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ASSESSING AND ENHANCING PROTECTIONS IN

CONSUMER FINANCIAL SERVICES

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

SECOND SESSION

ON

ASSESSING THE CONSUMER FINANCIAL MARKETPLACE SINCE THE FINANCIAL CRISIS, PARTICULARLY THROUGH THE WORK OF THE CONSUMER FINANCIAL PROTECTION BUREAU

SEPTEMBER 18, 2014

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director

LAURA SWANSON, Deputy Staff Director 

JEANETTE QUICK, Counsel 

PHIL RUDD, Legislative Assistant

GREG DEAN, Republican Chief Counsel 

JARED SAWYER, Republican Counsel

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

(II)


BANKI-41578DSA with DISTILLER
CONTENTS

THURSDAY, SEPTEMBER 18, 2014

Page

Opening statement of Chairman Johnson ............................................................. 1

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 2

WITNESSES 

Travis B. Plunkett, Senior Director, Family Economic Stability, The Pew 

Charitable Trusts ................................................................................................. 4

Prepared statement .......................................................................................... 18

Sheri Ekdom, Director, Center for Financial Resources, Lutheran Social Services of South Dakota ............................................................................................ 6

Prepared statement .......................................................................................... 25

Oliver I. Ireland, Partner, Morrison & Foerster ................................................... 8

Prepared statement .......................................................................................... 29

Hilary O. Shelton, Director, NAACP Washington Bureau and Senior Vice 

President for Policy and Advocacy ...................................................................... 9

Prepared statement .......................................................................................... 32

(III)


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BANKI-41578DSA with DISTILLER
(1)

ASSESSING AND ENHANCING PROTECTIONS 

IN CONSUMER FINANCIAL SERVICES 

THURSDAY, SEPTEMBER 18, 2014

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 11:04 a.m., in room 538, Dirksen Senate 

Office Building, Senator Tim Johnson, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. 

Six years ago this week, the collapse of Lehman Brothers 

sparked a financial panic more severe than most of us have seen 

in our lifetimes. The crisis exposed many failures in the financial 

system, including a failure to adequately protect consumers from financial products designed against their interests. 

We created the Consumer Financial Protection Bureau to make 

sure that consumers would always have a voice and a guardian in 

the financial marketplace. 

In the 3 years since the CFPB opened, the Bureau has proven 

itself to be a vigilant watchdog, standing up for hardworking American families and obtaining nearly $5 billion of relief for consumers. 

Extensions of credit should be provided on fair and transparent 

terms and should be affordable and accessible to all populations—

a point I also emphasized throughout this Committee’s work on 

housing finance reform. 

Small-dollar, short-term credit products serve an important demand, but like mortgages, should be carefully managed by both 

consumers and credit providers. Other financial products, such as 

prepaid cards, installment loans and payment developments, 

should include appropriate consumer protections. And consumer 

protections should also be a part of student loans to guard the next 

generation of Americans as they enter and leave college—an important topic this Committee has explored. 

Ensuring that financial products are safely designed is one piece 

of the consumer financial puzzle. Another is ensuring that consumer are treated fairly when consumer debt enters collections. 

Debt collection has consistently ranked as one of the most complained about issues with attempted collection of debt that is not 

owed as the most common complaint about debt collection. Among 

other effects, errors in debt collection can have adverse impacts on 

a consumer’s credit report. 


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Credit reports, another top area of consumer complaints, are increasingly used for many purposes outside of credit decision, including employment, rental decisions and child custody. Although 

the accuracy and reliability of credit reports are of paramount importance, recent studies show that one in four consumers identified 

errors on their credit reports that might affect their credit scores. 

I look forward to hearing from witnesses today on these important topics and other financial issues facing consumers today. 

I am especially looking forward to hearing from Ms. Ekdom 

about issues in my home State of South Dakota which, unfortunately, has the highest student loan debt and also unique consumer challenges facing its tribal and rural populations. 

As memories of the crisis fade, we must remain diligent in focusing on consumer financial issues, ensure that consumers have adequate protections and access to affordable credit, and support the 

CFPB’s efforts to guard against abusive practices. 

With that, I turn to Ranking Member Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman. 

Consumer protection is an important part of a well-functioning 

and safe financial marketplace. However, consumer protection cannot happen in a vacuum. 

Our regulators must consider the impact of regulatory actions on 

both consumers and financial institutions. Without taking these 

factors into account, regulators risk negatively impacting the cost 

and availability of credit and increasing the regulatory burden on 

financial institutions, especially at community banks and credit 

unions. 

Increased regulatory burden manifests itself in two distinct 

ways—either consumers pay more for products and services or 

small depository institutions have to exit the market, leaving many 

rural areas with no banking presence to the detriment of local communities. 

During the two most recent Committee hearings, I have highlighted the increasing regulatory burden that small- and mid-sized 

financial institutions face. These institutions are experts at relationship-building in communities across America, especially rural 

communities where longstanding consumer relationships are critically important. 

The annual privacy notice requirement is an example of a policy 

sounding good in theory but ending up causing great confusion and 

ultimately becoming an unnecessarily burdensome regulation. Millions of dollars are spent on privacy notices that are neither read 

nor readily understood. 

As was heard in the past two hearings, Senators Brown’s and 

Moran’s bill to repeal this requirement has widespread bipartisan 

support, with over 70 Senate co-sponsors. I fully support its quick 

passage in the Senate. 

Regulations are not the sole reason for confusion and overreaction. In March 2013, Federal banking regulators led by the Department of Justice began an operation to prevent fraud in the payment system. The operation called Operation Choke Point, while 

allegedly commenced to make sure that fraud stays out of our payVerDate 0ct 09 2002 11:34 Jan 21, 2016 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\DOCS\93420.TXT SHERYL

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ment system, has morphed into an attempt to shut down entire industries of law-abiding merchants. 

Small businesses, banks and payments processors have all been 

targets of this expansive regulatory approach. Just this week, I 

heard from two Idaho business owners involved in the guns and 

ammunition business who experienced difficulty finding essential 

banking services as a result of Operation Choke Point. 

While Federal regulators have reissued some guidance in this 

area, unfortunately, greater clarity is necessary for bank examinations so that law-abiding businesses are not denied banking services. 

Regulators also have a duty to be fair and transparent when they 

change the rules. In March 2013, the CFPB issued a bulletin on 

their Web site called the Indirect Auto Lending Bulletin, which 

suggested that auto lenders move from a risk-based, competitive 

pricing model to a flat fee model. This is notwithstanding the fact 

that auto dealers themselves were exempted from coverage by the 

CFPB. 

Because this significant policy change did not have to go through 

the traditional rulemaking process nor have public notice or comment, no cost-benefit analysis was completed. Such an approach 

could remove any assessment of a borrower’s credit risk and dissolves any competition in the marketplace. 

Without a cost-benefit analysis of this policy change, we have no 

idea how many consumers will be denied auto credit, and we have 

no idea how this will affect competition. 

As the CFPB proceeds with its rulemaking agenda on items such 

as payday lending, overdraft protection, auto financing and arbitration, I, once again, urge the Bureau to complete a thorough, qualitative and quantitative cost-benefit analysis for each rule. 

Regulation has real costs to consumers and businesses. It is incumbent upon the agencies to understand the cost of each regulatory action and to promote balanced and tailored regulations that 

provide market certainty. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Senator Crapo. 

I remind my colleagues that the record will be open for the next 

7 days for opening statements and any other materials you would 

like to submit. 

Now I would like to introduce our witnesses. 

Travis Plunkett is the Senior Director of Family Economic Stability at the Pew Charitable Trusts. Prior to joining Pew, Mr. 

Plunkett directed the Federal Legislative and Regulatory Affairs at 

the Consumer Federation of America. 

Sheri Ekdom is the Director of the Center for Financial Resources at the Lutheran Social Services of South Dakota. Sheri has 

22 years of experience in the credit consulting industry as well as 

a background in credit analysis, corporate training and credit operations. 

Sheri, I am glad you were able to travel all the way from South 

Dakota to testify today. 

Oliver Ireland is a Partner at Morrison & Foerster. 


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Hilary Shelton is Washington Bureau Director and Financial 

Vice President for Advocacy at the National Association for the Advancement of Colored People. 

I thank you all for being here today, and I would like to ask the 

witnesses to please keep their remarks to 5 minutes. Your full 

written statements will be included in the hearing record. 

Mr. Plunkett, you may begin your testimony. 

STATEMENT OF TRAVIS B. PLUNKETT, SENIOR DIRECTOR, 

FAMILY ECONOMIC STABILITY, THE PEW CHARITABLE 

TRUSTS 

Mr. PLUNKETT. Good morning, Mr. Chairman, Ranking Member 

Crapo, Senator Reed. It is great to be here with you. 

Mr. Chairman, I would particularly like to thank you for holding 

this important hearing. 

As you prepare to leave the U.S. Senate, I want to applaud your 

strong efforts and the Committee’s strong efforts, to ensure that 

the Nation’s financial markets function in an open and fair manner 

so that both consumers and businesses have an opportunity to 

thrive. 

I lead a portfolio of work at the Pew Charitable Trusts that rigorously assess and, where warranted, promotes nonpartisan, evidence-based solutions to improve the safety and transparency of 

consumer financial markets and the financial health of the American family. 

As you pointed out, Mr. Chairman, the Consumer Financial Protection Bureau is looking at a number of important consumer financial issues, some including debt collection and credit reporting 

that Pew is not involved with, but several very important issues 

that we are. I would like to highlight two for you today—prepaid 

cards and small-dollar loans. 

Pew’s most recent survey of card users shows that prepaid cards 

are used by 5 percent of Americans, about 12 million people, at 

least monthly, loading more than $64 billion onto these cards. 

These cards are a versatile financial tool for 10 million households in the United States that lack or cannot get a checking or 

savings account, or that want to supplement checking or credit 

card accounts with one dedicated to saving or paying for something 

without the temptation of buying it on credit. 

Considering the growing use of these cards as an alternative or 

complementary product to the traditional checking account, we 

think it is very important for consumers to be able to keep the 

funds on their prepaid cards secure and perform transactions without risk of losing money or going into debt. 

Although the cards are used like checking account debit cards, 

currently, legal protections and rules governing debt cards do not 

apply to prepaid cards. For example, there are no rules preventing 

credit products, such as overdraft or a line of credit, from being attached to prepaid cards even though our research shows that a 

substantial majority of prepaid cardholders do not want overdraft 

features. 

We have made a number of recommendations to the CFPB. I am 

just going to highlight a few: 


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First, that they prohibit overdraft or other automated, or linked, 

lines of credit. 

Second, that they require the funds on these cards be insured by 

the FDIC or the NCUA. This does not happen in some cases for 

nonbank prepaid card issuers. 

Third, that there be very good disclosure—concise, uniform, easy 

to understand and comparable to checking accounts because consumers compare them. 

And, very importantly, the key fees and terms need to be disclosed very prominently and not in several parts so that some key 

fees and terms are disclosed and some are less disclosed. We are 

concerned that some cards then might hide the true cost of that 

card for the consumer. 

On small-dollar loans, 12 million Americans take out payday 

loans each year, spending more than $7 billion. Our research has 

identified serious failures in the small-dollar loan market and 

shows how new policies can help lenders provide access to credit 

that leads to better consumer outcomes. 

Here is the problem: A typical payday loan averages $375 but requires lump sum payment within 2 weeks of more than $400, on 

average, far exceeding most customers’ ability to repay and meet 

other financial obligations without quickly reborrowing again. Most 

borrowers can afford, according to our research, to put no more 

than 5 percent of their paycheck toward a loan payment and still 

be able to cover basic expenses. Yet, in 35 States, repayment requires about one-third of an average borrower’s paycheck. 

Here are several recommendations for the CFPB as well: 

First, ensure that borrowers have the ability to repay the loan 

as structured. Only a strong ability-to-repay rule can solve the 

problems caused by unaffordable loan payments. 

The CFPB’s own research—you know, their own research—has 

shown that half-measures about how often people can borrow do 

not work. If lenders are permitted to make any lump sum loans, 

they will likely circumvent the CFPB’s role by directing borrowers 

to alternate between several lenders operating near each other. 

We would like to see a role from the CFPB that covers both lump 

sum, the traditional payday loan, and installment payday loans. 

The market is migrating toward payday loans, small-dollar loans, 

that are paid off over time, over a longer period of time. But these 

loans also often have unaffordable payments, such as a $500 payday installment loan with fees of more than $1,100. 

And we have also encouraged the CFPB to protect against excessively long loan terms. Some lenders have made loans that drive 

up costs by extending the terms far longer than necessary. Example: 16 months to repay a $500 title loan. 

Final issue is to address a rulemaking that the Department of 

Defense is considering on the Military Lending Act to make sure 

that, once again, we have a broad role that does not allow lenders 

to shift their products just a little bit and not be covered by the 

law. 

I would like to close by just reflecting on the CFPB’s role. As you 

well know, it was created in the wake of the financial crisis to 

make markets safe, efficient and transparent. The CFPB will play 


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a crucial role in the next couple of years—to enhance consumer 

protections in the areas I have identified. 

So far, they have taken a very methodical approach to understanding and addressing problems in these markets. In particular, 

their research in initial enforcement actions on transaction accounts and small-dollar loans has been thorough and deliberate. 

These steps provide a basis for the Bureau to propose effective 

new rules in the months ahead, and it is now up to the CFPB to 

seize this historic opportunity. 

