[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
RENT-A-BANK SCHEMES AND NEW
DEBT TRAPS: ASSESSING EFFORTS TO
EVADE STATE CONSUMER PROTECTIONS
AND INTEREST RATE CAPS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 5, 2020
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-81
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
42-805 PDF WASHINGTON : 2021
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut SCOTT TIPTON, Colorado
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
DENNY HECK, Washington TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
RASHIDA TLAIB, Michigan DAVID KUSTOFF, Tennessee
KATIE PORTER, California TREY HOLLINGSWORTH, Indiana
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois JOHN ROSE, Tennessee
AYANNA PRESSLEY, Massachusetts BRYAN STEIL, Wisconsin
BEN McADAMS, Utah LANCE GOODEN, Texas
ALEXANDRIA OCASIO-CORTEZ, New York DENVER RIGGLEMAN, Virginia
JENNIFER WEXTON, Virginia WILLIAM TIMMONS, South Carolina
STEPHEN F. LYNCH, Massachusetts VAN TAYLOR, Texas
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
February 5, 2020............................................. 1
Appendix:
February 5, 2020............................................. 49
WITNESSES
Wednesday, February 5, 2020
Aponte-Diaz, Graciela, Director of Federal Campaigns, Center for
Responsible Lending............................................ 5
Johnson, Creola, Professor, The Ohio State University Moritz
College of Law................................................. 8
Knight, Brian, Director and Senior Research Fellow, Program on
Innovation and Governance, Mercatus Center at George Mason
University..................................................... 10
Limon, Hon. Monique, Chair, Banking & Finance Committee,
California State Assembly...................................... 6
Saunders, Lauren, Associate Director, National Consumer Law
Center......................................................... 9
APPENDIX
Prepared statements:
Aponte-Diaz, Graciela........................................ 50
Johnson, Creola.............................................. 68
Knight, Brian................................................ 77
Limon, Hon. Monique.......................................... 80
Saunders, Lauren............................................. 91
RENT-A-BANK SCHEMES AND NEW DEBT
TRAPS: ASSESSING EFFORTS TO EVADE
STATE CONSUMER PROTECTIONS AND
INTEREST RATE CAPS
----------
Wednesday, February 5, 2020
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:10 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Maloney, Sherman,
Meeks, Scott, Green, Perlmutter, Himes, Heck, Vargas,
Gottheimer, Lawson, Tlaib, Porter, Axne, Pressley, McAdams,
Wexton, Adams, Dean, Garcia of Illinois, Garcia of Texas,
Phillips; McHenry, Wagner, Lucas, Posey, Luetkemeyer, Huizenga,
Barr, Tipton, Williams, Hill, Zeldin, Loudermilk, Mooney,
Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose,
Steil, Gooden, Riggleman, Timmons, and Taylor.
Chairwoman Waters. The Committee on Financial Services will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``Rent-A-Bank Schemes and New
Debt Traps: Assessing Efforts to Evade State Consumer
Protections and Interest Rate Caps.''
I will now recognize myself for 4 minutes for an opening
statement.
In November of last year, the Federal Deposit Insurance
Corporation (FDIC) and the Office of the Comptroller of the
Currency (OCC) issued a proposed rule that would provide legal
cover for predatory rent-a-bank schemes, where payday lenders
partner with banks to peddle harmful short-term, triple-digit
interest rate loans in States that have reasonable and often
voter-approved interest rate caps to protect consumers. Even if
a State, like my home State of California, has passed a law
setting a usury rate cap, this rule would allow lenders to
ignore the law and to import high-rate, high-risk, and
otherwise illegal loans back into the State. Low-income
consumers, who are already struggling, will pay the price.
American consumers used to be able to look to their
regulators to protect them from these kinds of predatory
schemes. Not so under the Trump Administration, where consumer
protection takes a back seat to consumer predation. And Trump's
regulators are working overtime to make sure the bad actors
have a clear path to trap millions of Americans in unending
debt.
This anti-consumer rule is just the latest to benefit
predatory payday lenders. When Trump's acting Chief of Staff,
Mick Mulvaney, was running the Consumer Financial Protection
Bureau (CFPB), he did everything he could for predatory payday
lenders, including withdrawing a lawsuit against a group of
deceptive payday lenders who were allegedly ripping off
consumers with loans with interest rates as high as 950 percent
a year.
It is no wonder that a CEO of a notorious payday lender
thought nothing of submitting her resume to be considered as
the next CFPB Director, but the job instead went to Kathy
Kraninger, who is no doubt making that CEO proud. Director
Kraninger has both delayed and proposed to undermine key
provisions of the CFPB's important payday, small-dollar, and
car title rules, which would have curbed abusive payday loans.
And 101 House Democrats wrote to Director Kraninger to call on
her to reconsider her efforts, but she has not relented.
Today, we will examine the implications of regulators'
actions to open the payday loan floodgates and the impact this
will have on States with sensible interest rate caps. We will
also discuss H.R. 5050, the Veterans and Consumers Fair Credit
Act, Congressman Garcia's bipartisan bill to place a Federal 36
percent annual percentage rate usury cap on payday loans and
car title loans, and extend the protections that active-duty
servicemembers have under the Military Lending Act to all
consumers across the country. It is long overdue for Congress
to take action to ensure that all Americans are protected from
harmful payday products with sky-high interest rates.
So, I look forward to hearing from our witness panel of
advocates and experts.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes.
Mr. McHenry. Madam Chairwoman, thank you for holding this
hearing. I think it is important and essential that Congress
understand how the banking industry is evolving in response to
technological innovation. It also is essential to help Congress
understand its role to ensure all consumers benefit from
advances in technology. So, I think it is a meaningful
conversation that we can have today.
Technological innovation over the past few decades has
enabled faster, more accurate credit underwriting for a much
broader population of borrowers. Much of this innovation has
been driven by industry newcomers that have developed a new
idea or business model, faster in time than it takes to get a
bank charter. So, these newcomers often partner with banks.
Bank/non-bank partnerships can make sense for several
reasons. First, economic: Because of their deposit-based
funding, banks tend to have the cheapest possible cost of
capital among all capital allocators.
Second, capacity: Banks have relatively large balance
sheets, enabling them to absorb new loans rapidly.
Third, expertise, and expertise still matters. Banks are
expert lenders. In other words, they are proficient in such
tasks as underwriting, compliance, and securitizing or selling
loans into the secondary market.
One other major reason that fintech partners with banks is
that special legal status banks have had for well over a
century--actually, a century and a half. Since the passage of
the National Bank Act, Congress has given special privileges to
banks, and that includes regulatory certainty about what
interest rates banks are permitted to charge on a loan. When
conducted properly, the benefits from this arrangement can be
cost savings for fintechs and banks, better competition among
banks, and better, faster, and cheaper banking products for all
consumers.
The best way to make sure that these partnerships live up
to their promise is to provide a clear regulatory framework
under which they can operate. To that end, I want to commend
the recent efforts of the OCC and the FDIC for their proposed
rulemaking that helps restore clarity to a segment of the
market. Their proposed rules would clarify what we all thought
we knew before 2015: that when a bank sells, assigns, or
otherwise transfers a loan that was valid when it was made,
that loan does not become invalid because of the transfer. This
is a common-sense rule of contracting that has existed for over
100 years, until 2015, when the Second Circuit Court's Madden
decision decided that, no, banks cannot be sure that their
loans hold any value when sold.
The Madden decision has been roundly criticized on its
legal reasoning, but more importantly, economists have now
measured the negative impact to consumers in the three States
governed by this bad Madden decision. The uncertainty caused by
the result has driven lenders away from those States. Borrowers
with FICO scores below 625 have seen a 52 percent reduction in
credit availability. Furthermore, personal bankruptcy filings
rose by 8 percent more in those States, relative to States
outside the Second Circuit. We can clearly see the harm that
results when lenders are faced with regulatory uncertainty.
I am pleased that we are hearing from experts today about
the need for clear rules of the road. Technology is the key for
greater financial inclusion, and while we must provide
oversight and certainty, we cannot fear innovation because we
don't understand it.
I yield back.
Chairwoman Waters. I now recognize the Chair of our
Subcommittee on Consumer Protection and Financial Institutions,
Mr. Meeks, for one minute.
Mr. Meeks. Thank you, Chairwoman Waters. Despite a decade
of economic growth, over 40 percent of American families don't
have savings for a $400 emergency. This problem is compounded
by the dramatic rate at which bank branches are closing
nationwide and the rapid disappearance of small community banks
and minority banks which serve marginalized communities at a
far greater rate than megabanks, creating banking deserts and
depriving these communities of access to credit and financial
services.
As a result, check-cashing stores, pawn brokers, auto title
lenders, and payday lenders often fill the gap. Payday lenders
are especially harmful, trapping borrowers in unsustainable
debt traps. We need to regulate payday lenders and address the
terrible harm they cause across the country. But in doing so,
we must ensure that something viable fills the gap. This
committee has long advocated for bringing more people into the
regulated banking space, ensuring that consumer protection,
anti-discrimination, and fair banking practice laws are all
applicable and enforceable.
This is a very real and urgent priority for me, and I thank
the witnesses and look forward to their testimony.
Chairwoman Waters. I now recognize the subcommittee's
ranking member, Mr. Luetkemeyer, for one minute.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. Thanks in
large part to the Dodd-Frank Wall Street Reform and Consumer
Protection Act, financial institutions have largely exited the
small-dollar lending space. However, some financial
institutions have managed to continue providing these products
through partnerships with fintech firms that help with
underwriting, marketing, and lending. Now, it seems my
colleagues on the other side of the aisle are going after these
partnerships to push banks out of small-dollar lending
altogether.
If that wasn't enough, the Majority is considering
legislation to enact an APR rate cap on all loans. Using an
APR, in my opinion, is a misleading measurement of any loan
under a year in length, and only serves to hide the true cost
of a small-dollar loan from consumers. Where is the
transparency in that?
On one hand, my colleagues are attempting to eliminate bank
involvement in small-dollar lending, pushing consumers into
less-regulated spaces, and on the other hand, they want to
eliminate the ability for non-bank entities to offer small-
dollar loans. If they succeed, you have to ask the question,
where will the unbanked and underbanked go to access credit? I
don't think any of us will appreciate and like the answer to
that question.
With that, Madam Chairwoman, I yield back.
Mr. Meeks. [presiding]. I would now like to introduce our
witnesses and welcome you to this committee: Ms. Graciela
Aponte-Diaz, who is the director of Federal campaigns for the
Center for Responsible Lending; Ms. Lauren Saunders, who is the
associate director at the National Consumer Law Center;
Professor Creola Johnson, who is the President's Club Professor
of Law at the Moritz College of Law at the Ohio State
University; Assemblymember Monique Limon, from the California
State Assembly, who is serving as Chair of the Banking and
Finance Committee; and Brian Knight, director and senior
research fellow for the Program on Innovation and Governance at
the Mercatus Center at George Mason University.
Each of you will have 5 minutes to summarize your
testimony, and when you have one minute remaining, a yellow
light will appear. At that time, I would ask you to wrap up
your testimony so that we can be respectful of both the
witnesses' and the committee members' time. And without
objection, all of the witnesses' written statements will be
made a part of the record.
Ms. Diaz, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF GRACIELA APONTE-DIAZ, DIRECTOR OF FEDERAL
CAMPAIGNS, CENTER FOR RESPONSIBLE LENDING
Ms. Aponte-Diaz. Good morning, Chairwoman Waters, Ranking
Member McHenry, and members of the committee. My name is
Graciela Aponte-Diaz, and I am the Director of Federal
Campaigns for the Center for Responsible Lending (CRL). CRL is
a nonprofit research and advocacy organization dedicated to
protecting home ownership and family wealth by fighting
predatory lending practices. For nearly 20 years, I have
dedicated my career to fighting for low-income families and
communities of color. I, myself, grew up low-income, with a
single mom who was trying to make ends meet. Luckily, she was
never a target of abusive payday or high-cost installment loans
because she lives in Maryland, a State that bans these
products.
In fact, 16 States, plus the District of Columbia, do not
allow payday loans, and the vast majority of States have
interest rate caps on installment loans. Active-duty
servicemembers are also protected from predatory loans through
the bipartisan Military Lending Act (MLA). Unfortunately, some
lenders have found a way to continue to target vulnerable
consumers, despite State laws, through rent-a-bank schemes.
Here is how a rent-a-bank scheme works. A predatory,
nonbank lender decides that they want to lend at higher rates
than what is allowed by State law, frequently, loans of 100
percent APR or more, even in States that have a 36 percent
interest rate cap or less. They find a bank that is willing to
originate the loans, because federally-insured banks are
exempted from State interest rate laws.
After the loan is processed, the bank sells the loan or
receivables back to the nonbank. The nonbank handles marketing,
consumer interactions, and servicing. The nonbank lender is the
public face of the loan, and neither the customers nor the
general public are aware of the motions behind the scenes to
legitimize a loan that would otherwise be illegal.
Nonbank lenders, such as Elevate, OppLoans, Enova,
LoanMart, and World Business Lenders currently lend at
outrageous rates in States where those rates are illegal under
State law. Through the use of rent-a-bank schemes with banks
regulated by the FDIC and the OCC, neither regulator appears to
have done anything to shut down these abuses.
I would like to share three examples of high-cost loan
documents that I have seen firsthand from borrowers with whom I
have worked.
A disabled Marine veteran was targeted with a $5,000 loan
at an APR of 115 percent, and a ridiculously long term of 84
months. As stated in her loan documents, that resulted in a
cost of $42,000 to borrow just $5,000 over 7 years. Not
surprisingly, she was unable to keep up with these unaffordable
payments and ended up in bankruptcy.
In another example, a single mother was targeted for a
$2,500 loan with an APR of more than 100 percent. After 5
years, she paid back $14,000, but was unable to save for her
daughter's college tuition.
And finally, a Spanish-speaking man was lured into a store
that said, ``Se habla espanol,'' which means, ``We speak
Spanish.'' However, no one spoke Spanish, and all of the loan
documents were in English. He walked out with a $2,700 loan at
123 percent APR. Worse, it was secured by the title of his
truck. He had to pay back $10,000 over a 5-year term or risk
his only mode of transportation to work.
These are just some examples of a now-too-common loan that
is being offered online or through storefronts that are
disproportionately located in communities of color. This is not
access to credit. This is not access to innovation. This is
access to debt.
Fortunately, there are ways to stop these abusive lending
practices. First, we need the FDIC and the OCC to take
enforcement actions against these predatory lenders that are
using rent-a-bank schemes and offering illegal loans in States
with rate caps. Second, the FDIC and the OCC should rescind
their proposal that does nothing to address this abuse, and, in
fact, emboldens predatory lenders to engage in rent-a-bank
schemes. Third, Congress should swiftly pass H.R. 5050, a 36
percent interest rate cap bill for veterans and all consumers.
And finally, the FDIC should preserve its 2005 payday loan
guidelines, its 2007 guidelines advising of a rate cap of 36
percent, and its 2013 guidelines, advising of ability to repay
for all bank payday loans.
Let me thank the committee again for the opportunity to
address these scams and real-life situations. I look forward to
your questions.
[The prepared statement of Ms. Aponte-Diaz can be found on
page 50 of the appendix.]
Mr. Meeks. I now recognize Assemblymember Limon for 5
minutes.
