CFPB, Choke Point Threaten Industry

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By PHILLIP LEE

For more than a decade, the payday loan industry has faced and survived numerous challenges from consumer groups and federal legislators.

Without a doubt, the biggest challenge that the industry has faced was legislatively — in particular, efforts to cap loans at 36 percent.

While that has somewhat diminished, a bigger storm is forming and it is not coming from the legislative front. Instead a new, two-pronged regulatory and legal assault may be the biggest challenge to the industry.

“The scrutiny of our industry certainly seems to have reached record levels, with state legislative efforts continuing; the CFPB releasing short-sighted, incomplete reports that may point to future rulemaking; and the coordinated efforts of several federal agencies through Operation Choke Point,” says Jamie Fulmer, senior vice president of public affairs, Advance America.

“We support efforts by federal regulators to address unregulated lenders, but are concerned that Operation Choke Point is being used to further an ideological agenda through the disruption of licensed, fully compliant lenders’ banking relationships.

Concerns and trepidation abounded when the Consumer Federal Protection Bureau was formed in 2011 through the Dodd-Frank Act. There was something of a honeymoon period as the CFPB sought information from the payday industry and fears were somewhat allayed when Director Richard Cordray acknowledged the need for small loans.

But the honeymoon, such as it was, is over. A White Paper was released last year, stating that payday loans and deposit advance products lead to a cycle of indebtedness for consumers.

Over the past months, the CFPB has begun to ratchet up the heat on the industry by releasing two more reports — a Data Points report and a Supervisory Note on payday lending.

Those reports have sparked industry-wide fears that stiff regulations are just around the corner. While the agency has no authority to levy any usury laws, such as interest rate caps, it can dole out other strict regulations which could create a difficult, if not impossible, environment for lenders.

DOJ Action

While the CFPB regulation loomed, the Department of Justice launched “Operation Choke Point,” which has crippled many in the payday industry. The DOJ has targeted payday lenders indirectly by going after the banks that service them.

“It appears that federal examiners are pressuring banks and third-party payment processors to terminate regulated short-term lenders’ depository accounts and block them from using the automated clearing house system to process loan repayments, making no distinction that the lender is a good actor operating in accordance with state and federal laws,” explains Fulmer.

Banks with other potential regulatory problems have found it easier to wash their hands of payday lenders rather than face the intense scrutiny that regulators have threatened.

“Some banks have unexpectedly terminated their relationship with Advance America, despite our company’s excellent record of regulatory compliance and long-standing relationships with these banks,” Fulmer says.

Caught in the Net

Industry officials say combating fraud in the financial sector is a good thing, but that attacking legitimate businesses is not.

“The goal to eliminate fraudulent and illegal activity from the marketplace is admirable, but Choke Point has resulted in numerous examples of legitimate businesses being cut off from access to the banking system,” says Amy Cantu, a spokesperson for the Community Financial Services Association of America.

Cantu argues that there is an enormous amount of evidence that this initiative is not properly distinguishing between criminal actors and legitimate businesses, such as licensed payday lenders, that are operating legally and in compliance with all applicable state and federal laws and regulations.

“While CFSA certainly supports attempts to prevent criminals and fraudulent operators from accessing the U.S. financial system, Operation Choke Point has proven to be an overly broad initiative that goes far beyond the stated purpose and is harming legitimate, law-abiding businesses such as CFSA’s members and the consumers they serve,” she says.

Cantu points out that Operation Choke Point has also put a burden on banks to act as surrogate law enforcement agents.

“CFSA, along with several members of Congress and other organizations in various industries, has made officials at the Department of Justice and federal banking agencies aware of this unwarranted intrusion into these banking relationships,” she adds.

Around the Corner

The issuing of the two reports by the CFPB have led to speculation that the agency will release regulations sooner rather than later.

“Director Cordray and his staff have regularly stated that creating a level playing field in consumer financial services is central to the CFPB’s mission,” Fulmer says.

“The bureau may issue rules to more equitably regulate interchangeable products — such as cash advances and overdraft protection — so that customers can more easily compare the cost of all credit options. (Currently, overdraft protection is not subject to the same disclosure regulations required for short-term loans.) That said, I don’t think anyone outside of the bureau can predict what will be forthcoming.”

However, if the two reports give any indication of what the CFPB is thinking in terms of regulations, collections, rollovers and number of loans will be addressed.

Key points in the Supervision Report released in May include:
• Lenders deceiving consumers to collect debt:
When payday lenders called borrowers to collect debt, they sometimes threatened to take legal actions they did not actually intend to pursue. Examiners cited these threats as unlawful deceptive practices.

Other lenders threatened to impose additional fees or to debit borrowers’ accounts at any time, when this was not allowed by their contract. Examiners also found lenders lied about non-existent promotions to induce borrowers to call back about their debt.

• Lenders illegally harassing borrowers and visiting consumers at work:
CFPB examiners found that payday lenders called borrowers multiple times per day. When lenders failed to accurately track how many times they had called a borrower, it increased the risk of a borrower receiving excessive calls.

Examiners also found that employees of payday lenders would sometimes visit borrowers’ workplaces in attempts to collect debt. Such practices by lenders can violate the Dodd-Frank Act’s ban on unfair practices.

• Lenders hiring third-party collectors that illegally deceive and harass consumers:
Many payday lenders hire third parties to collect their debts. The CFPB expects payday lenders — and all institutions subject to its supervision — to oversee their service providers to ensure they are complying with federal law.

Examiners found that third-party debt collectors misled borrowers in a variety of ways, including falsely claiming to be an attorney and making false threats of criminal prosecution. Third-party collectors also harassed borrowers by calling at unusual times.

Key issues in the Data Points report released in March include:
• More than 80 percent of payday loans are rolled over or followed by another loan within 14 days (i.e., renewed). Same-day renewals are less frequent in states with mandated cooling-off periods, but 14-day renewal rates in states with cooling-off periods are nearly identical to states without these limitations.

The CFPB defines loan sequence as a series of loans taken out within 14 days of repayment of a prior loan.

• While many loan sequences end quickly, 15 percent of new loans are followed by a loan sequence at least 10 loans long. Half of all loans are in a sequence at least 10 loans long.

• Few borrowers amortize, or have reductions in principal amounts, between the first and last loan of a loan sequence. For more than 80 percent of the loan sequences that last for more than one loan, the last loan is the same size as or larger than the first loan in the sequence.

Loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates.

• Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer. Among new borrowers (i.e., those who did not have a payday loan at the beginning the year covered by the data) 22 percent of borrowers paid monthly averaged at least one loan per pay period. The majority of monthly borrowers are government benefits recipients.

• Most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days. Roughly half of new borrowers (48 percent) have one loan sequence during the year. Of borrowers who neither renewed nor defaulted during the year, 60 percent took out only one loan.

Piling On

In a letter to the CFPB, Senators Dick Durbin, Jeff Merkley, Tom Harkin, Tom Udall, Richard Blumenthal and Elizabeth Warren pushed the bureau to take new action to protect consumers from predatory storefront and online payday loans. The letter arrived as the CFPB prepares rules for the small dollar lending market.

