and 

greater financial health 

5. Has transparent marketing, communications, and 

disclosures 

6. Is accessible and convenient 

7. Provides support and rights for borrowers 

IIIIL At the, heart of the Cornpa.ss,'Pn'nci[Jfes is, q 

~OfnP'itfnelJt to m~tu~tsucc:=s~ ln the customer~pf?Vider' 

~lationshJp"BYft=frtuni~g ,e~h custofrJer i~telac~iO~ 

a~'a sou fee ot m~n(f~ture e?gag~mems, a'?~,ali~ning 

tqmpany Culture ~nd incentives ac~rdingly. provfde~s 

cansu,ccessiul!y"J?d pn)~ti'l~Jy offe/r;,~trur;ture, a~i:J ~t;:li 

products and services th!tt promote a positive customer 

relationshi[0 In, th'e case of stpaJI~dolliir dedit pr~uct?, it 

meahs designing busitiess models 'and p;oducts sUr;b,that 

the fended; pro[itability'depends ofl. bono~crs' sUccess 

with t!Je 'prodf.!(;t (i.e. ft!if~ rates of on-time ~epayiryenJ;J(_)w 

default ra~s, t;tc:) without re-borrowing atrd while still 

'meeting basic need~ and other ilf!ad:cipl of>llgiit~ons; 'a :tugh 

default- rate,shoukl n~ver be accepte(j as'jus( a(!Ott,e~ cost 

of ~ing bus~n~ss. It a~so means thatemp(qre::: ~h~uld hf: incentivited based on success gf the fo<Jn portfolio~ ,not on 

tf?~ number of loans booked, and that ,borrowerrshOuld 

never be encouraged to refinance their loans, -as'a way foi 

th'e:fender to generate additional rev:enue: Provider~,f:l.~e 

~rtcoiJtaged Yo Identify and ~rack progress, against specm:c 

conso[Tler4ocused Key Performarice Indicators (KPls) al6ng 

wiih traditiOnal linallcial metrid. 

While some of these characteristics are straightforward, 

others imply clear trade-offs. For example, assessing 

ability to repay requires that the lender gather and 

verify information about the borrower, including but 

not limited to his or her identity, income, credit history 

and other obligations, which may slow down the loan 

approval process, making the loan less convenient for 

some borrowers. Fortunately, consumers report a variety 

of needs for small-dollar credit, and therefore a one-sizefits-all solution is not the goal (see Box 3). 

Much of the debate about small-dollar credit has 

heretofore focused on price, as expressed in Annual 

Percentage Rates (APR), as a primary determinant of 

quality. While affordable prices are certainly one aspect 

of high-quality small-dollar loans, what is "affordable" to 

any given borrower depends on many factors, including 

the loan's size, repayment period, interest rate and fees, 

as well as the individual borrower's unique financial 

"Know Your BorroWer:,The foqr ~eed ~ases;'O~~mau~oOflar 

Credit Consumers." Center for financt~I services- lrmov:ation~ 

December 2013. 
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COMPASS PRINCIPLES: The Cornp.ass Cwdc to Sma!J-Do/Jar Credit 

situation. CFSJ defines an affordable small-dollar loan 

as one for which the loan amount, repayment period, 

interest rate and fees are such that the borrower can 

successfully repay the loan without re-borrowing and 

white still meeting basic needs and 

other financial obligations (see 

Box 4). ln other words, whether a 

loan is affordable or not depends 

on underwriting, structure and 

pricing- not on price alone. 

Underwriting. As discussed earlier, loans should be 

made with a high expectation that the borrower will 

repay them, on-time and without renewing the loan. 

This means that !enders must invest in their underwriting 

capabilities, rather than accepting a high default rate as a 

necessary cost of doing business or relying on high fees 

from borrowers who are in a cycle of debt. As lenders' 

undervvriting capabilities improve, they ought to be 

able to distinguish higher-risk borrowers from lowerrisk borrowers, and price their loans accordingly. Credit 

should become much more affordable for the many 

consumers who use it responsibly. 

Structure. Structure is just as important as price in 

determining whether a small-dollar loan is affordable. 

For example, for borrowers who struggle financially, a 

two~week loan with a balloon payment structure is often 

very difficult to repay, even at very low prices. In most 

cases, loans should be structured in fully-amortizing 

installment payments; the amount of the loan and the 

repayment period are variables that should be adjusted to 

ensure that the borrower can afford to make the regular 

payments while still having enough left over to meet 

basic needs and other financial obligations.2 Borrowers 

should have the option to repay the loan early without 

penalty, preserving needed flexibility for those who wish 

to get out of debt more quickly. (However, lenders should 

not encourage borrowers to pay off early simply by 

refinancing or taking out another loan, a practice called 

loan flipping.) 

Pricing. Lenders must be able make a profit in order to 

offer consumers lasting, high-quality solutions at scale. 

However, small-dollar credit products should not benefit 

the lender at the borrower's expense; in other words, the 

business mode! should rely on successful repayment, not 

high probabilities of default. Pricing should be designed to 

incentivize and reward positive behavior, lowering costs 

for consumers as they demonstrate 

creditworthiness over time. Lenders 

should not rely on punitive rates and 

fees as profit centers, and borrowers 

should not be penalized for good 

behavior. Over time, lenders 

should leverage improved underwriting capabilities and 

operational efficiencies to lower prices and extend credit 

to more qualified borrowers. 

CFSI's vision for the future of the small-dollar credit 

marketplace is that consumers will have a variety of highquality options that meet their small-dollar credit needs 

and support them on a path to long-term financial health. 

For this vision to become reality, lenders will need to 

develop and pilot new models for delivering small-dollar 

credit that meet the standards outlined in this Guide. As 

they do so, CFSI believes that competition for the smalldollar customer will increase, leading to lower prices, 

more diverse product structures, more innovative features 

and better customer service- all of which mean more and 

better choices for consumers. 

Throughout the.Guide,we say that an 

affordable loan is one that ihe borfowercanrepay 

withgut re-borrowjng and while still me~t(ng basic 

needs. and otherfin#nciai obligations: By ""baijc needs 

tihd othE-r flnand;11 qbUgatJ-dns/', we,aie teferrinfrto 

n~:.ce~~eis,suc;h aS fo~f!, :~hr:flt.t;,~[ a:n~ ~~die~,~ Cafe, as well as debt service for other loaos,/ncf!Jding 

mortgage, .s_tudent, credit card and .t>thersf!iall-d?f)ar 

1qiws. ~y ~:Vith?ut re~borr~~~[}g,-: W~ p:~ ~~king ii 

ifisti~ctfon behyeen ?orrow~n~,~~~~n,~t ~?~~'futf.!re' 

date because a n~w credit rteed·ariSe!i (y,rhic(l does. 

nOt neceSsarily i~di~i.':t~ 'that,the origfn'al !O~'n>lVfls 

U{1affordable} and re·borrowing ifr,media!ely or 

shortiy afuir repiiying theoriginafl~h (yv.hich strongly 

suggests the borr()wer equid not afford. ta pay back the 

loan while :<till meeti!ig tWSic nee(i$ and other financial 

obligations in the next period). 

2 We stop short of saying that loans should be made in installments in ali cases. A loan with a balloon payment might still be considered high·quality if the 

Joan is small enough that repayment in one lump sum remains affordable to the borrower. 
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COMPASS PRINClPUS: Tfw Compass Gwde to Sma/1-Dolfar Cred1t 

3. HOW TO USE THE GUIDE 

Purpose and Audience 

The Compass Guide to Small-Dollar Credit is a tool 

for improving the quality of small-dollar loans through 

guidelines for their design and delivery. Lenders can 

use it to review or improve existing offerings, or to 

design new ones. Other actors in the small~dollar credit 

marketplace, such as investors, technology providers, 

consumer advocates or government agencies, can use 

the Guide to inform their own assessment tools for smalldollar loans. 

Structure of the Guide 

The following sections outline each of the seven 

guidelines with a corresponding list of recommended 

practices. The practices are divided into three categories: 

Core Practices: These are the standards for a highquality small-dollar credit product. A loan should 

not be considered high-quality unless it meets these 

practices. 

