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Hearing of the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee - H.R. 1214, The Payday Loan Reform Act of 2009



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REP. GUTIERREZ: This hearing of the Subcommittee of Financial Institutions and Consumer Credit will come to order.

Good afternoon, and thanks to all of the witnesses for agreeing to appear before this subcommittee today. Today's hearing is a legislative hearing that will examine H.R. 1214, the Payday Loan Reform Act of 2009. We will be limiting opening statements to 10 minutes per side but without objection, the record will be held open for all members' opening statements to be made part of the record. I yield myself five minutes.

Over the last two decades, payday lending has become a very controversial source of credit in many of our communities. The payday loan industry has grown in size from roughly 300 offices in 1992 to over 24,000 last year.

As our constituents are faced with even tougher economic conditions during this recession, they are more and more likely to turn to the services offered by the payday lending industry to pay for emergency car repairs, an unexpected doctor's bill and even groceries for their families.

Many of these families have been ignored or shut out of the mainstream financial services industry and have nowhere else to turn for credit. The last hearing on payday lending in front of the House of Representatives was held in March of 2007, and much has changed in those two years. More states have enacted protections against abusive payday loan practices by enacting cap rates or by banning payday lending altogether.

A select few states, like New York, North Carolina, Pennsylvania, and West Virginia, have banned payday lending altogether, and many states do not offer their citizens even a decent level of protection against abusive payday practices. And seven states fail to have any cap on small loan rates. Missouri, for example, has an APR cap as high as 1,955 percent.

While I have and will continue to support consumer groups' tireless efforts to eliminate abusive practices in the lending industry, they are fighting an uphill battle against better funded lobbyists in states like Delaware, New Hampshire, and Wisconsin, where there is no rate cap at all.

As we can see from this chart -- do you have the charts?

MR. : (Off mike)

REP. GUTIERREZ: As we can see from this chart that separates states into three classes; those that have banned payday lending, those that -- it is the first -- those that cap interest rates for payday lenders at 15 percent or 391 percent APR, and those that either have no cap at all or have a cap in place that exceeds 391, which is the largest number of 26 states there.

The column of my bill is to move all 23 of the states in the far right column, over to the middle column. Then the consumer groups will have a realistic opportunity to work their magic and move as many states as possible over to the far left column. By the way, that column on the far right represents almost 113 million Americans that would be helped by the bill.

The current state of affairs for those consumers is unacceptable, and Congress would be derelict in its duty if we allow them to remain unprotected from abusive and predatory lending. H.R. 1214, the Payday Loan Reform Act of 2009, creates significant protections from abusive payday practices by preventing rollovers and freeing consumers from the debt trap by mandating a cost-free 90 day repayment plan.

The bill lowers the effective APR of a payday loan to 48 percent, or $0.15 for every dollar loaned. This is a rate that is lower than the 23 current state rate caps, including California, Colorado, New Hampshire, and even my home state of Illinois. My legislation would also prohibit unfair mandatory arbitration clauses, increase disclosure, and honor all existing stronger state protections by creating a federal floor on which stronger laws can be built on.

We may hear from the consumer groups today that a similar law that was passed in Illinois has been a failure. But according to the State Department of Financial Institutions, Illinois' 15.5 percent rate cap has already saved consumers in our state over $35 million since its enactment in December of 2006. My bill would move that rate cap even lower.

I recognize that my bill is not a cure-all for this issue. My intent with H.R. 1214 is to give the efforts to protect consumer rights a boost by creating a minimum level of protection that all consumers will enjoy. This legislation would lower the APR cap for nearly 113 million Americans immediately upon its enactment.

Despite complaints from the industry that the bill sets rate caps too low and assertions from consumers that the bill does not go far enough, I think that improving protections for 113 million consumers is a significant step in the right direction.

The status quo in the payday industry is unacceptable. The Payday Loan Reform Act says "no" to the status quo. It would protect millions of Americans from abusive lending practices in one fell swoop. I look forward to hearing the testimony of our panelists and also look forward to a lively debate on this controversial issue.

I yield, the gentleman, Mr. Hensarling, five minutes for his opening statement.

REP. JEB HENSARLING (R-TX): Thank you, Mr. Chairman.

Congress and the Financial Services Committee continue to enact legislation that contracts credit in the middle of a recession. It was the mortgage cram down that made mortgage loans more expensive for some, inaccessible to others. And just a few moments ago, the credit card bill, which will deny credit to some, make it more expensive to others.

Now, we have the payday lending bill. The bill before us, I fear, essentially does two harmful things.

Number one, it establishes price controls. Number two, it erodes risk-based pricing which permits people, particularly low income people who haven't had access to credit before to finally have access to needed credit.

What will the outcome be if we pass this legislation? Again, consumers will lose, they will lose choices, they will lose credit, they will lose economic freedom. What will they gain? They will gain bounced checks. They will gain utility reconnect fees, they will gain eviction notices and they will gain the opportunity to be forced into the underground economy.

Now, I continue to observe, particularly I've been involved in the budget debate on the floor, and listening to my colleagues on the other side of the aisle here, how many talk about the benefits of the free enterprise system, yet we continue to have legislation after legislative initiative that appears to attack it and erode it daily.

I would remind my colleagues just because you don't need or don't appreciate a particular service doesn't mean that your neighbor doesn't. Not only we hear a number of sad stories about people who are caught up in cycles of debt, and I assume they are all true and my heart will go out to these people.

But I wonder though, if this never-ending cycle of debt that we hear so often, is that a symptom or is that the cause. My belief is it is probably the symptom. And indeed, I have a quote from a recent Federal Reserve study that said quote, "There is no evidence that loan rollovers and repeat borrowers affect store profits beyond their proportional contribution to total loan volume; in other words, the industry's profitability does not depend on the presence of repeat borrowers per se," unquote.

So I believe we need to go to the root-cause of the problem; not the symptom, the root-cause of the economic turmoil that are affecting the lives of our citizens. We need to pass policies in this Congress and in this committee that will help preserve our fellow citizens' jobs today and grow better job opportunities tomorrow. And prevent punitive taxes from shrinking their already shrinking paycheck.

I have a suggestion, we could start this afternoon. And we can start this afternoon by rejecting the Democratic budget, which establishes a national energy tax, which CBO says could impact families at $1,600 a month, $300 billion of new taxes for small businesses, with all the associated layoffs that would be associated with that.

Again, if we pass this legislation, I believe that consumers are going to be forced into many alternatives that they may find more harmful to them. The average telephone reconnect fee is $50. Maybe many consumers would have preferred to pay the $15 market fee to borrow the ($)100.

The average cable reconnect fee can be as much as a $100. Again, there are many consumers who would prefer to pay the $15 than the $100 reconnect fee. A bounced check in average $28.23, you add overdraft fees can be $56. Now, if we get focused on APR, which may or may not be the best way to judge these loans, a bounced check can have an APR of 755 percent and you add the overdraft fees, all of a sudden on that same $100 loan you have 1449 percent.

The chairman of the FDIC has said quote, "When used on a recurring basis for small amounts, the APR for fee-based bounce protection far exceeds the APRs associated with payday loans." And given that, these tend to be small short loans to people who are credit risky without collateral; there are fixed cost associated with these loans. The default rates are high, of course, of course, this APR is going to be large.

But why take away the option of what the consumer wants to do, why replace his judgment or her judgment with ours. The answer is economic growth, economic opportunity for our neighbors, a competitive market and effective disclosure.

Mr. Chairman, thank you. And I yield back the balance of my time.

REP. GUTIERREZ: The gentleman yields back the balance of his time.

Mr. Moore, you are recognized for one minute.

REP. DENNIS MOORE (D-KS): Thank you, Mr. Chairman for holding this hearing and your hard work in drafting H.R. 1214, the Payday Loan Reform Act.

I'm proud to be a cosponsor of this balanced legislation, and whenever we have industry on one side saying the bill goes too far and consumer groups saying it doesn't go far enough, we are probably striking it close to a proper balance. In Kansas, we already have laws in the books protecting consumers that are nearly identical to 1214.

Our state law already limits a maximum fee of $0.15 per dollar advance and bans rollovers. Applying these kinds of consumer protections to all states would probably permit states with tougher payday lending laws to maintain these requirements, I believe, is the right approach.

Thank you, Mr. Chairman. I yield back.

REP. GUTIERREZ: Thank you. We have -- Mr. Paulsen is recognized for two minutes.

REP. ERIK PAULSEN (R-MN): Well, thank you Mr. Chairman also for holding this hearing today.

At a time when the credit markets are frozen or certainly drying up, I think it is very important that we ensure we bring as much liquidity into the market as possible. And we need to make sure that there are as many options as possible that are available for consumers.

I found it interesting that a recent report by the Federal Reserve Bank of the state of New York noted that payday lenders fill a very valuable niche market, where banks and credit unions have left a void. The study found that people in those states that banned payday loans they bounced more checks, they filed more complaints about lenders and debt collectors, and they filed for bankruptcy at a higher rate.

So I want to make sure that any legislation that is pushed through by Congress does not exasperate those effects throughout the country. I certainly understand the goals of protecting consumers but we must make sure that credit is available for those who need it.

I also have some concerns about the preemption portions of the legislation, which we will have discussion on. There is a patchwork of legislation out there right now through all the different states but I want to make sure that we don't mire down the payday lenders with over regulation. I look forward to the testimony today from our witnesses and I yield back to the chairman.

REP. GUTIERREZ: Congressman Baca, you are recognized for three minutes.

REP. JOE BACA (D-CA): Thank you very much, Mr. Chairman Gutierrez and Ranking Member Hensarling for your leadership on this important subject.

The issue of payday advance lending reform is a critical one. And I applaud Chairman Gutierrez for introducing the legislation on this subject. As some of you know, I've introduced an alternative legislation on this issue. I believe that my bill H.R. 1846, the Consumer Lending Education and Reform Act or the CLEAR Act reforms the payday loan industry while also ensuring that borrowers have access to loans when they are needed.

In these difficult times students, police officers, teachers, and other working Americans sometimes need access to emergency credit. These people like Tina Haugh (ph) who would not have been able to pay for her daughter's emergency dental care if it hadn't been for payday loan she received.

And I received like about 47 different letters just in my area. And I'd like to just read one of them, it says, "Dear Congressman Baca, I've come blank for the payday loan" -- I'm not going to give advantage to that one. "I use these services during emergency. This is a good service to have when you need some money real quick. I feel this is a good service, please don't take it away."

Again, we must have access to credit open to borrowers like Tina and this person that I just read, who are doing the right thing.

But we also must have a cleaned up industry with tougher regulations and consumer protections and oversight. The CLEAR Act achieves these principles, while also imposing a strict national fee structure on payment loans.

My bill caps it at $0.15 per dollar plus allowance for a 5 percent original fees for loans borrowed over the Internet. This additional 5 percent fee for the Internet loan is due to higher consumer acquisition cost. My bill limits borrowers to refining a loan to no more than two times at a rate of $0.15 per dollar for the first refinancing and $0.10 per dollar for the second refinancing.

The CLEAR Act also requires lenders to obtain bonding to follow the Fair Debt Collection Practices Act and to advise borrowers of the availability of free credit counseling. These provisions will eliminate the fly-by-night lenders who take advantage of vulnerable individuals.

It is my preempting existing state law, the CLEAR Act would create a national standard in United States, create a national standard for short-term loans. This will ensure residents of the 50 states have access to payday advance loans at affordable rates. We must remember that for many of our customers, advance loans are more effective than other alternatives as you can see by the chart that we have out here.