I applaud this Committee once again for its oversight of the Bureau’s work and urge you to continue to do this in the next year 

or so, to ensure that the Bureau acts in a timely, effective and also 

balanced manner. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you. 

Ms. Ekdom, please proceed with your testimony. 

STATEMENT OF SHERI EKDOM, DIRECTOR, CENTER FOR FINANCIAL RESOURCES, LUTHERAN SOCIAL SERVICES OF 

SOUTH DAKOTA 

Ms. EKDOM. Senator Johnson, before I begin my testimony, on 

behalf of Lutheran Social Services of South Dakota, I would like to 

recognize your upcoming retirement, your work as a South Dakota 

legislator early on in your career and now nearly 30 years as a 

Congressman and Senator from South Dakota. 

We thank you for your tireless efforts, especially your dedication 

to underserved populations who have limited resources and means. 

Over the years, you have allowed their voices to be heard and their 

lives improved. 

Your work has made a difference, and we thank you for that. 

Chairman Johnson, Ranking Member Crapo and Members of the 

Committee, thank you for inviting me to testify. 

Lutheran Social Services provides financial counseling and education designed to help consumers take control of their financial future. Products offered are both reactive, as in the case of working 

through a financial crisis, and proactive for those seeking to prevent money problems or plan ahead for their future financial goals. 

We work with people from all age and income levels. However, 

the majority of clients seen fall in the low to moderate income 

range. 

A number of factors put many South Dakotans at risk for a financial crisis: 

54 percent of South Dakota households have difficulty covering 

their expenses and paying bills. 

57 percent of individuals do not have an emergency fund. 

32 percent have borrowed from a nonbank source, such as a payday lender. 

22 percent of South Dakota households are under banked. 

South Dakota ranks 48th in the Nation for the average weekly 

wages earned by workers. 

South Dakota ranks first in the Nation for the percentage of 

workers who hold more than one job. 

South Dakota is home to nine Indian reservations. 


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The challenges faced by these residents have been well-documented. Limited employment opportunities, generational poverty 

and geographic isolation make it difficult for families to become financially stable. 

The following issues describe some of the most significant financial challenges that we see in our work: 

Low wages and underemployment remain significant issues. 

The majority of clients seeking assistance are insolvent. Their income does not cover their living expenses. 

Clients coming into our office have high debt levels with little or 

no savings. 

There are many individuals that do not understand the ramifications of using short-term or payday loans as an attempt to resolve 

long-term issues. 

Low-income housing options remain scarce. On average, those 

seeking rental assistance can expect to remain on a waiting list for 

three to 5 years. Landlord-tenant issues are common. 

Medical issues and medical debt are one of the top reasons consumers seek our assistance. 

Consumers are quite often afraid and intimidated by tactics used 

by debt collectors to collect payments. 

Many consumers seek our assistance on how to build a credit report and how to improve their credit score. Some have fallen prey 

to credit repair scams that do little more than dispute accurate 

negative information and charge a high fee. 

The average client coming to see us with debt-related issues owes 

10 creditors over $28,000 in unsecured debt. 

The Consumer Financial Protection Bureau and the Federal 

Trade Commission Web sites are helpful in our work as we strive 

to protect consumers by sharing educational tools and keeping us 

abreast of changes within the consumer protection arena. 

I would offer the following recommendations to enhance financial 

protections: 

First, limit the number of short-term loans consumers may access at one time. Trouble typically comes when consumers have 

multiple short-term loans that exceed their ability for repayment. 

With the wide availability of online options, it would seem that a 

limitation on multiple loans may need to come from a Federal level. 

Second, support and promote community-based financial education. Our issue today is not a lack of good, quality, accurate education materials. Our issue is getting that information into the 

hands of consumers in a format they desire and that they can understand and digest. We need to determine methods, incentives and 

motivations so people will hear the information that can change 

their financial futures. 

Education from a neutral third party that is not selling the financial product also ensures that consumers are able to make decisions about big-ticket items, fully educated and without the pressure of any sales tactics. 

Thank you for the opportunity to testify. 

Chairman JOHNSON. Thank you. 

Mr. Ireland, please proceed with your testimony. 


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STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & 

FOERSTER 

Mr. IRELAND. Thank you, Chairman Johnson. 

I understand this may be your last hearing on consumer issues, 

and on behalf of the consumer financial services community I want 

to thank you for your leadership on this Committee. 

Financial services issues, as we have heard already on this 

panel, are complex and—as we will find out and as you know—controversial, but they are critical to American households, and we all 

owe you a debt of gratitude. 

Chairman Johnson, Members of the Committee, my name is Oliver Ireland. I am a Partner in Financial Services at Morrison & 

Foerster here in D.C. I have been in retail financial services and 

other financial services for 40 years, 26 years with the Federal Reserve and 14 as a private attorney. 

I am here today to address consumer financial services in the 

wake of the financial crisis and the enactment of the Dodd-Frank 

Act. Key components of that Act were the creation of the CFPB and 

the adoption of new standards for mortgages. The Credit Card Act 

of 2009 has also shaped the current market for consumer financial 

services. 

Although real problems led to the enactment of these laws, these 

Acts and the actions of the Federal banking agencies are having a 

chilling effect on consumer financial services. 

The Dodd-Frank Act stated that the purpose of the CFPB is to 

ensure consumers have access to consumer financial services and 

that markets for consumer financial services are fair, transparent 

and competitive. This purpose has a lofty goal, but the pursuit of 

fairness for consumers and zeal in enforcing consumer laws can 

make services uneconomical for providers and reduce access to 

services. 

For example, the Credit Card Act was enacted to curb credit card 

practices, but industry data shows a significant reduction in the 

availability of credit card credit to consumers while other forms of 

household credit, including automobile loans and student loans, appear to have increased. These data show that regulatory changes 

can lead to a reduction in the availability of services, forcing consumers to find substitute services that may actually be on less advantageous terms. 

In making regulatory policy, it is important to consider the effect 

on consumers’ access to services and how consumers will meet their 

needs going forward. In some cases, the stakes are higher. 

The Dodd-Frank Act sought to protect consumers and improve 

the mortgage market. It has taken some time for these changes to 

be put into place, and not all of them have been fully implemented 

even now. 

So it is difficult to assess the overall impact of these reforms, but 

early indications are that they are materially reducing mortgage 

originations. In the mortgage market, the potential effects of fewer 

originations on economic growth and employment are important as 

well as consumer access to credit. 

Looking beyond credit cards and mortgages, the markets for 

other consumer financial products and services are characterized 

by a higher level of uncertainty than I have observed before. This 


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uncertainty appears to arise from regulators’ reliance on generalized guidance and enforcement actions to shape policy. Broad guidance can cause financial institutions to abandon products that may 

not have been the focus of the guidance because the guidance is not 

well understood. Similarly, it is simply not possible to read public 

enforcement actions and to understand the specific practices that 

led to the actions. This uncertainty makes it difficult to determine 

how to proceed with current products and services, and how to determine whether or how to offer new products or services. 

This level of uncertainty could be reduced if regulators relied 

more on rule-writing processes where clear rules are developed 

through notice and comment. This process, this rule-writing process, is far more conducive to fair, transparent and competitive markets as envisioned by Dodd-Frank than reliance on vague guidance 

and enforcement actions. 

Thank you for the opportunity to be here today, and I would be 

happy to respond to any questions. 

Chairman JOHNSON. Thank you. 

Mr. Shelton, please proceed with your testimony. 

STATEMENT OF HILARY O. SHELTON, DIRECTOR, NAACP 

WASHINGTON BUREAU AND SENIOR VICE PRESIDENT FOR 

POLICY AND ADVOCACY 

Mr. SHELTON. Good morning, Chairman Johnson, Senator Crapo, 

Senator Reed and esteemed Members of this panel. 

Thank you so much for inviting me here today to testify and for 

requesting the input of the NAACP on this very important topic. 

Founded more than 105 years ago, the NAACP currently has 

more than 1,200 active membership units across the Nation as well 

as military bases in Europe and Asia. We have hundreds of thousands of card-carrying members in every one of the 50 States and, 

indeed, through the world. 

I was asked to address whether the community is being adequately served by financial services providers. Sadly, my unequivocal answer is no. 

Too many Americans, and especially racial and ethnic minority 

Americans, lost their jobs and in some cases their homes in the recession of 2008, and they have not, so far, been able to fully recoup 

their losses. As a result, we have lost access to affordable and sustainable credit and capital. 

One example, which I provided in more detail in my written testimony, is having a bank account. While just over 8 percent of all 

American homes do not have a bank account, more than 20 percent 

of African Americans are outside of the American banking system. 

One direct result of being frozen out of the traditional banking 

system is more of a reliance on nontraditional, or alternative, 

sources of capital. By nontraditional, I am referring to check 

cashers, title lenders and payday lenders, among others, which 

usually lend relatively small amounts of money for a short term. 

Let me be clear. While the NAACP strongly opposes any law or 

regulation which would restrict the flow of credit and capital to our 

areas, we are strongly against any predatory practices which drain 

financial resources and appear to target particular segments of the 


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American population. It is this policy which brings us to the role 

of the Consumer Financial Protection Bureau, or the CFPB. 

The NAACP has been a strong and steadfast supporter of the 

CFPB since its inception as it is the only agency with the Federal 

Government whose primary charge is the protection of the American consumer. 

Since its inception, the CFPB has taken great steps to limit the 

potential harm which financial tools and companies can impart 

upon Americans. Over the past 3 years, the CFPB has taken dramatic steps to help halt the financial abuses of American consumers by financial companies. 

In many cases, the victims of these abuses are people of lower 

and moderate income. Since 80 percent of African American families fall into this definition, the NAACP has worked with, and monitored the impact of, the CFPB on the communities served and represented by the NAACP since its creation over 3 years ago. 

On a national level, we at the NAACP Washington Bureau have 

worked with the CFPB to ensure that the rules, enforcement actions and supervisory activities are fair and will, overall, have a 

positive impact on our communities. 

In my written testimony, I provide detailed numbers of many of 

the accomplishments the CFPB has in just 3 years, but allow me 

to summarize here by saying they have given a huge voice to consumers and others who may have questions about financial services. 

Locally, the NAACP Financial Freedom Center works with the 

CFPB to enhance the capacity of racial and ethnic minority Americans and other underserved groups through financial economic education, to promote diversity and inclusion in business hiring, career 

advancement and procurement, and to monitor financial banking 

practices and promote community economic development. 

I was also asked to detail which consumer financial issues warrant additional scrutiny. 

Put broadly, it is the hope of the NAACP that the CFPB and 

Congress will take a stronger look at the structural racism inherent in the financial services arena and its impact on communities 

of color. Many of the issues facing our communities require legislative action, and as a result, the NAACP is hopeful that the 114th 

Congress will prove to be more responsive to our real financial concerns. 

Higher-cost credit, or the lack of any credit, in the communities 

of color widens the racial wealth gaps and concentrates African 

American and Latino families into areas of concentrated poverty. 

Specific issues include the need to stop high-cost predatory loans 

that seem to be pervasive in the communities across our Nation 

which are served and represented by the NAACP. 

The NAACP strongly supports legislation in the House and in 

the Senate—that is, S. 673 and H.R. 5130—which place a 36 percent APR cap on all lending. 

These wealth-stripping loans may provide very short-term relief, 

but their ultimate price tag is too steep to justify their existence. 

In my written testimony, I also outline steps which the CFPB 

can take through regulation to stop, or at least expose, abusive 

lending services. 


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The NAACP also opposes the use of credit reports by prospective 

employers as well as insurance companies, among others. 

Credit scoring favors consumers who have access to traditional 

forms of credit, such as auto and home loans, credit cards and personal loans. Thus, once again, racial and ethnic minorities are at 

a disadvantage when credit scoring and credit reports are increasingly used for everything from renting an apartment to getting a 

job. 

With that, Mr. Chairman and other Members of the Committee, 

I look forward to your questions. 

Chairman JOHNSON. Thank you all for your testimony. 

I will now ask the clerk to put 5 minutes on the clock for each 

Member. 

Ms. Ekdom, you have been involved in credit counseling for 

many years. Do you feel that the creation of the CFPB has been 

helpful for consumers, and what impact has the Bureau had on 

your work. 

Ms. EKDOM. I would start by saying that I think the Bureau has 

been helpful to consumers. It allows opportunities for them to be 

heard. 

Their Web site is set up in such a way that complaints can be 

filed. We have referred some clients that have had housing issues, 

and they have indicated that the responsiveness of the CFPB was 

significant in terms of being very responsive. 

And I think overall it has allowed customer service to be improved. I do not know that consumers always receive the ultimate 

answer that they want, but it eliminates some of the red tape and 

improves communication. 

There are a couple other parts of the Web site that I think are 

very helpful. 

There is a section where consumers can tell their story. And I 

think a lot of times, when we are dealing with financial issues, people feel that they are alone and that they are the only ones that 

are in the situation or the only ones that have a mistake or the 

only ones that are being victimized in a certain way. So allowing 

people to tell their story and others to be able to see that they are 

not alone, I think, is very helpful. 

There is also a component to the Web site where consumers can 

ask questions to the CFPB and receive answers. It does not necessarily just limit to the answer to the question. For example, there 

are sections on how to choose like a credit counseling agency, 

where the CFPB not only answers how to choose that; it arms consumers with questions that they can take as they go out and try 

to self-select—how am I going to choose who I work with? 

