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[Senate Hearing 113-568]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 113-568

   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

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       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)

                            C O N T E N T S

                              ----------                              

                      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)

 
   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.
    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 payment 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.
    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:
    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 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.
    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.

  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 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 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.
    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 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 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.
    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 de-risking.
    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 post-crisis 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 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.
    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.
    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:]
                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\
---------------------------------------------------------------------------
    \1\ For 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/credit_cards/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?abstract_id=2330942.
    \3\ The Consumer Financial Protection Bureau, CARD Act Report, 
(Oct. 2013), http://files.consumerfinance.gov/f/201309_cfpb_card-act-
report.pdf.
---------------------------------------------------------------------------
    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 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 Recession 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 series,\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:
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    \4\ The Pew Charitable Trusts, Payday Lending in America, 
www.pewtrusts.org/small-loans.

    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 one-third 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 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.
---------------------------------------------------------------------------
    \5\ The Consumer Financial Protection Bureau, Data Point: Checking 
Account Overdraft, (July 2014), http://files.consumerfinance.gov/f/
201407_cfpbreport_data-point_overdrafts.pdf.
    \6\ The Pew Charitable Trusts, Overdrawn: Consumer Experiences with 
Overdraft, (June 2014), http://www.pewtrusts.org//media/Assets/2014/
06/26/Safe_Checking_Overdraft_Survey
_Report.pdf.
---------------------------------------------------------------------------
    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-year-old 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 
confirms 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.
---------------------------------------------------------------------------
    \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.
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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\
---------------------------------------------------------------------------
    \8\ The Consumer Financial Protection Bureau Advanced Notice of 
Proposed Rulemaking, (May 2012) http://files.consumerfinance.gov/f/
201205_cfpb_GPRcardsANPR.pdf.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \9\ See http://www.consumerfinance.gov/blog/our-first-enforcement-
action-against-a-payday-lender/.
    \10\ See http://www.consumerfinance.gov/newsroom/cfpb-takes-action-
against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-
debt/.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \11\ The Pew Charitable Trusts, Overdrawn, 5.
---------------------------------------------------------------------------
    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 considerably from institution to institution and, in fact, no two 
banks studied use the same approach.
---------------------------------------------------------------------------
    \12\ For 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \13\ The Pew Charitable Trusts, Consumers Continue to Load Up on 
Prepaid Cards (Feb. 2014), 2. http://www.pewtrusts.org//media/legacy/
uploadedfiles/pcs_assets/2014/PrepaidCards
StillLoadedReportpdf.pdf.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \14\ The Pew Charitable Trusts, Why Americans Use Prepaid Cards 
(Feb. 2014), 8. http://www.pewtrusts.org//media/legacy/uploadedfiles/
pcs_assets/2014/PrepaidCardsSurvey
Reportpdf.pdf.
    \15\ Ibid., 14.
    \16\ Ibid., 8.
---------------------------------------------------------------------------
    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 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.
---------------------------------------------------------------------------
    \17\ The Pew Charitable Trusts, Checks and Balances, 2014 Update.
    \18\ The Pew Charitable Trusts, Consumers Continue to Load Up on 
Prepaid Cards.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \19\ The Pew Charitable Trusts, Payday Lending in America: Policy 
Solutions (Oct. 2013), 44-47. http://www.pewtrusts.org//media/legacy/
uploadedfiles/pcs_assets/2013/PewPayday
PolicySolutionsOct2013pdf.pdf.

    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 percent 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.
---------------------------------------------------------------------------
    \20\ See 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.
---------------------------------------------------------------------------
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 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-to-moderate 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-year-old 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\
---------------------------------------------------------------------------
    \1\ FINRA Investor Education Foundation, National Financial 
Capability Study. (2012). http://www.usfinancialcapability.org/
about.php.

    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\
---------------------------------------------------------------------------
    \2\ Corporation for Enterprise Development, Assets & Opportunity 
Scorecard. (2014). http://scorecard.assetsandopportunity.org/2014/
state/sd.

    South Dakota ranks 48th in the Nation for the average 
        weekly wages earned by workers.\3\
---------------------------------------------------------------------------
    \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.

    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 includes 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\
---------------------------------------------------------------------------
    \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.

    South Dakota ranks first in the Nation for the percentage 
        of workers who hold more than one job (8.9 percent).\5\
---------------------------------------------------------------------------
    \5\ U.S. Department of Labor Bureau of Labor Statistics, Multiple 
Job Holding in States in 2013, Monthly Labor Review, August 2014.

    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.
---------------------------------------------------------------------------
    \6\ U.S. Census Bureau, Small Area Income and Poverty Estimates, 
2012 Release. http://www.census.gov/did/www/saipe/data/highlights/
2012.html.
---------------------------------------------------------------------------
    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 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\
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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-study-shows-one-third-of-americans-
have-zero-retirement-savings-why/.

    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 
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        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.
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 pre-purchase financial counseling may reduce, by an average of 29 
percent, the likelihood of a first-time home buyer becoming seriously 
delinquent.\8\
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    \8\ Tsien, 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/robert_tsien/
20130415_getting_better.html.

    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 
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        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 many of the problems 
related to the financial crisis. A key component of the Dodd-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 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 Dodd-Frank 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 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.
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\
---------------------------------------------------------------------------
    \1\ Saez, 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.
    \3\ Wolff, Edward N. ``The Asset Price Meltdown and the Wealth of 
the Middle Class'' The National Bureau of Economic Research, November 
2012.
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    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\
---------------------------------------------------------------------------
    \4\ Desilver, Drew ``Five Facts About Economic Inequality'' Pew 
Research Center, January 7, 2014.
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    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.
---------------------------------------------------------------------------
    \5\ Boak, Josh ``Wealth Gap Hurts State Budgets'' Washington Post, 
September 15, 2014, p. A13.
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    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\
---------------------------------------------------------------------------
    \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.
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    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 account. 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\
---------------------------------------------------------------------------
    \7\ Selah, Makkada B. ``20 Percent of African Americans Too Broke 
for Bank Accounts'' Black Enterprise Magazine, September 16, 2014.
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    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\
---------------------------------------------------------------------------
    \8\ Kim, Anne ``CFED Fact File'', The Corporation for Economic 
Development, November 2012.
    \9\ Center for Responsible Lending See more at: http://
www.responsiblelending.org/payday-lending/#sthash.6i1AGboi.dpuf.
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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\
---------------------------------------------------------------------------
    \10\ Consumer Financial Protection Bureau, ``Consumer Financial 
Protection Bureau: By the Numbers'' July 21, 2014. http://
files.consumerfinance.gov/f/201407_cfpb_factsheet_by-the-numbers.pdf.

    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 focused 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 short-term 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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