STATEMENT OF THE HONORABLE MONIQUE LIMON, CHAIR, BANKING &
FINANCE COMMITTEE, CALIFORNIA STATE ASSEMBLY
Ms. Limon. Thank you. Thank you for holding this hearing
and inviting me to testify on how rent-a-bank schemes undermine
State consumer protection efforts. My name is Monique Limon. I
serve in the California State Legislature as an Assemblymember
and as Chair of the Committee on Banking and Finance.
High-cost consumer loans have created havoc for California
families over the last decade. Driven by the desire to avoid
the forthcoming CFPB rule, the payday lending industry began to
aggressively market larger, longer-term loans to vulnerable
consumers who were trying to pick up the pieces caused by the
Great Recession.
The average size of these loans is about $3,000, with an
annual interest rate of 100 to more than 200 percent. While
these high-interest rates are unconscionable, I am more
concerned by how often consumers default on these loans. As we
dug through the data, we found that more than one-third of
borrowers could not repay their loans, representing more than
100,000 Californians each year. Failing to repay a loan exposes
consumers to serious negative consequences like aggressive debt
collection, ruined credit scores, vehicle repossessions, and
even bankruptcy.
While consumers try to find a way out of this turmoil,
high-cost lenders are able to stay profitable because of the
extremely high rates and fees that they charge. Over the past
several years, the California Legislature attempted to address
this problem by establishing a ceiling on interest rates,
similar to policies adopted by dozens of red and blue States
across this country. It took us 3 years and 5 different bills
before we found the right balance to keep responsible lenders
in the market while also protecting consumers from high fees
and defaults.
Last year, I introduced a bill that caps rates on loans in
the $2,500 to $10,000 range at 36 percent plus the Federal
funds rate. This bill received strong bipartisan support from a
broad coalition of lenders, consumer groups, faith leaders,
veterans organizations, and community groups across the State.
On the strength of this coalition, the bill passed with broad
support and was signed into law by our governor.
In summary, the effort was thoughtful, and was deliberate.
The Legislature considered multiple options until we found the
right balance. But now that the new law is in place, high-cost
lenders are looking to exploit gaps and ambiguities in the
administration of Federal banking laws that would allow these
lenders to evade State laws and continue with business as
usual. When left unchecked, these rent-a-bank schemes
perpetuate the system of misaligned incentives that allows
lenders to profit, even when many of their customers fall into
default.
Both the FDIC and the OCC have stated that they do not
support bank partnerships designed to evade State laws. But
those agencies need to back up their words with actions. Until
they act, there will continue to be a small number of banks and
lenders who try to dodge State laws.
Before I conclude, I want to be clear that I do not believe
that all bank partnerships are bad. Bank partnerships that
create products where the interested borrowers and lenders are
aligned can be a healthy part of the financial system. However,
at the very least, bank partnerships must be limited to banks
that follow the FDIC's 2007 guidance on offering affordable,
small-dollar loans which encourage banks to offer small-dollar
credit with APRs that do not exceed 36 percent.
The Federal Government has the ability to fix the problem
of the rent-a-bank schemes with solutions that protect State
sovereignty, protect consumers, and create a fair and
competitive credit market with all lenders playing by the same
rules.
Thank you for bringing attention to this issue. I am
hopeful that Congress can work with the FDIC to ensure that a
handful of supervised banks are not being used to undermine
State consumer protection laws across this country.
[The prepared statement of Ms. Limon can be found on page
80 of the appendix.]
Mr. Meeks. Thank you for your testimony. I now recognize
Professor Johnson for 5 minutes.
STATEMENT OF CREOLA JOHNSON, PROFESSOR, THE OHIO STATE
UNIVERSITY MORITZ COLLEGE OF LAW
Ms. Johnson. Good morning. I am Professor Creola Johnson at
the Ohio State University College of Law. I was the first
academic to write a law review article about payday lending. It
was based on my research, which was funded by the university,
where we actually took out payday loans. And what I discovered
through this research of payday lenders surveyed in Franklin
County, Ohio, is that they had two primary goals: first, to get
the consumer to sign up for a loan without understanding the
consequences of what they were signing up for; and second, to
get the consumer on the hook to pay as long as possible at
triple-digit interest rates.
As has been mentioned, the rent-a-bank schemes are part of
keeping consumers in the dark. The consumer goes to a physical
store, interacts with a lender that is a nonbank entity, and
has no interactions at all with the bank that is in the
background. As I put in my remarks, this is part of the overall
mission of keeping people in the dark, keeping the consumer in
the dark.
As a result of my research, I concluded that rent-a-bank
schemes allow nonbank lenders to get away with charging triple-
digit or quadruple-digit interest rates, and not only so but to
keep consumers on the hook, and I describe these practices in
three main areas. I call them ``debt entrapment practices,''
and by that, I mean practices that seek to get a consumer on
the hook, and by that, I mean they are approved for credit in a
minimal amount of time.
Someone mentioned a few minutes ago that we are able to do
this quickly. You are able to do it quickly because you are not
actually focusing on the ability of the consumer to pay back
the loan. Debt entrapment practices also include issuing large
amounts, at triple-digit interest rates, and short maturity
dates. In other words, paying back the loan in a short period
of time where the majority of customers cannot pay back that
debt and keep up with their ongoing expenses.
The second category of illegal practices are what I call,
``treadmill practices.'' These practices are designed to keep a
continuing stream of payments coming in from the borrower. They
include multiple rollovers--extending the loan date multiple
times--back-to-back loan transactions, rapacious electronic
debits to the consumer's bank accounts, and illegal garnishment
of consumer wages.
Third, criminalization practices. These practices include
making the consumer feel that they need to fear imminent arrest
unless they comply with the nonbank lender's demands. These
include threatening to prosecute consumers for crimes, filing
police reports against them for criminal charges, and misusing
civil contempt proceedings to obtain arrest warrants against
consumers.
These three practices--debt entrapment, debt treadmill, and
debt criminalization practices--are what nonbank lenders want
to do, and they want to be able to hide behind the banks to
perpetrate these practices. Let us keep in mind that these
nonbanks are not subject to regulatory oversight by the FDIC or
the OCC, so they should not be able to get away with these
practices by hiding behind a preemption doctrine.
This is important for us to focus on, not just new
technology but focus on protecting the State sovereignty, to
protect consumers from usurious interest rates in these
practices that I just spoke about, and to protect consumers
based on all of these consumer protection laws in all 50
States, and U.S. Territories. And yes, we want to balance that
with allowing for reasonably priced credit products for
consumers. But they have to be balanced against the State
sovereignty and State consumer protection laws.
Thank you for allowing me to speak, and I look forward to
your questions.
[The prepared statement of Ms. Johnson can be found on page
68 of the appendix.]
Mr. Meeks. Thank you for your testimony. Ms. Saunders, you
are now recognized for 5 minutes.
STATEMENT OF LAUREN SAUNDERS, ASSOCIATE DIRECTOR, NATIONAL
CONSUMER LAW CENTER
Ms. Saunders. Thank you. Chairwoman Waters, Chairman Meeks,
Ranking Member McHenry, and members of the committee, thank you
for inviting me to testify today on behalf of the low-income
clients of the National Consumer Law Center (NCLC).
Today, we are facing the biggest threat in decades to
States' historic power to protect Americans from predatory
lending, rent-a-bank lending. Interest rate limits are the
simplest and most effective protection against predatory
lending, and are strongly supported by American voters of all
stripes.
At the time of the American Revolution, every State had
interest rate caps, and the vast majority still do today. For
example, on a $500, 6-month loan, 45 States and the District of
Columbia limit the rate at a median of 37.5 percent. At the end
of the 20th Century, however, most banks were exempted from
State rate caps, and rent-a-bank lending began as the latest in
a long line of attempts to evade State usury laws.
Short-term payday lenders first tried using rent-a-bank
schemes 20 years ago, but the bank regulators shut them down.
Yet in today's environment, high-cost lenders across the
country are again using a small number of rogue banks to offer
loans at astonishing rates that they cannot offer directly, and
that banks would not offer in their own branches.
My fellow witnesses have described some of the loans being
offered to consumers. I would like to focus on the rent-a-bank
lender that the OCC and the FDIC are actively supporting: World
Business Lenders. The FDIC and the OCC filed an amicus brief
supporting World Business Lenders and its right to charge a
Colorado business 120 percent on a $550,000 loan, because the
loan was originated by the Bank of Lake Mills and assigned back
to World Business Lenders, the same bank, by the way, that the
FDIC had sanctioned for targeting our servicemembers.
We have discovered several cases involving similar facts. A
World Business Lenders agent approaches a small business and
offers a loan. The paperwork shows that the loan comes from an
FDIC-supervised bank, Bank of Lake Mills or Liberty Bank, or
OCC-supervised Axos Bank. The bank quickly assigns the loan
back to World Business Lenders. These loans, ranging from
$20,000 to $400,000, are secured by a mortgage on the home of
the small-business owner at astonishing rates: 72 percent for a
general contractor in Florida; 73 percent for a New York owner
of a medical supply company; 92 percent for a couple in
Massachusetts. Many of these small business owners are facing
foreclosure, like a REALTOR in New York who was buried by a
$90,000 mortgage at 138 percent APR.
Many States prohibit these rates on second mortgages by
nonbank lenders, but World Business Lenders argues that as the
bank's assignee, it can charge outrageous rates.
This is the lender that the OCC and the FDIC are
supporting, with the same arguments that they are using to
justify their proposed new interest rate rules. These proposed
rules are in no way necessary to address legitimate secondary
markets. We see no problem in those markets. What we do see is
an explosion of predatory rent-a-bank lending undermining power
that States have had for nearly 250 years. The FDIC's and the
OCC's support for World Business Lenders tells us exactly who
is eager to step into the bank's shoes: predatory lenders.
So, what can Congress do? First and foremost, pass H.R.
5050, the Veterans and Consumers Fair Credit Act, to cover all
lenders, banks and nonbanks, with a 36 percent interest rate
cap. That is still a high rate, and the bill will not stop all
evasions of State usury laws. But an upper limit of 36 percent
will cut off the most egregious abuses of the bank charter that
facilitate predatory lending.
Second, stop the FDIC and the OCC from facilitating rent-a-
bank lending, and support States' historic power to limit
interest rates.
Third, pass H.R. 1423, the Forced Arbitration Injustice
Repeal Act, which will restore consumers' and small businesses'
access to the courts when predatory lenders violate the law.
Thank you for inviting me to testify today. I look forward
to your questions.
[The prepared statement of Ms. Saunders can be found on
page 91 of the appendix.]
Mr. Meeks. Thank you for your testimony. Mr. Knight, you
are recognized for 5 minutes.
STATEMENT OF BRIAN KNIGHT, DIRECTOR AND SENIOR RESEARCH FELLOW,
PROGRAM ON INNOVATION AND GOVERNANCE, MERCATUS CENTER AT GEORGE
MASON UNIVERSITY
Mr. Knight. Thank you. Good morning, Chairwoman Waters,
Subcommittee Chair Meeks, Ranking Member McHenry, and members
of the committee. Thank you for inviting me to testify today.
My name is Brian Knight, and I am the director of the
Program on Innovation and Governance, and a senior research
fellow at the Mercatus Center at George Mason University. Much
of my research focuses on the role of technological innovation
in the provision of financial services.
The key point I want to leave you with is that innovation
and competition in lending, of which the bank partnership model
is a key part, is helping to improve access to credit,
especially for borrowers poorly served by the traditional
market. We are witnessing an important evolution in the credit
markets, powered by innovative firms partnering with banks,
frequently smaller banks. Fintech firms, many partnering with
banks, now account for 38 percent of unsecured personal loan
balances, up from only 5 percent, 5 years ago. There is
evidence that these partnerships allow some borrowers to access
credit on better terms than they would receive from a
traditional lender. There is also evidence that these
partnerships allow for greater access to credit for borrowers
in parts of the country that are underserved by traditional
lenders, and that innovative lending can be less racially
discriminatory than traditional lending.
These partnerships are mutually beneficial for both the
fintech firm and the bank. The bank receives access to
technology beyond what it could develop on its own; access to
customers outside of its immediate geographic area, helping it
to diversity its business; better management of its balance
sheet; and enhanced servicing capacity. Fintech firms receive
assistance with regulatory compliance and the ability to do
business nationwide, under a consistent regulatory regime in
conjunction with their bank partner.
It is important to keep in mind that these relationships
are highly regulated. Fintech firms that partner with banks are
frequently regulated under the Bank Service Company Act and are
subject to examination by the bank's Federal regulator for the
services the fintech firm provides to the bank.
Additionally, the fintech partner is frequently subject to
examination by a State bank regulator if the partner bank is
State-chartered, and is covered by consumer protection laws
enforced by the Consumer Financial Protection Bureau (CFPB) and
the Federal Trade Commission (FTC). Likewise, the bank is
accountable for the actions of its fintech partner, taken in
furtherance of that partnership. Bank regulators have shown
themselves to be willing and able to police bank partnerships
and hold both banks and their partners accountable for bad
acts.
While these partnerships between banks and innovative
technology companies have displayed significant promise, they
have been threatened by recent litigation that has disrupted
long-settled expectations. In the case of Madden v. Midland
Funding, the United States Court of Appeals for the Second
Circuit held that New York law governed a loan that was
originally issued validly by a bank under Delaware law, and
therefore, the loan was usurious, when it was sold to a debt
collector after default. In effect, the court held that the
legality of a validly-made loan could change, depending on who
held it after it was made, even if the terms of the loan itself
did not change.
This holding has been criticized as an incorrect
interpretation of the law by the Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller of the
Currency (OCC), and the Obama Administraton's solicitor
general.
While this case does not directly deal with the type of
bank partnerships at the heart of innovative lending, it
appears to have had a significant and negative impact on credit
markets because it calls into question the ability of banks to
sell their loans to fintech partners. One study found that, in
the wake of the Madden decision, funding for marketplace loans
aimed at borrowers with FICO scores under 700 decreased
significantly in New York and Connecticut compared to outside
the Second Circuit, because of concerns that any loan made to
those borrowers may become invalid if sold to a nonbank
marketplace lender.
A subsequent study found a reduction in marketplace lending
credit available to New York and Connecticut residents,
especially low-income residents, as well as an increase in
personal bankruptcies, a phenomenon that the authors of the
study linked to the inability of low-income borrowers to access
credit in order to refinance debt or address exigent
circumstances like medical bills.
These unfortunate results highlight the potential harm of
impeding increased innovation and competition in credit
markets. Consumer protection is essential, but denying
consumers access to credit does not necessarily protect them,
because it does not remove the underlying issues motivating the
need for credit. Rather, allowing more innovation and
competition in credit markets, especially to those
insufficiently served by traditional products, presents a
better path to what we all want: a credit market that allows
consumers to make informed choices that best serve their needs.
Thank you again for the opportunity to testify, and I look
forward to your questions.
[The prepared statement of Mr. Knight can be found on page
77 of the appendix.]
Mr. Meeks. Thank you, and I thank all of the witnesses for
their testimony. I now recognize myself for 5 minutes for
questions.
Your testimony today has been very good, and I am sitting
here listening and trying to dig through where and what will be
the best way to go. One of the things that I have been trying
to do, especially on the subcommittee, is try to make sure that
there is access to credit in low- and moderate-income
communities, and we have found, to a large degree, that that
came from minority depository institutions (MDIs).
There are only 20 MDIs left today, and during that hearing
that we had, it was 20 that are left. And I agree with what
most of you said, when you look at payday lending and the title
and pawn shops, especially when it comes to small-dollar loans,
that is where folks in my community go when they try to borrow
some money. And generally, the MDIs have more accessibility in
working with them. When they testified here, they said it may
be better for them to have partnerships, especially when
dealing with technology.