If a customer, whoever derives protection on his or her checking account writes $100 check but only has $75 in the account the bank charges him somewhere approximately around $38. If a customer who does not have an overdraft protection bounces the same check for $100 check they will be charged $30 check -- if I can have an additional 30 seconds?

REP. GUTIERREZ: There is no further time.

REP. BACA: Can somebody yield to me?

REP. GUTIERREZ: Well, we could try. We'll recognize Mr. McHenry for three minutes.

REP. PATRICK MCHENRY (R-NC): I'll yield my colleague 30 seconds.

REP. BACA: Thank you. Thank you very much.

Just to finish up, then if a customer does not have the overdraft protection on the bounced check for the same $100, they will be charged $30 for a bad check, which means both the bank and the merchants are giving them a total of $60. So, they are actually paying more than going to a payday than what it would be otherwise.

The CLEAR Act provides national regulatory reform that contains consumer protection and oversight, will also ensure working Americans have access to credit. I thank the chairman for recognizing me and I look forward to working with him and other members on this important issue.

And thank you very much for yielding the time.

REP. MCHENRY: I thank my colleague, and thank you, Mr. Chairman. I thank the ranking member as well.

There is going to be a discussion about the North Carolina experience today. In North Carolina, we simply do not have payday lending recognized by the state. Now, the failure of state regulation means that there are no state chartered institutions that are allowed to do payday lending.

However, payday lending still occurs, even though illegally, in North Carolina. There are mechanisms to do that. We have individuals that drive over the state lines to do that. We have those that access other opportunities via the Internet. We have other individuals in the state that access credit through simply unregulated means, period.

The North Carolina experience is not a good one in terms of access for low and moderate income individuals to access opportunities for lending. So the North Carolina experience we need to be clear about.

Mr. Chairman, I ask unanimous consent to submit a Federal Reserve and New York staff report on payday credit bans.

REP. GUTIERREZ: Without objection, so ordered.

REP. MCHENRY: Thank you, Mr. Chairman.

And beyond that, in this -- this is the worst time to further constrict credit. We see with the recession, with the impact on other traditional means of lending, the constriction within our credit markets; the access of credit has been severely limited right now. The impact on families is real.

And so we need to have regulated means of individuals being able to meet their demands, their worldly demands of paying their car payment, making their home payment, paying their rent, even feeding their kids. This is a very basic function. I want to commend the chairman, though I've got concerns about his legislation, I do appreciate the fact that he has approached this in a pragmatic way and that we can have a realistic discussion on how we can properly allow for the function of the credit markets in many different ways in this country.

And I'm very grateful for the opportunity to have this discussion before this committee. I think it's important; especially now in these tough economic times that we have this discussion about the importance and the necessity of payday credit advances.

Thanks so much and I yield back.

REP. GUTIERREZ: The gentleman yields back the balance of his time. Mr. Scott for a minute and a half.

REP. DAVID SCOTT (D-GA): Thank you very much, Mr. Chairman.

Let me just say very quickly. These are tough -- tough times and with the tumultuous financial markets, bank bailouts, rising unemployment, continued downturn of our housing markets, many working and middle class Americans indeed are finding it harder and harder to make ends meet. And some are turning to short-term loans to get them over certain hurdles.

This is a market, these are consumers, these are our constituents out there who do need help. I think what we are trying to do with this legislation, which I'm a co-sponsor of, Mr. Chairman, as you know, we are asking and reaching for what I would refer to as a delicate balance.

And that delicate balance is to make sure that those of our consumers, those of our constituents, who need in an emergency situation to have access to safe and protected and fair means of acquiring funds that they need to get them over in a tough time. But yet, we must do it in a way that -- they -- protects them from getting caught in long-term debt and a cycle of debt.

This bill will not put payday lenders out of business, but what it will do is it will cause this industry to lose some profits. But all of it at the expense of ensuring that those 23 states with weaker, even no payday lending rules, will receive increased protections from those that have less than honest lending practices.

The bill will also -- will not preempt states that already have laws on their books that may be strong or even outlaw some of these practices. And there are those that say the bill does not go far enough, there are those that say the bill goes too far.

But again, Mr. Chairman, what I feel we have here, is a bill that does reach that delicate balance that is needed to give access to credit in these tough times to those folks that need it, while at the same time providing maximum protections for our consumers in this industry.

And I yield back the balance of my time.

REP. GUTIERREZ: Gentleman yields back the balance of his time. I ask unanimous consent to add an additional minute for opening statements on each side. Hearing no objection, so ordered.

Mr. Ellison, you have 45 seconds.

REP. KEITH ELLISON (D-MN): Thank you, Mr. Chair.

Sadly, there are millions of hardworking Americans out there without checking and savings accounts. These are the unbanked. Until we change that -- until we make much greater progress in areas of financial access, we will continue to have payday lending industry.

In the meantime, we have to make sure that all consumers using payday loan products are protected. For that reason, I want to commend you, Chairman Gutierrez, on your leadership in convening this important hearing on payday lending reform. In sum, I believe the legislation makes a lot of progress towards striking a balance between ensuring basic protections for consumers and not stifling their access to credit.

However, it's only a first step of many to provide affordable financial products to all Americans, to that end I'm especially interested to hear more about these efforts of regulated financial institutions like community banks, credit unions and others to bring millions of unbanked Americans into the fold of the mainstream financial services industry. Thank you. I yield back.

REP. GUTIERREZ: Thank you.

Mr. Hensarling, you are recognized for one additional minute.

REP. HENSARLING: Thank you, Mr. Chairman.

Not unlike the gentleman from California, I've heard from a number of my constituents. I've heard from a lady named Teresa in Dallas, where I live, a 43-year-old divorcee who recently survived stage four cancer. She wrote to me and said, "Congressman, without these loans, I would have been evicted from my apartment on two separate occasions. Please help to keep these loans from being banned. There are many of us out here with no other choice at all."

I also heard from Paul in Mesquite, Texas quote, "Working payday to payday in this economy, we sometimes need a quick loan for food, gas, utilities, prescriptions. If payday loans are banned, our checks may have to bounce and then I have to pay the big banks overdraft charges. I won't name the name of the company, payday lenders are helping working Americans stay afloat to a payday."

Mr. Chairman, I hope we keep in mind Teresa of Dallas and Paul of Mesquite as we go through this debate. And I yield back the balance of my time.

REP. GUTIERREZ: We certainly will.

Mr. Meeks, you are recognized for 45 seconds.

REP. GREGORY W. MEEKS (D-NY): Thank you, Mr. Chairman.

And I just want to say very briefly. You know, I wasn't always a member of Congress. In fact, I didn't always wear a suit like this. I grew up in a neighborhood that it was tough. My parents had no money, and what this is about is about options; it's about options, it is about options that average everyday people, good people can have, if in fact they find a hard time.

In fact, it could save their credit because if you, not only by paying a late fee, it ruins your credit and stops individuals, who have aspirations to own a home one day, because when they want to go own that home, if they didn't pay it back to the bank because they paid late, then their credit rating goes down and they are not able to afford a house to even move themselves up.

This is about options; we have some concerns, this bill addresses the concerns to protect consumers, you know, no rollovers, a fee capped at $0.15 for every dollar. You know, default extended as far as repayment is concerned. So -- among others. So in my brief time, I just want to say that this is for everyday people. And I cannot just give the -- I don't have to give the testimony what someone has given me. I can tell you that, I have lived through it. And I've seen the results when someone doesn't have options. I've seen them go to someone else who give that option --

REP. GUTIERREZ: The time of the gentleman --

REP. MEEKS: -- and if they don't pay back, unfortunately, sometimes they come back without a loan. And we need to stop that. I think this is a good bill, and I support it.

REP. GUTIERREZ: Thank you. Okay, we have some great witnesses. We're going to hear from them now. Testifying first before the subcommittee is Ms. Jean Ann Fox who is the Director of Financial Services for the Consumer Federation of America. But she is also testifying on behalf of Consumer Action, Consumers Union, and the National Association of Consumer Advocates, the National Consumer Law Center, as well as U.S. PIRG.

Please, Ms. Fox, you are recognized for five minutes.

MS. FOX: Thank you, Mr. Chairman, Ranking Member Hensarling.

I appreciate the invitation to come and testify before you today. I am also representing the Woodstock Institute in Chicago. We appreciate your interest in protecting consumers from the payday loan debt trap that results from these extremely expensive balloon payment loans that are secured by direct access to consumers' checking accounts.

Payday loans are harmful to borrowers. They undermine scarce family resources, they risk bank account ownership, they double the risk that you'll end up in bankruptcy or seriously delinquent on a credit card payment. When you study actual payday loan borrowers you find that these products are harmful to the families who use them.

We agree that payday lending and similar products should be reformed. But we respectfully disagree with the specific methods used in H.R. 1214. The bill authorizes single payment loans for short, as a day or two, at a cost of 391 percent APR for a two-week loan or 782 percent APR for a one-week loan.

The bill sets up an unaffordable repayment term. It has to be repaid in full out of your next paycheck that's deposited to your bank account. Otherwise, you'll end up paying bounced check fees to the payday lender and to your own bank. A family making $35,000 a year, which is a typical payday loan income range for borrowers would not be able to pay a typical $300 loan back, out of their next paycheck, even if the loan were free.

These are simply unaffordable single payment loan terms. The bill also authorizes loans to be secured by unfunded checks. In other words, to get a payday loan, every borrower has to write a check when they have insufficient funds in the bank at the time they write it, or they sign over electronic control of their bank account to the payday lender.

This bill authorizes lenders to turn a debit authorization into a paper check that takes money out of a consumer's bank account depriving them of current protections they would have under the Electronic Funds Transfer Act. The narrow definitions of a payday loan and of a creditor in this bill also means that it's easy to evade the application of the law.

For example, the chairman mentioned the Illinois experience. Illinois defines a tougher payday loan, it's 120 days. So most of the big payday lenders turn their product into 121 day or longer loan and they are not subject to the rate cap or the other provisions of the Illinois payday loan law.

There are other loopholes in this bill. It doesn't cover open- end credit. Most of the big payday lenders in Virginia turn their product into an open-end credit to get around changes to the law that took affect this year in Virginia.

In Texas, almost all of the payday loan business is done under the credit services organization model. It is doubtful whether this bill would apply to those payday lenders in Texas. The chairman has mentioned that at least rates will go down in some of the states, where rate caps are set higher than $15 per ($)100.

However, in 10 of those states, there is no rate cap for an installment loan. So there would be a little barrier to the payday lenders just changing their product into a 91 day installment loan and continuing to charge even higher interest rates.

The protections against the payday loan debt trap in this bill are well intentioned and we appreciate that. But they have been tried in other states and they don't stop payday lending from being a debt trap. The average customer has nine loans per year even in states that limit you to one loan at a time or that prohibit renewals or that have repayment plans.

As long as you allow this product to be offered under the terms of a typical payday loan, you'll have a payday loan debt trap. Congressional approval for a bill that caps rates at this high rate will undermine the momentum in other states. For example, at the ballot box last fall, voters in Arizona, rejected a ballot initiative that had the same rate cap, the same kind of repayment limits as are included in this bill.

Voters rejected 391 percent lending in Ohio, and the trend at the state is away from legalizing payday lending; the momentum is toward restoring conventional small loan rate caps. And I fear that passing this bill would undermine that momentum.

We urge you to ban loans secured by getting consumers to write unfunded checks, and we urge you to support the rate cap in Representative Speier's H.R. 1608, which would provide real protection for all forms of credit to all consumers.

