[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                    EXAMINING CONSUMER CREDIT ACCESS
                      CONCERNS, NEW PRODUCTS, AND
                          FEDERAL REGULATIONS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 24, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-149




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 24, 2012................................................     1
Appendix:
    July 24, 2012................................................    57

                               WITNESSES
                         Tuesday, July 24, 2012

Berlau, John, Senior Fellow, Finance and Access to Capital, the 
  Competitive Enterprise Institute (CEI).........................    32
Bishop, Frances C., owner, Dollar Pawn, Inc., on behalf of the 
  National Pawnbrokers Association and the Alabama Pawnbrokers 
  Association....................................................    31
Edwards, Kenneth W., Vice President, Federal Affairs, the Center 
  for Responsible Lending (CRL)..................................    34
Flores, G. Michael, Chief Executive Officer, Bretton Woods, Inc..    35
Gardineer, Grovetta, Deputy Comptroller for Compliance Policy, 
  Office of the Comptroller of the Currency (OCC)................     7
Jackson, Mary, Senior Vice President, Corporate Affairs, Cash 
  America International..........................................    30
Munn, Hon. John, Director, Banking and Finance, State of Nebraska 
  Department of Banking and Finance, on behalf of the Conference 
  of State Bank Supervisors (CSBS)...............................     9

                                APPENDIX

Prepared statements:
    Berlau, John.................................................    58
    Bishop, Frances C............................................    65
    Edwards, Kenneth W...........................................    74
    Flores, G. Michael...........................................    80
    Gardineer, Grovetta..........................................   114
    Jackson, Mary................................................   125
    Munn, Hon. John..............................................   127

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of Americans for Financial Reform..........   143
Baca, Hon. Joe:
    Written statement of The Hispanic Institute..................   150
Luetkemeyer Hon. Blaine:
    Written statement of The 60 Plus Association.................   152
    Written statement of Quik Pawn Shop..........................   154
    Written statement of Hon. Mark L. Shurtleff, Attorney 
      General, State of Utah.....................................   156
Edwards, Kenneth W.:
    Written responses to questions submitted by Representatives 
      Luetkemeyer and Baca.......................................   161
Gardiner, Grovetta:
    Written responses to questions submitted by Representative 
      Baca.......................................................   167
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   169
Written statement of William M. Isaac, former Chairman, FDIC.....   171
Munn, Hon. John:
    Written responses to questions submitted by Representatives 
      Luetkemeyer and Baca.......................................   173

 
                    EXAMINING CONSUMER CREDIT ACCESS
                      CONCERNS, NEW PRODUCTS, AND
                          FEDERAL REGULATIONS

                              ----------                              


                         Tuesday, July 24, 2012

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Renacci, Royce, 
Hensarling, Pearce, Westmoreland, Luetkemeyer, Huizenga, Grimm, 
Fincher; Maloney, Watt, Hinojosa, Baca, Scott, Meeks, and 
Carney.
    Also present: Representatives Schweikert, Sessions, and 
Green
    Chairwoman Capito. The hearing will come to order. I would 
like to first thank my colleagues, Mr. Luetkemeyer and Mr. 
Baca, for their hard work on the legislation before us today. 
This subcommittee held a hearing last fall on issues about 
access to consumer credit for borrowers who may not have the 
ability to use traditional sources of credit. H.R. 6139 is an 
attempt to address some of the potential inequities in the 
current regulatory structure for nondepository institutions and 
consumers.
    The recent economic downturn and anemic recovery have 
highlighted the difficult environment for consumers to access 
credit. A recent National Bureau of Economic Research study 
found that nearly 50 percent of Americans are unlikely or 
unable to raise $2,000 in case of an emergency with 30-days' 
notice. And we know this frequently occurs in many American 
families, an emergency that needs to be addressed.
    Furthermore, the FDIC found that nearly 25 percent of 
American households have trouble accessing credit from 
traditional sources like banks and credit unions. These tough 
economic times are highlighting, I think, the need for 
innovation and diversity in financial products. Last fall, the 
subcommittee had a hearing on innovation in the consumer credit 
market. Entrepreneurs across the country are developing new and 
innovative techniques and methods for consumers to access 
credit from nontraditional sources. Technology is providing new 
ways to analyze data and create platforms to distribute credit 
in a more cost-effective, transparent manner.
    We have also learned, through a series of hearings on the 
future of money, that it is entirely possible that consumers 
may become less reliant on traditional financial institutions 
as more payment services are driven towards mobile devices. 
H.R. 6139 is an important part of a broader discussion about 
how these financial products should be regulated. The majority 
of these products are currently subject to a patchwork of State 
regulatory regimes. In some States, consumers have access to a 
broad array of products, whereas in other States, there is 
little or no access to consumer credit from institutions 
outside of the traditional sources of banks and credit unions.
    Title X of Dodd-Frank grants supervisor authority for some 
nondepository institutions. The legislation before us today 
creates an optional Federal charter for nondepository 
creditors. They will be housed within the OCC. I look forward 
to hearing our witnesses' testimony on H.R. 6139 as well as the 
overall need to keep up with the innovation in nontraditional 
financial products.
    I now recognize Mrs. Maloney, my ranking member, for 4 
minutes for the purpose of making an opening statement.
    Mrs. Maloney. I want to thank the chairlady for calling the 
hearing, and I also thank all of our witnesses for being here. 
I am looking forward to the updated version of the bill that my 
colleagues--Mr. Baca and Mr. Luetkemeyer--have introduced that 
would give non-banks an optional Federal charter, allowing them 
to operate nationally to give small loans.
    I do want to say that this hearing is focused on what is a 
real problem in American society today. The amount of personal 
family debt is growing, credit card debt is over $1 trillion, 
and student loans have surpassed credit card debt. And I would 
say around the kitchen tables of America, many people are just 
trying to figure out how to make ends meet.
    One colleague told me a story about a mother whose car 
broke down. It needed a new transmission, so she needed a loan 
of $2,000 to fix her car. So where does she go to get this 
loan? Most credit unions and banks wouldn't give a loan of that 
small amount. It would be difficult to get.
    So there is a need in our structure for small loans and 
access to them. But until the financial reforms that were 
enacted in 2010, non-banks were exclusively regulated at the 
State level. But as we worked to revamp our financial system, 
we saw gaping holes in regulation and consumers were often on 
the losing end of the deal. The FTC had some oversight for 
these non-bank loans.
    Now that we have the Consumer Financial Protection Bureau 
(CFPB) with its sole mission of consumer protection across the 
financial industry, including non-banks, there will be a 
Federal regulator exercising authority over certain non-banks 
consulting with the FTC. And States like New York will still be 
able to exercise their authority to set a ceiling for consumer 
protection.
    For example, New York has imposed a usury cap of 16 percent 
on consumer and personal loans. Most payday and low-dollar 
loans are not permitted in the State because they almost always 
carry interest rates higher than 16 percent. However, we cannot 
deny that lower-income and underbanked consumers often turn to 
short-term loans to make it to the next paycheck. Some 
consumers are turning to the Internet for these products and to 
financial entities that are located offshore and away from all 
regulatory scrutiny.
    This is the main argument by proponents of the bill that is 
before us today, that consumers are turning to offshore 
entities which provide predatory products to consumers who have 
nowhere else to go. The bill we are reviewing today will 
preempt State laws for an entity that wishes to pursue a 
Federal charter with the OCC. The OCC, which is traditionally a 
safety and soundness regulator of banks, would be the principal 
regulator for these entities, and they have expressed some 
significant concerns about the bill.
    So I hope that this hearing will shed light on the entire 
question. And the questions that I have are: is the OCC the 
appropriate agency to be approving appropriate consumer 
products for the underbanked and underserved communities; and 
are consumers going to be sufficiently protected in creating 
this charter? So I look forward to the comments and to the 
testimony today. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Luetkemeyer for 3 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman, and thank you 
for holding this hearing to discuss what I believe is a very 
important topic: greater access to credit. I also want to thank 
the gentleman from California, Mr. Baca, for his hard work on 
this issue. He has been a dedicated leader on this subject and 
I greatly appreciate his efforts.
    At a time when nearly half of all Americans are living 
paycheck to paycheck, we cannot continue to operate without 
innovation in the credit sector. It is essential to begin to 
understand the true needs of American families in trying to 
address the problems that continue to plague them. H.R. 6139, 
the Consumer Credit Access, Innovation, and Modernization Act, 
will allow for and even encourage the development of new and 
badly needed financial products. And it does so under strict 
regulatory guidelines without jeopardizing consumer safety.
    Let me be clear, this is not a payday lending bill. In 
fact, this legislation bars new federally-chartered 
institutions from making loans for terms less than 30 days. 
Again, this legislation prohibits payday loans, and other loans 
with terms of less than 30 days. This legislation also requires 
the OCC to approve or deny any and all products and to 
coordinate with the CFPB, the Attorney General, and other State 
regulators. With that, Madam Chairwoman, I request unanimous 
consent to insert in the record a letter of support and a 
statement from Mark Shurtleff, Attorney General of Utah, and 
also a letter of support from The 60 Plus Association.
    Chairwoman Capito. Without objection, it is so ordered.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    We can sit here and say that consumers don't need these 
products, and we can continue to say that they are aren't 
necessary and they shouldn't be permitted, but that simply 
isn't a responsible way to move forward. These products are 
needed. Data shows that each year, Missourians alone initiate 
almost 2 million Internet searchers for these types of small-
dollar loans. Nationwide, that number surpasses 74 million. Our 
economy and society are moving toward doing more and more 
business online. To facilitate this movement in customer 
preference, we need to provide a structure to allow this, as 
well as safety measures to protect the consumer from 
unscrupulous practices.
    Mr. Baca and I offer today legislation that will closely 
regulate and monitor institutions and their products, ensuring 
full consumer protection and rigorous oversight by Federal and 
State entities. However, without these products, consumers 
seeking a small loan will be forced to go to offshore lenders 
in the black market, leaving Americans in need with no consumer 
protections whatsoever. It is time to allow all Americans 
access to safe, closely regulated forms of credit. I thank our 
witnesses for testifying today, and I look forward to the 
productive conversation. With that, Madam Chairwoman, I yield 
back.
    Chairwoman Capito. The gentleman yields back. Mr. Baca for 
3 minutes.
    Mr. Baca. Thank you very much for having this hearing. I 
would also like to thank the witnesses for being here this 
morning. I request unanimous consent to insert a letter on H.R. 
6139 from The Hispanic Institute into the record.
    Chairwoman Capito. Without objection, it is so ordered.
    Mr. Baca. Thank you. Just last week, the unemployment rate 
in my district rose to 12.6 percent. Combine that with the 
constant high unemployment across the country, hard foreclosure 
rates, and low economic growth, and you can see why more and 
more families are living paycheck to paycheck. As such, we have 
seen a credit divide grow deeper between the haves and the 
have-nots. What happens to the single parent who needs to fix 
their car? Think about that, those who have to fix their cars. 
What happens to unemployed families in need who need to pay 
their mortgages or monthly bills for food, heat, and 
electricity? How do these people deal with unexpected high 
medical bills?
    To make matters worse, many of these people have no access 
to banks or credit unions to provide them with the credit they 
need.
    Last year I introduced H.R. 1909, which creates a Federal 
charter for non-bank lenders to provide small-dollar loans to 
underserved individuals who are in need of credit. And I was 
pleased to work with my good friend, Mr. Luetkemeyer, in 
introducing a new bill, and I would say we both have come 
together in trying to come to a compromise, and a better bill 
that addresses a lot of the problems, and this is something 
that has been going on for 3 years.
    In working with him, we wanted to create safe, affordable, 
and innovative products that can be offered to those who need 
it. And those are the important reasons why we came up with 
this bill. H.R. 6139 creates a Federal charter under the OCC, 
and it will allow the OCC and the CFPB to work together to 
create again a safe and affordable credit option for 
underserved communities. Remember that, underserved communities 
can create an option. Instead of reinventing the wheel, this 
bill will work with what we have. It creates a Federal charter 
on unincorporated product institutions that are already in the 
market, increases access for struggling Americans across the 
country, and allows for experts innovation that is in the 
marketplace to grow and serve as many people as possible, and 
also allow for strong Federal regulatory oversight.
    And to those claiming that this is a payday, as my good 
friend, Congressman Luetkemeyer said, this is not a payday 
bill; it should be noted that payday products specifically are 
banned by chartered institutions. Over the past few years, 
there have been many who have made all kinds of points as to 
why certain products don't work, or why they are predatory or 
why they only make the products work. The fact is problems were 
easy to talk about and they don't require responsibility. What 
we haven't discussed is a solution, and this is a solution, a 
solution that will involve, over time, recognizing the market, 
and the industries that are already in place, and law for 
Federal regulations in which all parties are involved. That is 
why I believe H.R. 6139 provides that solution. And with that, 
I yield back the balance of my time.
    Chairwoman Capito. Thank you.
    I would like to ask unanimous consent from the subcommittee 
to allow Mr. Sessions 4 minutes for the purpose of making an 
introduction. Without objection, it is so ordered.
    Mr. Sessions?
    Mr. Sessions. Thank you very much, Chairwoman Capito, and 
thank you for allowing me to sit in with the subcommittee 
today, and I also thank your delightful ranking member and my 
colleagues on this subcommittee. During my first term in 
Congress, in 1997 and 1998, I had the opportunity to sit on 
this committee. I sat down front, and enjoyed many long debates 
and opportunities to understand the banking system. It has now 
become the Financial Services Committee, and your leadership, 
as well as the attention that these Members pay to this, is 
really very important.
    I also am delighted to be with my dear friend, Ed Royce. I 
have always sat to his left, and somebody made a mistake today 
and put me over here today, and I thank you for that mistake.
    Madam Chairwoman, today I am here to introduce a witness 
who will appear before the committee. I have the privilege of 
introducing a very successful Texas businesswoman, a great 
Texan, and a constituent of mine, my dear friend, Mary Jackson. 
Mary is senior vice president of corporate affairs and chief 
legislative officer for Cash America, Incorporated. Cash 
America is headquartered in Fort Worth, Texas, and provides 
financial products and services to consumers across the United 
States. She is representing her company and the Online Lenders 
Alliance, known as OLA, an association of U.S.-based online 
providers of consumer short-term loans. I have known Mary for 
over 20 years. She is a strong leader in the north Texas 
business community and an advocate for the free enterprise 
system. Mary is here today to testify about H.R. 6139, the 
Consumer Credit Access, Innovation, and Modernization Act of 
2012.
    My discussions with Mary have convinced me there are really 
three truths about this piece of legislation and the need for 
it. First, we have a serious credit gap in America, as has been 
noted by our speakers earlier today. Americans of modest means 
do not have adequate or acceptable access to financial credit 
products and services on a day-to-day basis, especially in the 
event of an emergency.
    Second, our Federal policies, both the Federal Reserve's 
efforts to make credit available and reliance on traditional 
sources, I believe have fallen short. The nondepository lenders 
such as Cash America and other OLAs could be a responsible and 
significant provider in this necessary and needed marketplace 
and could be a part of that solution.
    And finally, under H.R. 6139 the proposed federally-
chartered lenders can and will provide new and innovative 
products and services, and more importantly, competition in an 
effort to provide more and better credit options to so many 
hard-working Americans who need to access credit and be able to 
know that they can help their families in times of need.
    I appreciate you allowing this hearing to take place today, 
and I thank the gentlewoman and the ranking member for allowing 
me to sit in for a few minutes with this opportunity today to 
hear about this bill. Thank you very much. I yield back the 
balance of my time.
    Chairwoman Capito. Thank you.
    Mr. Hinojosa for 3 minutes.
    Mr. Hinojosa. Thank you, Chairwoman Capito, and Ranking 
Member Maloney. Today, we are discussing whether to give the 
Office of the Comptroller of the Currency the power to grant 
Federal charters to certain non-bank institutions. While I 
believe that the stated goal of my colleagues to increase the 
amount of credit to the underserved and unbanked populations is 
noble, and something that is necessary, I believe that this 
bill approaches it from the wrong direction, and I warrant to 
explain why.
    Two years ago this month, we passed the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, which set up the 
Consumer Financial Protection Bureau, or what we call the CFPB. 
In its 18 months of existence, the Bureau has made great 
strides in writing rules and beginning supervision of the non-
bank financial institutions that have eluded supervision for so 
long.
    I believe that to take these particular non-bank 
institutions out of the jurisdiction of the Bureau is 
premature, and that we should allow the CFPB to finish 
completing its rulemaking on non-bank supervision.
    The Office of the Comptroller of the Currency is 
represented here today, and according to submitted testimony 
that I read, they do not support the policy put forth by this 
bill, which is significant considering that they would be the 
ones in charge of doling out Federal charters.
    I look forward to hearing the testimony today. I hope that 
it addresses some of my concerns for my district and for my 
State of Texas and helps to push the dialogue about how best to 
serve the underbanked and unbanked constituents that I 
represent. I yield back.
    Chairwoman Capito. Thank you.
    That concludes our opening statements, and I would now like 
to introduce the first panel of witnesses.
     I will recognize each one of you for purpose of making a 
5-minute statement. Our first witness is Ms. Grovetta 
Gardineer, Deputy Comptroller for Compliance Policy, Office of 
the Comptroller of the Currency. Welcome.