“Sadly, the evidence shows that these loans trap consumers in a cycle of debt in which consumers end up owing more than the initial loan amount, an appalling practice that exploits the financial hardship of hard working families and exhibits a deeply flawed business model that does not consider borrowers’ ability to repay the loan,” the senators wrote in the letter to CFPB Director Richard Cordray.

“The CFPB was established precisely to crack down on these types of predatory practices and to provide strong consumer financial protections our families need and deserve. We urge you to swiftly take action.”

The senators encouraged the CFPB to consider successful examples of tough regulation in states such as Oregon, which in 2007 implemented a range of important consumer protections, including minimum loan terms, fee and renewal limitations, and a waiting period between loans with broad coverage for all types of small dollar lending.

Proposals

They also suggested the CFPB adopt the proposals in the Stopping Abuse and Fraud in Electronic Lending Act that particularly target the abuses in online lending.

Key measures that the senators urged the CFPB to implement via regulation include: limits on so-called “lead generators,” who collect and auction payday loan applications off to the highest bidder; additional enforcement against anonymous online lenders who avoid enforcement by hiding overseas or through other hard-to-reach structures, and ending the practice of remotely-created checks and electronic fund transfers that deduct money from a consumer’s bank account without permission.

The senators also noted the importance of covering a large range of loans, including auto title loans, as well as what they called the urgency of the issue and its importance to protect working families struggling to avoid financial hardship.

Reimagining Your Customer in the New Age

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By JOE FITZPATRICK
CEO/Founder
TranDotCom Solutions

The last 12 months have brought a great deal of change to our industry.

While the road ahead is sure to bring more challenges, it is more important than ever to ensure that we are offering the consumer a product that best services their lending needs. Here at TranDotCom, we have seen these needs evolve tremendously over the last 14 years that we have been providing services to the market.

In the not-so-distant past, the customer would go into a storefront operation and secure a small dollar loan that would allow her to pay a bill, buy groceries or fix the car.

She would offer a post-dated check or access to a bank account and walk out with cash in her pocket. On her next pay date, you would cash the check and recover your loan amount, fees and interest.

Simple and uncomplicated.

While this simple solution remains popular with many consumers, others need additional lending options to satisfy their financial requirements.

Thus, many lenders are reimagining the customer in today’s marketplace. They are looking for a stronger, long term relationship with the consumer — one where the lender and the borrower are partners in the process, and customers are able to pick the product that best satisfies their needs.

New Customer Desires

The customer is applying more scrutiny in their lender-of-choice decision-making process.

The consumer in the new age is looking for longer term loan options that will allow access to more credit and expanded loan repayment timeframes.

He likes the convenience of the traditional “pay day loan” process, but wants to redefine what the loan looks like. Now is the time to listen to your customer!

In today’s competitive lending marketplace, you must adapt to survive. While that has been a fact since the beginning of our industry, it particularly rings true today. The traditional short term lending model has recently lost favor, not only with the regulators, but also with the consumer.

Today’s customers desire access to more money and the ability to pay over time. This desire has driven competitive lenders to add an open ended or traditional installment model to their portfolio. These options can be beneficial to everyone involved.

Both the open ended and traditional installment models have a sense of familiarity about them.

Regulators know these models well. Any consumer who has ever had a credit card understands how these products work. Anyone with a car loan understands the basic principles of installment lending. These facts make the models more accepted by the mainstream.

The truth of the matter is that there is no document in existence that is easier to understand than a pay day loan lending agreement. But an open ended loan or an installment loan is synonymous with “traditional lending,” and therefore it is widely accepted.

The open ended line of credit and installment lending models give more choice to the consumer. She can better control the amount of money that she borrows and can figure out repayment terms that best fits her needs. When more control is put in the hands of borrower, everyone wins.

Offer Options

One consumer may be looking for a traditional, single pay loan that comes due on the next payday. If so, we can provide that. We always have.

That being said, another consumer may be looking for access to a larger sum with the ability to receive funds only when he needs it. The LOC product provides this flexibility.
There also are borrowers who are looking to pay back their loan the same way they do their car or house, with a fully amortized loan that is paid off in equal payments over an extended period. The installment product fits all these requirements.

As we look at these alternative products, we must realize that the ability to repay the loan is a critical factor in not only the underwriting process, but also in the long-term health of the industry. Who better to assess the ability to repay than the consumer himself?

New Access

LOC and installment loans give access to credit in new ways. The consumer can back into a payment amount that suits her budget and can access available credit lines in real time, when she needs it most.

These types of innovative lending advances in the subprime to mid-prime space will only help to mature our industry. They also will allow critics on the outside to understand that we thrive because we provide our customers with options that they cannot get elsewhere, and we do it in a way that benefits all involved.

The customer in the new age interacts with the lender in a new way as well. While the ability to walk into a storefront operation will always be important to many consumers, more and more borrowers are going about the business of credit acquisition in a new way.

Online research of lenders prior to stepping foot in the storefront is on the rise. The customer is looking at reputation and lending rates and then making more educated choices regarding where to obtain credit.

In addition, more and more consumers are choosing to borrow from the comfort of their browser. Online lending has seen tremendous growth over the last five years, and more and more store-front operators are looking seriously at building their online presence.

The customer in the new age wants total convenience and expects lenders to operate online as efficiently as in their stores. While extending your brand online often can be a challenge, the additional convenience that you offer your current clients is undeniable.

What’s more, your ability to expand into unchartered markets with limited overhead can be as big a win for you as it is for your customers.

Way of the Future

The bottom line is that the future of our industry is all about offering the consumer control of the lending environment. New product offerings that allow the customer to customize their loan solution coupled with the ability to secure the funds and make the payments all from their laptop or smart phone will be the winners in the rapid growth race.

The open ended line of credit and installment options offer this comfort and flexibility. Pair it with the ability to not only find and thoroughly research your brand online, but also complete the entire loan process without having to leave the couch, and it becomes an all-around win/win situation as you can grow with a reduced capital investment.

There is more change on the way. Those that can reimagine their customer now and react with innovative lending solutions will attract the new-age consumer and will forge a longer, more mutually beneficial relationship with them.

The need for the products will not disappear. The options that we provide our customers and the way that we service them will continue to evolve. Adaptation is key in the new age of lending, and those of us that offer innovation to the consumer will become stronger than ever before.

Joe Fitzpatrick has been a pioneer in the consumer lending space since founding TranDotCom Solutions more than 14 years ago. His vision has been the driving force behind the growth of TDC into a premiere provider of loan management systems and solutions to the consumer financial services industry. He frequently speaks as a subject matter expert at financial services conferences and trade shows around the country.

Working From Home, Really?

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By RICHARD B. KELSKY

When Marisa Mayer (formerly employee No. 20 at Google) took the helm of Yahoo, one of her first acts was to eliminate working from home.

But she didn’t just eliminate that. She eliminated paying people claiming that they were working from home.

It turns out that “working from home” may not be all it’s cracked up to be. It can be bad for your business, bad for you, and bad for your employees.

