[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
TRANSPARENCY IN SMALL BUSINESS LENDING
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
SEPTEMBER 9, 2020
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 116-090
Available via the GPO Website: www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
41-344 WASHINGTON : 2021
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELAZQUEZ, New York, Chairwoman
ABBY FINKENAUER, Iowa
JARED GOLDEN, Maine
ANDY KIM, New Jersey
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
BRAD SCHNEIDER, Illinois
ADRIANO ESPAILLAT, New York
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANGIE CRAIG, Minnesota
STEVE CHABOT, Ohio, Ranking Member
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
TROY BALDERSON, Ohio
KEVIN HERN, Oklahoma
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
TIM BURCHETT, Tennessee
ROSS SPANO, Florida
JOHN JOYCE, Pennsylvania
DAN BISHOP, North Carolina
Melissa Jung, Majority Staff Director
Justin Pelletier, Majority Deputy Staff Director and Chief Counsel
Kevin Fitzpatrick, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Nydia Velazquez............................................. 1
Hon. Steve Chabot................................................ 3
WITNESSES
Ms. Luz Urrutia, CEO, Opportunity Fund, San Jose, CA, testifying
on behalf of the Responsible Business Lending Coalition........ 5
Ms. Yanki Tshering, Executive Director, Business Center for New
Americans, New York, NY........................................ 7
Mr. Adam Levitin, Professor of Law, Georgetown University Law
Center, Washington, DC......................................... 8
Mr. Michael Hiles, Founder and Chief Executive Officer, 10XTS,
Cincinnati, OH................................................. 10
APPENDIX
Prepared Statements:
Ms. Luz Urrutia, CEO, Opportunity Fund, San Jose, CA,
testifying on behalf of the Responsible Business Lending
Coalition.................................................. 34
Ms. Yanki Tshering, Executive Director, Business Center for
New Americans, New York, NY................................ 43
Mr. Adam Levitin, Professor of Law, Georgetown University Law
Center, Washington, DC..................................... 49
Mr. Michael Hiles, Founder and Chief Executive Officer,
10XTS, Cincinnati, OH...................................... 60
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Center for Monetary and Financial Alternatives............... 64
Statement by Johnathon Bush, Not Just Cookies, Chicago,
Illinois................................................... 69
Statement by the Responsible Business Lending Coalition...... 71
TRANSPARENCY IN SMALL BUSINESS LENDING
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WEDNESDAY, SEPTEMBER 9, 2020
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., via
Webex, Hon. Nydia M. Velazquez [chairwoman of the Committee]
presiding.
Present: Representatives Velazquez, Finkenauer, Kim,
Davids, Mfume, Chu, Evans, Schneider, Delgado, Houlahan, Craig,
Chabot, Radewagen, Balderson, Hern, Stauber, Burchett, Spano,
and Bishop.
Chairwoman VELAZQUEZ. Good afternoon.
I call this hearing to order.
Without objection, the Chair is authorized to declare a
recess at any time.
I want to thank you for joining us this afternoon for this
official remote hearing. I want to make sure to note some
important requirements. Let me begin by saying that standing
House and Committee rules and practice will continue to apply
during remote proceedings. All members are reminded that they
are expected to adhere to these standing rules, including
decorum.
With that said, during the covered period as designated by
the Speaker, the Committee will operate in accordance with
House Resolution 965, and the subsequent guidance from the
Rules Committee in a manner that respects the rights of all
members to participate. House regulations require members to be
visible through a video connection throughout the proceeding,
so please keep your cameras on.
Also, if you have to participate in another proceeding,
please exit this one and log back in later. In the event a
member encounters technical issues that prevent them from being
recognized for their questioning, I will move to the next
available member of the same party, and will recognize that
member at the next appropriate time slot, provided they have
returned to the proceeding.
If a witness loses connectivity during testimony or
questioning, I will preserve their time as staff address the
technical issue. I may need to recess the proceedings to
provide time for the witness to reconnect. Finally, remember to
remain muted until you are recognized to minimize background
noise.
With that, let's jump in.
Affordable capital fuels new start-ups and helps existing
businesses expand into new markets and grow their customer
base. And we know that when capital is accessible on fair
terms, small businesses can do what they do best, strengthen
our communities and fuel our economy. However, predatory
lending practices and lack of oversight can put many small
businesses out of business. Last summer, our Committee examined
the use of confessions of judgement by predatory online
lenders. That hearing highlighted how merchant cash advance
companies and online lenders have been able to skirt state and
federal laws, and include predatory loan terms on small
business owners.
That hearing crystallized my belief that there needs to be
more transparency, accountability, and oversight, in the small
business lending arena. We all know that the internet and
technology has changed our lives for the better, allowing
consumers and businesses to buy virtually any product online,
access healthcare, and even educate our children.
That also is true for how we manage our finances. I am sure
that everyone participating today has recently gone online to
pay a bill, get a home mortgage quote, or sent money to a
friend or family member. Small businesses, many of whom the
large traditional money center banks do not serve, has turned
to the internet for capital to start a business or operate an
existing one.
Today's discussion is also extremely timely as economic
uncertainty due to COVID-19 remains high. Access to credit for
small firms may be even more challenging than usual. In this
unique environment, online, or FinTech lending, has continued
to grow, and remains an attractive option for small businesses
seeking capital. For small business borrowers, the biggest
advantage of FinTech is the ability to access capital after
being denied a loan by a traditional lender.
In many cases, FinTech lenders are able to meet the needed
payroll, inventory, or overhead needs of a small business, and,
in some cases, disburse funds in as little as 48 hours. FinTech
lenders are also likelier to make small-dollar loans generally
considered too small to be profitable by most banks, but which,
predominantly, go to women and minority-owned small businesses.
With minority owners being almost twice as likely to apply for
a loan online versus a traditional lender, it is critical for
them to be able to seek capital online, and be assured the
terms are fair, transparent, and affordable.
However, as this Committee has explored, there are also
potential risks for small firms seeking capital online. Aside
from confessions of judgment abuses, observers have noted a
considerable lack of transparency in the underwriting process
for many FinTech small business loans. It remains unclear
whether lenders, or other actors, in the space are using
certain information about applicants to discriminate.
Furthermore, not all FinTech lenders disclose the cost of
capital in a way that is clearly presented and easy to
understand for all small business borrowers. An economy where
small businesses are sometimes paying 200 or 300 percent
interest rates to keep their business running is not an economy
that is working for all. It is a result of a patchwork of state
laws, a lack of a federal regulator, and no federal law
preventing exorbitant interest rates. It has become clear to
us, and this Committee, through examples we have seen in prior
hearings and in our interactions with business owners in our
own districts, that small business owners applying for loans
online are just as vulnerable as anyone to deceptive practices
and unfair terms and have a right to a full and fair disclosure
of all terms just like consumers.
Just because they do not have an army of financial and
legal professionals, like big businesses, does not mean they
should be left to fend for themselves when seeking credit. We
all know that in order to maximize competition in a
marketplace, all actors need to have as much and as accurate
information as possible.
The same applies in the market for small business loans if
you are the borrower, you need as much and as accurate
information about your loan options as possible in order to
make the best decision for your business. That is why, earlier
this summer, I introduced the Small Business Lending Disclosure
and Broker Regulation Act, which will expand the Truth in
Lending Act protections and disclosures, or TILA, that
currently apply for consumers who also apply for small business
loans.
My bill will bring needed transparency to small business
credit markets, ensuring entrepreneurs understand their
obligations and rights when they sign up for a loan. I should
point out that these efforts are already underway at the state
level, with California enacting a similar bill into law 2 years
ago, and another version recently passed the New York State
legislature, and is awaiting approval by Governor Cuomo.
It is long overdue that we take this fight for fairness on
behalf of small businesses to the federal level. In this
pandemic, entrepreneurs have faced, and will continue facing,
some of the most difficult and uncertain economic conditions
ever, and it is vital we ensure predatory lenders do not
exploit this situation by enticing small businesses into unfair
and unsustainable loans.
Fortunately, some lenders already conduct the business of
online lending in a responsible way, and are able to do it
sustainably while making a positive impact on their
communities. We will hear from one of those lenders soon. We
will also hear from legal experts and advocates who will
illustrate the impact of applying TILA to small business loans
on minority communities, since small businesses usually
represent one of the few wealth-building opportunities for
people of color, and, in many cases, can serve as an official
community center for the neighborhood.
I look forward to today's discussion. Again, I want to
thank the witnesses for joining us today, and now yield to the
Ranking Member, Mr. Chabot, for his opening statement, and I
will ask members to please mute their mics. Thank you.
Mr. Chabot, you are now recognized.
Mr. CHABOT. Thank you, Madam Chairwoman, for holding this
important hearing on the impact of FinTech and online lending
on the Nation's small businesses. As the current Ranking Member
and former Chair of this Committee, I have had the pleasure to
speak directly with small business owners for many years, both
in my district and across the country. Whether it is talking to
small business owners or their employees, their input is
critical in determining best way to support our small
businesses, which are the backbone, after all, of this Nation's
economy.
To say that America's small businesses have some of the
hardest working people in the entire country would be an
understatement. They rise early. They stay late to meet the
challenges of their customers daily. They are also responsible
for creating two out of every three new private-sector jobs in
the country. To meet the needs and expectations of their
customers and to grow and thrive, these small businesses
require, as you mentioned, access to capital.
Unfortunately, Main Street businesses continue to report
that capital access is one of their greatest challenges.
Moreover, the current COVID-19 crisis has exacerbated this
problem for our Nation's job creators. And, of course, access
to capital continues to be one of the top issues that this
Committee tackles, and, fortunately, under your leadership and
previously under mine, in a bipartisan manner, because we are,
I think, the most bipartisan Committee in Congress, and that is
why we get the most done.
That is why today's hearing on FinTech and online lending
is so important. As small businesses faced local and State
shutdowns due to COVID-19, this Congress and President Trump
unveiled the PPP, Paycheck Protection Program, to assist small
businesses and their workers, for my State, Ohio, to your
State, New York, to Florida, to Texas, to California, and all
across the entire country. By utilizing private sector lenders,
PPP was able to deliver financing quickly, and, for the most
part, effectively. While there were only a limited number of
FinTech companies participating in the program, [inaudible]
delivered literally billions of dollars for America's small
businesses.