   STATEMENTS OF GROVETTA GARDINEER, DEPUTY COMPTROLLER FOR 
 COMPLIANCE POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 
                             (OCC)

    Ms. Gardineer. Thank you. Good morning, Chairwoman Capito, 
Ranking Member Maloney, and members of the subcommittee. I 
appreciate the opportunity to discuss the Consumer Credit 
Access, Innovation, and Modernization Act. Providing 
responsible financial services to underserved consumers is an 
important goal, but this legislation would harm minority 
populations, low-income neighborhoods, and communities with 
concentrations of our military servicemembers. In addition, it 
would encourage the development of businesses with unsafe and 
unsound concentrations in products that have serious consumer 
protection and safety and soundness concerns.
    My testimony provides a summary of our understanding of the 
bill, and gets into greater detail about each of these risks. 
During my remarks this morning, I will highlight just a few of 
our concerns. First, H.R. 6139 would adversely affect the 
consumers that it intends to help most. This bill would provide 
special status and Federal benefits to companies and third-
party vendors that would primarily offer credit products and 
services that carry greater risks or cost for consumers who 
lack access to more traditional bank products. We anticipate 
that such companies will request approval to offer products 
that include payday loans, tax refund anticipation loans, and 
car title loans. Our experience with these products is that 
they depend on high fees, repetitive use, high default, and 
severely weak legal compliance.
    Consumer interest groups have voiced similar concerns that 
these products trap consumers in a cycle of debt and prevent 
their access to safer, more traditional credit and banking 
services that could better meet their needs.
    We are also concerned that H.R. 6139 would negate many 
actions that Congress, the OCC, and other regulators have taken 
to safeguard consumers from the risks of these types of 
products.
    First, this bill prohibits establishing usury caps where 
otherwise appropriate. This prohibition could significantly 
reduce specific limits established by Congress and many States. 
For example, it could eliminate protection for members of 
America's Armed Forces. The cap to annual percentage rate of 
payday loans, auto title loans or tax refund loans extended to 
cover persons at 36 percent.
    Second, H.R. 6139 would create a class of federally-
chartered institutions with serious safety and soundness 
concerns. Our supervisory experience suggests that in addition 
to consumer protection issues, companies chartered under this 
bill rely on products that pose serious compliance BSA/AML and 
other operational risks.
    H.R. 6139 would direct the OCC to encourage joint ventures 
between credit corporations and third-party vendors to 
facilitate innovative products and services. Our experience 
teaches us that dependence on third-party providers to 
originate or deliver such products and services can create 
serious compliance risks. Such vendors often lack the requisite 
systems and procedures to comply with the myriad of BSA and AML 
and other regulations and risk management practices that are 
essential to the safe and sound conduct of these activities. 
The Comptroller recently singled out weak third-party oversight 
as a significant contributor to operational risk.
    Companies chartered under the bill also face significant 
BSA/AML exposure, because of their dependence on products with 
remote deposit capture characteristics, the lack of long-term 
customer relationships, and the ability of money launderers to 
exploit weaker monitoring and reporting processes.
    In addition, companies chartered under the bill faced 
significant concentration risk because of their limited 
business models that can threaten their viability if underlying 
market conditions deteriorate. These risks are magnified for 
firms that lack stable funding and depend on non-deposit 
wholesale funding. Because of these risks, these are products 
and services that the OCC has largely extinguished from the 
national banking system. And we would not support, license or 
charter an institution concentrating in these services today.
    Finally, the OCC agrees that consistent and uniform 
standards provide benefits for both consumers and businesses, 
but we believe authority already exists to achieve these goals. 
The Dodd-Frank Wall Street Reform and Consumer Protection Act 
authorized the Consumer Financial Protection Bureau to adopt 
standards for financial consumer products and services without 
regard to whether they are offered by banks, non-banks, or 
State- or federally-supervised institutions. The CFPB has 
general authority to supervise and regulate non-bank lenders, 
including payday lenders and large non-bank participants and 
consumer credit and services, and will be conducting 
examinations of such companies.
    In summary, the OCC is concerned that H.R. 6139 could have 
unintended and undesirable effects on the population it is 
intended to benefit. H.R. 6139 raises serious consumer 
protection, compliance, and safety and soundness concerns by 
creating a national charter for companies concentrating on 
products most prone to abuse and that are most often targeted 
to minority populations, low-income neighborhoods, and 
communities with high concentration of our military 
servicemembers.
    Furthermore, where the services are offered, State 
officials and the CFPB already have adequate authority to 
regulate these products and the companies that provide them. 
The OCC shares the authors' goal of providing financial 
services to underserved communities and unbanked populations 
and we look forward to working with the members of the 
subcommittee to achieve that goal. Thank you very much.
    [The prepared statement of Deputy Comptroller Gardineer can 
be found on page 114 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is the Honorable John Munn, director of 
banking and finance, State of Nebraska, Department of Banking 
and Finance. Welcome.

  STATEMENT OF THE HONORABLE JOHN MUNN, DIRECTOR, BANKING AND 
 FINANCE, STATE OF NEBRASKA DEPARTMENT OF BANKING AND FINANCE, 
  ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS (CSBS)