Whether you “work from home” once a week or every day, you can use this article to help evaluate your work-at-home approach — if you are willing to be brutally honest with yourself.

“I’m Much More Productive”

Most folks love working at home. And they have good reasons for it. Aside from a great commute and low gas and meal expenses, the primary reason is that they are unsupervised and only minimally accountable for their time and productivity.

You can spot work-at-homers easily, because the first thing they do is attempt to justify their part-time hours on a full-time salary (while still in their bathrobe): “At home, I can accomplish in 15 minutes what takes an hour in the office.”

Let’s assume that they are telling the absolute truth. The problem is that they are so pleased with themselves after that first 15 minutes, that they do absolutely nothing work-related for the next 45.

“I Don’t Need Supervision”

The vast majority of people are incapable of working from home. Other than an exceptional few, namely Einstein, Edison and da Vinci, there is no one on earth who works with the same vigor alone as when in the presence of others. And certainly not every minute of a working day.

In fact, being surrounded by employees and co-workers greatly increases effort and productivity. In essence, co-workers and yes, even employees, become your supervisor – driving you to higher, more professional levels.

And there is no substitute for the workplace exchange of ideas and experiences.
There are many times that focus —without interruption of employees —can be very productive for a business owner. But if you own a business, you know that you have a different energy and feel when you are on site. Unless you’re writing the Great American Novel, sitting around in your pajamas at home cannot be more productive than working in your store.

“What is It, Honey?”

Even the best work-at-home person is subject to distractions and interruptions.
Spouses, kids and pets are the worst offenders. They mean well, but they unconsciously interpret your “working at home” as your taking the day off and always being accessible. Incidents that would not even merit a phone call if you were in the office, become commonplace.

That means you will never achieve the total focus that you would at the office. Whether it’s a problem with your kid’s car, walking the dog or just your spouse heading out to the gym or supermarket, interruptions make you non-productive, less effective and more disconnected.

Declining Discipline — At Home

“I get up, make a fresh pot of coffee, check the news, review the reports from each of my stores before I shower and dress.”

That may be true. But if you’re telling me that you don’t check personal email, Facebook, Twitter, etc. etc., you’re lying. Not to me, to yourself.

So it gets to be 10:15 a.m., and you are still in your sweats and unshowered when one of your managers calls with a crisis.

How likely are you to jump in the car and go to the store? With all the machinations of getting ready (that could take an hour, plus the drive), you attempt to solve the problem over the phone.

If you somehow manage to quell the tide of that crisis, your sweat-suit lifestyle is re-justified and you start down a path that may be difficult to backtrack.

Over time, because working from home ultimately means loss of discipline, process and control, the next symptom is overreaction: behaving like a child, to whom every minor crisis is a major one.

Ultimately, when a true major crisis hits, you will find yourself blaming others, primarily because you are home and the crisis is at your store, where you know you should be.

Declining Discipline — At Your Stores

When you work from home, it’s not just your end of things that becomes undisciplined. It’s at your stores, too.

Even if your employees don’t know exactly where you are, they know for certain that you are not in the store.

They know that cameras are just cameras and are not eyes or ears. Cameras can’t hear unhappy customers, or count cash or train tellers or pass along your experience.

There’s a difference between watching and participating. In short, bricks and mortar businesses cannot be managed from home, and on-site store managers are not owners, they are employees.

Connected or Uninvolved?

You may feel as if being able to look at cameras and computers remotely means that you are actively involved in your business.

Actually, while relying on being “connected,” all you are doing is growing more uninvolved.

You miss all of the interactions, discussions, observations, customer contacts, teaching and management opportunities that occur when you are in the office.

“Green” Claim vs. Business Realities

The “green” side of working at home is obvious: The public at large benefits from less fuel consumption, lower emissions, fewer showers, less shaving cream and makeup, fewer go-to-work clothes, fewer trips to the cleaners, less traffic and less wear-and-tear on roads.

Companies can reduce expenses through smaller offices, less consumption of electricity and heating fuels, and on and on.

But that has absolutely nothing to do with productivity and effectiveness, especially in a business which depends on direct physical customer interaction for its existence.

The Web is riddled with references to a project between Stanford University and Beijing University involving call center employees in China that is used by many to justify working at home. Their joint effort produced data showing higher contact activities and lower absences.

But how the experience of call center employees relates to business owners, managers, creative types, face-to-face customer contact employees and folks whose work and processes are greatly improved by interaction, collaboration and owner guidance is unknown.

The study also indicates that employees who work at home may be impacting their own long term careers: promotions of the work-at-home employees were greatly reduced — by about 50 percent.

And the study’s conclusion that working at home reduces the use of sick days? Who would ever “call in sick” (and use up a paid sick day) when they are already home and getting paid?

Rules Rule

If you work at home you need rules. Rules about when you start your day, where you start your day, how you start your day. Rules about showering and getting dressed. Rules about your home office. Rules about lunch. Rules about distractions and interruptions. Rules about how often you will work from home.

The Take Away

Working at home feels good. It feels something like retirement, with a few interruptions and a little bit of work, for the exact same money. Such a deal!

Unfortunately, for business owners it’s a fantasy that is unsustainable. If you’re not able to retire now, you need to stop kidding yourself and get to the office.

You may find that some of the decline in your business is offset by your front line efforts, and that your being in the store actually drives marketing, effective new product introductions, better teller performance and control of losses and expenses.

If you can manage to take a day off now and then, OK, but keep that varied and occasional. You have a business to run.

 

Richard Kelsky is president of TellerMetrix, Inc. a provider of POS transaction, compliance, interface, electronic deposit and marketing software to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of NYU and NY Law School grad, a Certified Anti-Money Laundering Specialist and a frequent lecturer on business, legal, compliance, and technology issues. He can be reached at rkelsky@tellermetrix.com. This article does not constitute legal advice and is an expression of opinion by the author and not of any entity or organization.

Pawnbroker Challenges Use of Federal Courts

By RICHARD WEATHERINGTON
The federal courts have very defined limits on the claims they can hear, so when a complaint against a pawnshop is filed in federal court, it is not uncommon for the pawnshop to first make sure the complaint fits within those limits.

In August 2010, a woman whose first name was Marjorie, a resident of Massachusetts, went to a pawnshop to pawn a coin charm and a gold chain worth $7,800. She entered into a loan contract with the pawnshop. She said she only needed $500 to pay a utility bill and did not need a loan in excess of that; however, she claimed the pawnbroker indicated she could borrow up to $1,000.

Marjorie said that at a later point, she attempted to discover the payment amount in order to redeem her jewelry, but was told “not to worry about the payment at that present time because it was not due and to call back … .”
According to the pawn contract Marjorie had, the amount financed was $600 and the finance charge was $102, a 36 percent annual percentage rate, maturing on June 21. A second contract indicated another loan for $225, with a finance charge of $42, also a 36 percent annual percentage rate, maturing on July 17.

She claimed she called back and again was told there was no rush for the time to redeem her jewelry. Thereafter, Marjorie said she attempted to redeem her jewelry and was told that the pawned items had been melted down. She then filed a complaint in the United States District Court of Massachusetts, seeking damages.

