On Friday, several states' Attorney Generals announced that they had sent a letter to Congressional leaders urging them to oppose HR 6139, known as the Consumer Credit, Access, Innovation, and Modernization Act. The letter read in part:
"Most states have enacted laws and rules to regulate short term lending, including payday loans. Many of these states have chosen to strike a regulatory balance that preserves access to alternative forms of credit while protecting consumers from repeated debt cycles and other pitfalls associated with such products. H.R. 6139 would turn back existing consumer protections... H.R. 6139 would give nonbank financial services providers – including payday lenders, installment lenders, car-title lenders, prepaid-card issuers, check cashers, and others – access to a federal charter issued by the Office of the Comptroller of the Currency. The bill would totally preempt state licensing laws for nonbank financial services providers... In place of state safeguards, the bill would establish only minimal consumer protections... the bill establishes no standards for determining a consumer’s ability to repay. Moreover, the bill would exempt loans with terms of one year or less from the disclosure requirements of the Truth in Lending Act – the universal standard for measuring the true cost of credit – and substitute a cost metric that is confusing and misleading..."
The letter was sent on Friday October 5, 2012 to House Speaker John Boehner, House Minority Leader Nancy Pelosi, Senate Majority Leader Harry Reid, and Senate Minority Leader Mitch McConnell. 41 states' Attorney Generals signed the letter, including Guam and Puerto Rico.
In Congressional testimony during July 2012, the Office of the Comptroller of the Currency (OCC) stated its concerns:
"The effective result of H.R. 6139 would be to create a class of federally chartered companies (National Consumer Credit Corporations, hereinafter referred to as “NCCCs” or “companies”) focused on consumer credit products of the very nature and character that the OCC has found unacceptable based on consumer protection and safety and soundness concerns. In particular, it is our experience that the profitability of many of the types of small dollar, short-term loans that NCCCs would likely seek to offer is dependent on effectively trapping consumers into a cycle of repeat credit transactions, high fees, and unsustainable debt... The bill will result in a decrease in protections for categories of consumers that may be the most vulnerable. We have ample evidence from the recent financial crisis that the goal of enhanced access to financial products and services must be coupled with assurances that those consumers are subject to meaningful consumer protections and that the firms offering those products and services must do so on a prudent, safe, and sound basis. In this regard, the Consumer Financial Protection Bureau (CFPB) has been provided the authority to issue rigorous, uniform, and nationally-applicable consumer protection standards for financial products and services. It is important that the types of products envisioned for NCCCs not be carved out of coverage of CFPB-administered lending standards..."
There are plenty of examples of this cycle of repeat credit transactions, high fees, and unsustainable debt. In February 2009, CBS News reported about the payday lending industry:
"They've now grown into a $59 billion industry. But six states - Arkansas, Georgia, New Hampshire, North Carolina, Ohio and Oregon as well as the District of Columbia - have now effectively banned these loans... there are 24,000 payday lending stores in America - more than Starbucks and McDonald's combined. They provide 19 million American households a quick way to make ends meet... A typical customer takes out about eight payday loans a year..."
"The payday loan industry, threatened by Congress with extinction, has deployed well-connected lobbyists and hefty sums of campaign cash to key lawmakers to save itself. The strategy has paid off."
This 2011 news report explained how many layday lenders charge unbelievably high interest rates. Last month, the City of San Francisco negotiated a settlement with payday lender Money Mart (a/k/a Loan Mart), which agreed to pay to $7.5 million to reimburse consumers for alleged illegal lending activities and interest rates as high as 400 percent. Consumers eligible to receive reimbursements may receive payments ranging from $20 to $1,800.
The letter caught my interest for three reasons. First, it seems to avoid unnecessarily the CFPB. Second, it mentioned prepaid-card issuers, which this blog has covered extensively. Banks and non-bank prepaid-card issuers have targeted the same market as payday lenders: consumers who have a checking or savings account and not both (e.g., underbanked), or who have neither (e.g., unbanked). About 8 percent of U.S. households are unbanked, and 20 percent are underbanked. Unbanked and underbanked households are typically non-Asian minorities, low-income, young, and unemployed.
Third, anytime a proposed Congressional bill mentions both "modernization" and financial services, a closer inspection is usually wise. (The Graham-Leach Bliley Act, which repealed Glass-Steagall comes to my mind.) Things often get modernized for some, not for others who really needed it, and there are always unintended consequences. One of the OCC's concerns is money-laundering, which is connected to a host of other global ills. Legislation that creates a new class of financial institutions needs to be well constructed, closely reviewed, an adequately discussed publicly.The Attorney Generals' letter to Congress is available at the Illinois Attorney General website (Adobe PDF). Download H.R. 6139 (Adobe PDF) and see page 24, lines 3 through 8. That's a deal breaker. And, I suggest that you read the full testimony about H.R. 6139 by the OCC Deputy Comptroller of Compliance Policy (Adobe PDF).