So I think the Web site and the information overall has been 

helpful to consumers and has impacted our work also. 

Chairman JOHNSON. Thank you. 

Mr. Plunkett, under Wall Street Reform, the CFPB is required 

to complete a study on the use of mandatory pre-dispute arbitration agreements. 

Can you describe why such a study is important? 

Mr. PLUNKETT. Certainly, Mr. Chairman. 

Pew has done a great deal of research on mandatory pre-dispute 

arbitration agreements both for checking accounts and prepaid 


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cards, finding, for example, that the larger financial institution is 

the—more likely, its checking account agreement is to contain a 

clause requiring binding mandatory arbitration. 

The reason this is important for the CFPB to study, and ultimately to look at rules on, is because pre-dispute binding arbitration clauses prevent consumers from choosing the option of challenging unfair and deceptive practices or other legal violations in 

court, potentially allowing abusive practices to spread without legal 

or public scrutiny. 

They also deprive consumers of important legal remedies such as 

a jury trial, curtail judicial civil procedures and due process protections such as the ability to appeal a decision, and raise serious conflict-of-interest concerns if companies that provide arbitration services provide repeat business to the financial institutions that mandate it. 

Chairman JOHNSON. Thank you. 

Mr. Shelton, the EEOC has stated that using a person’s credit 

rating for employment adversely impacts minorities and women, 

and others have noted the impact of credit reports on the ability 

to obtain credit or rent for a home. 

Can you provide your perspective on the use of credit reports for 

these purposes and whether you think credit reports adversely impact minorities? 

Mr. SHELTON. Thank you very much, Mr. Chairman. 

It is a really challenging process when those of us, those who 

have been out of work for so long, find themselves in the position 

of the challenges they have had paying their bills during the time 

they were out of work. I mean, many of us still very clearly remember the big economic downturn of 2008. 

As such, those who have been able to hold on long enough to look 

for a job find themselves at odds with the situation they are in; 

that is, the employer will not consider hiring them because their 

credit score suffered during the time in which they were unemployed, but the manner in which you fix the payment problem is 

to make sure they get employed, that they have an income. 

African Americans and other racial and ethnic minorities find 

ourselves disproportionately unemployed, and it takes even longer, 

according to our experts, for us to get a new job after losing a job. 

In essence, we find ourselves in a much worse condition. 

On any given day, you can look at the reports coming from the 

Department of Labor, and you will see that the African American 

community is unemployed at a rate that is twice as high as our 

white counterparts. 

So it creates a major problem for us. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

Mr. Ireland, on Tuesday, the Committee heard from several witnesses regarding the regulatory burden for mid to small financial 

institutions. And, previously, I have raised concerns with the Consumer Financial Protection Bureau’s often irregular regulatory 

process. 

For example, the Bureau’s Indirect Auto Lending Bulletin, which 

I referenced in my opening statement, represented a major shift in 


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policy in the United States, with no public notice, no public comment and simply the issuance of a bulletin from the agency. 

Another example is the Bureau’s supervision by repeated enforcement action. You mentioned this general issue in your testimony. 

Could you describe in a little more detail the compliance challenges that financial institutions face when dealing with regulation 

through bulletins or with best practice regulation or supervising 

through enforcement? 

Mr. IRELAND. Sure. I would be happy to. It is what I do a lot and 

spend a lot of my time doing. 

And we will get—an institution will come to us, a bank or other 

financial institution—to look at their policies, procedures, their 

practices, to make sure that they are compliant because they have 

seen a new guidance come out or a new enforcement action. 

And a lot of times we will look at the guidance, and the guidance 

will be written so broadly; it covers almost everything. If you look 

at one part, they will have a string of coverage terms, of factors 

that may go into coverage of the guidance, that will cover almost 

any service you look at in that area. 

And so it is very hard to sort out what they are trying to get at 

and what they are not. 

Enforcement actions are even more difficult. You will see an enforcement action on a product, and without knowing the discussions between the individual institution and the enforcing agency, 

be it the CFPB or the banking agencies, you do not know what the 

problem was with that product. 

So you cannot sit down and read the enforcement actions in a 

specific area and figure out what the current rules of the game are, 

and that makes it very difficult to figure out how to—whether or 

not to continue to offer financial products and whether or not to 

offer new or innovative financial products. 

Senator CRAPO. Well, thank you. 

And one example that I would like to pursue with you, if you 

have any other observations to give to it, is the idea of the operation that I mentioned also in my opening statement, Operation 

Choke Point, which I think is something that is operating and having the consequences that you just described. 

This operation has received a lot of attention in the media and 

in Congress, and I am concerned that financial institutions are facing unrealistic regulatory expectations as a result of this operation. 

It has already negatively impacted at least two Idaho small businesses that have come to me and a number of community banks 

that do not really know how to act with regard to this operation 

that is going on. So what they end up doing is retrenching very 

radically. 

And just this week, I heard from two gun manufacturers. Apparently, firearms and ammunition are not politically favored at this 

point through this operation. 

And so totally legitimate businesses are finding it hard to find 

access to financing as a result of this very confusing regulatory system that we are facing. 

Could you offer some of your observations there? 

Mr. IRELAND. Yes, I would be happy to. 


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It is not just financing. It is deposit accounts as well. They are 

having their accounts closed. Some of the banks refer to it as derisking. 

When the examiners come into an institution and start to criticize various areas—you do not have enough controls over who your 

deposit account customers are—without giving clear guidance as to 

what the problem is, the natural reaction, particularly in the postcrisis environment, is to get out, is to cut back services, so that you 

do not get examiner criticism. And Operation Choke Point, in my 

opinion, has resulted in a lot of banks, small and large banks, cutting back on particularly deposit and payment services to customers. 

Senator CRAPO. But these are totally legitimate businesses. 

Mr. IRELAND. These are totally legitimate businesses. 

We hear from it. We hear about this all the time. 

And it is difficult for them to find replacement services. 

And the banks that are trying to deal with Choke Point do not 

really have a good handle on what they are supposed to do, and 

so they are overly conservative in response to it. 

Senator CRAPO. Thank you. 

My time is out. I would like to explore it further with you if we 

get a minute. 

Mr. IRELAND. Sure. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Well, thank you, Mr. Chairman. 

Thank you, all the witnesses, for their excellent testimony. 

Let me address a question to Mr. Shelton and Mr. Plunkett. 

I have been very active in trying to ensure that the Military 

Lending Act truly protects our soldiers, sailors, airmen and Marines. 

And you know that, Mr. Shelton, many of your members are active duty and on post. 

Mr. Plunkett, you are very active in this area, too. 

I come to this from when I was much, much younger, commanding a paratrooper company and listening to soldiers walk in, 

saying they had done something financially, unaware of the consequences and suffering. 

An example of that was recently given to us by the Consumer 

Federation of America. A lender made a vehicle title loan to a service member in June of 2011 on a 13-year-old car. The loan amount 

was $1,615 to be repaid in 32 months with $15,613 of interest at 

a 400 percent annual percentage rate. 

Now this loan was exempt from the current MLA rules because 

it was 181 days. The rule only covers 180-day loans. 

Also, there is a mandatory arbitration clause in the loan, which 

would have been prohibited in the MLA. 

Now I will ask what might be described as a leading question. 

Do you think we should broaden the rules so that we actually protect service men and women? 

Mr. SHELTON. Senator Reed, absolutely, yes. 

It was a smart idea to provide those protections to those very 

brave young men and women that are serving in our armed services today throughout the country. We hear so many stories of 

them for the first time actually having the kind of income that they 


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may be able to own an automobile as a hardworking member of our 

services. 

The example you just gave is one of many that have been shared 

with us. I was looking at the data of a guy that took out a loan 

for $2,604 and ended up paying $4,426 and other charges—which 

is the equivalent of 124.7 percent APR. 

It is outrageous. It has to stop. And we have to do everything we 

can to fill in those loopholes that are still part of the Act. Senator 

Reed. Thank you. 

I am hearing that the Defense Department is revising regulations, but your comments might provide more impetus. 

Mr. Plunkett, your comments? 

Mr. PLUNKETT. Senator, as I mentioned earlier, our policy recommendation is very broad for all policymakers, whether at the 

State level, the CFPB, the Department of Defense, to have a 

broad—take a broad look and regulate broadly on all small cash 

loans, and that would include payday loans, title loans, signature 

loans, and make sure that very narrow legal requirements cannot 

be skirted in the way you describe. 

Senator REED. Thank you very much. 

Mr. Shelton, let me turn to another issue, and that is foreclosure. 

The data we have seen are about 4.5 percent of white borrowers 

lost their homes in the period between ’07 to ’09; African American 

communities, 7.9 percent; Latino communities, 7.7 percent, respectively. 

And that means that roughly the African American and Latino 

communities were more than 70 percent more likely to lose their 

homes to foreclosure during that period. 

There are many reasons, many explanations, but what the Fed 

Reserve and OCC have right now is residual funds from the Independent Foreclosure Review Process. 

And how important is it for the Federal Reserve and OCC to ensure that these funds go to States that still have a need, particularly in these communities, and have demonstrated the ability to 

get the money out to people, not just sit on it and let this problem 

fester? 

Mr. SHELTON. Well, it is crucial. 

Again, as we talk about the income gap among African Americans and other racial and ethnic minorities and white Americans 

in society, we know that we lost our homes at a much, much higher 

rate, as you indicated in your opening statement. 

Certainly, resources that have been sat upon along those lines 

need to be distributed to very needy families so that they can keep 

their homes and their family nest eggs. 

Even organizations like the NAACP—as we mentioned, we have 

got over 1,200 membership units throughout the United States. We 

would be delighted to be helpful in making sure we can identify 

people that need that kind of assistance and see to it they get those 

much needed resources. 

Senator REED. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you. 

I will ask one more question and then turn it over to Senator 

Crapo. 


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Ms. Ekdom, you noted in your testimony that medical issues, or 

medical debt, is one of the top reasons consumers use your assistance. 

Can you describe what you heard and why this information 

about medical debt may be particularly problematic on a credit report, and what should be done to address these issues? 

Ms. EKDOM. The reasons that people come in to see us with medical debt are pretty varied. As I mentioned in my opening testimony, a lot of people coming in have limited income and no savings. So any kind of bump in the road can be a tipping point. 

So, for some consumers, it can even be small medical bills that 

create big issues within their monthly living expenses. We also see 

clients on the other end of the spectrum, that maybe they are uninsured or the portion that their insurance is not going to cover is 

significant and they need to figure out a repayment plan. 

Most of the consumers that we are working with that have medical debt were not dealing with the original provider. They have all 

been turned over to collections. 

In our work, when we see judgments, most of them are related 

to medical collections. And if the judgment goes to garnishment, it 

causes even more issues for the consumer. 

Sometimes we see issues related to the billing process that cause 

issues for consumers. 

So they had a medical event happen, and they are receiving invoices in the mail that may say: This is an invoice. You do not need 

to pay it, and insurance is still pending. 

And somewhere along the process, things get messed up. Something does not get paid. And a lot of times consumers find out 

about it because it is a collection item or they get the notice in the 

mail that you now have something at collections. 

When we are counseling people who are looking at purchasing a 

home or purchasing a car, sometimes that is when they discover 

that information. And usually, it is a lender that is referring them, 

saying, in order to be looked at for this loan, you need to clear up 

the judgment and collection items. 

So those are some of the things that we see. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

I do have a number of questions for other members of the panel 

and some more for Mr. Ireland, but I know that we are under a 

time restraint here. So, if it is OK with you and with the witnesses, 

I will submit some questions to you if you would be willing to follow up. 

I do want to say to all the witnesses; I found your testimony 

today to be very helpful. 

These are very critical issues that we are dealing with, and we 

need to get it right from all aspects. We do not want to restrict access to credit because we are too tight in asserting protections, but 

we want to make sure that we have the proper protections in place 

to protect those who are facing discrimination or other abusive 

treatment in our credit system. And our financial institutions are 

a key part of our economy. 

And your perspectives have been very helpful. So thank you 

today. 


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Chairman JOHNSON. I want to thank all of our witnesses for testifying today and for all their work to improve the consumer marketplace. 

This hearing is adjourned. 

[Whereupon, at 11:56 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 


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1For example, Pew conducted a comprehensive scan of all credit cards offered by dominant 

card issuers, which found that 100 percent of the products had at least one feature that Federal 

regulators later deemed to be harmful or deceptive. Just two of these practices—which were 

later eliminated by the CARD Act—were costing American consumers at least $10 billion per 

year. The Pew Charitable Trusts, Still Waiting: ‘‘Unfair or Deceptive’’ Credit Card Practices Continue as Americans Wait for New Reforms to Take Effect (Oct. 2009), http: //www.pewtrusts 

.org/∼/media/legacy/uploadedfiles/wwwpewtrustsorg/reports/creditlcards/PewCreditCards

Oct09-Finalpdf.pdf. 2 Johannes Stroebel, Neale Mahoney, Sumit Agarwal and Souphala Chomsisengphet, Regulating Consumer Financial Products: Evidence From Credit Cards, (Aug. 2013), http://papers.ssm.com/sol3/papers.cfm?abstractlid=2330942. 3The Consumer Financial Protection Bureau, CARD Act Report, (Oct. 2013), http://

files.consumerfinance.gov/f/201309lcfpblcard-act-report.pdf.