Says No Plausible Claim

The pawnshop filed a Motion to Dismiss, claiming that the District Court lacked subject matter jurisdiction and that Marjorie had failed to state a plausible claim upon which relief could be granted.

The broker did not take issue with the underlying facts alleged by Marjorie regarding the loan transaction entered into with her; rather, the broker contended that these bare allegations didn’t confer federal jurisdiction, nor did they state a cognizable claim for relief.

The broker claimed that there was no diversity of citizenship in the action because both parties were citizens of Massachusetts, nor was there any federal claim alleged in Marjorie’s complaint sufficient to confer federal question jurisdiction. The pawnbroker focused on the fact that Marjorie did not allege that she repaid the funds that she received, nor did she allege that the pawnbroker violated the terms of their agreement.

The pawnbroker said that Marjorie’s bare assertion that she wanted her collateral returned, or that her collateral was destroyed, was not sufficient to set forth a TILA claim that would invoke the federal question jurisdiction of the District Court, or that would state a plausible claim for relief.

Calls Plea ‘Nonsensical’

Marjorie opposed the pawnbroker’s motion to dismiss. The court noted that Marjorie’s pleading was virtually nonsensical. The court said from what it could discern, that Marjorie repeated the allegations in her complaint, parroted the statements in the pawnshop’s support of its Motion to Dismiss outlining the background of the pawnshop’s pawnbroking business, and took issue in general with the pawnbroking scheme because it takes advantage of customers.

Marjorie did not, noted the court, address in any meaningful fashion the merits of the pawnshop’s arguments.

The District Court first noted that subject matter jurisdiction in Federal district courts may be exercised over civil actions arising under federal laws. Under the United States Code, district courts have original jurisdiction of all civil actions arising under the Constitution, laws or treaties of the United States, and over certain actions in which the parties are of diverse citizenship and the amount in controversy exceeds $75,000.

The court said that with respect to “federal question” jurisdiction, a claim arises under federal law if a federal cause of action emerges from the face of a well pleaded complaint. The well pleaded complaint rule restricts the exercise of federal question jurisdiction to instances in which a federal claim is made manifest within the four corners of the plaintiff’s complaint.
The court said that with respect to “diversity” jurisdiction, the amount in controversy must exceed $75,000. The framework, said the District Court, for determining whether an action satisfies the jurisdictional minimum was established by the Supreme Court in 1938. The amount specified by the plaintiff controls for jurisdictional purposes, as long as that amount is asserted in good faith.

A court may dismiss an action for insufficiency of the amount in controversy only when, “from the face of the pleadings, it is apparent, to a legal certainty, … that the plaintiff never was entitled to recover” a sum in excess of the jurisdictional minimum.

In addition, diversity must be complete: the citizenship of each plaintiff must be shown to be diverse from that of each defendant. Where the citizenship of plaintiff and the defendant are not diverse, there is no diversity jurisdiction and the plaintiff’s claims against the defendant must be dismissed.

Where subject matter jurisdiction is lacking, the District Court said it may proceed no further. In addition to the court’s inherent authority to dismiss for lack of jurisdiction on its own, the Federal Rules provide that a party may move to dismiss a case for lack of subject matter jurisdiction.

The party invoking the jurisdiction of a federal court has the burden of proving that jurisdiction exists. Amorphous or conclusory allegations that federal jurisdiction exists, noted the court, is not sufficient to survive a motion to dismiss.

Motions to Dismiss for Failure to State a Claim

To survive a motion to dismiss for failure to state a claim, a complaint must present “only enough facts to state a claim to relief that is plausible on its face.” The factual allegations must be enough to raise a right to relief above the speculative level.

To expand on this standard further, said the court, a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.

In other words, the plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defendant has acted unlawfully.

Where a complaint pleads facts that are “merely consistent with” a defendant’s liability, said the court, it stops short of the line between possibility and plausibility of entitlement to relief. The United States Supreme Court in 2009 explained that “bare assertions … amounting to nothing more than a “formulaic recitation of the elements of a constitutional … claim,” for the purposes of ruling on a motion to dismiss, are not entitled to an assumption of truth.

Such allegations are not to be discounted because they are unrealistic or nonsensical, but rather because they do nothing more than state a legal conclusion even if that conclusion is cast in the form of a factual allegation.
In sum, for a complaint to survive a motion to dismiss, the non conclusory “factual content” and the reasonable inferences from that content, must be “plausibly suggestive” of a claim entitling a plaintiff to relief.

Appeals Court Standard

The District Court noted that the United States Court of Appeals for the Tenth Circuit articulated the plausibility standard.

In referring to the scope of the allegations in a complaint, the Tenth Circuit said that if they are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs have not nudged their claims across the line from conceivable to plausible. The allegations must be enough that, if assumed to be true, the plaintiff plausibly, not just speculatively, has a claim for relief.

On a spectrum, said the Tenth Circuit, the Supreme Court recently explained that the plausibility standard requires that the pleader show more than a sheer possibility of success, although it does not impose a probability requirement.

When faced with alternative explanations for the alleged misconduct, the court may exercise its judgment in determining whether plaintiff’s unsolicited conclusion is the most plausible or whether it is more likely that no misconduct occurred.

Complaint Failures

The District Court noted that Marjorie’s complaint failed to set forth any basis from which the court could find that there was subject matter jurisdiction, either under federal question jurisdiction or diversity jurisdiction.

First, said the court, with respect to diversity jurisdiction, Marjorie didn’t demonstrate that citizenship of the parties was completely diverse.

Moreover, even if diversity existed, the amount in controversy was $7,800 rather than the required $75,000. It could not reasonably be inferred that Marjorie’s actual or punitive damages exceeded $75,000; rather, from the face of the pleadings, the District Court said it found that it was clear to a legal certainty that the amount in controversy did not exceed $75,000.

Second, said the court, with respect to federal question jurisdiction, Marjorie’s complaint didn’t set forth any discernible federal cause of action upon which relief could be granted. Marjorie, said the court, simply unfolded the alleged underlying facts of the proposed pawnbroking transaction and claimed that she suffered the loss of her jewelry because the items had been melted down.

No TILA Violations Cited

TILA, said the District Court, is a federal law designed to promote the informed use of consumer credit and to protect consumers from dishonest credit transactions by requiring lenders to fully disclose all costs and key terms of the lending agreement used in lending documents.

In short, said the court, Marjorie had presented no bona fide basis for the subject matter jurisdiction of the District Court, and therefore failed to meet her burden. Accordingly, the District Court said it would allow the pawnshop’s Motion to Dismiss based on the lack of subject matter jurisdiction.

Pawnbrokers who would like a free copy of this case sent electronically should send an E-mail to cases@cnsus.org with “Federal Question” in the subject line.

USPS White Paper: Offer Banking Services

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By PHILLIP LEE

The next time one of your customers steps into a Post Office, she might ask for a roll of stamps, a couple of pre-paid envelopes and a $200 loan.