Given the FinTech's growing popularity, it is critically
important for this Committee to examine their role moving
forward. These companies are driving innovation within our
financial ecosystem. They are utilizing data to make rapid
lending decisions. Conversations on disclosure requirements are
necessary to ensure transparency is appropriate, and to protect
America's small businesses as well. So that is obviously
something that we need to consider as we consider this
important issue. I am looking forward to discussing all of
these topics today, including how these types of lenders should
operate within the confines of the SBA existing programs.
Additionally, I am hopeful our conversations today help
determine how FinTech and online lending is regulated, if that
is going to occur, at the Federal level. We know that all the
witnesses have busy schedules, so we appreciate them joining
with us here today virtually.
And with that, Chairwoman Velazquez, thank you for holding
this hearing.
And I yield back.
Chairwoman VELAZQUEZ. Thank you, Mr. Chabot.
I would like to take a moment to explain how this hearing
will proceed. Each witness will have 5 minutes to provide a
statement, and each Committee member will have 5 minutes for
questions. Please ensure that your microphone is on when you
begin speaking, and that you return to mute when finished.
With that, I would like to thank our witnesses for taking
time out of their busy schedules to join us. Our first witness
is Ms. Luz Urrutia, CEO of Opportunity Fund, a CDFI and SBA
lender based in San Jose, California. Opportunity Fund is one
of the largest nonprofit lenders in the country and recently
established a partnership with two large FinTech companies.
Welcome, Ms. Urrutia.
Our second witness is Ms. Yanki Tshering, Executive
Director of the Business Center for New Americans, a CDFI and
SBA micro lender serving New York City. Beyond helping
underserved entrepreneurs access affordable capital, Ms.
Tshering was also recently a key advocate in the efforts before
the New York State legislature to advance true lending
protections for businesses across the state. I particularly
thank you, Ms. Tshering, for your advocacy on behalf of all New
York entrepreneurs, and welcome you before us today.
Our third witness is Professor Adam Levitin. Professor
Levitin is the professor of law at the Georgetown University
Law Center, with a focus on banking and finance law, bankruptcy
law, and consumer protection. As an expert in this field, he
has testified before Congress on numerous occasions, including
last Congress before the Financial Services Committee on this
issue.
Welcome back to the Small Business Committee, Professor
Levitin, and I look forward to hearing your views on the
interplay between FinTech and small business lending.
Finally, I would like to turn it over to the Ranking
Member, Mr. Chabot, to introduce our last witness.
Mr. CHABOT. Thank you, Madam Chair.
Our final witness will be Michael Hiles. Mr. Hiles is the
founder and Chief Executive Officer of 10XTS here in
Cincinnati, Ohio. 10XTS is a software start-up company that is
focused on blockchain technology and FinTech. Mr. Hiles has a
long history of working within Cincinnati's technology sector.
Prior to founding 10XTS, Mr. Hiles worked in the software
development at Sabre Systems. He founded a web development
company called Soft Links Interactive and worked at Proware.
Mr. Hiles was also responsible for setting up the
Cincinnati chapter of Founder Institute, which assists business
through the incubator and accelerator models. Mr. Hiles, I want
to thank you for taking time out of your busy schedule to be
with us today. It was my honor to speak with you recently on
another call, and we look forward to your testimony here this
afternoon.
And I yield back.
Chairwoman VELAZQUEZ. Thank you, Mr. Chabot.
Now I would like to begin by recognizing Ms. Urrutia for 5
minutes. Thank you, Ms. Urrutia.
STATEMENTS OF LUZ URRUTIA, CEO, OPPORTUNITY FUND, TESTIFYING ON
BEHALF OF THE RESPONSIBLE BUSINESS LENDING COALITION; YANKI
TSHERING, EXECUTIVE DIRECTOR, BUSINESS CENTER FOR NEW
AMERICANS; ADAM LEVITIN, PROFESSOR OF LAW, GEORGETOWN
UNIVERSITY LAW CENTER; AND MICHAEL HILES, FOUNDER AND CHIEF
EXECUTIVE OFFICER, 10XTS
STATEMENT OF LUZ URRUTIA
Ms. URRUTIA. Good afternoon, Chairwoman Velazquez, Ranking
Member Chabot, and Committee members. My name is Luz Urrutia,
and I am the CEO of Accion Opportunity Fund and Opportunity
Fund. Opportunity Fund is a CDFI and the Nation's leading
nonprofit small business lender. We believe small amounts of
money, and the right financial advice can have lasting changes
in peoples' lives, drive economic mobility and build stronger
communities.
Last year, we deployed $120 million in 3,200 loans mostly
to minority immigrants and women-owned businesses. Accion
Opportunity Fund is also a founding member of the Responsible
Business Lending Coalition, a group of nonprofit and for-
profits in the industry committed to transparency and
innovation in small business lending.
Before COVID-19, small businesses were already facing
significant challenges, accessing responsible capital. Main
Street financial institutions do not generally lend directly to
underserved small businesses for a variety of reasons--tight
credit boxes, small dollar amounts, lack of profitability,
risky industries. But since the Great Recession, many banks
left communities, and FinTechs and online lenders stepped in to
fill the gap. There is no argument that these lenders have
transformed the marketplace by speeding access to capital, and
some of them, not all, being transparent and responsible.
Unfortunately, it has also created many unprincipled
lenders that are wreaking havoc across Main Street, charging
exorbitant rates and providing products that lack proper
disclosures and transparency. After COVID, we believe the
lending landscape will be altered even further. Banks will
tighten their credit boxes even more. Many FinTechs and
merchant cash advances providers will retrench or fail due to
their capital structures and portfolio losses. The result will
be that underserved small businesses will have an even bigger
challenge accessing capital.
To meet this capital need, Accion Opportunity Fund believes
that innovative partnerships with responsible FinTechs will be
crucial. An example is Opportunity Fund's partnership with
Lending Club, a one-of-a-kind partnership between a nonprofit
CDFI, and a responsible, for-profit, publicly traded FinTech
lender. Lending Club has the marketing reach and partnerships
to provide an accessible digital experience for small
businesses in need.
Opportunity Fund combines its credit assessment tools and a
high touch customer service model to provide small businesses
with responsible credit and transparent rates. The partnerships
provide capital and technical assistance to businesses whose
needs may not be met, or might pay significantly more with
other providers.
More than 50 years ago, Congress enacted the Federal Truth
in Lending Act to protect Americans from scrupulous lenders,
making deceptive offers of credit. Unfortunately, we do not
have those same protections for the Nation's small businesses.
Opportunity Fund analyzed the data set of alternative loans
held by small business owners who came to us hoping to
refinance. We found that unregulated lenders were charging an
average APR, annual percentage rate, of 94 percent with an
average monthly loan payment nearly double the borrowers' net
incomes. One loan was priced at an astounding 350 percent.
These loans put many small business owners in a crushing cycle
of debt.
Take Deanna Irish, owner of Wine Tour Drivers, in
Sacramento, California. Deanna took a $25,000 online loan that
cost her $2,000 a month. She was able to refinance with
Opportunity Fund cutting her payment to $900. Since then, she
has been able to pay off her loan. These high rates are unfair
and deceptive, often hidden under layers of misinformation.
Federal research also finds that small businesses are often
misled by disclosure quoting non-APR rates. The inability to
compare prices on an apples-to-apples basis, and lack of
transparency, stymies free market competition that could lower
prices and spur financial services innovation.
I want to thank the Chairwoman for introducing the Small
Business Lending Disclosure and Broker Regulation Act of 2020,
which will deliver much needed protections to small businesses.
Research also shows it will bring over $3.8 billion in savings
to nearly 800,000 small business annually, including hundreds
of millions in savings for over 158,000 minority-owned small
businesses. The legislation could not come at a better time,
when many business owners are desperately seeking for ways to
remain solvent. An uninformed business decision for a financing
choice could be the difference between survival and failure. We
applaud California and New York for passing legislation
mandating transparency in small business lending, however, a
State-by-State approach hampers innovation and increases costs
for lenders. This national approach is much needed to provide
clear and concise national regulations that protect all small
businesses equally and allow responsible lenders to innovate
and create quality products.
I encourage all of our leaders in Congress to work together
to pass the Small Business Lending Disclosure and Broker
Regulation Act of 2020.
Thank you.
Chairwoman VELAZQUEZ. Thank you, Ms. Urrutia.
Ms. Tshering, you are recognized for 5 minutes.
STATEMENT OF YANKI TSHERING
Ms. TSHERING. Thank you. Thank you, Chairwoman Velazquez,
Ranking Member Chabot, and distinguished members of the
Committee. Thank you for inviting me to speak with you today
about the lack of transparency in small business lending, and
the urgent need to provide entrepreneurs with the information
they need to make informed decisions.
My name is Yanki Tshering, and I am the executive director
of the Business Center for New Americans, a treasury-certified
Community Development Financial Institution and Small Business
Administration micro lender and community advantaged lender
based in New York City.
In addition to my role leading BCNA, I have also served on
the board of the New York State CDFI coalitions since 2015.
BCNA was founded to help hard-working immigrants and refugees
pursue the American dream. Over two decades, we have provided
financial counseling and loans to help clients to start or grow
a business, buy a home, or save for the future. BCNA serves
exceptionally diverse clients. Our micro and small business
clients range from the street vendor who comes in once a year
to borrow $500 to fund his inventory of roses for Valentine's
Day to the deli owner operating six grocery stores with 80
employees.
Since we were founded, BCNA has made over $33 million in
micro and small business loans, and provided training and
advice to over 10,000 businesses. One of those businesses is
Haute Knit whose owner, Vladimir Teriokhin, produces knitted
garments for New York design houses. Vlad was initially
thrilled when he was approved for a $35,000 loan from an
alternative FinTech lender that he found online, but gradually
realized to his horror that he was paying over 61 percent in
annualized interest.
When Vlad came to BCNA 3 years ago to ask us about a loan,
part of which he would use to pay off that high interest loan,
we were shocked to learn that he was also required to pay the
full amount of interest and fees, even if he was able to prepay
the loan, something he didn't understand when he signed off for
the loan.
We are happy to have been able to help him with financing
that loan and many more for affordable terms that are
transparent and fair. Unfortunately, now, more than ever, small
businesses are suffering from a lack of access through
responsible transparent credit. The Truth in Lending Act,
originally passed in 1968, requires lenders to clarify,
disclose their pricing, and terms for consumer loans, but does
not apply to financing for commercial loans.