PREPARED STATEMENT OF TRAVIS B. PLUNKETT

SENIOR DIRECTOR, FAMILY ECONOMIC STABILITY

THE PEW CHARITABLE TRUSTS

SEPTEMBER 18, 2014

Chairman Johnson, Ranking Member Crapo, and Members of the Committee:

I am pleased to be here with you today to discuss protections in consumer financial markets. As a senior director at the Pew Charitable Trusts, I lead a portfolio 

of work that rigorously assesses and, where warranted, promotes nonpartisan, evidence-based solutions to improve the safety and transparency of consumer financial 

markets and the financial health of the American family. We focus on families’ ability to borrow and manage their funds safely and wisely, to save for the future and 

to move up the economic ladder. Included in our work is an extensive body of research examining the current financial condition of diverse families, the effect of 

employer benefits on household financial security and the connection between financial capital—especially emergency and retirement savings—and economic stability 

and mobility. 

Chairman Johnson, I would like to thank you for holding this important hearing 

and—as you prepare to leave the U.S. Senate at the end of the year—applaud your 

strong efforts to ensure that the Nation’s financial markets function in an open and 

fair manner so that consumers and businesses have an opportunity to thrive. 

Since Pew launched our safe credit cards project in 2007, we have focused on better understanding household financial needs and experiences, identifying policies 

that improve consumer outcomes and promoting a marketplace and regulatory environment that allow businesses to innovate and better meet consumer needs. We employ a data-driven approach, working to inform policymakers with a detailed empirical analysis of industry practices and their effects on consumers.1 Along with the 

work of a number of organizations, senior Members of Congress from both parties 

and President Obama, Pew’s research on the credit card marketplace contributed to 

the passage of the Credit Card Accountability, Responsibility, and Disclosure 

(CARD) Act and the adoption of rules by the Federal Reserve that have effectively 

implemented this groundbreaking and effective law. A 2013 academic study, authored by professors from New York University’s Stem School of Business and the 

University of Chicago’s Booth School of Business, concluded that the CARD Act is 

saving consumers more than $20 billion annually, with little to no reduction in access to credit.2 Last October, the Consumer Financial Protection Bureau (CFPB) released a report concluding that the CARD Act had eliminated the deceptive and unfair credit practices it had targeted and that the total cost of credit paid by consumers had declined by 2 percentage points between 2008 and 2012. The CFPB also 

found that, while the amount of card credit declined during the financial crisis, creditworthy consumers still had access to $2 trillion of credit lines.3

Pew’s current consumer financial efforts focus on the transaction accounts that 

Americans rely on every day to manage their finances, including checking accounts, 

prepaid cards and mobile payments, and on small-dollar loans. Our consumer banking initiative began in 2010 with market research on consumer experiences with 

checking accounts, analyzing the offerings of the Nation’s largest banks. Our work 

on checking accounts has focused on disclosures, overdraft and dispute resolution 

policies. 

We’ve also conducted extensive research on general purpose reloadable (GPR) prepaid cards, which are a relatively new consumer financial product that is growing 

in popularity. In our most recent survey of prepaid card users, Pew found that 5 

percent of adults (implying roughly 12 million people) used these prepaid cards at 

least monthly. Consumers load money onto the cards and are not required to undergo a credit check before purchasing them. These cards are a versatile financial tool 


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for the 10 million households in the United States that lack a checking or savings 

account; that cannot obtain a credit card because of poor credit histories; and that 

want to supplement checking or credit card accounts with one dedicated to saving 

or paying for something without the temptation of buying it on credit. U.S. consumers loaded more than $64 billion onto these cards in 2012, according to the Mercator Advisory Group, up from $56.8 billion in 2011. 

The increasing popularity of the cards is good news for consumers who want an 

alternative to traditional checking or credit accounts—particularly because these 

cards have become more affordable over the past year and, in many cases, offer 

lower and fewer fees than basic checking accounts. The bad news, however, is that 

there are no Federal laws or regulations that directly protect consumers from hidden fees, liability for unauthorized transactions similar to Regulation E, or insurance against loss of funds in the event of an issuing institution’s failure. Nor are 

there Federal rules requiring these cards to provide disclosures of fees, terms, conditions, or dispute resolution practices. Federal Reserve Board checking account rules 

that require consumers to affirmatively opt in to overdraft service also do not apply 

to GPR cards, and there are no rules preventing other credit products such as a line 

of credit from being attached to prepaid cards. These omissions are troubling because Pew’s research shows that most GPR prepaid cardholders do not want overdraft features to be available on their cards. Instead, they want a safe and useful 

financial tool that helps them maintain financial discipline. 

Considering the growing use of these cards as an alternative or complementary 

product to the traditional checking account, it is important for consumers to be able 

to keep the funds on their GPR prepaid cards secure and perform transactions without risk of losing money or going into debt. Though our research finds that the providers are competing for business by lowering some fees and are facing pressure 

from new entrants in the market, including retail banks and established financial 

services companies, current consumer protection measures clearly lag behind similar 

products such as debit cards linked to checking accounts. 

With regard to checking accounts, Pew’s most recent research shows that the marketplace has improved in some respects, with more banks and credit unions using 

a summary document to disclose key checking account fees, terms, and conditions. 

In 2011 after analyzing account information from the 10 largest banks and finding 

that the median length of the disclosures was 111 pages we developed a summary 

disclosure ‘‘box,’’ consumer-tested and promoted its adoption among financial institutions. As of September 2014, 20 banks, including 11 of the 12 largest, and 8 credit 

unions, including the three largest, have worked directly with Pew to adopt this 

model document. Additionally, the box appears to be evolving into an industry 

standard, with many institutions adopting a box without collaborating directly with 

Pew. A sample of the Nation’s 50 largest banks found that the number with a disclosure box adhering to Pew’s recommendations increased from 23 percent in 2013 to 

54 percent in 2014. 

We’ve also studied the disclosures that are included with the purchase of general 

purpose reloadable (GPR) prepaid cards. Currently, most consumers shop for prepaid cards in a store and only have access to the complete fees, terms and conditions 

for a card after purchasing it and opening the card packaging. This makes it impossible for these consumers to comparison-shop for the card that best meets their 

needs prior to purchase. Based on the current ‘‘clamshell’’ packaging, we were able 

to develop a disclosure document that consumers could open in a retail establishment to help them choose the card that will best meet their needs. Since a GPR 

prepaid card can be used as a replacement for a checking account, we developed this 

prepaid disclosure box based on our checking account model, allowing consumers to 

not only comparison shop among prepaid cards, but also making it easy to compare 

these products to checking accounts. 

JPMorgan Chase was the first company to adopt a prepaid disclosure box, for its 

Liquid card. We have also worked with Visa on a new designation that identifies 

safe cards that meet significant consumer protection standards. To receive the designation, cards must have the following features: no overdraft charges, a simplified 

fee structure with a flat monthly fee; clear cost disclosures; deposit insurance by the 

Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA); and no customer liability if the card is lost or stolen. Cards must 

also be in compliance with most aspects of Regulation E of the Electronic Fund 

Transfer Act. Cards that qualify will receive a special Visa insignia that will be visible on card packaging and materials, allowing consumers to identify and easily select them. 

We also continue to focus on overdraft policies as part of our research and advocacy on checking accounts. Previous Pew research examining the financial stability 

of low-income Hispanic households in the Los Angeles area during the Great RecesVerDate 0ct 09 2002 11:34 Jan 21, 2016 Jkt 000000 PO 00000 Frm 00023 Fmt 6621 Sfmt 6621 S:\DOCS\93420.TXT SHERYL

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4The Pew Charitable Trusts, Payday Lending in America, www.pewtrusts.org/small-loans.

sion showed that more of these families had a checking account involuntarily 

closed—or closed the account themselves—because of hidden fees (31 percent) than 

because of a reduced income (27 percent). Our research also showed that families 

with a checking account weathered economic problems better than those without 

and were able to save more money. 

Since research shows that overdraft policies are a large factor in causing consumers to leave the banking system, Pew has focused on working with financial institutions to reform bank overdraft policies and practices. For example, we provided 

advice to Bank of America as they developed their Safe Balance account, a new 

product that does not include overdraft as an option. Effective marketing by Bank 

of America will be the key to ensuring that large numbers of consumers are aware 

of and can choose this account option. 

Another area of our focus is small-dollar credit. Pew’s small-dollar loans project 

focuses on payday, auto title, and traditional installment loans, as well as emerging 

alternatives to these products. In 2011, when Pew began work in this area, we 

shared the concerns that some policymakers and other stakeholders expressed that 

the small-dollar loan market showed signs of harmful practices and market failures. 

Yet research on the often-complicated motivations behind consumer use of these 

types of products was limited, as was data about borrower experiences and attitudes. This lack of fundamental knowledge made it difficult to assess the potential 

effectiveness of policy solutions. Therefore, Pew embarked on an extensive research 

project. We completed the first-ever nationally representative survey of payday loan 

borrowers, and conducted an exhaustive analysis of regulatory data and academic 

papers. 

Pew’s research, which has been published in our Payday Lending in America se- ries,4 demonstrates that there are serious failures in the small-dollar loan market 

and shows how new policies can help lenders provide access to credit that leads to 

better consumer outcomes. Key findings of our work include: 

• 12 million Americans take out payday loans each year, spending approximately 

$7.4 billion annually. The average loan is $375.

• A payday loan is characterized as a short-term solution for unexpected expenses, but the reality is different.

• The average borrower is in debt for 5 months during the year, spending $520 

in interest to repeatedly reborrow the loan.

• 69 percent of first-time borrowers use the loan for recurring bills (including 

rent or utilities), while just 16 percent deal with an unexpected expense such 

as a car repair.

• Payday loans are unaffordable.

• Only 1 in 7 borrowers can afford the more than $400 needed, on average, to 

pay off the full amount of these lump-sum repayment loans by their next payday.

• Most borrowers can afford to put no more than 5 percent of their paycheck 

toward loan payment and still be able to cover basic expenses. Yet in the 35 

States that allow lump sum payday loans, repayment requires about onethird of an average borrower’s paycheck.

• Most payday loan borrowers have trouble meeting monthly expenses at least 

half of the time.

• 41 percent of borrowers have needed a cash infusion, such as a tax refund or 

help from family or friends, to pay off a payday loan.

• Payday loans do not eliminate overdraft risk. Most borrowers also overdraw 

their bank accounts.

• A majority of borrowers say payday loans take advantage of them. A majority 

also say they provide relief.

• Borrowers want changes to payday loans.

• By almost a 3–1 ratio, borrowers favor more regulation of the loans.

• 8 in 10 borrowers favor a requirement that payments take up only a small 

amount of each paycheck.

• 9 in 10 favor allowing borrowers to pay back the loans in installments. 

CFPB Efforts to Date on Transaction Accounts and Small-Dollar Loans 

The CFPB is required by law to ensure a safe and transparent consumer financial 

marketplace, which includes mandates to address unfair, deceptive and abusive 


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5The Consumer Financial Protection Bureau, Data Point: Checking Account Overdraft, (July 

2014), http://files.consumerfinance.gov/f/201407lcfpbreportldata-pointloverdrafts.pdf. 6The Pew Charitable Trusts, Overdrawn: Consumer Experiences with Overdraft, (June 2014), 

http://www.pewtrusts.org/∼/media/Assets/2014/06/26/SafelCheckinglOverdraftlSurvey

lReport.pdf.

practices and to ensure consumer access to financial services. It is empowered under 

the Dodd-Frank Act with rulemaking, enforcement and supervision powers to 

achieve these goals, as well as a mandate to collect and respond to individual complaints about products and services and to engage and educate consumers. Significantly, it has authority to oversee the business conduct of virtually all depository 

institutions and designated large nonbank financial services companies in a uniform 

manner. This allows the Bureau to write consistent rules that cover similar products offered by different types of financial services providers—such as prepaid cards 

or small-dollar loans. This approach has benefits for both financial services companies and their customers, ensuring a level regulatory playing field for industry and 

equivalent protections for consumers, no matter what type of company they seek out 

or product they use. 

Research 

The CFPB is also required under the Dodd-Frank Act to put research and analysis at the center of its work and to carefully balance the interests of industry and 

consumers. For example, it is required to monitor consumer financial markets to assess risks to consumers and the impact of existing regulations on financial institutions and small businesses in order to reduce burdensome requirements and minimize the impact of new rules. Since it opened its doors over 3 years ago the CFPB 

has published many research papers that document activity that is occurring in various consumer product markets and provide an evidence base-along with the work 

of research-oriented institutions like Pew—for any regulatory actions the Bureau 

proposes to take. For example, the CFPB found in its July, 2014 Data Point that 

8 percent of customers incur 75 percent of overdraft fees.5 Similarly, Pew found in 

a recent survey of consumers who had overdrawn their checking account with a 

debit card that 7.3 percent of customers are responsible for 49 percent of the overdraft fees charged.6 This data demonstrate that consumers who repeatedly overdraft 

are not only providing a substantial part of overdraft revenue but are also sustaining very high aggregate fees, putting their financial security at risk. 

The CFPB also found in this Data Point that the propensity to overdraft is higher 

for younger account holders, with 10.7 percent of the 18–25 year old age group having more than 10 overdrafts per year. Pew’s survey research found that a 25-yearold is 133 percent more likely to pay an overdraft penalty fee than a 65 year-old. 