    Mr. Munn. Good morning, Chairwoman Capito, Ranking Member 
Maloney, and distinguished members of the subcommittee. My name 
is John Munn, and I serve as the director of the Nebraska 
Department of Banking and Finance. It is my pleasure today to 
testify to you on behalf of CSBS. State regulators play a 
central role in overseeing the nondepository consumer credit 
industries. And we appreciate the opportunity to be part of 
this important discussion.
    I applaud the efforts of Representatives Baca and 
Luetkemeyer and their colleagues to make financial services and 
products available for unbanked and underbanked consumers. 
While we recognize that providing these individuals with access 
to financial services and products is an important objective, 
we have significant concerns about H.R. 1909 and H.R. 6139.
    First, we are concerned the bills would establish an option 
for a Federal business charter without meeting the necessarily 
high thresholds that Congress has traditionally required for 
receiving such a benefit. Historically, Congress has created 
Federal charters only in highly limited circumstances. In fact, 
most industries and businesses--large and small--in the United 
States thrive and meet important consumer needs very 
successfully without a Federal charter.
    Second, the bills would circumvent our ability to establish 
and enforce laws governing the financial services providers. 
The current legal structures governing the types of businesses 
covered by the two bills have long-standing foundations in 
State law. The citizens of each State have determined what 
financial services companies and what products are available to 
them.
    In my home State of Nebraska, much of the legal structure 
around payday lenders was adopted in the early 1990s. At that 
time, our legislature made the decision to take these 
businesses out of unregulated back alleys and away from loan 
sharks and to place them into regulated storefronts. The result 
of this action was to preserve access to these services and 
products but with more protection for consumers and 
accountability for the industry.
    In 2010, Nebraska had approximately 115 licensed payday 
lenders, and these companies reported a 20 percent net profit 
after taxes.
    Finally, the bills would undermine the carefully structured 
State-Federal balance in financial services regulation. The 
State law structures and processes governing financial services 
providers are complimented by our Federal partners. These 
partnerships leverage the benefits and strengths of each side 
of the relationship. States serve as the front-line licensing 
and regulatory authority ensuring that companies wishing to 
offer such services meet certain minimum requirements and 
comply with State and Federal laws. The Federal component 
brings a perspective that reinforces without supplanting State 
authority.
    Members of Congress on both sides of the aisle and in both 
Chambers have repeatedly voted to keep existing State 
regulatory regimes. Unfortunately, both bills run contrary to 
the goal of State-Federal collaboration and will fundamentally 
undo our existing partnership. As State regulators, we benefit 
from our proximity to the consumer transaction and to the 
communities served by the financial services providers. We hear 
firsthand about the regulatory burdens, and we see up close the 
consequences of bad actors. These bills take this perspective 
out of the picture to the detriment of the marketplace and of 
consumers.
    The challenge for policymakers is to create a framework 
that ensures industry professionalism, accountability, and the 
proper alignment of incentives while avoiding unnecessary 
regulatory inefficiencies and burdens. For State regulators, 
regulatory collaboration and coordination have been vital to 
striking that balance. Thank you for the opportunity to appear 
today. I look forward to responding to any questions or 
thoughts the subcommittee may have.
    [The prepared statement of Mr. Munn can be found on page 
127 of the appendix.]
    Chairwoman Capito. Thank you very much.
    That concludes the testimony from panel one, and I will 
begin my 5 minutes of questioning.
    The GAO recently studied depository institutions offering 
short-term, low-dollar loans--we all talked about this in our 
statements--and concluded that these products still are not 
very widely available. Given that many States either directly 
or indirectly have eliminated payday lending, does your agency 
intend to encourage these institutions that you regulate to 
move into this market and meet the rising consumer demand for 
short-term, low-dollar products?
    Ms. Gardineer. Madam Chairwoman, the OCC continues to 
encourage the institutions that we regulate to meet the credit 
needs of low- and moderate-income individuals in this country, 
and we agree that more can be done to achieve that. We 
encourage them to issue affordable credit, and we oftentimes 
make sure they understand that they can get favorable CRA 
recognition by doing so.
    However, our concerns with regard to this bill are that in 
our experience, we have issued guidance because of the concerns 
and the problems we have seen with the harm that these types of 
products have brought to consumers in the past. So we know we 
can do more and more needs to be done and we are certainly 
willing to work with the committee, as well as our State 
partners and other Federal regulators to achieve those goals.
    Chairwoman Capito. Mr. Munn, let me ask you, let's use your 
State of Nebraska as sort of a sample. What availabilities do 
you have in Nebraska that are State-regulated for this type of 
lending? Do you have payday lenders?
    Mr. Munn. Yes, we have payday lenders. We license small 
loan companies in addition to the 173 banks and 18 credit 
unions that we supervise.
    Chairwoman Capito. Do the institutions that you regulate 
make tax refund anticipation loans and those--
    Mr. Munn. No, they do not.
    Chairwoman Capito. So those have been specifically banned 
through State statute?
    Mr. Munn. Not specifically; I think more because of 
regulatory scrutiny of those practices.
    Chairwoman Capito. As a regulator, what product concerns 
you the most in terms of being maybe unfair or difficult for a 
consumer in this high-risk, low-dollar area?
    Mr. Munn. I think the burden in payday lending improperly 
granted the debt cycle it has created is maybe the most 
worrisome, and the cost that leads to for the individual 
consumers.
    Chairwoman Capito. The loss--most of those loans are 
supposed to be repaid in relatively short periods of time, 
correct?
    Mr. Munn. Yes, they are. And while we have a law that 
prohibits same-day transactions as far as going in paying 
interest and renewing that transaction, often the gap isn't 
very far between. Also, in Nebraska, you can go to different 
payday licensees for an additional advance having paid off one 
payday lender.
    Chairwoman Capito. So you could go to one, and then go to 
another. You can do that in Nebraska?
    Mr. Munn. Yes, you can.
    Chairwoman Capito. I would imagine--I am from West 
Virginia, a small State. We have low socioeconomics in some 
cases, a lot of elderly people. I am certain that is the case 
with everybody here, but you have heard the statistics, and I 
am directing to both of you really, of folks who can't get a 
$2,000 loan for whatever, tires for the car or anything, a 
medical emergency. What options--are we going to push everybody 
to the Internet for Internet lending, is that something that 
falls in the bailiwick of this type of regulatory environment? 
What suggestions can you make to try to solve this problem?
    I know, Ms. Gardineer, you said we are encouraging our 
institutions to do this, but the reality is I am not sure they 
really are doing it, and if they are, I am not sure that is 
maybe in the magnitude to solve an issue here. I think we all 
acknowledge there is an issue here.
    Mr. Munn, do you want to start?
    Mr. Munn. Absolutely. Being from a rural State as I am, 
which I think applies to your State, I think maybe we have 
better support systems in place for those situations, 
oftentimes in the car repair situation you mentioned, the shop 
doing the repair would allow the individual to do it in 
payments. About 20 percent of our credit unions in Nebraska, 
both federally- and State-chartered, have initiated quick cash 
programs with an 18 percent interest rate which keeps it within 
our State usury rate, therefore, they have the ability to 
structure, they will allow up to 60 days, keeps the APR much 
lower than it does when you compute the APR on payday loans.
    Chairwoman Capito. Did you have something to add, Ms. 
Gardineer?
    Ms. Gardineer. Yes, I believe that we all recognize that 
there is a problem here and there is a need for enhanced access 
to credit, but I think that is part of the issue that we see 
with the bill. We have great concerns about increasing 
consumers' access to building their creditworthiness here. And 
in many ways, what we see is access to transactions that 
perhaps provide money, but don't necessarily provide the 
credit-building relationship that we think is vital to these 
consumers as they begin to get these small-dollar loans.
    Chairwoman Capito. I am going to have to stop you there, 
because I am going to run out of time, I am sure we will get 
into the rest.
    Mrs. Maloney for 5 minutes.
    Mrs. Maloney. So Ms. Gardineer, you agree that, or rather 
the OCC agrees that there is a credit gap in our country and a 
serious lack of credit access for Americans of limited means? I 
think you both agree that there is, is that an appropriate 
assessment?
    I would say the OCC and State institutions have a 
responsibility to try to help meet these needs. And Mr. Munn, 
you mentioned the credit unions' efforts with the quick cash 
deal. What is the OCC doing to help fill that gap? What would 
you recommend, if you are opposed to the bill, how would you 
recommend that you fill the gap for the people who do need 
access to short-term credit?
    Ms. Gardineer. I think what the OCC--
    Mrs. Maloney. To build credit scores, as you said.
    Ms. Gardineer. In order to help consumers build their 
credit relationships, I think what we don't want to see is the 
unintended consequences of the harmful effects that could come 
from some of these products and services that, in our 
experience, we have seen have done more harm than good in 
helping these consumers meet those credit needs.
    So our concern is not that there is a lack of access to 
low-dollar loans. However, we do think that they have to be 
done in a very prudent and safe and sound way, and our concerns 
are not limited only to the consumer protection issues, but we 
also see the significant concerns we have with the safety and 
soundness issues that come with the offering of these products 
and services as well.
    As I mentioned in my statement, and as reflected in my 
testimony, there is a significant amount of oversight required 
with regard to BSA and AML compliance that oftentimes is 
extremely expensive and could certainly undermine the economic 
viability that the bill seeks to have these companies achieve 
in order to be profitable, but meet credit needs of these 
individuals.
    So again, we want to work with you to look at the 
innovations that could be offered, but we are fearful based on 
our supervisory experience.
    Mrs. Maloney. You have commented in your statement that you 
want to serve underserved communities and unbanked populations, 
but I am not hearing and you don't want any abuses, and you 
want to protect them, and you want to help them build their 
credit scores, and I think that is all great, but how? Where 
does the mother whose car broke down and desperately needs 
$2,000, where does she go to get a loan that she needs? Would 
the quick loans that the credit unions have give a loan as low 
as $2,000? And what are the answers, you are saying what you 
are against, but you are not saying what you are for. How do we 
help this unbanked, underserved, really needy population?
    Ms. Gardineer. I think that the goal of the bill is to 
foster and encourage the innovative products and services. And 
we do support the goal of that bill.
    Mrs. Maloney. Do you have any ideas for innovative products 
or services or how we would serve this population, either of 
you? I agree that you want to protect consumers, I am with you 
100 percent, and you want to build credit, but you are not 
saying how you would do this, how that would happen.
    Ms. Gardineer. I think what the bill structure actually 
anticipates as far as the OCC's ability to charter and approve 
these products and services is not to--and I think there may be 
language in the bill that specifically addresses we are not to 
create these products, but we are to evaluate them, that would 
be what would be asked of the agency. And our concerns, again, 
Congresswoman, that we--
    Mrs. Maloney. You testified you find them unsafe and 
unsound, but I am looking for solutions. Mr. Munn, would the 
credit unions give $2,000 loans, or do you have any other 
solutions that would be safe and sound?
    Mr. Munn. No, the largest loan in the program in Nebraska 
is $500 for a 60-day period.
    Mrs. Maloney. Is that a national program or is that just in 
your State?
    Mr. Munn. I believe they developed it on their own.
    Mrs. Maloney. I would say pawnbrokers, too, are a source, 
wouldn't you say?
    Mr. Munn. They can be. We do not regulate pawnbrokers in 
Nebraska. We should give credit to financial institutions we 
supervise for tremendous efforts at financial literacy to try 
and address the problem hopefully before it develops, as low as 
elementary school, and even up through senior citizens' events. 
As far as appropriate budgeting, savings and also they're very 
quick to refer people to financial counselors, if they are 
unable to assist them with a loan.
    Chairwoman Capito. Thank you. Mr. Renacci for 5 minutes.
    Mr. Renacci. Thank you, Madam Chairwoman, and I want to 
thank the witnesses this morning for being here. Ms. Gardineer, 
you indicated in one of your responses that the OCC encourages 
low-dollar, short-term loans, correct?
    Ms. Gardineer. Yes.
    Mr. Renacci. And the Center for Financial Services 
Innovation conducted a study in 2008 that found as much as 75 
percent of the unbanked and the underbanked population had 
credit scores that would be considered subprime or lack enough 
credit history to generate any score at all. Do the financial 
institutions that you regulate which offer short-term, low-
dollar loans require the borrower to have above-average credit?
    Ms. Gardineer. I am sure that the institutions that we 
regulate require the consumers to have the ability to repay, 
and to be able to demonstrate that.
    Mr. Renacci. But if they had below average credit or no 
credit score at all, would those banks that you regulate loan 
money out to those individuals?
    Ms. Gardineer. I believe I can say we would be concerned 
with that type of lending activity.
    Mr. Renacci. You would be concerned with that? So how do 
those individuals build a credit score, and at the same time, 
how are they able to borrow the money that they need for short-
term emergencies?
    Ms. Gardineer. I think one of the things that we need to do 
is take a more holistic approach to how we deal with this 
problem. And by that, I think we recognize that a lot of these 
consumers do have access to these types of products now, and 
they are clearly regulated by the States. What I think we would 
like to see is the creation--with the creation of the CFPB, 
there is now a framework of a Federal agency that can issue 
very robust guidelines to lending standards that could be 
applied on a national scale. And by doing that, you would 
ensure that consumers would have the very protections that I 