This means that small business owners like Vladimir are
left to face a Wild West of unregulated and increasingly
complex financial products without any consistency in how the
lenders explain, or present their products to borrowers.
We regularly assist clients who have encountered
alternative loan products, such as merchant cash advances that
they did not understand at times with dire consequences.
Larger, more established businesses are able to hire attorneys
and accountants to translate confusing term sheets, but as
members of the Committee know very well, the overwhelming
majority of small and micro businesses don't have the funds for
that level of legal assistance.
This is why we are very happy to be here today in support
of Chairwoman Velazquez's recently introduced Small Business
Lending Disclosure and Broker Regulation Act, which will ensure
that no small business is left behind and extend sensible
disclosure protection to entrepreneurs nationwide.
Thank you.
Chairwoman VELAZQUEZ. Thank you, Ms. Tshering.
Now we recognize Professor Levitin for 5 minutes.
STATEMENT OF ADAM LEVITIN
Mr. LEVITIN. Chairwoman Velazquez, Ranking Member Chabot,
and members of the Committee, good afternoon. Thank you for
inviting me to testify before you today.
My name is Adam Levitin. I am a law professor at Georgetown
University, where I teach courses in commercial law and
financial regulation. For over 50 years, consumer credit has
been governed by an extensive Federal regulatory regime of
disclosure, substantive term regulation, and supervision of
lenders. There is no equivalent regulatory regime for business
loans. The lack of regulation of business lending is, in large
part, because businesses are presumed to be more sophisticated
entities than consumers, and, therefore, less needing of
governmental protections. Yet, there is a considerable range of
financial and legal sophistication among businesses and the
reason that a borrower takes out a loan does not determine the
borrower's ability to otherwise protect his or her interests.
Small businesses, in fact, often resemble consumers in
terms of limited information, sophistication, and market power
in credit markets. Moreover, small business borrowing is often
personally guaranteed by the small business's owner. The lack
of regulation leaves small business vulnerable to abusive
practices of the sort that were prohibited in consumer credit
markets in the 1960s and 1970s. It makes sense to recognize
that small businesses need many of the same sorts of
protections as consumer borrowers to ensure that they can enjoy
fair, efficient credit markets. And that is precisely what the
Chairwoman's bill, a Small Business Lending Disclosure and
Broker Regulation Act would do.
Most importantly, the Chairwoman's bill would extend the
centerpiece of Federal consumer credit regulation, the Truth in
Lending Act, to small business loans. The Truth in Lending Act
requires, among other things, the standardized disclosure of
the cost of credit in the form of the finance charge and the
annual percentage rate, or APR. That is an annualized measure
of the finance charges as a percentage of the principal
obligation.
Standardization of credit cost disclosure is important,
because it enables borrowers to more readily understand and
compare various credit offers available on an apples-to-apples
basis, so that the borrowers can make an informed decision
about using credit. Informed use of credit is essential for
ensuring robust price competition, which is the first line of
consumer protection.
Let me give you an example of what the world could look
like without standardized credit cost disclosure. If I were to
tell you that a loan cost 10 percent without telling you more,
you could not tell if that meant 10 percent annually, 10
percent monthly, or 10 percent weekly; much less, if that 10
percent were compounded and with what frequency. That actually
leads to very different effective interest rates. Without
compounding, the 10 percent monthly figure would translate to
120 percent annually, and the weekly figure, to 520 percent
annually.
So the imprecision of stating 10 percent interest allows
for abuses of consumers. Let me illustrate this with a story of
small business from Sarasota, Florida called Homes by DeRamo.
And this is the story experience with a predatory small
business lender, called World Business Lenders, that operates
in partnerships with various banks that rent out their banking
charters to enable the nonbank lender to evade State laws.
So the DeRamos got a loan from World Business Lenders
through a small Wisconsin bank with two branches, called Bank
of Lake Mills. It had no connection whatsoever with Florida.
And the pricing of the DeRamos' loan was never disclosed as an
annual percentage rate. Instead, it was disclosed in terms of a
daily percentage rate, and that appeared as a 12-digit decimal
figure of just over 0.33 percent. Annualized, however, that
translates into 121 percent APR.
That 121 percent APR figure never appeared anywhere in the
DeRamos' loan documents, however. Moreover, even the daily
percentage rate, was never prominently disclosed. It was buried
in the midst of legalese. No interest rate whatsoever appeared
on the summary term sheets for the loan. Instead, the only
percentage figure that appeared was for 15 percent prepayment
penalty and that is the figure that the DeRamos believed was
the interest rate on the loan.
So the Chairwoman's bill would address this sort of abuses
that occurred with the DeRamos' loan, by requiring disclosure
of credit cost in standardized terms. It would also prohibit
the sort of gotcha-type of enormous prepayment penalties for
same lender refinancing as the DeRamos experienced. And most
importantly, I think, it would extend the scope of the Consumer
Financial Protection Bureau's regulatory authority so that the
CFPB can supervise the larger participants in the small
business lending and use its power to prohibit unfair and
deceptive acts of practices as a gap filler.
I would urge the Committee to take up the Chairwoman's
bill, which is an excellent point for bringing much needed
protection to small business borrowers.
Thank you.
Chairwoman VELAZQUEZ. Thank you, Professor Levitin. Now we
recognize the gentleman, Mr. Hiles, for 5 minutes.
STATEMENT OF MICHAEL HILES
Mr. HILES. Chairwoman Velazquez, Ranking Member Chabot, and
members of the Committee, thank you for the invitation to
testify at this hearing.
My name is Michael Hiles, and I am the CEO of 10XTS, a
Cincinnati-based FinTech/RegTech company building blockchain
solutions for financial records. The SBA's admirable effort to
rapidly mobilize financial stimulus through EIDL and PPP loans
demonstrates how small business funding is clearly an essential
lifeline to a thriving economy. When American small business is
unable to access capital, single moms, immigrants, and regular
ordinary people suffer. The SBA is historically partnered with
banks as the origination and servicing agents for lending
programs. While this approach has generally allowed the SBA to
serve a wider market, the administration can only be as
effective in delivering services and support as their partners.
Therein lurks the problem faced by the SBA.
The PPP program experienced significant delays in
delivering financial relief to small businesses due to many
banks' inability to adjust business operations in an agile
fashion and fairly deliver funds in a diverse and inclusive
ways. We directly experience these frustrations.
Legacy banks are already in the throes of compressive
disruption. They are not in a position to quickly respond to
rapid, disruptive changes in the market. The resulting
permanent branch closures and downsizing has been an alarm bell
for many. In 2018, Gartner published a report indicating that
by 2030, 80 percent of the traditional financial services firms
will close, become commoditized, or exist formally, but will
not compete effectively in the market.
With so many consolidations, banks have struggled to merge
redundant, legacy IT systems. The largest banks are a
hodgepodge of too-big-to-fail technology strung together with
little to no standardization. As a result, institutions are
weighed down with inefficient fragmented processes. Our
hypothesis at 10XTS is that a bevy of problems are mostly based
on how information, records, documents, and data are stored,
managed, shared within, and between other organizations and
customers. Trusted information is still mostly another human
vouching for the authenticity of documents and data.
Facing increasing regulatory scrutiny, banks have been
reluctant to drive innovation due to the inherent compliance
risks. Financial services industry already spends more than
$270 billion per year in compliance and regulatory obligations.
Legacy systems limit the simple automation and straight-through
processing from front end to the back office. Proprietary
systems complicate the adoption and integration of emerging
tech like blockchain, AI, robotic processing, and API-based
micro services. In short, legacy information systems reduce a
bank's ability to innovate and improve value for their
customers and partners.
Meanwhile, there are now approximately 60 million
Generation Z banking customers who control $45 billion in
annual spending. With the oldest of them nearing age 24, these
young adults literally have no recollection of life prior to
the internet, social media, and mobile tech. Gen Z expects
highly transactional services, placing more value upon
convenience over traditional branch-based relationship-driven
banking.
In consideration of these things and other things, I offer
the following recommendations: One, coordinate efforts with the
U.S. Treasury and Federal Reserve Bank in establishing a
sandbox environment, and a decentralized national network of
financial records. Without a definitive path of its own,
relying on the financial services industry to provide tech
solutions means the SBA is at risk for future
disenfranchisement of the growing market of digital-first
business' owners who rely upon tech solutions for fast,
efficient business operation.
Similar to the early communications standards that became
the internet and web, a collaborative approach to building a
commercial lending and financial records network by the SBA,
Treasury, tech companies, and banks could accelerate a more
verdant, efficient, and trustworthy financial system. Through
collaboration, the SBA is in a position to establish new
standards for financial document and information networks, data
interoperability, robotic process automation, and exchange.
Firms that optimize customer data, robotic processes, and
provide new solutions can offer timely and relevant support for
the SBA's programs. With data-driven and digital-only models,
challenger firms are in a better position to adapt to rapid
change and unforeseen circumstances.
Number two, leverage and improve upon small business
innovation research, SBIR programs, to foster FinTech and
RegTech innovation. The SBA has an opportunity to collaborate
with technology companies to provide proof of concepts for the
direct delivery of automated services. However, Federal
contracting, grant, or regulatory policies can be quite
prescriptive when it comes to defining technology and solution
requirements.
Instead, Congress should establish goals for the outcomes
of innovation programs and then strive to support businesses
that offer effective, affordable technology solutions. While
contracting vehicles already exist, they can be prohibitive for
small companies to pursue due to the amount of resources
required. As we have seen with recent SBIR innovations and
instant procurements and streamlined processes within the Air
Force, tapping into a wider national brain trust for innovation
can be achieved through thoughtful improvements through the
existing processes.
As we deliberate national small business, funding, banking,
technology, and even monetary policies, Congress should invest
in these opportunities, accelerate them where possible, and
ensure the financial and regulatory standards and technology of
the future continue to be led by American ingenuity and
resolve.
Thank you, again, for inviting me to testify, and I look
forward to addressing each of your individual questions.
Chairwoman VELAZQUEZ. Thank you, Mr. Hiles. Thank you all
for everything you have shared with us. I will begin by
recognizing myself for 5 minutes.
Ms. Urrutia, the goal of my bill is to bring transparency
and understanding of pricing terms and conditions to small
business lending nationally. How would increased transparency
have a unique impact on borrowers of color, immigrant
entrepreneurs, and other vulnerable communities?
