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To: U.S. Senator Joe Donnelly
From: Steven Jessen-Howard
Subject: Payday Lending Reform: Consumer Financial Protection Bureau proposed regulations
and HR 4018: The Consumer Protection and Choice Act
Payday lending has become a 50 billion dollar industry in America1, as nearly one in six
American households have taken out a payday loan2. In fact, there are more payday lending
storefronts than McDonald’s chains in the U.S.3 Payday lenders provide customers with small
cash loans, averaging $3504, in exchange for checks to be cashed when customers receive their
next paycheck. These loans are used primarily by lower-income individuals – the mean payday
borrower makes $22,476 a year5 – who would not typically qualify for other types of loans.
Payday loans are generally advertised as quick fixes to temporary economic problems, but most
borrowers have trouble paying off their loans on time. The average payday loan borrower ends
up taking out 10 loans and paying 391% in interest and fees6. In fact, only 2% of payday loans
are given to one-time-only borrowers7. For this reason, many consider payday lending to be a
“debt trap” and claim that federal regulation of payday lending is required to protect borrowers
from becoming caught in cycles of debt.
The American payday lending industry emerged in the 1990s, so there is little previous
legislation regarding payday loans, especially on a federal level. One exception to this is the
1 Pew CharitableTrusts
2 The Atlantic
4 NBC News/Pew
5 NBC News
6 U.S. PIRG
7Center for ResponsibleLending
2007 Military Lending Act, which imposed an interest cap of 36% on some types of consumer
loans, including payday loans8. For the most part, states have held the power in terms of
regulating payday lenders. While states have usury laws limiting interest rates that lenders are
permitted to charge, payday lenders often avoid them by defining their interest charges as
“service fees.9” Some states have laws to specifically address payday lenders. Fifteen, including
New York and Pennsylvania, do not allow any payday loan storefronts. Nine states, including
Florida and Colorado, allow payday lending, but maintain regulations on the industry such as
limits on interest rates and fees. The other thirty-five states have little or no regulation on payday
lenders, allowing them to offer single-repayment loans with APRs of 391% or higher10.
The 2010 Dodd-Frank Act, passed in response to the economic crash of 2008, created the
Consumer Financial Protection Bureau (CFPB), a federal agency whose sole goal is to protect
the financial interests of American consumers from fraudulent and/or exploitative business
practices. While only states have the power to regulate maximum interest rates or fees, the CFPB
has the power to establish federal regulations on payday lenders11, and does not need
Congressional approval to do so.
The CFPB has announced that it will be releasing a set of federal regulations on the
payday lending industry this spring or summer12. The agency has released drafts of these
regulations which would force lenders to adhere to a set or “prevention,” and/or “protection”
requirements, as well as restricting lenders from attempting to collect payment from consumers’
bank accounts in ways that tend to incur excessive fees. Prevention rules require payday lenders
9 Pew CharitableTrusts
10 Pew CharitableTrusts
12 These restrictions will also apply to a few other types of small loanssuch asvehicletitleloans,butthis memo will
focus on payday loans.
to verify that potential borrowers have the ability to repay loans in a timely manner. Protection
rules include placing limits on the amount of time lenders allow borrowers to roll over their loans
and remain in debt, and requiring lenders to offer borrowers affordable paths out of debt13.
Opponents of the CFPB’s plans drafted the Consumer Protection and Choice Act (CPCA)
in response to the proposed regulations. The CPCA would allow states that have existing laws
regulating the payday lending industry that meet a certain standard to be exempt from any
regulations issued by the CFPB14. The standards described by the CPCA limit the interest rates
and fees that payday lenders are allowed to charge, but do not include the restrictions such as
verifying ability to repay loans that the CFPB is considering to impose. If the CPCA passes, it is
likely that states currently without payday lending restrictions will pass legislation allowing them
to meet the minimum requirements to avoid being subject to CFPB regulations. This would
remove most of the meaningful impact of CFPB proposals.
Support for Increased Federal Regulation:
A wide variety of interest groups have supported increased regulation of payday lenders.
These primarily grassroots efforts in support of the CFPB regulations and opposed to the CPCA
are often led by consumer protection and financial reform groups such as the U.S. Public Interest
Research Group, Americans for Financial Reform, and the Center for Responsible Lending.
However, a wide variety of groups have voiced their support for “ending the debt trap.”
Typically citing moral concerns with profiting from indebting others, such groups include the
U.S. Conference of Catholic Bishops and other faith leaders who banded together to form the
group Faith for Just Lending. Representing two groups who take out a disproportionate number
of payday loans, the NAACP and National Council of La Raza have also stated support for
CFPB efforts to regulate lenders. Furthermore, many labor organizations such as the AFL-CIO
and American Federation of Teachers have supported the CFPB15. Many veterans have also been
vocal advocates for lending regulation, citing the Military Lending Act and arguing that veterans
should receive the same safeguards that active service members do. Many of these groups have
helped organize individuals to protest at payday lending storefronts and lawmaking chambers, as
well as sign petitions and send letters to their representatives. The large range of support groups
is reflected in broad public support for proposed regulations. Pew Research found that 75% of
American adults say that they want payday loans to be more regulated, and no aspect of the
regulations outlined in the CFPB’s draft received less than 68% support from the same survey
group16. In the political realm, most Democrats support the CFPB’s planned legislation, echoing
the concerns of excessive interest rates and fees that place an undue burden of debt on
economically vulnerable individuals. President Obama has been a vocal critic of payday lending
practices, and would almost certainly veto the CPCA if it passes while he remains in office.
While some Republicans have also expressed their support for reforming payday lending
practices, most believe regulation should come from the state level, and none have endorsed the
CFPB’s proposed rules.