The CFPB’s Data Point also concluded that most consumers who overdraft bring 

their accounts into the black quickly, with more than half achieving a positive balance within 3 days and 76 percent within 1 week. Correspondingly, Pew’s research 

has found that most consumers who overdraft had negative balances for four or 

fewer days. Finally, the CFPB found that the median size of debit card transactions 

that result in an overdraft fee is $24 and that the median fee is $34. If put in terms 

of an annualized loan interest rate, a typical overdraft carries a 17,000 percent 

APR. Based on this data, we can conclude that overdraft programs offer expensive, 

very short-term loans that are disproportionately used by younger customers who 

are new to the banking system. 

In the case of small-dollar lending, the CFPB has taken a methodical approach 

to studying the market. In April of last year, the Bureau published findings of a 

year-long study of usage data obtained through its supervision of conventional and 

bank deposit advance payday loan providers. The Bureau found that the structure 

of payday loans created substantial risk of harm to consumers. This is because payday loans require borrowers to pay several hundred dollars out of their next paycheck to lenders that have a priority payment position, allowing them to reach directly into borrower checking accounts before other bills are paid. The Bureau found 

that a sizable share of payday loan users conduct transactions on a long-term basis 

(two-thirds of borrowers use seven or more loans per year, mostly in rapid succession), suggesting that they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter. 

In March of this year, the Bureau followed up with a second report that revealed 

new usage data, showing for example that the vast majority (80 percent) of payday 

loans originate within 2 weeks of a previous loan, suggesting how important consecutive repeat usage is to the payday loan business model. With these studies, the 

CFPB used its unique access to market data to release definitive research that conVerDate 0ct 09 2002 11:34 Jan 21, 2016 Jkt 000000 PO 00000 Frm 00025 Fmt 6621 Sfmt 6621 S:\DOCS\93420.TXT SHERYL

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7 Robert De Young and Ronnie J. Phillips, Payday Loan Pricing, (Federal Reserve Bank of 

Kansas City, Economic Research Department, Feb. 2009), 7, http://www.kansascityfed.org/

PUBLICAT/RESWKPAP/PDF/rwp09-07.pdf. 8The Consumer Financial Protection Bureau Advanced Notice of Proposed Rulemaking, (May 

2012) http://files.consumerfinance.gov/f/201205lcfpblGPRcardsANPR.pdf. 9See http://www.consumerfinance.gov/blog/our-first-enforcement-action-against-a-paydaylender/. 10See http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-expressfor-pushing-payday-borrowers-into-cycle-of-debt/. 11The Pew Charitable Trusts, Overdrawn, 5. 12For a data visualization of this practice, see http://www.pewtrusts.org/en/multimedia/

data-visualizations/2014/checksand-balances; The Pew Charitable Trusts, Checks and Balances

(Apr. 2014), 21. http://www.pewtrusts.org/∼/media/Assets/2014/04/09/ChecksandBalances

Report2014.pdf.

firms findings by Pew and other researchers,7 that the vast majority of payday loans 

(and therefore lender revenue) result from long-term, repeat usage. This lending is 

often predicated on leveraging access to the borrower’s checking account to collect 

payment on loans that many cannot afford, leading to repeat borrowing to make 

ends meet. 

Enforcement and Rulemaking 

The CFPB has said that it will propose rules this year on prepaid cards. In 2012, 

the CFPB released an advanced notice of proposed rulemaking, asking about significant consumer protection issues for consumers using these cards, including disclosure, unauthorized transactions and product features, specifically overdraft or credit 

linked to these cards.8

The CFPB has also stated its intention to issue rules governing the payday and 

small-dollar loans market. In November of 2013, the Bureau took its first enforcement action against a payday lender that was allegedly engaging in inappropriate 

collections activity.9 More recently, the Bureau sanctioned another lender for ‘‘pushing payday borrowers into a cycle of debt.’’10 Notably, the Bureau found that the 

company in question had ‘‘created and leveraged an artificial sense of urgency to 

induce delinquent borrowers with a demonstrated inability to repay their existing 

loan to take out a new [company] loan with accompanying fees.’’ This, the CFPB 

concluded, took unreasonable advantage of consumers’ inability to protect themselves, and was an abusive practice under applicable law. 

Problems that Remain in the Transaction Account and Small-Dollar Loan 

Markets 

Although much progress has been made by Congress and the CFPB in recent 

years in addressing problems in consumer financial markets, a great deal of research by Pew and the Bureau itself demonstrate there are still significant safety 

and transparency problems that need to be addressed. 

Checking Accounts and Prepaid Cards 

One area of particular concern regarding checking accounts is consumer confusion 

about whether they have opted in for overdraft coverage when using their debit card 

for a purchase or at an ATM. In 2010, the Federal Reserve implemented new rules 

requiring that consumers affirmatively choose to ‘‘opt in’’ to overdraft coverage, but 

our most recent survey of checking account consumers who had incurred an overdraft in the last year showed that over half were not aware that they had chosen 

coverage.11

Unfortunately, this situation has not improved. We asked the same question in 

a 2012 survey of consumers who overdrafted and got a similar result. The CFPB’s 

research into overdraft further elucidated the problems with this market. Their 

2013 ‘‘Study of Overdraft Programs’’ found that of opt-in rates varied dramatically 

for the banks they examined, ranging from less than 10 to more than 40 percent. 

The CFPB study suggests that the manner in which each institution describes or 

sells overdraft options to new customers varies considerably. We have urged the 

CFPB to write new rules requiring financial institutions to provide account holders 

with clear, comprehensive, and uniform pricing information for all available overdraft options so that each consumer can make an informed decision about this product. This could be accomplished by modifying the Federal Reserve’s ‘‘safe harbor’’ 

opt-in form to ensure that consumers understand all of their options and the implications of their choices. 

Furthermore, ‘‘high-to-low’’ transaction reordering remains a serious concern. This 

involves financial institutions manipulating the order that transactions post to an 

account in order to deplete the balance more quickly, leading to more overdrafts and 

additional fees.12 In its 2013 study, the CFPB found that debit posting orders vary 


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13The Pew Charitable Trusts, Consumers Continue to Load Up on Prepaid Cards (Feb. 2014), 

2. http://www.pewtrusts.org/∼/media/legacy/uploadedfiles/pcslassets/2014/PrepaidCards

StillLoadedReportpdf.pdf. 14The Pew Charitable Trusts, Why Americans Use Prepaid Cards (Feb. 2014), 8. http://

www.pewtrusts.org/∼/media/legacy/uploadedfiles/pcslassets/2014/PrepaidCardsSurvey

Reportpdf.pdf. 15 Ibid., 14. 16 Ibid., 8. 

considerably from institution to institution and, in fact, no two banks studied use 

the same approach. 

Pew’s research shows that somewhat fewer banks are engaging in high-to-low 

transaction reordering in the last year. Our latest analysis found a small decrease 

in the proportion of banks that reorder transactions from high to low, from 54 percent in our 2013 report to 49 percent in 2014. While this indicates some progress, 

it’s important to note that all of the banks that we surveyed state in their disclosures that they retain the right to change their practices at any time. Pew has 

urged the CFPB to write new overdraft rules that prohibit the reordering of transactions to maximize fees, in favor of posting deposits in a fully disclosed, objective, 

and neutral manner. Without a rule forbidding this practice, even banks that no 

longer reorder transactions have the ability to reinstate this practice at any time. 

Given the extremely high cost of overdrafts described above, we have also urged the 

Bureau to require all financial institutions to make penalty fees reasonable and proportional to a bank’s costs in covering the overdraft transaction. 

General purpose reloadable cards are relatively new financial products. As a result, they do not carry the same consumer protection requirements as checking accounts, despite the similarity in how they can, and are being, used. Comparing the 

data from our two market scans published in 2013 and 2014 we have observed that 

the fee structure of these cards is shifting to more closely resemble checking accounts.13 Interchange fees for each transaction are not as common as for debit or 

credit cards, and monthly fees, like those associated with a checking account, are 

more prevalent. 

Additionally, our survey research finds that a primary reason consumers use GPR 

cards is to avoid unexpected or hidden fees, like overdraft, associated with traditional checking accounts.14 We found that 66 percent of prepaid consumers use the 

cards so that they do not spend more money than they actually have.15 In fact, 63 

percent report having paid checking account overdraft fees and 41 percent say they 

have closed or lost a checking account because of these fees.16 In our 2014 market 

scan we found that only one card in the marketplace offers overdraft, demonstrating 

that this feature is not necessary to make the product financially viable. For these 

reasons, we have urged the CFPB to prohibit overdraft or other automated or linked 

lines of credit on GPR cards. In addition, we have recommended that the Bureau 

extend important protections under The Electronic Fund Transfer Act (EFTA) that 

apply to checking accounts to prepaid cards. These Regulation E protections include 

requirements that financial institutions: investigate unauthorized transaction 

claims, place limitations on the liability of consumers, credit the account for the 

amount of a disputed transaction while the dispute is pending, and provide consumers access to periodic statements and past transaction information. Given the 

substitutability of these products it makes sense for consumers to expect and receive 

similar protections. 

Another important protection for consumers is the requirement that funds on 

GPR prepaid cards be FDIC insured. Currently, while most cards are covered by 

Federal deposit insurance, nonbank prepaid card providers that do not carry a Visa 

or MasterCard logo are not required to make sure that these funds are federally 

insured should the company go out of business. Rather, the card provider can choose 

to comply with State money transmitter laws, which do not offer the same level of 

protection for consumers as Federal insurance. As stated above, the CFPB has broad 

authority to ensure that similar products are regulated consistently. The Bureau 

should require that all funds loaded onto prepaid cards are covered by this insurance. 

Both checking accounts and prepaid cards need clear, concise, and easy-to-understand disclosures. This information should be accessible both online and when consumers purchase the cards at bank or credit union branches (for checking accounts) 

and retail locations (for prepaid cards) to enable the consumer to shop among different providers. While we applaud the many banks and credit unions that have voluntarily adopted clear checking and prepaid card disclosures, consumers will only 

have access to uniform information that allows them to easily compare the terms 


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17The Pew Charitable Trusts, Checks and Balances, 2014 Update. 18The Pew Charitable Trusts, Consumers Continue to Load Up on Prepaid Cards. 19The Pew Charitable Trusts, Payday Lending in America: Policy Solutions (Oct. 2013), 44–

47. http://www.pewtrusts.org/∼/media/legacy/uploadedfiles/pcslassets/2013/PewPayday

PolicySolutionsOct2013pdf.pdf.

and condition for all checking account and prepaid providers if the CFPB requires 

it. 

Finally, in December 2013, the CFPB’s report, ‘‘Arbitration Study Preliminary Results,’’ found that larger banks tend to include mandatory arbitration clauses in 

their consumer checking contracts, while mid-sized and smaller banks and credit 

unions do not. Interestingly, the Bureau estimates that only about 8 percent of 

banks include arbitration clauses in their checking account contracts but that these 

clauses cover 44 percent of insured deposits. Mandatory pre-dispute binding arbitration clauses present several risks. They prevent consumers from choosing the option 

of challenging unfair and deceptive practices or other legal violations in court, potentially allowing some abusive practices to spread without legal or public scrutiny. 

They also deprive consumers of important legal remedies—including a jury trial—

curtail judicial civil procedures and due process protections, such as the ability to 

appeal a decision, and raise serious conflict-of-interest concerns if the companies 

that provide arbitration services provide repeat business to the financial institutions 

that mandate it. 

In Pew’s 2012 report, ‘‘Banking on Arbitration: Big Banks, Consumers, and 

Checking Account Dispute Resolution,’’ we also found that the larger the financial 

institution the more likely an account agreement contains a clause requiring mandatory binding arbitration. We determined that financial institutions that require 

arbitration are much more likely to ban class-action lawsuits. In our most recent 

‘‘Checks and Balances’’ report, we found that more banks have added class-action 

and jury trial waivers along with mandatory binding arbitration clauses to their account agreements, all of which limit a consumer’s options during a dispute.17 In a 

separate report on prepaid cards, we found that 51 of the 66 cards studied (77 percent) have contractual clauses that require cardholders to submit to mandatory 

binding arbitration. Fifty cards (76 percent) also disclose that cardholders are not 

permitted to participate in class action litigation involving that card.18 As a result 

of this research, Pew has recommended to the CFPB that mandatory arbitration 

clauses in checking accounts and prepaid card contracts be prohibited. 

Small-Dollar Loans 

As you know, the CFPB has the power to regulate some nonbank financial entities, such as payday lenders, which is the first time these institutions will be under 

Federal oversight. Though the Bureau has not yet issued rules to govern this market, it has stated its concern over the potential harms in this market, and its intention to use its powers to address those harms. Similarly, after several years of intensive study, Pew has concluded that the CFPB must issue broad new rules to govern 

the entire small-dollar loan market. 

Pew’s research conclusively shows that payday loans are unaffordable for most 

borrowers. The loans require payments equal to one-third of a typical borrower’s income, far exceeding most customers’ ability to repay and meet other financial obligations without quickly borrowing again. Payday lenders have a unique legal power 

to withdraw payment directly from borrowers’ checking accounts on their next payday, prompting those without enough money left for rent or other bills to return to 

the lenders, repay the loans, and pay an interest-only fee to quickly re-borrow, resetting the due date to the next payday. This extraordinary form of loan collateral 

allows lenders to thrive even as they make loans to those who cannot afford them. 

The average borrower is in debt for nearly half the year, and the vast majority of 

lender revenue comes from those who borrow consecutively. Payday lenders achieve 

profitability only when the average borrower is in debt for months, even though the 

product is promoted as a short-term bridge to the next payday. These facts demonstrate a significant market failure. 