Ms. URRUTIA. First, I want to start by saying that
underserved small businesses, particularly the minorities,
immigrant, and women-owned do not generally maintain existing
banking relationships. I think this was recently brought to
light after looking at the results of who received PPP loans.
Unfortunately, we saw that many minority immigrants and women-
owned business who tried to apply with banks were left at the
back of the line, or declined altogether. There is also plenty
of research from many sources showing that these underserved
communities are most negatively impacted when it comes to
accessing responsible and affordable capital.
The Brookings Institute research shows that minority and
women-headed households generally have lower levels of
household wealth, making external borrowing more difficult. It
also shows that these two segments have increasingly difficult
times accessing responsible capital. Similarly, the U.S.
Department of Commerce, Minority Business Development Agency
shows that minority and women-owned businesses are less likely
to receive loans, more likely to receive lower amounts, and
more likely to be denied when compared to nonminority
businesses.
Chairwoman VELAZQUEZ. Thank you. Thank you. I just need to
go on with other questions. Thank you so very much.
Ms. Tshering, you noted that nonprofit lenders are left
helping small businesses pick up the pieces due to the lack of
transparency and abusive lending practices in online lending.
Can you elaborate on some of the terms these FinTech products
have that hurt small business borrowers?
Ms. TSHERING. So what we found and it is the CDFI Business
Center For New Americans, which I represent, but also all--we
have a coalition of CDFIs in New York State, and we work very
closely together. What we found is the, you know, lack of
transparency of the actual interest rate. And I think we had
someone who just spoke, the professor, who explained in detail,
you know, very often the fact that the interest rate is a daily
interest rate is not conveyed clearly to the borrower.
So when you actually--you don't have the ability to compare
apples to apples. So a borrower may look at a CDFI's loan
product offerings and see 8-1/4 percent, and 10 percent, and
when they see the interest rate that is conveyed to them by a
FinTech, or an online, or some other lender, they are very
confused. So, you know, we greatly feel what we are asking for
is transparency and fairness. We are not condemning the FinTech
sector. We are condemning and bringing to light the bad
behavior.
The other thing that we were shocked to find out, and I
have to point this out, was the fact that even if we stepped
in, a CDFI stepped in and was willing to make a loan to
refinance, this loan with this exorbitant interest rates
because of what the client on the borrower small business owner
had signed on, it was still liable for the entire fees and
interest for the term of the loan.
Chairwoman VELAZQUEZ. Thank you, Ms. Tshering.
Ms. Urrutia, in an effort to increase transparency in small
business lending, an unexpected degree of disagreement has a
reason with respect to annual percentage rate, or APR,
disclosures. Some have argued that a total cost of capital
metric is appropriate, but others have argued that an APR
cannot be calculated for certain products.
What is your response, and why is it so important that APR
specifically be disclosed to borrowers? Do you believe it is
more accurate or useful metric for borrowers in comparing loan
products?
Ms. URRUTIA. They are providing capital over time for a fee
just as lenders are. For a long time, the merchant cash advance
industry has long claimed that their products are different to
get around regulations that are intended to protect their
customers. This is just another example of that avoidance. A
lot of conversation focuses on the nuances of the product
themselves. Are they an MCA? Are they a daily debit? What are
the product features? This financing is mostly very high cost
and doing more harm than good.
You know, customers need to be educated. The best
businesses educate their customers because that allows them to
make informed decisions. APR is definitely a metric that helps
borrowers understand how much they are paying, and be able to
compare apples to apples, one product to another.
Chairwoman VELAZQUEZ. Thank you. Thank you. My time has now
expired, and maybe if we go to a second round of questioning, I
will be able to ask question for the witnesses that I haven't
gotten to yet.
Now, the Ranking Member, Mr. Chabot, is recognized for 5
minutes.
Mr. CHABOT. Thank you, Madam Chairwoman, and I will begin
with Mr. Hiles.
Mr. Hiles, Cincinnati is a modest-sized city. How is
Cincinnati come to be such a significant driver of financial
innovation? What advantages have you found here in this area?
Mr. HILES. Madam Chairwoman, Ranking Member, thank you for
the question.
Cincinnati has a great legacy of financial technology. In
1976, that was the start of the electronic trading with the
Cincinnati stock exchange. In fact, Cincinnati is recognized as
being the first independent software vendor company in history,
Cincom Systems. So it has a wonderful technology legacy that
was followed through. In 1977, Fifth Third Bank launched the
very first ATM network, the Genie Network, which has become
fairly ubiquitous now throughout the world for accessing cash
through trusted networks. Separately, I am honored to have been
on the team that was the first to ever connect a court judicial
case management system to the world wide web and allow a clerk
of courts case management search look-up, and we won a
Smithsonian Computer World Laureate award for that.
So we have got a tremendous history of firsts, and that is
one of the reasons that we are now also advocating the
establishment of a decentralized network of records as a way to
really provide proof and efficacy of financial identities,
entity information, assets, and, ultimately, transactions, so
that they can be queried instantly by regulators, but then also
ensure the security and the efficacy of documents and data as
they are passed between institutions and organizations and
individuals.
So that hopefully answers the question, Ranking Member.
Thank you.
Mr. CHABOT. Thank you very much.
Ms. Urrutia, I will go to you next. Could you expound upon
the partnership that Opportunity Fund has with LendingClub and
Funding Circle and how that those partnerships have helped
reach small businesses across the country?
Ms. URRUTIA. Sure. We established a one-of-a-kind
partnership where we were able to take LendingClub customers
that applied for a loan and got denied, primarily for credit
reasons, in the background we were able to check them to decide
if we could provide them a prequalification offer. In essence,
we were a second look for a FinTech lender. They brought the
marketing and, their digital capabilities, and we brought our
high-touch customer service and our ability to underwrite
credit for these underserved consumers, giving access to credit
to borrowers that, otherwise, would have been turned down.
And for certain borrowers that we cannot handle because
their loan sizes are greater and/or they are prime creditworthy
customers, we would send them to another lender, such as
Funding Circle for them to underwrite; again, better expanding
access as well as providing transparent rates and affordable
loans.
Mr. CHABOT. Thank you very much.
Ms. Tshering, I will go to you next. As we have seen,
COVID-19 has acutely impacted small businesses across the
Nation. This is especially true for the country's smallest
firms. I have introduced legislation that considers the
smallest of small businesses, those that have 10 or fewer
employees.
As Congress looks to assist these smallest of hard-hit
businesses during this emergency period, do you have any
suggestions as to what we could consider why these smallest
businesses have a particularly hard way to go?
Ms. TSHERING. That is a great question. Thank you.
So one thing I want to, you know, thank everyone who is
involved in passing the CARES Act, one of the provisions that
is not talked as much about as the PPP--we hear so much about
the PPP loans, was under the CARES Act, anyone who was funded
with the loan from funds from the SBA were able to get 6 months
of loan repayments assistance under the CARES Act.
So, that was a lifeline for small businesses that had a
loan funded by the SBA, many of the EIDL loans, others were
really, really helpful, but when we speak to our clients and
other clients of other CDFIs, the area where most of the
businesses seem to really need help is some form of rent
relief. And what they have also said over and over, again, is,
Yes, we do not need more debt, you know. We would love to have
a program which would, you know, provide some equity, help us
pay off the 4 months of rent that we owe, and some of the
expenses so we can get back on track.
Mr. CHABOT. Thank you very much. My time is expired, Madam
Chair.
I yield back.
Chairwoman VELAZQUEZ. Thank you. The gentleman's time has
expired.
Now we recognize the gentlelady from Kansas, Ms. Davids,
for 5 minutes.
Ms. DAVIDS. Thank you, Chairwoman Velazquez and Ranking
Member Chabot, for holding this hearing today. The COVID-19
pandemic has certainly illustrated and exacerbated many of the
challenges that our small businesses face in their ordinary
day-to-day operations, whether we are talking about access to
capital, starting a business, keeping the doors open in an
emergency, and we are seeing just how hard those challenges can
be.
FinTech, I think, presents a unique and exciting
opportunity for lenders to better reach and serve small
business owners who are often in search of small loans, things,
you know, loans that are under $1 million, and FinTech lenders
are often able to speed up the typical loan turnaround time,
which can be critical for small businesses with tight margins.
But, as we know, the FinTech industry, as it grows and
adapts, we have a responsibility to ensure that those
opportunities for small business lending are equitable and that
they are fair. And so, Ms. Urrutia, I would really love to hear
from you about how we ensure that FinTech and online lenders
offer fair and clearly understood terms, and making sure that
they are remaining accessible to small lenders and you were
kind of touching on this earlier when you were talking about
the transparency that the Chairwoman was asking about, but
also, just in terms of making sure that folks understand the
terms that they are signing up for, how we educate folks on
that.
Can you talk a little bit about that?
Ms. URRUTIA. Sure. Thank you.
First, there are many reputable national lenders. CDFIs and
FinTechs alike, who deliver solutions online to customers
throughout this country in both rural and urban communities.
And these organizations, ourselves included, we meet borrowers
where they are and when they need us. And we have been and will
continue to be committed to transparency in our lending
activities. Examples of many of these lenders are members of
the Responsible Business Lending Coalition, which is a network
of more than 110 nonprofit and for-profit lenders, investors,
and small business advocates that share a commitment to
innovation in small business lending, and we also are concerned
about the rights of small businesses. The 50-plus lenders in
the group currently provide borrowers in need of loan capital
with transparent disclosures.
The second point I will make is that we strongly believe
that an educated customer is our best customer. By being
transparent, we help them to understand how to pay loans back,
which means more people can get credit as a result. For us and
for these lenders, customer success drives business success.
Ms. DAVIDS. Oh, really quickly, I would like to hear a
little bit more about--I am really interested in making sure
that small business owners are able to trust that they are
interacting with a lender that is really going to either meet
them where they are at or educate them in a way that is
necessary.
Can you talk a little bit more about that? The Responsible
Lending Coalition sounds really interesting. Are there other
groups out there that are doing similar work?
Ms. URRUTIA. Yes, and I would say that under the
Responsible Business Lending Coalition, we created--the
Business Borrower Bill of Rights, which outlines six principles
of what responsible lending would look like. It does not mean
that other lenders that have not signed on to this bill are not
doing responsible lending, but I think that the BBoR will serve
as a guideline for small businesses when taking out a loan to
understandf if, the loan meets this criteria?
Ms. DAVIDS. And then, Ms. Tshering, I saw you nodding your
head a bit. I would love to hear from you on this.
