Small Business Payday Lending Roundtable Thursday, September 22, 2016 1:00-3:00 PM

1. Small Business Payday Lending RoundtableThursday, September 22, 20161:00-3:00 PM Presented by Jennifer Smith Assistant Chief Counsel for Economic Regulation & Banking Office of Advocacy US Small Business Administration

2. Welcome & Introductions The Office of Advocacy is an independent office within the Small Business Administration (SBA). As such, the views expressed today do not necessarily reflect the views of SBA or the Administration.

3. Most Important Issues for Attendees Complexity of rule will lead banks to back out of market too much compliance & risk Concerned about credit union members to get funds and impede innovation Tribal potential proposed rule negative impact on community and impact on tribal community Infringement on tribal sovereignty Lack of tribal consultation and impact n tribal entities

4. Most Important Issues for Attendees • Threat to employment on reservation and direct hit on insurance for employees 401(k) and health insurance • Survival of tribe payday lending creates an opportunity to keep tribe together tribal sovereignty • Impact on employment; very rural; big impact on infrastructure on small communities • Concerned that CFPB ignores the state laws that work for consumers and lenders

5. Most Important Issues for Attendees • How is the federal approach compatible with state law? • Ability to repay is main concern easier to get a 500,000 mortgage than a $200 loan ATR will eliminate customers • Ability to stay in business post regulations majority of payday lenders in California are small businesses difficult to stay in business 82% revenue drop • CFPB has not shown that consumers are harmed to make a conclusion that rules are necessary

6. Most Important Issues for Attendees • Online lender wants tribal and offshore lenders included to ensure a level playing field and protect consumers • TN passed payday loan in 1996 & works well in the state; lack of regulated credit in smaller markets • Concerned about staying in business and negative impact on customers • Florida has rules and need to come to the table to work out

7. Most Important Issues for Attendees • Credit unions compliance overhead complexity ATR • Viability of the plan if it’s applicable to tribes and it doesn’t address harms to consumers • Overwhelming regulatory burdens on smaller lenders • 80 %Storefronts will be unprofitable and 62% will lose their jobs • Impact on profitability • Prohibitive complexity and cost will prevent small dollar bank loans • Impact on credit and SBA loans

8. The RFA and SBREFA Panels • The RFA requires agencies to consider the economic impact of actions on small entities when promulgating regulations. • If a rule will have a significant economic impact on a substantial number of small entities, an agency must prepare a regulatory flexibility analysis . If not, the agency may certify the rule. • The SBREFA panel process only applies to rules that will have a significant economic impact on a substantial number of small entities.

9. What is the SBREFA Panel Process? • Requires EPA, OSHA and now the CFPB to conduct special outreach efforts to ensure that small entity views are carefully considered prior to the issuance of a proposed rule • Panel consists of a representative or representatives from the rulemaking agency, the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) and the Chief Counsel for the Office of Advocacy. • Panel solicits information and advice from small entity representatives (SERs) • Panel convenes and completes its report within 60 days • Panel report, including recommendations, is completed prior to publication of a proposed rule and becomes part of the official docket for the proposed rule

10. Payday Lending Clarification • Loans to Small Businesses • Loans for Emergency Purposes

11. Impact of the Proposed Rule on Small Entities • Short Term Loans-Consumer is required to repay the entire amount within 45 days • CFPB projects reduction revenue of 70% • Cannot survive 70% reduction • CFPB assumes consolidation of stores small stores may be 20 miles apart or in separate towns and be impossible to consolidated • Credit union majority of credit unions are impacted loans are under 45 days in the credit union industry not addressed in the rule; not common but some credit unions do have them

12. Impact of the Proposed Rule on Small Entities • Ability to Repay • Brick and mortar know customers; could offer on line but not licensed; Florida requires face to face would need money to build online very expensive • Online lender is licensed in all of its states

13. Impact of the Proposed Rule on Small Entities • Ability to repay continued • 5 elements are required for a credit card • 11 for 500,000 mortgage • 15 aspects for a $200 loan • If a person made $40,000 they would not qualify for a loan by $14 (source Bob Ziegler) • 140,000,000 people • Credit unions say school teachers are number 1 users of product

14. Ability to Repay • Online ATR important • proof of income is difficult to provide; concerned about false information; model income similar to credit card act instead of absolute proof of income; storefront agrees people walk in with a paystub • Different rules with different states VA and KY don’t allow for an ACH; CA considering no ACH • Option to go online not necessarily available re several state laws require a check

15. Other • Median income of tribe member is $12,000 goal for tribe is economic development rules will directly impact the economic vitality of the tribal community; payday lending creates job for tribal community • Sovereign right of nations being infringed upon

16. Impact of the Proposed Rule on Small Entities • Ability to Repay continued • If product is gone people won’t pay rent, car note, etc. • Concerned about what will happen to consumers • Folks will go on line to bigger companies that may be able to consolidate • Consumers may go to unlicensed online companies • Relationship is key to brick and mortar; • VA has

17. Impact of the Proposed Rule on Small Entities • Need to provide CFPB info about underwriting • Assumption that anyone gets loans not the case tribes reject 98% of applicants • Already underwriting capabilities • ATR and residual income not necessarily the way of determining whether someone will repay; doesn’t measure intent to repay • Willingness to repay is key

18. Impact of the Proposed Rule on Small Entities • Recordkeeping Requirements • Need to check will all agencies and report to one • Need to comply with MLA on Oct. 3 but not ready • Having to check all agencies will be expensive • Challenges of dealing with systems • Costs of the transactions but also challenge of getting systems to talk with each other • Need a safe harbor for smalls that are trying to comply but have glitches

19. Impact of the Proposed Rule on Small Entities • Reporting & Recordkeeping • Reporting credit-rule does not address the issue • All 3 credit reporters require a minimum of 120 days to be reported to

20. Impact of the Proposed Rule on Small Entities • Prohibition on Loan Sequences

21. Impact of the Proposed Rule on Small Entities • 30 Day Cooling off Period • Need to look at purpose of loan and underwrite it • Spending habits and bill cycle may not be 30 days; a shorter period is better • People save money if they avoid a bounced check fee • Pay down/payoff with an emergency

22. Impact of the Proposed Rule on Small Entities • Longer Term Loans-

23. Alternatives • Assumption of cycle of debt-alternative some states consumer really doesn’t have to pay back a loan there could be a pay plan; Florida requires consumer to have a payment plan; try to work it out based on what consumer can pay • Tribal-wants to work on a government to government basis for alternatives • Illinois installment payday loan act as an alternative; other states have payday plans; stay with state rates but give option after 3 loans next loan 120 but allow 1 loan for emergency

24. Alternatives continued • Would allow for consumer to get a credit score and provide an off ramp • Credit union rep believes that there should be a de minimus exemption from the rule • Write in final rule a safe harbor for smalls that are in compliance with state laws and extended through an enforcement structure that assures simplicity in complying with state and federal requirements; simplicity and clarity for the customers

25. Alternatives continued • Industry could lower payment for borrower with off-ramp to protect the borrower

26. Advocacy Contact for CFPB & Financial Issues Jennifer A. Smith Assistant Chief Counsel for Economic Regulation & Banking Office of Advocacy United States Small Business Administration 409 Third Street, SW Washington, DC 20416 Ph: (202) 205-6943 Jennifer.smith@sba.gov

27. Thank you!