Payday lending and consumer credit
The CFPB has the authority to regulate larger non-bank financial institutions in areas such as consumer credit, debt settlement, credit reporting, and prepaid cards. Determining how to define a larger participant in these markets was at the top of the CFPB’s to-do list for year one. We were able to provide perspective on the consumer impact of payday lending and consumer credit from our experience with our successful campaigns to establish consumer protections for payday and consumer installment loans in Illinois. In our comments to the CFPB, we argued that market share should not be the only criterion to determine whether a consumer credit company is a larger participant. Companies whose poor business practices or lack of controls result in significant negative impact on consumers should also be considered larger participants as well.
Overdraft credit programs
Overdraft protection programs are high-cost, short-term credit products triggered when a bank customer spends more than his or her account balance. These fees are often poorly explained and structured in ways that maximize bank fee income, which deters low-wealth consumers from a banking relationship that could help them build wealth. We told the CFPB that financial institutions should link accounts, such as savings or lines of credit, to checking accounts in order to avoid overdrafts. The CFPB should also monitor access to these lower-cost alternatives as a fair lending issue. Consumers should also be notified that they will overdraw their account at the point of sale and have the option to end the transaction, and ATM overdrafts should be prohibited in all instances. While new protections have been enacted that require consumers to opt into overdraft programs, opt-in rates vary widely on an institutional basis and raise concerns about how the programs are marketed. The CFPB should monitor marketing materials for accuracy, as well as institutional procedures that result in repeat usage of overdraft programs.
Prepaid debit cards are playing an increasingly large role for underbanked consumers. Similar to a checking account, prepaid cards offer a secure cash alternative and offer access to payment networks. There are inconsistent consumer protections for prepaid cards, however, and they are often disconnected from other financial products, resulting in a second-class banking experience. Setting up a strong regulatory framework is critical to protecting consumers who choose these cards. At a field hearing in Durham, North Carolina, we told the CFPB that deposit insurance, clear funds availability policies, and fraud protection should be universal for prepaid cards. The CFPB should also promote prepaid functionality that facilitates access to the financial mainstream and prohibit the use of high-cost credit on prepaid cards. Separately, we commented to the CFPB that the bureau should define as larger participants prepaid service providers whose annual dollar volume accounts for more than five percent of the total marketplace in the previous year.
Debt settlement and credit reporting
As with payday and consumer credit, the CFPB must determine the criteria for larger participants in debt settlement and credit reporting. We commented to the CFPB that the debt collection industry is comprised of many different kinds of actors with disparate consumer impact, such as law firms, debt buyers, debt collectors, and debt settlement companies. The credit reporting market is similarly heterogeneous, with full-service credit reporting, specialized credit reporting, and credit scoring firms playing distinct roles. The CFPB should consider these different markets separately when defining larger participants.
Much has been accomplished in the CFPB’s first year laying the groundwork for regulations of industries that have previously had little or no federal oversight. What do you think should be on the CFPB’s agenda for year two?