Ms. TSHERING. Yes.
So, you know, I want to point out, as Luz referred, that
many who have not signed on to this, you know, small business
lender Bill of Rights, but they believe in what we are asking
for. And we are not, you know, condemning the FinTech sector,
as I said before. What we are saying is, we want some rules in
place to affect and make sure there is no bad behavior, which
impacts very negatively on small business owners.
Ms. DAVIDS. Yeah. I appreciate that, and it sounds like
there are a lot of--when I was hearing about the partnerships
with folks like Lending Tree and other online folks, I think
that it sounds as though, there is--again, I said this earlier,
a lot of opportunities for access and growth just making sure
we are making that a fair and equitable process.
Thank you so much for your responses.
And I yield back.
Chairwoman VELAZQUEZ. The gentlelady yields back.
Now we recognize the gentlelady from American Samoa, Mrs.
Radewagen, for 5 minutes.
Mrs. RADEWAGEN. Thank you, Chairwoman Velazquez and Ranking
Member Chabot, for holding this hearing, and I, too, want to
welcome the panelists.
For Ms. Urrutia, in your testimony, you state that small
business owners are sometimes shut out of a traditional
financial system. Why do you believe some lenders do not
consider them good candidates for traditional lending products?
And small businesses are--well, as Congress continues to
discuss PPP and the next round of COVID relief, what should we
concentrate on that would provide the most assistance to small
businesses?
Ms. URRUTIA. Sure. Yes. Banks generally have a very
specific criteria under which they make loans. They look at
FICO scores, and there are a lot of small business owners and
individuals that don't have one--primarily those that either
new to credit or, immigrant communities. Second, they are
looking at size of loans. The loans we are talking about are
very small microloans. It is really hard to make those loans
profitable. Also, many of these minority-owned businesses are
in industries that pose a greater risk for banks, even though,
we would disagree with that statement based on our own
experience.
So, the overall profitability and the overall segment that
we are talking about has needs that the banks are just not set
up to serve. As a result, these small businesses are going to
alternative lenders to seek the credit that they need; online,
MCAs, FinTechs. In terms of PPP, we believe that there are
several things to improve. We do believe that there needs to be
the ability for businesses to access a second PPP loan. We also
believe that to incentivize lenders to make smaller loans,
lenders should get paid a minimum fee of $2,500. As an example,
at Opportunity Fund, our average loan for PPP was $15,000,
okay.
The average loan on the second round was 73,000 for the
industry as a whole, and even larger in the first round. So, to
incentivize lenders to make smaller PPP loans, there should be
a process to forgive any loans under $150,000. That will help
lenders be willing to make those smaller loans.
Mrs. RADEWAGEN. Thank you, Chairwoman Velazquez. I yield
back the balance of my time.
Chairwoman VELAZQUEZ. The gentlelady yields back. Now we
recognize the gentleman from Maryland, Mr. Mfume, for 5
minutes.
Mr. MFUME. Well, Madam Chair, thank you very much. You are
very gracious with your time. I hopped on a little late because
I have had conflicting meetings this day, and so in deference
to the members on our side that may have been here earlier
before me, I would yield until the next round.
Chairwoman VELAZQUEZ. I recognize the gentlelady from
California, Ms. Chu, for 5 minutes.
Ms. CHU. Thank you, Madam Chair.
Well, Ms. Tshering, I am so glad you are on this panel
today because your organization is a Community Advantage lender
serving immigrant and minority business owners. What this
hearing today shows is that it is so important for us to
support the Chairwoman's Small Business Lending Disclosure Act
ASAP.
And I have also introduced legislation, along with my
colleague, Representative Spano, that would authorize the
Community Advantage program for 5 years, which has been
operating as a pilot program successfully since 2011.
Now, we are facing a long recovery from COVID-19, and we
need to be bold about giving small businesses, especially
underserved small businesses, more opportunities to access SBA
capital.
So, you know, we have an interest in making sure the
Community Advantage program remains live. And as a Community
Advantage lender, can you speak to the potential of this
program to play a part in the economic recovery for small
businesses, especially those owned by immigrants and people of
color, and especially when they may be potentially taken
advantage of by unscrupulous FinTech lenders?
Ms. TSHERING. So, thank you. So, the Community Advantage
product is a great product. We are relatively new to the
product. We have been making these loans for 2 years. But what
I have to say, we were pleasantly surprised once we started
processing them, how efficiently we got a response as to
whether something was approved or not, if a loan was approved,
or if documents were missing. And I think it has a great role
to play in the recovery efforts.
New York, here, businesses are reopening. We are making,
you know, emergency microloans funded by the SBA. We are also a
very active lender with funds, awards from the Treasury, the
CDFI fund at the U.S. Department of Treasury. But the CA,
Community Advantage program, has a great role to play.
And I think, you know, if more of the business owners were
aware of the product, certainly there is some time involved in
underwriting the loan, but that makes sense because, you know,
you really have a responsibility to make sure that the borrower
has the ability and, you know, is able to repay before you make
the loan to the business.
Ms. CHU. Thank you for that.
And, Ms. Urrutia, as the only member from California on
this committee, I would like to ask you about SB-1235, which
was signed into law in my home State in 2018, and was the
country's first truth-in-lending law specifically for small
business. And I know your organization was very instrumental in
the passage of this bill in my State.
Of course, this legislation did address the misleading
advertising practices by requiring lenders to disclose the true
estimated cost of their products on an annualized basis, and it
laid the groundwork for a similar effort in New York State.
And, of course, I commend Chairwoman Velazquez for spearheading
these disclosure requirements here in Congress because we
certainly need it on a national basis.
So, can you tell us how the bill is doing and expound on
the lessons learned from SB-1235 in California, and how we can
apply those lessons to the Federal level?
Ms. URRUTIA. SB-1235 has not been fully implemented yet in
California, but, transparency is what we all were looking for.
That is why when this bill was passed, there was no opposition
to enacting some of the disclosures.
-What we saw is that high-cost lenders continue to
oppose it because their APRs will be much higher than
the rates that they disclose now. As I said earlier,
the Federal Reserve found instances of providers
claiming that a 4 percent ``fee rate'' of 4 percent,
when the estimated APR was 45 percent, or a ``factor
rate'' of 1.15 when the estimated APR was 70 percent.
The Fed found these rates are confusing.
So, when we introduced this bill, I think that the reason
we found support is because consumers and small businesses
deserve the right to know their options and what they are
buying so they can make informed decisions. And we are looking
forward to successful and full implementation of the bill in
California.
Ms. CHU. Thank you. I yield back.
Chairwoman VELAZQUEZ. The gentlelady yields back.
I now will recognize the gentleman from Ohio, Mr.
Balderson, for 5 minutes.
Mr. BALDERSON. Thank you, Chairwoman. Chairwoman, I
appreciate you doing this committee today, and I look forward
to listening. It has been good today.
My first question will go to Mr. Levitin. In your
testimony, you briefly discuss personal guarantees. At the SBA,
personal guarantee is utilized with many of the government
guaranteed lending products. Can you provide more detail about
its role in traditional lending products?
Mr. LEVITIN. Sure. Personal guarantees are--commonly are
very frequently used as business lending because the small
businesses--in many situations, the dividing line between what
is a small business asset and what is a personal asset gets--it
can be fussy. That is one reason.
For example, a contractor who buys a Ford F-150 or
something might use it for work, but he is also going to use it
to take his kids to school, and to get groceries and the like.
It is both--it may be registered in the business's name, but
the business is really hard to separate from the person, and
that is why you often see personal guarantees for all
businesses where the credit of the business is just tied up
with the credit of the person.
I don't think a personal guarantee is, in any way, a
problem. I want to be clear about that. But when you start
having personal guarantees it can make it look a lot more like
[inaudible] than if, you know, a large--Coca-Cola were to go
and take out a multimillion dollar loan.
Mr. BALDERSON. Thank you. I will follow up for you. What
small business provision should Congress concentrate on while
discussing the next COVID relief package?
Mr. LEVITIN. I think the key--maybe the most important
problem small businesses are facing is rent, and that is not an
easy problem, because you have small businesses that, through
no fault of their own, are facing real problems with their
rent, and you have landlords who, through no fault of their
own, are finding their own liquidity stressed because of the
COVID problems. I don't, unfortunately, have a good solution
for you on this, but that is, I think, where a lot of attention
needs to be paid.
Mr. BALDERSON. Okay. Well, thank you.
My next question is for Mr. Hiles. Mr. Hiles, thank you for
being here today. What do you believe are the factors that are
driving change within the country's banking and lending system?
Mr. HILES. Madam Chairwoman, Representative Balderson,
thank you for the question.
There is a confluence of different factors affecting the
banking system right now. As I stated in my initial testimony,
one of the problems through consolidation for Main Street to
Wall Street has been the development of these gigantic too-big-
to-fail patchwork quilts of disparate financial IT systems in
the way that the documents and the data are managed become very
expensive to maintain.
And we have seen instances where very large banks have
spent upwards to $1 billion in an attempt to launch a fully
automated digital bank from the inside out. And we know that
from the technology standpoint, the technology innovation
generally takes place outside of large institutions and then
becomes acquired or absorbed within as we are able to innovate
and pivot.
There are other compressive factors, you know, the risks
from a regulatory cost standpoint and, you know, not clear
guidance. We have struggled with standards in technology. We
have had a little bit of a national dialogue, in particular,
around blockchain. There has been an attempt to bring to the
floor a previous legislation that defines even the taxonomy of
blockchain and cryptocurrency and trying to inject some
definitions into the mix.
I would like to also remind the committee that FinTech, in
and of itself, is not necessary alternative lending. FinTech is
just financial technology that powers an efficient way for even
traditional financial firms to continue to operate.
Mr. BALDERSON. Thank you very much for your answer.
Madam Chair, I will yield back my remaining time. It is
pretty short. So thank you very much for all of you being here
today.
Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
Now we recognize the gentleman from Pennsylvania, Mr.
Evans, for 5 minutes.
Mr. EVANS. Thank you, Madam Chairperson. Thank you for your
leadership on this issue.
The question I want to start off is with the professor from
Georgetown. Mr. Levitin, can you describe the pros and cons of
using FinTech for lending? What can business owners do right to
now protect themselves from predatory lending? And I would like
to get others to respond to that too.
