WASHINGTON, D.C. — Today, U.S. Sen. Sherrod Brown (D-OH) chaired a hearing of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection. The hearing, entitled “Are Alternative Financial Products Serving Consumers,” examined issues affecting unbanked and “underbanked” Americans, including payday loans, installment loans, auto title loans, and deposit advance loans.
Those who testified at today’s hearing were:
- Mr. G. Michael Flores, CEO, Bretton Woods, Incorporated. [Testimony: HERE]
- Ms. Stephanie Klein, Director, NetCredit Consumer Lending, Enova International. [Testimony: HERE]
- Mr. Nick Bourke, Project Director, Safe Small-Dollar Loans Research Project, The Pew Charitable Trusts. [Testimony: HERE]
- Mr. David Rothstein, Director of Resource Development and Public Affairs, Neighborhood Housing Services of Greater Cleveland. [Testimony: HERE]
- Ms. Nathalie Martin, Frederick M. Hart Chair in Consumer and Clinical Law, University of New Mexico School of Law. [Testimony: HERE]
Brown’s remarks, as prepared for delivery, follow:
Thank you to the witnesses for being here, and thank you Senator Toomey for working with us on this hearing.
I want you to imagine that you are 40 years old and living in Youngstown, Ohio.
You were working at the steel mill, in a union job, and earning $70,000.
Then the plant shuts down because it couldn’t compete with a flood of illegal dumped imports from China.
You manage to find a retail job working full time and making $22,000 a year.
Your income is a fraction of what it used to be, but your costs are the same, and some – like food, gas, and health care – are going up.
At some point along the way, you lose your home to foreclosure.
You are just trying to make ends meet, hoping that you can just buy yourself some time until you make it to your next paycheck.
You applied for five different credit cards, but were denied each time.
So you decide to take out a payday loan or loan against the title of your car.
But the money from your loan runs out again before the next pay period.
Like 80 percent of consumers in the CFPB’s recent study, you end up rolling over your loan.
And you end up like the average borrower, rolling your loan over six or seven times and eventually paying $575 in fees that you can’t afford on a $400 loan.
This is a problem that too many Americans are facing today, and in response they are forced to turn to loans with triple-digit interest rates that trap them in a cycle of debt that leaves them worse off than they started.
In 2003, the Office of the Comptroller of the Currency said that “a fundamental characteristic of predatory lending is the aggressive marketing of credit to prospective borrowers who simply cannot afford the credit on the terms being offered.”
The OCC was talking about mortgages, and the results of predatory lending devastated millions of American families and entire communities, including far too many in Ohio.
During the financial crisis, one mortgage lender said, “If you had a pulse, we gave you a loan. If you fog the mirror, [we] give you a loan.”
I am concerned that we are now seeing this definition of predatory lending at work in the small-dollar loan markets.
For years, payday loans and other short-term, small-dollar credit products were marketed to consumers and policymakers as a one-time, stopgap tool to get people through temporary emergencies.
Now we are seeing that these products are being used to cover basic expenses, and that these lenders rely upon repeat borrowing for their profitability.
The cycle of debt is the result of:
1) Workers’ wages stagnating over the past decade;
2) American families’ inability to accumulate enough wealth through savings over lifetimes spent working; and
3) Weak consumer protections leaving consumers vulnerable to financial predators.
This is a large problem – 12 million Americans use payday loans per year, small-dollar lending is an $80-billion per year business, and there are more payday lending stores in the United States than there are McDonalds and Starbucks, combined.
Solving a problem this big will not be simple.
We need to raise the minimum wage and extend emergency unemployment insurance to put money back into Americans’ pockets.
We need to do more to encourage savings and wealth building. Senator Moran and I have introduced legislation to promote prize-linked savings accounts to help consumers build assets.
And we need a strong CFPB and robust consumer protections to ensure that these products are affordable and sustainable.
That means limits on costs, requirements consumers can repay their loans, products with longer repayment terms, and the ability to pay down loan principal.
We must not allow working Americans to remain exposed to predatory products or predatory lending tactics that harm our families, and, like subprime mortgage lending, harm our communities and our economy.