REP. GUTIERREZ: Thank you. I tried to give the gentle lady a little more time since she is against the bill, so that we can show fairness here, but I hope we won't all continue Mr. McCullen, as you're next, president and chief executive officer for Finance America of Louisiana. You're recognized for five minutes.

MR. MCCULLEN: Thank you, Mr. Chairman, members. It's an honor to be here today. I own the largest small loan company in Louisiana and operate 30 locations. I am also president of the Louisiana Cash Advance Association and working closely with the Louisiana Legislature and the Office of Financial Institutions help to draft and implement the laws that we currently operate.

Our laws are working, and I want to offer you information that will help you in your decision-making process. From the beginning, we had two specific goals in mind, provide structure to a service that customers need and want, and implement tight consumer protections.

All lenders are licensed, regulated, and extensively audited by the Office of Financial Institutions. And I believe we have one of the best consumer protection laws in the country. If you want a national standard and want to implement something that will work, implement Louisiana's law.

As with any new industry, ours has certainly had its problems, and there have been bad operators just as in any industry. But with lots of hard work, things are leveling out, and in Louisiana the number of lenders is actually dropping. This phenomenon happens in every new industry, and it is the way our country's free market system works, businesses rise and fall based up on consumer demand. I believe we will continue to see downward adjustments and consolidations in the future. Louisiana's law provides for full disclosure of all fees and terms on the promissory note including APR.

It prohibits companies from accepting fees to rollover, flip, or renew a loan. This is one of my personal hot buttons, and our law keeps consumers from getting into a cycle of debt. Our law allows for the collection of reasonable attorney's fees and court costs, and mandates the posting of a fee schedule and the Office of Financial Institutions' 800 number for complaints.

The maximum fee allowed on a cash advance in Louisiana is 16.75 percent of the face of the check. This means when someone borrows $100, the fee is $20. If they borrow $200, the fee is $40. No compounding, no excessive fees.

There is a $45 fee cap, and like other lenders, we are allowed a $5 documentation fee. There are very few complaints. In fact, Louisiana had over 4 million transactions in 2008, and regulators only received 24 complaints and only two pertained to excessive fees.

While we are an open book and disclose all fees in the promissory note, I believe we should be taken out from under the Truth in Lending. Ours is a fee-based business, and APR should not apply. Money is just like any other commodity, and applying APR to our business skews reality and is illogical.

I compare our business to a triple-A Rent-All store. You can buy a hedge clipper at Home Depot for $100 or you can rent it from triple- A for $20. Our customers rent the same way. It's just our product is money and they pay a fee for the convenience. If they do not need our service, they will not come in.

An example of how someone would use our service is if they bounce three $50 checks, the total fees could exceed over $150. If the same person borrows $150 from one of our stores, the fee is around $30, $150 versus $30, it's that simple. Defaults are a constant problem. If a $300 loan customer charges off, seven other customers must pay in order for us to break even.

Louisiana's law could be better by allowing us to reduce or control bad debt in a better way. Some states have implemented a database, which allows for only one or two loans at a time. I am not in favor of the database, but controlling consumer bad debt would be a benefit. We use Teletrack to track data, and if a customer has more than one loan, we will not loan to them.

If they have charged off somewhere else, we will not loan to them. The consumer groups want you to believe that we are trying to put people deeper into debt, when in reality we want our customers to pay and not default. It's perception versus reality.

The consumer groups have done an excellent job of spreading misinformation, and I've realized that perception can become reality when repeated enough times. But the horror stories you see in the newspaper and on television are not reality in Louisiana. And for the record, we are not predatory, and we take no collateral and there's nothing to take away.

Again, the consumer groups are spreading incorrect information, and they know it. They have hijacked the word "predatory" and are incorrectly applying it to us. Predatory lending applies only to the mortgage business. It has nothing to do with rates, or fees, or APR. If it did, every NSF fee would be considered predatory.

According to the recently released FDIC study of bank overdraft programs, the average $66 check that bounces and is repaid in two weeks incurs an APR of over 1,000 percent. A $60 ATM overdraft that is repaid in two weeks incurs an APR of over 1,100 percent. ATM overdrafts and NSF overdrafts paid by the bank for their customers are extensions of credit.

I'm not suggesting that you apply APR to these extensions of credit, but my point is that if you apply APR to us, then the same should be applied to them. I'm comparing apples to apples. If you exempt them, we should also be --

REP. GUTIERREZ: The time of the gentleman has expired. Testifying third is Mr. G. Michael Flores. He is the chief executive officer of Bretton Woods Incorporated, a management consulting firm. And Mr. Flores, your -- the chart that you brought is going to be to my left, your right. Sorry, we can't put it on the other side closer to you.

MR. FLORES: Thank you, Chairman Gutierrez, Ranking Member Hensarling, and members of the committee. I'm CEO of Bretton Woods, Inc. a management consulting firm. And my clients include banks, thrifts, credit unions, payday lending industry, and bank technology companies.

I've more than 30 years experience and have taught at the Graduate School of Banking in Madison, Wisconsin and the Pacific Coast Banking School in Seattle, Washington, and published several articles and studies on the financial services industry.

In essence, my business is helping banks improve profitability. Because this hearing is about payday lending, I am here today to put this in the context of the bigger picture, the short-term, unsecured credit market.

The short-term credit market is made up of products and services for people who need a small amount of cash for a short period of time. It is more than a $70 billion market that includes credit card over- the-limit fees, overdrafts, NSFs, and payday loans. Additionally, the market includes tens of billions of dollars in late fees or reconnect fees as been mentioned earlier.

All of these credit products are short-term, and all unsecured.

Currently, banks and credit unions control the largest share of this market. That may come to the surprise of some people because very few banks offer the unsecured, short-term dollar products that we typically consider to be a loan.

As the committee may know, only 30 banks have signed up for the FDIC's small loan pilot program, which was designed to see if alternatives to payday lending could be offered profitably. The results are not in, but I'm not encouraged that they will be profitable or encouraging.

I've worked with banks over these years, and this legacy cost structure of banks inhibit their ability to offer these small dollar short-term credits in a profitable manner. So what role do banks play in the short-term credit market? Well, primarily through insufficient funds known as bounced check fees, and overdraft protection.

These products are all part of the competitive marketplace and are considered alternatives to payday loans. If you'll refer to our first chart here, the pie chart, I published research I conducted in November and December of 2008, and recently updated in early March of this year, and found that banks and credit unions earned $34.7 billion in combined NSF and overdraft fees.

By comparison, the late and over-the-limit penalties on credit cards is $20 billion, and payday lenders earn $7.3 billion for 2008. As been mentioned earlier in your hearings two weeks ago on overdrafts and credit cards, these fees for banks are an increasingly significant source of revenue for these banks.

As a matter of fact, if these fees were eliminated or reduced, many banks would be unprofitable in this country. Now, from the consumer's perspective. When a consumer doesn't have enough money to pay a bill in her -- his or her checking account, then they have the option of either bouncing the check, using overdraft protection, getting it advanced on a credit card or using a payday loan.

If you'll look at chart two please. It's been early about the FDIC study that average cost of a bounced check was 36 -- it was 66 or the average amount was $66. For that transaction, the consumer would pay $27 in overdraft fees.

If they did not have overdraft protection, the fee would be averaging almost $29 to return the check, plus a merchant fee of over $26 payable to the merchant to whom they wrote the check. In comparison, a customer who took out a $66 payday advance would pay approximately $10.56 based upon $0.16 per dollar advance. Just by looking at the household data, you can get a sense to which option is used the most. And this is one of the major points I want to make today, if you bring up the next chart, please.

There are approximately 101 million households with checking accounts in this country. In states where payday loans are -- on the national average, excuse me, these households pay approximately $343 in NSF and overdraft fees per year. In states where payday loans are available, the average household pays $239 per year.

And in states where these loans have been eliminated, the average household pays $496 a year in NSF and overdraft fees. Now, I want to stress that I don't maintain that there is a direct relationship. But I think this is a significant indicator and should justify an extensive and robust study considering all the variables to determine if there is indeed a direct correlation between availability of an option such as a payday loan and the impact on NSF and overdraft fees.

In conclusion, I'm a proponent of competition, and I'm a proponent of options for the consumer. As long as there are options available, the consumers are smart. They will look for the best value at the lowest costs, and I would hope this legislation strikes a balance that encourages competition and not reduces competition. Thank you.

REP. GUTIERREZ: Thank you very much. And now we have -- last but not least, we have Ms. Gerri Guzman, a resident of Montebello, California who is coming before us today to discuss her role as a payday lending consumer. You're recognized for five minutes, Ms. Guzman.

MS. GUZMAN: Thank you. Good afternoon. My name is Gerri Guzman. I am resident of Los Angeles County in California. I currently serve on the Montebello Unified School District Board of Education, where I serve 33,000 kindergarten through 12th grade students and their families, 78 percent of whom qualify for free or reduced lunch.

I am also active in the following organizations, Soroptimist International, the Boys and Girls Club, and my local chapter of the American Red Cross. I have also been a payday lending customer, and I am here today to talk about that experience.

I am thankful for the opportunity to be here, as I think sometimes with issues like payday lending, the opinions of the people who actually use the service aren't often heard. I also would like to add that when my city considered a moratorium of payday lending business licenses, I took the opportunity to meet with several community members to listen not only to their experience, but to gain an understanding of why my community uses payday lenders.

Personally, I consider payday loans to be a necessary evil. If I had the choice, I would never have been in the situation where I needed a payday loan. I'm sure this rings true for the tens of millions of lending customers around the country.

In a perfect world, we would all have the money set aside in a savings account to cover the expenses that are unexpected or unavoidable. But having much money in the savings account is not a reality for many working families, especially today.

I first became a payday lending customer when I decided to leave my job and become my mother's primary caretaker before her passing, 14 months prior to her passing. I did not regret for a moment my decision. However, I would be lying if I told you it didn't create a temporary financial hardship.

At the time, my options were to take out a payday loan or not to purchase a water heater. I was aware of the cost of the payday loan and decided that it was the best option for me at the time. Thankfully, my financial circumstances have changed, and although I am no longer a payday customer, I would like to know that the option is available, should I need to be again.

I do wish that there were more choices and better choices for consumers. But in reality there are not. The more choices, in tough financial times, people have the smarter decisions they can make and the better off they will be in the long run.

I, like most people in this day and age, are budget conscious and look for the best options available in all situations. I knew what a payday loan would cost, but the bottom line is the process was simple and quick. I'm aware that payday lending customers often get themselves into trouble.

And some people make poor choices and get caught in a debt spiral. But certainly this is not unique to only payday lenders -- lending customers. I do think that it is important that government protect people from predatory lenders and abusive practices. I would like to see a mechanism in place to minimize a likelihood of payday lending customers getting trapped in a cycle of debt.

I am sure that most people intent to pay off their loan when it's due, but often unexpectedly again, the money is not available. In these situations, it's important that a lender work with a borrower to make sure they aren't worse off than they were before, an adjusted payment plan would be very helpful to my consumers and certainly be more realistic.

It would also be helpful to make it easier for customers to compare credit products. Most of my neighbors are hardworking middleclass and lower class families. Very minimal health care insurance often makes it a necessary situation to make the choice of making a payday loan, or having bounced a check, or doing without the necessary services.

It would be helpful to make it easier for customers to compare those products. Companies need to be upfront and clear about how much the borrower will pay the -- will pay for the loan and when it is exactly due back. However, I have found that even with the information to make an informed decision, emergency situations often create urgency and all too often the quickest, easiest solution wins out over reason.