Mr. LEVITIN. So, as Mr. Hiles was saying a second ago,
FinTech simply--it is actually not a very useful term because
it is so vague. It just means bringing technology to the lend--
to financial services, and that can mean a whole range of
things. In the lending context, it usually is used to refer to
online lenders. But a website is hardly, you know,
revolutionary technology at this point.
Often when we think of FinTech lenders we--people are
referring to lenders that are using alternative underwriting
data, so that they are able to maybe underwrite loans for
borrowers that do not have traditional credit scores or have
thin credit files, and also, lenders using particularly
automated underwriting.
And these two things, the automated underwriting and the
use of alternative underwriting data, enables both cheaper
underwriting and faster underwriting, and underwriting of
populations that might not otherwise be served by the
traditional lending market.
Potentially, that is all really good, right. There is a lot
of potential upside to FinTech. The problem is that FinTech
has--it can be both good and bad, and you have--just as in the
regular banking market, you can have abusive practices. You can
have those, too, with FinTech.
And with FinTech lenders, often they are not operating with
a banking license, so their regulation will vary. It is going
to be on the State level primarily. And what that means they
are actually subject to can just--there is substantial
variation depending on how they do this.
Additionally, some FinTech lenders are not banks, but they
partner with a bank. These bank partnerships are sometimes
called rent-a-bank arrangements, where the bank acts as the
front. It makes the loan and then immediately sells the loan,
and the loan was made on spec for the FinTech. What that allows
the FinTech to do, it allows it to evade State regulations.
So the example I give in any opening statement of the
DeRamos' business loan, the 121 percent interest rate, well,
Florida has an 18 percent usury cap. It actually applies--
unlike many States, Florida's usury cap applies to business
loans as well as to consumer loans.
How is a 121 percent APR loan made there? Well, because
banks are exempt from State usury laws. And by having the
little tiny Wisconsin community bank with just two branches in
Wisconsin be the formal lender, and then a few days later, sell
the loan to the FinTech, the FinTech was able to at least make
an argument that it was not subject to the State's usury laws.
And, unfortunately, over the summer, the Office of
Comptroller of the Currency and the Federal Deposit Insurance
Corporation both put finalized rulemakings that pretty much
blessed this process, and are giving a green light to bad
actors in the financial services space rather than trying to,
you know, squeeze out the bad actors and have an open field for
the good actors.
Mr. EVANS. So maybe somebody can go real quick. I have a
minute. So can I get you to respond the pros and cons on it?
Mr. LEVITIN. Can you repeat that, sir? I didn't hear it.
Mr. EVANS. Is anybody else giving comments on the pros and
cons of FinTech along the panel?
Ms. URRUTIA. I would just say that FinTechs have done a
great job of leveraging technology and data analytics to scale
lending to underserved communities in markets where banks have
left, and they have become banking deserts. And they have the
reach and many are responsible.
The problem that we have as responsible lenders is with
those online and FinTech providers that are not transparent in
their disclosures. And with those who say that why don't we
just talk about the cost of credit and the dollar amount,
recognizing that that is not a good, fair comparison, because a
6-month loan is very different than a 5-year term loan, and so
you have to look at APR in order to be able to compare apples
to apples.
Mr. EVANS. I yield back the balance of my time.
Chairwoman VELAZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Oklahoma, Mr. Hern, for
5 minutes.
Mr. HERN. Thank you, Madam Chairwoman. I really appreciate
you doing this meeting today, and Ranking Member Chabot, and
our witnesses for testifying today.
As a business owner for over 35 years before getting into
Congress 2 years ago, I am certainly very familiar with the
complexities associated with obtaining access to capital
through the loan programs that are out there and available.
I am also--as a cofounder of a small community bank, I also
understand the compliance standards and the financial risk our
lenders face on the other side. So I have a unique perspective
of being on both sides of this for over 20 years now.
These financial risks have grown significantly, due to
small businesses utilizing online lending more frequently,
which often creates quicker means to obtaining loans, as each
of you have described, is more appealing to younger
demographics of business owners. If it is usually that easy and
that automated, there is usually something of suspicion behind
it, and I think that is what has been so appetizing about these
type of loans.
Unfortunately, online lending comes with a lack of
transparency and increased ambiguity regarding long-term
agreements, again, as we have been speaking to today. Going
forward, as our society's reliance on the digital marketplace
continues, it is essential that we increase transparency so
that small businesses better understand the terms of online
lending agreements.
Compliance standards are also a growing problem, as our
Nation's banks have been overregulated since the passage of
Dodd-Frank, and they have become worse during the coronavirus
crisis. While the PPP and auto programs have helped businesses
remain open and for employees who are unemployed, a quick
turnaround in processing these loans has placed even more
standards on many banks, causing them to work extra hours and
adding to the overall compliance cost.
So, to ensure more efficiency and transparency with SBA
lending, we need to reduce the burdensome regulation for banks
and strive to innovate. And this brings me to the first
question.
Mr. Hiles, in your testimony, you note that the need for
the SBA to be more innovative and work with technology
companies to foster FinTech and RegTech solutions, if the SBA
is to innovate through online platforms, how do we ensure that
we are not overregulating causing more burdens for banks, yet
also to ensure there is transparency for small businesses
within loan agreements?
Mr. HILES. Madam Chairwoman, Representative Hern, thank you
for the question. We are advocates of leveraging technology
that exists today that allows for the immutable mathematical
proof of documents and data. I think of it as the underlying
technology beneath cryptocurrencies, but applied in an
enterprise fashion for compliance purposes.
This allows a mathematical way to encrypt the information,
and then decentralize it to, you know, essentially hack-proof
it. I don't like to say that word because it is not true, but
at least elevate a much higher level of security around that
information.
This also provides for a proof of information and data from
a regulatory standpoint as an examiner would be provided with a
token key to the network to access specific records on a real-
time basis. It would seem that from a transparency standpoint
these kinds of innovations would be a dream come true for both
small financial institutions who already struggle with
technology innovation. As a community bank, they don't have the
R&D budgets. And then from an administrative standpoint, to
help leverage some of these new technologies, to also work in a
far more efficient fashion as an administration. These are the
kinds of things that we look forward to in the future with the
ability to, you know, proof documents and data.
Mr. HERN. Thank you.
Mr. Levitin, my second question, I will start with you on
this and we will see where time goes, but this is regarding
increased lending flexibility for banks. What are some of the
actions the government can take to reduce current regulatory
burdens on banks to increase the flexibility within lending
leading to quicker turnaround for loan processing, as that
seems to be one of the appetizing things to the FinTech
industry right now?
Mr. LEVITIN. So I am not actually aware of any particular
regulation that slows down the speed of underwriting. There may
be just internal technological and operating procedures that do
so, but I am unaware of anything in terms of Federal regulation
that requires a delay between when the bank decides to make a
loan and when there can be a disbursement, or about how fast a
bank can undertake an underwriting process.
There are certain things that, you know, pretty much any
lender is going to be required to abide by, such as anti-money
laundering regulations, but those should not be creating a
particular delay once the necessary documents are submitted to
a lender.
Mr. HERN. Madam Chairwoman, I yield back the balance of my
time. Actually, I have none left.
Chairwoman VELAZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Illinois, Mr.
Schneider, for 5 minutes.
Mr. SCHNEIDER. Thank you, Madam Chair. And thank you and
the Ranking Member for hosting this important hearing.
I want to thank our witnesses for joining us today.
This summer, I had the privilege to host a number of
virtual roundtables with, in particular, minority business
owners in my district. And in these, time and again, we heard a
common theme that these small businesses, especially minority-
owned businesses, had nowhere to turn for financial assistance.
Now, the big businesses were getting ahead of them in line
at the banks and accessing PPP, at least in the first round.
Many submitted their paperwork, only to get skipped over, and
they really struggled. In the second round, they did a little
bit better.
But the data supports the conclusions. Only 12 percent of
black and Latino business owners pulled between April 30 and
May 12 said that they had received the funding they had
requested, while about 1 quarter received some funding. In
contrast, half of all small businesses reportedly receiving
Federal reports through the PPP program.
So we passed PPP. We had additional help that we hoped to
offer through the Heroes Act, but nothing has yet to come. And
one of the biggest themes, or concerns I heard in these
conversations, was the fear that nothing would come and they
would be left hanging.
So my first question, and maybe I will start with Ms.
Urrutia, is how successful do you think the second round of PPP
funding was in targeting these underserved communities?
Ms. URRUTIA. [Inaudible] a lot of different places.
Minority-owned businesses and the most vulnerable ones that we
are talking about do not generally have banking relationships.
As a result, the banks were only supporting their customers
first. So that is why your comment that they stood at the back
of the line, they stayed in the back of the line, for the most
part.
Also, if you look at the average size of loans that were
made, in the second round, it was $73,000. Our average loan
size was $15,000, and we deployed about 1,000 loans in a 6-week
period.
And so we must ensure that PPP funds go to the smallest,
most vulnerable small businesses, because they are the ones
that are minority-owned, and they are the ones that really need
it, and that is why we are supporting that a second PPP loan be
authorized.
We are also asking that PPP loans under $150,000, be
automatically forgiven. Those businesses are the ones that need
the most relief in order to get back on their feet.
And then, the other piece is an administrative fee. As you
know, 5 percent was paid by SBA to loans under $350,000. In our
case, we made a $15,000 loan. Five percent is $750. That does
not cover the cost of processing the loans and working with
these borrowers that need so much help to ensure that they can
get approved.
Mr. SCHNEIDER. Thank you.
And maybe, because I think my next one is somewhat of an
academic question, I will turn to Professor Levitin. But, you
know, as we are looking forward, we are looking to the next
package. In the minute and a half left, can you touch on, you
know, the needs that businesses might have in the next round,
how we could better structure this program to serve these
underserved businesses, and what we might do also to create a
more efficient, effective process to make sure these businesses
have access to the loans?
Mr. LEVITIN. So, there is a bit of a MacGyver problem here
where you have got to work with the tools you have at hand. We
can't start setting up an entire new financial system from
scratch.
Given the tools that are at hand, I think that PPP made the
best of what it could from a bad situation. And while I am not
generally enthusiastic about using--relying on private
financial institutions to carry out Federal aid programs--I
think we have seen problems with that in the past, for example,
with mortgage servicers and Federal foreclosure relief--I think
that, you know, the goal for the next round has to be figuring
out a way that the banks that participate in PPP or any
expansion of that will reach out not just to their existing
clients, but try and serve new clients, and see this as an
opportunity for developing new banking relationships.
