CFPB, Choke Point Threaten Industry



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.


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


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?



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 This article does not constitute legal advice and is an expression of opinion by the author and not of any entity or organization.