Sounds far-fetched that the United States Postal Service could venture into the banking business? Maybe not as far-fetched as you think.

It’s no secret that a financially-strapped USPS is looking at ways to generate revenue and it seems that all options are on the table.

The Office of the Inspector General of the USPS recently released a White Paper on “Providing Non-Bank Financial Services for the Underserved.”

“The Postal Service is well positioned to provide non-bank financial services to those whose needs are not being met by the traditional financial sector,” the report says.

“It could accomplish this largely by partnering with banks, who also could lend expertise as the Postal Service structures new offerings.”

Complementary Role

The report is quick to point out that it is not looking to compete with banking institutions but rather work as a complement to them.

“The Postal Service could help financial institutions fill the gaps in their efforts to reach the underserved,” the report says. “While banks are closing branches all over the country, mostly in low-income areas like rural communities and inner cities, the physical postal network is ubiquitous.

“The Postal Service also is among the most trusted companies in America, and trust is a critical element for implementing financial services,” it continues.

“With affordable financial offerings from the Postal Service, the underserved could collectively save billions of dollars in exorbitant fees and interest. This could make a big difference to struggling families — on average, people who filed for bankruptcy in 2012 were just $26 per month short of meeting their expenses.”

The report states that many postal services in other countries have had success in financial services. It also notes that the USPS already dabbles with some financial products such as money orders and international money transfers.

“(Some services offered) could include reloadable prepaid cards with features that encourage people to save money, mobile transactions, and products that help the underserved take part in e-commerce,” it says.

“They also could include new ways of transferring money both domestically and internationally, and perhaps even include small loans that would help customers overcome unexpected expenses. As society becomes increasingly cashless, the Postal Service’s ability to provide a physical link to the new digital economy will become more and more vital.”

Support from Warren

While bankers are balking at the idea, Sen. Elizabeth Warren was intrigued by the idea. Warren is an advocate for the Consumer Financial Protection Bureau and was considered a candidate for the agency’s chairmanship.


Why Buy the Cow When You Can Get the Milk for Free?

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By RICHARD B. KELSKY 

When I was in college, the country was going through a social and sexual revolution. For the first time, unmarried couples started openly living together.

When a grandmother learned that her grandchildwas “living in sin,” she routinely clucked (you know, that noise of disapproval created by repeatedly sucking your tongue downward off of your palate) and asked disapprovingly, “Why buy the cow when you can get the milk for free?”

Historians have traced that expression back to the mid-1600s, when farming and livestock were the most common pursuits.

The original expression is believed to have been, “It is better to buy a quart of milk by the penny then keep a cow.”

In Australia, they say it in an oddly civilized way: “Why buy a book when you can join a library?”

The fact is, that rhetorical question can be applied to virtually every circumstance where someone is trying to get something for nothing. But I’m not writing about trying to get a free hamburger from McDonalds.
I am writing about association membership — in particular, the conundrum that non-members get to enjoy the fruits of the association’s work, without paying dues.

National Associations

Membership at the national level is mandatory. According to the Oxforddictionaries.com, mandatory means “required by law or rules; compulsory.” According to me, it means you have to join.
When it comes to national associations, FiSCA and CFSA attract the lion’s share of the financial services industry. Here’s how they each describe themselves:
FiSCA
Financial Service Centers of America, established in 1987, is the oldest national trade association representing more than half of the nation’s financial service centers providers, with member locations in communities across the country.

Financial service centers offer a wide array of basic financial services to millions of Americans including check cashing, money transfers, money orders, bill payments and small dollar, short-term loans.
Visit fisca.org for more information.

CFSA
The Community Financial Services Association of America was established in 1999 as the national organization for small dollar, short-term lending or payday advances.

CFSA member companies represent more than half of all payday advance stores and are located in neighborhoods across the country [32 states] providing a valued service to those communities.

Visit cfsaa.com for more information.

What They Do

Both organizations meet frequently with regulators, conduct annual events that are attended by members, vendors, and regulators, commission surveys and studies, foster best practices, keep their members updated on news and events, respond to unfounded attacks on the industry and generally communicate the need and value of the services you provide.

Through my companies, I have been a FiSCA member and attending its conferences since the organization was founded.

Over that time FiSCA has grown to become a broad representative presence for the entire financial services industry, recently moving its headquarters to Washington.

CFSA has grown rapidly and is focused on short-term credit, featuring many corporate members, and is headquartered in Virginia.

If you can somehow come up with an excuse for not joining a national association, at the very least, attend a national association event.

They are reasonably priced, located in great venues, and you’ll get the chance to see and meet with the vendors who serve the industry, be exposed to the latest products, get updated on regulatory and legislative directions, attend workshops, and develop relationships with other industry members.

State Associations

When it comes to your state association, most folks fall in to one of three groups: MIWD (Member In Words and Deeds); MINO (Member In Name Only) or NAM (Not A Member).

MIWDs attend every meeting and event, join committees, support association efforts, serve as officers and board members, promote the industry and more.

They are the farmers: they take care of the farm and cows, and do what it takes to produce the milk.

MINOs make up the vast majority of every organization. They pay their dues (which pay the bills), and generally support association efforts.

These are the financiers of the farm — they may not work there, but they put their money where their mouth is. And that’s very important.

NAMs have their reasons for not joining. But at the end of the day, they need to put those aside (whether politics, philosophical disagreements, an argument at a meeting in 1988, or something else). State associations need their help and participation.

All Shapes, Sizes

There are more than 30 state associations listed on the FiSCA website and in Cheklist magazine.

Granted, some are larger, better established and more organized than others. In most cases that’s a function of math: (number of members) x (dues) = money to do things.

Regardless of size or depth, in each and every instance, they represent your only opportunity for formal representation within your state.

I believe in supporting your state association, so you need to join yours, even if you are a member of a national association.

State and national associations have common but very different roles in your future, especially in regulated states.

National organizations cannot monitor legislation and industry-impacting activity in each and every state — they often depend on state associations to identify pending storm fronts.

Similarly, national organizations cannot meet and work with regulators and legislators in every state in order to improve communication and relationships, protect licensees and achieve positive change. Both levels are necessary.

If you don’t bite the bullet and join, it becomes a “chicken and egg” problem. The organization needs members, some people won’t join unless they see activity (meetings, events, legislative progress), and activity cannot be funded without members.

In many cases, only a handful of folks fund and run the entire state association — at their own cost in time and money and to the benefit of all licensees in that state.

In many states, the association’s efforts have produced an ongoing and open dialog with regulators and legislators, rate adjustments that help absorb increasing costs and risks, amendments to regulations that assist both consumers and licensees and revenue growth opportunities (see below).