So my first question will go to Ms. Johnson. I don't know
whether your research had shown what effect this would have on
minority depository institutions in regards to, if there was a
rate cap at 36 percent, what effect would that have on their
viability, remaining in the community, and/or what other
incentives can be utilized so that they can feel it is okay to
do business with a small-dollar loan with a lower interest
rate?
Ms. Johnson. If I understand your question correctly, you
are asking what impact would an interest rate cap have in
minority communities?
Mr. Meeks. Minority depository institutions, minority
banks.
Ms. Johnson. Right. My research does not deal specifically
with those types of organizations. I don't know if any of my
colleagues could speak to that.
Mr. Meeks. Ms. Aponte-Diaz, do you--
Ms. Aponte-Diaz. Yes. Hello. I can speak to our credit
unions or our partners' Self-Help Federal Credit Union offers
loans capped at 18 percent, and they are able to do that for--
we did a special program for DACA recipients at 18 percent at
the top, depending on their credit, and we are able to do that
and provide lower interest rate loans for--
Mr. Meeks. And is that for small-dollar loans?
Ms. Aponte-Diaz. Small-dollar loans. Yes, a DACA loan is
about $600.
Mr. Meeks. Let me ask another question, because one of the
things that I had hoped, back when we had the financial crisis
and we created the CFPB, was that we would have someone that
would be fighting for consumers. Unfortunately, I think that we
have moved back from, say, some of the rules that were being
put down by Director Cordray. Under Director Cordray's CFPB,
particularly for the payday rule, it was anchored by two
pillars: ability to repay, which is tremendously important, and
that is what got us in trouble before with these no-doc loans;
and capping at three the number of loans that lenders could
make in quick succession. He was indicating that this would get
at the heart of the payday industry's debt trap business model.
Assemblymember Limon, what would you say about what the
CFPB was saying under Director Cordray's leadership?
Ms. Limon. Thank you. I do want to comment on your previous
point. I can tell you that with the State law in California
that was passed at 36 percent plus Federal rate, we still have
a $2 billion industry for just California alone. I can't tell
you how many of those are minority-owned banks but the space is
still there for lending. So, I want to be clear that there are
still some options.
And as far as Director Cordray's direction, the ability-to-
repay underwriting is absolutely important to this space and to
this market, and certainly capping the number of loans that
people take out at one time is another way to address this.
These are elements that we have explored in the State of
California and elements of which we are supportive. They are
not written into the law that was passed, but there are
different elements that can further address the security of
ensuring payback.
Mr. Meeks. So if he was still here, are the rules that he
was putting in place--do you believe it would been a failure or
a success in the rule as he had outlined it?
Ms. Limon. Success.
Mr. Meeks. Thank you. I am out of time, and so I now
recognize the gentleman from California, excuse me, the ranking
member from North Carolina--
Mr. McHenry. Very different. We are getting some California
jobs though.
Mr. Meeks. --Mr. McHenry.
Mr. McHenry. We are getting some California jobs, and I am
so grateful for that.
Anyway, Mr. Knight, in your written testimony you speak of
the spread of the bank/fintech partnership model as having a
number of benefits, including better credit terms for
consumers, improved access, and some of the technological
advantages that we see in other areas outside of consumer
lending, right? So, there are a lot of benefits afforded to
this model.
But looking at this, in 2015, the Second Circuit had a
ruling in Madden v. Midland that a loan to a New York resident
was valid when it was made by a bank, but became invalid once
it was sold by the bank to a nonbank third party, right? This
came as a surprise to many. Why?
Mr. Knight. Because it upset a well-settled expectation
that, one, banks can sell loans, that that is the power of a
bank and that they can sell the loan and the loan remains
valid, and that is an important criteria.
Mr. McHenry. Why can they sell a loan?
Mr. Knight. Well, they need to sell loans for a host of
reasons--balance sheet management, risk management. In the case
of Madden, this loan had gone into default, so they wanted to
move it off of their balance sheet so they could shed the risk.
There is a profitability argument there, particular for smaller
banks which don't necessarily have the deposit base to sit on a
whole bunch of loans. So, it has long been recognized that
selling a loan is part and parcel of being a bank, that is the
ability to sell the loan as a bank prong.
The second prong, which the Second Circuit really didn't
deal with, is the common law of valid-when-made doctrine, which
generally says that a loan, if it is valid when it is made,
does not become usurious because of a downstream transaction.
Mr. McHenry. Okay. So is that a payday issue, a payday
lending issue of valid-when-made? Is that all this is about?
Mr. Knight. No. This applies to--
Mr. McHenry. To every loan.
Mr. Knight. --every loan.
Mr. McHenry. Okay. And a loan is an asset on a bank's
balance sheet.
Mr. Knight. Correct.
Mr. McHenry. Right. So the issue of valid-when-made is how
old? How longstanding is this practice?
Mr. Knight. The early 19th Century court cases refer to it
as this longstanding maxim, but I don't know how far back it
goes.
Mr. McHenry. So how does this affect the banking system if
it becomes the national norm?
Mr. Knight. It could severely limit the ability of a bank
to sell a loan, because under the logic of the Madden decision,
the bank could only sell the loan and have it remain valid if
the recipient could have made that loan themselves. So in that
case, you basically have banks selling to other banks, and not
just any bank. It would have to be a bank that, under that
bank's home State law, could have made that loan. Which means,
one, you can't move that risk outside the banking system. You
are just trading it among banks. And two, that significantly
diminishes the ability of a bank to sell a loan at what should
be its appropriate market value.
Mr. McHenry. Okay. But this issue gets conflated with a
number of issues that are hotly litigated across States. Is
that not the case?
Mr. Knight. Right. It has been validly made it has been
conflated with the ability of a bank to sell a loan
statutorily, and it has been conflated with the True Lender
doctrine, and they are all related but they are also all
distinct.
Mr. McHenry. What is True Lender?
Mr. Knight. The True Lender--so, valid-when-made is about
what happens to the loan after it is sold, because if the loan
isn't valid in the first place, valid-when-made doesn't apply.
True Lender is an emerging doctrine that even if the bank
technically makes a loan, it is not considered the true lender
under certain circumstances by some courts. And the emerging
doctrine is a predominant economic interest test, so if the
bank does not have the predominant economic interest test in
the loan when the loan is made, or shortly thereafter, some
courts will say, ``Well then, bank, you weren't the true
lender. The party that has the predominant economic interest
was, in fact, the true lender, and so we will look to see if
that party could have made the loan.''
Mr. McHenry. Okay. So resolving this issue of valid-when-
made is distinct from True Lender?
Mr. Knight. Yes, it is.
Mr. McHenry. And to this end, what we have seen in the
Second Circuit jurisdictions of New York, Connecticut, and
Vermont is that the availability of credit has gone down, that
rates have gone up, and it has had a negative effect on
consumers. And that is according to the Stanford-Columbia-
Fordham study of this. Is that correct?
Mr. Knight. Both that study and a subsequent study.
Mr. McHenry. Thank you. I yield back.
Mr. Meeks. The gentleman's time has expired. I now
recognize the gentleman from California, Mr. Sherman, who is
also the Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, for 5 minutes.
Mr. Sherman. Thank you. It is interesting to see the
argument made that if fewer payday loans are made, consumers
are hurt. That jumps to a conclusion. But the fact is that
wages are too low, and people often are knowledgeable but poor.
What are you going to do? Sell your truck? Rely on overdraft
protection? Fall behind on your rent? Or go to one of these
payday loans or similar loans?
I don't think APR is the best way to evaluate the cost of
short-term loans. I think the minority made that point. For
example, I pay a $2 fee to use a particular ATM. If I spent 15
minutes extra time, I could go to my own bank's ATM. So I am
borrowing the money, $200, for 15 minutes, and paying $2 to do
that. That is, what, about 100,000 percent interest. It is not
because--the bank is getting a fair fee. The owner of the
machine is getting a fair fee. They have to have the machine
there. They are entitled to what I think is a fair fee to save
me from having to wait for my money for another 15 minutes.
The position of the OCC seems outrageous when they say that
they can adopt any regulation to facilitate banks' ability to
operate across State lines. I will throw out one example. Are
we going to have a position where if a bank makes a loan on a
piece of real estate, that State and local law can't change the
zoning of that real estate, because that would hurt the bank?
And if a bank ever were to make a loan, then forever, that
property would be exempt from down-zoning.
The OCC is taking an outrageous position on this, but they
want us to listen to them on LIBOR and other issues. The OCC's
position is, well, if you are a bank, you are not going to be
subject to State and local regulations to protect consumers,
and we are going to make sure that there is no Federal
protection for consumers. And if you engage in a business
practice to roll over the loan 26 times a year, year after
year, well, that is just fine as long as a bank is involved
that is making some money, and we are facilitating banks and
making banks more profitable.
Let me ask my own California Assemblymember. We have taken
some real actions in California. What do people do when they
need money to pay to keep the lights on?
Ms. Limon. People still have access to credit. As I
mentioned, there is still a $2 billion credit space in
California under the rate cap.
Mr. Sherman. Is that $2 billion of all consumer loans, or
how do you define it?
Ms. Limon. For small-dollar lending.
Mr. Sherman. Small-dollar lending, not credit cards.
Ms. Limon. Small-dollar lending.
Mr. Sherman. And when you say ``small,'' you mean under
$5,000? Under $2,000? Under what?
Ms. Limon. Under $10,000.
Mr. Sherman. Under $10,000. Is there space there for people
who need to borrow $500, because I would hate to borrow $5,000
if I need $500.
Ms. Limon. Under $10,000 includes the $500.
Mr. Sherman. Yes, but is there a vibrant industry in
California where I can get a $500 loan, if I don't need a
$10,000 loan?
Ms. Limon. There is an industry, and regrettably the
industry, at this moment, for $300 and under, and above, if it
is under the 36 percent, is a very healthy one. We haven't done
anything about addressing payday proper. The bill that we have
passed in California is about the $2,500 to $10,000 space,
which is the highest-used product, the highest-growing product
in the State of California.
Mr. Sherman. I would point out to my colleagues that it
looks like OCC wants to push this regulation through, but a
provision on an appropriations bill preventing them from doing
that would be the best way to make sure that we don't have a
situation, as we do today, where there is no Federal
regulation, and an agency dedicated to making a lot more money
for banks is going to allow them to evade California law and
other law.
It would be one thing if the OCC was applying this after
we, in Congress, consider the Garcia bill and others, and have
reasonable Federal rules. Then, the OCC would be saying,
``Well, you are a bank. That means nationally.'' But to have a
zero consumer protection rule for everything shows that the OCC
needs to be reined in, hopefully by a provision in the
appropriations bill.
I yield back.
Mr. Meeks. The gentleman's time has expired. I now
recognize the gentlewoman from Missouri, Mrs. Wagner, for 5
minutes.
Mrs. Wagner. I thank the Chair. According to a 2017 survey
by the FDIC, 25 percent of U.S. households, or 32 million
Americans--and I will say again, 32 million Americans--are
either unbanked or underbanked. These households might have a
checking or a savings account but they also obtain financial
products and services outside of the formal banking system. A
minority of these households do not even have a bank account
with an insured institution.
Lack of access to banking continues to worsen as branches
close across our country. Access to safe and affordable
financial services is absolutely critical, especially among
families with limited wealth, whether they are looking to
invest in education or simply manage the ups and downs of life.
Mr. Knight, in your testimony you stated that the bank
partnership model allows for greater access to credit for
borrowers in parts of the country that are underserved by
traditional lenders. Could you please elaborate more on how
these partnerships help those without access to mainstream
banking services?
Mr. Knight. Absolutely. Thank you for that question, ma'am.
Based upon the research I have seen, where the partnerships
bear fruit is that a relatively modest-sized bank that could
never make the sort of financial commitment to build out their
technology on their own is able to partner with a technology
firm that is able to put forward an internet platform that can
penetrate just about anywhere, particularly with the increasing
penetration of the internet and smart devices, and that enables
borrowers who are in areas where maybe banks have retrenched or
are otherwise underserved to access relatively high-quality
credit over the internet, who couldn't necessarily do that via
a traditional bank branch model.
And so, that allows your modest-sized bank, which is good
at banking but not so great at technology and scope, to partner
with a fintech company that is great at technology and scope
and is not a bank, and it is two great tastes that often taste
great together.
Mrs. Wagner. You have given us kind of the outline of how
the pieces are put together in terms of this bank partnership.
How does the actual constituent benefit? How does this model
work for them, those who are, in fact, underserved in so many
of these communities?
Mr. Knight. First, it gives them more options and more
potential lenders competing for their business. Competition has
been shown to frequently drive down prices and credit, just--
Mrs. Wagner. Drive down prices and credit.
Mr. Knight. Yes. You will also see, and there is evidence,
that many of these firms are using innovative underwriting to
better serve groups that are not necessarily well-served by
your traditional FICO-based underwriting model. So for those
groups, they will see better underwriting that is both more
accurate and also frequently cheaper.
Then, they have ease of access and convenience, and it can
often be relatively quick to access these loans.
Mrs. Wagner. So they can get that money when they need it,
expeditiously, for the, as I call it, ups and downs of life.
Mr. Knight. That is correct, and an example from the small-
business space is that one of the things that these small-
business loans, and to be completely clear, on the small-
business side, these loans are often more expensive than a
small-business bank loan. But a lot of these businesses could
not get a small-business loan because they need less money, and
the bank would take much, much longer to approve the loan, so
they are paying for convenience and a right-sized loan.
Mrs. Wagner. In my limited time, is it possible for banks
to evade State law if they have bank preemption?
Mr. Knight. No. They are operating on the basis of Federal
law, and Congress has made a choice to grant both State and
Federal banks certain authorities.
Mrs. Wagner. And you have already talked about what will
happen to access to affordable credit if bank partnerships are
prohibited by Congress. It will go away. Is that correct?
Mr. Knight. It would certainly be crimped.
Mrs. Wagner. And who would step in to fill that void?
Mr. Knight. Probably an alternative provider or an illegal
provider, or--
Mrs. Wagner. An illegal provider. Thank you. My time has
expired.
Mr. Meeks. The gentlelady's time has expired. The gentleman
from Georgia, Mr. Scott, is now recognized for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. I want to follow up on
a point of questioning that I agree on with Chairman Meeks, and
also my colleagues, Mr. Sherman and Mrs. Wagner. We have been
working in this committee for many years against predatory
lending, but what we have found out is that we need to do a
rifle approach to solving this problem and not a scatter gun
that could bring innocent bystanders in who are actually out
here doing a remarkable job, providing credit access and
lending to the very people that we are concerned about
protecting from the predatory lenders.
Let me start with you, Ms. Limon. When it comes to the
creation of new financial products, are there not other pro-
consumer features to products that policymakers should focus on
beyond the APR, things like fee transparency, limitation on
debt rollovers? Are those not also important aspects for us to
explore as we look to incent innovation and expand services to
the unbanked and underserved?
Ms. Limon. Yes. Those are also important elements to
consider.
Mr. Scott. And now, let me get to the heart of the matter
here. In your written testimony, you describe feedback from
some lenders in your State, stating that they preferred an
interest rate cap to underwriting guardrails.
Our concern on this committee is around access to credit.
And I have heard from lenders, I have heard from online
lenders, and I have heard from banks, and as my chairman, Mr.