think the bill seeks to introduce.
    Mr. Renacci. I have to interrupt you. Your explanation has 
nothing to do with how the individuals build their credit 
score; you are talking about the CFPB and standards. We have 
individuals that need dollars today, need to be able to borrow 
money today, don't have a credit score, want to go to these 
organizations, and you have haven't answered how they get that 
money, or how they are able to borrow that money.
    Ms. Gardineer. The lending standards of financial 
institutions regulated by the OCC would require a demonstration 
of a borrower's ability to repay, as I said earlier. One of the 
concerns that we pointed out with the bill is not only that 
consumers have access to cash, but begin to rebuild their 
credit. We have concerns with some of the products and services 
we think we would see from some of the companies that would be 
chartered, such as reloadable prepaid cards.
    Mr. Renacci. I don't mean to interrupt you, but I only have 
so much time. How about those people who have the ability to 
pay but have low credit scores? I keep getting back to the same 
thing and we keep going off in a different direction. There are 
some who have no credit score but have the ability to pay, and 
those who have a low credit score but have the ability to pay. 
Does the OCC promote those type of loans, for small banks to 
loan out money?
    Ms. Gardineer. We encourage our institutions to make these 
types of loans, but there is a regulatory framework within 
which prudent loans need to be made. And we do believe that 
while meeting the needs of these consumers is paramount to the 
bill, and we certainly support the goals, they have to be done 
in a prudent manner and in a safe and sound manner.
    Mr. Renacci. Let's go to the institutions that you regulate 
in offering short-term, low-dollar loans, can you tell me has 
that increased or decreased over the last decade?
    Ms. Gardineer. I don't have the data to support that, but I 
can get that and get back to you.
    Mr. Renacci. Okay. Mr. Munn, quickly, can you comment on 
the importance of being able to share information between 
regulators and securing confidential manner?
    Mr. Munn. We are in a new environment, especially with the 
CFPB primarily, and the ability to share among financial 
regulators, both State and Federal, and law enforcement is key, 
not only in Bank Secrecy Act and money laundering efforts, but 
also just in general as to character issues.
    Mr. Renacci. I have introduced legislation, H.R. 6125, to 
ensure that information can be shared among regulators in a 
manner that ensures confidentiality and privilege protection 
stay in place. Can you give me your thoughts on that, and do 
you believe it is necessary?
    Mr. Munn. It is necessary and needed, because there is a 
wide array of regulatory bodies out there now, especially from 
State to State. And having access to information about, 
especially bad actors, is key to us being effective regulators.
    Mr. Renacci. Thank you, I yield back.
    Chairwoman Capito. Thank you. Mr. Baca for 5 minutes.
    Mr. Baca. Thank you, Madam Chairwoman. Ms. Gardineer, in 
your testimony you raise the objection to a 45-day review 
period for the approved product that the OCC would be required 
to follow stating that it would be too quick to turn around. 
For chartered banks that you currently oversee, what is your 
typical review process for new credit products and how long 
does it take--how long would you propose the review period be 
for short-term products?
    Ms. Gardineer. I think the 45 days is taken in context with 
the language of the bill and the OCC's expectations in 
reviewing and approving the products. So the bill requires the 
OCC to make a determination that the products and services 
would significantly harm the interest of underserved consumers, 
or small businesses, which we believe would require us to prove 
a negative, based on activities that have not yet been 
conducted. Generally--
    Mr. Baca. What proof would you be able to do that in 
determining that, that it would do harm? You said it would do 
harm.
    Ms. Gardineer. That is the standard that is outlined in the 
bill, that the OCC would have to apply in order to disapprove a 
bill.
    Mr. Baca. We don't really know if it would do harm or not.
    Ms. Gardineer. Exactly. So in order to meet that standard 
in evaluating the product or services and the only way that the 
OCC could disapprove any of the products or services offered by 
one of these companies would be to meet that standard, and to 
meet it within a 45-day period. I think the bill provides that 
if the OCC does not act within that 45 days, the product or 
service is deemed to be approved, and at that point cannot only 
be offered to low-income, underbanked--
    Mr. Baca. Let me ask an additional question. In your 
testimony you infer that under the bill, the lines between the 
OCC's authority and the CFPB's authority would be unclear. 
Doesn't the bill initially leave the CFPB essentially intact 
with its consumer protection authority under the Frank Dodd? 
And moreover, can you point to any part of the bill that would 
allow the OCC to overturn any determination made by the CFPB 
that a product is abusive or predatory?
    Ms. Gardineer. I think what we looked at is the concerns 
raised by the bill in its current form that would require the 
OCC to create disclosure for these types of products. The issue 
that we see and what I addressed in the bill is the exemption 
for certain types of disclosure under the Truth in Lending Act 
(TILA), which the CFPB now administers. And if certain 
disclosure would not be required for the short-term loans that 
would be part of the offers presumed by these companies, then 
there could be confusion with regard to consumers who would not 
necessarily benefit from the protections under TILA for the 
disclosures of APRs, for example. So those are some of the 
concerns that we referenced in our testimony today.
    Mr. Baca. You also make the point that we should turn our 
attention to small-dollar loans authorized by Dodd-Frank which, 
to date, has not received $1 of Federal funds or had any funds 
requested by either the President or Congress. If this program 
were funded, the program would only be successful as much as 
the appropriated funds allow it to be. And I am not sure if you 
have been aware of the current political debate of the Federal 
spending has not been something that Congress has been able to 
agree on. Considering all of this, what would be your solution 
for the growing credit divide, and why should the CFPB be able 
to oversee the Federal charter, even though it is not what they 
were constructed to do? How does a program that has never been 
funded allow for small-dollar loans? And how much Federal funds 
would it take for this program to really make some of the 
progress in today's current economy?
    Ms. Gardineer. Congressman, I don't know how much money it 
would take to make such a program successful. We could 
certainly go back and see if there are folks at the OCC who 
could develop data and we could get back to you on that. With 
regard to the CFPB, what I am suggesting is that the Dodd-Frank 
Wall Street Act created the CFPB and gave them the authority to 
issue broad standards and guidelines that would cover both 
banking and non-banking entities. And in order to maintain a 
level of consistency and consumer protection, we believe that 
robust guidelines that would be issued by the Bureau would 
better help to achieve the goals of the bill.
    Mr. Baca. Did my time run out?
    Chairwoman Capito. Your time has run out.
    Mr. Baca. Oh, okay.
    Chairwoman Capito. Thank you.
    Mr. Royce for 5 minutes.
    Mr. Royce. Yes.
    Ms. Gardineer, you mentioned several times in your 
testimony that the OCC has some concerns with this legislation 
in regard to money laundering and the Bank Secrecy Act. It 
sounds as if you are saying that this legislation, which 
creates a Federal nexus for some of these institutions, would 
weaken certain money-laundering provisions, or you have some 
concerns with that. I wondered if you could explain that to me.
    Ms. Gardineer. Of course. Certain of these products and 
services would utilize products that we believe would 
facilitate money laundering. In our experience, one of the 
things we know is that the cost of controls, in order to have 
an effective BSA/AML program in a financial institution, is 
extremely costly. Not only that, there is a myriad of oversight 
that is required to meet the very complex set of regulations 
and rules that have been put into place to protect against the 
BSA/AML concerns.
    This is pretty much echoed by FinCEN, which recently 
promulgated rules to address prepaid cards, a product that we 
believe would be utilized by many of these companies to offer 
transactional-type services to the underbanked and unbanked 
that are targeted in the bill.
    Mr. Royce. The thing that is concerning, I think, is the 
presumption that the OCC would not be capable of adequately 
safeguarding this sector when it comes to the anti-money 
laundering provisions, because what we are talking about here 
is a system of attempting to address offshore sites, to address 
these tribal entities that are involved in the business. And, 
again, it would seem to me that with a Federal nexus here, this 
would give you the wherewithal to monitor this more 
effectively.
    We currently have a situation where you have offshore 
companies, you have Indian tribes playing a very large role and 
an ever-increasing role in this sector. So it would seem that, 
again, giving a Federal regulator some oversight, that fact 
would actually increase the safeguards on this front.
    Today, FinCEN is forced, if you think it through, to work 
with 50-plus State regulators, all the State regulators and the 
District of Columbia. That can't be an ideal structure for 
trying to detect money laundering through the United States.
    In a way, you are arguing against the ability of the OCC to 
do an effective job on this front, and, of course, we had 
recently in the Senate that study about the OCC's failure in 
this regard. But I would think that in many ways, this would 
help give you the tools to pull that together.
    Ms. Gardineer. I think the issue that we have identified, 
Congressman, is not one of our oversight, but it is the issue 
of expanding the market for these products. By providing this 
specific Federal charter, you would now be allowing products 
and services that in our experience, we have identified as not 
only having safety and soundness concerns, but consumer 
protection concerns as well.
    Mr. Royce. All overseen by the OCC here.
    Ms. Gardineer. And my analogy to what you are talking about 
is the issues that we saw growing from the subprime market with 
regard to real estate. Subprime products had been around for 
many, many years, but generally offered to a very niche group 
of individuals. It was the expansion of that product to a 
broader demographic and across the country that led to a 
significant downfall with regard to the real estate crisis that 
we saw.
    So the expansion of the products into the marketplace is 
where we ground our concern with regard to the growing AML and 
BSA concerns that we have identified.
    Mr. Royce. Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Hinojosa for 5 minutes.
    Mr. Hinojosa. Thank you.
    I thank the distinguished panelists for your testimony. It 
seems to me, just like my colleagues who sponsored this 
legislation, I am concerned about the availability of credit 
and the type of financial products available to our most 
underserved communities. Hidalgo County in my congressional 
district in deep south Texas has a population of nearly 
800,000, and it is the most unbanked county, with over 100,000 
low-income households, many of whom are unbanked or 
underbanked. I have concerns that stripping the Consumer 
Financial Protection Bureau of their role to oversee non-bank 
small lenders will dilute their ability to comprehensively 
protect the underbanked and non-banked in my district. 
Supporters of the new proposal argue that it does not in any 
way remove the authority of the Bureau to examine, to issue 
regulations, or to enforce rules regarding these lenders.
    So my question to you, Ms. Gardineer is, do you believe 
that granting the OCC the authority to issue formal approval of 
these consumer products could undermine a later Bureau finding 
that the practices are abusive?
    Ms. Gardineer. I think that given the current structure of 
the CFPB and its role to evaluate and study consumer products 
and services, it is vital under the Dodd-Frank Act that the 
CFPB have the ability to issue national standards with regard 
to the offering of lending products. This safeguard exists 
currently today in our statutory structure.
    Mr. Hinojosa. Are you concerned that the OCC does not have 
the resources to provide sufficient oversight of a completely 
new class of financial entity such as small-dollar lenders?
    Ms. Gardineer. It is certain risks that we have identified 
that we believe with the expansion into the market would do 
more harm than good and create--
    Mr. Hinojosa. But you don't understand. We only have 800 
people in the Bureau. We need 1,200 to be fully staffed. So 
that is what my question was about, and I didn't get an answer.
    I have a question for Mr. John Munn. Is there a compelling 
national interest to establish a Federal charter in this area, 
and what gaps in regulation do you believe this bill is looking 
to close?
    Mr. Munn. I see no compelling need for a Federal charter, 
as these bills would basically gut State regulation. We feel we 
are the feet on the ground.
    In regard to the question about the Bank Secrecy Act and 
any money laundering, the information that is used in that 
pursuit flows up from the institutions we supervise, and the 
majority of institutions are State-chartered or regulated.
    Mr. Hinojosa. Thank you for clarifying that.
    How does Nebraska's licensing scheme and enforcement 
mechanism differ from what would be in place if this bill were 
enacted?
    Mr. Munn. We license on a county basis, which gives us a 
much smaller area in which to monitor the performance of a 
payday lender. We have a limit as to the fees that can be 
charged: $15 per $100. A licensed payday lender may not hold 
more than two checks from an individual at any one time. A 
check may not be held for more than 34 days, and the checks in 
the aggregate cannot exceed $500.
    Mr. Hinojosa. So how do States differ now in their 
regulation of the non-bank lenders? What kinds of protections 
are in place that could be preempted if this bill were enacted?
    Mr. Munn. I think those States that have a central registry 
of payday-lending transactions where each licensee needs to 
forward electronically a notation of an advance to an 
individual would be a way in which they can coordinate amongst 
them so that the use of payday lending advances is appropriate.
    Mr. Hinojosa. My final question: Would the bill undermine 
our States' authority to license and regulate non-bank 
financial service providers?
    Mr. Munn. Absolutely.
    Mr. Hinojosa. I yield back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Luetkemeyer?
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    I would like to follow up for just a second with Mr. Munn.
    So far, Mr. Munn, you have been talking about payday 
lending and H.R. 1909, and none of that is what we are talking 
about today. We are talking about our bill, H.R. 6139, which 
does not allow payday lending, number one. Number two, all of 
the lending that is in there is beyond 30 days.
    So my question to you is, you made the comment a minute ago 
that there is no compelling need in your State for small-dollar 
lending. Is that what you just said?
    Mr. Munn. Yes. No, I am sorry, the question was, is there a 