Grade A, Ultra-Pasteurized and Homogenized

Like milk, some associations are deserving of Grade A ratings for their ongoing efforts. Many thanks to Ed D’Alessio (FSCNY), Scott McClain (NJFSC), Abby Hans (CCEA), Bill Staderman (RIAFSC), Amy Cantu (CFSA) and the FiSCA team for their insights into the activities and accomplishments of their respective organizations during 2013. Here’s a “Golden Globe” style take on what these organizations have collectively achieved in the past year, for which they are all “winners.” Most important accomplishment: Opening and maintaining ongoing communication with regulators and legislators. Most important ongoing service: Monitoring legislation and regulation at the earliest levels of consideration – and responding on the industry’s behalf. Most offered services: AML/policymanual training and member guidance. Best industry-sustaining activity: Working with regulators to have permitted rates track CPI, minimum wage, risk and other cost increases. Best immediate service: Sending alerts to members of crisis level issues. Most time-saving effort: Working to eliminate filing CTRs and SARs with state agencies (since they are already filed and accessible on-line at FinCEN). Most consumer-oriented achievements: Supporting consumer protection, choice and awareness through (1) effective rate and terms disclosure and financial literacy, (2) opposing legislation that would limit consumer choice, (3) working to stop unlicensed/unregulated activities and (4) endorsing “Best Practices.” Most effective community support: Scholarship and disaster relief programs. Best process accomplishments: Working with regulators to improve on-line applications, and to conduct audits at main offices, rather than store-by-store. Promoting esprit de corps: Running effective, informative and well-attended meetings.

You Can Do Something

Obviously, join one or both national associations. If you have a state association, and you are not a member, join now.

Put aside your reasons for not joining, whatever they may be, for the common good of the industry in your state.

Without a state association you have absolutely no local voice — especially with regulators and legislators — and no place to exchange ideas, directions, and opportunities. Put “Join my state association” on your calendar today.

As they say in Australia, “Don’t just sit there like a stunned mullet,” join up and participate. You and the entire industry will be better for it.

Richard Kelsky is president of TellerMetrix, Inc. a provider of POS transaction, compliance, interface, electronic deposit and marketing software to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of NYU and NY Law School grad, a Certified Anti-Money Laundering Specialist and a frequent lecturer on business, legal, compliance and technology issues. He can be reached at: rkelsky@tellermetrix.com. This article does not constitute legal advice and is an expression of opinion by the author and not of any entity or organization.

Check Casher Seeks Return of Seized Funds

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By RICHARD WEATHERINGTON

It’s bad enough to be stung for nearly $22,000 in bad checks, but it is even worse to see the money paid out taken by the government under its asset forfeiture powers. A New Jersey check casher found out how hard and costly it can be to successfully navigate a claim made against forfeited assets.

On Feb. 9, 2010, a man whose first name was Amaury presented three checks that collectively totaled $21,965.00 to a check cashing service located in New Jersey. The check casher paid Amaury the face value of the checks in cash.

Several hours later, Amaury was arrested, and his property, including approximately $29,000, was seized by the United States government.

Amaury was subsequently indicted on conspiracy and cocaine related drug charges. On Feb. 16, 2010, the Drug Enforcement Administration issued a report that stated, “Amaury said that he acquired his approximately $29,000 by writing and cashing bad checks earlier that day. …”

There was no dispute that part of the property the government seized from Amaury included the $21,965.00 in cash that the check casher paid Amaury earlier that day.

Because the checks Amaury negotiated were worthless, upon learning of his arrest, the check casher wrote to Amaury, the assistant United States attorney in charge of Amaury’s case, and the DEA seeking the return of the funds.

On June 10, 2010, the DEA responded to the check casher’s letter, stating that the “time period to file a claim expired on May 6, 2010, as published in the Wall Street Journal.” The DEA also advised the check casher to file a petition for the return of the money, also knows as a petition for remission or mitigation.

On July 6, 2010, the check casher filed a petition with the DEA seeking the return of the seized money. The DEA sent “written notice of the seizure of the seized funds” to the check casher on Aug. 4, 2010, and advised the check casher to petition the DEA for the return of the property or to timely contest the forfeiture proceeding in federal court.

On Oct. 6, 2010, the DEA administratively forfeited the seized funds. The DEA’s official declaration of forfeiture stated, in pertinent part:
Notice of the seizure and intent to forfeit was published on the following dates 03/22/2010, 03/29/2010, 04/05/2010 and was sent to each party who appeared to have an interest in this/these properties. Because there were no claims filed for the property within thirty (30) days from the date of the last publication of the Notice of Seizure or thirty five (35) days from the date the Personal Seizure Notices were mailed, it is hereby declared that the property has been forfeited to the United States Government under the forfeiture law.

The government didn’t dispute that the actual notice was not sent to the check casher on the dates listed on the declaration of forfeiture; the government appeared to have viewed the check casher as a general unsecured creditor who did not have a legal interest in the forfeited property.

The DEA subsequently denied the check casher’s petition for the return of the funds on Nov. 29, 2010, and held fast to that conclusion after a petition for reconsideration was filed on March 29, 2011. That the check casher did not exercise its option to contest the forfeiture proceeding in federal court was also undisputed.

Amaury was sentenced on May 16, 2011. During the sentencing, the United States District Court for the Southern District of New York expressed concern regarding the government’s retention of funds that belonged to the check casher and recommended that the government release the $21,965.00 to the check casher.

As a result, on May 18, 2011, the court entered an Order of Restitution, which ordered Amaury to pay a total amount of $21,965.00 “less any award released to the check casher by the United States.”

Hires Lawyer

In June 2011, the check casher retained an attorney to assist it in securing the funds. As of April 2012, the check casher had still not received the funds and submitted a petition to the United States Attorney’s Office for the Southern District of New York for remission of $21,965.00.

Because the funds had since been forfeited and shared with local law enforcement, the USAO had to request that the Department of Justice invoke its “restoration procedures” to release the funds.

It was during this stage that the check casher filed a third-party claim seeking an order:
(1) releasing the sum of $21,965.00, plus interest, which was seized by the government from Amaury, and
(2) granting the check casher attorneys’ fees incurred in connection with the filing of its motion, under the Civil Asset Forfeiture Reform Act or, in the alternative, under the Equal Access to Justice Act.

Magistrate Judge

The dispute then went before a magistrate judge for the U.S. District Court for his report and recommendation.


2014 Could be Turning Point

By William Sellery
Executive Directir, FiSCA

If 2013 is any kind of gauge, there is no doubt that 2014 will be another extremely active year for the Financial Service Centers of America.

Fortunately, in 2013, significant and worthwhile progress was made on a wide variety of issues. However, much work lies ahead. Looking to the future, 2014 could easily be a real turning point on several issues of major importance to our industry, from potential payday loan regulations, to the ability of government beneficiaries to choose a paper check, to addressing new fraud vulnerabilities from remote deposit capture, to responding to unwarranted bank terminations, among many issues currently being addressed.

Congress Role Vital

While there seems to be an increasing likelihood of even more day-to-day regulations — especially from the Consumer Financial Protection Bureau — the involvement of Congress will also continue to play a key role as many final decisions are made.

FiSCA has long recognized the link between public policy and our members’ businesses. Legislation, and its ensuing regulations, can dramatically affect how our members run their businesses on a day-to-day basis.