I want to thank you today for your time. I appreciate the opportunity to represent the tens of millions of payday lending customers across the country, many of whom I represent. We each have our own personal reasons for going to a payday lender. But I think that almost all of us would agree that while this is not a perfect option, and it's not right for everyone, we are very grateful that the option was available when we needed it. Thank you.

REP. GUTIERREZ: Thank you very much. I appreciate the testimony of all of the witnesses. First, let me take in terms of my five minutes. I think it is probably better to talk about a specific amount of money in relationship to $100 or in terms of a service because when you do the APR, I'm not quite sure you can compare an apple to an apple and orange to an orange.

That's just my point of view people can continue to use the APR argument if they wish to do so. I would like to share with Ms. Fox that I appreciate her testimony and I would like to have an opportunity hopefully -- I addressed a group of consumer groups earlier today, this morning, so that we can begin the process of dialog and open communication -- because it is clear, given her testimony that she -- you don't grasp the bill and what our goal is in the bill.

First of all, I want to make sure that everybody understands what our bill does. It allows you six payments, 13 days apart for 78 days and including the 14 days, that's 92 days. But if you listen to the testimony that was given earlier, you would think that you could simply roll it over. Well, we have a ban on rollovers.

We have a ban on non-sufficient funds, and being able to submit a check for non-sufficient funds. And our APR is actually lower than Louisiana, which is at 521, we reduced it to 391. Because we specifically relate $15 to ($)100. And then of course they said, well, they got around the bill.

Ms. Fox says that and she is right. This is not an installment loan protection program. This is about the payday industry. We hope, in the near future, to be able to deal with installment loans, but that's not what we are talking about today. If people change the nature of their relationship with their -- with those providing funds to them, then those changes should not be attributed to this measure.

This measure, as many of my colleagues, who are supporting, understand is a measure which will allow us to take 23 states and over 100 million people who do not have these protections today and be able to encourage them. Ms. Fox, in your testimony, you assert that H.R. 1214 would provide congressional approval for payday lending. I find the argument confusing.

See, by not acting to curtail payday lending in over 18 years it has grown from 300 store fronts to 24,000. And so has not Congress already provided its approval? Ninety million Americans participate in legal and authorized payday lending.

Wouldn't federal regulations on payday lending demonstrate that Congress is paying attention and ready to regulate the industry? Is your argument that no federal legislation on payday lending would send us a message that Congress disapproves of payday lending?

MS. FOX: Thank you, Mr. Chairman. The action that Congress has taken on payday lending to-date has been to ban this product for service members and their families. In 2006, you enacted a provision in a defense authorization bill to put payday lending off limits to service members at the request of the Department of Defense, because this product was viewed as being harmful to them.

Typically, small loan products are regulated at the state level, where state laws authorize certain types of lending like installment lending, pawnshops or payday loans. Typically, Congress does not enact authorization bills for specific products. You have overarching laws like Truth in Lending which require all creditors to tell consumers what their loans cost --

REP. GUTIERREZ: I guess, I understand those things and since my -- even though I'm the chairman, my time is still limited to five minutes.

MS. FOX: Okay.

REP. GUTIERREZ: The issue here is --

MS. FOX: Yeah.

REP. GUTIERREZ: -- whether or not we wish to take 23 states and over 100 million consumers and offer them a protection they do not have today? And so I guess, would you like to see rollovers eliminated in 23 states, which this bill does, just yes or no because I know my time is waning?

MS. FOX: This bill doesn't stop back-to-back lending --

(Cross talk)

REP. GUTIERREZ: It does. It does that, and so we'll have a continuing conversation about it, because it does, and it specifically says that. You know, if you wish to be against the bill because you wish us to do nothing other than eliminate payday lending, which, in your statement, anybody can read and extrapolate, Ms. Fox, you don't like the payday, I don't like the payday, you wish to eliminate it, you wish to ban it, that's not possible.

That's not possible. So what we're trying to do, many of us, is to reform that very system that many of us -- and as I stated earlier, we'd like to take the columns over. But that's just not possible. So as we look at those situations in this Congress, and I just would like to say to the lady also that, you know, I began the amendment process for the military servicemen here in this committee that got it down to 36 percent.

We were successful in that venture. I think I have a good gauge of what is and can or cannot be successful. But I'll work with you, because the only bill that we've gotten after I have introduced this bill is a bill that makes it harsher on consumers vis-à-vis the payday industry. I look forward to working with those that have the ability of doing better.

I yield the gentleman, Mr. Hensarling, five minutes.

REP. HENSARLING: Thank you, Mr. Chairman.

Okay, Ms. Fox, I guess I have to bite on this one. I think I heard the chairman say, and I'm not sure I completely heard you make this definitive statement, but is it the position of your organization that payday lending should be banned, period and paragraph?

MS. FOX: It is our position that consumers should be protected from triple digit interest rates. They should not be exposed to writing checks without money in the bank as security for a loan, and they should have an affordable repayment schedule in order to make the loan affordable.

REP. HENSARLING: Now, unfortunately Ms. Fox, I have a short period of time, if you -- you would do well in this institution as well, we are not particularly good about giving yes or no answers either.


I'm curious, and I'll throw this open to anybody on the panel. I believe that the best consumer protection is a competitive market. I've spent a number of years in the business world. I think I've got history, I think I have evidence. If I did my own homework properly, I've at least seen studies that tell me that there are over 22,300 payday stores in America.

I saw one study from a particular state that said there were more payday locations than McDonalds, Burger King, and Wendy's combined. I had my staff pull the yellow pages out at Dallas. I'm a Dallas resident.

There were over 125 different payday locations, 46 locations of ACE Cash Express, 25 of Cliff's Check Cashing, 14 Advance America, 13 Check 'n Go, 10 Easy, 7 Check into Cash, 6 Federal Cash Advance, 4 Speedy Cash, and too many Cash America locations to even count.

To me, it seems like a fairly competitive market. And I'm fearful that the underlying legislation might make it less competitive.

Does anybody want to take the opposite view that there is a competitive marketplace?

Seeing none, let's talk about what might happen if we lacked competition in that market. The gentleman from North Carolina, who didn't hear at the moment, because I saw him speaking on the floor out of the corner of my eye, --

REP. GUTIERREZ: What did I miss?

REP. HENSARLING: The gentleman who agrees with me is not.


The one who introduced the Federal Reserve study into the record. I'd like to quote from that same Federal Reserve study, which investigated how consumers fared after payday lending was essentially banned in Georgia and North Carolina. I'm sure the gentleman from North Carolina will have an opportunity to speak to that.

But the Federal Reserve study concluded quote, "Compared with households in states, where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, filed for Chapter 7 bankruptcy protection at a higher rate.

"North Carolina households have fared about the same. This negative correlation, reduced payday credit supply increased credit problems, contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check protection sold by credit unions and banks or loans from pawnshops." End quote. That from the Federal Reserve. Does anybody wish to take issue with their conclusion --

MS. FOX: Yes.

REP. HENSARLING: -- on the panel. Ms. Fox, we'll give you a short amount of time.

MS. FOX: Yes, when studies are done that look at actual payday loan borrowers, they find that they are better off without this product. For example, in a large Texas study, payday loan borrowers are twice as likely to end up in bankruptcy in the next two years as people who applied for and were turned down for the loan --

REP. HENSARLING: Well, Ms. Fox, do you not believe the earlier testimony as far as the various APRs. I think the gentleman from Louisiana talked about the average fee for bounced checks, reconnect fees. Do you doubt that evidence?

MS. FOX: Absolutely not. As we testified earlier in March, we think overdraft loans are the bank equivalent of payday lending. And this committee can deal with that by enacting Representative Maloney's H.R. 1456 --

(Cross talk)

REP. HENSARLING: -- the remaining time I have. I'm going to try to get another question in here if at all possible. But I know, we just had this debate on credit cards, and yes, credit card terms can be confusing.

I've walked into a number of payday stores in Dallas, Texas. Fees are right there on a big board, it's not confusing to me. I talked to several customers. They seemed to know exactly what they were doing and they were very happy to have that option versus a lot other alternatives that were less so.

Mr. McCullen in Louisiana, are these hard to understand transactions?

MR. MCCULLEN: No, they are not.

REP. GUTIERREZ: You have 15 seconds, Mr. McCullen, to answer the question.

MR. MCCULLEN: They are not. Everything is posted and listed on the promissory note and the customer understands exactly what the fees are. There is no hidden fees.


MS. GUZMAN: Is there any time for one additional brief comment?

REP. GUTIERREZ: No, I'm sorry.


REP. GUTIERREZ: We might get a -- little later on, I'm sure we'll come back to you, Ms. Guzman.


REP. GUTIERREZ: We've about 11-1/2, 12 minutes. I'm going to stay and listen to the -- yeah, I'm going to stay and listen to the gentleman from North Carolina as it's already been kind of prepped up. We don't want to take a break.

So the gentleman from North Carolina is recognized for five minutes, and then we're going to go vote and come right back.

REP. MELVIN L. WATT (D-NC): Thank you, Mr. Chairman. Of course, I may not be able to come back and I appreciate you giving my questions in or comments in before I leave. First of all, I want to start by inviting all of my colleagues who say they believe in states' rights, to come on back and join the states' rights caucus that I've been trying to remind them.

They've deserted. I have no problem with helping these 23 states, but when the chairman says that we can't ban payday lenders, that's exactly what we've done in North Carolina. Whether I agree with it or don't agree with it, we've got a state legislature there. They've considered this issue.

And so -- and I've been trying to decide, trying to review the bill to be clear on whether it does preempt state laws or whether it does not preempt state laws. To the extent that it preempts state laws, North Carolina's law, it may well be helping the 23 states that the chairman said that it helps, but it's overriding North Carolina's law, which says you can't do this in North Carolina.

And so unless we can write this bill in such a way that it -- that the provisions of it are a true flaw, as opposed to a preemption, I have serious problems with it. And I don't read these provisions to do that, so --

REP. GUTIERREZ: The gentleman, enter in a colloquy with me?

REP. WATT: I'm happy to -- (cross talk) -- yield to the chair.

REP. GUTIERREZ: That is the intent of the bill, not to preempt?

REP. WATT: I've been told that --

REP. GUTIERREZ: But if could just -- and I look forward to working with you because I know you're really good at the law and drafting legislations so that we can make it as explicitly as possible -- (cross talk) -- to make sure that we reach --

REP. WATT: I just want to make clear that when you find all of these folks who are supporting this bill -- when you make that clear, the room will get a lot more scarce than it is today.


REP. WATT: If this bill is a flaw and we are explicit that it is a flaw then I think we're moving the state of the law forward. But if it is an exemption -- a preemption of state law, then in North Carolina we haven't moved the, I mean --

REP. SCOTT: Would the gentleman yield to me?

REP. WATT: My legislators tell me they don't want payday lending in North Carolina.

REP. SCOTT: But will he yield to me?

REP. WATT: I'm not happy to.

REP. GUTIERREZ: Let me put it -- it will be a lot easier, my friend, because if that isn't accomplished, and I know that you and I can get that done explicitly in this legislation, then the room won't be full -- won't be empty or full because I'll simply withdraw the legislation as the -- as a sponsor and ask my colleagues to -- it will cease to exist as a bill. If we are not -- and I look forward to working with you because I know the clarity -- (cross talk) -- in which you can write that -- this legislation.

REP. WATT: I'm glad to hear that from the chair. And I hope everybody in the room heard it.