Stretch Practices: These are additional best practice 

ideas for providers looking to stretch beyond the 

basic requirements. 

Next Generation Practices: These practices are for 

providers that have met the standards for quality, 

challenged themselves to stretch beyond the basics, 

and are considering the next step in high-quality 

product design. These practices are called "next 

generation" to emphasize the need for new models 

for delivering small~dollar credit that may not yet 

exist today. We need additional customer-focused 

innovation, research and testing for these new 

models to emerge. 

Please note that the examples are simply for illustrative 

purposes and should not be used as a checklist. Many of 

the practices in this Guide entail distinct business strategy 

decisions that are at the provider's discretion, and there 

is no one-size-fits-all approach to a high-quality smalldollar credit product. 

How Not to Use the Guide 

This Guide is intended as a tool to help lenders design 

high-quality small-dollar credit products. It cannot 

function as a "seal of approval" for any product or 

company, as CFSI does not monitor how individual 

lenders use this Guide or evaluate the extent to which 

they adhere to its principles. 

This Guide is not intended to provide advice about 

regulatory compliance. Users should seek legal counsel 

to ensure compliance with all applicable laws and 

regulations. 
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COMPASS PRINCIPLES: The Compass Guide to Smaff·Doffar Credit 

4. COMPASS GUIDELINES AND PRACTICES 

FOR SMALL-DOLLAR CREDIT 

Alongside each guideline, the Compass Principle(s) most fully embodied by the 

guideline are identified. For each of the Core, Stretch and Next Generation practices, 

examples are provided to illustrate how a company might apply the practice. 

This Guide defines a high-quality small-dollar loan as one that: 

Use the best available ~nderwriting t~~hniques to ens,ure a borrower's ability to repay \tyithout re-borrowing 

and whiJe still meeting basic needs and financial obligatiOns. 

Examples: 

Consider the borrower's oVerall 

Collect and 

Coiled and 

in~titution or through 

Develop t1 secondary scorecard that enables the institution to consider boirowers without a ~r~ditional credit profile. 

Do not make loans that rely solely on collateral for repayment. 

Example: 

!f collateral is accepted {e.g. preauthoriled ACH or payroll deduction), use additional underwriting techniques to 

ensure the borrower's ability to repay. 

Offer an appropriate loan product and amount based on each individual borrower's financial situation and 

the lender's risk. 

Examples: 

Balance the amount borrowr::d o1nd loan term to ensure that 

the total -cost of the loan to the borrowE-r. 

nb traditional 

risk to the lender whileexp.;:mding access 

Monitor portfolio performance to ensure that most borrowers are using the product as designed, Without 

defaulting or re-borrowing. 

Example: 

Set target rates for indicators of borrower success, such as the frequf'nc-y of defaults, late payments or repeated use, 
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COMPASS PR!t\:C!PU:S: The Compass Gwde to Smafl-Doflar Credit 

Design r~paymenfti~i~g a~~ ~ther ~rod~~~ fe~t~r:s !() ~~PP()~ ~nd ~nco~~age ~ucce~sful o~·tirjl;., r~;~y~~llt. EXamples: .· 

For dOsed~od loa~s, ind!Jd€ repaym,~nt 'of 'principal ':Vith each payment {fulty amortizi~~) artd ~ci 'f!~ep$yrpe'(lt, 

penalty: .·· . ·. . .· . . · · For, lines of credit,. set default minimum payments,tO include,both principal and interest, and encpur'age,borr<!~ts to 

paY mor~,th'an their minimum PaYmer'i eacr moOt~·':' ' ~ '' ,',, ~ ~ '>~ 

Batance t~e ~mount ?orr?wed a~d t~e,,Je~g~~, ~fre~y~~h~ to, e!l~~r~ t~at if!dl~idO<;'~I paym~n~ ~re affO~dable ~hHe 

,minimizingthetotafcoSto_ftheloonto,~heborrow~t::, , , , , , ,, : ,' 

Allow ~eaSona?le grace periods, en~bli,ng ?'?rrower~ ~q ~?i~ J~te payff!ent fees ~nd ~af~:'iO~~re,st, r~fus- , 

Enable bofrowers to opt out,of or, reschedUle a:utomatic repayme~ts with!n a reasonable,grace peri,ocl.' 

Cre<~:~e meaningful safeguards to prevent harmful misuse or overuse of the product. 

Examples: 

For dosed-end loans: 

If a borrower takes out more than one l-oan at a time, ensure that total payments On all lOans do not exce~d 

the borrower's ability to repay. 

Do not encourage borrowers to pay off their loans early simply by refinancing Or ~aking out another loan. 

Consider limits on the number of loans in a giVen period as means to prevent harmful 'misuse or overuse of 

the product. 

For lines of credit: 

Periodically monitor and reevaluate t~e borrower's creditworthirless, reducing or increasing credit lines as 

needed to resf>ond to changes in the borrow~r's financial situation. 

Consider requiring that borrowers periodically reduce their balance to zero to prevent harmful misuse or 

overuse of the product. 

Do not allow borrowers to exceed their credit limit. 

Provide support to borrowers when they have trouble repaying. 

EXamples: · 

Accept partial pay~nts when a borroWer has twUbte repaying. 

Design ft~x!Q~e,repayment plans for resp.ohsibfe,borro~'ers-facing ,~,i:fficult finanCial ,cil:curh~tartC~~ 

Ali~w borrowers to put payments temporarily,on hold when fadna,difficult finandat drcumstanc~. 
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Allow flexibility in 

Examples: 

COMPA~S PRINCIPLES: The Compass Guide to Small-Dollar Credit 

Set loan payment due dates to correspond with the borroWer's pay schedule or receipt of other income, 

Allo-:v borrowers !0 choose their, own loan payinent due date_s:and/or to reschedule them {withi~ a reasonable grace 

period) at any time. 

Allow borrowers to customize the amount borrowed, loan term and payment amount up front in order to 

design a Joan that fits their budgets, within ranges that underwriting suggests the borrowers can afford.' 

Example: 

Provide an interactive online tool that shows prospective borrowers how much they will have to pay (both in 

individual payments and over the life of the toan) for various possible loan amounts and durations. Set defaults that 

encourage borrowers to pay off the loart as quickly as they can aff~rd to do, to help them get out of debt faster. 

Provide custOmizable 

Examples: 

Allow bor!owers to choose to rece1ve alerts 'before automatic payn:tents are withdra\(Vn1 J)rov\:<:ti(lg the 'option, to 

approve the payment or resthedul~ it (with a reasoriable grace period). , ' ' 

Allow borrowers to choose to receive alerts whOO their loi:tn balance reaches certain threSholds ('e,g. when they 

nave paid off X1

Yo of,their toan, or ~hey have $,X lett to pay bef?n~ tlletf 1oan is fully paid offt Or when they have raid 

a c~rtain amount fn total fees. 

Offer online, or mobile budgeting and pers?nal financial management tools and/or access 'tO thirQ*party provi~ers 

for, those purposes. 
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COMPASS PR!NC1PU:S: The Compass Guide to Small-Dollar Credit 

Is priced to align profitability for the 

provider with success for the borrower. 

Prl~e ~~~~s t~ .!~~~~fivfze ~nd·reward ~O~i~iv~ b~fi~~ib~, ~~~~~t~~ ~ri~~atld/~r incr~~si~g ·b~~~fits· ~if b~·~~~is as they ~emonstrate cre<!itworthiness over time. 

Examples: ' 

lnCentivize autof!tatic lo~n ·repayments from tfansactto.nal accoun~s, while allowing the bortOwer the ·~ption to Opt 

out at any time. 

Reduce· ra~ over time for: bohowe~ who demonst~at~ ~onsis~~~t ·r~payment 

<k Refund fees. oq,a pro~mta basis when loans are paid back early .. 

Do not rely on penalty fees and interest .rates or fees eamed from refinancing as profit drivers. 

Examples: 

Minimize late payment fees and penalty interest rates. 

Allow reasonable grace p€riods, en.abling c~msumers to avoid }ate payment fe~s. and penalty !nterest rates, 

Minimize upfront fees and use accounting mt.'i:ho~s that accrue interest over the life of the loan, to reduce loan 

officers' incentives to encourage borrowers HHe:f!naf1ce. 