compelling need for a Federal charter.
    Mr. Luetkemeyer. A Federal charter, right. But you don't 
have anybody whose--you don't allow lending above $500 for 
small-dollar loans; is that correct?
    Mr. Munn. As far as payday lending advances, yes. As far as 
small loan companies, they may loan to whatever limit they feel 
is appropriate.
    Mr. Luetkemeyer. Okay. We have a situation, though, in your 
State, you may not be aware of it, but about 900 people a day 
go online to find other sources of lending. Does that concern 
you at all?
    Mr. Munn. Absolutely. I am concerned about how do they know 
that they are working with a valid entity on the other end?
    Mr. Luetkemeyer. Thank you very much. You just made my 
point. I think it is very important that we do that as well, 
and that is what this bill is trying to do. Because what they 
are doing is going offshore. They are going to tribal locations 
where they are loaning online. And what this bill tries to do 
is allow a Federal charter to take those folks into 
consideration to allow them access to that credit so that it 
can be controlled. And it is not out of--and it addresses your 
concerns and makes sure that it is done in a safe and sound 
way. Would you agree with that?
    Mr. Munn. How will the individual know, the consumer, when 
they go online, that they are interacting with a licensed 
supervised payday lender? I did a search--
    Mr. Luetkemeyer. Wait. Timeout. We are not doing payday 
lending. This is not payday lending.
    Mr. Munn. Is there going to be a prepayment penalty if 
somebody repays a 30-day advance?
    Mr. Luetkemeyer. No. There is no prepayment penalty. Have 
you read the bill? There is no prepayment penalty in this.
    Ms. Gardineer, let me talk to you a little bit. Obviously, 
Mr. Munn hasn't read the bill, so it is going to be difficult 
to ask him any questions about it.
    With regard to you, you keep talking about a number of 
things here that keep going back and forth, back and forth, 
with regard to the issues that we are talking about. First, you 
say traditional banking is not working. You made the comment 
that you want to extinguish small lending from the banking 
system, yet you want to work with our banks to make sure that 
they can provide for the folks who are in need, who are on the 
line with their lives and their livelihoods, who just need a 
small-dollar loan, yet you have no solutions. Your solution was 
a prepaid card.
    If I am not mistaken, you have to buy the prepaid card with 
money; do you not?
    Mr. Munn. I assume so.
    Mr. Luetkemeyer. How does that solve the problem? Mr. Munn, 
I am asking the question of Ms. Gardineer. Thank you.
    Ms. Gardineer. This was just an example of the types of 
products and services we believe would be utilized in order to 
provide the loans that are contemplated under the bill.
    Mr. Luetkemeyer. That prepaid card is not a loan.
    Ms. Gardineer. No, it is not.
    Mr. Luetkemeyer. No, it is not. Thank you very much.
    Another question for you. You are talking about a problem 
building credit history. We had a hearing here not too long ago 
with regard to the folks who rent to own, and it is very 
interesting that during the course of the discussion, many 
people testified that to rent to own was a great way to 
establish their credit history to be able to go back then and 
be able to get a normal loan.
    You don't believe that people being able to get a short-
term loan, most of whom pay it back--in fact, I was the 
chairman of the Financial Services Committee when I was in 
Missouri, and we were working very long and hard on all of 
these small-dollar lending folks like this, and we had fewer 
complaints about them than we did the banking industry. Why? 
Because the people come in, they have a particular need, and 
they go in and address it, and they take care of their 
business. That is the way they establish credit. I think that 
is important, don't you?
    Ms. Gardineer. I agree that it is important to establish 
credit. Our experience, however, has shown that the types of 
products and services that the OCC has reviewed and taken great 
steps to issue guidance to protect consumers and enforcement 
actions to deal with the high cost of the fees, the rollover 
and the unsustainable debt that we believe consumers can be 
trapped in is of a greater concern and does not help them build 
credit.
    Mr. Luetkemeyer. You keep looking at the glass as if it is 
half empty. I think it ought to be half full. I look at this as 
an opportunity to help people if it is structured correctly. 
You keep telling me that the OCC can't do this, it can't do 
that; we are looking for this, we are looking for that.
    We are giving you the authority in this bill to be able to 
work with the individuals who want to do this type of lending 
and create an environment that will work for not only the 
lender, but for the person who is getting the money as well, 
and works for you to be able to regulate this. The CFPB is 
involved in this. This is a collaborative effort on all 
people's part to be able to offer a product that helps 
everybody in this situation.
    I am really curious, and I have another question in regards 
to safety and soundness, but I will leave that for another day. 
I see that my time is up.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Scott for 5 minutes.
    Mr. Scott. Thank you, Madam Chairwoman.
    Here is what I think is wrong with this--that is a 
challenge with this bill. KPMG did a study, a very, very 
effective study, that said that there are 30 million Americans 
who are either unbanked or underbanked, and my problem with 
H.R. 6139 is that you have in this bill a $5,000 unsecured 
credit limit and a $25,000 secured credit limit, both of which 
the OCC can raise. That is correct; is it not?
    Ms. Gardineer. Yes.
    Mr. Scott. All right. Can you explain to me the 
justification for such a high required level of credit? And 
what about those folks who simply need $2,000 or $3,000 and 
where the bulk of these 30 million are impacted? How do you 
justify this high limit?
    Ms. Gardineer. Congressman, these are issues with the bill 
that we have identified in our testimony. The bill would 
actually allow short-term loans that could be greater than 30 
days. They could be secured. They could be secured by salary 
payments, if you will. They could be high cost. They could have 
rollovers. They could, of course, increase the cycle of debt, 
the very thing that we believe is not the goal of the bill, but 
could certainly be the unintended consequence of the bill.
    Again, what we believe we have seen in our experience is a 
construct of the bill that would essentially require us to 
charter companies as national consumer credit corporations 
against--and have as a part of those new charters companies 
against which we already have cease-and-desist orders 
outstanding for offering the very types of products that trap 
consumers into a cycle of debt that we think is more abusive.
    Mr. Scott. Could you share with us what potential 
implications would result from this requirement, from this high 
level?
    Ms. Gardineer. I think what we see with regard to the high 
dollar amount is it doesn't actually achieve the goal that we 
have identified with regard to underbanked and unbanked. There 
is a range here with regard to the dollar amounts, as you have 
pointed out, the $5,000 unsecured, $25,000 secured credit. But 
in the discussions and the studies that we have read, 
oftentimes consumers are seeking much smaller dollar amounts in 
order to meet their short-term needs.
    Again, our concern is if the goal of the bill is to help 
consumers build their creditworthiness, but these unintended 
consequences that could sustain a cycle of debt with these 
types of fees is the result, then we haven't actually achieved 
the goal of helping the consumer.
    Mr. Scott. So you agree with me that this is a major 
shortcoming of this bill?
    Ms. Gardineer. I agree.
    Mr. Scott. Now, let me ask you about this issue of the 
overlapping between the OCC and the CFPB. What are your 
concerns there? Isn't there a danger here that when you have 
this overlapping, when you bring in another agency and you have 
one in place that is just getting really under way, and we are 
still faced with efforts of trying to disavow that, doesn't 
that bring out a sense of uncertainty and unpredictability of 
who is in charge of what, and isn't that another basic flaw in 
this approach?
    Ms. Gardineer. I think what would be created under the bill 
is the OCC having the authority to charter national consumer 
credit corporations and to then approve or disapprove, given 
the standard products and services that are presented to it 
within a 45-day period. That would seem to be in conflict with 
the current regulatory or statutory regime, rather, with the 
CFPB that has the authority currently to issue rules and 
guidelines that would create national lending standards that 
apply both to banking and non-banking entities and achieve that 
level of consistency that consumers need in order to make 
informed comparisons about the costs of low-dollar credit and 
the availability of that type of credit. The two agencies 
together, or the OCC having this authority, doesn't appear to 
be needed, given the authority of the CFPB currently.
    Mr. Scott. Thank you very much.
    Chairwoman Capito. Thank you.
    Mr. Pearce for 5 minutes.
    Mr. Pearce. Thank you, Madam Chairwoman. I would like to 
yield a couple of minutes to Mr. Luetkemeyer.
    Chairwoman Capito. Mr. Luetkemeyer is recognized.
    Mr. Luetkemeyer. Thank you, Mr. Pearce.
    I just had a quick question with regards to safety and 
soundness, Ms. Gardineer. You made that comment a couple of 
times. Can you explain how a small-dollar lender has a safety 
and soundness problem?
    Ms. Gardineer. I think that the bill actually requires the 
OCC to encourage affiliations with third-party vendors, and as 
I mentioned in our testimony, the Comptroller very recently 
made a statement about third-party vendor oversight and the 
problems that it raises with operational risks on a safety and 
soundness basis.
    Mr. Luetkemeyer. You continue to go down this track, Ms. 
Gardineer, of saying, well, we have had this experience, and 
therefore it is a bad thing. Why don't we change the way we are 
doing business then and make it a good thing? You have the rule 
capability. You have the authority, working with the CFPB, to 
come up with new rules, new criteria. If it has to be 
capitalized differently, if it takes new management practices, 
that is fine.
    But when you say safety and soundness, I have a real 
problem with that comment. As a former regulator, safety and 
soundness has a whole different meaning to me. When you impugn 
that the integrity of the institution is at risk, you are 
talking about safety and soundness. And we are talking about an 
institution that has no safety and soundness impact on this 
society or this whole regimen as a whole. We are looking at one 
individual institution that may or may not be in compliance, 
and you have power over that.
    And I keep saying, you keep wanting to not say, well, we 
can't do a good job of overseeing it. If you can't do a good 
job overseeing a small-dollar lender, how in the world can you 
do a good job overseeing Bank of America and JPMorgan?
    Ms. Gardineer. The issues that I have raised, Congressman, 
deal with the third-party vendors who the OCC would be 
encouraged to have these--
    Mr. Luetkemeyer. Ma'am, with all due respect, if you don't 
want them to hook up with those lenders when they apply for 
their charter, you don't give it to them. You are in control. 
You act like you have no control over this, and yet this bill 
gives you the authority to do everything you want.
    I yield back to my good friend from New Mexico. Thank you.
    Mr. Pearce. Thank you.
    Mr. Munn, you talk about wanting to protect the consumer, 
and the great fault you find with the payday loans or whatever 
is just the charge, right, the amount of the charge; is that 
it?
    Mr. Munn. The--
    Mr. Pearce. So what is your real objection to the payday 
lending?
    Mr. Munn. I don't object to payday lending as a process. It 
is the law of the State, and I enforce State law. So I am 
neither in favor of it nor against it.
    Mr. Pearce. So you pass regulations in order to control 
what? Do you pass regulations--
    Mr. Munn. So that the business is in regulated storefronts.
    Mr. Pearce. So you would control the price of the products; 
is that right?
    Mr. Munn. That is correct.
    Mr. Pearce. Okay. And that is basically where you are 
coming from Ms. Gardineer; is that right?
    Ms. Gardineer. Yes, sir.
    Mr. Pearce. Now, would you both say that several hundred 
million dollars is an exorbitant amount to pay for a $140,000 
or $150,000 loan, and the cost was several hundred million 
dollars? Wouldn't you say that is exorbitant?
    Mr. Munn. Yes.
    Ms. Gardineer. Yes.
    Mr. Pearce. There was a guy in New Mexico trying to get a 
$140,000 loan and couldn't find it. He just had an idea. He was 
willing to give up half his company stock for the $140,000. No 
one in New Mexico would take it on, so he moved to Seattle, and 
Bill Gates ended up paying somebody a lot of money for 
$140,000. Now, what you all would do is stop that completely, 
because that was a pretty large amount to pay, yet Bill Gates 
didn't mind. At the end of the day, he came out okay, I think; 
wouldn't you say?
    Mr. Munn. Absolutely.
    Mr. Pearce. He survived it.
    The question I have at the end of the day is one a 
constituent put to me: If I want to borrow $100 today and pay 
$120 back at the end of the week, what business is it of yours, 
the government? It is a pretty similar question to what Bill 
Gates would have asked.
    What we are going to do is regulate out the potential for 
this economy to thrive. We are going to regulate out every 
opportunity for anybody who is right now unbanked to find 
money. We are going to do that on credit cards. We are going to 
do it all the way up and down the row. Maybe we should just put 
out a warning that says, if you go out beyond here, you are on 
your own. We are not going to protect you at all. We don't know 
what is out there. You go here at your own risk.
    But the idea we could regulate every breath that people 
take, every step that they make, every business decision, every 
crunch they get into is one that is doomed to fail. A 
government that intends to regulate everything has no freedom 
and no movement. We have plenty of examples of those economies 
in the word. Now, I don't want anybody cheated either, but I 
also want Bill Gates to find his $140,000 when he comes along.
    Thank you.
    Chairwoman Capito. The gentleman yields back.
    I would like to ask for unanimous consent to insert a 
statement into the record from Mr. William Isaac. Without 
objection, it is so ordered.
    Mr. Carney for 5 minutes.
    Mr. Carney. Thank you, Madam Chairwoman. Thank you and the 
ranking member for having this hearing, and for the sponsors of 
the legislation and the witnesses today for coming to discuss 
what is a difficult issue and a serious problem for so many 
folks.
    We had in here several months back a hearing with, I 
believe it was the FDIC, who had a pilot program to address the 
credit needs of the unbanked, and I think their target APR was 
like 38 percent. The report that they presented to us that day 
was that it was a miserable failure. They tried to get their 
member institutions to take up that program, and it was quite a 
failure.
    I spoke to Richard Cordray before he was made the head of 
the CFPB, when he was the Chief Enforcement Officer, about 
payday lending and my concern about consumers and how they were 
addressed by that. He had field hearings, I understand, after 