Meeks, mentioned, we have had our African-American bankers
here--and we have not had a new African-American bank in a
quarter of a century--who are very concerned about this rate
cap and their ability to provide access to credit for the very
people that we want to provide with credit. They feel that they
may be unable to fulfill demand for credit under such
circumstances, particularly for the low-income consumers who
are already having many challenges.
I call your attention to a 2018 study by the World Bank
that found that binding interest rate caps below market values
can reduce overall credit supply. I am sure you may be familiar
with that. A separate study, looking at the experience in
Chile, found that the impact was felt most profoundly by the
youngest, least educated, and poorest families, the very
families that you and I both are concerned about.
And also let me add this. Because the underwriting costs
are strained by the rate cap, the lender must make larger loans
in order to make the loan profitable. This means that consumers
may take out a larger loan than they need, which can place our
consumers in a financially precarious position. And the rate
cap extends broadly to most types of credit and is not narrowly
targeted--that is our concern--to the payday lenders, and rate
caps cause a loss of credit availability, particularly for non-
prime, sub-prime consumers who pose a greater risk of default.
And this is because the lender cannot afford to offset the
underwriting costs due to the rate cap.
All I am saying is that we can't dismiss these concerns; we
have to deal with them. So what I want to kind of hear from
you, Ms. Limon, is what information did you have prior to
passing your law that led you to believe the rate cap would not
restrict access to credit?
Ms. Limon. The very principle of our law is that high
interest rates cause higher defaults for the very same families
that we are trying to serve. And so, that is a concern. We saw
over 20,000 Californians have a car repossessed and over
100,000 Californians go into default because of these loans.
Mr. Scott. And do you--
Mr. Meeks. The gentleman's time has expired.
Mr. Scott. Thank you, sir.
Mr. Meeks. The gentleman from Florida, Mr. Posey, is
recognized for 5 minutes.
Mr. Posey. Thank you, Mr. Chairman. Our topic today
illustrates one of the great paradoxes of regulations. On the
one hand, our government has sought to regulate prices to
protect consumers, only to find out that doing that restricts
the supply of the good or service and actually hurts those whom
they seek to protect. And, in an everyday perspective, a lot of
consumers would jump for joy if Congress passed a law that said
you couldn't charge over $1 a gallon for gasoline. A lot of
people would be really excited and say, ``You really did the
right thing.''
But we know what would happen, don't we? You would have
zero gasoline. And so, is it better to pay more than $1 for a
gallon of gasoline or not have any gasoline?
In that regard, I ask unanimous consent to enter into the
record a 1970 Newsweek article by the late Milton Friedman,
entitled ``Defense of Usury.''
Mr. Meeks. Without objection, it is so ordered.
Mr. Posey. Thank you, Mr. Chairman. There are two more
items I would like to put in the record. The first is Rolf
Nugent's classic paper that appeared in the Harvard Business
Review in 1930, that showed how half-percentage reductions in
maximum interest rates across three States was correlated with
funding for small loan needs of low-income people and the
unfortunate growth in bootleg lenders.
And finally, a 1975 paper from the Florida State University
Law Review that details the history of small-loan regulation in
Florida. This paper details the ways that market innovators got
around rate ceilings. The articles will help remind us that
regulating small-dollar loans has a wide range of unintended
consequences, including denying many low-income people the
loans that they need.
Mr. Meeks. Without objection, it is so ordered.
Mr. Posey. Thank you, Mr. Chairman. These papers also
underscore another important aspect of our hearing, and that is
regulatory arbitrage. Interest rate caps in one or more States
make incentives for market lenders to innovate to make loans to
residents of those States who need them. They have done this in
partnership with banks in other States.
Mr. Knight, what role do small-dollar lenders or loans play
in our economy? Do they provide essential financial services?
Mr. Knight. Small-dollar credit can provide essential
financial services for borrowers. There is definitely evidence.
I should say that for small-dollar credit, particularly, say,
storefront payday, the economic evidence is mixed as to whether
access is a good thing or a bad thing, but it is pretty clear
that for at least some borrowers, it can be absolutely
essential.
Mr. Posey. Okay. I believe that the regulation of interest
rates, as I mentioned, is a real paradox, and some States seek
to protect consumers and they make money unavailable to them,
unfortunately. This two-edged sword is difficult to balance
sometimes. Which aspect do you believe is more important,
protecting from high interest rates or protecting from credit
scarcity?
Mr. Knight. I believe that protecting from credit scarcity
is frequently more important. I believe that in a functioning,
competitive, and well-regulated market, there is definitely a
role for regulation to play, consumers should be able to access
credit and that they will be able to address their credit
needs, because frequently they are accessing credit to avoid a
greater harm. There is always the option to not take a loan,
but if you are taking a loan to avoid a greater harm, that loan
should be available to you.
Mr. Posey. The CFPB has delayed the ability-to-repay
mandatory underwriting provisions until November. CFPB
originally proposed to rescind the entire rule. Can you
evaluate the underwriting provisions in terms of benefits,
costs, and impact on consumer credit availability?
Mr. Knight. Sir, I am afraid I cannot do that. I have not
done a sufficient study of that to have an informed opinion.
Mr. Posey. Okay. In fairness, Ms. Limon, would you care to
respond?
Ms. Limon. I'm sorry. Can you repeat the question that you
would like me to respond to?
Mr. Posey. Yes. It was talking about the delay of the CFPB
rule, that they had the ability to pay rule.
Ms. Limon. We would like to see that in California, and
that has actually been a challenge to us, and part--not full,
but part of the reason we also stepped up to pass our own rate
cap law.
Mr. Posey. Okay. Thank you very much. Mr. Chairman, I see
my time has expired.
Mr. Meeks. The gentleman yields back. The gentlewoman from
North Carolina, Ms. Adams, is recognized for 5 minutes.
Ms. Adams. Thank you, Mr. Chairman, and I want to thank all
of the participants today for sharing with us your ideas.
Let me, first of all, ask Ms. Limon, in addition to your
work on predatory lending, you have also been leading a
conversation in California about strengthening the oversight
authority of the State financial regulator, particularly in
light of the Trump Administration's efforts to weaken consumer
financial protection and the CFPB's role in enforcement. Can
you talk briefly about why California feels the need to act,
and what you hope to accomplish by strengthening the State's
role in protecting consumers in the financial marketplace?
Ms. Limon. Thank you. Last year, I introduced a bill that
would have developed a California version of the CFPB. In light
of the Administration taking action on some of the work that we
expected to be coming down, California has really seen a need
to step up. With almost 40 million people in the State of
California, we know that we are a big portion of the market
share for a lot of this lending space, and so we feel that it
is very important to protect consumers, and as a State, we have
had to step up in the absence of Federal oversight and
regulation.
Ms. Adams. Okay. So it is my understanding that California
had been trying for a number of years to get a rate cap in
place. What do you think were the key components of your
efforts last year to get the bill over the finish line, and was
there bipartisan support for the new California law?
Ms. Limon. Thank you. There was strong bipartisan support
for this bill, and we built a coalition that I think was very
strong. Over 2 decades of having this conversation, with
multiple bills introduced in the last 3 years, we put together
a coalition that included, among others, veterans' groups, and
the Urban League. We had many groups at the table, including
responsible lenders, who told us time and time again that they
could work within the interest cap rate and provided options
for consumers in California.
Ms. Adams. Okay. Well, great. I served in the North
Carolina House for about 20 years so I understand how important
it is to bring stakeholders to the table. Otherwise, they say
you are on the menu. But thank you for that.
Ms. Saunders, NCLC has previously highlighted some high-
cost mortgage loans, as high as 138 percent APR made to small
business owners through a rent-a-bank scheme. Would you please
tell us more about these loans, the terms, and the
circumstances in which they were made?
Ms. Saunders. Sure. First mortgage loans are deregulated
and there is no rate cap, but many States do limit the rates
for second mortgages. And yet, there is a nonbank lender, World
Business Lenders, that is using a couple of banks, OCC-
supervised Axos Bank, and in the past, FDIC-supervised the Bank
of Lake Mills in Wisconsin, to entrap small business owners
with really horrendous loans.
For example, Jacob Adoni in New York, was looking for a
personal loan, but he was forced to reference his business in
the loan documents. He ended up with a $90,000 loan at 138
percent, and he is facing foreclosure. And that is an illegal
loan in New York, but the claim is that because the loan was--
the paperwork showed it came from a bank and then it was
assigned back to the lender, that makes it legal.
Elissa Speer is facing foreclosure in Connecticut because
of a $20,000 loan at 121 percent, supposedly for her
restaurant, which she didn't own a restaurant, but they trumped
up these loan documents claiming that a leaf blower was
equipment for a restaurant.
These are the kinds of things that we are seeing predatory
lenders do, using banks as a fig leaf.
Ms. Adams. Thanks very much. Ms. Saunders, where are we now
with the ability-to-repay standard in the 2017 rule? Is it
important for us to fight for this, and what other features are
necessary?
Ms. Saunders. It is absolutely necessary for us to fight
for it. In the absence of a rate cap, the CFPB's ability-to-
repay rule, a very modest rule that simply caps the number of
loans and has a common-sense rule, that the lender should
consider a person's ability to repay, should go into effect. It
has been saved by the court. The CFPB has threatened to repeal
it, and we need to put it into effect.
Ms. Adams. Thank you. Ms. Aponte-Diaz, CFPB Director
Kraninger will be appearing before our committee tomorrow. What
questions would you recommend we ask her about these issues?
You have 20 seconds.
Ms. Aponte-Diaz. For Ms. Kraninger?
Ms. Adams. Yes.
Ms. Aponte-Diaz. She was on the board that approved the
FDIC proposed rule, so we would ask her to rescind that rule
and also to move forward with the ability-to-repay payday rule.
Ms. Adams. Great. Thank you very much. Mr. Chairman, I
yield back.
Mr. Meeks. The gentlelady's time has expired. I now
recognize the gentleman from Missouri, Mr. Luetkemeyer, for 5
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. Ms. Limon, you
made a statement a minute ago when you were talking about your
bill from California. My understanding is that the bill was
signed October 11, 2019. Is that correct?
Ms. Limon. Yes.
Mr. Luetkemeyer. And it only regulates loans between $2,500
and $10,000. Is that correct?
Ms. Limon. That is correct.
Mr. Luetkemeyer. Okay. Mr. Sherman from California asked
you about $300 loans a while ago, and I didn't really hear you
give him a good answer to that. You don't regulate the $300
loans, though. Is that correct?
Ms. Limon. We have not done anything around payday loans.
Mr. Luetkemeyer. Okay. That was not the impression we got
from your testimony and your earlier comments. Also, you said
that you have a $2 billion industry. Have you studied--and I
doubt that you have, since the most you could have studied
would be 4 months here, since the law was signed--what kind of
effect it has had on small-dollar lending yet?
Ms. Limon. The $2 billion that I referenced is the lenders
that are lending within the rate cap, so just to be clear, the
industry is bigger--
Mr. Luetkemeyer. Okay. But have you seen an effect on this?
I would imagine you haven't, at this point.
Ms. Limon. The data will not come out for another year.
Mr. Luetkemeyer. Okay. So we really can't say whether it
has or has not helped it, at this point.
Ms. Limon. What I can say is what the existing market is
under the rate cap, and that is $2 billion.
Mr. Luetkemeyer. Very good. My concern is--and I think you
have found the sweet spot there, because a George Washington
University study says that the break-even point for a 36
percent APR is $2,600. So, you are where the break-even point
is, so it is interesting that you have that.
Also, there is a UK study that my good friend from Georgia,
I think, is referencing here. The UK put into effect, in 2015,
a 100 percent rate cap, and then the Financial Conduct
Authority did an assessment on it and found that the value and
number of short-term dollar loans fell 50 percent in 6 months.
I am guessing you are going to see a significant decline in
loans in this $2,500 to $10,000 area as well.
And one of the things that concerns me is the
misrepresentation of the cost of the loan. APR, in my judgment,
if you are talking about a loan that is less than one year, is
irrelevant, and I will give you an example. If you have a leaky
faucet in your house, you call the plumber up. He comes out,
turns a tap, and 10 minutes later, he walks out the door and
hands you a bill for $50. Now, was that a surcharge, Ms.
Saunders, or did he charge you $300 an hour for that service?
Ms. Saunders. I think that the rent-a-bank loans that we
are talking about--
Mr. Luetkemeyer. I am asking you a question. Is it a
service charge for him coming to your home with his truck, his
equipment, his knowledge, and his tools, fixing your faucet, or
did he charge you $300 an hour?
Ms. Saunders. Well, he hasn't offered you a loan, so no, it
is not an interest rate.
Mr. Luetkemeyer. That is not the question I asked. I asked
whether he is charging you by the hour or whether he is
charging you a service charge.
Ms. Saunders. People charge in various ways. You can charge
by the hour or you can charge a surcharge, and--
Mr. Luetkemeyer. Okay. You don't want to answer the
question. The answer is, it is a service charge, which is
exactly what any kind of a loan less than a year should be. It
should be disclosed as a service charge. I would argue that you
are hiding the true cost of the loan, hiding behind an APR,
because that customer doesn't know what the true cost of it is.
If it is $5 per 100, $10 per 100, $20 per 100, whatever it is,
if you don't disclose that in a way they can understand, they
will never know. Who knows what a 200 percent--let me give you
an example.
You have a $400 loan, which is the average that most people
can't afford to cover anymore. And if you charge them $20, do
you know off the top of your head what kind of interest rate
that would be?
Ms. Saunders. It depends on how long it has been--
Mr. Luetkemeyer. Over 14 days, 2 weeks. That is the normal
rate.
Ms. Saunders. Twenty dollars for a $400 loan?
Mr. Luetkemeyer. Yes, 14 days.
Ms. Saunders. You know, under pressure, I can't do the
math. I can tell you that 15 for 100 is--
Mr. Luetkemeyer. Okay. It is 120 percent.
Ms. Saunders. Okay.
Mr. Luetkemeyer. A while ago, we just established that the
average is going to cost you $35. So, here we have a loan that
is below the cost. Do you think they are going to make that
loan if it is below the cost?
Ms. Saunders. What they would probably do is make a better
loan, that is a longer-term loan, that gives you time to pay it
back.
Mr. Luetkemeyer. No. The customer doesn't want--you see,
that is the problem that you are getting into here. You are
trying to drag them into something different. The customer just
walks in and wants a 14-day loan until he gets to payday, and I
will show you here in just a minute that there is a reason for
this. And if you only use that amount of money, that is all you
want, why should you drag the customer into something they
don't want? That is my concern.
Ms. Saunders. APRs give people the ability to compare the
same amount of money--
Mr. Luetkemeyer. APRs hide the true cost of the loan. I
will argue that until--
Ms. Saunders. And I would argue the other way around
because it is usually--
Mr. Luetkemeyer. Professor Johnson, I have a comment for
you, before I end my testimony here. You are talking about
having gone out and surveyed some different payday loan
institutions. I would recommend to you, for reading, ``The
Unbanking of America,'' by Lisa Servon. She went out and did 4
months in 2 separate locations of check cashers and payday
lenders. She had the same sort of preconditioned, pre-thought
process that you have displayed today with regard to your
testimony, and she came up with a completely different view of
what happened. I suggest that you read that.
Mr. Meeks. The gentleman's time has expired.
Mr. Luetkemeyer. Thank you very much, Mr. Chairman.
Mr. Meeks. The gentlewoman from Michigan, Ms. Tlaib, is
recognized for 5 minutes.