Actively help borrowe~s avoid penalty fees and interest rates through smart communication (e.g. alerts., targeted 

advice from <:ustomer service repre.senta!ives, etc}. 

Place a cap on the total amount of interest and !ate fees a bOrrower ca~ pay on the loan to prevent rapidly accu,mulating 

costs in the event the borrower has trouble making payments. 

Ensure borrowers receive the rnost appropriate and lowestcprice<l loan for which they qualify. 

Examples: 

Pr~vid~ opp~rtuniti:es to graduate to fower~coStprOdU~ts. 

P,rovi<;fe ppportunitles to i'efinarice. oth~r higO~cqstx:f:ebt.at,ilwre faVo:abJe ra~es. 

Proactively m':mitor borrow~rs' use of the product to identify bpportuniti~ to graduate theffi to. lowCr-:tost 'prOducts. 

PrOvide additional benefits to positive beh~vior. 

Example: 

Offer app:ropriate additional financial service prodUcts to regular borrower? ip gOod 

prepaid cards with savings and budgeting tools. 

as.rCipadable 
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COMPASS PRINCIPlES: The Compass Guide to Smaff-Doffar Credit 

Creates opportunities for upward 

mobility and greater financial health. 

' ' '' " ' ' ' < \' ',' ' '' " ' ' ';~ ',' ' ' \ ' : ',, '' 

Help the bnrrower leverage successful repayment into better credit ()pportunities in the future. 

Examples: 

Report repayment ~o tnaj?r,credlt b~re.::us t?,help: borr?wer~ e~ablish 'or ~,ul!d credit scores. 

Provide a clear path of graduation based qn successful repayment,,such as from a sec~red ~redit card to an 

unsecured credit card, or from, one product to ahother yvith ~tter terms and,lower prtces. 

If a borrower does not qualify for a 1oan today, provide actionable and specific advice that can help him or 

her work towards qualifying in the future. 

Examples: 

Provide referrals to credit c~unseling services that can help the borrower learn how to in:tprove his or her score in 

the future. 

Offer information about other services, such as government benefits, job training or soda! s-ervices, which can help 

the borrower improve his or her financial situation. 

leverage teachable moments to provide goida;,ceaboui bow to use the product successfully. 

Examples: 

U,se key moments such as loan application, apprOval and Servit_.:ing as opportunities to w:oviOe prOaCttye 'advice to 

the borrOwer about how to avoid fees anO qualify fOr beiter Credit opportuf)'fties in the fUture. 

Alfo"'( borrowers t() avoid a, late payrn~tlt fee or receive ah inter~t rate discount by con:':pleting on fin~ Jiri<intlal 

education modules. 

P~vide h~rr.owers ,wi~h information, abm~t't~~ir' ~.-' ~di~ (~~O~.s,~n.d,'Cre~lit ~co~e at ,k~y ~~~~f.~ ~ve.,'ritt.'- ~. tit~ ' ,, ' '' 

of the loan so they can observe in real-ti~e 'hoW ~paynie,nt behZ.vior affects tfl:eir cfedit prQfiles. 

Examples: 

Pmvlde access to a credit sc;ore for a!! app,icarits, 'regardless of decision. 

Provid~ borrowers With free access ~o credit rePort !J'IOOitOririg s~rvic~s. 

Incorporate d~ar, easy~to-understand informatiOn about,the borrow~r's,cr~dit score into perio~lc sfatements,Jnd/or 

an online dashboard. 

~om Dine s~all~d~llat: lOans wi~,,savi~g~ bpp~rtunities',an~,'~n~e~,ti~~~,, ~elping :botr~w~~~, ~~~f~~e, ~~~~ ability to f!lanage future emergencies or cash shor~alls. 

Examples: 

Continue to direct automatic payments into a savings account aft€rthe Joan'has bee'n fully Pl!id off. 

Require that the borrower open a savings account as' a corditioi! of the, loan ~rtd,make a nOmihal 'coniributiO!l to 

the account as an incentiv~ for the borrower, to begin using ii. ' 

Credit the ap)Jii<;ation fee into the borrower's'Savjngs' account if he or sfJi?,flays the loan on tirOe,' 

,tJ:irec~ a portion _of the loan amqunt intO savin~s, an~ ~o not ,charge ln:er.est on that portio~ of the l()a!l. 

ProVide ~ bonus that gets deposited into the ,~rrower's s,avings account when the Joan ls fuHy repaid. 

Allow the b<;mower to refinance higher-cost, debt, and dJret;t a portion of the ~avings from the lower p.lymenl<;;'into' 

a savings account 
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COMPASS PRINCIPLES; The Compass Guide to Smali-Dol!arCredJt 

Provide borrowers with information about the loan product in a mariner and language they cat\ understand' 

so that they can make better and more informed decisions. 

Examples: 

for dosed-end loans, 'pr~vide borro~ers w!th -a, f41l payment schedule: that shows the,'d~tes- ~nd amounts of ?lt 

payments~ indudtng the a':'ounts appti~ to interest and prlncip~t unt~l ,the loan batan<:e reacheS zerO. 

L!Se affirm~ti'':"e statem~nts to enable b~r~o.wers to a'ffir~, that they,' ,understand the :~~~ C'9S.t 

:consequences of late or non-payment, ~.g. 1

'1 ~e~o~ni?~ that l ~lit pay ~'X, ,and will p~y $~ e~r~ 

Provlde,periodic toan statements th~t dearlY demonstr?te success tOW~rds:paying of( the loary (:and, if, applicable, 

progress towards savings goals-}. ' ' 

Provide marketing collateral, loan application~, di:;dosures, statements and account' information in multiple 

languages, 

;;\ COmmunicate decline decisions in a mannef 1hat is easy :to ,Understand and in compliance, with the Fair Credit 

Reporting Act 

Clearly communicate to prospective borrowers th..1f their 'repayment behavior will be repOrted ,to 'mJ.jor <:redit 

bureaus. 

Clearly market information aboyt the risks tO botrowlm loan 

will be pulll?'d and em{:lk1yment verified, that they Will bt:> 

payment, etc.) 

Example: 

Include:? section in' pefio?ic 

they will. be able to pay qff the 

behavior, 
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COMPASS PRlNCJPlES: The Compass Guide to Small· Dollar Credit 

Is accessible and convenient. 

Make loan decisions lit' a 

tender's com~it!flet!t to responsible uhd~rwritirig. 

Examples: 

leyerage,existi~g third~party 'p!atform~,to' ~na?le ~rrowerS to vefify ~ore of,their ioformatio~ on the,spt)L 

Set dear expe~tions up front for J?rn:'P~tiv~ b~lffow~rs a~ut how ~ui~kty they w~H ~eceh:e a t~An ~isi~n. 

Develop underwriting techniques that ~Uow for prequal!ficat,ion for,!oal).s up to a -certain limit based on:~ pr~e((i(>ting 

relationship with the borrower. 

Ensure that loan application, decision, disbt;trsemenf an~ servicing processes are convenient and culturally 

relevant. 

E?Camp/es: 

Allow applications to be accessed and submitted through multiple channels, such as in~person, by mail, by phone, 

online, via kiosk or via mobile device. 

Allow payments to be made through multiple channels, such as ACH, in~pe:r:son, by phone, online, via kiosk or via 

mobile device. 

~rovlde the option of receiving funds distributions through multiple channels such as by paper check, direct deposit, 

wire transfer or payment directly to a third-party provider. 

Provide a loan dashboard online, via m!)bile ptatfqrms a~d!or through lnter~l.Ctive Voke Response (IVR) systems so 

that borrowers can easily access account inf~rrnation and make paymen~~t 

Provide marketing collateral, loan applications, disclosures, statements and account information in multiple 

languages. 

Allow customers to use multiple forms of id~mtification when applying for a loan (e.g. foreign identification). 

Allow customers to request mailed paper statements at a reasonable cost. 

delivery cliatmels to 

minimize risk to the lender. 