that and found that there are a lot of people out there in 
communities across the country who need access to credit. They 
are not getting it from the banking institutions.
    So, there is a real need out there. He said he had heard 
that. I know that all of my colleagues on both sides of the 
aisle are hearing that as well. So the question gets to be how 
do we address that need? It seems that the banking industry is 
not doing it, the regular banking industry, if you will.
    Mr. Munn, I know you are here on behalf of, I guess, the 
Conference of State Bank Supervisors. Are you speaking on their 
behalf?
    Mr. Munn. Yes, I am.
    Mr. Carney. Was there a process that you all or the 
organization went through to develop your position on the 
legislation that we are discussing today?
    Mr. Munn. Discussions between regulators, State regulators, 
happened both through CSBS and outside of CSBS, and gradually, 
I think, we have the benefit of understanding what is working 
in other States and what may not be working in other States.
    Mr. Carney. So it is essentially the issue of preemption, 
from your perspective?
    Mr. Munn. Yes.
    Mr. Carney. So you are regulating these kinds of lenders 
right now. What are the kinds of problems that you see?
    Mr. Munn. The problems that we see, we are very restrictive 
as to Internet, access to Internet payday lending. We require 
that a license--
    Mr. Carney. By ``we,'' do you mean in Nebraska or just 
generally?
    Mr. Munn. Excuse me, I am speaking in terms of Nebraska, as 
far as we require a physical presence within a State for that 
licensee to offer Internet payday lending so we have some 
office where we can go to to review the records.
    Mr. Carney. Is that typical of other States?
    Mr. Munn. Yes, I believe it is.
    Mr. Carney. What other kinds of things? In terms of--the 
biggest concern are these short-term loans that translate into 
an APR that we would otherwise think is excessive, but if you 
are looking for that $500 to pay for your new brake job or 
whatever, you are going to pay what you need to do.
    Mr. Munn. That is right.
    Mr. Carney. Isn't that really the essence of the problem? 
Is that what you see at the State level?
    Mr. Munn. Each State sets its own caps on it. And, of 
course, there are 16 States that either don't allow it or have 
set the APR so low that payday lenders can't make money at it.
    Mr. Carney. Is it the APR, or is it the continuing reupping 
if you will, taking an additional--the cycle of debt, if you 
will, that has been described earlier?
    Mr. Munn. I have not read the Pew study that just came out 
last week, but in reviewing the major points, I think they used 
the 5-month cycle of debt was common for people who go in for 
one payday advance.
    Mr. Carney. Ms. Gardineer, you heard me talk about the need 
for this. What is the alternative? Is there a way to cure the 
legislation that we have before us, or is there a different 
approach? You didn't seem to have an answer in response to 
other Members who asked a similar question.
    Ms. Gardineer. In looking at the legislation and preparing 
the testimony today, we offered our observations on the bill 
presented in front of us. The OCC would be willing to work with 
any of the Members, the committee, and the other Federal 
regulators to address the needs of short-term credit, but I 
don't have today any additional ways that we could do that.
    Mr. Carney. I think you may have suggested to try to get 
this population in the regular banking system. Did you suggest 
that, or did I hear--
    Ms. Gardineer. No. Actually what I said is that I think the 
best oversight that we have in the current structure of the 
statutes is the CFPB's ability to issue nationwide standards 
that would apply to non-banks as well as banking entities to 
address the credit needs.
    Mr. Carney. Thank you. My time is up. Thanks for coming 
today and sharing your expertise with us.
    Chairwoman Capito. Thank you.
    Mr. Grimm for 5 minutes.
    Mr. Grimm. Thank you, Madam Chairwoman.
    Mr. Munn, you just mentioned that you have very robust and 
strict rules about online lending in Nebraska. I just had a 
question. How do you enforce those rules? And let me give you a 
specific example. I am in Nebraska. I log on. I go offshore, 
and they send me a prepaid card in the mail. How do you enforce 
that? And they are breaking the rules of Nebraska, let us just 
say, in many ways. How do you enforce that?
    Mr. Munn. Of course, we would not be licensing that 
offshore lender. If the consumer complains about it, we would 
attempt to get to the bottom of the situation that they have 
put themselves in.
    Mr. Grimm. But in all sincerity, you being in Nebraska, you 
are not going to do anything about that company in Macau?
    Mr. Munn. We are very limited as to what we can do.
    Mr. Grimm. Okay. So, again, I just want to emphasize, I 
think it is a little bit misleading to discuss all of the rules 
and regulations that you have for the Internet when we all know 
that these offshore companies is what we are really trying to 
avoid in the first place. You can't really do anything 
whatsoever to stop them from doing these loans on the Internet, 
because unless you plan on monitoring people on the Internet, 
which we know you certainly are not going to do, you wouldn't 
even know about it until after the fact, until after the damage 
is done.
    So isn't there something to be said about limiting or at 
least trying to attack the problem of all of this offshore 
lending that is going on and get something that is regulated 
and that we can maybe do a better job of?
    Mr. Munn. As a State regulator, I don't think we can begin 
to try and regulate foreign companies.
    Mr. Grimm. Exactly.
    Ms. Gardineer, you mentioned before an analogy with the 
real estate market. First of all--and also safety and 
soundness, and I think it all goes together. Are these 
institutions, these lenders, are they depositories? Because I 
thought they were nondepositories.
    Ms. Gardineer. The entities that the bill would ask the OCC 
to charter?
    Mr. Grimm. Yes.
    Ms. Gardineer. That is correct. But they could be owned by 
depositories.
    Mr. Grimm. Okay. But for the most part, they are not 
depositories?
    Ms. Gardineer. They are not depositories.
    Mr. Grimm. So if they are not depositories, where is that 
safety and soundness issue? Because I have to be honest with 
you, I don't see it either. Normally in this committee, safety 
and soundness goes to the integrity of the overall banking 
institution. We are talking about having taxpayers on the hook. 
If one of these small payday lenders makes loans they shouldn't 
make, they go out of business. But it certainly isn't systemic, 
or it is not going to affect the taxpayers, will it? Can you 
foresee a situation where it is affecting the taxpayers if a 
payday lender or one of these small lenders goes out of 
business?
    Ms. Gardineer. The form of ownership can change under the 
bill. So even though these would be chartered as 
nondepositories, I think the bill actually would permit 
depository institutions, bank holding companies, savings and 
loan holding companies to own these types of companies. And at 
that point, I think that you do have the nexus between the 
depository institutions, the holding company structure that 
could create a safety and soundness issue.
    Mr. Grimm. Hold on. But under that bill, the OCC can decide 
whether that happens or not, correct?
    Ms. Gardineer. In the framework of the bill.
    Mr. Grimm. So the OCC, based on this framework, could 
prevent that.
    Okay. Back to the real estate market. Is that really a fair 
analogy? In this scenario, we have a lender that is lending 
money pretty much on the hook themselves. Are they then selling 
that, packaging it and selling it, to the Federal Government?
    Ms. Gardineer. I think--
    Mr. Grimm. The risk? Are they or are they not selling the 
risk to the Federal Government?
    Ms. Gardineer. I am sorry, Congressman, I don't think I 
follow your question.
    Mr. Grimm. The risk of that loan, is it being packaged and 
sold to the Federal Government? These lenders, are they going 
to package and sell it to the Federal Government?
    Ms. Gardineer. No, I don't know that--actually I can't say, 
because the products and services would have to be approved by 
the OCC. So the construct of how those services would be 
offered--
    Mr. Grimm. Okay. I can assure you that they are not being 
packaged and sold like--that is silliness. Okay? This is a 
serious proceeding. The subprime loans were sold to Fannie Mae 
and Freddie Mac, sold to the government, which put taxpayers at 
massive risk. The banks were knee deep in this stuff, and it 
was a systemic problem that hurt our overall economy. And real 
estate in my State is 25 percent of our State economy. This 
amount of lending isn't even in that regime, and I just think 
that analogy is simply absurd.
    Ms. Gardineer. Actually, I think the analogy has some 
merit, because what we are talking about with regard to all 
aspects of lending are the disclosures that consumers need in 
order to make informed choices. And what we saw with the 
subprime market was the expansion of that product to a broader 
demographic without the disclosures with regard to how the 
products were offered and the mechanics of that type of loan.
    Mr. Grimm. I know my time is up, but the problem wasn't 
with disclosures; it was that the Federal Government was buying 
it all, so no one cared.
    Thank you. I yield back.
    Chairwoman Capito. Mr. Green for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman, and I especially 
thank you for allowing me to continue to interlope, given that 
I am not a part of the committee. And I thank the witnesses for 
appearing. Let me start with Mr. Munn.
    Mr. Munn, you were asked a question earlier, and you didn't 
get a chance to respond in terms of your knowledge of the bill. 
Would you like to respond before I go to some other areas in 
terms of your knowledge of the bill?
    Mr. Munn. Thank you.
    The point has been made more than once that in the bill as 
proposed, the lenders would not make a loan of less than 30 
days. And my question was, well, I don't see any prepayment 
penalty called for, so somebody may go to one of these lenders. 
They only need the money for 7 days, but they are made a 30-day 
loan with the 30-day fee, and pay it off in 7 days. From an APR 
standpoint, that increases the APR substantially.
    Mr. Green. And does that, in your mind, constitute a 
penalty?
    Mr. Munn. A penalty? It would quadruple the annual 
percentage rate, and, of course, that is what we are used to. 
The terms we think of in terms on payday lending is the annual 
percentage rate so that the consumer can shop from one payday 
lender to the next.
    Mr. Green. How many hats are you wearing today? I know what 
your current title is, but in your testimony you seem to 
indicate that you are representing some other entities.
    Mr. Munn. I represent the State of Nebraska as the director 
of its Department of Banking and Finance and serve at the 
pleasure of the Governor, but then I also appear on behalf of 
the Conference of State Bank Supervisors in which I am actively 
involved. I also represent all State financial regulators on 
the Federal Financial Institutions Examination Council, an 
entity created by Congress in 1979.
    Mr. Green. When you are speaking, how do I know when you 
are representing Nebraska or the other entities? Where is the 
line of demarcation? Is there a bright line for me?
    Mr. Munn. There probably isn't a bright line. I would think 
today, probably 60 to 70 percent of my testimony was Nebraska-
based.
    Mr. Green. Let us ask a few questions now about your 
opinion as it relates to the other entities. Has there been a 
request by these other entities to regulate in this area? Are 
you aware of a request that is being made by entities, 
Governors, for example? I know you are not representing 
Governors, but are Governors asking for this kind of 
regulation?
    Mr. Munn. No, I am not. It is the powers granted to the 
Consumer Financial Protection Bureau by Congress is where the 
new source of regulation is coming from.
    Mr. Green. And as it relates to preemption, your State 
would oppose preemption, I take it?
    Mr. Munn. Yes, we would.
    Mr. Green. Do you have any sense of how the other States 
would weigh in on the question of preemption?
    Mr. Munn. I think the States would come down consistently 
on my side, especially when 16 of the States either don't allow 
payday lending or have set a usury rate such that it is not 
economically feasible for the lenders.
    Mr. Green. And for the benefit of people who may not follow 
these issues closely, but may be following this hearing today, 
explain what preemption means so that people will understand.
    Mr. Munn. Okay. Preemption means that the Federal law in a 
certain situation is given supremacy over the laws of the 
State, and the State has nothing to say about how--whatever the 
object of the preemption was, the State regulation is cast 
aside.
    Mr. Green. Generally speaking, who usually favors 
preemption? I hate to get you into a political quagmire, but 
who usually favors preemption?
    Mr. Munn. Generally, companies that want to do business in 
more than one State. However, I am more familiar on the banking 
side. We have banks we supervise which operate in several 
States very effectively because State regulators work together 
from a home State-host State basis.
    Mr. Green. Let us talk about persons who are States' rights 
advocates. Do they usually favor preemption, persons who are 
States' rights advocates?
    Mr. Munn. Not to my knowledge.
    Mr. Green. Let us talk about what your knowledge base 
reveals. What does it reveal as it relates to preemption? 
Persons who are States' rights advocates, would they normally 
favor this kind of thing?
    Mr. Munn. The subject of the bill?
    Mr. Green. No, not the subject, but having the Federal 
Government decide what States should do, or taking the 
authority from States.
    Mr. Munn. No, I would think they would naturally be opposed 
to that.
    Mr. Green. And my final question will be this: If this is 
passed, will Nebraska have the opportunity to continue to 
regulate, in your opinion, payday lenders, as opposed to what 
is being now established? There is a new name being given to 
institutions that will engage in this conduct. Are you of the 
opinion that you will be able to continue to regulate payday 
lenders and other lenders?
    Mr. Munn. I don't believe that we would. I think that the 
current payday licensees that we have would probably either be 
forced out of business or would seek a Federal charter.
    Mr. Green. So you would be preempted.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    That concludes our first panel. I thank both of our 
witnesses. We will assemble the second panel and begin in a few 
minutes.
    I would also like to ask unanimous consent to insert a 
statement into the record from Americans for Financial Reform. 
Without objection, it is so ordered.
    Chairwoman Capito. We will have a quick changeover.
    [brief recess].
    Chairwoman Capito. All right. We will reconvene, if I can 
get order in the room.
    I want to recognize each of our witnesses. First of all, I 
want to thank them for coming, and I want to recognize each one 
for 5 minutes for the purpose of making a statement.
    Our first witness is Ms. Mary Jackson, who was introduced 
by her good friend Pete Sessions, a Member of Congress. She is 
the senior vice president, corporate affairs, of Cash America 
International, Incorporated. Welcome.
    I would remind the witnesses that you are really going to 
need to pull the microphones close, and make sure they are on 
so, that we can properly hear your statements. Thank you.