Ms. Tlaib. Thank you. Professor Johnson, who funded your
research?
Ms. Johnson. The Ohio State University.
Ms. Tlaib. The university academics. I really pay attention
to who is funding various research and books and things of that
nature.
I want to focus on the truth today. We are calling this the
rent-a-bank method, correct?
Ms. Johnson. Yes.
Ms. Tlaib. When someone is intentionally committing an act
that is clearly illegal and uses someone else to do it, isn't
that still a crime?
Ms. Johnson. Yes.
Ms. Tlaib. So, the truth is that the rent-a-bank is
actually a criminal scheme, correct? Do you not agree, Mr.
Knight?
Mr. Knight. It depends on the nature of the action.
Ms. Tlaib. Got it.
Mr. Knight. I don't want to give you a misleading answer.
Ms. Tlaib. That is okay. I will make sure to tell my son
that hiding behind someone else when he is part of the crime--
that he is still part of a criminal scheme if he does that. So
you can all continue to say it depends, but the truth is you
have State law that is being circumvented by these banks that
are really targeting the most vulnerable communities, people
that we represent. We are not here representing the banks and
big corporations. We are elected by the people, not by them.
On December 5th and 6th, FDIC Chairwoman McWilliams had
testified before various committees and was asked several
questions about FDIC-supervised banks that are helping high-
cost lenders evade State interest, abusing in these
terminologies, really, to commit crimes, to basically sit back
and watch them do it, whether or not their proposal that they
submitted encourages those criminal schemes.
I specifically asked Chair McWilliams about these criminal
schemes happening in my State, in Michigan, where we have
really strong interest caps, and it is really important. We
have a huge amount of working-class, middle-class families who
are being targeted. Chair McWilliams said the agency, ``frowns
upon arrangements between banks and nonbank lenders for the
sole purpose of evading state law.'' Great. Let's see that in
action, right?
Ms. Aponte-Diaz, does this satisfy your concerns about the
so-called rent-a-bank criminal scheme, is what I am going to be
calling it, because that is the truth?
Ms. Aponte-Diaz. Absolutely not. It has been lip service to
date. There have been no enforcement actions on these rent-a-
bank schemes from the FDIC, and the proposed rule actually is
going to embolden predatory lenders to enter into more rent-a-
bank schemes.
And if you don't mind, I just wanted to add to the many
questions around access to credit. We recently did a study in
South Dakota where voters, through a ballot initiative, voted
77 percent that they wanted a 36 percent rate cap. We came back
3 years later to ask folks how they felt about that, and 82
percent of the folks in the poll said that they are very happy
with the 36 percent and they wouldn't change it. We saw, still,
an increase in lending--not just stable but an increase in
lending, in South Dakota. And so, I just wanted to add that as
well.
Ms. Tlaib. And I think, Ms. Aponte-Diaz, we can do a lot of
polling and surveys. That seems not to matter here. And it is
the truth. It seems to me that there is a lack of a sense of
urgency in trying to help middle-class families not become
targets of these criminal schemes. And it may be corporations,
it may be folks. But I will tell you, my residents get labeled
these kinds of really awful names and so forth, and kind of get
brushed off. But boy, if it is a corporation, a CEO, a bank, a
predatory lender, it seems like we kind of give them a pass.
And I feel very strongly about this.
Do you think FDIC's McWilliams is being straight with
Congress about the criminal rent-a-bank scheme when, I believe
the quote was, `It is up to states to decide what rate caps are
appropriate, if any, or whether or not the states want to opt
out of that ability of the interest rates to be preserved when
an out-of-state entity purchases the loan product.'' There is a
lot of stuff here. But it is because of this that a Utah bank
can simply claim that the loan was made in Utah because that is
where the charges are imposed, and payments sent, but it is
really in the fine print of the contract. It literally is on
paper that they are circumventing the law. It is blatantly, in
your face, a criminal scheme.
What more can we do, because it is very obvious that is
exactly what is happening?
Ms. Aponte-Diaz. Chairwoman McWilliams mentioned this opt-
out, but States should not have to opt out. California spent 3
years going through the democratic process, and Colorado and
South Dakota, through the ballot initiative. We should not have
to go through these extra steps.
Ms. Tlaib. No. It undermines--
Mr. Meeks. The gentlelady's time has expired.
Ms. Tlaib. Thank you, Mr. Chairman.
Mr. Meeks. The gentleman from Kentucky, Mr. Barr, is now
recognized for 5 minutes.
Mr. Barr. Thank you. I am stunned. I have never heard
interest rate preemption that is specifically authorized under
Federal law, the National Banking Act and the Federal Deposit
Insurance Act, ever described as a criminal scheme. But
nevertheless, I learn something new every day here.
Mr. Knight, many of the other witnesses here today have
offered this narrative that banks in these partnerships are
merely passive participants who allow bad actors to use their
charters to prey on consumers. The title of this hearing, in
fact, suggests that banks play no significant role in these
partnerships. But in reality, the relationships we are
discussing today are genuinely innovative partnerships that
allow banks to provide access to credit to portions of the
population previously underserved by financial institutions, or
stuck with predatory payday lenders, check-cashing businesses,
or pawn shops. In many cases, banks provide significant value
to both their partners and the consumers, including by
developing underwriting standards, retaining a portion of the
risk on their books, and maintaining high standards of customer
service.
Would you please discuss how banks play an important,
active role in these bank fintech partnerships that we are
discussing today, and discuss how banks have skin in the game?
Mr. Knight. Yes. Thank you very much. Yes, I think that
there is a concern that these partnerships are basically a bank
handing a nonbank lender a stack of stationery and saying, ``Go
for it.'' And if that is the case, that is against the law, and
the regulators already have tools to police it.
In reality, many of these partnerships are a collaborative
effort between a bank and what amounts to sort of a vendor who
can help them, from a technology perspective, from an
underwriting perspective, with the utilization of technology,
from a marketing perspective, and then from a balance sheet
management perspective, which are things that banks contract to
third parties all the time.
Mr. Barr. And then, banks have additional capital and they
have underwriting expertise.
Mr. Knight. They have capital. They have underwriting
expertise. They have regulatory expertise.
Mr. Barr. Yes.
Mr. Knight. The have the ability to help the fintech firm
manage the efforts.
Mr. Barr. Well, let's just follow the logic of the critics
that this is truly only passive conduct on the part of the
bank. And I think by passivity they mean the loans are not kept
in portfolio. But banks are passive in a number of other asset
classes, and I don't hear our witnesses leveling charges of
rent-a-bank for these activities. Consider a mortgage. Fannie
Mae and Freddie Mac have very specific rules for what kinds of
paper they will buy. Are they involved in a rent-a-bank when
they insist on specific loan terms for mortgages, and then
purchase them a few days after the loans are extended? Should
we shut down that system and insist that Fannie and Freddie
enter the direct lending market?
Mr. Knight. No.
Mr. Barr. Okay. Let me ask you, Mr. Knight, in your
testimony you note that the Madden decision resulted in the
reduction of credit availability to residents in States within
the Second Circuit, and that the rate of personal bankruptcy
filings increased due to a lack of available funding options
for borrowers. Would the FDIC and the OCC's proposed rules to
clarify valid-when-made help reverse these credit availability
issues?
Mr. Knight. They would help.
Mr. Barr. And tell me, what would happen to the credit
markets, particularly in terms of liquidity, when originators
and purchasers of loans are not certain about the permissible
interest rate for those loans?
Mr. Knight. I think what we are seeing is that it dries up,
and particularly for the riskier loans, the loans that would
have to be priced at a somewhat higher interest rate, because
there are concerns about their validity. People are not going
to invest money in a loan that they are not certain will remain
valid.
Mr. Barr. So the vibrancy of a secondary market is directly
contingent upon the valid-when-made doctrine?
Mr. Knight. Well, some combination of the valid-when-made
doctrine and the ability of a bank to sell a loan and have it
remain valid, which is a statutory power.
And, sir, if I may note, one more important thing in that
partnership.
Mr. Barr. Sure.
Mr. Knight. The bank has to own the credit model. The bank
has to be the ultimate decision-making party. They own that
regulatorily. They are responsible for the loans that are made.
And if it isn't that way, that is against the law, and they are
in trouble, and there are tools available to police that
already, and the FDIC and the OCC have shown a willingness to
do so.
Mr. Barr. Mr. Knight, final question. I represent a
relatively rural district. I have some urban and suburban parts
in my district as well, but I do think about my rural
constituents a lot, in the context of access to financial
services. A recent Federal Reserve study shows that 51 percent
of the counties in the U.S. saw net declines in the number of
bank branches between 2012 and 2017, and these declines in bank
branches disproportionately hit rural communities. Another
report by researchers from the Fed found that online fintech
lending has penetrated areas that could benefit from additional
credit supply, including those areas that have lost bank
branches.
As banks are closing and consolidating, how are fintech/
bank partnerships able to fill the void and service rural
customers?
Mr. Meeks. The gentleman's time has expired. The
gentlewoman from Massachusetts, Ms. Pressley, is now recognized
for 5 minutes.
Ms. Pressley. Thank you, Mr. Chairman, and thank you to our
witnesses for being here today.
It seems there is no lack of creativity when it comes to
the financial industry's desire to exploit those facing
hardship. To be clear, unless you believe that poverty is a
character flaw, there is absolutely no justification for
triple-digit interest rate installment loans. The unfortunate
reality is that if 40 percent of Americans cannot afford a $400
emergency, then there are larger structural issues at play.
People are not being paid enough for their work to be able to
live, let alone save. In times of struggle, the options
shouldn't be a debt trap interest rate or nothing at all.
This is particularly frustrating when States like my own,
the Commonwealth of Massachusetts, go to great lengths to
protect consumers from predatory lenders. Massachusetts
maintains criminal usury laws, capping small loans at 23
percent interest while making it a crime to assist in providing
a predatory loan, implicating the lender and the bank.
Ms. Johnson, how does this compare to protections in other
States you have looked at?
Ms. Johnson. In response, I wanted to say that, yes, this
isn't something new. The Pennsylvania attorney general sued
Think Finance, who had rent-a-bank partnership with First Bank
of Delaware, and rent-a-tribe partnerships, in other words,
partnering with Native American tribes in order to charge
triple-digit interest rates. The lawsuit is going forward
against Think Finance as a criminal enterprise with this
partnership with the Native American tribes. So, that is not
something foreign. We have criminal usury statutes.
And in response to your question, we have some States suing
civilly. We have some States suing criminally. But either way
it goes, consumers need to be protected through these statutes
to protect consumers from triple-digit interest rates.
Ms. Pressley. Absolutely, and I still hear from folks in my
district, Massachusetts 7th, and across the State, about the
continued availability and marketing of these predatory loans.
There is also a question of what happens when the debt from
these loans is sold. So Ms. Saunders, how might a debt
collector's pursuit of the purchased loan differ from that of a
lender illegally operating in the State?
Ms. Saunders. Debt buyers who buy charged-off debt are
obviously going after people who are struggling the most and
who often have been the target of predatory lending. And we
have heard a lot of talk about the Madden case. Well, debt
buyers are buying charged-off credit card debt for pennies on
the dollar. They do not need to charge outrageous interest
rates on top of that, and certainly the Madden court was
correct that it doesn't hurt banks not to let debt buyers
continue to pile on to people who have been the target of
predatory lending.
Ms. Pressley. I think we eliminated debtors' prisons in
something like 1833. But last December, ProPublica published
their report entitled, ``The New Debtors' Prisons,''
highlighting University of Utah law professor Christopher
Peterson's work on the skyrocketing abuse of the States' small
claims courts.
And I ask for unanimous consent to submit this article for
the record, Mr. Chairman.
Mr. Meeks. Without objection, it is so ordered.
Ms. Pressley. Mr. Peterson's research is just one more case
study into our continued criminalization of poverty and the
weaponization of the legal system against those who are already
living on the margins.
Ms. Saunders, do you believe that what we are seeing in
Utah can spill over into States with stronger consumer
protection?
Ms. Saunders. Yes. Unfortunately, we are seeing that Utah
is the center of a lot of this predatory rent-a-bank lending.
We have FinWise Bank there and others that are enabling debts
of thousands of dollars, tens of thousands of dollars, over
years, at 160 percent APR or higher. There is a $4,500 loan
that will cost $13,000 to repay. APRs matter.
And if the lack of oversight and rate caps in Utah can
spread across the country, then every State, including your
own, will be the subject of predatory lending.
Ms. Pressley. Back in 2017, Massachusetts Attorney General
Maura Healey settled with the State's then-largest debt
collector for $1 million for egregious abuse of the State's
small claims courts to collect from folks whose incomes were
exempt.
Ms. Saunders, what does it mean to have exempt income, and
what are the unique risks of these aggressive collection
practices to vulnerable communities?
Ms. Saunders. Exempt income is income that you need for
basic necessities--food, medicine, rent--and income that, like
Social Security, other forms of pension, public benefits, and
certain amounts of wages, are exempt from collectors, because
we don't believe that people should have to starve because they
are in debt.
Ms. Pressley. That is right. It seems that this is less
access to credit or really just access to debt.
Mr. Meeks. The gentlelady's time has expired.
Ms. Pressley. Thank you.
Mr. Meeks. The gentleman from Texas, Mr. Williams, is now
recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman. Interest rates are
the price of obtaining credit. I am a small-business owner in
Main Street America. I have been in business for 50 years and
have never had one day in my business life that I have been out
of debt.
In any line of business, price is determined by calculating
many different factors. A business must cover the cost of
hiring employees, keeping inventory, and paying taxes, just to
name a few.
Tom Miller, of Mississippi State University, stated,
``Although a 36 percent interest rate might sound high and
profitable, personal installment loans are profitable at that
rate only if the loan exceeds a certain size threshold. If we
set a national rate cap at 36 percent, many of those innovative
products that are filling a need for many people in our
economy, would no longer be profitable and would cease to
exist.
``Rather than increase government intervention with a
national rate cap, we should allow capitalism and the free
market to determine the price of obtaining credit. This is
called competition.''
Before I continue with my questions, Mr. Knight, are you a
proponent of capitalism or are you a socialist?
Mr. Knight. I am a proponent of capitalism.
Mr. Williams. Thank you very much. That is a great answer.
We are doing good this year.
This issue is about personal and financial freedom. If we,
in Congress, set an arbitrary rate cap on what we think is too
high an APR, we are limiting customer choice and saying that
the government knows your financial situation better than you
do. Unfortunately, some of my colleagues seem to believe that
if we legislate high APR loans out of the marketplace, the
demand for these products will simply go away.
However, statistics show that millions of Americans lack
the ability to pay for a $400 emergency expense. We should be
spending our time on legislation that allows people to save
more of their hard-earned money and build personal wealth,
rather than limiting the options available to them when they
are most in need of assistance.
Mr. Knight, can you elaborate on what population would be
most hurt by enacting a national interest cap, and what would
happen to their availability of credit?
Mr. Knight. Yes. In terms of access to credit, the
population that would be most likely to suffer would be the
more marginal borrowers, your relatively less affluent, your
relatively young. Underrepresented groups would likely see a
reduction in access to credit.
Mr. Williams. A Bloomberg analysis showed that 5 years ago,
22 percent of Wells Fargo's consumer loans were made to
customers with credit scores below 680. Today, this number has
shrunk to 11 percent. Traditional financial institutions are
having to avoid riskier lending after greater pressure from
regulators following the financial crisis, and more government
involvement. Unfortunately, these changes have made obtaining
credit much harder for a person of that population.