Based on our research findings on small-dollar loans we developed policy recommendations urging the CFPB to:19

• Ensure that the borrower has the ability to repay the loan as structured. The key to achieving this goal will be to require lenders to more carefully consider a borrower’s ability to repay the loan, as structured, without having to borrow again to make ends meet. Payments on a payday loan currently 

take more than one-third of the borrower’s next paycheck, and that is an unreasonable amount. Pew’s research provides a clear benchmark for identifying a 

more reasonable payment—for most borrowers, monthly payments above 5 perVerDate 0ct 09 2002 11:34 Jan 21, 2016 Jkt 000000 PO 00000 Frm 00028 Fmt 6621 Sfmt 6621 S:\DOCS\93420.TXT SHERYL

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20See The Pew Charitable Trusts, Payday Lending in America. The report includes a case 

study of Colorado’s 2010 payday loan reform, which required all payday loans to become 6-

month installment loans and included many features that approximate Pew’s policy recommendations. 

cent of gross monthly income are unaffordable. The CFPB should treat loans 

requiring payments above this threshold as unreasonable unless the lender can 

clearly demonstrate, through proper underwriting, that the borrower can afford 

more. With such a clear benchmark in place, the CFPB could eliminate a broad 

array of harms while giving honest lenders a clear and low-cost way of making 

safer credit available.

• Spread loan costs evenly over the life of the loan. Front-loading of fees 

and interest creates incentives for lenders to refinance loans and extend overall 

indebtedness (sometimes called loan flipping). Any fees should be paid evenly 

over the life of the loan. Sensible rules to limit lender incentives for loan flipping should be part of any small-dollar loan rule.

• Guard against harmful repayment or collections practices. Borrowers 

need stronger rights to protect their checking accounts against unscrupulous 

lenders or debt collectors, and banks should be held more accountable for honoring their customers’ requests to stop payments or cancel automatic electronic 

withdrawals. Sensible safeguards can preserve the integrity of the electronic 

payments system and help honest lenders make affordable loans to those who 

need them.

• Require concise disclosures of periodic and total costs. Consumers need 

accurate information to make good decisions.

• Continue to set maximum allowable charges. Research shows loan markets 

serving those with poor credit histories are not price competitive.

Pew has also recommended that policymakers protect against excessively long 

loan terms and have developed a formula based on borrower income and the size 

of the loan to prevent this costly practice. The formula can be included in laws or 

regulations in conjunction with other legal requirements, or can be used as a benchmark by financial institution examiners. 

Pew has shown empirically that enacting such measures can yield much better 

consumer outcomes with almost no loss in consumer access to credit, in a way that 

works for lenders.20 Access to credit remains virtually unchanged after a recent 

legal reform in Colorado, but borrowers spend less, and payments are far more affordable. 

Conclusion 

The CFPB, which was created in the wake of the financial crisis to make consumer financial markets safe, efficient and transparent, has a crucial role to play 

in the next few years in enhancing consumer protections for transaction accounts 

and small-dollar loans. The CFPB clearly has the authority and jurisdiction it needs 

to effectively and fairly address the serious problems I have identified today. It has 

also demonstrated that it will take a methodical approach to understand and address problems in these markets. In particular, the CFPB’s research and initial enforcement actions on transaction accounts and small-dollar loans have been thorough and deliberate. These important early moves provide a basis for the CFPB to 

propose effective new rules in the months ahead that eliminate unfair, deceptive or 

abusive practices, while also allowing scrupulous financial services companies a fair 

chance at serving consumers profitably. It is now up to the CFPB to seize this historic opportunity. We applaud the Committee for its attention to and oversight of 

the CFPB’s work in these areas and urge you to continue these efforts to ensure 

that the Bureau acts in a timely, effective and balanced manner. 

Thank you for the opportunity for Pew to participate in this discussion. My colleagues at The Pew Charitable Trusts and I would welcome the opportunity for further conversations at any time. 

PREPARED STATEMENT OF SHERI EKDOM

DIRECTOR, CENTER FOR FINANCIAL RESOURCES, LUTHERAN SOCIAL SERVICES OF

SOUTH DAKOTA

SEPTEMBER 18, 2014

Senator Johnson, before I begin my testimony, on behalf of Lutheran Social Services of South Dakota, I would like to recognize your upcoming retirement, your work 


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1FINRA Investor Education Foundation, National Financial Capability Study. (2012). http:/

/www.usfinancialcapability.org/about.php. 2 Corporation for Enterprise Development, Assets & Opportunity Scorecard. (2014). http://

scorecard.assetsandopportunity.org/2014/state/sd. 3 U.S. Department of Labor Bureau of Labor Statistics, Covered Establishments, Employment, 

and Wages by State, Fourth Quarter 2013. http://www.bls.gov/news.release/cewqtr.t03.htm.

as a South Dakota legislator early on as you began your career, and now nearly 30 

years of service as a Congressman and Senator from South Dakota. We thank you 

for your tireless efforts—especially your dedication to those underserved populations 

who have limited resources and means. Over the years, you allowed their voices to 

be heard and their lives improved. Your work has made a difference and we thank 

you for that. 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee:

Thank you for inviting me to testify this morning on the topic of assessing and 

enhancing protections in consumer financial services. For the past 22 years, I have 

worked in the financial counseling and education industry. I am currently the director of the Center for Financial Resources at Lutheran Social Services of South Dakota. 

LSS has provided financial counseling and education services since 1984. Our 

agency is a member of the National Foundation for Credit Counseling, a HUD-approved housing agency, accredited by the Council on Accreditation (COA), and an 

approved provider of bankruptcy counseling and education under the Department 

of Justice Executive Office of U.S. Trustees. 

LSS provides financial counseling and education designed to help consumers take 

control of their financial future. Services include: financial management and budgeting sessions, debt management programs, bankruptcy counseling and education, 

and credit report and student loan consultations. Housing counseling and education 

is available to renters, first-time home buyers, homeowners and those seeking to 

prevent or resolve housing delinquency or default issues. Since long-term financial 

success often means making deliberate changes to priorities and lifestyles, LSS offers a full range of education products on topics to promote financial literacy and 

complement financial counseling and debt management programs. 

Products offered are both reactive, as in the case of working through a financial 

crisis, and proactive, for those seeking to prevent money problems or plan ahead for 

their future financial goals. 

At the Center for Financial Resources, we work with people from all age and income levels—although the majority of clients seen (69 percent) fall in the low-tomoderate income (LMI) range. Client ages for counseling sessions for last year 

ranged from 18 to 92, with the majority of our clients falling in the 31- to 45-yearold age bracket. 

When people come into our office, the most common ‘‘primary causes of financial 

problems’’ include poor money management, reduced income, separation or divorce, 

excessive spending, unemployment and medical issues. 

A number of factors put many South Dakotans at risk for a financial crisis:

• 54 percent of South Dakota households have difficulty covering their expenses 

and paying bills.

• 17 percent of South Dakota households spent more than they made during the 

last year, even excluding major purchases like a car.

• 57 percent of individuals don’t have an emergency fund in case of unexpected 

expenses or a job loss.

• 32 percent have borrowed from a nonbank source such as a payday loan, title 

loan, or pawn shop.1

• 22 percent of South Dakota households are under banked—they have a bank 

account but routinely use nonbank services such check-cashing services, payday 

lenders, and title loans.

• 46 percent of South Dakotans have sub-prime credit ratings—without good 

credit, consumers pay higher interest rates than other consumers on everything 

from credit cards to car loans to mortgages

• The average South Dakotan owes $6,666 in credit card debt.2

• South Dakota ranks 48th in the Nation for the average weekly wages earned 

by workers.3

• 6.9 percent of South Dakotans are unemployed or underemployed. In addition 

to those people who are counted in the official unemployment rate, this also inVerDate 0ct 09 2002 11:34 Jan 21, 2016 Jkt 000000 PO 00000 Frm 00030 Fmt 6621 Sfmt 6621 S:\DOCS\93420.TXT SHERYL

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4 U.S. Department of Labor Bureau of Labor Statistics, Alternative Measures of Labor Underutilization for States, Third Quarter of 2013 through Second Quarter of 2014 Averages. http:/

/www.bls.gov/lau/stalt.htm. 5 U.S. Department of Labor Bureau of Labor Statistics, Multiple Job Holding in States in 

2013, Monthly Labor Review, August 2014. 6 U.S. Census Bureau, Small Area Income and Poverty Estimates, 2012 Release. http://

www.census.gov/did/www/saipe/data/highlights/2012.html.

cludes people who have given up looking for work, or who want to work full 

time but have only been able to find part-time work.4

• South Dakota ranks first in the Nation for the percentage of workers who hold 

more than one job (8.9 percent).5

South Dakota is home to nine Indian reservations and has one of the highest concentrations of Native Americans at the State level. The latest Census figures report 

that Native Americans or Alaska Natives compose just over 10 percent of the State’s 

population, the majority of whom reside on reservations. 

The challenges faced by residents of South Dakota reservations have been well 

documented. Limited employment opportunities, generational poverty, and geographic isolation make it difficult for families to become financially stable. Despite 

the tribes’ and State’s economic development efforts, the people living on these reservations still have significantly lower income and home ownership rates, and higher poverty rates than the rest of South Dakota. Although numerous reservation 

communities across the country suffer from high rates of poverty and unemployment, five counties in South Dakota in which reservations are located rank in the 

top 25 counties with the highest poverty rates for the entire United States. The 

overall poverty rate in the five counties ranges from 39.2 percent to 47.4 percent, 

compared to the State poverty rate of 13.6 percent.6 Of the financial counseling clients we have seen on reservation communities, most have been unbanked. This 

makes them susceptible to predatory products such as payday loans and title loans. 

The following issues describe some of the most significant financial challenges we see in our work:

• Low wages and underemployment remain significant issues for South Dakotans.

• The majority of clients seeking assistance for financial counseling are insolvent (their income does not cover their living expenses). Clients coming into 

our office have high debt levels with little or no savings. For families living 

paycheck to paycheck, this combination leaves them lacking the means to 

deal with financial emergencies and limits access to low-cost loans or financial products.

• The flow of needed credit to credit-worthy home buyers has tightened as traditional banks, both large and small, navigate new regulator expectations 

under Dodd-Frank.

• There are many individuals that do not understand the ramifications of using 

short-term or payday loans as an attempt to resolve long-term issues. The individuals could benefit from education on the consequences if misuse of the loans 

occurs and discussion of other options to prevent a similar financial crisis in the 

future.

• About 13 percent of households we counsel struggle with payday loans:

• 55 percent of these clients had 2 or more payday loans; 20 percent had four 

or more payday loans

• For clients with 7 or more payday loans, the average balance per loan was 

$758

• Annual interest rates from 100 percent to 400 percent can compound these 

payday loan debts to unmanageable levels.

• Low-income housing options remain scarce.

• Since the demand for housing assistance often exceeds the limited resources 

available to HUD and the local housing agencies, long waiting periods are 

common and South Dakota is no exception with 6,000 people on waiting lists. 

On average, those seeking rental assistance can expect to remain on a waiting 

list for three to 5 years. The lack of safe, affordable housing is particularly 

severe on Native American reservations.

• Landlord-tenant issues are common. We receive calls daily from consumers 

with questions about pending evictions, confusion on lease issues and fair 

housing issues. Many times we see low- to moderate-income individuals have 


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7 Indexed Annuity Leadership Council, New Study Shows One-third of Americans have Zero 

Retirement Savings, Why? August 22, 2014. http://indexedannuitiesinsights.com/new-studyshows-one-third-of-americans-have-zero-retirement-savings-why/.

fewer resources available to stand up to unfair practices or have a lack of understanding of their rights or responsibilities.

• Medical debt—medical issues and medical debt are one of the top reasons consumers seek our assistance.

• Consumers may have trouble navigating the medical billing process (i.e.,

when has insurance or other coverage paid—when are they responsible).

• One medical ‘‘event’’ may generate multiple bills from multiple providers; invoices may be received for many months before the billing is complete.

• Debt collection—consumers are quite often afraid and intimidated by tactics 

used to collect payments; many are unsure how to verify/dispute collection 

items; many don’t understand debt/divorce situations, or the risks and responsibilities of co-signing a loan.

• Credit reporting—many LMI consumers seek assistance on how to build a credit 

report; how to improve their credit score; how to obtain free reports and how 

to insure accurate information is on the reports; some fall prey to credit repair 

scams that do little more than dispute accurate, negative information and 

charge a high fee.

• Many consumers are ill prepared for retirement—36 percent of people in the 

United States have no retirement savings; this includes 26 percent of adults between the ages of 50 and 64—one of the most crucial age groups for retirement 

planning and saving.7

• We continue to see consumers with high debt levels. The average client coming 

to see us with debt-related issues owes 10 creditors $28,227 in unsecured debt. 

Student loan debt, now the second-largest form of consumer debt and growing, 

is also an area of concern for many consumers and an area that seems to be 

garnering significant national attention as we seek solutions for over-extended 

borrowers.

The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission Web sites are helpful in our work as we strive to protect consumers by sharing 

educational tools and keeping us abreast of changes within the consumer protection 

arena. Asking consumers to ‘‘tell their story’’ and tracking consumer complaints positions the CFPB to quickly identify trends and respond appropriately. We have referred a few clients directly to the CFPB with housing complaints; they were 

pleased with the responsiveness the Bureau and indicated they felt ‘‘heard.’’