  STATEMENT OF MARY JACKSON, SENIOR VICE PRESIDENT, CORPORATE 
              AFFAIRS, CASH AMERICA INTERNATIONAL

    Ms. Jackson. Thank you, Chairwoman Capito, and members of 
the subcommittee.
    I am here to advocate today for consumers. The National 
Bureau of Economic Research released their study citing that 
about half of all Americans couldn't come up with $2,000 in 30 
days to meet an emergency. I am sure this is something you are 
already keenly aware of because the study is referring to your 
constituents.
    I have been an employee of Cash America for over 20 years 
and have watched our businesses grow as community banks have 
left the neighborhoods, and I have seen the improvement in the 
non-bank lending space, and it is exciting to see the progress 
of products and better customer service that has evolved. But 
as with any business, there is still room for improvement.
    We have witnessed the explosion of Internet lending. We 
believe the current State laws do not adequately protect 
consumers, forcing them to opt for loans that do not have high-
quality standards or enough consumer protections. But foremost, 
we listen to our customers who have consistently told us they 
need more choices.
    Cash America is an innovative, 28-year-old financial 
services company with over 7,000 employees. We operate with 
4,100 licenses in 31 States and adhere to 12 Federal lending 
laws, most notably anti-money laundering, truth in lending, and 
fair credit reporting. We are a customer service company that 
hears from our customers--such as Regina in Atlanta--who say 
more options would be a great idea that would help a lot of 
families in need.
    Consumer behavior is changing rapidly with advances in 
technology, and according to research, global Internet usage 
increased 75 percent in the last 5 years and is expected to 
increase another 40 percent in the next 3 years. Research also 
shows that 59 percent of the U.S. population banked online in 
2010. At Cash America our online lending subsidiary, E-Nova 
International, conducted about 4 million transactions last year 
and extended around $2 billion in credit.
    A Federal non-bank charter, as outlined in H.R. 6139, would 
take the industry from struggling with 50 different State 
models to one overriding solution that meets consumer needs. 
The State-by-State model is utterly ineffective. We can't offer 
the same choices to consumers with identical financial needs 
because they are separated by nothing more than a State line. 
And in most States, the spectrums of offerings is limited by 
outdated laws that restrict the number of choices available to 
consumers.
    For instance, in California, if someone needs $1,000, they 
would have to borrow from 4 different payday lenders at $250 
each, or qualify for a loan over $2,500 and pay back $1,500 
immediately to get the $1,000 they seek.
    Also, States like Nebraska have not modernized and will not 
license Internet lenders. Currently, lenders are required to 
develop new products dependent on antiquated State consumer 
credit statutes that were not drafted for current technologies 
or online interstate consumer lending. And if we were to apply 
the same State-regulated scenario to credit cards, most 
Americans living in States like New York and Texas would not be 
able to carry a credit card due to their State laws.
    More than 60 million Americans are in need of non-bank 
financial products. We envision under the charter working 
alongside banks, credit unions, nondepository lenders, and 
others who desire to provide credit options for consumers. Even 
the CFPB has stated that achieving solutions at scale requires 
that we actively engage in all sectors.
    What innovative production do consumers need and want? 
Consumers need amounts from $500 to $5,000, with longer terms 
of 3 months to 2 years, and we are committed to providing these 
under the charter. Moreover, we care about our customers, and 
despite recent articles to the contrary, we have no desire to 
circumvent the CFPB's efforts, and the bill specifically states 
so.
    We have Federal banks and State banks. We have Federal 
credit unions and State credit unions. We need a Federal non-
bank charter and State licensed lenders. The debate over 
consumer lending continues to be volatile, but most ironically, 
everyone here wants the same thing: more quality financial 
choices in the marketplace for hard-working Americans.
    Cash America was built on the foundation of serving people 
that traditional financial institutions have overlooked. We 
encourage you to support H.R. 6139. Let's modernize our 
thinking and our laws so we can truly meet the needs of those 
who have the fewest options.
    Thank you, Chairwoman Capito, Ranking Member Maloney, and 
subcommittee members. It has been a pleasure to share our 
thoughts with you today. Thank you.
    [The prepared statement of Ms. Jackson can be found on page 
125 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Ms. Frances C. Bishop, the owner of 
Dollar Pawn, Incorporated, on behalf of the National 
Pawnbrokers Association. Welcome.

 STATEMENT OF FRANCES C. BISHOP, OWNER, DOLLAR PAWN, INC., ON 
BEHALF OF THE NATIONAL PAWNBROKERS ASSOCIATION AND THE ALABAMA 
                    PAWNBROKERS ASSOCIATION

    Ms. Bishop. Thank you.
    Good morning, Chairwoman Capito, Ranking Member Maloney, 
and members of the subcommittee. My name is Fran Bishop, and my 
husband and I have owned and operated Dollar Pawn in 
Haleyville, Alabama, for 24 years. I have also been an active 
member of the National Pawnbrokers Association and the Alabama 
Pawnbrokers Association, having served as president of both 
organizations as well as chairing their government relations 
committees.
    As the old ``What's My Line'' game show began with enter 
and sign in, I am a wife, a mother, a grandmother, a 
pawnbroker, and a small business owner. Today, I am here to 
express the concerns of the National Pawnbrokers Association, 
which is comprised of independent, family-owned pawn stores all 
across the country.
    By point of clarification, none of the large publicly 
traded pawn companies are members of our association. Our small 
business members serve over 30 million consumers' short-term 
cash needs through face-to-face, nonrecourse pawn transactions. 
The NPA only represents pawnbrokers and no other nondepository 
industry.
    With the greatest respect to the Members sponsoring H.R. 
1909 and H.R. 6139, these bills provide or even expand access 
for providers, but are not likely to afford more access for 
consumers. Specifically, this bill is anti-small family-owned 
business and favors large megaproviders. It is Wall Street 
versus Main Street once again. Its anticompetitive nature is 
likely to result in fewer providers rather than more. Fewer 
providers commonly results in higher prices.
    These bills preempt States' regulatory, supervisory, 
licensing or examination powers already in place by State 
legislatures, or in some cases, a vote of the people. 
Consumers' credit needs are being met in our members' 
communities by State-licensed, nondepository providers as well 
as local community banks and credit unions. The sky is not 
falling.
    Another Federal bureaucracy to charter Federal 
nondepository providers is unnecessary. The permanently broad 
powers a Federal charter holder would receive will at best be 
scantly regulated by only one agency, the OCC, which already 
has its plate full supervising, examining, and enforcing laws 
regarding national banks and federally-chartered thrifts.
    A Federal charter holder would be able to bypass all of the 
State requirements I mentioned previously, as well as TILA, 
annual percentage rate disclosure, CFPB examination, 
supervision, enforcement, et cetera; but our members, small 
businesses, will remain subject to all of the above and more 
that time does not permit me to cover here.
    Pawnbrokers are the Nation's safety net lenders, regulated 
by the States for decades. Regulators rarely receive complaints 
about pawn transactions. We serve our communities and our 
customers well. I urge you to not create an unlevel playing 
field for our small businesses by giving megaproviders access 
to expanded and largely unregulated markets under the guise of 
access to consumers and small business.
    Thank you, Madam Chairwoman, and members of the 
subcommittee.
    [The prepared statement of Ms. Bishop can be found on page 
65 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. John Berlau, senior fellow, finance 
and access to capital, the Competitive Enterprise Institute. 
Welcome.

STATEMENT OF JOHN BERLAU, SENIOR FELLOW, FINANCE AND ACCESS TO 
      CAPITAL, THE COMPETITIVE ENTERPRISE INSTITUTE (CEI)

    Mr. Berlau. Thank you, Madam Chairwoman, Ranking Member 
Maloney, and honorable members of the subcommittee. Thank you 
for this opportunity to present testimony on behalf of my 
organization, the Competitive Enterprise Institute.
    This story also shines light on one of the most untold 
stories on the workings of Congress, and that story is that 
sometimes Members of Congress actually are working together and 
finding common ground on legislation, legislation that would 
pare down excessive regulations that block stable and 
transparent sources of credit and capital for both consumers 
and entrepreneurs.
    My organization, the Competitive Enterprise Institute, is a 
Washington-based free-market think tank that, since its 
founding in 1984, has studied the effects of all types of 
regulations on job growth and economic well-being. My title at 
CEI is senior fellow for finance and access to capital, and to 
increase access to credit and capital, CEI proposes a public 
policy strategy that can best be described with a phrase 
sometimes associated with energy exploration, ``all of the 
above.''
    Banks, credit unions, and non-bank lenders all have a role 
to play in expanding credit for responsible consumers and 
entrepreneurs, and all should be able to operate free of 
excessive regulation. That is why we supported the regulatory 
relief in the recently enacted and bipartisan Jumpstart Our 
Business Startups Act for community banks to allow them to more 
easily raise capital and seek investors, it is why we support 
bipartisan legislation allowing credit unions to make more 
business loans, and it is why we support the subject of this 
hearing, H.R. 6139, giving non-bank lenders the same 
opportunity to offer financial services through a national 
charter similar to the system that banks have had for 150 
years.
    Now, my organization, the Competitive Enterprise Institute, 
has actually long supported optional Federal chartering as part 
of our goal of what we call competitive federalism. As our 
Chairman Michael Greve has written, real federalism aims to 
provide citizens with choices among different sovereigns and 
regulatory regimes. And all this bill would basically do is for 
the unsubsidized non-bank lenders who aren't taking deposit 
insurance, aren't a risk to the taxpayers, to create a similar 
system of optional Federal chartering that has existed for 
banks for almost 150 years at the very same agency, the Office 
of the Comptroller of the Currency.
    It was in the Civil War that the National Bank Act was 
enacted, and many banks have chosen to stay with State 
regulators. But competition from federally-chartered banks has 
lowered the cost of credit and capital for everyone, and I 
think a similar reduction in the cost of credit and increase in 
access to credit could occur under a system of optional Federal 
chartering for non-bank lenders to work to the benefit of both 
consumers and entrepreneurs.
    I want to point out that research on entrepreneurship from 
the Kauffman Foundation and other respected sources, as well as 
some prominent specific examples, shows there is much less of a 
gulf between personal credit and business credit than some 
policymakers may believe. Sergey Brin, for instance, started 
what is now Google, Incorporated, as a college student, using a 
personal credit card. Spike Lee financed some of his first 
films by maxing out his credit cards. And the Kauffman 
Foundation has found that nearly half of entrepreneurs use 
personal credit cards, and there is also evidence that 
entrepreneurs utilize non-bank lenders more typically 
associated with consumer borrowing. Former Federal Reserve 
Senior Economist Thomas Durkin has written that--and has found 
that small independent businesses, seasonal businesses such as 
landscaping, plumbing, and handyman services, may use auto 
title loans as a source of short-term working capital.
    H.R. 6139 would broaden these options and lift barriers to 
loan innovations such as short-term loans, and would have 
longer-duration installment loans specifically suited to small 
entrepreneurs and to many consumers.
    Thank you so much again for inviting me to testify, and I 
look forward to answering your questions.
    [The prepared statement of Mr. Berlau can be found on page 
58 of the appendix.]
    Chairwoman Capito. Thank you.
    Mr. Kenneth W. Edwards, vice president, Federal affairs, 
the Center for Responsible Lending. Welcome.

