WASHINGTON, D.C. – Following last week’s ruling by the Ohio Supreme Court that undermined laws to protect Ohio consumers from predatory loans, U.S. Sen. Sherrod Brown (D-OH) announced new efforts to ensure that borrowers are protected from predatory payday loan companies. Brown was joined at the Ohio Poverty Law Center by Maya Reed, a Columbus resident who worked as a financial services manager at a local payday lender. Reed discussed tactics used by payday lenders to harass low-income consumers who took out short-term loans to help make ends meet.
“Hardworking Ohio families shouldn’t be trapped with a lifetime of debt after accessing a short-term, small-dollar loan,” Brown said. “However, that’s exactly what is happening. On average, borrowers who utilize these services end up taking out eight payday loans a year, spending $520 on interest for a $375 loan. It’s time to rein in these predatory practices. That’s why I am calling on the CFPB to prevent a race to the bottom that traps Ohioans into lifetimes of debt.”
More than 12 million Americans use payday loans each year. In the United States, the number of payday lending stores exceeds the combined number outnumber the amount of McDonalds and Starbucks franchises. Despite laws passed by the Ohio General Assembly and Ohio voters that sought to rein in unfair payday lending practices, companies continue to sidestep the law. Last week’s Ohio Supreme Court decision allows these companies to continue violating the spirit the law by offering high-cost, short-term loans using different lending charters.
Brown sent a letter today to the Consumer Financial Protection Bureau (CFPB) calling on the regulator to provide more robust consumer protections to ensure hardworking Ohio families don’t fall prey to predatory loans that keep consumers trapped in a cycle of debt. In his letter, Brown pointed to a Center for Financial Services Innovation report that found that alternative financial products – including payday loans – generated nearly $89 billion in fees and interest in 2012. Brown called on the CFPB to address the full range of products offered to consumers – specifically looking at the practices of loan companies offering auto title loans, online payday loans, and installment loans. With regulation of the payday industry traditionally falling to states, Brown is calling on the CFPB to use its authority to implement rules that fill gaps created by inadequate state laws, as illustrated by the recent Ohio Supreme Court ruling.
“Ohio is not the only state that has been unsuccessful in reining in payday and other short term, small dollar loans, to protect consumers from abusive practices,” Linda Cook, Senior Attorney at the Ohio Poverty Law Center said. “Making this marketplace safe for consumers will take action on both the state and federal level. I join Senator Brown in urging the Consumer Financial Protection Bureau to enact strong and robust consumer protections, and I urge our state legislators to step up to the plate as well to fix Ohio’s lending statutes so the will of Ohio’s voters can be enforced.”
Full text of the letter is below.
June 16, 2014
Mr. Richard Cordray
Consumer Financial Protection Bureau
1700 G Street, N.W.
Washington, D.C. 20552
Dear Director Cordray:
Small-dollar credit products affect the lives of millions of Americans. The United States now has an estimated 30,000 payday loan stores, more than the number of McDonalds and Starbucks combined. The Federal Deposit Insurance Corporation (FDIC) estimates that nearly 43 percent of U.S. households have used some type of alternative credit product in the past. The Center for Financial Services Innovation estimates that alternative financial products generated approximately $89 billion in fees and interest in 2012 -- $7 billion from payday loan fees alone.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) authorizes your agency, the Consumer Financial Protection Bureau (CFPB), to examine all payday lenders, and any other non-bank lenders that are larger participants in their credit markets. The CFPB has authority to prevent any covered financial service provider from “committing or engaging in an unfair, deceptive, or abusive act or practice” and to write rules identifying such practices by particular covered financial services providers. As the CFPB noted in its Regulatory Agenda, you are also in the pre-rulemaking stage of issuing new regulations for payday loans and other small-dollar products.
As you develop these rules, it is essential that all of these like products are treated equally. In your testimony last week before the Senate Committee on Banking, Housing, and Urban Affairs, you noted that payday lenders were able to skirt the 36 percent interest rate cap in the Military Lending Act of 2007. As you know, in 2008, our home state of Ohio also enacted the Short Term Loan Act imposing a 28 percent interest cap on payday loans. After that law passed, payday lenders reorganized to continue lending under the state’s thrift charter. This action was challenged by local legal aid organizations, but the Ohio Supreme Court recently upheld these predatory loans. Ohio has also seen a rise in auto title lending since the passage of the 2008 law.
Because most small-dollar, short-term loans possess three of the “Four Ds” that negatively affect consumers – deception, debt traps, and dead ends – the CFPB must address the full spectrum of products being offered to consumers, including:
Auto Title Loans – Auto title loans contain similar features to traditional payday loans. Instead of providing a postdated check, borrowers must provide their car’s title as collateral. Auto lending advertisements may tend to promote the speed with which consumers will have access to cash, but may not generally mention the interest rate of the loans, the likelihood a loan will result in a vehicle being repossessed, or the likely amount of time it will take for the borrower to repay the debt. One study described the pricing terms as “shrouded by the timing in which the borrower receives it,” namely at the time that the loan is made, rather than the beginning of the application process. The same study noted that laws governing title loans generally do not disclose the “pattern of usage information to inform borrowers about the likely consequences of having taken out a loan.” Researchers note that the proceeds from interest and fees are much more profitable to lenders than the value of repossessed collateral.
Online Payday Loans – While online payday loans make up a minority of the total loan volume, their market share has been growing in recent years. Online loans tend to be offered with fees equal to or higher than storefront loans – their major cost drivers are customer acquisitions (often through lead generation) and loss rates that are higher than brick-and-mortar payday lending. Some online payday lenders have been establishing operations offshore or in states with permissive lending laws in order to argue that they are not subject to more stringent restrictions.
Installment Loans – A number of payday loan companies have expressed their interest in or intent to move to an installment loan model. In states with more restrictive lending laws, installment lenders may tend to sell add-on products – such as credit, auto, and health insurance policies – the associated costs of which are not necessarily required to be disclosed to consumers under the Truth in Lending Act (TILA). Some have expressed concerns about certain features of installment loans, including high origination fees and front-loading of interest, that create incentives for repeated roll-overs, also known as “flipping.” For example, one installment lender reported that rolling over existing loans makes up more than three-quarters of its loan volume.
The CFPB is charged with “ensuring that all consumers have access to … consumer financial products and services [that] are fair, transparent, and competitive.” It is clear that the state-based system of regulating alternative financial products contains deficiencies that run counter to the CFPB’s mission. Therefore, the CFPB must use its robust consumer protection authority to write rules for small-dollar loans that will fill the gaps left by inadequate state laws.
Thank you for your attention to this matter of great importance to Ohio consumers.