As far as alternatives go and the need for more clarity and transparency in disclosure agreements, the following was a key quote from a representative from Pew Charitable Trusts:

Susan Weinstock, Pew Charitable Trusts: “Unfortunately, the checking accounts in our study did not meet this standard. We found a median of 111 pages of disclosure documents…The banks often used different names for the same fee or service; put the information in different documents, different media, or different locations in a document…Many of these documents are not user-friendly, with much of the text densely printed, difficult to decipher, and highly technical and legalistic.”

We believe that CFSA’s Best Practices should be considered as a blueprint for responsible lending within the payday advance industry, and can be adopted for most short-term financial products. Provisions include: Full disclosure of fees, truthful advertising, right to rescind, appropriate collection practices, including no criminal action, and a requirement to be licensed in each state where the company does business.

In her post, Hillebrand said: “Payday lending operations—including those that operate online and those that target people residing on reservations—continue to be a concern for both communities.”

We wanted to remind our readers that CFSA Best Practices require that all our member companies that offer payday advances through the Internet must be licensed in the state in which the customer resides and that they comply with all applicable state laws. As a condition of membership, members must abide by all CFSA Best Practices and pledge their commitment to them annually.

In a statement on Native American partnerships with payday advance companies, our Board Chair D. Lynn DeVault said this: “CFSA believes that our strict set of Best Practices is a business model that ensures strong consumer protections while preserving access to short-term credit.”

“The fact remains that for the many years that I sat on this committee and considered bills concerning payday lending, the bottom line is we ask DFI every year for the number of complaints they received. There were none, none. Repeatedly year after year we could find no evidence of complaints [through] DFI. Now that has certainly changed in the last year, because now DFI reports that the Washington law that limits eight payday loans per year, now they’re turning to unlicensed Internet payday lenders and here are the complaints. Hundreds of them. Not one before the law, now all of these after the law. … Now I would rather have my constituents doing business with a licensed regulated entity that DFI can control. But we have no way of regulating out of state or out of country [lenders].”

Several stories this week have surfaced on this issue, and for a Friday we thought you might want to watch some video coverage. As mentioned in the story, the latest report out of the DFI in Washington shows that, of the licensed entities of which the DFI tracks, consumers paid $122 million dollars less in payday loan fees than they did in 2009. But what we want to know is whether or not these numbers include unregulated entities? Does the DFI accurately portray the full lending picture in Washington?

Such restrictions on payday lending would merely force consumers to use higher cost providers, some of which are unregulated and unlicensed. In the wake of the Washington state restriction, some regulators and legislators said that they have seen an increase in consumers turning to unlicensed and unregulated lenders who may operate beyond the reach of state regulators.

Unlicensed lenders are not accountable to the state either through state examination or compliance standards. DFI’s enforcement chief said that even if the agency can get a subpoena to go after an illegal lender, it’s difficult to get a response and difficult to enforce the subpoena because the lender is either out of state or in another country.[1]

Today, payday advance stores fill an important need for small dollar, short-term credit for banked, working Americans in communities throughout the country. Millions of customers across the country have used payday advances responsibly and appreciate having somewhere to turn when they need quick access to credit. Analysts estimate payday advances are used by 19 million American households.

We strongly encourage consumers who need access to credit to do business with CFSA members who are required to be licensed and regulated. A member that offers payday advances through the Internet must be licensed in the state where the payday advance customer resides.

As an example, in October, 2010, the Washington State Department of Financial Institutions (DFI) warned consumers of the danger of unlicensed payday lenders.

“When a consumer takes a loan from an unlicensed lender, there is very little we can do to protect them, and often little we can do to the company if they don’t adhere to our laws, especially if they are located outside of the United States.”

Swanson said that people in need of a loan would be “better off trying to find a bricks-and-mortar financial institution in Minnesota” that’s licensed. Consumers may be able to get a small line of credit with a local bank or credit union.

“The worst then they can do is to do business with these unlicensed” firms, she said.

“One could argue that … financial institutions with strong or successful marketing plans always look out for the best interests of consumers, because those are the products that are going to be the most successful over time, those that are good for consumers,” Fischer said. “If you develop those types of products, price them appropriately, you’re going to do very well.”

We believe that CFSA’s Best Practices should be considered as a blueprint for responsible lending, and can be adopted for most short-term financial products. Provisions include: Full disclosure of fees, truthful advertising, right to rescind, appropriate collection practices, including no criminal action, and a requirement to be licensed in each state where the company does business.

More specifically, CFSA Best Practice #3:

A member will not advertise the payday advance service in any false, misleading, or deceptive manner, and will promote only the responsible use of the payday advance service.

“I’ve always said it’s like pornography: I’ll know it when I see it,” said Jeffrey Taft, a partner with Mayer Brown LLP. “It’s hard for you to define it. I think it will be virtually impossible for the bureau to really come out with concrete guidelines.”

So what authority does the CFPB have under Dodd-Frank?

Under Dodd-Frank, the bureau cannot declare an act or practice abusive unless it: “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

The Catch 22:

“It creates a knife edge,” said Jo Ann Barefoot, the co-chairman of Treliant Risk Advisors. “What happens if you decide that you think that certain loans are unsuitable for proportionately more minority borrowers, or more women or more elderly, then you could be charged with not being liberal enough in your lending.”

A word to the wise to all consumers of payday loans: Use a CFSA Member! We want to make sure that situations like this don’t happen. Remember, using a CFSA Member means you’re doing business with a legitimate financial institution.

Our first two Best Practices state:

1. 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.
2. A member will comply with all applicable laws. A member will not charge a fee or rate for a payday advance that is not authorized by state or federal law.

You’ll know when you’re taking out a loan with a CFSA member if you see this seal.

So what happens if you experience a collection scam? CFSA released a statement earlier this year about rogue debt collectors. Here’s a snapshot from what our Board Chair D. Lynn DeVault said:

“It is simply wrong to pursue criminal complaints against consumers who have defaulted on personal debt,” said D. Lynn DeVault, board chair of the CFSA. “Lenders should be working with their customers to figure out a solution. Our members offer borrowers an extended payment plan at no extra cost to the borrower and adhere to CFSA Best Practices which prohibit any criminal recourse.”

CFSA’s Best Practices state, “A member will not threaten or pursue criminal action against a customer as a result of the customer’s check being returned unpaid or the customer’s account not being paid.”

If you have consumers that are being called by someone claiming they have defaulted on a loan and will face criminal prosecution, please have them file a complaint with the Federal Trade Commission.

Here’s more information for consumers on what they can do during the call:

• Ask the caller to provide official documentation verifying the debt.
• Don’t provide or confirm any bank account, credit card, social security number, or other personal information over the phone.
• File a complaint with the FTC.