CFPB to Crack Down on Certain Payday Lending Practices

WASHINGTON — The Consumer Financial Protection Bureau unveiled details Thursday about how it intends to examine payday lenders as Director Richard Cordray vowed to crack down on certain payday lending practices.

"While we need to learn more about the prevalence of this conduct and what allows it to fester, where we find these practices we will take immediate steps to eliminate them," Cordray said at a field hearing on payday lending in Birmingham, Ala.

With the appointment of Cordray as its first director, the CFPB has moved quickly to assert its authority to regulate nonbanks, including payday lenders of any size.

Cordray said the agency is already aware of some payday lenders engaged in practices that are clearly illegal and present immediate risk to consumers, including unauthorized debits on a person's checking account and aggressive debt collection tactics.

"These illegal practices are outrageous," Cordray said. "We want to root them out where we find them. And we want to work with responsible parties in the industry to prevent them from expanding."

The field hearing, the first-ever held by the fledgling agency, coincided with the release of CFPB's Short-Term, Small-Dollar Lending Procedures, an addendum to its examination field manual.

Similar to its exam procedures for mortgage servicing and origination, the latest guidance outlines the type of information the agency intends to collect and the procedures it will use to track lending activity, from initial marketing to collection.

Representatives from the CFPB, consumer and civil rights groups and the financial services industry testified at the hearing in Alabama, which has one of the highest number of payday lenders per capita in the country, according to the bureau. (It also is the home district of two prominent CFPB opponents — Sen. Richard Shelby, R-Ala., and House Financial Services Committee Chairman Spencer Bachus.)

CFPB has already begun examining deposit advance products — similar to payday loans — that are offered by banks. But it didn't have the authority to regulate nonbanks, including payday lenders, until the bureau had a permanent director.

With Cordray appointed on Jan. 4, the bureau immediately launched its nonbank supervision program, which includes oversight of companies that offer mortgages and private student loans, regardless of their size.

The bureau is currently assessing the risks in those three markets to determine where to focus its supervision resources, and is expected to begin examining nonbanks within the next month or two.

Although its policy agenda has focused largely on the mortgage market, Cordray's comments and the bureau's latest guidance make clear that payday loans are a top priority.

"Now," Corday said, "the bureau will be giving payday lenders much more attention. This is an important new area for us. And the purpose of this field hearing, and the purpose of all our research and analysis and outreach on these issues, is to help us figure out how to determine the right approach to protect consumers and ensure that they have access to a small loan market that is fair, transparent, and competitive."

Cordray said CFPB plans to focus in particular on the repeated, long-term use of payday loans to try to understand what consumers know when they take out a loan and how these products affect them.

"We plan to dig deep on this topic," he said.

The bureau will also move immediately to stop illegal practices, Cordray warned.

One example is unauthorized debits on a customer's checking account, which can occur when the consumer is dealing with a company hidden behind the payday loan.

The agency said that the company advertising the loan may not be the same as the actual lender, and could sell the customer's sensitive information to a potentially fraudulent individual.

Another example is aggressive debt collection practices, including lenders or debt collectors posing as federal officials, threatening borrowers with criminal prosecution, trying to improperly garnish wages, and harassing the borrower, their friends, family or co-workers.

Small-dollar loans are currently being used by approximately 19 million American households, the bureau said, from whom payday lenders collect more than $7 billion in fees a year. For the typical two-week term of a payday loan, fees can equate to an annual percentage rate of 391% to 521%, according to the CFPB.

Although some state regulators have been examining payday lenders for compliance with state laws, they had not been subject to federal examination and supervision until now, even though they are subject to certain federal regulations.

The exam procedures are comprised of five different "modules" that cover a payday loan's lifecycle: marketing; application and origination; payment processing and sustained use; collections, accounts in default and consumer reporting; and third-party relationships.

The marketing procedures direct examiners to compare English language advertisements to those in other languages, and identify any products or practices that are rewarded by incentive compensation programs. The application and origination procedures, meanwhile, focus on the process companies use to take and evaluate applications, while the payment processing section details methods an examiner must use to assess "roll-over" or "back-to-back" transactions, including the portrayal of payments options, fees and other disclosures.

The guidance also directs examiners to look for potentially unfair, deceptive or abusive acts or practices. Although the manual offers standards that examiners should use when assessing such practices — particularly the new "abusive" standard — it only uses the statutory language from Dodd-Frank.

"The particular facts and circumstances in a case are crucial to the determination of UDAAPs," the manual says. "Examiners should consult with headquarters to determine whether the applicable legal standards have been met before a UDAAP violation is cited."

According to the payday lending procedures, examiners may obtain and review myriad documents — from annual reports to telephone recordings to training materials — as well as perform transaction testing, conduct interviews with management and staff and survey customers.

Payday lenders are subject to a slew of consumer financial laws, including the Truth In Lending Act (Regulation Z), the Electronic Funds Transfer Act (Regulation E), Fair Debt Collection Practices Act, Fair Credit Reporting Act, certain provisions of the Gramm-Leach-Bliley Act, and the Equal Credit Opportunity Act.

This fact is often lost, however, in the debate over payday lenders, said Ted Saunders, the chief executive of Community Choice Financial Inc., an alternative financial services company that offers payday loans in 14 states. He said many payday lenders already face strict oversight, including enforcement actions and fines, from state regulators.

Saunders, who testified at the hearing in Birmingham Thursday, said in an interview that his business is receives regular audits, and that he meets often with state regulators.

"At the end of the day, this entire exercise should be for the benefit of the consumer," said Saunders, who is also on the board of directors for the Financial Services Centers of America, a trade group whose members include payday lenders. "We need to go first to the state regulators that keep very detailed records on where the weaknesses are. We don't need to recreate the wheel just because we have a new federal agency."