Very great example of how innovation can happen in the short-term credit market, and a look at the many alternatives that are available to all consumers who seek payday-like loans. We applaud those in the space who disclose fees and APR upfront (a Best Practice of CFSA Members is “Full Disclosure,” click here to find out more). Only consumers win when this is done, allowing them to easily comparison shop.

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 The payments are automatically withdrawn from the customer’s account when a paycheck is deposited.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…”

CFSA released the following statement today regarding the Bureau’s field hearing yesterday in Birmingham, Alabama. The following comments can be attributed to D. Lynn DeVault, CFSA’s Board Chair:

“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.”

Quote of the day (from yesterday’s hearing) came from none other than Ted Saunders, member of CFSA’s Board of Directors and also CEO of Community Choice Financial:

“My customer is not uninformed, my customer is not unintelligent and I respectfully disagree that closing me down and letting alternatives flourish would be a good solution”

Kim Gardner, CEO of Cash USA and member of CFSA’s Board of Directors, delivered her remarks at the Consumer Financial Protection Bureau’s (CFPB) first field hearing in Birmingham, AL which convened to discuss the issue of payday loans. The following are her written comments that were submitted for the record:

Hello, my name is Kim Gardner. I represent a small family-owned financial services business. We are also CFSA members and I represent the small member companies on its Board of Directors. I’ve been in the financial services business for 16 years – 10 of which have been right here in Alabama.

I would like to thank Director Cordray and the staff of the Consumer Financial Protection Bureau for inviting me to share some insight into the Alabama payday lending market, and for organizing this series of important discussions.

I am proud to be a payday lender. Not everyone can or will turn to a bank or credit union when they are in need of credit. We provide critical access to short-term credit for millions of American families each year through affordable, reliable and transparent services.

Payday loans are simple, clear and easy to understand. Consumers like the product because it’s quick and confidential. Let’s face it; no one wants to borrow money. But when an urgent need comes up before their next payday, our consumers know they can turn to us.

As a member of the Community Financial Services Association of America (CFSA), an organization seeking to ensure consumer confidence in the payday advance industry, my company abides by a strong code of best practices. These best practices offer consumer protections in addition to those required by state and federal law. Measures include a commitment to full disclosure, truth in advertising and fair collection practices and extended repayment plans – which allow consumers more time to repay their loans and no additional cost.

Our services are effectively regulated at the state level. Under the Alabama Deferred Presentment Services Act, payday loans cannot exceed $500, and through a state-managed database, lenders verify a borrower’s outstanding loans do not exceed the $500 limit. Fees are capped, with a term of 10 to 31 days. Loans can only be renewed once. These measures help to ensure that our customers can be successful borrowers – and that’s our primary goal.

Here in Alabama, approximately 1,100 licensed lenders serve thousands of consumers. Loan examiners from the State Banking Department regularly perform examinations for compliance, and the state collects and manages consumer complaints.

In addition to these comprehensive regulations, lenders also comply with a number of federal regulations including the Truth in Lending Act (TILA) and the Military Financial Services Protection Act, among others.

As a lender and small business owner, I am committed to operating a viable business. But my employees and I are also dedicated to our customers and communities too. Our success belongs to the consumers we serve, and without offering strong consumer protections, we would not be sustainable.

As storefront lenders, we are part of the neighborhoods we serve and sensitive to the needs and concerns of our customers.

As I have found in our stores – communication is key. You have to get to know the customers in order to know how to serve them.

We contribute to the Alabama economy by providing reliable access to credit, but also by hiring local employees and vendors, renting storefronts and using other local services.

But the core of our business is customer service. We treat our customers with respect and dignity and we always keep their best interests in mind.

We know consumers have options when it comes to short-term credit – whether it’s a payday loan, a bank or credit union overdraft program or a credit card advance. Our job is to make sure they have the information they need to make the best personal and financial decision for their individual situations.

As the CFPB and other federal and state regulators work together to look for the best ways to protect consumers, I urge you to create a regulatory framework that allows consumers to compare financial services and products similarly – regardless of the provider.