So Mr. Knight, can you explain how greater bank
partnerships can help solve this issue, and the benefit to
consumers that it would create?
Mr. Knight. Yes. There is a benefit in two ways,
potentially: one, better access to assessment underwriting on
the front end; and two, better balance sheet management and
servicing on the back end. So a bank is able to leverage a
partnership to access customers, underwrite them, service them,
and move the credit off of their balance sheet into either a
loan sale or a securitization, which is very similar to what we
do with any number of other things like credit cards, car
loans, et cetera, and then have that loan serviced. And this
allows, particularly smaller banks, to access these markets,
which allows for greater competition in the credit markets.
Mr. Williams. And most people deal with smaller banks. Mr.
Knight, in your testimony you talk about innovation and the
benefits of bank partnerships with fintech companies. There is
a misconception that these partnerships operate outside the
bounds of any laws. So, could you talk briefly about some of
the third-party guidance that currently exists, and how it
helps protect consumers?
Mr. Knight. Sure. Both the OCC and the FDIC have strong
third-party guidance that both places a strong burden on the
bank to manage its partner and the conduct with its partner,
and holds the bank accountable for the auctions of its partner
as if the bank did it themselves.
Also, under the Bank Service Company Act, to the extent
that the partner is providing services for a bank, be it
marketing, underwriting, or servicing, or something like that,
that partner is also subject to examination by the bank
regulator. And if you talk to some of these firms, you will see
that they have bank regulators coming in to visit them.
Mr. Williams. I yield back. Thank you for being a
capitalist.
Mr. Meeks. The gentleman yields back. The gentleman from
Illinois, Mr. Garcia, is now recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you, Mr. Chairman. I live a
half-block from Main Street in a Chicago neighborhood, and I
have seen how predatory payday loans and sky-high interest
rates are trapping too many consumers into debt traps.
Consumers might take out a small-dollar loan to meet a short-
term need, only to find that they can't keep up with the
triple-digit interest rate on that loan. Soon, they are forced
to take out another loan to meet the need, stacking debt on top
of debt, and trapping them in a vicious cycle.
Ms. Saunders, can you tell us very briefly two instances of
what happens when people get caught up in a debt trap, and what
are the hardships and health consequences that consumers face?
Ms. Saunders. Sure. When they get into a debt trap, they
have trouble meeting other expenses. Especially when they have
very aggressive payday lenders or debt collectors after them,
they may have trouble buying medicine or buying food or paying
for their rent. In addition, these predatory lenders often
require access to their bank account, and they take out money
before they have paid for expenses, and they are going to incur
overdraft fees and NSF fees.
Mr. Garcia of Illinois. Thank you. One major reason why I
think it is so important for this committee to pass my bill,
the Veterans and Consumers Fair Credit Act, is that the
protections in the Military Lending Act have been shown to
work. Veterans and military groups support my bill because they
are familiar with the research showing that the Military
Lending Act protects active duty servicemembers from predatory
loans and so pushes them towards healthier forms of credit.
Assemblywoman Limon and Ms. Aponte-Diaz, what alternatives
to payday loans exist out there that comply with the 36 percent
rate cap but make sure that people get the credit that they
need without falling into a debt trap, and how have consumers
fared in States with strong interest rate caps in place?
Ms. Limon. Thank you, and I want to point out that
California has the California Pilot Program for Affordable
Small Dollar Credit, and we have had that in place for a number
of years, and that caps loans under $2,500 to 36 percent. So,
that exists. It is a market that has been increasing over the
last few years, and what we have also seen is that businesses
are looking for regulatory stability to keep investing in this
space.
Mr. Garcia of Illinois. Thank you.
Ms. Aponte-Diaz. And I will just add, I am from a State,
Maryland, which has never had payday loans or high-cost
installment loans, and there are multiple other ways to access
credit. There are credit cards. There are also credit unions,
and to your point, minority depository institutions, and credit
unions are not charging more than 36 percent.
There is also just the targeting--the marketing done by
these high-cost lenders is why it is concentrated in
communities of color. It is on your phone. It is on our radio
stations. It is everywhere. So this is sort of what our
community thinks, this is what is available. But there is a lot
more. There are emergency programs for utility companies. There
are nonprofits, churches, and a lot of other things. But we are
bombarded with the marketing from these high-cost lenders.
Mr. Garcia of Illinois. Thank you. A little bit of history
on this issue for a moment. In 1978, Robert Bork, a well-known
jurist in our country, argued and won a Supreme Court case that
allowed banks to exploit high-interest rates.
Here is how Binyamin Applebaum described what happened next
in his book, ``The Economists' Hour'': ``Citicorp's vice
chairman compiled a list of five states that had lenient laws
or might be willing to write new laws. One of the five names on
the list was South Dakota, which was already moving to get rid
of its interest rate caps. The bill sailed through the
legislature and was signed into law.
``But that wasn't enough. Under Federal law, banks needed
an invitation to enter a new state. Citicorp executives flew to
South Dakota and promised to bring 400 jobs.--you may have
heard that earlier--The company gave the text of the desired
invitation to South Dakota's Governor, Bill Janklow. The
necessary legislation was introduced on the last day of the
legislative session in 1980, passed by both houses, and the
same day signed into law by Janklow before the sun went down.
He also declared that the need for jobs was an emergency, so
the law took effect immediately.''
Four hundred jobs saved the State of South Dakota. Ever
since then, South Dakota has exported high interest rates to
consumers all over the country. So, that is why we are
advancing this bill. We need to learn from history and not
repeat those mistakes.
Mr. Meeks. The gentleman's time has expired. The gentleman
from Tennessee, Mr. Kustoff, is recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman, and I do want to
thank the witnesses for appearing this morning.
Mr. Knight, if I could, I would like to plow over some
ground that I know that we have talked about this morning, and
make a couple of observations. One, and again, we have talked
about this, I think every Member of Congress has constituents
who lack the ability to pay a $400 emergency expense. They are
my constituents, and everybody else represents these hard-
working people as well, who literally do work paycheck to
paycheck.
The second observation is, as we have talked about, we have
a number of people in our communities, for all the reasons we
have discussed, who are becoming unbanked or underbanked. So
again, if we look at capping interest rates at, say, 36
percent, a couple of questions. One is, what happens to access
to credit for those who are unbanked or underbanked, in my
district or any other district, maybe whose credit score is
around 600, give or take? If you could address that question
first.
Mr. Knight. We would expect to see a rationing effect of
credit, so some loans would not get made because they could not
be made profitably. We would also expect to see a distortion in
the model of credit, because APR is just one factor in a loan.
And so if you have to squeeze the balloon, you would see either
larger loans being made or longer timelines being made, or some
combination thereof.
There is also evidence that you would see a shift from
independent loans to loans secured by something, or loans made
by, say, a seller. There is a CFPB working paper that shows
that in the presence of a binding usury cap, you don't see
subprime independent auto loans. You see the dealer, the
subprime car dealer, be the only lender, because they can raise
the cost of the car. So it is a smaller interest rate but
applied to a bigger principal, which becomes a problem if you
want to prepay the loan or default on the loan, and you end up
buying less car for more money.
Ms. Aponte-Diaz. Can I just add that payday lending
actually leads to being unbanked.
Mr. Kustoff. Thank you. Mr. Knight, if we could look from
the historical perspective and maybe look 5, 6, 7 years ago at
Chile, they instituted a cap rate of 36 percent on small loans,
unsecured loans. Are you familiar with what happened in that
country?
Mr. Knight. There was, as expected, a rationing of credit.
There was a reduction in access, and the reduction in access
fell disproportionately on the relatively poor and the
relatively young.
Mr. Kustoff. And what further result occurred when they
capped the rate at 36 percent?
Mr. Knight. My recollection is that, yes, there was that
rationing of credit. You saw fewer loans being made, and people
had to then compensate in some other way. And there is other
evidence and other scholarship that indicates that in the
presence of credit rationing, particularly something like
subprime credit rationing, people move to other alternative
forms of credit. They don't go with a credit card. They go to
another alternative form or something like overdraft.
Mr. Kustoff. Thank you. So as far as usury laws are
concerned, they essentially set a cap on the price that a
lender can recoup from making a loan, unless, of course, the
lender gets into fees and other charges. Can you talk about how
those laws affect the incentives to lend in a given market?
Mr. Knight. Yes. As I mentioned, a usury cap is going to
disincentivize loans made to relatively risky borrowers,
because they cannot be made profitably over the portfolio of
loans. They are also going to incentivize either shifting to
more fee income rather than interest rate income if the law
allows for that, or shifting the structure of the loan to be
generally high principal and longer term, so that while the APR
is lower, it is actually acting on a higher principal for a
longer period of time.
A useful exercise is if you compare a 30-year mortgage at 4
percent APR to a payday loan of 2 weeks at 500 percent APR,
taken to their natural term, as interest is a percentage of
principal, it is actually higher with the mortgage, because
even though it is a lower APR, it is a longer loan.
Mr. Kustoff. Thank you. My time has expired, and I yield
back.
Mr. Meeks. The gentleman yields back. I now recognize the
gentleman from Texas, Mr. Green, who is also the Chair of our
Subcommittee on Oversight and Investigations, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing as well.
Mr. Knight, persons who are caught in this debt trap, who
received loans that they could not afford--what do you propose
we do for the countless number of people who are caught in
these debt traps? Do we just write them off as persons who
should not have engaged in this process? They should have been
better educated? Maybe they should have made more money.
Perhaps, they shouldn't have been poor. But what do we do? We
have people who are being harmed when we know that things
shouldn't be occurring as they are. The Supreme Court has
ruled, since the 19th Century, that you cannot engage in a
scheme to create loans that are usurious. So, what do we do?
Mr. Knight. Thank you very much for your question, sir, and
it is a very valid concern about the plight of people who are
trapped in suboptimal situations. I don't mean to make light of
it. It is a very real concern. And I would say that I think we
are looking at sort of a two-pronged issue. One is the
underlying macroeconomic situation.
Mr. Green. I understand that, but let's not use my time
explaining the micro or the macro either, of economics. Tell
me, what do we do with the people, for the people?
Mr. Knight. I would say that our best bet is to provide
people with better options, because the risk we run is that you
can legislate away the supply of credit, but you cannot
legislate away the demand for credit. So, the solution is to
provide better options for credit for people who are poorly
served. I don't think anyone thinks that a payday loan is the
pinnacle of credit, and I hope we move to something that is
better and more broadly available.
Mr. Green. We are talking about people now who are
entrapped into this cycle of borrowing. We know that it is
unlawful to develop a scheme such that a bank and a nonbank
entity can enter into it for the purpose of having an interest
rate that they could not ordinarily have in a given State. That
is unlawful. So, what do we do? What do we do for the people
who are caught in this trap?
Ms. Aponte-Diaz. Can I add that this is a bigger problem
than just access to loans. This is low wages, historically, in
our country. When the gentleman speaks about Chile, if we are
following what is recently going on in Chile, there is a huge
inequality issue in Chile, and they are still struggling
because of wage issues.
So we need to not try to solve this problem by giving
people loans of 150 percent APR. Even at 36 percent, a $10,000
loan costs $10,000. So APRs do matter, and this is not the
solution that we should be talking about, ``Oh, we should let
the free market charge whatever, 100 percent.'' Thirty-six
percent is generous. It is a very generous number to say that
you can charge someone that amount.
Mr. Green. Thank you. Mr. Knight, back to you. What do we
do when we have persons who are in this position? We have at
least one recommendation, but the other side doesn't offer any
alternative. They don't come with a plan to help extricate
people from the enigmatic circumstance. Their plan is leave
things as they are. This is the way things are and they should
continue to be. I am asking you for a plan. What do we do?
There is a plan on the table. What do we do?
Ms. Johnson, are you attempting to weigh in?
Ms. Johnson. I was not, but I was just thinking in my head
that we need to pass--if we don't want an interest rate cap,
then we need to say that banks in partnership with nonbanks
should not be able to do multiple rollovers, should not be able
to extend the maturity date multiple times, should not be able
to electronically debit people's credit cards or bank accounts
over and over again, and should not engage in illegal
garnishments in order to collect on the debts. In other words,
we need to--if we are not going to have an interest rate--
Mr. Green. With my time that I have left, pardon me for
interrupting, I am going to challenge my colleagues on the
other side to give us a solution as opposed to an objection. I
yield back.
Mr. Meeks. The gentleman's time has expired. I now
recognize the gentleman from Tennessee, Mr. Rose, for 5
minutes.
Mr. Rose. Thank you, Mr. Chairman, and I thank Chairwoman
Waters and Ranking Member McHenry for organizing this hearing
today.
Mr. Knight, I think as has already been discussed here
today, the valid-when-made issue is often confused or used
interchangeably with the True Lender issue. When Chair
McWilliams testified in a Financial Services Committee hearing
here in December, she tried to clarify that the FDIC's proposed
rule did not touch the True Lender doctrine. Do you agree with
Chair McWilliams' assertion that the True Lender question is
outside the scope of this rulemaking?
Mr. Knight. I do.
Mr. Rose. Thank you. When done properly, bank partnerships
with nonbank lenders are good for consumers, good for
competition, and good for innovation. These partnerships and a
healthy secondary market for loans also help extend credit to
consumers who might not otherwise be able to access it. This
includes many of my own constituents in the Sixth District of
Tennessee.
Mr. Knight, in your comment letter supporting the OCC's
rulemaking, you noted that these bank partnerships are a
critical aspect of the business of banking. You go on to also
say that having these loans remain valid is critical the modern
economy. Why is the ability to sell a loan important for banks?
Mr. Knight. It is important for banks because it is an
important function of safety and soundness concerns, the
ability to shift risk off their platform in a meaningful way,
and a potential source of revenue, particularly for smaller
banks who don't necessarily have the deposit base to hold a
whole bunch of loans on their balance sheet, given the
regulatory requirements that they face.
And so, if we want, particularly smaller community and
other banks to be more competitive going forward, they need
options to manage that, and these bank partnerships provide
such an option when done well.
Mr. Rose. Earlier, Ms. Tlaib cut you off when asking about
the illegality of these arrangements. Would you like to take a
moment and complete your response there?
Mr. Knight. Sure. The point I was going to make is it is
not that--I think we need to distinguish between a rent-a-bank
scheme and a bank partnership, because they are two separate
things. A rent-a-bank scheme is where the bank is a passive
party that basically just allows whomever, the nonbank lender,
to impersonate it and just sign off on everything that is done.
In these bank partnerships, the bank actually exercises
ownership, discretion, and control. They are ultimately
responsible and they ultimately have the final say, and they
have a relationship with these partners akin to that of a
vendor.
Mr. Rose. I think you made an important point in your
comment letter that I would like to highlight here today, and
you just reiterated a few moments ago, which is that
diminishing access to credit does not diminish the need for
credit. I see this in my district, and I want to make reference
to Mr. Luetkemeyer's comments earlier about what happens when
we restrict the ability of individuals to get those small-
dollar loans that they may need, on terms that they want, which
is to borrow for a very short period of time. I see this in my
community all the time and I just want to stress the importance
that we may think, when we impose statutes that limit those
types of transactions, that they somehow go away.
But I can assure the listeners, and our experts testifying,
and my colleagues, that they don't go away, that people find
ways to get the credit they need, whether that be by extending
terms in some way or whether it be by seeking that credit
through nontraditional sources, and that is what I often see in
my community, where I guess so-called bootleg lenders are
available, loan sharks, if you will, that unfortunately, we
force borrowers to seek out when we restrict their ability to
access the credit that they want and that they need through
traditional terms.
