CFPB Pressed to Set Limits on Small-Credit Lenders

WASHINGTON — Consumers are still at risk from small-dollar loans with high fees or that roll-over debt, an advisory council warned the Consumer Financial Protection Bureau on Wednesday.

In a meeting of the agency's group of finance and consumer experts, several board members suggested that the CFPB needs to do more to examine small credits and payday lenders.

"The focus on small affordable credit — I put that out as one of the important threads," said Maeve Brown, the executive director of the Housing and Economic Rights Advocates in Oakland, Calif. "Access to affordable well-priced loans with clarity of terms that are appropriate for what the consumer's truly attempting to achieve is critically important for moving us forward."

The second meeting of the 25-member consumer advisory board, which was created by the Dodd-Frank Act to advise the CFPB on market trends and financial issues, tackled a range of issues, but the risks of small-dollar loans remained a consistent theme.

Brown noted a senior citizen who came to their offices after she sought a $99,000 loan against her house, was instead approved for $160,000 (plus $30,000 in broker fees) and could no longer afford the payments on a fixed income.

The CFPB has taken a keen interest in short-term credit companies such as payday lenders in which debt rolls over repeatedly, generating high fees in what Director Richard Cordray called a "debt trap."

In opening remarks before the council, Cordray said the agency is focusing on four red flags: deceptive practices, debt traps, structural roadblocks such as inaccurate credit reporting and discrimination.

"As we continue to build up the capacity of this new agency, those efforts will continue unabated over the coming year," said Cordray "But it is also important for us to reflect on what we find to be the more fundamental problems and challenges endemic to consumer financial markets, so that we can understand and address them more effectively."

But some members of the advisory board also voiced concerns about further regulation that would squeeze specialty lenders from the marketplace.

"In terms of the importance of market dynamics, is to consider what is likely to happen if the spigot is turned off or the flow is constricted," said Jonathan Zinman, an associate professor at Dartmouth College. "I don't think there's a strong evidentiary case for believing that simply restricting the flow is going to make consumers better off for a variety of reasons."

Cordray partially addressed that concern in his opening remarks, noting that there is an "obvious demand for short-term credit products, which can be helpful for consumers who use them responsibly and which are structured to facilitate repayment.

"Our goal is to reduce the compliance burdens of implementation and help us better understand how to write practical rules that deliver value for consumers, he said.

Some advisors also urged the CFPB to preempt states that are unwilling to rein in small-credit lenders.

"There's certainly a lot of things the CFPB can do to fill in holes for states that don't have that political will," said Don Baylor, senior policy analyst for economic opportunity at the Center for Public Policy Priorities.

Baylor pointed to his own state, Texas, which he said has no limits to what smaller credit lenders can charge for fees, number of rollovers or how much a consumer can borrow.

"In Texas we have no limits, which kind of gives you a sense about our political will …so we see pretty drastic effects of that," he said. "Last year, we saw 35,000 cars reposed, which is a rate of about 100 a day."

But there were other issues raised when the meeting opened up to public comments, particularly on arbitration clauses that are either forced or unknowingly placed in lending contracts.

"I urge the consumer advisory board to oppose forced arbitration in consumer contracts," said Tom Domonoske, a consumer lawyer in Virginia who helps the local Legal Aid Justice Center. "This is what I live with on a daily basis when I have to explain to my clients that they are not allowed to take their dispute, when they're being abused by a corporation, into court."

While the advisory board did not address this topic during the public discussion, the CFPB launched an inquiry into arbitration last year and is currently conducting a study. Once the study is completed, the CFPB will consider whether imposing conditions or prohibitions on arbitration clauses would better protect consumers.