The CFBP could assist us further in our work by making referrals to or 

partnering with community-based, State and Federal resources poised to help consumers deal with their financial issues to ensure a better chance of success. By continuing to provide links and information on their Web site such as ‘‘How to Choose 

a Credit Counselor’’ or ‘‘How to Locate a Housing Counselor,’’ we can insure that 

as people look for ways to stabilize or improve their financial situation they are 

aware of help that is available to them. It also empowers clients to self-select and 

be armed with the proper questions so they receive the help they need from a trusted source. 

Having provided some context on the issues we see consumers dealing with on 

a daily basis, I would offer the following recommendations to enhance financial protections related to consumer financial services:

1. Limit the number of short-term loans consumers may access at one time 

We recognize there are situations when consumers need access to small dollar 

credit; the trouble typically comes when consumers have multiple short-term loans 

at one time that exceed their ability for repayment. With the wide availability of 

online options, it would seem that a limitation on multiple loans would need to come 

from a Federal level. 

It may also be worth considering a requirement for short-term lenders to provide 

customers with information on available financial education services from a neutral 

third party that is not selling the financial product. 


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8Tsien, Freddie Mac, Executive Perspectives-Insights on Housing Finance, Pre-purchase 

Counseling is Getting Better all the Time, April 15, 2013. http://www.freddiemac.com/news/

blog/robertltsien/20130415lgettinglbetter.html.

2. Support and promote community-based financial education

(Assist with incentives to encourage attendance and discourage conflicts of interest related to providing the education) 

We know that education works! For example, a recent study suggests that prepurchase financial counseling may reduce, by an average of 29 percent, the likelihood of a first-time home buyer becoming seriously delinquent.8

• Most of the LMI consumers that attend a pre-purchase class initially register 

as they need to complete the class in order to receive a certificate of completion 

that may allow them to qualify for various down payment or closing cost assistance programs. This may be the ‘‘carrot’’ that prompted them to register. We 

need to help consumers understand the ‘‘what is in it for me’’ as we seek to increase financial responsibility and empower consumers to take control of their 

finances. Whether we are training youth on managing money or becoming a 

first-time renter, or assisting consumers in understanding how to build a better 

credit record, incentives that encourage consumers who may not otherwise attend a class to show up may ultimately not only increase their financial knowledge but their financial situations.

• Although education is often called the gateway to success, many are hesitant 

to take that first step. If you are unaware of options available, you may not be 

able to see the value that financial literacy training can provide. Incentives 

along with education sessions may open the door for individuals to gain awareness, discuss their issues and proactively learn lessons that may otherwise be 

taught as the hard and unforgiving consequences of money management mistakes (i.e., evictions, repossessions, NSF fees, etc.).

• Our issue today is not a lack of good, quality accurate education materials; our 

issue is getting that information into the hands of consumers in a format they 

desire and that they can understand and digest. Just because we ‘‘build it’’—

does not mean they will come. We need to determine methods and motivations 

so people will hear the information that can change their financial futures.

• Insuring that consumers receive education prior to some of the largest purchases in life (i.e., homes, cars, student loans, etc.), from a neutral third party 

that is not selling the financial product, also ensures that consumers are able 

to make decisions about big-ticket items fully educated and without the pressure of any sales tactics.

Thank you for the opportunity to testify. 

PREPARED STATEMENT OF OLIVER I. IRELAND

PARTNER, MORRISON & FOERSTER

SEPTEMBER 18, 2014

Chairman Johnson, Members of the Committee, it is an honor to be here today. 

My name is Oliver Ireland. I am a partner in the Financial Services practice at Morrison & Foerster here in Washington D.C. I have over 40 years of experience working as a lawyer on financial services issues. I spent 26 years with the Federal Reserve System, including 15 years as an Associate General Counsel at the Board in 

Washington where I worked on issues ranging from writing rules to protect consumers, to establishing policies and writing rules to reduce systemic risk in the financial system. I have 14 years’ experience as a private sector attorney helping providers of financial products and services to navigate the financial regulatory system. 

I understand that this may be Chairman Johnson’s last hearing on consumer 

issues as Chairman of this Committee and as Senator from South Dakota. On behalf 

of the financial services community I want to start by thanking Chairman Johnson 

for his work as a Member of this Committee and as its Chairman. Financial services 

issues are complex and usually controversial. At the same time they are critical to 

American households. Chairman Johnson, we all owe you a debt of gratitude. 

I am here today to address the State of the market for consumer financial products and services in the wake of a severe financial crisis where consumer household 

mortgages played a key role, and in the wake of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (‘‘Dodd-Frank Act’’) which was designed to address 

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Frank Act was the creation of the Consumer Financial Protection Bureau (‘‘CFPB’’), 

but the Dodd-Frank Act also specifically addressed standards for mortgages in a 

separate Title. In addition, the Credit CARD Act of 2009, enacted shortly after the 

peak of the financial crisis, has also played an important role in shaping the current 

market for consumer financial products and services. 

There is no denying that problems in the market for consumer financial products 

and services led to the enactment of the Credit Card Act, the mortgage provisions 

of the Dodd-Frank Act and the creation of the CFPB; however, both statistical and 

anecdotal information suggest that these initiatives, coupled with actions of the Federal Banking agencies, are having a chilling effect on the markets for consumer financial products and services. 

At the outset, it is important to remember that we regulate providers of consumer 

financial products and services because of the importance of these products and 

services to American households and to the economy as a whole. Our goal should 

be to ensure that the markets for these products and services are fair and efficient 

and that consumers have access to these markets. In establishing the CFPB, the 

Dodd-Frank Act stated that the purpose of the CFPB is to ‘‘seek to implement and, 

where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial 

products and services and that markets for consumer financial products and services 

are fair, transparent and competitive.’’

This purpose statement sets a lofty goal that can be approached but may be very 

difficult to achieve. Congress recognized the difficulty in achieving this goal by including the word ‘‘seek’’ in the purpose statement. A key factor in seeking this goal 

is the recognition that there are two sides to every consumer financial product and 

service—the consumer and the provider. Pursuit of fairness for the consumer can 

make products or services uneconomical for providers and have an adverse effect on 

access to those products or services for some, or all, consumers. 

Zeal in enforcing consumer laws, particularly those that do not have well defined 

standards such as the unfair, deceptive and, with the passage of the Dodd-Frank 

Act, abusive standards that originated in the Federal Trade Commission Act and 

are incorporated into the Dodd-Frank Act, can also adversely affect access to consumer services as providers become more reluctant to continue existing products 

and services and to introduce new ones. To illustrate the concerns, I will focus on 

three areas: the effect of the Credit CARD Act on access to consumer credit for everyday needs, the potential effect of the mortgage provisions of the Dodd-Frank Act 

on access to mortgage credit, and the chilling effect of uncertainty on access to consumer financial products and services generally. 

CREDIT CARD ACT 

The Credit CARD Act was enacted in response to a number of practices in the 

credit card market. For example, in seeking to provide access to credit to more consumers, credit card issuers had developed a practice of granting credit to cardholders with uncertain credit characteristics and, where the cardholder later exhibited higher risk characteristics, increasing the rate on the cardholders account to 

address that risk. Cardholders who thought that they were going to be able to enjoy 

credit at a lower initial rate viewed this practice as unfair; however, many cardholders continued to enjoy the rates that they had originally anticipated. The Credit 

CARD Act generally prohibited credit card issuers from raising rates on existing 

balances, except in very limited circumstances. 

In connection with Federal Reserve Board rulemakings on this issue that preceded the Credit CARD Act, industry analysis indicated that restricting the ability 

to raise rates on existing balances would reduce credit card issuer revenue by billions of dollars and that in an effort to adapt to this loss of revenue credit card 

issuers would either raise interest rates on credit card accounts generally or remove 

risk from their portfolios by limiting access to credit by consumers that appeared 

to be higher risk. 

Although data on the credit card market subsequent to the implementation of the 

Credit CARD Act has been affected by the financial crisis and the ensuing high levels of unemployment, data developed by the American Bankers Association, in conjunction with Argus Information and Advisory Services and Keybridge Research, 

shows marked changes in the credit card market since the implementation of the 

Credit CARD Act including a significant reduction in the availability of credit card 

accounts and, where such accounts are available credit card lines, to consumers with 

higher credit risk scores. These data also show that credit cards, where available, 

are increasingly being used as payment instruments rather than as means of obtaining household credit. For example, the proportion of credit card accounts that 

pay off their balance each month has increased even while monthly use of credit 


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cards has increased. At the same time, the effective finance charge yield on credit 

card portfolios, the amount actually paid for credit, has declined. 

These data might be attributed to household deleveraging in the wake of the financial crisis, and indeed mortgage credit has also declined sharply; however, mortgager credit relative to disposable income had shown a marked bubble that appears 

to coincide with the bubble in housing prices during the first decade of this century, 

but credit card credit did not experience a similar bubble. Further, other forms of 

household credit, including automobile loans and student loans, appear to have increased as credit card credit has decreased. 

A detailed analysis of these data is beyond the scope of this testimony and is best 

conducted by economists with a strong understanding of consumer financial transactions and the consumer financial markets, however, these data strongly suggest 

that significant changes in the regulatory environment for consumer financial products and services, such as the Credit CARD Act, can lead to a reduction in use or 

the availability of those services. These data also suggest that in order to achieve 

the goal of assuring that consumers have access to markets for financial products 

and services in regulating these markets, it is important to understand the consumer demand that these services meet. If new regulations result in unmet consumer demand because of a redirection in consumer access to financial products and 

services, that unmet consumer demand is highly likely to lead consumers to try to 

meet their needs from other, substitute sources. These substitute services may be 

more expensive or otherwise on less advantageous terms than the products or services that are no longer available. For example, in the case of the Credit CARD Act 

it is possible that consumers with higher credit risk scores who are no longer able 

to obtain credit cards to meet their needs for short-term credit may find themselves 

turning to other higher cost credit to meet their needs or to increasing their secured 

borrowing collateralized by their automobiles or their homes to provide a liquidity 

cushion to deal with unforeseen events. 

At this point in time it is not clear how higher risk score consumers have met 

any needs for credit that they would have met through the use of credit cards before 

the Credit CARD Act was implemented. In formulating regulatory policy to meet the 

goals that the Dodd-Frank Act established for the CFPB, it is important to consider 

the effect of that policy on consumers’ access to retail financial product and services 

and how consumers may meet their needs if access to the financial products or services that are the focus of new regulation requirements is curtailed. 

MORTGAGES 

In some cases the stakes are higher. In the case of home mortgages, the financial 

crisis demonstrated that the failure of a sufficient volume of retail consumer transactions can have destabilizing effects on the economy as a whole. This potential is 

significant in the area of home mortgages where mortgage credit outstanding represents almost half of nominal gross domestic product (‘‘GDP’’), and at the time of 

the financial crisis represented more than sixty percent of nominal GDP. The DoddFrank Act sought to protect consumers and improve the market for home mortgages, and potentially the market for residential real estate more broadly, by improving mortgage underwriting standards. It has taken some time for these changes 

to be put into place and not all of them have been fully implemented even now. Accordingly, it is difficult to assess the overall impact of these reforms on consumers’ 

access to mortgage credit in developing regulatory policy for the home mortgage 

market. Nevertheless, early indications are that these reforms are materially reducing mortgage originations. 

Given the significance of mortgage credit, and housing more broadly, in the economy, the potential effects of an undue reduction in mortgage originations on economic growth and employment have to be considered, as well as individual consumer’s access to home mortgage credit. 

UNCERTAINTY 

Looking beyond the markets for credit cards and home mortgages credit, the markets for other consumer financial products and services are characterized by a higher level of uncertainty on the part of the providers of those products and services 

than I have observed before. This uncertainty appears to arise from the level of reliance by the CFPB and the Federal bank regulatory agencies on generalized guidance and enforcement actions to shape these markets and to address perceived 

harms to consumers. While financial institutions have long criticized regulatory initiatives as overly prescriptive, the absence of clarity can be as constraining as detailed rules, and in some cases more so. Broadly drawn ‘‘guidance’’, whether issued 

by the CFPB or the Federal bank regulatory agencies, can, and has, caused financial 


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institutions to abandon products even though those products were well received by 

their customers. 

More difficult to measure is the extent to which new product initiatives are abandoned before they see the light of day out of fear that they will run afoul of hazily 

defined regulatory concerns. In particular the Federal banking agencies broad reliance on reputational risk is difficult to predict and or anticipate until it appears. 

Although banking institutions in particular rely on their reputations in the market 

to maintain their ability to raise deposits and fund themselves in the wholesale 

markets, in some cases reputational risk has been used in cases where the link to 

bank safety and soundness is not apparent. 

Similarly, the labeling of practices as unfair, deceptive, or abusive in enforcement 

actions is difficult for financial institutions to interpret. This difficulty arises both 

from the vagueness of these standards themselves and from the generality of the 

language included in public enforcement actions. It is simply not possible to read 

public enforcement actions and to understand the specific practices that were led 

to the enforcement action. Given the complexity of financial products and services, 

an enforcement action directed at a specific term of a product or service, or to specific marketing language, but that is described in the public action as unfair or deceptive in connection with the product or service simply does not enable other providers of similar products or services to understand the specific regulatory concerns. 

This uncertainty makes it difficult to determine how to proceed with current products and services and to determine whether or how to offer new products or services. 

