Bureau Publishes Payday Loan Examination Procedures; Hosts First Field Hearing
WASHINGTON, D.C. – In Birmingham, Ala. today, the Consumer Financial Protection Bureau (CFPB) is convening the agency’s first-ever field hearing to gather information and input on the payday lending market. The hearing coincides with the publication of the Bureau’s Short-Term, Small-Dollar Lending Procedures – a field guide CFPB examiners will use to make sure payday lenders – banks and nonbanks – are following federal consumer financial laws.
“We recognize the need for emergency credit. At the same time, it is important that these products actually help consumers, rather than harm them,” said CFPB Director Richard Cordray in his opening remarks at today’s field hearing. “Now, the Bureau will be giving payday lenders much more attention.”
Payday loans are typically marketed to bridge a cash flow shortage between pay or benefits checks. They generally have three features: the loans are small dollar amounts; borrowers must repay the loan quickly; and they require that a borrower give lenders access to repayment through a claim on the borrower’s deposit account.
Most loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed. For the two-week term typical of a payday loan, these fees equate to an Annual Percentage Rate ranging from 391 percent to 521 percent. Loan amounts and finance charges vary depending on state law. If the consumer does not repay the loan in full by the due date, the loan agreement typically permits the lender to cash the consumer’s check to obtain repayment.
Payday lenders have sprung up across the country over the past 20 years, beginning in storefront locations. With the advent of new media, payday loans now are offered through the Internet. Most recently, some banks began offering similar loan products.
With the establishment of the CFPB, a federal agency for the first time can supervise not only bank payday lenders but also all nonbank payday lenders. Specifically, the Short-Term, Small Dollar Lending Procedures describe the types of information that the agency’s examiners will gather to evaluate payday lenders’ policies and procedures, assess whether lenders are in compliance with federal consumer financial laws, and identify risks to consumers throughout the lending process. The procedures track key payday lending activities, from initial advertisements and marketing to collection practices.
The CFPB will be implementing its payday lending supervision program based on its assessment of risks to consumers, including consideration of factors such as the volume of business and the extent of state oversight. The CFPB also will be coordinating with federal and state partners to maximize supervisory capability and minimize regulatory burden. If a violation of a federal consumer financial law has occurred, the CFPB will determine whether supervisory or enforcement actions are appropriate.
In general, CFPB supervision will include gathering reports from and conducting examinations of bank and nonbank activities. The examination process will begin with scoping, review of information, and data analysis followed by onsite examinations. The CFPB will be in regular communication with supervised entities, and it will conduct follow-up monitoring.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.