REP. SCOTT: Would the gentleman yield for one second?

REP. WATT: I'm happy to yield to my gentleman friend from Georgia.

REP. SCOTT: Thank you very much, the gentleman from North Carolina.

Our case is very similar in Georgia, where we also have outlawed the payday lending. And as a co-sponsor of this bill, I can assure you that we will make -- if it is not clear as is, we certainly will make sure that it is clear. And the chairman has spoken --

REP. WATT: I'm reading the language on page 10, "Requirements of this subsection regarding extended repayment plan shall supersede any repayment plan requirements under any state law." I don't know what that means. Perhaps we would be able to clarify it.

I'm reading that, we preserve to attorneys general enforcement authority, that's on page 16 of the bill. But I'm also reading, "Scope of application, the provisions of the section apply to any person or entity that seeks to evade its applicability by any device, subterfuge, or pretense whatsoever."

North Carolina has done it openly not by pretense subterfuge or device, they've done it openly. So I mean, if your intent is that and we can get there, I'll be right there with you. But --

REP. GUTIERREZ: Thank you. The time of the gentleman has expired. We -- I wanted you to have the opportunity. And Mr. Royce has a question, so we'll try to get that in. I would encourage people to go vote. And we'll be right back.

REP. EDWARD R. ROYCE (R-CA): Thank you very much, Mr. Chairman. In light of the time, let me just ask this question to the witnesses. You know, some offer referred to payday lending as predatory in nature. But on that topic, the New York Federal Reserve, and this was during the time that our current Treasury Secretary Tim Geithner was the bank's president, and they did a study entitled Defining and Detecting Predatory Lending.

And in that study, they come to this issue of payday lending. And they note, quote, "Our findings seem mostly inconsistent with the hypothesis that payday lenders prey on lower -- for example, lower the welfare of households with uncertain income or households with less education. Those types of households who happen to live in the states that allow unlimited payday loans are less likely to report being turned down for credit, but are not more likely, by and large, to report higher debt levels, contrary to the over-borrowing prediction of our model." Unquote.

So I was going to ask, Mr. McCullen, do you agree with the New York Fed's assessment of payday loans. Doesn't the presence of a robust short-term credit market, in fact, benefit some consumers by increasing the availability of credit to them? I'll also ask Mr. Flores that question.

MR. MCCULLEN: Yes, sir, Mr. Royce. People use us for all kinds of different reasons and it's a line of credit almost that people can use at any point.

REP. ROYCE: And Mr. Flores, your observations on that front?

MR. FLORES: I am in full support -- (cross talk) -- that availability of payday lending will certainly assist those consumers.

REP. GUTIERREZ: We have five minutes to get over and vote.


REP. GUTIERREZ: We'll make sure you get all your time when we get --

REP. ROYCE: Well, I'll just conclude then, Mr. Chairman, by saying let's make sure that, you know, in terms of that credit availability, for people, you know, that try to access credit let's make sure that they're allowed, you know, that we don't foreclose that option for them as we move forward. And again, Mr. Chairman, thank you.

REP. GUTIERREZ: Yes. We're going to recess for the vote. I have an emergency meeting I need to go to. Mr. Ellison will be filling in for me when we get back.

(Sounds gavel)


REP. ELLISON: The hearing will be called back to order and reconvene. The chair will recognize himself at this time for five minutes.

Ms. Fox.

MS. FOX: Yes, sir.

REP. ELLISON: In your testimony, you asserted H.R. 1214 could provide congressional approval for payday lending. I find this argument somewhat confusing. By not acting to curtail payday lending over the -- oh, sorry -- Ms. Fox, it's clear that, from your testimony, that you are very much opposed to H.R. 1214 and any attempts to regulate payday industry that would stop short of banning the product.

Part of what you do for a living is to count votes. Is there legislation currently in the Congress that would ban payday lending that you believe has enough support to pass both chambers and be signed into law?

MS. FOX: We believe that consumers need protection from all forms of extremely expensive credit. Senator Durbin's S.500 and Representative Speier's H.R. 1608 would provide the traditional 36 percent small loan rate cap that would cover everything from bank overdraft loans to payday loans. President Obama ran on a platform of supporting a 36 percent rate cap and voters in America --

(Cross talk)

REP. ELLISON: -- my time, Ms. Fox. Does that piece of legislation you decided have enough votes to pass?

MS. FOX: I am ever hopeful that Congress wants to support consumers caught up in a disastrous credit --

REP. ELLISON: Thank you, Ms. Fox. Ms. Fox, you know, you've heard the testimony of Ms. Guzman. She did say that -- I believe her term was "a necessary evil," something that people don't want, but and I'll be the first to agree that I tend to not have a lot of problems with payday lending.

But if you just simply foreclose the option outright, what happens to people like, say, Ms. Guzman. Does she now have to bounce a check to get that water heater she needed. What about the situation, where you just got -- you need some money, you don't have anybody to go to, and your options are bounce the check or just suffer, I guess. What do you -- what about that?

MS. FOX: We think consumers deserve better than payday lending.

REP. ELLISON: Okay, Ms. Fox, thank you.

MS. FOX: And in California --

REP. ELLISON: Thank you, Ms. Fox.

So Ms. Guzman, your situation, I mean, do you think that the bill, we're talking about now, balances the equities in a reasonable way? As you've already pointed out, you're no big fan of payday lending either.

MS. GUZMAN: Right.

REP. ELLISON: But if you got to do something and you're in really in a jam, do you think the bailout balances the equities.

MS. GUZMAN: I think it's offering a very realistic answer to payday lenders that it all gives them the option an access, which is the American way. And at the same time it protects the consumer, which is what we look traditionally from our government for a minimal amount of protection in this case from the situation getting out of control or not having, you know, the certain protections you need to continue -- not to continue to live in this type of debt.

REP. ELLISON: Thank you, Ms. Guzman.

Mr. Flores, how could the payday product be improved to make it more useful to the consumer, in other words, eliminate the debt trap and to make the loan easier to repay? Do you have any views on this?

MR. FLORES: Yes, sir, I do. I've read the legislation and I agree with the -- certainly the disclosures, not necessarily for the Truth in Lending disclosure because I think that's misleading. I like the six-month payment plan that certainly offers relief to the consumer. And so I think that's -- would be the key issue. One point I would like to make though on that legislation is the $0.15 per dollar cap. Philosophically, I'm against price caps or price controls.

And not just from the business' profitability standpoint but as businesses grow and costs increase, be it salaries, overhead whatever, there is no additional relief for that company to do something with the pricing short of trying to control expenses more. And so I think that is an issue that I would take with this. Otherwise, I think the bill will strike the balance that you're looking for.

REP. ELLISON: Mr. Flores, in your testimony, you also indicate that quote, "The legacy cost structures of banks inhibit their ability to offer short-term, low dollar credits in a profitable manner." Unquote. Could you elaborate on what do you mean by that?

MR. FLORES: Banks have a huge investment with -- we call brick and mortar. Branch offices around the country, they have huge operation centers, information technology centers, personnel and the way they are designed that the cost for them, and we looked at this many years ago, and a lot of banks who said, you cannot make an individual loan under $5,000.

The resource it needs -- the individual resource, the systems resources, the compliance costs, the documentation cost to make a $5,000 loan is the same that would make a $500 loan. And they cannot -- they just don't have the cost structure to efficiently offer that product.

REP. ELLISON: The gentleman from Minnesota's time has expired.

And the chair will recognize Mr. McHenry from (Texas ?).

REP. MCHENRY: Thank you, Mr. Chairman.

Ms. Fox, just a basic question for you. You know, if payday loans were prohibited nationwide -- let's say we did that legislatively -- what do you think would replace it?

MS. FOX: If payday loans were prohibited nationwide, consumers would save billions of dollars -- (cross talk) --

REP. MCHENRY: But what would replace it?

MS. FOX: Consumers would use traditional small loan companies, that's what happened in North Carolina when payday lending was -- (cross talk).

REP. MCHENRY: I'm from North Carolina, and that's not true with the case. They travel to South Carolina, they use other mechanisms, I mean, people need short-term lending and what you're saying is in essence, people would just bounce a check.

MS. FOX: Very few consumers deliberately write a check to bounce for -- if they don't have sufficient money. That tends to be something that catches you by surprise, when your bank lets your debit card -- (cross talk) -- go through, but there are --

REP. MCHENRY: Reclaiming my time. Let's reference the Federal Reserve report that is submitted for the record. Federal Reserve report expresses that in states like Georgia and North Carolina there are -- the example they use in the report, you have more complaints to the Federal Trade Commission about lenders and debt collectors, you have more bounced checks in that state, you have higher bankruptcy rates in that state, and they don't allow for payday lending.

So explain to me how this is a rational argument you're making because human nature, there is obviously a need for this type of short-term lending. Do you disagree that there is a need for it?

MS. FOX: There is a need for small-dollar lending. The short term is part of the problem. The Federal Reserve report you're referring to is one staff member's draft report. It's not an official report from the New York Federal Reserve Bank.

They looked at aggregate data. They did not look at individual consumer experiences, for example. During that period of time, there were more complaints from DC consumers about debt collection to the Federal Trade Commission than there were from Georgia. So the standards that he used to try to describe what was going on --

REP. MCHENRY: So you're just --

MS. FOX: -- are too --

REP. MCHENRY: I'm trying to talk about --

MS. FOX: -- aggregate. They aren't a good description.


MS. FOX: If you look at research done looking at actual consumers who use payday lending, every one of them shows it's harmful.

REP. MCHENRY: Okay, great. So you're saying that there is just simply -- there is a demand for it, but you don't think it's good for consumers to have this option.

MS. FOX: We think there is a demand for small-dollar loans that are served by credit unions, by credit card cash advances, by traditional small loan companies that make installment loans to consumers. This market can be served and is being served --

REP. MCHENRY: What if you don't have a credit card?

MS. FOX: A third of the people live in the state where payday lending is not permitted --

(Cross talk)

REP. MCHENRY: They travel across state lines in North Carolina.

MS. FOX: In New England --

REP. MCHENRY: I've seen the effects in North -- Pardon me?

MS. FOX: In New England --

REP. MCHENRY: Well, I'm not from New England. I'm giving you the North Carolina experience.

MS. FOX: Yeah.

REP. MCHENRY: And, you know, you've mentioned that basically in North Carolina, that we haven't suffered based on the prohibition of payday loans.

MS. FOX: That's what the banking commissioner's survey of North Carolina consumers found that they were -- they didn't miss it. They were glad to see it go.

REP. MCHENRY: Well, that is okay. Well, certainly, you know, in terms of who they deal with in the regulated, you're asking one right -- you're saying that one person's opinion is invalid from the Federal Reserve, which I think the American people know is pretty valid, and another person's is very valid based on your political perspective.

MS. FOX: Well, the North Carolina bank -- (cross talk) --

REP. MCHENRY: Mr. Flores. To -- let me actually go onto someone else, Ms. Fox. I don't have much time. And we obviously, know your perspective on this that you just -- you understand the demand, but you don't think it's possible or necessary to fill that demand with regulated means.

Mr. Flores, you do a lot of work on this. And the question is, do you have an opinion on whether the consumers are better off or not better off to have a regulated payday alternative.

MR. FLORES: Sir, they're much better off. It's a $40 billion demand annually --

REP. MCHENRY: Why are they better off?

MR. FLORES: --for this type of credit. Their $40 billion would have to be met with other vehicles. And right now that other vehicle is basically an overdraft or a credit card advance.