I want to conclude by just stressing that it is important
to note that in the 115th Congress, this committee passed
legislation, on a bipartisan basis, that would have codified
the valid-when-made doctrine. And when that legislation, H.R.
3299, came to the House Floor, it again passed with bipartisan
support. And so I think we would be well-advised to keep that
bipartisan mindset in mind. I yield back.
Mr. Meeks. The gentleman yields back. I now recognize the
gentleman from Florida, Mr. Lawson, for 5 minutes.
Mr. Lawson. Thank you, Mr. Chairman. I would like to
welcome you all to the committee. And I will start out with
you, Ms. Saunders. Can you please explain the True Lender
doctrine?
Ms. Saunders. The True Lender doctrine is just a variant of
centuries-old rules that usury law should not be evaded. The
Supreme Court, as early as, I think, 1838, and probably earlier
than that, has said that we are going to look beyond the form
of a transaction, because predatory lenders are very creative,
and we are going to prevent evasions. True Lenders is one form
of evasion where a State-regulated lender hid behind a bank,
but the payday lender or the regulated lender is the true
lender.
Mr. Lawson. Okay. Mr. Knight, did you want to comment on
that?
Mr. Knight. Yes. I just to elaborate that the doctrine is
not universally applied. Some courts apply it, and some courts
adopt a more contractual analysis of whomever the lender is on
the contract is deemed to be the lender. As I mentioned
earlier, it seems that the emerging trend is to look at who has
the predominant economic interest in the loan. So if a bank
already has a purchaser lined up for the loan, that weighs
against the bank being the true lender in the court's mind,
versus a loan that the bank intends to hold for a while.
For example, the Madden decision doesn't deal with True
Lender because the bank held the loan until it defaulted.
Mr. Lawson. Professor Johnson, how do you feel about that?
Ms. Johnson. The True Lender doctrine--first of all, I
agree with my fellow witness that it is a longstanding
doctrine. And what we are talking about with these new
transactions, at the end of the day the payday lender or the
nonbank lender performs all of the servicing functions, all of
the debt collection functions. The bank itself might have an
interest that effectively amounts to 10 percent, maybe 20
percent of the receivables. To me, that is not a situation
where the bank is in control. He is describing a scenario where
the loans are on the books of the bank.
In the cases that we are talking about, including pending
cases--and I would direct you to read my statement where I talk
about Kabbage, a fintech lender which has partnered with Celtic
Bank in Utah--at the end of the day, the nonbank, Kabbage, is
basically doing all of the lending functions, all of the
servicing-related functions, and so Kabbage should be the true
lender.
Simply saying the bank is involved somehow in a way with
the partnership does not do away with the fact that the
predominant economic interest is still with these nonbanks.
Therefore, if we are not going to cap the interest rates, we
should do something else about what the nonbanks can do in
terms of servicing these debts and collecting on these debts.
Mr. Lawson. Professor Johnson, in capping the interest
rates, will that provide more opportunities for individuals,
especially in minority communities, where they have to go,
oftentimes, to payday lenders in order to make it to their next
paycheck?
Ms. Johnson. Capping interest rates may drive down payday
lenders in the community, but it doesn't mean that there are
not other lending alternatives. As my fellow witnesses
identified, you have millions of dollars being spent in
advertising by the for-profit, nonbank lenders, whereas credit
unions and some of these other entities don't have all of that
advertising. So the person in your community may not realize
they can just simply go to a credit union and get the same type
of loan, except at a better interest rate, on better terms, and
not only being paid back over a longer period of time, also
benefitting from budgeting and other services provided by the
local bank or community bank or credit union.
Mr. Lawson. Ms. Limon, would you like to comment on that?
Ms. Limon. Thank you. I would say that States are doing
different things. There are multiple options. California has a
pilot program. But I think that another piece that is really
important to highlight is that as we have this conversation
about rent-a-banks, they are really going around State laws. In
July of 2019, before the bill had passed in California, before
it had been signed by the governor, there was a conversation
with these companies about how they were going to evade the
law, and that, I think, is what we are trying to get at, how we
ensure that these companies don't evade the law by finding a
partner outside of the State to do business as usual and offer
products that are not good for consumers.
Mr. Meeks. The gentleman's time has expired.
Mr. Lawson. Thank you.
Mr. Meeks. I now recognize the gentleman from Georgia, Mr.
Loudermilk, for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman, and I thank the
panel for being here. This is a very important discussion we
are having here, because what we need to be focused on is how
do we make finance available, especially to most vulnerable
communities. And I think what my friends on the other side of
the aisle are doing is going to be harmful to those very
communities. I am talking about rural and minority communities,
because those are the ones that have a problem getting access
to capital.
And I appreciate the comment that was just made about a
conversation of evading the law. I know of the conversation,
but I don't know that anything has transpired with that. So,
Mr. Knight, I would like to ask you a series of quick
questions, because I think what has happened is we have
demonized something that has been standard operating practice
in the financial services market for a couple of centuries.
Now, since we have been here today, some have tried to
portray the OCC and FDIC rulemaking on valid-when-made as a new
regulatory giveaway to banks. My understanding is the Madden
decision deviated from nearly 2 centuries of precedent in
banking law. Is that true?
Mr. Knight. I believe so.
Mr. Loudermilk. Do these proposed rules change the
agencies' underlying policy, or do they simply codify the
agencies' longstanding position?
Mr. Knight. They codify the longstanding position.
Mr. Loudermilk. Two centuries' worth of longstanding
positions.
Mr. Knight. Yes.
Mr. Loudermilk. That has worked very well.
Mr. Knight. Yes.
Mr. Loudermilk. When I make a loan, I really don't care
what happens on the back side of it, as long as my interest
rate is the same all the way through. I am okay if it goes
down, but I need to know that that interest rate is going to
stay the same. And the person loaning the money to me needs to
be profitable so they can make more money. I think that is an
important position to have.
Another question: Nonbank lenders are not permitted to
export interest rates unless they are partnering with a bank or
credit union that originates the loan, is that true?
Mr. Knight. I would clarify that the bank or credit union
is the one exporting the interest rates, because they are the
lender.
Mr. Loudermilk. So there is a bank, a regulated bank, on
the back side of this. Correct?
Mr. Knight. Correct.
Mr. Loudermilk. In order to benefit from the bank's
interest rate exportation authority, nonbank fintech lenders
must submit to regulation as third-party service providers by
the banking regulators, and the bank is accountable for the
actions of its fintech partners. Is that correct?
Mr. Knight. In the bank partnerships we are talking about,
that is what the law says.
Mr. Loudermilk. And that is what we are worried about, is
these fintech partnerships.
Do Federal banking regulators check to make sure these
loans are made lawfully during the exam process?
Mr. Knight. Yes.
Mr. Loudermilk. They do. Is there widespread abuse of these
bank partnerships by payday lenders?
Mr. Knight. Not to my knowledge.
Mr. Loudermilk. Do you know of any that are exporting it?
Mr. Knight. I do not know of any.
Mr. Loudermilk. Okay. I haven't heard of any either.
Kabbage was brought up. I had a small business. We had lines of
credit. We were going through a traditional bank and credit
unions for small-business lending. After the Dodd-Frank Act, my
business no longer qualified for those loans. Had there been a
Kabbage available, I would have been able to save a lot of
employees that I had to lay off because I couldn't have access
to capital. So I think we need to be very careful in demonizing
businesses that are actually providing funding to markets that
traditional banks and credit unions can't.
Ms. Aponte-Diaz. Can I add something?
Mr. Loudermilk. I am not quite done yet. Why has the
availability of credit decreased and personal bankruptcies
increased in the three States since the Second Circuit made the
Madden decision?
Mr. Knight. Based on a recent study, the authors link it to
the lack of access to marketplace lending and the inability of
borrowers who would otherwise be able to either refinance an
existing loan or deal with exigent circumstances like a medical
bill, the inability to access credit.
Mr. Loudermilk. And low-dollar loans are an issue. I
apologize, but I have a short amount of time, and I always run
out of time.
Regarding another issue which we are talking about, a
national interest rate cap, here is a concern I have. The
small-dollar loans are a big problem. Forty percent of
Americans can't afford a $2,500 emergency that they have. They
need access to credit. The problem we have, as a George
Washington University study indicated, is that the break-even
APR of a $2,600 loan is 36 percent. That is the break-even APR,
which means if you are going to borrow below that, you need to
have some higher interest rates. Right?
So a 36 percent national interest rate cap would
effectively eliminate loans under this amount. A study by the
Federal Reserve Bank of New York indicates that up to 60
million Americans do not qualify for traditional bank--
Mr. Meeks. The gentleman's time has expired.
Mr. Loudermilk. Mr. Chairman, may I submit the study for
the record?
Mr. Meeks. Without objection, it is so ordered.
Mr. Loudermilk. Thank you. I yield back.
Mr. Meeks. The gentleman from Washington, Mr. Heck, is now
recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman, and I want to thank all
the members of the panel as well for their presence today, and
more importantly, for their advocacy on behalf of people who
need a voice. Frankly, the older I get, the more I have come to
the conclusion that if we are not here to give a voice to
people who don't have one, I am not quite sure why we are here.
I appreciate much of the conversation thus far. I
appreciate what I think is an important element of this, which
is the access to credit issue and the implications of this
proposed policy, and the oft-cited data point, which
Congresswoman Pressley cited, that 40 percent of American
households don't have $400 to meet an emergency need. And that
is a balancing consideration of this debate going forward.
I do think there should be a balancing consideration of
what is it that States have actually done, albeit too few of
them, and the graph happens to be up right now as I speak. I am
from Washington State, and we are pretty proud of our efforts
at consumer protection. Years ago, we enacted a payday lending
limitation statute, which was very hard-won. We are talking
tooth-and-nail, knock-down, drag-out. And by just about every
measurable account, it is working.
Now I don't pretend to be a total expert, but here is what
I do know. I know the reports are good from consumer
organizations and the regulator. I know that the number of
payday lending locations has declined by 90 percent, payday
lending dollar volume is down 83 percent, and perhaps best of
all, the number of complaints filed with our regulator has
decreased from hundreds per year to 40. It seems to be working.
That begs a question for me in the broader context of this.
I think, Ms. Saunders, I would like to ask you, is there a
compelling argument for State preemption, or Federal preemption
of State statute, State policy, when there is arguably a
comparable consumer protection regime?
Ms. Saunders. No, there is not. As I said in my opening
statement, it is as American as apple pie for States to have
interest rate caps to protect their residents. All of the
States have them. Of course, it goes back to the Bible, and
most States have them today.
Unfortunately, although, Washington State has good laws,
and it is a modest law, no more than eight rollovers, and yet
the payday lenders couldn't live on that abusive model. But in
Washington State, although you only allow 29 percent on a
$2,000 loan, there is a rent-a-bank lender, OppLoans, that is
using FinWise bank in Utah, which is making 160 percent APR
loans up to $4,000 in Washington State. And there is nothing
under the National Bank Act that allows nonbank lenders to
obliterate the centuries-old usury caps that States like
Washington have, to protect your citizens.
Mr. Heck. So your point of view, and I am asking in all
sincerity, is that Washington State law does not protect its
consumers to a sufficient degree, notwithstanding the data I
shared and the reports I get?
Ms. Saunders. The Washington State laws are quite good, but
there are a couple of lenders that are starting to evade them
using this rent-a-bank model. And if we don't put a lid on it
right now, you are going to see a lot more problems.
Mr. Heck. Isn't there a way to solve that without an
overall rate cap?
Ms. Saunders. Well, I think an overall rate cap would cut
off the worst of the high-cost rent-a-bank lenders, but we also
can simply stop banks from exporting high-rate loans into
States like Washington that don't allow it.
Mr. Heck. So remember my premise here, which is that we are
here to provide and extend protection to people who are
vulnerable. I think it is worth keeping in mind that Federal
preemption is a two-edged sword, and that what one hand giveth,
the other hand can taketh away.
And I always feel compelled to remind people that if we
want to go down the road of Federal preemption, understand
there is another side of that coin, that if Federal preemption
seeks to, if the policymakers seek to, they can remove those
consumer protections.
I have had this argument or debate or good-hearted back-
and-forth with my colleagues on this committee for quite some
time as it relates to insurance regulation. I live in a State
where the insurance commissioner is doing a great job, and I
don't want somebody to come in and set a lower standard than he
has set. And the same danger presents itself when it comes to
this area.
But I will take into account and further plumb your
feedback on our law--
Mr. Meeks. The gentleman's time has expired.
Mr. Heck. --and I guess I am going to stop talking.
Mr. Meeks. The gentleman from Ohio, Mr. Davidson, is now
recognized for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman. And thank you to our
witnesses. I appreciate your efforts to make sure we get this
right.
Mr. Knight, I think you said it perhaps best, that Congress
could enact legislation that would restrict the supply of
lending, but we wouldn't be able to dramatically affect the
demand. And so, what happens when we have big disconnects
between supply and demand? Normally black markets form, right?
So, we have large black markets all around the United States,
it is a significant part of U.S. GDP, and a lot of that is
attributable to broken market systems. And some of those are
the result of legislation.
So could you highlight how a rate cap would do just that,
limit supply without checking demand?
Mr. Knight. Yes, absolutely. Ironically, one of the great
progressive reforms in this very area was the Uniform Small
Loan Law of 1916 by the Russell Sage Foundation, and their
recognition was that usury rates were too low to attract
legitimate lenders and that they needed to actually allow
people to make profitable loans. And when they made those
reforms, they were opposed by the religious leaders and all who
wanted the much lower rates, but also loan sharks, who wanted
to continue to operate illegally and not face legitimate
competition. And so the risk we run if we set an interest rate
that is binding and limits and constricts credit is that either
we cut people out of the legal system and they have to go seek
some inferior alternative, including loan sharks, or we have to
distort credit products so that they are inferior to what they
would have gotten otherwise, and, therefore, are a worse fit
than they could have had, had we left the market.
Mr. Davidson. Thanks for that basic explanation. And my
colleague, Mr. Green, was highlighting what is the alternative.
Well, the alternative is to make the economy grow, to create
more jobs than there are people to fill them, to see wages
rising instead of stagnant, to have wages at the bottom portion
of the economy growing faster than wages at the top of the
economy, to get past the broken status quo of stagnant growth
and on to the economy that we are enjoying today. And we did
that largely through deregulation, tax reform, and
incentivizing investment in the United States and growth. We
still have a long way to go, but we are making progress.
Ms. Saunders, as you are aware, this past year Ohio passed
a law that regulated payday lenders, or lenders in question
related to this year. Pew, a consumer advocacy group, very
similar to your organization, NCLC, has said that the Ohio
legislature got payday loan reform right. The structure of the
loan has an interest rate component plus fees.
Here is an example of what Ohio's law allows. If you lend
$300 for 4 months under current Ohio law, the APR could be as
high as 161 percent, depending on what day of the month the
loan is originated. It doesn't appear that Pew thinks a 36
percent rate cap is the right reform. They also support bank
lenders that charge rates at least double the 36 percent rate.
Why is there a disconnect between Pew and NCLC?
Ms. Saunders. I think Ohio is following the path of
Colorado. Ohio voters voted to cap rates at 28 percent,
overwhelmingly, back in 2008, but the payday lenders decided to
call themselves mortgage lenders in order to be able to charge
a fee allowed for mortgages, and they got around it. And the
legislature, where there is a lot of big payday loan money,
unfortunately, blessed that.