It’s my experience that customers are best served when they can quickly and easily compare different credit options. You’ve heard different perspectives on payday lending today. Please come see for yourself. I would like to have you visit some of our stores and meet our employees and customers. Listen to their stories and get a better understanding of our service.

I look forward to continuing to working with the Bureau and others to strike the appropriate balance between regulation and reliable access to a wide variety of financial services, including payday loans.

I am confident the Bureau will come to see payday lending as I do – a valuable and legitimate service, offering consumers a needed short-term credit option with meaningful consumer protections and outstanding customer service.

Don’t worry, we’ve been tweeting live from Birmingham. Go to twitter.com/paydaypundit and follow us! And see our reposts on #Facebook! We even threw in some pictures so you can really see what was going on.

Tomorrow at noon, the Consumer Financial Protection Bureau (CFPB) will be putting on its first field hearing in Birmingham, AL. Tomorrow’s hearing will include testimony from two members of CFSA’s Board of Directors and other industry representatives, customers, and members of the public – all who will provide the CFPB with on-the-ground insight into the payday lending market.

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

Another great article from Felix Salmon at Reuters, discussing the differences between a credit union payday-like product and those offered by traditional payday lenders.  It’s probably one of the more level-headed approaches to explaining how the product works.

Just one excerpt from the article:

“…what payday lenders are really selling is convenience, at least as much as it is loans. Check cashers, payday lenders, and the like do not keep typical banking hours: they’re open late, they’re open at weekends, and they are generally found in small storefront locations which would not be suitable for a fully-fledged bank branch.

This is entirely rational — you want to be where your customers are, and you need to be able to reach your customers when they’re not working any of their jobs. But at the same time, it’s expensive. And in general, credit unions are already paying for the cost of their overheads, before they start offering any kind of payday loan. So while payday lenders have to cover a lot of overhead from the proceeds of just one product, credit unions have to cover just the marginal cost of the payday loans, which is a great deal smaller. After all, their staff and real estate is already being paid for.”

This was mentioned by Salmon in the article we just posted about: “At the same time, however, the loan companies do themselves no favors at all by being incredibly opaque about the terms on their loans and the interest rates they’re charging; I’d never actually recommend that someone go to such a shop, since the entire business model seems to be based on exploiting sophistication asymmetries and charging as much interest as possible.”

As a reminder to any payday advance consumer doing business with a CFSA Member, this is one of our Best Practices that we believe sets us apart from the rest:

1. FULL DISCLOSURE: A member will comply with the disclosure requirements of the state in which the payday advance office is located and with federal disclosure requirements including the Federal Truth in Lending Act. A contract between a member and the customer must fully outline the terms of the payday advance transaction. Members agree to disclose the cost of the service fee both as a dollar amount and as an annual percentage rate (“APR”). A member, in compliance with CFSA guidelines where they do not conflict with applicable federal, state or local requirements, will further ensure full disclosure by making rates clearly visible to customers before they enter into the transaction process.

Can you eliminate access to short-term credit like payday loans? A senior editor at The Atlantic doesn’t think so. Great excerpt below from the story:

Credit unions are not charities.  They have responsibilities to the members who deposit money with them: they cannot make loans that are reasonably likely to lose money (at least in aggregate).  And while the interest rates on products like payday loans are indeed eye-popping, the companies themselves are not especially profitable.  This suggests that the reason the loans are so expensive is that they cost a lot to make.

Why is this?  For starters, because the risk of default is very high.  It’s hard to get good numbers, and estimates vary widely, but I’m pretty sure that they’re well north of 10%.  That’s a pretty high default rate for any type of loan, but particularly one where the term is measured in weeks.

That’s not the only reason to think that these loans are expensive.  Since they are often for very small amounts, they have high transaction costs relative to the loan amount–it takes just as much time to process forms for a $200 loan as it does for a $10,000 loan.

There’s also the structure of the loan, which involves a lot of intensive interaction with the borrower.  Remember, the short term (and the fact that they’re tied to payday) helps hold down the default costs on payday loans.  It’s also really expensive to achieve; it means maintaining a storefront with people in it at all hours.