Credit card advance is very expensive. You have an advance fee of 3 to 5 percent. And in these cases you're going to have APRs well north of 20 percent. And most people will make minimum payments and they'll never get out from under it versus a payday, which they fully plan to pay off in that two week -- one-week or two-week period.

REP. MCHENRY: Well, thank you, Mr. Flores. And what I would say is you're missing a third option, which is the illegal option.

And, Mr. Chairman, if you'll give me 15 additional seconds? There is a third option, which is the illegal option, which instead of charging a high interest rate, the experience I've had with individuals I knew and worked with in my family's business that they could get lending. And it was dollar-for-dollar lending. If you wanted $20, you pay $20 --

REP. ELLISON: The gentleman's time has expired.

REP. MCHENRY: -- and if you didn't pay, you get your legs broken. That's the illegal option and that's unfortunately what Ms. Fox is really trying to -- (cross talk.)

(Sounds gavel)

REP. ELLISON: The gentleman's time has expired.

The chair will recognize the gentleman from Georgia, Mr. Scott.

REP. SCOTT: Thank you, Mr. Chairman.

Let me begin by, sort of, going over a little bit here. First, let me deal with the state's preemption issue. It certainly is the intent of this legislation not to interfere with those states who already have laws on the books of whatever nature they may be.

And I think when we get to my colleague from New York, Ms. McCarthy, she's going to go into a little more detail with this because there are varying understandings of that. But certainly, this legislation is a targeted piece of legislation that targets 23 states that do not have any regulatory reform on payday lenders.

It is also an effort by this body to get a bill passed that will prevent some major protections for consumers and our constituents who want this service. Whether we may want it or may use it or not, there is a niche and a market that is there that consumers want and need.

Let me just very briefly, Ms. Fox, are you aware that this legislation that we have, caps interest rates and fees for short-time loans at a combined 15 percent and at the same time gives borrowers liberal, very liberal repayment loans that are structured in a way that will not take them into this cycle of unending debt.

MS. FOX: I'm glad you've asked about that because there are some states that have tried using an extended repayment plan. And it hasn't worked to prevent payday loans from being a debt trap. And those states, they have the same average number of loans for customers as the rest of the states that authorize payday lending. And that's because the payday lender whose profit is based on getting consumers to renew loans one after another has no incentive to encourage people to use the repayment plan -- you have to ask for it.

So in the states that have tried it, only 2 to 3 percent of the eligible loans end up going into the repayment plan with the same problem with the renewal ban; it prohibits renewals. Well, all but five of the states that permit payday lending prohibit renewals in one way or the other. But consumers just come in on payday, pay off the loan and now they don't have enough money to make it for the rest of the pay cycle, so they write a new check, they take out a new loan, it's not counted as a renewal, it's a back-to-back loan, and that's how people get trapped in the debt trap.

REP. SCOTT: All right. But what I'm saying is, you support the measure that we have in the bill, or do you not support, in this legislation, our language that will regulate and will impose balanced criterion on these loans, which specifically address the cycle of debt and excessive interest rates that result from continually refinancing or rolling over these loans. That is the crucible of the issue.

MS. FOX: Right.

REP. SCOTT: That this bill addresses and stops, which is the most egregious point in payday lending.

MS. FOX: We think this bill authorizes egregious lending, it authorizes writing unfunded checks to get loans, it authorizes a payback term of low -- of as little as two days. It authorizes back- to-back loans one right after the other.

REP. SCOTT: Right.

MS. FOX: And it does not serve as your intended consumer protection.

REP. SCOTT: Right. Do you believe, Ms. Fox, that these 23 states that had nothing, that this bill will offer some help and a regulated form as needed?

MS. FOX: It doesn't offer much of a reduction in the rates.

For example, in California, payday loans cost --

REP. SCOTT: But my question is that -- and I agree --

MS. FOX: Yeah.

REP. SCOTT: -- we can't deal -- we here have to fashion measures that try to respond to constituents needs and measures that we can develop the coalitions and alliances of thought that we can get through this body.

MS. FOX: Well, if we --

REP. SCOTT: And so the point I'm saying is would not these 23 states be better off with this effort of bringing some relief and some reform in the regulatory reform?

MS. FOX: The --

REP. SCOTT: Just a yes or no, that's all I wanted to --

MS. FOX: No, they would not be better off --

REP. SCOTT: All right. Ms. Guzman --

MS. FOX: -- because of all the loopholes in the bill --

REP. SCOTT: -- let me ask you this, because I only have a -- one question. I understand, I believe, you've used payday lending, is that correct?


REP. SCOTT: So I think that your comments will be very important. May I just ask the --

REP. ELLISON: The gentleman's time has expired.

REP. SCOTT: All right.


MR. : Yes.

REP. ELLISON: Mr. Marchant from Texas.

REP. KENNETH MARCHANT (R-TX): Thank you. First of all, my position on this after serving 18 years in the state legislature in dealing with this issue every single session for 18 years is that this is an issue that very much deserves to be debated and decided in the state houses. I do not believe this is a federal issue; I'm with (Mr. Watts ?) on this issue.

I do not believe that you can write legislation on this kind of a subject at the federal level and try to force it down on states who have clearly had the opportunity -- probably every year they meet, these 23 states have had the opportunity to take this subject up. So that -- I'm not for the legislations, simply because of that. As far as trying to set federal lending limits and federal -- actually, had the federal government set rights on a private transaction, a legal private transaction, that also is something that I'm not interested in.

Perhaps there's some venue (ph) because there's federal insurance on the banks, there may be some case to be made for preemptive rights of the federal government to go down and talk and pass ordinances and laws for banks. In Texas, we were the last state in the union to have branch banking, because we felt like it was a state's rights issue. We were the last state to pass home equity loans, because we felt like it was a state's rights issue. So I'm very much a state's rights issue guy on this here; I do not believe that the federal government can effectively regulate this industry.

I'm -- I represent a district that -- throughout my career, I always felt like the payday lending industry was an industry that I would see in districts where there were a lot of working class, a lot of people that lived from paycheck to paycheck, but my district's a suburban district near Dallas, and if you walk into one of the payday lenders in my district, you're going to find housewives, you're going to find school teachers, you're going to find factory workers, you're going to find people who work for the city, and you're going to find people that I don't think that we have given enough credit to.

These are people that can add and subtract and multiply. They know that bouncing a check at the bank is not a good thing. They know that it is costlier to go to the bank and bounce a check than it is to go to the payday lender. They know that it could hurt their credit rating if they make a credit card payment late. They know that the credit card late payment is probably going to be more expensive than the payday lending rate.

So I like the testimony of the gentleman from Louisiana. We think that our system in Texas is working very well. I would like to give the other 23 states that have decided to not do anything about it or still haven't decided what kind of laws they want to make to continue to have that -- those rights and to continue with that. For that reason, I'm going to be against the bill and thank you, Mr. Chairman.

REP. ELLISON: Gentleman yields back. The chair will recognize the gentle lady from New York, Ms. McCarthy.

REP. CAROLYN MCCARTHY (D-NY): Thank you, Mr. Chairman, I appreciate this hearing. First, let me say, and join my colleagues from North Carolina and Georgia that, you know, in the state of New York we do not have payday lending, but we do. It's just a different form of what you're talking about.

What is defined and regulated by the state as a payday loan, they have operations that offer similar projects -- products, but don't need all the principles of a payday loan, so they're unregulated and that is a grave concern and I think that's what, you know, we're trying to get at.

Now, I know CFSA has best practices for the payday advance industry. A lot of that has been put into this bill. The only difference will be that within this bill, there'll be teeth or -- where we could actually -- do regulate that if that's what is going to come down on the road. So to say that, you know, some of the states don't have any form of payday, I find not true. But the other thing is too -- in my area, we have "payday lenders," we don't have any banks.

So where are those people that live in those particular areas -- there is no banking. The other thing is, in almost all the banks that I know, you have to have a -- an account to go in and cash a check. So again, we're finding problems with that. You know, if it's a paycheck from a -- whatever the job is, and they have an account there, maybe the bank will cash that check, but otherwise you can't cash a check there.

So I guess, my feeling is that -- I guess, I got -- want to go to Ms. Fox. It's my understanding that the Consumer Financial Service Association of America has a list of best practices that their members must follow, and then a legislation reforming payday loans, H.R. 1214, puts a cap on interest rates that is lower than the fees allowed, again, in 23 states that allow payday lending.

Could you explain how a payday loan could be worse than the consequences of not being able to obtain a short term loan from a financial institute, forcing an individual to bounce a check as we've heard from many of my colleagues. And I think that's something that we have to take into consideration. We want to basically -- there's no one here on this -- on the -- Republican or Democrat, that wants to condone anyone that is ripping off any of our constituents, nobody does.

But the fact of life is that we need to have -- people, when they want to cash their check or have a short term loan, they have -- need to have a place to go. To me it's almost like an ATM machine, here are your prices, if you want to borrow, or take money out with your credit card, you're going to pay an upfront fee. And if we can do that with some sort of regulation, I think that is better than what it is today.

MS. FOX: In New York, your 25 percent criminal usury cap prohibits payday lending, and although you have check-cashing outlets where people pay a fee to turn a paper check into cash, that's not a credit transaction. I know you do have refund anticipation loans that are expensive in New York, because those are offered by banks, so New York can't regulate those interest rates.

But there are other options. Everybody that gets a payday loan is a bank customer; you have to have a checking account opened in order to write a check. You could apply to your bank for real overdraft protection at a lower cost. A lot of credit unions offer low cost small loans to their members. In Pennsylvania, the treasurer of the state puts deposits into credit unions to encourage them to make very low cost loans available in Pennsylvania --

REP. MCCARTHY: I agree with you on that. But I'm saying to you, I know in certain districts, part of my district, they don't have a credit union, they don't have a bank, where are they supposed to go, they also probably don't have a car, so where do they go?

MS. FOX: Most people, when they have a $100 or $200 shortfall, turn to their family and friends. They deal with whatever the credit emergency is, they call the utility company and ask for extended payments, they ask the landlord for a bit more time. Paying 400 percent --

REP. MCCARTHY: Ms. Fox, I'm not trying to give -- Ms. Fox, I'm not trying to give you a hard time, but --

MS. FOX: Yeah --

REP. MCCARTHY: -- we're talking about people that are probably on the very lower end of income. And most likely their family members are not going to have money. But with that -- I swear that Mr. Flores, you had wanted to say something?

MR. FLORES: Yes, I'd like to respond to that. When you go to the bank to apply for traditional overdraft line of credit, which would be akin to a credit card, many banks that I've dealt with who have actually formalized these overdraft programs have limited or eliminated offering the traditional overdraft line of credit, because there is very little revenue associated with that product. The revenue is all in this overdraft protection program.

So I think it's very difficult to say that people have the option to go in and get this, because if banks have looked at the profitability of all these products and given the interest margin squeeze they are facing right now, they're looking for the most profitable products they can offer.

REP. MCCARTHY: Thank you. With that I yield back my time.

REP. GUTIERREZ: Thank you. We're going to go to -- I just want to alert the members that when we begin these hearings, there are 10 minutes per side by unanimous consent for opening statements. And if people want time, there will be a lot of that time on the basis of their seniority in the committee so that everybody has ample time to be able -- the gentleman on my right takes care of that side, and sometimes people don't get to speak. I assure you when I was here 17 years ago and I was way down there in the fourth row, I would've hoped these kinds of rules would've been in place. Mr. Cleaver, you're recognized for 5 minutes.

