Financial Services Financial Institutions Subcommittee Chair Randy Neugebauer of Texas said the loans are often needed to forestall consumer harm.
The marketplace is evolving and becoming very competitive, he added.
Republicans at the hearing cited payday loan regulation as an example why people in the presidential primaries have said they are frustrated that the Obama Administration is trying to tell them how to run their lives.
Sherry Treppa, chair for the Habematolel Pomo of Upper Lake Indian tribe in California, warned CFPB rules on small-dollar lenders would destroy economic development for tribes.
CFPB Acting Deputy Director David Silberman said the agency is still in the early stages of drafting regulations, but a core requirement is that the lenders would have to assess the ability of borrowers to pay back the loans.
The agency has enacted a similar requirement for mortgage lenders spurred by the Dodd-Frank Act.
Silberman said 35 percent of small-dollar loans work exactly as intended and the borrowers are able to pay them on time. But half the borrowers need to take repeated loans for the same amount and incurred high interest charges.
He said 20 percent of consumers who borrow multiple times on an original loan end up defaulting and become the subject of collection proceedings.
“With payday loans, people think they are taking a short ride, but they are taking a very long ride at a very great cost,” the CFPB executive said.