Examples: 

th.e borrower, fadli!ate timely loan approval and 

Allow borrowers to submit applications :Jnd make payments at ret~illocationS where th'ey ffequent!)' Shop! such as_ 

supermarkets, 

Tie loan :approval and disbursement to the payment of a partiCular vendor, s-uch as u~ility 'companieS or auto 

mechanics. 

Work with employers to faciHtate access to loans as an employee benefit 
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CO!\.WASS PR\NClPLES: The Compass Guide to Smalf·Dollar Credit 

Provides support and rights for 

borrowers. 

borrowerS·can obtain 

Provide .customer support through multiple as iO~person; '?Y Phone, on!il;e1 via tdosk o~ via ~Ol?ile 

phone .. 

Pr~wide cust>>mer suppo(t in multiple langUage~. 

Develop Interactive .Voice Response {~VRJ systems !hid 'a.re av?;ilab1~ in !Til!Jtipl-it laOguages, easy .to naVigate:'-and 

mak~ dear how to access a live agent. 

Provide contact information for the relevant stat€ body in the eve.nt ~he.borrowe~: to 

register a complaif!t or seek additiOnal guidance. 

Assign borrowers to individual relationship ma'nitgers wh'.Mre primarily responsible tor provi.ding the~ with customer 

support. 

Design dispute resolution and collection practices that are reasonable and fair to the ConsUmer. 

Examples: 

Ensure that collection practices comply ~ith 'the Fair Debt Collection Practices Act and all applicable regutations. 

Before Initiating collections, reich out to the borrower and consider designing a repayment plan, waiving late fees 

or back interest, or other measures to assist with repayment. 

Provide an independent ombudsman process to resolve disput.es. 

Do not use collections tactics that employ harassm~nt or intimidation under any circumstances. 

Provi~e a process for ~)orrowers to easily dispu}'e errors in theit credit reports. 

Develop and disseminate a Borrower's Bill of Rights. 
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Jil! 

~Center for I Financial Services Innovation 

312.881.5856 

www.dsinnovation.com 

CH!C..AGO • NEWYORK • WASH!NGlON, DC 

The Compass Principle::; are supported, in part by· 

FORDFOUNDATION 

OMIDYAR NETWORK' 

The opinion> expressed in this guide are those of CFSI only and do not necessarify represent 

those of the ford Foundation or Omidyilf Network. 

({) 2D14 Center for firiandaf Services 1nnovat1on 

All R!CHTS RESERVfD.l1\is documt>nt contain$ mi!Wrial prok•cted under tn\ematimMl and f-ederal Copyright Law~ MO Trf'aties. ,~ny oniluthorited 
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Habematolel Pomo of Upper Lake 

375 E. Hwy 20, Suite I Upper Lake, CA 95485 

Toll Free: 1-877-543-5102- Fax: 707-275-0757 

United States House of Representatives 

Committee on Financial Services 

Short-Tenn, Small Dollar Lending: The CFPB 's Assault on 

Access to Credit and Trampling of State and Tribal Sovereignty 

February 10,2016 

Statement of Sherry Treppa 

Chairperson, Habematolel Porno of Upper Lake 

Chairman Neugebauer, Ranking Member Clay, and Honorable Members of the committee, thank 

you for the opportunity to testify at this important hearing on short term lending and tribal sovereignty. 

My name is Sherry Treppa and I am the chairperson of the Habematolel Porno of Upper Lake, a federallyrecognized Indian Tribe located in rural Upper Lake, California. I have represented the Tribe's interests 

as an elected leader for the past eleven years, and held the position of chairperson for the last seven. 1 also 

serve as the Vice-Chairperson of the Native American Financial Services Association (NAFSA), an 

intertribal organization formed in 2012 to advocate for tribal sovereignty and responsible business 

practices in e-commercc. 

As a vital part of our economic development strategy, our Tribe owns and operates several online 

small-dollar lending businesses that operate on our Trust lands. f am here today to provide you with 

information on how our Tribe regulates and supervises these businesses and the considerable tools we 

have available to protect consumers. I would also like to share my thoughts and feedback on the efforts 

the Consumer Financial Protection Bureau {CFPB) has taken to restrict the short-term, small dollar credit 

marketplace and preempt State and Tribal rights, and what that will mean to American consumers and 

Indian tribes. 

To first understand these critical issues, it is important to understand our tribe's people, our long 

and arduous history, and the sovereign authority that we have worked so hard to safeguard. 

Our ancestors have called the Clear Lake region of California home from as early as 6,000 BC. 

Our people flourished until significant migration and settlement brought conflict and disease that, in one 

generation, decimated our numbers by 95%. The flawed federal policies that ensued subjected Porno 

Indian tribes to enslavement, internment, horrific abuse, and slaughter. Notably, the U.S. Cavalry in 1850 

nearly eradicated my Tribe's ancestors, predominantly elderly, women and children, in an aggressive 

military operation known as the "Bloody Island Massacre." The only survivor of that attack was a 6-year 

old girl who survived by hiding underwater and breathing through a tule reed. 

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Our Tribe and our lands were first federally recognized in 1907 eventually amassing over 560 

acres through piecemeal acquisitions. In 1956 the federal government passed the California Rancheria 

Act, which terminated the Tribe's federal recognition.' We lost not only our recognition, but also our 

land, which is fundamental to our way of being. Despite efforts to destroy our tribe and our identity, we 

persevered. In 1975, the Tribe began the arduous task of reestablishing its identity and restoring its 

dignity by filing a court action alleging that the Tribe's termination was illegal. Although the suit took 

nearly 10 years to litigate, we prevailed. After restoration in 1983, the Bureau oflndian Affairs (BIA) 

refused to recognize our Tribe's 1941 Constitution which required the Tribe to reorganize under federal 

law, and impeding our efforts to restore our land-base. In 1998, we began reorganization, working with 

the BIA to reestablish our government, finally succeeding in 2004 in adopting our current Constitution. 

After this long and onerous process, the Department of the Interior accepted into trust a small, 11.24 acres 

tract of land for the benefit of our Tribe. These achievements, gained through years of effort and raw 

human will, are our legacy. 

As elected leaders of our Tribe, I and other members of our Tribal Council honor that legacy 

through our unrelenting efforts to improve the general welfare of our citizens through self-development, 

education and other opportunities for advancement. E-commerce and lending provides those 

opportunities. 

Before I go into the specifics of our Tribe's lending practices and the strong regulatory 

framework that undergirds them, I believe it is important that I provide an overview of tribal sovereignty 

and the rights that Tribes have to legislate and regulate business activities occurring within their 

jurisdictions. 

Tribal Sovereignty and Self-Regulation 

The inherent sovereign power oflndian Tribes predates the United States Constitution. Indian 

Nations appears twice in the Constitution, each time in Article I, treated as separate and existing 

sovereign nations. Nearly every piece of modern legislation dealing with Indian tribes explicitly affirms 

the protective trust relationship between tribes and the federal government. The federal trust responsibility 

to Indian tribes underlies both the "government-to-government relationship" with Indian tribes and the 

imperative that federal agencies not actively impede the economic development and self-determination of 

Indian tribes, and that they engage in meaningful consultation when any federal undertaking might impact 

tribes in a significant way. The sole power to diminish tribal sovereignty rest• with Congress. Whatever 

Congress has not expressly diminished by legislation remains for the exercise of tribal governments like 

the Habematolel Porno of Upper Lake. 

Tribal Regulation of Consumer Lending Activity 

From our sovereign power springs the right to legislate and regulate the operations of business 

activities within our jurisdiction. Consistent with our commitment to improve our members' economic 

prospects, in 2010, the Tribe began to explore e-commerce and online small dollar lending as a viable 

economic opportunity. After a thorough review of the industry and related opportunities, our tribal 

1 See, the California Rancheria Termination Act of 1958, Public Law 85-671 (72 Stat. 619) found at 

h!!p://www.gpo.gov/fdsys/pkgiSTA TUTE-72/pdf/ST A TUTE-72-Pg6l9.pdf. 

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council, consistent with our inherent power, constructed a regulatory framework using the model that has 

proven successful in the tribal gaming industry. 

