Last December the House of Representatives passed regulatory reform legislation that included creation of a Consumer Financial Protection Agency. The Senate is considering similar legislation, and though the original concept of a CFPA was to oversee and regulate those financial institutions and products that were direct contributors to the country's financial meltdown, such an agency as currently envisioned on Capitol Hill now encompasses all financial products.
Why bloat this new agency by requiring it to regulate products and services that are already heavily regulated at the federal and state levels — and had nothing to do with the financial crisis?
A case in point is the check cashing and payday loan industries. A misperception among some members of Congress is that check cashers and payday lenders are "lightly or unregulated institutions" and so should be subject to CFPA jurisdiction. In fact, our businesses must comply with a wide array of federal and state requirements. At the federal level these include:
- Title 31 of the Internal Revenue Code
- Bank Secrecy Act
- USA Patriot Act
- Truth in Lending Act
- Fair Debt Collection Practices Act.
In addition, many of our companies must comply with regulations associated with being categorized as money services businesses.
Finally, state regulation of check cashers includes licensing, record keeping and reporting requirements. Consumer protection concerns are addressed through fee caps and clearly spelled-out fee disclosure and signage requirements. Customers know up-front how much each transaction will cost. There is complete transparency.
Similarly, payday loans are only legally available in those states that adopt specific laws allowing the product, and all include significant consumer protections that address issues such as term, rate, rollovers, renewals, etc. Again, there is complete transparency with these transactions.
Given these facts, why expand a CFPA's jurisdiction to include check cashing and small loans? Most likely, it is lack of understanding about the products and the customers who use them.
For example, check cashing is a discrete "fee for service" transaction that does not create an account relationship and is not a financial product. What will surprise many people is that 58% of check cashing customers also have bank accounts. They use their local check casher for a combination of reasons: convenience (stores are open extended hours, even 24-7), transparency and instant liquidity (no waiting for the check to clear).
Likewise, the payday loan product is often misunderstood. Despite claims to the contrary, companies offering these loans earn respectable profits, not egregious ones. A recent Ernst & Young study of the multiline industry (companies offering check cashing and small-dollar loans) found that, on a pretax and preinterest basis, multiline lenders earn an average profit of $1.37 per $100 of principal loaned — a modest margin of 9.1%, before taxes.
As debate on the proposed CFPA continues, Congress must keep its eye on the prize: creating a stronger regulatory environment that prevents a repeat of the financial meltdown.
Expanding a CFPA's jurisdiction to include elements of the financial services industry that had no role in creating the crisis and already comply with significant federal and state regulations is bad public policy. It would increase these companies' regulatory burden with no corresponding benefit to the low- and moderate-income people who use check cashing and small-loan services. In fact, these consumers could actually be hurt by such a CFPA, through higher prices and reduced access.
Congress must keep CFPA focused where it belongs and not unnecessarily expand its jurisdiction.