Portland, OR – Oregon’s Senator Jeff Merkley today announced his intent to introduce federal payday legislation to establish strong rules for payday lenders and close loopholes on online and offshore payday lending sites. Today, Merkley also sent a letter to Consumer Financial Protection Bureau (CFPB) Director Richard Cordray to call on him to take action against payday lenders. 

“Millions of Americans are affected by the abusive and deceptive payday lending practices across our country and over the internet,” said Merkley. “While Oregon is lucky to have state legislation in place to stop the worse practices, there are still loopholes and offshore websites that are dragging Oregon families into black holes of debt. We have to bring order to the Wild West of the lending market.” 

 While visiting with consumer advocates in North Portland today, Senator Merkley outlined steps that should be taken to rein in deceptive payday lending practices and close loopholes by online and offshore websites. Elements of the legislation that Merkley will be introducing include: 

  • Requiring greater disclosure for online websites that mask the true identity of the lender and ending abusive practices that provide data to payday lenders and debt collectors that defraud consumers in paying debts they do not owe;
  •  Closing loopholes and other measures to rein in offshore payday lenders that can drain bank accounts without consumers having the ability to stop them;
  • Making sure that all banks and insured depository institutions are supporting healthy banking practices.

Senator Merkley was joined at today’s event by representatives of Economic Fairness Oregon and Innovative Changes.

“It’s an unfortunate truth that each time we find a way to help people hang on to more of their money, there’s a new tactic or scam aimed to strip them of it,” said Angela Martin, executive director of consumer advocacy non-profit Economic Fairness Oregon. “This is why it is so important for us to have strong and vigilant leadership on issues of consumer protection.”

As speaker of the Oregon House in 2007, Senator Merkley led the effort to protect consumers against abuses by the payday lending industry by imposing an interest rate cap of 36% on all consumer finance loans and limiting rollovers of short-term loans. 

Full copy of the letter sent to Director Richard Cordray is included below.

March 12, 2012

Hon. Richard Cordray
Consumer Financial Protection Bureau
Washington, DC

RE:  Payday and Other High-Cost, Small-Dollar Lending

Dear Director Cordray: 

Every year, millions of Americans are taken advantage of by payday, auto title, and other high-cost, small-dollar lenders.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Consumer Financial Protection Bureau (CFPB), giving it strong authorities to bring order to this Wild West lending market.  We write today to urge you to use that authority vigorously and, in particular, in a manner that supports the efforts of states which have already acted to establish basic rules of the road in this area.

Payday and other high-cost, small-dollar loans are marketed as ways to cover short-term credit needs.  However, the loans are often structured to trap borrowers in long-term debt.  These loans have high fees and automatic roll-overs, which, as research by the Consumer Federation of America has shown, combine with other practices to make the effective annual interest rates 400 percent APR or more. 

If consumers in need of short-term borrowing turn to these lenders, they are likely to find themselves worse off than if they had never used them.  According to the Center for Responsible Lending, over 75 percent of payday loans are the result of repeat borrowing on the same principal, and an estimated 12 million Americans are annually caught in long-term debt from loans that were marketed as quick and easy short-term solutions. These loans generate $4.2 billion in fees and trap borrowers in debt, which in turn limits access to mainstream banking, harms credit scores, undermines employment prospects, and ultimately can lead to bankruptcy.  The industry also fuels a number of abusive debt collection practices.  It would not be a stretch to say that payday and similar small-dollar lending, as currently conceived, impoverishes many American families every year. 

Without a doubt, the CFPB must act soon to establish strong national rules to stop unfair, deceptive, and abusive practices.  As part of that effort, the CFPB should partner with the states and implement rules that will enhance states’ consumer protection efforts.  State attorneys general and state consumer departments act as the “50 cops” on the beat, and the states’ consumer lending laws provide valuable tools, including usury caps, to complement CFPB authority.  In addition, sixteen states and the District of Columbia have passed specific state laws to rein in some of the worst practices. 

While the states can play the important role of first responder, there are important things that the CFPB can do to support and enhance those efforts.  We below highlight three areas where CFPB action can meaningfully protect consumers and enhance strong steps already taken by states. 

First, there has been a troubling increase in the use of Internet-based “lead generators,” which are web sites that front as web lenders but only collect data on potential customers for payday lenders and others.  Such websites mask the identity and nature of the true lender, who may be separated by several levels of front operations, obstructing state law enforcement.  Violators may ultimately be caught and subjected to state law enforcement, but the process can be costly, draining state resources, and leaving consumers subject to illegal predatory lending in the meantime.  The CFPB should vigorously address the problem of lead generators collecting bank accounts and sensitive personal information.  In addition, the CFPB should also immediately take steps to stop those that violate privacy laws or otherwise engage in deceptive or abusive practices, such as providing data to debt collectors that defraud people into paying debts they do not owe. 

Second, offshore Internet lenders are a particular problem.  They avoid state laws by relying on loopholes in the rules covering debit transactions and remotely-created checks, and can drain bank accounts without the consumer having the ability to stop those transactions, even when the loans are illegal.  These rogue websites make it difficult and costly for states to enforce against them by locating (or appearing to locate) offshore.  In fact, some U.S. lenders are structuring their operations to appear to be offshore, even though the vast majority of their activities are U.S.-based.    The CFPB should close loopholes around debit transactions and remotely-created checks, as well as other measures to rein in these offshore lenders.  In addition, the CFPB can use its examination authority to identify Internet lenders that are making loans in violation of state law.  The CFPB can also identify which banks are processing those transactions, and use the payments system to stop those illegal loans. 

Third, after exiting the business only a few years ago, some insured depository institutions (including national banks) have begun to return to the high-cost, small-dollar lending space.  In contrast to many credit unions and community banks, which have been pioneering ways to offer affordable loans to people in need, these insured depository institutions have begun providing “check advance” services that increasingly resemble payday loans.  Federally chartered institutions then rely on overbroad preemption interpretations or other loopholes to avoid the constraints of state lending law limits.  The CFPB should close loopholes that obstruct the application of state lending laws and also consider rules to ensure our insured depository institutions are supporting healthy banking practices.

We believe each of the problems above should be addressed through strong cooperation between state enforcement and the CFPB, as well as with other banking regulators where necessary.  The practices should be addressed soon, before they spread beyond further.  Fortunately, the Dodd-Frank Act gave the CFPB powerful tools that we believe can address these challenges.  To the extent that legal authorities are needed to augment your efforts, we stand ready to work with you. 

In conclusion, it is critically important that we expand access to affordable credit and the mainstream banking system, as well as strengthen financial literacy across the board.  The Dodd-Frank Act included important tools in these areas as well, and they should be fully funded, strengthened, and expanded. 

Of course, the first step is to move forward with your rulemaking to provide for supervision of payday and other small-dollar lenders, supported by good research and data collection.  We hope you will act quickly and look forward to your speedy response.


Sen. Jeff Merkley (D-OR)

Sen. Daniel Akaka (D-HI)