We enacted a lending ordinance that sets forth the parameters of legal operation of consumer 

lending from our Trust land. This lending ordinance prohibits tribal licensees from engaging in unfair, 

deceptive, or fraudulent practices, or engaging in any consumer financial services other than those 

expressly permitted under that ordinance2 Tribal lending entities that issue loans within our trust land 

must comply with that legislation. 

We created a regulatory commission and charged it with oversight of the tribal lending 

businesses, and gave it the power to enforce our laws. This regulatory commission is a separate division 

of the Tribe's government, which means that it operates independently of our tribal government. The 

commission has the autonomy to exercise its enforcement authority should a lending business violate the 

consumer protection laws that we established. 

Sovereignty at Work: Collaborating to Protect Consumers 

My Tribe has exercised its sovereign power in other ways beyond our robust legal and regulatory 

framework. We have actively sought opportunities to enter into cooperative agreements or compacts with 

states as a means to coordinate the exercise of authority in this area and promote a collaborative 

government-to-government regulatory environment. By way of example, our Tribe successfully entered 

into a Memorandum of Understanding with the State of New Mexico in December, 2014, which explicitly 

memorialized our Tribe's sovereign authority to engage in online short-term lending and acknowledged 

that the legislation enacted by our Tribe effectively regulates transactions between consumers and 

licensed lenders that occur on Trust land, adheres to best practices, and does not violate federal or tribal 

law. 

The California Department of Business Oversight's Information-Sharing Pilot program offers 

another example of the initiatives our Tribe has undertaken to foster government-to-government 

cooperation with states. Our Tribe, along with other tribal members ofNAFSA, collaborated with the 

Department of Business Oversight to explore opportunities to develop a framework that facilitates 

information exchanges between regulatory authorities. The experience was positive and we continue to 

pursue open dialogues and additional Memoranda of Understanding with other states, ever eager to work 

cooperatively and communicate openly with states as co-regulators to achieve shared goals of consumer 

fairness and protection. Indeed, these efforts are consistent with the regular practice of many Tribes 

throughout the country to collaborate with state authorities on tribal-state relations in areas as wideranging as law enforcement, environmental protection, bunting and fishing, public lands management, 

and education. 

Another enforcement power available to Tribes in regulating financial services businesses, as the 

CFPB itself admits, is the ability to bring legal actions under the Dodd-Frank Act, just as States can. 

Indeed, the Navajo Nation and the CFPB brought an enforcement action together against a tax refund 

business in mid-2015 under this authority. While we have not seen the need to rely upon anything more 

2 See, Ordinance at §7.3. 

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than our own laws and regulatory commission to handle consumer complaints and other regulatory issues, 

my Tribe (and others operating small dollar lending businesses) are aware of this significant power, and 

are certainly prepared to exercise it should the need to do so arise. This Committee should make no 

mistake- ample power already exists for Tribes to protect consumers and regulate businesses within its 

jurisdiction. 

What Tribal E-Commerce Offers Consumers 

To fully illustrate what my Tribe has developed to meet the needs of consumers and our tribal 

members, I would like to go into more detail regarding my Tribe's lending operations and their 

obligations under Tribal law. 

The Tribe's lending businesses must be licensed by our Tribal regulatory commission before they 

may engage in lending. They may not charge consumers an application fee or penalize them for early 

payment of their loans. Tribal lending entities must maintain a compliance management system to ensure 

compliance with Tribal law, promulgated regulations and applicable federallaw3 This system must 

include a full suite of written policies that cover all aspects of lending. Each lender must also have 

internal controls and processes that allow it to monitor its operations to ensure that its procedures follow 

those policies' As an additional control, our regulatory commission audits these businesses regularly. If 

deficiencies are identified during an audit, or if a lender fails in any way to satisfY their compliance 

obligations, then the commission is empowered to take corrective action. This includes imposing fines 

and penalties, as well as suspending and revoking the lender's license, which would terminate the lender's 

ability to extend credit. This regulatory framework is what our tribal lending entities operate under, and it 

ensures that their practices are responsible and based on principles of consumer protection. 

The loans that our Tribe's businesses offer are not payday loans; they are unsecured loans that arc 

repaid in installments, which means our lenders have no real remedies if a customer defaults. 

Consequently, a robust underwriting process is an operational imperative. Our Tribe's lending businesses 

use computer algorithmic waterfalls and data analytic tools to assess a consumer's application. The 

amount of a customer's credit request is compared against their income and existing credit obligations 

because it is a strong factor in determining their ability to repay. An applicant's repayment history is 

checked because it is the strongest factor in assessing their willingness to repay. If a customer's ability to 

repay or willingness to repay do not meet the lending company's underwriting requirements, or if the 

identity verification portion fails, then the application will be denied. Data from the Tribe's lending 

businesses illustrate the rigor and effectiveness of our underwriting. From all of the applications received 

in 2015, 4 only 3.1% were accepted. Of those accepted for review, less than 2% were approved and 

funded. Put another way: 98,3% of new customers are rejected in underwriting. This commitment to 

responsible lending helps to prevent customers ti·om taking loans they are unable to repay. 

3 Sec, Ordinance at 7.4. Federal laws that our Tribal businesses adhere to include, as applicable, the Truth in 

Lending Act, Equal Credit Opportunity Act, Electronic Fund Transfer Act, Fair Credit Reporting Act, GrammLcach-Bliley Act, Fair Debt Collection Practices Act, Telephone Consumer Protection Act, the Telephone Sales 

Rule, and Section 5 of the Federal Trade Commission Act which prohibits unfair, deceptive or abusive acts or 

yracticcs. 

See, the Habcmatolel Porno of Upper Lake Tribal Consumer Financial Services Regu1atory Ordinance, §7.1 

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The typical customer that our tribal lenders approve for credit is approximately 45 years old with 

a median income of $45,000. The typical customer rarely reports public assistance or other benefits as an 

income source. The median loan amount is $700, and, although the installment contract is structured on a 

ten-month payment schedule, customers are encouraged to pay extra toward the principal or pay off the 

loan early without penalty. We have significant data that shows customers frequently repay their loans in 

less than four months. Data also shows that our customers have moderate borrowing patterns: when 

measured over two years, our customers have an average of 1.6 loans. 

The Benefits of Tribal Lending for Us and Our Consumers 

The decision to enter into the small-dollar credit marketplace has been transforrnative for our 

Tribe in that all net revenue derived from consumer lending is used to fund essential Tribal governmental 

services such as: cultural programs to promote the Tribe's language, heritage, and community; an 

Honored Elders Assistance Program, which provides monthly stipends for members 65 and older; a 

school clothing allowance for K-12 children, and scholarship programs to help with the costs of higher 

education; and a Community Care Program for members to receive violence and suicide prevention 

counseling, and other vital social services. Without tribal lending, these programs would be impossible. 

For American consumers, our credit products offer options for meeting financial obligations 

without fear of defaulting on an obligation, failing to pay a bill, or overdrawing their checking account. 

The CFPB may consider small dollar lending to be a scourge of the credit industry; our customers tell a 

different story. In 2015, our total complaint rate was only1.6%. This number likely drops to 1% when 

considering that some of those complaints are likely due to loan applications we denied. That number is 

significant and it illustrates the quality and the legitimacy of our operations. 

My tribe agrees that consumer protection should be a primary concern of this industry, because 

responding to consumer demand in a regulated, compliant, and helpful manner is the essence of consumer 

protection -and that is what we do. Much of the reason we have been successful is the strong 

commitment we have made to ensure that tribal lending businesses adhere to fair and responsible lending 

practices that protect consumers. That is why we question the need for new CFPB rules. Efforts to impose 

additional regulations would significantly obstruct access to credit and reduce or eliminate consumer 

choices for meeting unexpected financial obligations. 

Before the CFPB seeks to impose new regulations, I wonld first like them first to acknowledge 

the robust regulatory framework that our Tribe, and other tribes, have created, and that our lending 

businesses are operating within. In contrast to our experience working with other federal agencies as well 

as state and local governments, the CFPB has refused to engage in a meaningful dialogue about our 

shared interests and so far has shown little interest to work together, where necessary, as co-regulators. 

