By RICHARD B. KELSKY
By now, most of you are familiar with the Consumer Financial Protection Bureau. Created with the passage of Dodd-Frank in July 2010, the CFPB is charged with representing the interests of American consumers in connection with financial-related products and services. Its director is Richard Cordray.
I recently attended a Town Hall Meeting called by the CFPB to obtain comments from the public regarding checking accounts.
Where and When
The meeting was held at Hunter College — located at 68th Street and Park Avenue in New York City — at 5:30 p.m. on a Wednesday. Having been raised in New York, my initial reaction was, “Where and when?”
For non-New Yorkers, the area surrounding 68th and Park happens to be one of the most expensive neighborhoods in America. According to Bloomberg News, the median apartment runs north of $2.8 million. If you drove to the meeting, you could spend $45 just to park your car.
It seemed pretty unlikely that an ordinary, individual consumer from Brooklyn — after getting off work at 5 — would make the effort to get there. So you can appreciate my difficulty in seeing this location and the timing of the meeting as geared to drawing attendance by individual consumers desiring to relate their checking account experiences.
On the other side of the coin, I applaud the CFPB’s director for personally getting on the road to meet with consumers. I am also keenly aware that a large percentage of young adults incur overdraft fees, so some student comments on checking accounts would be relevant.
I also recognize the desire to have members of the media attend, as well as consumer groups, for whom a Manhattan location would be convenient.
Who — the Audience
I arrived early, took a seat, and observed. The largest group in the audience was students at Hunter College, followed by representatives of various community service and other organizations, law students, labor representatives and some individual consumers. I also spotted a few bankers. Press attendance was relatively modest.
The Town Hall opened with an introductory program including the president of Hunter College, as well as Rep. Carolyn Maloney, New York State Attorney General Eric T. Schneiderman, and CFPB Director Richard Cordray. After those brief remarks, Cordray and CFPB Assistant Director for Community Affairs Zixta Martinez took their places on stage and the floor was opened for comments.
How — A Well-run Meeting
Cordray and Martinez handled the public session extremely well. They are very smart people: professional, charming, confident and excellent communicators.
In responding to comments, the director exhibited the ability to think on his feet – a rare commodity these days.
What — Audience Comments
The comments from the floor were generally very passionate. Many were delivered by representatives of organizations, rather than individual consumers. Some of those representatives also included an aspect of personal experience in their comments, most commonly relating to overdraft protection, multiple overdraft charges and transaction ordering by banks.
Other comments touched on student loans, bank debit cards, mandatory placement of earnings on cards, prepaid debit cards and payday loans. This was somewhat curious because they are not allowed in New York — although, since payday loans are routinely obtained by New Yorkers over the Internet in an unregulated environment, the comments could reflect on-line experiences. Speakers also addressed the cost of maintaining a checking account, credit checks in connection with retail employment applications, Wal-Mart, and made a couple of comments — not necessarily negative — about check cashing.
Cordray’s answers were measured, responsive, and demonstrated a keen understanding of the CFPB’s mission. It appeared to me that the director is focused on transparency of disclosure. I did not get the feeling that promoting Machiavellian legislation was on the near-term agenda.
Interest Rates vs. APRs, Rollovers
During the course of the meeting, I was concerned about a few references to payday lending “interest rates” (including the use of the term “usury”) and “rollovers.”
Putting aside the numerous state law issues involved, most people discussing payday lending interchangeably refer to APRs as “interest rates” — even though they are materially different terms.
APRs include fees as well as interest rates in the calculation. In addition, it is also generally understood that APRs were intended for comparing longer-term loans (in order to consider the effect of up-front fees over the term of the loan) and as a tool for evaluating loans of comparable duration.
For example, a payday loan of $100, with 0 percent interest (yes, zero percent), a two-week term and the only charge being a fee of $10, would have a calculated APR of more than 260 percent.
Given the combination of short term, amount, risk, and the costs incurred in documenting, issuing and processing the loan (including labor, rent, cost of money, insurance, and all other expenses of running a business), it is simply not appropriate to paint this APR with a broad “interest rate” brush or casually use the term “usury.”
Usury is defined by state law on a state-by-state basis — often including exemptions for particular types of loans. Similarly, in many states, payday loan rollovers (as well as multiple loans) are controlled by state law and loan databases.
It may surprise some readers to learn that while payday loan APRs are fully disclosed, bank overdraft fees have no APR disclosures. That is because it was somehow decided that overdraft protection is not a loan.
What would the effective APR be on a $34 overdraft charge for a $2 cup of coffee — for a five-day term? (Hint: 124,000 percent — yes, one-hundred-twenty-four thousand percent.) How about $34 on that $1 refill for the same 5 days? (Hint: Double it).
Understandable disclosures are good things, provided that they are intended and written so as to help consumers make informed decisions, not to make decisions for them.
No matter what subject you pick, there are always extreme cases that can make headlines. We issue ten million life-saving prescriptions with “package insert” disclosures stapled to every prescription bag, but the headline we read is about a handful who misused the drug.
Similarly, in virtually every industry, the actions of a few bad apples overshadow the good practices of the overwhelming majority. Disclosures should inform, without bias, thereby allowing the consumer to independently decide.
Successful neighborhood financial service providers have always earned their customers’ business through clearly stated charges and extraordinarily efficient delivery of courteous service, often on an extended hours or 24/7 basis.
In my experience, their customers are extremely aware of all charges and closely examine their receipts and documents.
In one check casher’s comments during the Town Hall meeting, he summed up succinctly that as the operator of a group of check cashing stores in New York, he provides the combination of transparency, level of service, range of services, reasonableness of charges and environment that consumers want.
To that point, one of the commenting community service organization representatives acknowledged that check cashers are less expensive than banks for many consumers.
Educated Free Market Makes Choices
Over the past couple of years, prepaid debit cards went mainstream. Just like smart phones, TVs and cars, different brands have different features and costs.
Much depends on how the individual consumer puts the card to use. While some were calling for more regulation, consumers became more aware and better educated about prepaid cards, what they cost and how they work, and the free market has defined their terms, acceptance and success.
Sure, there are charges – as they say, “there ain’t no such thing as a free lunch” — but now, numerous reports have found more and more consumers opting for prepaid debit cards in lieu of checking accounts, primarily based upon ease of use, certainty of cost, and lack of surprises.
Over time, a more informed consumer has contributed to the industry’s product evolution and mainstream acceptance.
Having visited more than a thousand neighborhood financial service businesses, and having spoken with customers, employees and owners, I am confident that transparency of charges and terms is the industry norm and the level of customer awareness is very high.
Can you imagine a bank posting its charges in its lobby? How about a bank providing each customer with a detailed transaction-by-transaction receipt? Or a bank giving a customer the opportunity to choose from a range of alternative products for the same service?
In neighborhood financial services, that is a part of everyday business.
While many remain concerned, I am optimistic about the CFPB. I am not a fan of business-hampering legislation, or imposing regulation over many for the acts of a few. I am, however, in favor of consumers receiving clear and unbiased disclosures leading to informed, independent choice.
If the CFPB accomplishes that result across the entire financial sector, it is good for everyone — and the free market will dictate the outcome.
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 New York 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: firstname.lastname@example.org