REP. EMANUEL CLEAVER (D-MO): Mr. Chairman, this is one of those times I know people assume that we come here with all -- with positions already in concrete, which is not true for me to -- certainly not today. Most of the assumptions that I came in here with have dramatically changed.

Although I am not a fan of payday lending, not at all, but I am concerned about and I'm not sure anyone has addressed a way in which we can provide necessary services to the unbanked and it is also -- the unbanked represents an untapped market and I'm not -- I'm a federalist, so I'm not interested in supplanting federal legislation -- supplanting state legislation with federal legislation, and so I'm really struggling with exactly where I am.

The only thing I know for sure is that I don't like payday lending, because I think some of the practices, frankly, are -- when you have fees of 300 percent as it happens in some places, that can't possibly be good, but on the other hand, what do we do to provide service to the unbanked, can anybody -- yes, sir, Mr. Flores.

MR. FLORES: Mr. Cleaver, I've -- I have worked with clients in the past who've tried to address the unbanked situation, and the key to the unbanked is the first product they need is the checking account. And some of the strategies that have been employed is what's called a checkless checking account, where direct deposit is made to eliminate any potential fraud on the deposit side or return -- (inaudible) -- deposit side. And no checks are permitted, only the debit card for ATM withdrawals and point of sale transactions, which would eliminate any potential for overdrawing this type of account.

When somebody establishes that, and over a period of time, has a track record, then they go that next step in developing the appropriate credit --

REP. CLEAVER: The problem is -- thank you, I'm -- I hate to cut you out, except my time is moving. And the problem with that is when you go into the urban core, there is no gradualization, because there is no bank. You know, there are -- you know, you can ride around in a urban core for miles and miles and not come in -- not come across a bank or a grocery store for that matter, but -- so -- Ms. Guzman.

MS. GUZMAN: Congressman -- let me say that going back to my statement of an evil but a necessary evil and when we deal with evil we try to minimize the impact, and I think this legislation and legislation like that that permits payday as -- lending establishments, however regulates or caps the fees to protect the consumer are the only answer.

Unfortunately, addressing Ms. Fox, some of my constituents, many of them have -- my neighbors do not have family members they can turn to for a payday lender situation

MS. : Yes.

MS. GUZMAN: -- we have a transient population right now with the economy where people move from community to community, state to state, to find jobs. Many of them are first generation Americans, native- born Americans, they do not have a family support base or safety net here. So as I stated, payday lenders, there is a market for them, there is a need for them and I would just be very grateful if we -- (cross talk) -- whenever possible.

REP. CLEAVER: Yeah, but the -- where I'm trying to go -- thank you, where I'm trying to go is -- and I -- maybe I'm inarticulate --

MS. GUZMAN: What is the answer?

REP. CLEAVER: What happens to the people who live in areas where there are no banks?

MS. FOX: There are -- may I --


MS. FOX: Yes. There are programs that are -- have been launched in a lot of large cities; it's called "Bank on" where the mayors and local civic leaders are working with banks to encourage them to provide the basic entry level banking services that the communities that you're describing need.

My organization, Consumer Federation of America is working on America Saves campaigns across the country to try to help low and moderate income consumers become savers. We have new data out from the Federal Reserve that does -- that compares people who use payday loans with people who don't and the folks who don't use them are twice as likely to be savers than the folks who end up at a payday loan outlet.

So if there are creative programs being worked on to bank the unbanked. The problem is once you get these consumers banked, now they are the prime market for payday lenders since having a checking account is a prerequisite, but they don't have enough money to be able to pay the loan back all at one time on their next payday.

REP. GUTIERREZ: Yes, thank you very much, your time has expired.

REP. CLEAVER: Thank you, Mr. Chairman.

REP. GUTIERREZ: Ten seconds to go out of order, unanimous consent. I'd like to ask Mr. McCullen a question before we go any further. Hearing no objections, so ordered.

I have your statement here. Last paragraph, "I respectfully request that you defeat this bill in its current form or alter it to mirror the Louisiana law, which allows $20" -- "which allows $0.20 and a dollar plus" --

MR. : Per dollar.

REP. GUTIERREZ: -- "per dollar, sorry, and a documentation fee." So you're against the bill in its current form, is that correct?

MR. MCCULLEN: Yes, sir.

REP. GUTIERREZ: Thank you. Ms. -- gentle lady Ms. Speier is recognized for five minutes.

REP. JACKIE SPEIER (D-CA): Thank you, Mr. Chairman. Ms. Guzman, I had a question for you. If you could get a payday loan for 36 percent instead of 300 percent, would you like that?

MS. GUZMAN: (Off mike.)

REP. SPEIER: So would you support a bill that had a interest cap of 36 percent instead of 300 percent?

MS. GUZMAN: I would support any one that would.

REP. SPEIER: Would you put your microphone on, please?

MS. GUZMAN: I'm -- I apologize. I would support anything that would minimize the negative impact to consumers or my neighbors --

REP. SPEIER: So there -- yes, Mr. Flores?

MR. FLORES: I'd like to --

REP. SPEIER: Would you support that?

MR. FLORES: Well, it sounds good, but the issue is, when you do a 36 percent annual percentage rate, that means it boils down to $1.38 fee for a $100 advance. And no one can off -- there's not a business model that will allow anyone to even cover their costs and offer that product. So while, yes, it sounds good, and it is -- 36 percent on a traditional installment loan makes sense, but this type of fee product, it does not make sense, because no one -- the -- you would put the industry out of business and you --

REP. SPEIER: Well, maybe some of us think that the industry has overstayed its welcome.

MR. FLORES: Well --

REP. SPEIER: That's -- Mr. Flores, that's all I have to ask, for you. It appears that the payday lending industry is losing some of its momentum. In fact, there hasn't been an initiative that they brought before a state since 2005 that has actually passed, because the people -- in our communities recognize that 300 percent interest rate is not a good interest rate.

And in DC, as I understand it, it has been prohibited; payday loans are now prohibited as is they are in New York and other places, and I got to believe that in huge communities like that where there are a high percentage of low income people that are finding other ways to get credit when they need it. The question I have for you, Ms. Fox, is the following: what are the loopholes in this bill?

MS. FOX: The bill defines a covered payday loan as only closed end, so it leaves out all the payday lenders who've turned their product into an open end product. For example, in Virginia, Advance America makes open end loans, same cost structure, same term loan -- term for the loan, it's just they called it "open end," it would not be subject to this bill.

Any loan that was for longer than the 90-day definition would not be covered by this bill and payday lenders have already changed the term of their loans in order to get around that kind of definition as well. We're also concerned that the credit services organization model, which is used widely in Texas -- Texas has never passed a payday loan industry bill to allow payday lending, their Texas finance commission rules would permit it under their regular small loan law, but most lenders in Texas call themselves credit services organizations and charge a high for arranging a loan with some third party lender.

It's not clear to me that they would be subject. So we have a bill that would leave out almost all the payday lending in Illinois, probably all of it in Texas, a big chunk of it in Virginia, and it would be very easy for lenders in 10 of the 23 states that permit higher than the 390 percent cap in this bill to just change their product into an installment product, because there's no rate cap on installment lending. So it'd be very easy to get around the definitions in this bill and keep right on charging 500-600 percent without violating this bill.

REP. SPEIER: So what would improve the bill?

MS. FOX: It would improve the bill to prohibit holding the personal check as security for the loan; to make these loans on the basis of a contract.

REP. SPEIER: Listen, let me ask you a question on that. It seems to me almost illegal, because you're not supposed to provide a check if you don't have sufficient funds.

MS. FOX: You'd think so, wouldn't you.

REP. SPEIER: So you're basically -- they're basically asking the person to conduct themselves in an illegal manner by offering up that check that they don't have sufficient funds to use.

MS. FOX: That's true and in some states, the payday loan law has to exempt these customers from being subject to the criminal bad check law, because otherwise they would be, but the lender knows you don't have money in the bank when they take the check, but they hold it, and that adds costs for consumers and in Virginia, people paid in 2007, about $5 million to their own banks in bounced check fees, because their payday loan checks were returned.

REP. SPEIER: Okay, so that would improve the bill. What else would improve the bill?

MS. FOX: A longer loan repayment term. If you gave people five months to repay, your payday loan is structured here at $15 per 100, that could set down to 36 percent APR. We know from the chart I included in my testimony that the typical family making $35,000 a year cannot pay all of this back out of one --

REP. GUTIERREZ: The time of the gentle lady has expired.

REP. SPEIER: Thank you.

REP. GUTIERREZ: Congressman Maxine Waters.

REP. MAXINE WATERS D-CA): Thank you very much. I'm going to yield to the gentle lady from California. I just came in -- her line of questioning is exactly what -- that I looked forward to doing. So Ms. Speier, would you continue your line of questioning please?

REP. SPEIER: If I'm -- thank you. So we had so far established that if you would not require them to hold the -- a blank check, that would be an improvement to the bill. If you could provide within this bill a longer repayment period, that would improve the bill, what else would you --

MS. FOX: And a reasonable small loan rate cap. Competition does not drive down the cost of payday lending. You may have a payday lender on every corner, but they are all typically charging the legal rate. It takes a rate cap to bring down the cost of loans to consumers who have little power in the market.

In the traditional small loan rate cap, a 36 percent is the reform that consumers say they want to have. If you do polling -- that was released just this last week. Seventy percent of Americans want a rate cap of 36 percent or less to protect consumers from rate gouging, and that's the rate cap that was upheld in voting at the polls, both Ohio and Arizona last fall. Consumers don't think that creditors should be allowed to charge 400 percent interest.

REP. SPEIER: And Ms. Fox, just to point out to you when I introduced the bill that would create a usury rate of 36 percent, I had people in my district calling me saying that's too high, although they would find this particular conversation particularly interesting. I think. I yield back.

MS. : Yeah.

REP. GUTIERREZ: And the lady yields back.

Mr. Paulsen.

REP. WATERS: The gentle lady is yielding back and -- her time to me. Let me just say Mr. Chairman, that the payday lending has always been a real concern of mine and you're right, I happen to have a portion of my district where we have a lot of lenders and the argument is made that, you know, people depend on this kind of lending, but I just think that, you know, 300-400 percent is way too high.

Let me tell you what I began to think about payday lending. We've been dealing with sub-prime loans, and we refer to many of the deals as exotic lending where we had Alt-A loans that they didn't do verification on employment. We had adjustable rate loans that were just outrageous in the amount of money that costs the taxpayer when they reset with these high margins and on and on and on. And we were calling for a regulation and we want tighter regulation.

The same thing is going on here. We have products that are interests to our consumers and we need to crack down on this just as we are looking at the sub-prime loans and the mess that was created. We have a problem here with people making very little money who will never be able to get out from under this kind of debt unless we do something to crack down now.

This has been going on for a long time, and so Mr. Chairman, just let me say that no matter what the intent is, the fact of the matter is we have got to resist any attempt to make it look as if we are cracking down, when in fact we are opening the door for more abuse. And I will yield back the balance of my time.

REP. GUTIERREZ: The gentle lady yields back her time. Mr. Paulsen, you're recognized for 5 minutes.

REP. PAULSEN: Thank you, Mr. Chairman. I know a lot of the questions I had have already been asked, but I wanted to ask Mr. McCullen first perhaps, you know, how would the legislation H.R. 14 really impact your business if you can just describe how the legislation would impact what you do?