Opposition to Federal Regulation
The CFPB’s regulation proposals have met strong opposition, particularly from
Republicans and the payday lending industry. While the majority of politicians opposed to the
reforms are Republicans, several Democrats also support the CPCA. Democratic National
Committee chairwoman Debbie Wasserman-Schultz is one of nine Democratic co-sponsors of
the bill. Not surprisingly, the payday lending industry and its employees strongly oppose any
15 Americans for Financial Reform
kind of regulation. The industry has spent millions in campaign contributions, primarily to
Republicans, and lobbying efforts to avoid regulation17. While they constitute a minority, a
significant number of payday loan customers also oppose regulation of the industry. These
opponents of regulation often express concerns that imposing restrictions on lenders would put
them out of business, leaving individuals in need of short-term loans with no access to needed
temporary funds. Furthermore, many worry about the issue of government patronization. They
argue that if consumers are willing to take a loan, the government should not undermine these
desired transactions by requiring borrowers to prove their ability to repay the loan.
In addition, the CFPB itself is a central focus of opposition, especially from Republicans.
Ever since its proposal, the CFPB has faced massive dissent from Republicans, who criticize its
lack of congressional oversight and increased federal involvement in the financial sector18.
Seeing as the vast majority of Republicans support legislature to eliminate the CFPB outright, it
is unlikely that they would support any actions of the agency.
Case Study: Colorado
Colorado provides a window into the effects of regulations somewhat similar to CFPB
proposals. In 2010, Colorado implemented payday lending reform that reduced acceptable fees,
extended the minimum term of loans, and required loans to be repayable over time, rather than
coming due all at once19. According to Pew, the effects of this reform resulted in the closing of
half of Colorado’s payday stores, but the remaining stores almost doubled their customer
volume, and payday borrowers are now paying 42 percent less in fees and defaulting less
frequently, with no reduction in access to credit20. The general consensus is that Colorado’s
18 Various sources includingU.S. PIRG
19 The Atlantic
regulations were successful in protecting consumers without removing their ability to receive
While regulations could lead to lower fees and costs for borrowers, payday lenders have
found ways around them in the past that allowed them to continue the practices that regulations
aimed to end. For example, when Illinois enacted regulations for lenders that provided loans of
120 days or less, lending companies simply began offering 121 day loans. Similarly, after Ohio
passed legislation regulating companies licensed as short-term lenders, there were soon no
businesses licensed in the state as short-term lenders, and a sudden increase in businesses
licensed as mortgage lenders, as payday lenders reclassified themselves and began offering
“short-term mortgages” of around $30021. It is possible that if CFPB, or stricter state-level
restrictions are enacted, loan companies would exploit similar loopholes allowing them to
effectively avoid regulation.
Another important consideration is maintaining the availability of short-term loans to
individuals currently served by the payday lending industry. The volume of the industry, even
with annual interest rates that often near 400%, demonstrates that there is a high demand for such
loans. If regulations are enacted and cause payday storefronts to close, there may be a shortage of
such loans. Few companies are willing to offer these loans, as the smaller sums of money offer
relatively lower margins, and the higher percentage of defaults on such loans means they carry
higher risk. Legislators such as CFPB mastermind Elizabeth Warren and Democratic presidential
candidate Bernie Sanders have advocated pressuring larger banks into offering such loans,
claiming that their large existing overhead would allow them to do so with minimal losses.
21 Last Week Tonight with John Oliver.
Furthermore, Warren and Sanders have suggested partnering the United States Postal Service
(USPS) with banks in order to offer short-term loans and other basic banking services to
otherwise underserved communities22. While this policy could expand important lending services
to poor communities often neglected by banks, it seems unlikely to be considered for the time
being. Even many payday lending opponents oppose this idea, claiming that it would require a
massively expensive restructuring of the entire USPS23.
Because of the number of payday borrowers who find themselves in a cycle of debt, paying
enormous fees and interest rates, I would recommend voting against the CPCA and supporting
the CFPB’s proposed regulations. States such as Colorado demonstrate that regulation can help
consumers without limiting their access to loan services. Furthermore, more investigation into
providing alternative sources of short-term loans to low-income individuals is necessary. I also
believe that it is important to address the root causes of the demand for such loans. 47% of
Americans state that they "can’t pay for an unexpected $400 expense through savings or credit
cards without selling something or borrowing money24." As long as this is the case, there will be
a large market for payday loans. Enacting legislation allowing more American families to meet
expenses without needing loans is important to mitigate payday lending controversy.
23 The Atlantic
Americans for Financial Reform. Feb 2015. “CFPB Sign-on Letter.”
Congress.gov “H.R.4018 - Consumer Protection and Choice Act.”
Consumer Financial Protection Bureau. “Factsheet: The CFPB considers proposal to end payday
debt traps.” http://files.consumerfinance.gov/f/201503_cfpb-proposal-under-
Cox, Jeff. Nov 2014. “There Are More Payday Lenders in U.S. Than McDonald's” NBC News.
Frisch. Karl. Nov 2015. “Payday Lenders Hoping for a Grand Old Party in 2016.” Huffington
Greenberg, Jon. June 2015. “47% say they lack ready cash to pay a surprise $400 bill” Politifact.
McClean, Bethany. April 2016. “Payday Lending: Will Anything Better Replace It?” The
Oliver, John. 2015. “Predatory Lending.” Last Week Tonight. YouTube video.
Pew Charitable Trusts. “Payday Lending in America.” http://www.pewtrusts.org/en/research-
Pyke, Alan. Feb 14. “Elizabeth Warren Proposes Replacing Payday Lenders with The Post