The CFPB's refusal to work with tribes in a government-to-government manner is not consistent 

with the federal government's trust responsibility to tribal government• nor does it respect the inherent 

sovereignty of Indian tribes. I remain concerned that the CFPB is developing its proposed action in a 

vacuum without consulting with tribes to learn about the innumerable tools that we have developed to 

ensure that we conduct business in a manner that is fair, responsible, compliant and benefits our tribal 

members and the American consumer. 

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We respectfully urge Congress to take an approach that respects the historic government-togovernment relationships of federal entities and sovereign tribes, and one that takes account of both 

consumer need and the robust self-regulation that sovereign Tribes such as the Habematolel Porno of 

Upper Lake have established. 

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U.S. House Subcommittee on Financial Institutions and Consumer Credit 

Thursday, February 11, 2016 

t:OOPMET 

Testimony oflndiana Attorney General Greg Zoeller 

Re: Preemption of State lending laws 

Thank you Mr. Chairman and members of the committee. I am Greg Zoeller, 

the Attorney General oflndiana. I appreciate the invitation and it is an honor to be 

in front of you today to talk about this important matter of preserving states' rights, 

and to raise awareness of an ongoing barrage of federal government overreach. 

Over the years, Indiana, and other states, have crafted meaningful regulation 

and consumer protections for their citizens, including small loan lending. Indiana 

established consumer friendly protections for all borrowers, while providing 

solutions for those who need additional help. In the past year, the Consumer 

Financial Protection Bureau has proposed a rule creating a regulatory framework 

that defies the very goals my state has strived to achieve for consumers to maintain 

access to credit while not inadvertently driving them to unregulated, unsafe loan 

products. Like other states, we have worked hard to strike this balance between 

access to credit and protections against predatory lenders. The proposed federal 

regulations would throw this balance off and reduce access to short-term loans for 

the people in my state and others who need this type of financial assistance the 

most and who need it from reputable lenders. 

This policy area has historically been left to states and as Attorney General I 

defend my state's authority. Indiana has extensive experience in crafting these 

regulations to protect consumers. For example, currently in Indiana, lenders are 

prohibited from making a small loan to a borrower if the total of the principal 

1 
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amount and the finance charges of the small loan to be issued, combined with any 

other small loan balances that the borrower has outstanding with any lender, 

exceeds 20% of the borrowers' monthly gross income. Indiana also requires certain 

disclosures about the nature of this financing option. These and other regulations 

promulgated under Indiana law provide Hoosier-specific protections which would 

be pre-empted under the proposed Bureau rules. 

Moreover, the regulatory framework proposed by the Bureau is 

extraordinarily broad. It covers not only payday loans, but short- and medium-term 

loans which can be made by community banks and credit unions as a service to 

customers. The new rule would create an environment that discourages this type of 

lending by these already heavily regulated institutions. Without this legitimate 

source of short-term lending, consumers who need these types of funds will be 

forced to turn elsewhere ... likely to unscrupulous lenders where they are at higher 

risk for abuse. 

Many of my attorney general colleagues across the country have raised these 

concerns with the CFPB to little avail. Since the creation of the Bureau in 2010, 

attorneys general have continued to express concern that the Bureau's goals to help 

consumers have conflicted directly with the authority of states to balance the 

interests of financial institutions and organizations with the protections of its 

citizens from fraud. 

As Attorney General, I take my role as protector of consumers seriously. 

have been a strong advocate on behalf of consumers, especially those most 

vulnerable in our society. When seniors and veterans were increasingly becoming 

victims of scam artists, I successfully worked with the legislature to increase 

2 
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penalties against those who targeted these victims. We've also worked to educate 

and defend consumers struggling with debt and similar issues, for example 

refusing to tolerate unfair debt collection tactics, and funding foreclosure 

prevention services and debt counseling to Hoosiers. My attorney general 

colleagues and I are on the ground working with consumers, assisting victims and 

tackling these important issues. The progress we've made to advance strong 

consumer protections that work best for our states should not be undermined. Onesize-fits-all, blanket regulations from a federal bureaucracy will only wipe out 

years of thoughtful, state-specific efforts to assist and protect our citizens. 

So at issue is not simply whether the regulatory framework that the CFPB 

has proposed is best for the consumers in my state but whether the rules that 

provide for both access to credit and protection from predatory lending are best 

done in Washington for the nation or by each individual state. 

Thank you for your time. I am available for any questions. 

3 
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23568.069

CYNTHIA H. COFFMAN 

Attorney General 

DAVID C. BLAKE Chief Deputy Attorney General 

MELANIEJ. SNYDER 

Chief of Staff 

FREDERICK R. YARGER 

Solicitor General 

STATE OF COLORADO 

DEPARTMENT OF LAW 

The Honorable Richard Cordray 

Director 

1700 G Street, N.W. 

Washington, D.C. 20552 

Dear Director CordrayRALPH L. CARR 

COLOR<\DO JUDICIAL CENTER 

1300 Broadway, lOth Floor 

Denver, Colorado 80203 

Phone (720) 508·6000 

Office of the Attorney General 

October 15, 2015 

I write regarding the Consumer Financial Protection Bureau's (CFPB) consideration 

of rules regarding short-term loans. While I share certain concerns voiced by other 

Attorneys General, I am not writing to critique the CFPB. Instead, I am asking that you pay 

close attention to how the states, especially Colorado, have managed the small-dollar 

lending industry and consider incorporating those lessons into regulations you may 

promulgate. 

U.S. Chief justice Louis Brandeis is famously quoted as describing a state's right to 

manage its own affairs without federal interference as a laboratory, a place he said to "try 

novel social and economic experiments without risk to the rest of the country." New State 

lee Co. v. Liebmann, 285 U.S. 262, 311 (1932}. In 2010 Colorado addressed concerns about 

abuses in the payday lending industry and had what all sides would agree was an energetic 

debate on a new regulatory approach. The result of that debate has proven to be a success. 

Indeed, we consider it a success for the consumer, for the state as a regulator and also for 

the industry. Industry abuses (as measured by enforcement actions) are down; consumer 

complaints are down; and the industry itself is profitable and able to offer its products 

responsibly to consumers who choose to engage in that market. In light of the successes 

we've enjoyed in Colorado, I strongly encourage you to not only study how we regulate the 

industry and to consider adoption of our approach, but I offer my office's assistance as you 

continue to consider application of regulations nationwide. 

Many of the CFPB's proposals attempt to keep consumers from falling into a "debt 

trap" wherein, for example, short-term single payment loans can place consumers in a cycle 

of debt and may cause financial harm rather than assist consumers. CFPB appears to be 

moving towards proposing rules to address the consumer's ability to repay; possible 

payment plans ("no-cost off ramp"); establishing cooling off periods; and limiting the 

lender's access to the consumer's accounts or vehicles. 

Colorado's extensive experience with these types of measures tells us such 

proposals will not work in the real world if the intent is to preserve access to credit 
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Page 2 

products for the financially strapped. Analysis has clearly shown that longer term loans, 

even if they involve small dollar amounts, are a benefit to consumers from the standpoint 

of affordability. Colorado's experience with our Act and regulations, which create a sixmonth repayment minimum, have helped reduce the risk that consumers will suffer from 

continuous indebtedness and constant reborrowing from these type ofloans. Large onetime payments have proven to be the source of the problem. Rather, having an affordable 

payment is key to successful repayment of the loan for both the consumer and the lender. 

A properly structured loan, based on the results of the underwriting process, will rarely 

result in a single payment loan. As such, I encourage the CFPB to explore the option of 

requiring lenders to originate multiple installment loans that will amortize over several 

consumer income cycles. 

There is little doubt that your agency's current proposals, if implemented, will have 

an impact on the high interest rate lending industry, especially smaller lending entities. 

This will likely result in less competition among lenders and decreased access to credit for 

low-income consumers. Given the experiences and data collected after the significant 

changes to the Colorado payday lending law in 2010,1 and the success we've enjoyed since 

it was amended, we believe our input would be extremely beneficial as the CFPB attempts 

to enter this field of regulation. 

We ask you to consider what the states have done and where they have succeeded 

in working with the lending industry to reach a model that works. Too often this 

administration has attempted to overlay its prerogatives onto the states despite the states 

having already adequately solved the problem. I hope you agree that this is an opportunity 

to work together and get it right. 

