President Obama's recess appointment of Richard Cordray as director of the Consumer Financial Protection Bureau has drawn strong reaction from industry officials and consumer advocates alike. For financial institutions, the appointment means a new federal entity combing through compliance data, something nonbank financial institutions have never experienced. For consumer advocates, the appointment ends the long wait until the CFPB could begin fulfilling the mandate by Congress on behalf of the American people.
The industry and its sympathizers are upset not because of the choice of Cordray, per se, but because it lost the battle against Dodd-Frank in 2010. The president's action says clearly that the agency and its new regulatory purview are here to stay. Instead of spending billions of dollars lobbying on Capitol Hill, banks and nonbank financial institutions would better serve themselves by working with the tide instead of against it.
Now that it has a director, the CFPB can exercise its full authorities to ensure that financial markets operate fairly, transparently and competitively. For the first time, nonbank entities such as payday loan companies will be subject to consistent examination and oversight to ensure that all consumers are receiving the protections afforded by federal consumer financial laws like the Truth in Lending Act, Equal Credit Opportunity Act, and more. The president's appointment and the bureau's supervisory power is a welcomed beacon for consumer advocates and community groups fighting to end unfair and deceptive lending practices.
The day after Director Cordray's appointment, the CFPB launched its nonbank supervision program and pinpointed payday lending as a top priority area. The agency has a lot of work ahead. There are an estimated 22,300 payday loan stores nationwide that make $30 billion in loans each year to Americans struggling to make ends meet. The White House reports that the average payday customer pays 400% interest on a two-week $100 loan. This lucrative business relies on a lending model of usurious rates designed to keep consumers in a cycle of debt. Numerous studies reveal that the majority of payday borrowers take out 12 or more loans per year. Often, borrowers need to take out another loan to pay off their last one.
Payday lenders have drawn much criticism over the years for their triple digit interest rates and short term lump sum payment structure. In fact, the Department of Defense and Congress have enacted reforms prohibiting payday lenders from making loans to active duty military service personnel. Unfortunately for consumers, Congress has failed to pass legislation that would cap interest rates on payday loans to ordinary borrowers.
The CFPB can and should impose safeguards against predatory payday lending institutions, such as extending the minimum repayment period or limiting the number of loans consumers can take out in one year. The CFPB can also collect and make public information from both payday loan companies and banks on the usage of their payday products and the demographics of their customers.
The payday industry thrives in its current form because of financing provided by big banks. Through a series of credit agreements, Wall Street banks provide over a billion dollars in financing to the payday loan industry. Wells Fargo, Bank of America and U.S. Bank alone provide $75-$300 million lines of credit to Advance America, the country's biggest payday lender. Worse still, mainstream banks like Wells Fargo and US Bank are offering their own payday-like loan products (with sanitized names like "direct deposit advance").
As the popular movement against corporate greed and corrupt practices continues, big banks should take heed and stop their financing of predatory payday loan corporations, and start offering responsible, affordable small dollar loan products to their own customers.
To thoroughly supervise the payday industry, the CFPB should examine all payday lenders, including banks, and banks that profit from financing unscrupulous practices. With the CFPB's leadership, consumers will have a much better chance of accessing regulated, fairly priced financial products.
Liana Molina is a campaign organizer for the California Reinvestment Coalition.
Question from the Editor: What would you consider an ethical way to meet consumer demand for short-term, small-dollar loans? Leave a comment below.