Eventually, after a lot of hard work, going up against big
money from predatory lenders, the Ohio Legislature came up with
something that allows high-rate loans, like Colorado did. But
eventually, Colorado voters voted for a 36 percent rate cap.
Mr. Davidson. And fees. And then what will happen is the
same challenge of black markets.
Professor Johnson, I like your framework, and as another
Ohio person, thanks for coming to share your expertise in the
field. I like kind of the rubric that you laid out, but I don't
necessarily understand the mechanisms of how it works, for
example, debt entrapment. Could you explain how someone is
forced to take this loan?
Ms. Johnson. Okay. So by debt entrapment, I don't mean that
somebody is being forced to take the loan. By that, I mean that
you have set up a scenario where a person is signing up for a
loan, not really understanding the consequences of that loan.
For example, if we talked about the payday loan rule that was
to take effect this past year, it would have required you to do
the ability to repay, right? So underwriting, ability to repay,
that should be something that should happen now.
Mr. Davidson. So, sound underwriting practices would help
make a difference. And frankly, I would like to go into a lot
of areas where we totally disregard sound underwriting
practices and we socialize the risk. We distribute the risk
over everyone, including people who can qualify for lower
rates.
So, thanks for the hearing, and--
Mr. Meeks. The gentleman's time has expired. The gentleman
from California, Mr. Vargas, is now recognized for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman, and thank
you to the witnesses for being here. I apologize that I wasn't
here earlier. I also sit on the Foreign Affairs Committee, and
we were dealing with the unique challenges that women face in
global health, and I wanted to be there for that presentation.
But now that I am here, I do want to ask this. APR does
matter, and if you don't think it matters, we don't take those
300 percent loans. I always tell my two daughters, ``Don't
listen to what people say. Watch what they do.'' You go to the
beach and they say, ``Oh, the water is warm.'' I say, ``Why
aren't you in it?'' ``Hell, no. I am not getting in that cold
water.'' We don't take those loans, because we think they are
predatory. That is why we don't take them.
But I did want to talk about State rights versus Federal
preemption. It is interesting. I have been around long enough
to listen to Republicans always talk about strong State rights,
except when they don't like them, and then they are against the
State rights and the Federal Government should be involved.
California Assemblymember Limon, you passed a law, and it
seems to be working. Obviously, it is early on. Can you comment
on the process you went through, and the State went through, to
do that?
Ms. Limon. This was a very extensive process. It has been
tried for well over 2 decades. But we really put an incredible
coalition together, faith groups, the Urban League, veterans'
groups, responsible lenders, all to try to come up with a
solution to one product, which was the fastest-growing product
in the market, that caused the most harm to the consumer.
And we passed this law and it was signed, and now what you
see is that there are companies evading it. And I actually want
to use Mr. Knight's description, if I may. He talked about the
rent-a-bank scheme being an impersonation of the true lender.
And based on that description, I argue that the rent-a-bank
schemes ongoing in California will clearly show that the
nonbank lender is the lender.
I want to give an example of what is happening. When you
see a title lender like LoanMart advertising their loans on a
website, between 60 to 220 percent, and in the fine print at
the bottom of this website you see that it says that the loan
is made by a bank in Utah. That is what we are talking about.
They are evading State law. The State law is very clear that it
is 36 percent plus the Federal rate, and now they are using a
bank outside of the State to evade an existing law.
Mr. Vargas. Ms. Aponte-Diaz, you stated at one point that
the underbanked actually get hurt taking these predatory loans
because, in fact, oftentimes, they get unbanked. Could you
explain that a little bit?
Ms. Aponte-Diaz. Yes. I have spent the last 7 years in
California talking to payday borrowers, to folks who have
gotten the installment loans, and there is not one of those
former payday borrowers who said, ``I would go back and do this
again,'' or ``I would go to the black market.'' Once they get
out of that debt trap, they are done with it, and look for
better access to credit.
I'm sorry. Can you repeat your question one more time?
Mr. Vargas. Yes. You said that what happens, you snuck it
in there quickly--
Ms. Aponte-Diaz. Oh, the unbanked. Yes. I am so sorry. For
payday lending, and increasingly installment lending, you have
to give your bank account information so that it can be
deducted directly from your bank account. So what we see often
is, maybe the borrower doesn't have enough money to pay their
rent or groceries or utilities, and the payday lenders come and
still take that money out. And so, if there is no money in
there, then you have your overdraft fees over and over, and
then those lead to bank closures. So I was arguing that we are
not trying to help the unbanked.
Mr. Vargas. You had to sneak it in there. I just wanted to
hear your explanation. I appreciate it. Thank you very much.
Ms. Aponte-Diaz. Thank you.
Mr. Vargas. I do want to ask one last question--I have
about a minute left--the issue that you can't loan to anyone
$2,600 or less at 36 percent because it is just not doable.
Professor, could you comment on that, or whomever would like
to?
Ms. Saunders. I would just say that I don't think that is
true. Self-Help Credit Union, an affiliate of the Center for
Responsible Lending, certainly does it. In South Dakota and
Montana, when the voters capped rates at 36 percent, we
actually saw an increase in credit union small-dollar loans.
Mr. Vargas. That is what I believed, but I have heard it
almost as if it was coming from Moses here that this was in
case the law. But I also have to thank you. See, most of it
does go back to the Bible. As a former Jesuit, I appreciate
that, and you do have usurious laws in the Bible too, that we
don't violate.
Mr. Knight, I have 20 seconds left, would you like to
comment on any of that?
Mr. Knight. I would just say that I think it is fantastic
if credit unions can fill some of this gap, but there is a
capacity question as to how much of the gap they can actually
fill. And it is an open question.
Mr. Vargas. I wanted to give the Republicans an
opportunity, because everybody seems to just talk to you and
not to the others. I wanted to make sure you had equal--
Mr. Meeks. The gentleman's time has expired. The gentleman
from North Carolina, Mr. Budd, is now recognized for 5 minutes.
Mr. Budd. I thank the Chair. Mr. Knight, I appreciate you
being here. So much of the discussion surrounding the Madden
case--I think I have heard it mentioned earlier, from some of
my colleagues--has to do with the valid-when-made doctrine,
which says that a loan does not become valid when transferred
to a third party. The idea behind valid-when-made is that a
loan is valid from the beginning; it can't suddenly change when
transferred to another person or company. And to my
understanding, this has been part of the banking law in the
U.S. for about 100 years. So far, so good?
Mr. Knight. I think it has been a part for longer than
that. If I may, I want to note one thing, just for
completeness.
Mr. Budd. Please.
Mr. Knight. There is a counterargument that says that the
early cases largely dealt with note assignment, and so the fact
that it was two subsequent loans is relevant. I disagree with
that.
Ms. Johnson. But those were the early cases.
Mr. Knight. Those were the early cases, but those cases, as
we acknowledge, banking changes rapidly, and more recent cases
have held that a subsequent transaction does not invalidate the
loan. And I think if you look at sort of the notion behind it,
there isn't a reason why a subsequent downstream transaction
that does not change the borrower's obligations should relieve
the borrower of their obligations.
Ms. Johnson. The Madden decision did not involve--
Mr. Budd. I reclaim my time. Thank you, Mr. Knight.
However, the Madden v. Midland Second Circuit decision in 2015
kind of branched away from this longstanding principle, and it
ruled that loans could become invalid when sold from a bank to
a nonbank. So as a result of this decision, credit markets have
become volatile, many borrowers have seen their access to
credit diminish, as we have talked about today, and it is at a
time when we should be doing everything we can to provide small
businesses and consumers--I even heard my colleague from
Georgia mention that lack of capital access as a small business
owner--better access to credit and financing alternatives. So,
it seems unwise to put caps on consumer loans.
So Mr. Knight, in your opinion, was the Madden decision
wrongly decided?
Mr. Knight. I believe it was.
Mr. Budd. And in what ways has the Madden decision actually
hurt low-income borrowers, hurt low-income borrowers' access to
credit?
Mr. Knight. Based upon the academic evidence I have seen,
we have seen a constriction in credit and a resulting--there is
evidence of a link to an increase in bankruptcy as people who
need to access credit to address either an emergent situation
or an existing loan, where they need to be able to refinance an
existing loan, are not able to do so. And one of the weird
wrinkles of this is that you can be under a credit card debt at
30 percent and not be able to access a marketplace loan at 25
percent to refinance it, because in the latter case, the bank
is planning to sell the loan. That strikes me as nonsensical.
Mr. Budd. So just striving for clarity here, we have this
decision, this Madden decision. We cap these rates, trying to
help people, because I think on both sides, we really want to
help people here, absolutely. But it ends up hurting people?
That is what I am hearing from you.
Mr. Knight. It appears to be rationing credit, and that
appears to be having a harmful result.
Mr. Budd. More bankruptcies.
Mr. Knight. That appears to be the evidence.
Ms. Johnson. Can I respond to that bankruptcy--
Mr. Budd. Great. Thank you. I want to continue on. I would
like to make two observations and then tie them together into a
question. The first is that it is incredibly troubling that
millions of Americans lack the resources to pay for a $400
emergency expense. I think we all can agree that that is very
troubling. But today, as we speak, hard-working Americans are
living paycheck to paycheck. When times get tough, they may
need to borrow money from somewhere.
The second observation is the basic principle that our
financial services economy is built on risk-based pricing. Many
of the people I have described have credit scores just right
above 600, and today they have access to credit, and lenders
lend to them in accordance with State and Federal laws designed
to promote safe and responsible lending.
So here is my question, Mr. Knight. If we cap the interest
rates at 36 percent, what is going to happen to access for
credit for the unbanked and the underbanked folks across our
country? Will their need for credit just magically disappear,
or is it more likely they will turn to unregulated credit if
regulated creditors turn them down?
Mr. Knight. The need for credit will not disappear, and so
to the extent a borrower who previously could access credit and
is now capped out of the market, they will either search for
illegal or otherwise alternative credit or suffer the
consequence that they were seeking to avoid with a loan.
Mr. Budd. Thank you. I believe I am out of time. Thank you
for your time.
Mr. Meeks. The gentleman yields back. I now recognize the
gentleman from Texas, Mr. Taylor, for 5 minutes.
Mr. Taylor. Thank you, Mr. Chairman. I appreciate this
hearing.
I just wanted to quickly do a lightning round. So a bank,
the profit margin is about 10 percent, right? And other
businesses have higher profit margins. Some have lower profit
margins. What is an unacceptable profit margin, in your mind,
for payday lenders? And I will start with Mr. Knight. I am just
looking for a number--8 percent, 10 percent, 100 percent? What
is an unacceptable profit margin for a payday lender in your
mind, Mr. Knight?
Mr. Knight. I don't have a numerical answer. I'm sorry.
Mr. Taylor. Ms. Saunders?
Ms. Saunders. I focus on the impact on the consumer, not on
the profit.
Mr. Taylor. Got it. Okay. Professor?
Ms. Johnson. No magic number. I am more concerned about the
terms of the loan as well as the interest rate.
Mr. Taylor. Okay. Ms. Aponte-Diaz?
Ms. Aponte-Diaz. We have asked the payday lenders for a
description. Like they are telling us they need to pay for
their storefronts, for their employees, and we have asked over
and over for details about why they have to charge 100 percent
to make ends meet, and we have not seen the documents on that.
But what we have seen is that there are 40 percent default
rates on these high-cost installment loans.
Mr. Taylor. Sorry to cut you off, but do you have a number?
Ms. Aponte-Diaz. No.
Mr. Taylor. I will come back to you in a second. Ms. Limon?
Ms. Limon. No numerical number. It is to do right by the
consumer.
Mr. Taylor. Okay. So, there are publicly-traded payday
lenders. Have you looked at their profit and loss statements?
Ms. Aponte-Diaz. No.
Mr. Taylor. Why? You can go look at their FTC filings,
right?
Ms. Aponte-Diaz. Right.
Mr. Taylor. So, you have a K-1. You can go look at that.
You haven't looked at that?
Ms. Aponte-Diaz. I have not personally, but--
Mr. Taylor. Okay. Mr. Knight?
Mr. Knight. Yes. There are a couple of studies that look at
that, and payday lenders are not particularly profitable
relative to other finance companies. In fact, they tend to be
significantly less profitable than more traditional finance
companies.
Mr. Taylor. Do you want to put a number on that?
Mr. Knight. I don't have the exact--don't quote me on this,
but I believe they are about a third as profitable.
Mr. Taylor. I have seen numbers in the 8 to 12 percent
range, in terms of profitability.
Mr. Knight. Yes.
Mr. Taylor. So sometimes higher than banks, sometimes lower
than banks, but I haven't seen anything that indicates--what
generally lowers prices is competition, right? So if you have
lots of people competing to provide something, it drives the
margins down to where it sort of comes to be a risk-adjusted
rate of return. So, hey, that is an acceptable rate of return.
And then in terms of pricing, thinking about processing a
payday loan, if you were going to process a payday loan, you
would need to buy a credit report, right? You would need to
have a human being standing at a teller to fill out the forms.
Those are some of the prices that go into not just the interest
rate on the money but the actual processing of the form. Do you
want to speak to that, Mr. Knight?
Mr. Knight. My understanding, based upon the research I
have seen, is that a lot of the expense about payday loans is
overhead. It is location, because this is largely a
convenience-driven business, and it is staff, because it is
human-intensive and the hours are long. And so, yes, a lot of
the cost is what we would consider to be overhead.
Mr. Taylor. Right. And if we put lots of regulatory burdens
on lenders and make it really difficult to lend, then we are
actually making fewer competitors, and that, in turn, should
drive up prices and make the margins higher. If it is harder to
do, it gets more expensive, as a general rule of thumb.
Ms. Aponte-Diaz. Excuse me, sir. Just to add, what we have
seen is $8 billion stripped in payday lending and car title
loans in fees across the country, so $8 billion.
Mr. Taylor. I don't know what that means.
Mr. Knight, just thinking about what banks do, they
typically hire consultants to do their IT work, right? So,
banks hire consultants to do their IT systems, their mobile
banking applications for small regional banks. They have to go
hire someone to go do that for them. They hire companies to do
loan processing, to actually create the document processing
management system. They go to outside credit bureaus to go get
their credit reports, because they don't do that internally.
And so, they interact with the Federal Government, with the
SBA loan program. It is very normal for all businesses, but in
particular, in this case, to use outside vendors to provide
services for them. What would be the benefit to a bank to use
an outside vendor to help them underwrite smaller loans?
Mr. Knight. To the extent that this vendor has a good model
and good technology--and I should note that ultimately the bank
has to own the model. And my understanding is, from talking to
some of these companies, the bank does own the model. They
don't just accept the model whole cloth. They push back, they
work on it, and it is a collaborative process. But to the
extent that this new customer, this partner, can bring new
technology, new capabilities, it can benefit the bank.
Mr. Taylor. Okay. Thank you. Mr. Chairman, I yield back.
Mr. Meeks. The gentleman yields back. All time has expired.
Without objection, a statement from the California Attorney
General, Xavier Becerra, and a statement from Hope Credit
Union, both supporting the preservation of State laws that
better protect consumers, are entered into the record.
Without objection, it is so ordered.
I would like to thank our distinguished witnesses for their
testimony today. Your testimony has been very important and
very insightful to all of the Members, I am sure.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereas, at 12:46 p.m., the hearing was adjourned.]
A P P E N D I X
February 5, 2020
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