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Questions for Richard Cordray

This morning, Richard Cordray, head of the Consumer Financial Protection Board, testifies to a House Committee on the Board's semi-annual report. One of the Board's prime focuses has been the payday lending industry, which it was empowered to regulate by the Dodd-Frank Act of 2010 (and CEI has concerns about the way it is going about that).

However, the industry is under a quite separate assault from the Department of Justice and other banking regulators, who are aggressively investigating the banks that provide its financial oxygen in an initiative known as Operation Choke Point. While the CFPB was involved at a very early stage, according to internal DOJ memos, it appears to have dropped out. Cordray should face some questions on this. Here are a few he perhaps should be asked:

Q1: “You have said that you are aware of Operation Choke Point that the Department of Justice is coordinating ostensibly to investigate fraud among banks and payday lenders. Do you believe it is possible that such a broad sweep investigation as Choke Point might deter banks from doing business with legitimate payday lenders?”

If Cordray answers in the negative, he should be shown the complaint recently filed in federal court by payday lenders. There is plenty of evidence this is happening.

Q2: “Payday loans are of necessity given to people who might have trouble repaying them. Do you believe that a return rate of 3% is de facto evidence of fraud by merchants or do you consider it possible that such a rate of return might arise from legitimate business?”

A 3 percent rate of returned items (where the bank does not process the charge on a customer's account initiated by a merchant) may indeed indicate a high rate of customer challenges to illegitimate charges. It might also indicate a high rate of "bounced checks" from the merchant's customers. In which case, it is the merchants, not the customers, who are the victims of fraud. This is more likely to happen when the customer base is not affluent, as is clearly the case with the payday lending industry. Nevertheless, Operation Choke Point uses such a rate of returned items as its basis for investigation of a bank's dealings with the industry.

Q3: “If Operation Choke Point succeeds in killing off the payday loan industry, where does someone without a bank account go to get emergency funding to keep the lights on?”

Consumer protection presumably also means protecting consumers from the disappearance of an industry they in many cases rely on to pay their bills on time. Yet there is some evidence that the administration is engaged in an effort to replace the payday lending industry with a tax payer funded alternative. Cordray's answers to this question may illuminate this issue further.