As we’ve always asserted, we want decisions to be based on facts, not misperceptions. Providing facts to decision-makers in Washington has always been one of the key goals of FiSCA. The importance of successfully providing those facts in a meaningful way, before proposals are finalized or decisions made, is magnified as federal actions increasingly address our products and services — and now even procedures and processes.

Recognizing the need to play a meaningful role in the debate of public policy issues, FiSCA has strategically structured itself to provide the right resources, at the right time, on the right issues. Springing from the original decision to move FiSCA’s headquarters into Washington, FiSCA is fully engaged on several levels to ensure that key facts, positions, and reasoning are brought forward on a timely basis for consideration of decision-makers.

Again, facts, not misperceptions, need to drive decisions. FiSCA is committed to making that happen.

Overall, since passage of the Dodd-Frank bill that legislatively created the CFPB, much of the immediate focus has shifted from legislative issues to the regulatory environment. Taking CFPB as the most prominent example, the new agency has regulatory authority over all our products and services under the guise of consumer protection – coupled with broad examination and powerful enforcement capabilities.

So it is critically important that decision-makers within CFPB clearly understand the nature of our business, how it works, and how our customers are appropriately protected.

Members Need Knowledge

In that regard, as an association, one of our missions is to assist our members to better understand the unfolding regulatory environment and to provide timely information on compliance procedures from the various agencies that regulate our business.

As we have indicated to many regulatory agencies over time, our members want to comply with all applicable regulations, but they need to know clearly what is expected of them. It’s critical when that knock on the door comes that you will have already implemented the correct policies within your company.

FiSCA has implemented strong, comprehensive and leading-edge compliance programs for our members. Although reserved for members only, the FiSCA website (fisca.org) contains comprehensive compliance tools designed to help our members meet current regulatory requirements, from AML/money laundering regulations to newly issued rules from the CFPB.

FiSCA’s Annual Conference now contains two separate compliance tracks for those regulatory areas, and those workshops have become among the most popular and well attended.

Let’s take a look now at some of the key issues for our industry for 2014, the status, outlook, and how those issues may affect the business of the neighborhood financial service center industry. This is Washington, of course, so Congress and the regulatory agencies can both be involved on different levels as policies are developed.

Financial Choice

On March 1, 2013, all government beneficiaries were required to receive their benefits electronically — either directly deposited into a bank account, or placed on a government-issued prepaid card.

The option of being able to choose a paper check was not available except for a small number of very narrowly defined exemptions. And even those exemptions contained onerous process requirements, making them nearly impossible to obtain.

The U.S. Treasury Department then began using heavy-handed, almost intimidating, messages to beneficiaries to sign up for electronic delivery. However, bank accounts and prepaid cards don’t work for everyone, and the fairness of “Choice,” the ability to choose a paper check, made great sense as a reasonable and fair alternative.

Although FiSCA worked with Treasury to examine possible solutions, we found that Congress was more receptive in understanding the fairness of Choice. Hearings have been held in both the House and Senate, highlighting the problems for millions of beneficiaries, and supporting the principle of Choice.

In both written and oral testimony, Treasury has now indicated that paper checks would continue for those who have not established a bank account or signed up for a prepaid card. Further, Treasury agreed to tone down and scale back intimidating notices to beneficiaries.

Nevertheless, more work needs to be done. The law still requires electronic delivery, and choosing a paper check needs to be an option, not an unclear and uncertain default. And troubling instances are emerging of government agencies blocking enrollments for direct deposit on certain prepaid cards, forcing people onto the government-endorsed card.

Further, more and more employers are now requiring employees to receive their pay electronically – not by paper check. Again, the fairness of Choice needs to be provided to those who prefer a paper check.

FiSCA will be continuing to work in 2014 on the issue of Choice, with the goal of providing a fair and reasonable ability for everyone to choose a paper check when that option suits them better.

Consumer Financial Protection Bureau

The potential for payday loan regulations will be a major area of interest and activity for FiSCA in 2014. Under the Dodd-Frank Act, the CFPB has direct authority to engage in rulemaking, issue industry guidance, examine payday lenders, and commence enforcement actions based on violations of consumer protection laws. In fact, the very first field hearing of CFPB addressed payday lending.

A CFPB “white paper” released earlier this year concluded that further regulatory action is warranted to provide consumer protection.

While no official confirmation has yet been provided, it is widely anticipated that payday, in some form, will be addressed by the bureau in 2014. How it’s addressed, and how it may impact our members, will be a significant focus of FiSCA activity in the coming year.

FiSCA has worked hard to establish a strong, credible working relationship with CFPB. We are hopeful that relationship provides an appropriate forum to work with CFPB on the critically important payday issue.

Additionally, FiSCA continues to be active with the bureau on other MSB issues, such as check cashing and money transmitting, and prepaid card regulations, as those areas become more prominent in the bureau.

Again, FiSCA will provide relevant facts to assist the bureau in the consideration of any new regulations.

Bank Discontinuance

The wholesale and unwarranted termination of MSB bank accounts will continue to be a major issue focus for 2014. Bank accounts are the life blood of the industry and any contraction in the availability of banks in the MSB marketplace is of significant concern. The issue of account terminations has resurfaced, focused on the increased use of the ACH payment system to provide payments on payday loans. Several ACH processors and banks have terminated MSB relationships in response to regulatory pressure. FiSCA is committed to working with regulators, banks, and third-party ACH processors to ensure that the appropriate use of legal and approved procedures do not result in any further unwarranted account terminations.

Remote Deposit Capture

As more wide-spread use of technology naturally progresses, and more consumers use their smartphones to deposit checks electronically, the issue of fraud has increased simultaneously. FiSCA’s members are becoming vulnerable as liability issues arise, and fraud continues to increase.

Therefore, 2014 is likely be an important year in addressing the remote deposit capture issue as FiSCA works with banks and trade associations, such as the American Bankers Association, to develop policies and procedures to better work with established and emerging consumer banking technology.

Congress

Both the House Financial Services Committee and the Senate Banking Committee will continue in 2014 to exercise their respective oversight authority to review the regulatory activities of various agencies, particularly the CFPB.

While the current partisan approach to politics may prevent many bills from being signed into law, it will not prevent the active consideration of many proposals. In fact, the House Financial Services Committee passed several bills changing dramatically the way CFPB operates.

While it is unlikely the Senate will take up any of those bills, the House, nevertheless, will continue to keep the focus on many regulatory agencies even more in 2014. How agency witnesses answer certain questions sometimes provides an insight into agency thinking, which can be helpful.

Conclusion

As FiSCA continues to fight for its membership and the industry in 2014, the resolution of these issues and many more will likely play an important role in how our industry operates into the future. With a seat at the table, FiSCA will continue to advocate that facts, not misperceptions, be the basis of all sound decisions going forward.

2014 Year to Solidify Industry

By Lisa McGreevy
President and CEO, OLA

The online short-term, small dollar credit industry has certainly had its ups and downs over the last year. Yet, we continue to see ongoing growth and innovation within our industry.

A recent study conducted by Stephens Inc. has shown that online short-term loan volumes reached $18.6 billion in 2012, a 30 percent increase from 2011. As demand for our product continues to fuel the growth of the industry, it also sparks innovation.