This uncertainty could be reduced if regulators relied more often on a rule writing 

process where existing regulations are revised to address new issues or, if necessary, 

where new rules are created. The process of developing specific regulatory text, receiving comments on that text, and responding to the comments in final rules imposes a discipline on the regulatory process that increases the likelihood that the 

desired goals can be achieved and unintended consequences avoided. This process 

also gives providers of consumer products and services a better understanding of the 

agency’s goals than vaguely worded enforcement actions and broadly worded guidance provide. This regulatory process also gives providers lead time to implement 

new requirements. This process is far more conducive to the fair, transparent and 

competitive markets envisioned by the Dodd-Frank Act than the apprehensive markets for consumer financial products and services that the current process is creating. 

As the agency with the primary responsibility for writing rules with respect to 

consumer financial products and services, the CFPB is still developing its expertise 

with the regulatory process. As it gains experience with this process it should be 

able to streamline its information collection process so that providers of consumer 

financial products or services are not required to produce unnecessary information, 

and so that the CFPB itself can avoid focusing on collateral issues that do not directly promote the goals that it is seeking to achieve. The CFPB should also be able 

to sharpen its focus on key issues and potential solutions in order to reduce repetitive clarifications of rules that it does issue. 

Thank you for the opportunity to be here today, I would be happy to respond to 

any questions. 

PREPARED STATEMENT OF HILARY O. SHELTON

DIRECTOR, NAACP WASHINGTON BUREAU AND SENIOR VICE PRESIDENT FOR POLICY

AND ADVOCACY

SEPTEMBER 18, 2014

Good morning, Senator Johnson, Senator Crapo, and esteemed members of this 

panel. Thank you so much for inviting me here today to testify and for soliciting 

the input of the NAACP on this very important topic. 

Founded more than 105 years ago, in February 1909, the National Association for 

the Advancement of Colored People, the NAACP, is our Nation’s oldest, largest, and 

most widely recognized grassroots-based civil rights organization. We currently have 

more than 1,200 active membership units across the Nation, with members in every 

one of the 50 States. 

My name is Hilary Shelton, and I am the Director of the NAACP Washington Bureau and the Senior Vice President for Policy and Advocacy. I have served as the 

Director of the NAACP Washington Bureau, our Association’s Federal legislative 

and political advocacy arm, for over 17 years. 


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1Saez, Emmanuel, ‘‘Striking it Richer: The Evolution of Top Incomes in the United States’’ 

U.C. Berkley, September 3, 2013. 2 Clark, Meagan ‘‘Rising U.S. Income Inequality Is Hurting State Tax Revenues’’ Standard & 

Poor’s, September 15, 2014. 3Wolff, Edward N. ‘‘The Asset Price Meltdown and the Wealth of the Middle Class’’ The National Bureau of Economic Research, November 2012. 4Desilver, Drew ‘‘Five Facts About Economic Inequality’’ Pew Research Center, January 7, 

2014. 5 Boak, Josh ‘‘Wealth Gap Hurts State Budgets’’ Washington Post, September 15, 2014, p. A13. 6 Center for Responsible Lending, ‘‘Foreclosures by Race and Ethnicity: The Demographics of 

a Crisis’’ June 18, 2010 www.responsiblelending.org/.../foreclosures-by-race-and-ethnicity.html#sthash.geo75K3a.dpuf.

INTRODUCTION 

Financial empowerment and the economic security of the communities served and 

represented by the NAACP has, since our inception, been a cornerstone of our agenda. ‘‘Economic Sustainability’’ continues to be a priority for the NAACP in that it 

is one of the five ‘‘game changers’’ (along with criminal justice, education, health, 

and civic participation/voting rights) outlined in the most recent NAACP strategic 

plan, designed to carry us through our second century in fighting against racial bias 

and racial and ethnic inequality. To that end, in addition to being very active legislatively on issues from supporting an increase in the Federal minimum wage to opposing predatory lending of all sorts in our communities, the NAACP currently has 

a ‘‘Financial Freedom Center,’’ whose purpose is to enhance the capacity of racial 

and ethnic minority Americans, and other underserved groups, through financial 

economic education; to promote diversity and inclusion in business hiring, career advancement and procurement; and to monitor financial banking practices and promote community economic development. 

THE HISTORY AND THE SITUATION TODAY FACING MOST RACIAL AND 

ETHNIC MINORITIES 

In recent times, the concentration of wealth in fewer and fewer hands has become 

an important subject of national debate. In 1982, the highest-earning 1 percent of 

families received 10.8 percent of all pretax income, while the bottom 90 percent received 64.7 percent. Three decades later, in 2012, the top 1 percent received 22.5 

percent of pretax income, while the bottom 90 percent’s share had fallen to 49.6 percent.1 For the past 5 years, wages have risen for the wealthiest Americans while 

barely floating above inflation for most people.2 Furthermore, wealth inequality is 

even greater than income inequality. While the highest-earning fifth of U.S. families 

earned 59.1 percent of all income, the richest fifth held 88.9 percent of all wealth.3

Unfortunately, the crisis of the racial wealth divide has still yet to be adequately 

discussed. The difference in median household incomes between white Americans 

and African Americans has grown from about $19,000 in 1967 to roughly $27,000

in 2011 (as measured in 2012 dollars). Median African American household income 

was 59 percent of median white household income in 2011; yet as recently as 2007, 

black income was 63 percent of white income.4

The wealth gap, when combined with the disparate impact of the recession of 

2008, has further caused severe, disproportionate, damage to the communities 

served and represented by the NAACP. As was quantified in a released just this 

last Monday by Standard & Poor’s, States are struggling to meet the demands of 

funding programs including education, highways, and social programs such as Medicaid.5 This lack of State funds most hurts those who can least afford it, neighborhoods and communities which are still reeling from the recession of 2008. 

The recession of 2008 was tough on most Americans, but particularly and disproportionately rough on racial and ethnic minority communities. While White 

Americans made up the majority of the 2.5 million foreclosures completed between 

2007 and 2009—about 56 percent—minority communities had significantly higher 

foreclosure rates. 

While about 4.5 percent of white borrowers lost their homes to foreclosure during 

that period, African American and Latino borrowers had 7.9 and 7.7 percent foreclosure rates, respectively. That means that African Americans and Latinos were 

more than 70 percent more likely to lose their homes to foreclosure during that period. 

Overall, blacks lost about 240,020 homes to foreclosure, while Latinos lost about 

335,950, according to an analysis of government and industry data on millions of 

loans issued between 2005 and 2008—the height of the housing boom.6

So that brings us to today. Too many Americans, and especially racial and ethnic 

minority Americans, have lost their homes as well as their access to affordable and 

sustainable credit. One of the most basic, fundamental steps is owning a bank acVerDate 0ct 09 2002 11:34 Jan 21, 2016 Jkt 000000 PO 00000 Frm 00037 Fmt 6621 Sfmt 6621 S:\DOCS\93420.TXT SHERYL

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7Selah, Makkada B. ‘‘20 Percent of African Americans Too Broke for Bank Accounts’’ Black 

Enterprise Magazine, September 16, 2014. 8Kim, Anne ‘‘CFED Fact File’’, The Corporation for Economic Development, November 2012. 

9 Center for Responsible Lending See more at: http://www.responsiblelending.org/paydaylending/#sthash.6i1AGboi.dpuf. 10 Consumer Financial Protection Bureau, ‘‘Consumer Financial Protection Bureau: By the 

Numbers’’ July 21, 2014. http://files.consumerfinance.gov/f/201407lcfpblfactsheetlby-thenumbers.pdf.

count. It is among the most basic symbols of financial growth, maturity, security, 

and independence. Owning a bank account is a crucial step toward financial security 

and success. A bank account not only provides people with a vehicle for saving, it 

can help build credit and greater financial capability. While just over 8 percent of 

all American homes do not have a banking account, more than 20 percent of African 

Americans are outside of the American banking system.7

One direct result of being frozen out of the ‘‘traditional’’ banking system is more 

of a reliance on ‘‘nontraditional,’’ or alternative sources of capital. By ‘‘nontraditional,’’ I am referring to check cashers, title lenders, and payday lenders, among 

others, which usually lend relatively small amounts of money for the short term. 

The problem with many of these loans is that they end up being expensive, and 

even predatory, often trapping the consumer in a cycle of debt when they are already having difficulties making ends meet. Check cashers, for example, typically 

charge up to 4 percent of the face value of a check—or $20 for a $500 check.8 And 

a typical payday loan borrower is indebted for more than half of the year with an 

average of nine payday loan transactions at annual interest rates over 400 percent.9

THE ROLE OF THE CONSUMER FINANCIAL PROTECTION BUREAU 

(CFPB) 

One key component of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was the creation of the Consumer Financial Protection Bureau 

(CFPB). The NAACP has been a strong and steadfast supporter of the CFPB since 

its inception, as it is the only agency within the Federal Government whose primary 

charge is the protection of the American consumer. 

Since its inception the CFPB has taken great steps to limit the potential harm 

which financial tools and companies can impart on Americans. Over the past 3 year 

the CFPB has taken dramatic steps to halt the financial abuse of American consumers by financial companies. In many cases, the victims of these abuses are people of low and moderate income (LMI). Since 80 percent of African American families fall into this definition, the NAACP has worked closely with and monitored the 

impact of the CFPB on the communities served and represented by the NAACP 

since its creation over 3 years ago. 

In its first 3 years, the CFPB has yielded aggressive, yet at the same time measured, results. Specifically, looking at the numbers alone:

$4.6 Billion: Money ordered in relief to consumers by CFPB enforcement actions.

15 Million: Consumers who will receive relief because of CFPB enforcement actions.

$150 Million: Money ordered to be paid in civil penalties as a result of CFPB 

enforcement actions.

$75 Million: Monetary relief provided to consumers as a result of CFPB supervisory actions.

775,000: Consumers who will receive remediation because of CFPB supervisory 

actions.

400,000: Number of complaints CFPB has received as of July 2014.10

In addition to congratulating the agency and its employees on a job well done to 

date, I would be remiss if I did not also give a shout out and high commendations 

to the Director of the CFPB, Rich Cordray. Under Rich Cordray’s leadership, the 

CFPB has grown and it now has a staff of over 1,350 employees and is one of the 

most effective Federal agencies in town. 

RECOMENDATIONS 

As the CFPB continues to mature and define its role in the regulatory space, the 

NAACP hopes that they will take a stronger look at the structural racism inherent 

in the provisioning of credit to people of color and its impact. Higher cost credit, 

or the lack of any credit, in the communities of color widens the racial wealth gap 

and concentrates African American and Latino families into areas of concentrated 

poverty. The NAACP feels that the CFPB, as the only Federal regulator solely foVerDate 0ct 09 2002 11:34 Jan 21, 2016 Jkt 000000 PO 00000 Frm 00038 Fmt 6621 Sfmt 6621 S:\DOCS\93420.TXT SHERYL

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cused on protecting the needs of the consumer, can play a key role in helping to 

shrink the unacceptable wealth divide. 

Regarding the availability of credit and the availability of financial services from 

both deposit and nonbank lenders there continues to be seen a disparate lack of access to safe and affordable credit products in communities of color. The NAACP 

strongly urges the CFPB to study this phenomenon and to make recommendation 

for its rectification. 

Other forms of credit also display sign of structural barriers, as the CFPB revealed in their analysis of auto lending. In particular, the prevalence of payday 

lenders in areas where banks are closing branches results in a stubbornly high level 

of un- and under-banked racial and ethnic minority families. Once these families 

lose access to traditional banks their ability to access credit is further constricted. 

We need to rid our neighborhoods of predators and stop the proliferation of abusive 

predatory lending products that strip, rather than build, financial health and wealth 

in our communities. While the CFPB cannot implement a nation-wide cap on interest rates (we strongly support the legislation introduced by Senator Cardin and Congressman Cartwright, S. 673 / H.R. 5130, which mandates an interest rate of no 

more than 36 percent APR), the Bureau can take affirmative steps to curb abusive 

lending or at least expose it. 

In short, the CFPB has an obligation to bring meaningful reform to the marketplace. At the same time, the CFPB must take steps to allow legitimate, nonexploitative, nonpredatory credit to remain viable and readily available in every community. 

To that end, we urge that any rule addressing payday, car title or any other shortterm lending product accomplish the following:

1. Requires the lender to determine the borrower’s ability to repay the loan, including consideration of income and expenses;

2. Does not sanction any series of back-to-back, consecutive, or repeat loans;

3. Establishes an outer limit on length of indebtedness that is at least as short 

as the FDIC’s 2005 guidelines—90 days in a 12-month period;

4. Restricts lenders from requiring a post-dated check or electronic access to a 

borrower’s checking account as a condition of extending credit; and

5. Transparency of fees, penalties, additional interest rates, and pay-off costs.

Another consequence endured by families who lack access to traditional bank 

branches and bank accounts is the reduction of their credit profile. Credit scoring 

favors consumers who have access to traditional forms of credit, such as auto and 

home loans, credit cards, and personal loans. Thus, once again, racial and ethnic 

minorities are at a disadvantage when credit scoring and credit reports are increasingly used from everything from renting an apartment to getting a job. 

Finally, the NAACP pledges to continue to work with the CFPB and any other 

entity to ensure that credit is accessible and affordable to all Americans, regardless 

of their race, ethnicity, gender, age, or any other unique characteristic or where they 

live.


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