BillFloat and ZestCash are two online start-ups who “are introducing new versions of these loans that also carry significant fees,” and we’re happy to see that consumers have many options when shopping for a short-term credit loan.

In this New York Times article, Ann Carrns highlights the following about these two companies who are offering innovative products in this space:

“BillFloat, based in San Francisco, doesn’t pay any money directly to the customer. Rather, it pays its customers’ bills — say, a utility bill or cellphone bill — and then automatically deducts the amount of the bill, plus fees and interest, from the customer’s bank account within 30 days.”

…

“Customers apply by filling out an online questionnaire, and are then contacted by a ZestCash representative to complete the process. ZestCash, Mr. Merrill said, uses a proprietary underwriting process that looks at hundreds of variables to determine if the customer is likely to pay back the loan. If approved, the customer chooses an amount to borrow — up to $800 — and selects not only the length of the loan, but also the amount of the payments. The payments are automatically withdrawn from the customer’s account when a paycheck is deposited. The approach gives borrowers more flexibility…”

“Several studies have found that payday lenders are indeed more likely to locate in neighborhoods with disproportionately large Hispanic and/or black populations. Importantly, however, this literature uses data at the county or Zip code tabulation area, so the authors can’t really say which households are actually using payday credit. Nor can they control for household level income and other variables that might influence payday credit usage. The household-level data we study allows us to do both.”

Another important piece to NY Fed’s research: Unconditional Comparisons

“…Unconditionally, payday credit users and nonusers differed in a number of ways. The average payday credit user was younger for one, by about 11 years. Users were disproportionately female: 41 percent of users were female, while just 27 percent of nonusers were female. Single households, particularly single households headed by women, were disproportionate users of payday credit.

“There are obvious racial differences between users and nonusers as well, at least unconditionally. Consistent with the targeting critique, blacks and Hispanics were disproportionately represented among payday credit users. Blacks represented 22 percent of users, but only 12 percent of nonusers. Hispanics accounted for 15 percent of users, but just 9 percent of nonusers. By contrast, whites represented a larger share of the nonusers.

“There are some educational differences as well. Perhaps surprisingly, payday credit users are not the least educated members in society; users were actually more likely to have a high school degree or to have a GED than were nonusers. However, they were less likely than nonusers to have completed college.”

“We appreciate the Consumer Financial Protection Bureau’s (CFPB) willingness to hear from all stakeholders as it develops plans to regulate the small loan market. Storefront lenders made 110 million loans to nearly 20 million American families last year. At a time when access to small dollar loans is more vital than ever, developing strong, uniform, research-based rules will be a benefit to consumers.

“State governments currently regulate all aspects of payday advance lending in every state where payday advance loans are available. We have long worked with our state regulators in all 32 states where we operate to ensure compliance with state licensing and renewal requirements, supervision and examination procedures, and other consumer protection laws and regulations. Our member companies are committed to following all state and federal laws, as well as adhering to our association’s strict set of Best Practices that include truthful advertising, appropriate collection practices, and providing an Extended Payment Plan to customers who are unable to repay their payday advance loan.

“The Bureau’s new Short-Term, Small-Dollar Lending Examination Procedures is now published and our members look forward to working with our new federal regulator to confirm their compliance with all federal consumer financial laws and regulations.”

A few highlights:

• “… Let me stress again that this is a field hearing. We came here to listen, to learn, and to gather information on the ground that will help inform our approach to these issues. We are thinking hard about these issues, and we do not have all the answers worked out by any means.”
• “Whatever their reasons may be for taking out a payday loan, Americans are now borrowing billions of dollars this way. Lenders collect over $7 billion in fees annually.”
• “… And so I want to be clear about one thing: We recognize the need for emergency credit. At the same time, it is important that these products actually help consumers, rather than harm them.”
• “In addition to the things we need to learn more about, we know there are some payday lenders engaged in practices that present immediate risk to consumers and are clearly illegal. While we need to learn more about the prevalence of this conduct and what allows it to fester, where we find these practices we will take immediate steps to eliminate them.”

The CFPB wants you to tell them your story: good or bad, about your experience with a payday advance. Your story will help inform how the CFPB works to protect consumers and create a fairer marketplace. By filling out their comments section or even telling your story via their contact form, you are opting in to tell the Bureau why a payday advance is an important financial option for you!

“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.”

Here’s an excerpt from the Bureau’s announcement:

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.

To download the Manual, click here.

Stay tuned in with us by following us @paydaypundit and watching for #CFPBPaydayHearinginAL

WHEN

Thursday, January 19, 2012
12:00 p.m. CST/ 1:00 p.m. EST

WHERE

*New location
Birmingham-Jefferson Convention Complex
East Ballroom A
2100 Richard Arrington Jr. Blvd. North
Birmingham, AL 35203

SCHEDULE

12:00 p.m.
Opening Remarks
Joyce White Vance, U.S. Attorney
U.S. Representative Terri Sewell
Richard Cordray, Director of the CFPB

12:20 p.m.
Expert Testimony
CFPB Staff Participants
Raj Date, Deputy Director of the CFPB (Chair)
Patrice Ficklin, Assistant Director for the Office of Fair Lending and Equal Opportunity
Gail Hillebrand, Associate Director for Consumer Education & Engagement
Peggy Twohig, Assistant Director for the Office of Nonbank Supervision

12:20 p.m.
Panel 1: Consumer Experience with Payday Loans
Shay Farley, Legal Director, Alabama Appleseed
Marcella Roberts, CEO, Building Alabama Reinvestment
Stephen Stetson, Policy Analyst, Alabama Arise
Shirley Worthington, VP of Community Initiatives, United Way of Central Alabama

1:00 p.m.
Panel 2: Industry Perspective on Payday Loans
Kim Gardner, Cash USA
Daryl McMinn, Chief Operations Officer, Listerhill Credit Union
John Owen, Senior Executive Vice President, Head of Consumer Bank, Regions Financial Corp.
Ted Saunders, CEO, Community Choice Financial, Inc.

1:40 p.m.
Public Testimony

There’s no doubt that less access to legitimate, regulated loans will drive consumers to unscrupulous offshore providers that are in effect, beyond the legal reach of U.S. authorities. A proliferation of online pharmacies portends the future of short-term loans if consumers lack state-based, regulated credit options.

A 60 Minutes’ nine-month investigation called “The difficult fight against counterfeit drugs,” which aired March 10, 2011, detailed how counterfeit prescription drugs manufactured outside of the United States were sold through “rogue internet sites, often posing as legitimate pharmacies.” According to the report, “Thirty-six million Americans are estimated to have bought their medicines from these sites, many searching for quality drugs at a better price. Some sites pretend to be from Canada because Canada is known for safe, inexpensive medicines.”

CFSA believes that appropriate state regulations provide strong protections for consumers, while ensuring continued access to choices for short-term credit needs. That same principle should apply in cyberspace. Customers who choose to get a payday advance online should not forfeit any of the protections they would receive from a regulated, store-front lender.