Our industry is pioneering advances in technology and software which will provide 21st century credit to the 21st century consumer.

Government Outreach

Unfortunately, the growth of our industry has lead to government overreach by state and federal regulators. This summer, federal agencies such as the Federal Deposit Insurance Corporation and Department of Justice began concerted efforts to pressure banks to stop processing legal, authorized payments between online lenders and their customers.

The overreach by these federal agencies was unprecedented, threatening the livelihood of many small businesses across the country and possibly further restricting credit access to millions of American families.

Rogue government bureaucrats who simply don’t like our lending products have been trying to end an entire industry, yet offer no alternatives to those who rely on access to short term credit.

While persistent attempts to misrepresent our industry continue, I am confident that we will become a stronger industry in the end. I believe this because of the way we have stuck together as an industry and persevered in the face of these threats.

We have proven that we are a legitimate and legal industry that provides essential financial products to millions of Americans. There is a path towards permanency and it continues in 2014.

Important Years

The Online Lenders Alliance sees 2014 as an extremely important year for solidifying the permanency of the online lending industry.

We believe the best way to protect and grow is by finding a federal solution to ensure that consumers have access to the credit they need and lenders have the ability to provide them that credit.

Innovation in online lending has always been driven by consumer demand and feedback.

We believe that current state-by-state laws are insufficient to govern the global nature of the Internet. By passing a federal charter to regulate our industry, we would establish a framework that would best protect our industry, ensure nationwide access to short-term consumer credit and preserve consumer protection laws and regulations.

OLA supports bipartisan legislation, the Consumer Credit Access, Innovation, and Modernization Act (H.R. 1566), which would create a federal charter program for nonbank lenders.

H.R. 1566 would establish a clear set of rules for lenders and ensure all consumers have access to new, innovative financial products generally unavailable to them at banks and credit unions.

Win for Consumers

A federal charter would provide protection to consumers by subjecting the chartered lending institutions to federal and state oversight and provides assurance to consumers that they are dealing with licensed lenders who are compliant with all federal consumer protection laws.

H.R. 1566 would authorize the Office of the Comptroller of the Currency and Consumer Financial Protection Bureau with supervisory and enforcement authority.

No Alternative

Additionally, the bill specifically gives states attorneys general investigative and enforcement authority.

No one, including regulators and consumer groups that purport to represent consumers’ interests, has put forth any viable alternative for meeting underserved consumers’ credit needs.

Congress must find a federal solution or nonbank lenders will never be able to adequately meet underserved consumers’ credit needs because outdated, overly restrictive and differing state laws will continue to prevent them from doing so.

According to the FDIC, nearly 70 million American are either unbanked or underbanked. The struggle for credit options is real and our industry provides a solution to that problem.

The upcoming year will provide an enormous opportunity for not only companies across our industry but for elected officials and regulators alike. We have the opportunity to establish a legitimate and thriving industry that provides a vital service to millions across the country.

Working with Regulators on Credit Access, Options

By Dennis Shaul
CFSA, CEO

Over the last few years, and in particular in 2013, the payday lending industry has faced an unprecedented level of attention from regulators and policymakers.

All companies are under heightened scrutiny as the effort to eliminate bad actors that operate illegal, unscrupulous businesses remains paramount.

It is certainly a worthy effort and one that the Community Financial Services Association supports, and the attention from certain state and federal agencies underscores the important collaborative relationship between regulators and our industry.

Ultimately, pragmatic regulatory scrutiny benefits both consumers and legitimate lenders — the vast majority of our industry — and weeds out the bad actors from the reputable lenders and ensures safe, short-term credit options remain accessible.

Further, it brings to the forefront a necessary national discussion of the short-term credit needs of millions of Americans — needs that for too long national policy has failed to address in a productive way.

Filling a Need

As short-term lenders well know and as evidenced by the continued success of short-term lending businesses, alternative financial services, including payday loans, fulfill an important role in the credit market – one which traditional banks are generally unable to fulfill.

A 2011 study by the National Bureau of Economic Research found that half of American households could not come up with $2,000 from all available sources for an unexpected expense in a 30-day period.

Roughly half of all American families are living paycheck-to-paycheck, and lack adequate savings to cover unplanned expenses. Millions of Americans simply do not have the cash flow to pay all their bills at the beginning of the month.

To serve these millions of Americans today and with an eye on the future, members of CFSA have upheld the highest standards in our industry. All our members follow a mandatory set of Best Practices to help protect our customers. As part of these Best Practices, all our members are licensed in every state where they operate. Because of these standards, none of our members were in the crosshairs during the recent crackdowns on illegal lending.

While we are proud of our Best Practices, we see 2014 as a year to expand upon them — working within the industry and with our partners in the regulatory space – toward the ultimate and singular goal of improving the customer experience.

At both the federal and state levels, we are well-positioned to help inform a conversation on short-term credit. Our members, after all, have been providing these products for more than 20 years and have the analytic experience and expertise.

We are fully committed to working in 2014 to push forward several initiatives that will improve the loan experience for our borrowers.

For example, more substantive research is needed to understand the various ways in which consumers use short-term credit products and how this use impacts upon their financial welfare. While regulators and consumer advocates released several reports in 2013, those studies presented very little in terms of hard or meaningful data that could inform product changes. Many of these reports are based on anecdotes and perceptions rather than a thorough, scientific analysis that stands up to academic rigor.

In order for regulators to develop effective rules, we need a better, data-driven understanding of how these products actually affect borrowers for better or worse. With this information in hand, both the industry and state and federal governments can work to enhance the customer experience.

Further, both industry and regulators should work hand-in-hand over the next several years to explore product innovations. This will ensure that we are evolving to meet changing consumer needs. The states have for long served as a laboratory for regulatory experimentation and product development and, indeed, states have the most experience regulating short-term credit products.

As an example, several states have authorized additional loan products with different terms that provide consumers with options. Continuing to experiment and innovate can only benefit consumers in the form of more products and more choices.

Underwriting is another important issue for the industry, and it is a primary concern of the Consumer Financial Protection Bureau, as evidenced by its white paper released earlier this year. Better, more stream-lined underwriting is needed for short-term credit products in order to discern those borrowers who are likely to default or may have difficulty with repayment.

However, traditional underwriting is too time-consuming and expensive for short-term, small dollar loans. With the unique structure of our loans and the immediacy in which they are needed, complex underwriting could create a barrier to entry.

Instead, we need to develop new ways, using new data sources, to evaluate a borrower’s ability to repay a loan. Several companies are already exploring alternate forms of underwriting, which will help to better evaluate who will benefit from using short-term credit.

Regulation will always come with challenges and opportunities. Overregulation can lead to limited choice for consumers or onerous standards that make it difficult to do business. Balanced regulations, which are the result of well-reasoned discussion and debate, create markets in which consumers benefit and businesses can succeed.

Next year will be an important one, as regulators at all levels develop rules that will define credit markets for years to come. CFSA looks forward to participating in these discussions to improve short-term credit for consumers, and continue to offer products that meet their unique needs.