MR. MCCULLEN: The legislation that's being discussed here today, if it had been in place in Louisiana last year, I would've ended in the negative. That's why I'm here not to support this bill. I ask in my testimony that you implement the Louisiana bill, because I am listening to all these different things being said here, we don't have these problems in Louisiana, because it's against the law. We had 24 complaints last year and we had over 4 million transactions. We have a very tight, succinct bill that operate -- that we're able to operate under and protects the consumers. So that is why I was against this bill.

REP. PAULSEN: And then I'm just curious Mr. McCullen, I mean, who would really benefit from this law if that's the case, I mean, is there another product that's similar to yours that you offer, and I'd mentioned this in my opening statement, but -- you know, on a widespread basis, is there any other product that's offered that really substantially, is available at lower cost for people?

MR. MCCULLEN: Not to my knowledge, no.

REP. PAULSEN: Yeah. And coming from Minnesota, Mr. Chair, I mean, it's the case where I've talked to people in this industry too that, you know, their average interest rate that they'll charge is only 9-1/2 percent. And so a very reasonable level and -- you know, I -- Ms. Fox had mentioned earlier her concern about triple digit APRs and I'm just curious what do you think of a 99 percent APR? Ms. Fox.

MS. FOX: It's still high. It sure beats 520 percent, which is what they can charge in Louisiana for a single payment loan. We think that the traditional small loan rate cap in states has been around 36 percent. And it provides for loans to consumers who don't have a perfect credit rating under an affordable repayment schedule, and we think that it would be more beneficial than what's being proposed here.

REP. PAULSEN: Well, I think it's also important to point out that it would be very beneficial for consumers down the road to not necessarily rely in the description of an APR, I don't think consumers understand what APR means necessarily and just regulating -- not having that triple digit APR, it's going to be much more easier for consumers if they understand what real fees are. We've seen that in the credit card industry. Mr. McCullen, you got a comment on that?

MR. MCCULLEN: I appreciate that comment, because I wanted to bring that to the table. Most Americans do not understand APR. I have lots of friends of mine that are personal friends of mine, they do not understand what we do and how we do it. When I explain it to them, they understand that this is a flat fee.

And I also want to make a comment about APR the American banking association testimony that was before the subcommittee on March 19th said with regard to applying APR to overdraft fees, another short term product, "Any time an annual percentage rate is calculated for a term of less than a year, the inclusion of a fixed fee, even a modest one will distort and overstate the APR. The shorter the repayment period, the greater the APR will appear. In instances where there is a fixed fee, this means that the sooner the consumer repays, the greater their calculated APR. A difficult concept to explain to consumers as it appears they're repaying -- that their paying earlier actually increase the cost of credit."

REP. PAULSEN: Well -- and -- Mr. Chair, I just -- it just points out -- I think there are some states that have done some good things and have some good models; in Minnesota -- Louisiana might be another case too and I hope you consider that as the legislation moves forward, thank you, yield back.

MR. : Thank you.

REP. GUTIERREZ: Thank you. Mr. Sherman, you're recognized for 5 minutes.

REP. BRADLEY SHERMAN (D-CA): Thank you. I'm a bit confused about using APR as a way to determine the fairness of the fee. Ms. Fox, I was once at my bank an hour before it opened. Usually, I'd go inside to get a couple of hundred bucks out of my account, but I wanted the money an hour sooner than I could get it, because, like, they were closed. And so I went to the machine, I paid -- my bank was good, they only charged me a $1 fee to get my $200 an hour early, $1 to get my 200 bucks an hour early. Now, that's a 186,000 percent APR. Am I an idiot for paying a 186,000 percent APR to pay that $1 fee just for an hour?

MS. FOX: Was the $1 fee to borrow the money or just a fee for accessing it through the ATM rather than in person?

REP. SHERMAN: It's the time value of money, I was going to get the same money sooner whether it constituted a loan for the hour which was then repaid to the bank without further cost or otherwise.

I mean, it's -- I got my money an hour early, time value of money, one hour, 200 bucks, 186,000 percent APR.

MS. FOX: Well, I would never say that a member of commerce -- of Congress was an idiot, so --

REP. SHERMAN: Everyone else does.

MS. FOX: Well, I would never -- I wouldn't --


MS. FOX: But I would say --

REP. SHERMAN: Should that transaction be banned, because it's a 186,000 percent APR?

MS. FOX: Well, that's not the product we're talking about today --

REP. SHERMAN: I'm asking you a question here --

MS. FOX: Okay.

REP. SHERMAN: -- you know, you don't get to confine your responses just to what we're talking about today.

MS. FOX: Truth in Lending has been the law of America for four decades. It requires that credit be quoted with a comparable price, so you can compare a one-month pawn transaction, a two-week payday loan, a six-month installment loan, a cash advance into credit card and that's --

REP. SHERMAN: But when you're doing things for a short period of time, I mean --

MS. FOX: That's right.

REP. SHERMAN: -- if one payday lender charges $30 to use the money for two weeks, and another one charges $40 to use the money for three weeks, you don't necessarily say the -- that the higher fee is the better deal. Time value of money is something I understand, I'm a CPA --

MS. FOX: Yes, and --

REP. SHERMAN: I also understand it just doesn't make any sense to evaluate a fee-like transaction, the --

MS. FOX: We disagree.

REP. SHERMAN: Okay. The other point I'll make is, I deal with my constituents, they know I'm a CPA, they ask me all kinds of -- the only financial transaction they do understand is the payday loan.

MS. FOX: Well --

REP. SHERMAN: None of them understand just about anything else, but you know, you say, okay you use your credit card and you pay most of it off, and then you use it some more, how much is that going to cost you -- they got no idea. The only -- I -- you know, you pay your -- you use your overdraft protection, how much is that going to cost?

MR. : Nobody knows.

MS. FOX: Well, if this subcommittee would enact Representative Maloney's overdraft bill, consumers would get Truth in Lending cost disclosures for those loans as well and we think that would have a great benefit on the banks.

REP. SHERMAN: What I'm questioning is whether Truth in Lending makes any sense at all for loans of less than a month or two months. You're -- what you think of as great information, to my constituents, is (gobbledygoop ?) or misleading.

MS. FOX: Well, requiring loans to be repaid in less than several months also doesn't make very good sense for consumers in the income bracket that use payday loans.

REP. SHERMAN: Some people only want to buy -- I see my home girl from the San Gabriel Valley where I grew up, Aztecs (ph).

MS. : Hey.

REP. SHERMAN: I mean, were there occasions where you needed the money for only a month, or did you always have a need for the money for three months or four months or longer?

MS. GUZMAN: No, in that particular occasion that I discussed earlier, I did only need it actually for 30 days. What I did was, I paid it back, because I'm not allowed to roll over, and literally borrowed it back at that moment, again, paying another fee, because I couldn't pay it back for 30 days. But you know, I was able to pay it back.

REP. SHERMAN: So -- but you only held the money for a grand total of 30 days?


REP. SHERMAN: Okay. So if we forced you to take the money for 60 days, but we charged you just a little bit more, would that help you?

MS. GUZMAN: Well, it will at least give me the option of not having to pay it back in two weeks. I'm just saying, in my -- Congressman, in my experience, every one situation is different. I do have very well intended neighbors who would need the loan --

REP. GUTIERREZ: The gentleman's time's expired.

MS. GUZMAN: Oh, I'm sorry.

REP. SHERMAN: Okay, I just ask the witness not to tell anybody in the San Fernando Valley that I actually grew up in the San Gabriel Valley, I yield back.

MS. GUZMAN: My lips are sealed.

REP. GUTIERREZ: Yes, we ban rollovers in this particular bill and we give you 90 days to pay the money back so you wouldn't have had to pay the fee again. Mr. Childers is recognized for 5 minutes.

REP. TRAVIS WAYNE CHILDERS (D-MN): Thank you, Mr. Chairman, and I have been following between votes in the earlier part of the panel, I want to thank you all for being here from office. And I think this has really been touched on today, but I really wanted to address the issue Mr. Chairman, of regulating by the states. And I just want to go and say this.

I am from Mississippi. Mississippi is -- no different from all the other states, we have varying degrees of people in need of various amounts of loans and sizes. I come from a state, quite frankly, that does a good job of regulating. They do a good job of regulating banks, they do a good job of regulating consumer loans, and they do a good job of regulating payday loans, if that's what it is to be called.

Now, at my age, I have survived many eras, let me just say that, and there are times that I needed a little bit of money and there were times that I needed a lot of money. And I'm not so sure that this is really the avenue for us to take on this. And I will say this, I'll use my own state as an example there. It is my belief that customer John Doe will go to the place where he can borrow money or Jane Doe will go to the place they can borrow money for the least amount, I believe that. I've done that in my life.

There are times that my own hometown bank probably charged me more than my neighbor, but there were a lot of factors. Maybe my credit wasn't as good at that time, maybe he thought I already owed too much money, I just -- I wanted to make that -- just as a statement, really, into the panel -- and I understand each of your interest and I appreciate that, I had read what you'd delivered to us and I've listened to you while in my office in between these votes today. But my state does a good job.

And I really have nothing by complements for my own state, and in my state, the payday loans companies seems to be the target, if you will, of maybe this discussion today. The people there -- and only -- don't get me wrong. I'm certain that there have been instances where people have been aggrieved -- it is like any industry, there are always some who have been wronged or believed to have been wronged.

By the same token, I saw this industry in my state and regardless of what I personally think about the industry, I will say this, they stepped up and worked with the state of Mississippi to regulate themselves to a degree or to accept regulation so they could stay in business. I'm anxious -- you know, I welcome any comment from the panel back, but I just wanted to speak, I guess, on behalf of state regulation.

MR. FLORES: Congressman, I was just looking at my study and for the state of Mississippi, since you do a lot of payday lending --

REP. GUTIERREZ: I'm -- Mr. Flores, could you put your microphone on?

MR. FLORES: I'm sorry. The state of Mississippi, the average consumer who has a checking account pays a $163 in overdraft in NSF charges compared to the national average of over $300. So again, according to my opening statement, is there a direct correlation? I don't think there's enough data yet, but there's certainly an indication that we ought to look at it in more detail. And so the consumers in your state are paying less in overdraft charges than consumers in many other states.

REP. CHILDERS: I would agree there probably isn't enough data to say that is it, but it is -- if it's a fact, just is what it is. Thank you, Mr. Chairman.

REP. GUTIERREZ: You're welcome. A couple of quick questions to Ms. Fox. You said -- is it your testimony that competition will not drive down the price of payday loans?

MS. FOX: It has not --


MS. FOX: It has not -- no.

REP. GUTIERREZ: Okay. So supply and demand works everywhere else except the payday industry?

MS. FOX: That's right, we feed off --

REP. GUTIERREZ: Okay. I just wanted to make sure that was your testimony.

MS. FOX: Yeah.

REP. GUTIERREZ: I can tell where you're at. And then your testimony is that the bill would force payday lenders to change their product?

MS. FOX: It would give them an incentive to change the product.

REP. GUTIERREZ: So they would -- so it would -- so while it has nothing to do with the -- driving down the price, it will change their behavior, in terms of changing their product to installment loans?

MS. FOX: From past experience --

REP. GUTIERREZ: From past experience. So it does have on one, but not on the other. Everyone's had opportunity, I would ask unanimous consent that a letter supporting the goals of this legislation from the national association of federal credit unions be entered into the record. Hearing no objection, so ordered.

I want to thank the witnesses and the members for their participation in this hearing. The chair notes that some members may have additional questions for the witnesses, which they may wish to submit in writing, therefore, without objection, the hearing record will remain open for 30 days for members to submit written questions to the witnesses and to place their responses in the record, this subcommittee hearing is now adjourned.

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