We look forward to you contacting our office so we can begin a productive dialogue. 

Please feel free to contact Ms. julie Ann Meade, First Assistant Attorney General for our 

Consumer Credit Unit at 720-508-6109 or julie.meade@state.co.us. 

Sincerely, 

/) .• 11~· f 

(__)j!t-ltv~j7f 1 .. ,f/J;11tl!f1-- f i'' / !J 

~/ 

CYNTHIA H. COFFMAN 

Attorney General 

1 Please see the Pew Charitable Trttsts' report entitled "Payday Lending in America: Policy 

Solutions" for data on Colorado's successes in this area. http:l/www.pewtrusts.org/en/research~andanalysis/rcports/2013/l0/29/pavdav-lendingAin·america~policy-solutions 
140 


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Faith for Just Lending 

a coalition to end predatory payday lending 

February 11,2016 

The Honorable Randy Neugebauer 

Chairman 

Subcommittee on Financial Institutions and 

Consumer Credit 

House Financial Services Committee 

United States House of Representatives 

2129 Rayburn House Office Building 

Washington, D.C. 20515 

The Honorable William 'Lacy' Clay, Jr. 

Ranking Member 

Subcommittee on Financial Institutions and 

Consumer Credit 

House Financial Services Committee 

United States House of Representatives 

2129 Rayburn House Office Building 

Washington, D.C. 20515 

Dear Chairman Neugebauer and Ranking Member Clay: 

We write as a diverse and non-partisan group of religious leaders, practitioners, and social service 

providers who are working together to end the predatory practices of payday lending. We are 

uniform in our belief that usurious and deceptive debt trap lending is a moral issue that calls for a 

government response. Our churches and members have been working at the local, state and federal 

level to reform this practice. While some states have effectively reined in the worst abuses of this 

industry, many have not, leaving households ensnared in the vicious cycle of debt that is part of the 

business model for some engaged in the payday lending industry. 

We appreciate the subcommittee's interest in the payday loan industry, but we are concerned that 

today's hearing does not reflect an urgency to help constituents trapped in predatory loans. The socalled short-term loans involved in payday lending, with initial terms of two weeks, often result in 

long-term debt. According to a survey of payday borrowers conducted by the Pew Charitable Trusts 

only 14% of borrowers can afford to pay off the average payday loan out of their monthly budget. 

This leads to a pattern of re-borrowing and long-term debt such that 76% of all loans are renewals or 

quick re-borrows. By setting their customers up in this debt trap, lenders increase fees and profits, 

while making their customers more likely to lose their bank accounts, fall behind on expenses, and 

file for bankruptcy. 

We urge this subcommittee to offer ideas and work towards a positive solution. For our ministers and 

congregations these are not just statistics, they are the faces of their congregants and community 

members who have come to them for help. One reform that has proven effective in many states is 

limiting loans to 36% APR. Likewise, in 2006, Congress limited the rates on loans made to members 

of the military and their families to 36% APR. Some payday lenders claim they cannot stay in 

business under such regulations. However, these experiments demonstrate that small dollar lending 

remains viable and families fare better with reasonable terms of credit. 
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23568.072

We agree that individuals should manage their resources responsibly, save for emergencies, and help 

others in need. In fact, we often ask our churches and institutions to teach responsible stewardship 

and assist neighbors in times of crisis. We also believe lenders should extend loans at reasonable 

interest rates based on ability to repay within the original loan period, taking into account the 

borrower's income and expenses. This is a basic, common sense requirement of traditional lending 

and one that should be employed in small, short-term loans as well. 

Our nation can do better than putting the entire burden on desperate people to ensure they are not 

being preyed npon by unethical business practices. Lenders should not be able to take advantage of 

those who are most vulnerable and who have little or no resources at their disposal. Indeed, shortterm loans should help borrowers get out of a financial crisis, not become more deeply entrenched in 

one. 

We are confident effective legislation is possible. We offer ourselves and our expertise to you as you 

seek a real solution that helps those with immediate financial needs while prohibiting usury and 

deceptive lending practices and request that this letter be entered into the public record. 

Sincerely, 

Southern Baptist Ethics & Religious Liberty Commission 

United States Conference of Catholic Bishops 

National Association of Evangelicals 

National Latino Evangelical Coalition 

National Baptist Convention, USA, Inc. 

Cooperative Baptist Fellowship 

Center for Public Justice 

Ecumenical Poverty Initiative 

PICO National Network 

cc: The Honorable Jeb Hensarling, Chairman 

cc: The Honorable Maxine Waters, Ranking Member 
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"Short-term, SmaU DoUar Lending: The CFPB's Assault on Access to Credit and 

Trampling of State and Tribal Sovereignty" 

Subcommittee ou Financial Institutions and Consumer Credit 

February 11,2.0161:00 PM 

Questions for the Record l• ___ ~ _ 

for Robert Sherill 7/t:w-4.~ 

Submitted by Representative Keith Ellison 

I appreciate your willingness to provide testimony before the Financial Services Committee. I 

also greatly appreciate your efforts to better your life. Please provide answers to the following 

questions about your loan from Advance Financial. 

• When did you take the loan- month and year? lo( z~{ t'-t 

• How much did you borrow_J It O'il 

• How long was the loan term? ;o&."''/'S 

• Were there any prepayment penalties? l\1> 

• Were there any fees other than interest? If so, what were they? 

1.7.'/. i """q~r fV '"""'fl.- • Was there an origination fee? fl<> 

• After taking this loan from Advance Financial, did you take additional loans from them? 

If yes, how soon after you took the first loan did you take additional loans? Had you paid 

off the first loan before taking the second loan or did you roll the frrst loan into the 

second and/or subsequent loans? :r: rene..uetl -the t "<>-"\ If "h""'e ~ 

I po..i ~ ( ...... fvtl Or\ {1->c, .(;~ """~ • Did you take another loan with another small dollar lender within the next two months? 

l do"'+- l"b"\e.•J,.v bJ\'1 1,,\.V., jet- 1'- (otu"<h'l•"" /Jv\,011-w fl()..fe-, I Jal-·;-f- • How did you repay the loan? Was it a lump sum payment due in a couple of weeks or I<•!...,., >f. 

installment payments over several months? I believe you said you did not have a bank 1:f VJ"-5 2-

account at the time so did you pay by cash or money order or did you use some other i"" onrl'"'~ .,.... 

method? 1 ·tl.. • 1 \ , •L .o•+. pn.• t" OLSI-i 01""'- w~ p. C.r~f.l- C<~r·"'· \ \"""-~ \ 

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Financial. What is the hourly wage you pay your employees? Do they feel this salary is 

adequate to meet their fmancial needs? Why do they seek loans from Advance Financial 

or other lenders? Have you tried to establish a banking relationship for your employees 

where they can have direct deposit and small dollar loans? Are you familiar with the 

income advance loans that other employers provide to their workers such as the Working 

Bridges in Chittenden County, Vermont Details here: 

http://www .unitedwaycc.org/fileslgalleries/W orking_ Bridges_ Profile_ FINAL. pdf? 
143 


23568.074

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144 


23568.075

House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

Short-term, Small Dollar Lending: 

The CFPB's Assault on Access to Credit and Trampling of State and Tribal Sovereignty 

Questions for the Record 

February 1 l, 2016 

Questions for Acting Deputv Director Da"id Silberman, Consumer Financial Protection 

Bureau, from Congressman Keith Ellison: 

Question 1 

I strongly support your efforts to rein in harmful payday loan practices. But I'm concerned about 

the ability for banks and credit unions to offer affordable alternatives at scale. Is the CFPB 

considering streamlined guidelines for banks and credit unions? If so, will they be clear enough 

to foster the development of new small loan alternatives that could better serve the millions of 

people who use payday loans today? 