Mr. SCHNEIDER. Great. Thank you.
And my time is expired, so I will yield back. But first,
let me just, again, thank our witnesses today and thank the
Chairwoman and the Ranking Member for this hearing.
Chairwoman VELAZQUEZ. Time has expired. Now we recognize
the gentleman from Minnesota, Mr. Stauber, for 5 minutes.
Mr. STAUBER. Thank you, Chairwoman Velazquez and Ranking
Member Chabot. I really appreciate your leadership during this
really difficult time for COVID-19, and the small business
owners throughout the Nation, the 30 million of them.
Mr. Levitin, you just talked about the banking industry.
You know, during this COVID-19, we have relied on our small
community lending banks to, you know, help with these PPP loans
with not a lot of help or guidance from the SBA at times, and I
think they did a really good job under the circumstances. From
your comments, I hope you agree with that. I think you stated
that. Is that correct? Did I hear you correctly?
Mr. LEVITIN. [Inaudible] on the implementation of the PPP
program to take a position there. So I just want to--I am going
to say, my answer would be no comment.
Mr. STAUBER. Okay. And that is fine, because I want to put
forth my congratulations and support for community banks and
lending institutions that helped 51 million people keep their
jobs and helped almost 10 million, 9-plus million businesses to
stay open during this time.
And I would just say this, here is a question. The small
businessmen and women across this Nation, they are the engine
of our economy. The members of this committee understand that.
I would ask anybody this question: Do you think, because small
businessmen and women are the engine of our economy on Main
Street America, is there anybody on the panel of experts here
that feel there is a need for small businesses to be protected
from COVID-19-related lawsuits? Anybody--this is directed to
any one of the witnesses.
Ms. URRUTIA. Can you say more about--when you say protected
from COVID-19 losses, what do you mean?
Mr. STAUBER. Lawsuits.
Ms. URRUTIA. Lawsuits.
Mr. STAUBER. Lawsuits.
Ms. URRUTIA. Okay.
Mr. STAUBER. Anybody? Any of the three witnesses?
Ms. TSHERING. Are you talking about lawsuits from employees
or from, you know, customers or--yeah.
Mr. STAUBER. From the general public. Somebody comes in,
you own a small business, you are following the CDC recommended
guidelines. You have payments to make to the lending
institutions that helped you get through, and there is a
lawsuit--COVID-related lawsuit stating your business--I went
into your business and got COVID. Tell me about your thoughts
on that.
Ms. TSHERING. Yeah. So what we found is when we have asked
our clients, you know, what sort of concerns do you have when
you are operating your business, this is the last thing on
their mind, you know, because they all have reopening plans;
they, you know, have signs about masks, they have, you know,
plastic barriers. That is the last concern on their mind.
Their concern is the rent they owe. And I think we had the
professor also mention, we found that rent, you know, rent for
the last few months, the debt that they have is the biggest
concern among our small business owners.
And the other concern we have is, you know, hopefully there
will be more relief for them. But we--you know, I manage a
CDFI, and there are hundreds of CDFIs throughout the U.S.
Mr. STAUBER. So----
Ms. TSHERING. They should--you know, they could be funded--
yeah.
Mr. STAUBER. Ma'am.
Ms. TSHERING. Yeah. Go ahead.
Mr. STAUBER. Let me ask maybe the question more directly.
Is that something as a small business supporter, like you are,
is that something you would support protecting the small
businesses from these types of lawsuits? Because your
experience where you are at, and my experience from talking to
our Chamber of Commerces are much different. And so, I would
say that it is a priority that when they open, when they follow
the CDC guidelines that they aren't in lawsuits.
So I will be more direct: Do you support the protection,
the liability for small businesses from lawsuits for COVID-19
only when they follow CDC guidelines? Anybody?
Yeah. So that is--your--the silence is deafening here, and
that is the concern. That is the real concern we have across
America. We talk about support for small businesses. Well, here
is an opportunity to protect them. We have given our small
businesses relief that they needed, in fact, the three-page PPP
for those small minority-owned businesses that don't have a
human resource department to be able to access there.
And so my question was, we are doing all this upfront. Do
you know that of 30 million small businesses across this Nation
probably 25 million, 28 million of the small businesses could
not even handle one lawsuit?
So we know they are the engine of our economy, and it
strikes me that all three of you are silent on my question.
Ms. TSHERING. So can we--yeah. We would like to give this
more thought and get back to you, so we are very clear about
what exactly you mean. And, you know, we appreciate your
concern for small businesses, so we would like to get back to
you on this.
Mr. STAUBER. I appreciate that. I am a small business owner
for 31 years. And as Professor Levitin said, it is not easy,
but we need that stability and the certainty to be able to even
keep our doors open. And I think you would all agree with that.
I think that is--the last question I have, and I know I
have a little bit of time here, are there any archaic laws that
you see on the books that we should remove, that you as--from
your expertise, that we should remove to help small businesses
not only succeed, but also access to capital in an easier
fashion like the PPP loans, the three-page loan to get that
access to--that capital to the small businesses that need it?
Anybody?
Mr. HILES. I will take that one very quickly. I think that
Congress and the Securities Exchange Commission and, you know,
the dialogue that is happening around equity funding is a
positive step in the right direction with the realignment of
what constitutes an accredited investor. I think that there
needs to be more of a crowdfunding focused approach to some of
the smaller businesses in particular.
That being said, even working with some of the Title 3 JOBS
Act crowdfunding portals represents a pretty significant
upfront, front-loaded expense to mount a marketing campaign and
get through the statutory requirements in order to launch a
crowdfunding campaign for even a very small amount of funding.
Cost of capital tends to run fairly high.
Mr. STAUBER. Okay. Does anybody else want to tackle that
one? Okay. I just----
Chairwoman VELAZQUEZ. Time has expired.
Mr. STAUBER. Thank you, Madam Chair.
Chairwoman VELAZQUEZ. Thank you.
Now we recognize the gentleman from Tennessee, Mr.
Burchett, for 5 minutes. You need to unmute yourself, sir.
Mr. BURCHETT. I think we skipped the order there. I think a
Democrat should be next. I hate to cut in front of one of my
colleagues across the aisle.
Chairwoman VELAZQUEZ. No. I have recognized everyone.
Mr. BURCHETT. Oh, okay. So I am last. Oh, well, I should be
more offended then. I apologize. I will remember that
offensiveness to the next meeting. No, you are wonderful,
Chairlady. I always enjoy being on with you, ma'am. I am sorry
we are not in person.
I guess I am wondering about how do we increase our
access--I am just going to ask all of the panelists there, if
we can just start at one end and go to the other. How do we
increase access to capital for business and limit our risk for
lenders?
And I guess I would be interested really in our minority
community. It seems like the percentage and the volume of loans
go--it seems they are at a disproportionate amount, some of
those folks, and I would be--I anxiously await your answers.
Ms. URRUTIA. I can start. I think a number of ways. First
of all, make sure that CDFIs have the proper funding that they
need. CDFIs are ensuring access to credit for impacted
businesses in rural communities, underserved small businesses.
We are offering affordable loans, technical assistance, and a
lot of other services that are needed, and we need to be
properly funded and have leverage and balance sheet capacity to
support the lending.
So in support of CDFIs, a supplemental appropriation of $1
billion to the CDFI Fund will allow CDFIs across the country to
leverage $12 billion in capital that will be deployed to
communities in need. That is the first thing.
The second thing is make sure that section 1071 of Dodd-
Frank is passed so that lenders report on the amount of lending
that they are doing to minority and women-owned businesses. We
need to have visibility so that we can understand what the
problems are and correct them.
We also should be looking at reauthorizing the State Small
Business Credit Initiative, SSBCI. After the Great Recession,
this was a great program. It provided over $1.5 billion to
State-led small business financing programs, and it gave a lot
of flexibility to lenders to leverage that capital as loan loss
reserves to support over $8 billion in small business loans.
So, I think that this is a great opportunity for public and
private sector partnerships to come together through access to
funding for CDFIs and loan loss reserves so that we can feel
comfortable and continue to increase lending in these
communities.
Mr. BURCHETT. Okay. Thank you. Anyone else?
Ms. TSHERING. So, you know, as a CDFI that works with
minority and women-owned businesses, I would like to second
what Luz just recommended about supporting CDFIs. And they are
all, several hundred of them, or maybe even more than several
hundred, spread all over the United States, rural, urban, you
know, and they really understand the clients they work with,
the businesses that need some hand-holding. And eventually,
many of them are bankable and able to get larger loans from
banks, so I really support that suggestion.
Mr. LEVITIN. I would also like to echo the point about
section 1071 of Dodd-Frank. It is way past time for the
Consumer Financial Protection Bureau to have implemented the
data collection on small business lending, which is just the--
it is the necessary precondition for trying to police the small
business lending market for discriminatory lending. And without
that data, it is just not easy to do any kind of meaningful
fair lending enforcement.
Mr. BURCHETT. All right. I guess, Mr. Hiles, I will ask you
the last question. I don't think I have got 30 seconds. But
have the online lenders in the FinTech industry experienced a
higher demand for capital from new businesses, and how is the
industry managing the existing investments in companies that
have made significant operational changes?
Mr. HILES. There has, indeed, been a significant growth.
Thank you for the question, Representative, Madam Chair. There
has been a significant growth in usability, and as I indicated
in my initial testimony, we expect those numbers to continue to
climb as the younger generation, who is far more transactional,
less relationship-focused, wish to leverage the technology that
has been in their hands since they were literally born as
children to access all manner of capital.
And so, from that standpoint, we see there being nothing
but a growth path forward for everything from online
alternative lending to fully automated, full digital banking,
and even non-lending banking as seen with some of the recent
legislation in the State of Wyoming with special purpose
depository institutions, you know, really remix the notion of
what banking is from a services versus a lending-risk
standpoint. Thank you for the question.
Mr. HERN. I yield back my time, Chairlady. Thank you,
ma'am.
Chairwoman VELAZQUEZ. The gentleman's time has expired.
Now we are going to go to a second round of questioning,
and I welcome the members to stay on. I will recognize myself
for 5 minutes.
Professor Levitin, last Congress, you testified before us
on the Financial Services Committee on the use of the rent-a-
bank scheme that allows FinTech lenders to get around state
usury law. Can you explain the mechanics of those transactions
to us, and how this scheme enables predatory lenders to
continue operating unchecked?
