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From Banking and Finance Law Daily, September 19, 2014

Senate hearing considers consumer protections in financial services market

By Colleen M. Svelnis, J.D.

The Senate Banking Committee heard and read testimony from industry leaders on financial products and services who testified on the effects of the financial crisis, the effect of the current regulatory environment on consumers, and how to enhance consumer protections. The hearing was entitled “Assessing and Enhancing Protections in Consumer Financial Services.”

Chairman Tim Johnson (D-SD) said that the Consumer Financial Protection Bureau “has proven itself to be a vigilant watchdog, standing up for hardworking American families and obtaining nearly $5 billion of relief for consumers.”

Regulatory burden. Ranking member Mike Crapo (R-Idaho), also gave a statement, saying that “[i]ncreased 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.” Crapo also spoke against annual privacy notices, saying it “sounds good in theory” but calling it an “unnecessarily burdensome regulation” and against stated with regard to Operation Choke Point that “greater clarity is necessary for bank examinations so that law abiding businesses are not denied banking services.”

Payday lending and debt collection. Johnson cited issues in the market including payday loans and debt collection. “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. Ensuring that financial products are safely designed is one piece of the consumer financial puzzle. Another is ensuring that consumers are treated fairly when consumer debt enters collections.”

Consumers in crisis. Sheri Ekdom, Director of the Center for Financial Resources, Lutheran Social Services of South Dakota, which provides counseling and education services, testified on the topic of assessing and enhancing protections in consumer financial services. Edkom spoke about the primary causes of financial problems, which she says include divorce, excessive spending, unemployment, and medical issues, as well as the following issues:

  • for families living paycheck to paycheck, low wages and underemployment leaves them lacking the means to deal with financial emergencies and limits access to low-cost loans or financial products;

  • the flow of credit has tightened as traditional banks navigate new regulator expectations under the Dodd-Frank Act;

  • individuals who do not understand the ramifications of using short-term or payday loans in an attempt to resolve long-term issues could benefit from education on the consequences of misuse;

  • low-income housing options remain scarce;

  • medical debt;

  • consumers are quite often afraid and intimidated by tactics used in debt collection;

  • credit reporting—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;

  • lack of preparation for retirement—36 percent of people in the U.S. have no retirement savings, including 26 percent of adults between the ages of 50 and 64; and

  • high debt levels, including student loan debt.

Credit scoring and access to bank accounts. In her testimony, Hilary Shelton, Executive Director for National Association for the Advancement of Colored People, urged that any rule addressing payday, car title, or any other short term lending product must include:

  1. requiring the lender to determine the borrower’s ability to repay the loan, including consideration of income and expenses;

  2. prohibiting sanctions on any series of back-to-back, consecutive, or repeat loans;

  3. establishing 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. restricting 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.

Shelton also stated that families who lack access to traditional bank accounts have their credit profile reduced. This is an issue because credit scoring “favors consumers who have access to traditional forms of credit, such as auto and home loans, credit cards, and personal loans.” She said this disadvantage is accentuated for racial and ethnic minorities because credit scoring and credit reports are “increasingly used from everything from renting an apartment to getting a job.”

Consumer financial services market. Oliver I. Ireland, a financial services lawyer and partner at Morrison and Foerster in Washington, D.C., addressed the state of the market for consumer financial products and services in the wake of the financial crisis and the resulting regulations aimed at addressing the causes of the crisis.

Ireland stressed his belief that post financial crisis initiatives like the Credit Card Act, the mortgage provisions of the Dodd-Frank Act, and the creation of the CFPB coupled with actions of the Federal Banking agencies, are having a “chilling effect on the markets” for consumer financial products and services. Ireland said that the 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.

Ireland stated that 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. He attributed this to 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. Ireland testified that 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. He concluded by saying that the CFPB should be able to sharpen its focus on key issues and potential solutions in order to reduce repetitive clarifications of rules that it does issue.

Small dollar loan market. Travis B. Plunkett, Senior Director for Family Economic Stability at The Pew Charitable Trusts testified that the CFPB has to enhance protections for transaction accounts and small dollar loans. He said there are serious failures in the small dollar loan market. According to Plunkett, Pew’s research indicates:

  • 12 million Americans take out payday loans each year, spending approximately $7.4 billion annually;

  • a payday loan is characterized as a short-term solution for unexpected expenses, but 69 percent of first time borrowers use the loan to pay recurring bills, while 16 percent use it for an unexpected expense like a car repair;

  • payday loans are unaffordable—requiring about one-third of the average borrower’s paycheck;

  • most payday loan borrowers have trouble meeting monthly expenses at least half the time;

  • 41percent of borrowers have needed a cash infusion to pay off a payday loan;

  • payday loans do not eliminate overdraft risk—most borrowers also overdraft their bank accounts;

  • a majority of borrowers says payday loans take advantage of them (a majority also say they provide relief); and

  • borrowers want changes to payday loans such as more regulation, percentage of paycheck payment limits, and installment payments.

Plunkett delivered policy recommendations developed by Pew, including:

  1. Ensure that the borrower has the ability to pay the loan as structured.

  2. Spread loan cost evenly over the life of the loan.

  3. Guard against harmful repayment or collections practices.

  4. Require concise disclosures of periodic and total costs.

  5. Continue to set maximum allowable charges.

Companies: Center for Financial Resources; National Association for the Advancement of Colored People; Pew Charitable Trusts

MainStory: TopStory BankingOperations DoddFrankAct DebtCollection CFPB Mortgages

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