Response 

The Consumer Financial Protection Bureau is committed to fulfilling the dual purposes set out in 

the Consumer Financial Protection Act of 2010 of pairing access to consumer financial products 

and services with fair, transparent, and competitive markets. In crafting a proposed regulation of 

payday, vehicle title, and similar loans, the Bureau is carefully considering the costs and benefits 

of such regulation to consumers and lenders and is seeking to balance the need for important 

consumer protection in these markets with access to credit for consumers. In general, the 

Bureau's proposals under consideration would require lenders to determine a consumer's ability 

to repay a payday, vehicle title, or similar loan; the proposals would also penni! lenders to make 

certain loans meeting clear structural and other criteria without reaching a determination of 

ability to repay. The alternatives that the Bureau is considering to the ability-to-repay 

requirement would be available to all lenders making loans covered by the re!,>ulation, including 

banks and credit unions. 

Question 2 

During last fall's House Financial Services Hearing on the CFPB's semi-annual report to 

Congress, I asked Director Cordray about the longer-term alternative sections of the SBREFA 

framework, and more specifically the 5% payment-to-income alternative section, and offered my 

support. Does the CFPB still have the goal of including a longer-term "alternative" option that 

sets clear rules for affordable payments and reasonable durations? 

Response 

The Bureau continues to refine the proposed approach to regulation in the markets for payday, 

vehicle title, and similar loans. As part of this framework for regulation, the Bureau continues to 

believe that permitting lenders some underwriting flexibility when making certain carefullystructured covered longer-term loans may be one important component and continues to develop 

options for doing so. 
145 


23568.076

House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

Short-term, Small Dollar Lending: 

The CFPB's Assault on Access to Credit and Trampling of State and Tribal Sovereignty 

Questions for the Record 

February 11, 2016 

Questions for Acting Deputy Director David Silberman, Consumer Financial Protection 

Bureau, from Congresswoman Kyrsten Sinema: 

Question 1 

The proposal currently being considered would apply to payday loans, vehicle title loans, deposit 

advance products, and certain high-cost installment and open-end loans. Please provide 

clarification as to why the Bureau has chosen to combine these loans into one rulemaking. 

Do you anticipate that these products will be linked together in the final rulemaking, or have you 

considered issuing separate rulemakings? 

Response 

In March 2015, the Consumer Financial Protection Bureau released the outline of proposals 

under consideration, including payday, vehicle title, and similar loans. While the precise 

structure and certain features of these products vary to some degree, the markets that would be 

covered by the Bureau's proposals under consideration share important similarities in both 

product structure and lender practices. TI1e Bureau is concerned that certain lender practices are 

causing substantial consumer harm throughout the markets, and that such practices may be best 

addressed through the same rulemaking. After releasing the proposals under consideration, the 

Bureau convened a Small Business Review Panel, which included representatives from each 

potentially affected market to obtain feedback on the proposals under consideration. The Bureau 

is continuing to develop a proposed rulemaking on these products. 

Question 2 

It is my understanding that the Bureau is considering a proposal that would generally cover 

longer-term credit products with a contractual duration longer than 45 days and an all-in annual 

percentage rate in excess of 36 percent where the lender holds either (l) access to repayment 

through a consumer's account or paycheck, or (2) a non-purchase money security interest in the 

consumer's vehicle. 

Additionally, the Bureau is considering a proposal to allow lenders to offer covered longer-term 

loans without conducting the full ability-to-repay determination, as long as the loan has 

payments below a specified payment-to-income ratio and meets certain other requirements. 

I would like to learn more about how the CFPB detennined the all-in annual percentage rate of 

36 percent, as well as why the CFPB is considering setting the payment-to-income ratio at 5 

percent? 
146 


23568.077

House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

Short-term, Small Dollar Lending: 

The CFPB's Assault on Access to Credit and Trampling of State and Tribal Sovereignty 

Questions for the Record 

February 11,2016 

Response 

TI1e cost threshold for coverage under the proposals under consideration would focus the 

Bureau's regulation on those longer-term loans that the Bureau believes pose the greatest risk of 

harm to consumers. The Bureau has considered various ways of calculating the cost threshold, 

including considering the Military Annual Percentage Rate under 32 CFR part 232, which would 

permit lenders to determine whether their loans would be covered under the Bureau's regulation 

by using the same calculation that a lender would use to detennine the costs of loans made to 

servicemembers and their families under the Military Lending Act. 

One proposal under consideration as part of the framework for regulation of covered longer-term 

loans would permit lenders to make a covered longer-term loan without undertaking the 

proposed ability-to-repay detennination if, among other criteria, the loan has periodic payments 

that are not more than five percent of the consumer's gross income during the same period. The 

payment-to-income approach would permit lending without satisfying the requirements of an 

ability-to-repay determination, while imposing important structural and other requirements for 

such loans. The Bureau continues to refine the proposed approach to regulation in the markets 

for payday, vehicle title, and similar loans. As part of this framework for regulation, the Bureau 

continues to believe that permitting lenders some underwriting flexibility when making certain 

carefully-structured covered longer-tenn loans may be one important component and continues 

to develop options for doing so. 

Question 3 

Please provide information about the data that infom1ed the vehicle title component of the 

forthcoming Rulemakingsfor Payday, Vehicle Title, and Similar Loans. 

Did the Bureau compile and refer to research on the existing processes and procedures used by 

title lenders nationwide to detem1ine a borrower's ability to repay (including non-traditional 

methods)? 

Response 

In developing proposals for regulation in the market for vehicle title loans-along with payday 

and similar loans-the Bureau has examined information from a wide variety of sources, 

including the agency's market monitoring, enforcement, and supervisory activities. The Bureau 

has carefully looked at state laws and regulations on vehicle title lending and met with 

representatives of state, local, and tribal governments, industry, and consumer advocates to hear 

their views on practices and regulation in the market for vehicle title loans. In addition, during 

the Small Business Review Process, the Bureau heard from Small Entity Representatives about 

their processes for making vehicle title loans. 
147 


23568.078

House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

Short-term, Small Dollar Lending: 

The CFPB's Assault on Access to Credit and Trampling of State and Tribal Sovereignty 

Questions for the Record 

February 11, 2016 

Question 4 

With no readily accessible alternative sources of short-tenn credit, I am concerned about the 

everyday implications of the Bureau's forthcoming rulemaking. 

In particular, does the CFPB have data highlighting: (1) ctment product usage (specifically as 

relates to title loans), both nationwide and in Arizona; and (2) the impact the rulemaking will 

have on such product usage and the availability of credit to consumers, including the specific 

impact on Arizona. 

Response 

The Bureau is using Joan-level data from several large lenders that offer a range of vehicle title 

loan products to analyze consumers' current use of the products and the likely impacts of any 

proposed regulation on product usage and the availability of vehicle title credit. TI1e Bureau is 

also reviewing publicly available infonnation, such as data and publications from state re~:,>ulators 

and research published by academic and other researchers, to supplement its own analysis. The 

Bureau will publish the results of its analysis prior to, or contemporaneously witl1, a proposed 

rulemaking covering vehicle title loans. 

Question 5 

It is my understanding that the Bureau is considering proposals that would require lenders to 

determine that a consumer has the ability to repay a loan. 

Will the Bureau's ability-to-repay detennination requirements be principles-based or specifically 

prescribed guidelines? How will the Bureau measure outcomes to detennine if access to credit is 

impacted? 

Response 

At the core of the proposals nnder consideration tl1at the Bureau is considering is a requirement 

that lenders take into consideration a consumer's income and major financial obligations to 

detennine a consumer's ability to repay the loan without reborrowing. During the Small 

Business Review Process and in outreach with numerous stakeholders, including industry, 

consumer groups, representatives from state, local, and tribal governments, Members of 

Congress, and other financial regulators, the Bureau has received substantial feedback on the 

ability-to-repay approach, the potential costs to lenders and consumers of that approach, and the 

potential impact on consumer access to credit. The Bureau continues to refine the proposals 

under consideration and will look forward to continuing to receive feedback on the proposed set 
148 


23568.079

House Committee on Financial Services 

Subcommittee on Financial Institutions and Consumer Credit 

Short-term, Small Dollar Lending: 

Tire CFPB 's Assault on Access to Credit and Trampli11g of State and Tribal Sovereignty 

Questions for the Record 

February 11, 2016 

of requirements for determining ability to repay, the costs of the regulation, and the impact on 

access to credit following publication of a notice of proposed rulemaking. 

0