Mr. LEVITIN. Absolutely, Madam Chairwoman. So every State
in the country has some sort of usury law. They vary
substantially--but here is the basic thing you need to
understand about them: Banks are not subject to State usury
laws. I put in a little asterisk. It is a little more
technically complicated, but that is the basic takeaway. Banks
are not subject to State usury laws. Nonbanks are subject to
State usury laws.
In a rent-a-bank arrangement, a nonbank will partner with a
bank, and here is the terms of the partnership: The bank will
make loans according to the specifications of the nonbank. It
may even use an underwriting platform that is licensed to it by
the nonbank, where basically the nonbank has done all the
programming and has set all the terms of the underwriting.
The nonbank will do the marketing, it will service the
loans, and it will also purchase the loans or purchase an
economic interest, such as a participation interest, in the
loans from the bank, so that all the bank is really doing is
being an origination agent. Its name is on the loan documents
originally. And maybe it provides very--you know, the original
funding for a very short period of time. Maybe it holds a 10
percent or 5 percent economic interest in the loans going
forward.
But for all real purposes, the nonbank is the lender, and
it is using the bank as a front to make the loans. And the
reason it does that is because then that gives it a legal
argument, which is a contested one, but it gives it a legal--it
gives the nonbank a legal argument that the bank is the true
lender, and that, therefore, the loan is not subject to State
usury laws, and that the nonbank is not subject to State
licensure requirements, and that the loan is not subject to
other State consumer protections, such as limitations on
rollovers, in the case of payday loans.
Chairwoman VELAZQUEZ. How does the lack of federal
regulation allow this practice to continue unchecked?
Mr. LEVITIN. Well, historically, if you went back about 17
years, in 2003, the Office of Comptroller of the Currency
cracked down on these kind of arrangements, which were being
used by online payday lenders. And the Office of Comptroller of
the Currency stopped every national bank that was involved in
doing this kind of rent-a-bank from doing this.
A few years later, the FDIC stopped all the State-chartered
insured banks from doing this. I was actually an expert witness
for the FDIC in some litigation about this.
We have since had a change in management at the OCC and
FDIC, and the change in view about the dangers of predatory
lending. And the OCC and FDIC have intervened in usury
litigation to try and protect rent-a-bank schemes.
And this last summer, they both finalized regulations
that--and I emphasize these regulations have already been
challenged by the Coalition of State Attorneys General, but
these regulations, if upheld, will basically bless this kind of
rent-a-bank arrangement.
And they say if the bank's name is on the loan, it doesn't
matter what the real facts are, it doesn't matter that the bank
did absolutely nothing with the loan, we are going to treat it
as a bank loan.
Chairwoman VELAZQUEZ. Thank you.
Mr. LEVITIN. And that just allows the banks to rent out
their Federal regulatory privileges, which isn't how the system
should work.
Chairwoman VELAZQUEZ. Thank you. Thank you very much.
Ms. Tshering, as someone who played a key role in the push
for New York's TILA for Small Business that awaits Governor
Cuomo's signature, I just want to ask you, what are some of the
hallmarks of the New York legislation that you think must
remain in any federal legislation?
Ms. TSHERING. Well, one thing for sure, something we have
been--you know, each witness has said over and over again, you
know, very important that we are able--you know, a borrower is
able to compare apples to apples. So key is the APR, so they
are able to see what the loan is going to cost. The second is,
you know, no prepayment penalties.
What we are asking for asking for is transparency. And as
you, and earlier, Ranking Member Chabot referred to, you know,
we are talking about business owners. This is an opportunity
for them to build assets and wealth. But what happens is when
they take on these loans, which are, you know, not very clear
about what the costs are involved, then they are really
stripped of their assets.
Chairwoman VELAZQUEZ. Thank you.
Ms. TSHERING. So what we are asking for is very simple: We
are asking for transparency and clarity.
Chairwoman VELAZQUEZ. Thank you. Thank you. My time has
expired. Now I recognize the Ranking Member, Mr. Chabot, for 5
minutes.
Mr. CHABOT. Thank you, Madam Chairman. Thank you.
And I will go to Mr. Hiles. Mr. Hiles, as you know, a
number of FinTech companies did participate in the PPP program,
the Paycheck Protection Program. Moving forward with respect to
the SBA and their other existing programs, like the 7A loans
program, the 504 loan program, the microloan program, those
types of things, how do you see FinTech now fitting into those
programs in the future? And how would you like to see, you
know, that relationship progress, FinTech and the SBA?
Mr. HILES. Chairwoman, Ranking Member Chabot, thank you for
the question, and that is a good question. A couple of things.
One is that, as I stated in my initial testimony, that SBA is
going to continue to be subjected to the--call it
idiosyncrasies and the disruption that is taking place in the
financial institution, and the financial services market right
now for those myriads of market forces and technology reasons.
The opportunity to define standards first as opposed to
being necessarily highly prescriptive about the technology but
then working with the--not only the financial institutions, but
the technology providers and the folks that build technology,
to innovate and come up with new solutions that would optimize
the management of the documents and the data and all of the
loan applications, the borrowing applications, you know, all of
the TRID compliance, everything that goes along with these
loans from a documentation standpoint, but then optimize and
bring a high degree of efficiency and optimization as an
administration, and then be a leader that sets the standard
forth about those programs beneath which the FinTech industry,
and then ultimately, the traditional financial services
industry, can follow suit and operate.
If you are looking for the private sector to establish
these kinds of standards and then adopt them, I think that we
have leaked pretty far in terms of technology innovation and
where we are at, and we are scrambling to figure out how to
incorporate that into traditional organizations.
And now is a time for leadership. And much like the Federal
Government established the standards that ultimately became the
internet and the world wide web, we are in the throes of
potentially doing the same with finance and financial records.
And so, I would highly admonish the stakeholders across the
board to consider this type of opportunity right now with the
industry.
Mr. CHABOT. Thank you.
And then, finally, as Congress continues to examine the
role of your industry, FinTech companies, do you have any
recommendations for us? And, you know, especially relative to
regulations, you know, more regulations versus the trend that
we have tried to establish in government in recent years is to
reduce unnecessary regulations or duplicative things, you know,
so we don't kill the goose that laid the golden egg here for
the economy and otherwise. So do you want to weigh into that
with the additional time I have available to you here?
Mr. HILES. Certainly. Thank you. There would be a couple of
key areas. One of the things that we like to do is we like to
start with the regulation first, and then work our way
backwards into the technology itself. And I think that there is
this resistance to technology in general. It is frightening. It
is hard to understand. And the idea that people are using
technology to necessarily skirt the regulations isn't
necessarily true. Once again, it goes back to those standards.
I have seen some interesting things coming out of OCC and
interim Director Brooks talking about how payment providers
would ultimately end up with some form of de facto charter. I
know that that has raised a lot of red flags with banking--you
know, division of bankings with the States already.
So it is going to be an interesting dynamic to see how we
get there in terms of getting past the logjam that exists with
banking and tech now. Do we leapfrog it forward with technology
companies that become financial institutions? Not real sure at
this point.
But Congress does absolutely have an opportunity to lead
the discussion as opposed to being responsive and waiting for
the--hopefully, you know, at some point, there would be a
solution, but historically, that has tended to be not
necessarily the case when it comes to standard setting, and
that is where I believe the Small Business Administration has
the opportunity to really drive this conversation forward.
Mr. CHABOT. Thank you very much.
And, Madam Chair, I think my time is expired, and I do have
a 3:00 commitment, so I will be dropping off shortly.
Chairwoman VELAZQUEZ. Yes.
Mr. CHABOT. But I thought this was an excellent hearing. I
want to thank all the witnesses for their fine testimony. I
yield back.
Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
Now we recognize the gentleman from Pennsylvania, Mr.
Evans, for 5 minutes. You need to unmute.
Mr. EVANS. Okay. Can you hear me now?
Chairwoman VELAZQUEZ. Yes, we can hear you.
Mr. EVANS. Yes. I just want to follow up to something that
the Chairwoman was talking to the professor regarding what you
described about State policy and Federal policy. How do
financial technology leaders ensure compliance with equal
credit opportunities and unfair banking rules? Is what I heard
in the discussion you were having with the Chairwoman, is that
the same situation?
Mr. LEVITIN. No, that is not. So there is no--the rent-a-
bank situation does not enable nonbanks to evade fair lending
laws. They are still subject to--whether it is the bank or the
nonbank partner, someone there is subject to fair lending laws.
The problem on the fair lending side is that the--that if you
want to do fair lending enforcement or looking for disparate
impact, you need to have data.
And section 1071 of the Dodd-Frank Act enacted a decade ago
calls for the collection by the Consumer Financial Protection
Bureau of data on small business lending. Unfortunately, the
Consumer Financial Protection Bureau has not yet implemented
the regulations necessary to effectuate that, so we don't have
any data being collected.
I would suggest that, you know, at least a temporary
stopgap measure would be for any further Federal assistance
that is given out under, sort of, additional--I am not sure
what we are going to call it--CARES Act round 2 or what have
you, HEROES Act, any additional--that there be requirements
that lenders start collecting and submitting data on the race,
the ethnicity, and the gender at least of the parties that are
assisted, so we have a better understanding of where money is
flowing and making sure that it is being made available
equitably to everyone in society.
Mr. EVANS. Thank you.
And I yield back the balance of my time. Thank you, Madam
Chairperson. Thank you for your leadership.
Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
Let me thank all of our witnesses today for their
testimony. We have explored some of the risks FinTech lending
presents for small businesses, and also some of the benefits.
It has become clear to me that there is a way to leverage those
benefits, greater speed, affordability, and accessibility, and
translate them into gains for small business owners.
Also, we have heard from lenders who can sustainably make
these loans, create the partnerships necessary to bring the
mission-based lending model online, and help the small
businesses grow and create jobs without resorting to deceptive
or abusive practices.
However, it also remains clear to me that much more needs
to be done in this space to eliminate unfair and abusive
practices by predatory lenders who have no interest in helping
small businesses grow or helping a community flourish, only to
enrich themselves at the cost of the small businesses.
Congress must follow the lead of New York and California
who are actively working to ensure a safe, fair, and affordable
small business lending market.
I ask unanimous consent that members have 5 legislative
days to submit statements and supporting materials for the
record. Without objection, so ordered.
If there is no further business before the Committee, we
are adjourned.
[Whereupon, at 2:55 p.m., the Committee was adjourned.]
A P P E N D I X
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