   STATEMENT OF KENNETH W. EDWARDS, VICE PRESIDENT, FEDERAL 
       AFFAIRS, THE CENTER FOR RESPONSIBLE LENDING (CRL)

    Mr. Edwards. Thank you. Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee, thank you for 
inviting me to testify on better understanding of the 
regulatory regime for nondepository creditors and my views on 
H.R. 6139.
    I currently serve as vice president of Federal affairs at 
the Center for Responsible Lending, a nonprofit, nonpartisan 
research policy organization dedicated to promoting and 
protecting homeownership and family wealth by eliminating 
abusive financial products.
    In my testimony today, I would like to emphasize the 
following three points: Point number one, H.R. 6139 would 
circumvent the CFPB's carefully contemplated supervisory, 
enforcement, and rulemaking authority over certain 
nondepository financial institutions. The CFPB is the primary 
Federal regulator with explicit authority over large 
nondepository institutions and certain nondepository entities, 
including payday lenders. Title X of Dodd-Frank tasks the 
Bureau with consumer protection through rulewriting supervision 
and enforcement to ensure that markets allow borrowers to gain 
access to and choice among financial products and services that 
are fair, transparent, and competitive.
    In just 1 year, the CFPB has begun to create sensible rules 
of the road for financial markets through a balanced and level 
regulatory playing field for market participants. Without such 
even-handedness, consumers would be exposed to a financial 
marketplace rife with the very kinds of abuses that led to the 
financial crisis. The CFPB supervisory purview over 
nondepository entities is prudently designed to improve the 
quality of financial services in this sector and enforce 
Federal consumer financial law.
    Point number two, H.R. 6139 would expressly allow 
nondepositories to evade 230 years' worth of State consumer 
protection laws, licensing, and supervision that are essential 
to protecting vulnerable consumers from abusive financial 
practices.
    Under H.R. 6139, nondepository charter holders would be 
able to offer financial product terms that some States have 
either expressly prohibited or heavily regulated; for instance, 
high-cost payday loans. Marketed as short-term relief for a 
cash crunch, payday loans typically carry annual interest rates 
of around 400 percent and create long-term debt traps for 
working people. The loan structures ensure that the vast 
majority of borrowers cannot pay off the loans when due without 
leaving large gaps in their budgets. As a result, borrowers are 
forced to take out new loans after paying the first one back.
    States are the traditional regulator for most small-loan 
products, including payday loans. In fact, State limitations on 
interest rates have existed for over 200 years. However, since 
the mid-1990s, payday lenders affirmatively sought and were 
often granted special authority to charge over 300 percent APR 
on their loans. Since 2005, a countertrend developed, and no 
new State agency has granted payday lenders or other short-term 
lenders their needed exemption from traditional small-loan laws 
and other regulations.
    Despite the harmful impacts of payday lending and the 
States' efforts to rein in the financial abuses associated with 
this form of small-dollar credit, H.R. 6139 would permit credit 
companies to circumvent State laws and would prohibit the 
Federal financial consumer watchdog, the CFPB, from acting to 
protect borrowers from harmful products.
    Point number three, H.R. 6139 would roll back important 
Federal credit protections for consumers. Since 1969, the Truth 
in Lending Act has required creditors to disclose finance 
charges and APRs before consumers sign a loan as a baseline 
cost-credit comparison measure.
    Payday loans, for instance, are also subject to TILA's 
credit disclosure requirement, and as a result, consumers are 
afforded an accurate way to gauge the true costs of lending 
across products. H.R. 6139 upsets this long-standing Federal 
consumer protection by exempting credit companies from this APR 
disclosure. This would result, of course, in a significant 
marketwide rollback of Federal credit law.
    In conclusion, we believe that this legislation would 
directly harm vulnerable borrowers, particularly the 
underserved, and should be opposed.
    Thank you again for the opportunity to testify, and I look 
forward to answering any of your questions.
    [The prepared statement of Mr. Edwards can be found on page 
74 of the appendix.]
    Chairwoman Capito. Thank you very much.
    And our final witness is Mr. G. Michael Flores, chief 
executive officer, Bretton Woods, Inc. Welcome.

   STATEMENT OF G. MICHAEL FLORES, CHIEF EXECUTIVE OFFICER, 
                      BRETTON WOODS, INC.

    Mr. Flores. Good afternoon, and thank you very much, 
Chairwoman Capito, Ranking Member Maloney, and members of the 
subcommittee for the opportunity to testify today on a topic of 
growing concern to many in this room, and one that I have 
followed for several years. My firm provides management 
advisory and research services to banks, credit unions and 
alternative financial services providers. With more than 30 
years' experience, I have witnessed the evolution of the 
financial services marketplace. In 2008, this country woke to 
the worst economic crisis since the Great Depression. I belive 
we have now reached a decision point on how to deal with the 
credit needs of the 60-plus million Americans marginalized by 
the traditional banking model.
    Based on my most recent study, ``Serving Consumers' Needs 
for Loans in the 21st Century,'' I would argue that consumers, 
notably those in the low- to moderate-income range, would stand 
to benefit from a new financial paradigm that recognizes the 
potential of alternative financial services providers. Many, 
but certainly not all of these consumers are part of the 60 
million Americans who are either unbanked or underbanked. In 
addition, there is a growing class of moderate to middle-income 
consumers who have chosen to leave traditional banking because 
of increased fees or because they need an unsecure personal 
loan, a product no longer offered by most traditional banks.
    Access to credit has been an ongoing problem that has 
worsened with the times. Difficulties of underbanked and 
unbanked consumers to obtain smaller dollar loans has been the 
subject of increasing debate, including in a number of 
Congressional hearings. But it is not just about low- to 
moderate-income consumers, because the fact is that bank 
customers, many of what you and I consider healthy bank 
accounts, are coming up short as well.
    Since the 1980s, banks have used credit card lines, home 
equity lines, and overdrafts to provide consumer credit. These 
are now less viable due to the poor economy and increased 
regulations. Overall, the community banks' focus on consumer 
lending has declined significantly since 1985 according to the 
FDIC. And during that period, unsecured installment loans have 
all but disappeared from bank product suites, due to 
profitability, risk, and regulatory concerns.
    Today, loans under $5,000 are all but non-existent, and 
with good reason. Given the legacy cost structure and slowed 
option of new technology, many banks aren't capable of properly 
making loans under $5,000. New Federal regulations and 
increased compliance costs are causing banks to examine their 
customer base. As my study details, the traditional banking 
business model relies on scale to be profitable. According to 
JPMorgan Chase, about 70 percent of customers with less than 
$100,000 in deposits and investments will be unprofitable.
    Given the level of investment required to succeed in the 
21st Century, it is only rational that banks target their most 
profitable customer segments. The potential fallout is 
significant and will likely add to a further retraction in the 
credit market. Limiting consumer and small business credit also 
has a detrimental effect on local economies.
    Consumer financial services are clearly at a crossroads and 
I believe that a new financial regulatory structure is 
warranted. The answer points to the capabilities of alterative 
financial services providers; many have invested in more 
efficient and cost-effective technology, but costs associated 
with regulatory variations in 50 States inhibit their ability 
to offer a range of standard products, particularly in the $750 
to $5,000 range. Differing State regulations deny alternative 
financial services providers the ability to achieve scale, 
reduce cost, and thereby pass on the savings to the consumer.
    Studies of the impacted restricted regulations and other 
industries, most particularly the lack of Federal preemption, 
repeatedly shows that these very State regulations limit 
options and increase costs to consumers. There is room for both 
Federal- and State-approved lenders, as it is a model for State 
and national chartered banks.
    I would further argue that the lack of standard product 
nationally, in and of itself, creates disparate impact on 
consumers. That is, nothing more than a State line can cause 
consumers to meet their specific credit needs with less than 
optimal and more expensive alternatives. I believe this bill 
will move us from the status quo, and we need to move from the 
status quo, we have been talking about it, identifying the 
problem, but we have yet to act upon any solutions. I think 
this bill will help bring relief to millions of American 
consumers. Thank you for your time, and I would be happy to 
answer any questions. I would like to submit my study for the 
record.
    [The prepared statement of Mr. Flores can be found on page 
80 of the appendix.]
    Chairwoman Capito. Thank you all very much. I would like to 
begin the questioning. Ms. Jackson, just a point of 
clarification here on this bill. You mentioned several States, 
I believe mine is one of them that does not do, or at least it 
does not permit payday lending. It was a Federal floor here 
that such is proposed with a bill, would that statute be 
preempted by this? So it could go forward in all 50 States?
    Ms. Jackson. The premise of the bill is basically to allow 
longer-term installment type loans in the marketplace. So 
States like West Virginia that have a usury cap where citizens 
are going online and getting either payday loans or a form of 
installment loans, yes, we would, as a federally-chartered 
enterprise, be able to compete with the offshore lenders to 
deliver products that do have consumer protections, that do 
have oversight and give consumers a choice.
    Chairwoman Capito. So, that is a yes. Then, would the State 
legislature, in your opinion, be able to come in and override 
that federally-chartered provision? I would suppose, no.
    Ms. Jackson. I believe with the way credit cards are 
treated in this country and other banking products, that we 
could be working with State regulators on some of those 
solutions. There are some exceptions. The Credit Card Act and 
the way credit cards are processed in certain States, but it 
doesn't prohibit the basic tenets of a credit card to be 
available to consumers in those States.
    Mr. Berlau. Congressman, if I may, it would only--the 
entities would only get the exemption if they applied and met 
the standards of the Office of Comptroller of the Currency 
prescribed under the bill, similar to the system of State and 
national banks where a bank can choose to be regulated by the 
Federal or by the State government.
    Chairwoman Capito. Right, so the OCC would--that 
determination would then allow people to override the 
prerogative of the State legislature.
    Mr. Berlau. But if it chooses not to, or the OCC decides it 
does not meet their standards, then yes, all the West Virginia 
rules would still apply.
    Chairwoman Capito. Ms. Bishop, you mentioned and launched 
concerns in your testimony that this would disproportionately 
favor large entities, and you mention that yours was not one of 
those. So in your State, what is the situation now? Who are you 
competing against? Are your customers the same? And has your 
customer base changed over the last 3 or 4 years? Who are you 
competing with as your customers changed, and who are you 
competing against?
    Ms. Bishop. Speaking to the pawn industry, which is what my 
business is and the association I represent, I continue to 
compete with other pawnbrokers down the street, or in the next 
town or what have you. We also--payday lending is allowed in 
Alabama, it is regulated also by the same State banking 
department which also regulates the pawnbrokers, small loans, 
mortgage brokers and so forth. So that--
    Chairwoman Capito. Do you feel like--not to interrupt, but 
I have a little--do you feel like you are serving the same 
customers?
    Ms. Bishop. No.
    Chairwoman Capito. And then on the other one, has your 
customer base changed over the last 4 years with the downturn 
of the economy, is it broader or has it basically stayed 
steady?
    Ms. Bishop. It has broadened somewhat, not only just with 
the downturn in the economy, but other economic situations 
with, for instance, the price of gold, which is higher than it 
has been in probably who can remember when. That has brought an 
additional segment of customers in who can use that asset as 
collateral for their tangible personal property loan.
    Chairwoman Capito. Mr. Flores, a consumer who does not have 
enough money in their checking account, or even if they don't 
have a checking account, they have an option, or in their 
checking account, they could bounce a check, use overdraft 
protection, get a payday loan, pay the bill late or borrow from 
another institution. Why would consumers pick one of these--I 
am going to postulate the reason they pick one over the other 
is it is the one they can get and they can get to, and sort of 
get them over the hump until they can solve whatever problem, 
the electric bill or whatever. Do you have an opinion on which 
one of these, because they all come at a relatively high price, 
or gaining momentum or losing momentum or why a consumer would 
choose one of these over another?
    Mr. Flores. There is a continuum of need, and I break it 
down in my report, unanticipated needs for short-term dollar 
amounts, and overdraft coverage, which is much less expensive 
than bouncing a check with associated fees and late charges, et 
cetera. A payday loan is less expensive than an overdraft, if 
you look at what the average overdraft amount is and overdraft 
fee, the installment loan meets that longer-term need for a 
higher ticket item, that $2,000 to $3,000 that we are talking 
about that really is not available out there and hasn't been 
since the old finance companies of the 1970s or 1980s.
    Chairwoman Capito. I bought my refrigerator with one of 
those, 30 years ago.
    Mr. Flores. So I think we need to give the consumer a lot 
more credit than we do. Their need to manage their finances 
down to the last penny, they know how to do that and they look 
for the best options available to them. So the more options we 
can give them, ultimately the less cost they will incur to meet 
these needs.
    Chairwoman Capito. Thank you. Mrs. Maloney?
    Mrs. Maloney. Thank you. I think we all agree that there is 
a need for small loans. And the supporters of the bill argue 
that they are not there, so therefore they are going on the 
Internet, they are going offshore, they are getting these loans 
that are more predatory with higher interest rates. And I would 
like to ask the panelists if they have any research, or Mr. 
Flores, if your report touched on this area, or Mr. Edwards, or 
Mr. Berlau, and your comments, Ms. Bishop, if you could tell me 
how widespread pawnshops are, are they in every single 
community, all across rural, every State, whatever? But my 
primary question right now is the question on the statements by 
some earlier that people are going on the Internet to get loans 
in order to get this refrigerator, or get that car fixed, or 
whatever it might be. And Ms. Jackson, if any of you or all of 
you would comment on whether that is widespread or whatever.
    I am going to start with Mr. Flores and just go down the 
panel. And if you would like to comment on what your research 
is or your understanding of the use of the Internet to address 
these needs?
    Mr. Flores. I did a research report on overdrafts a few 
years ago comparing other short-term alternatives. The demand 
was upwards of $100 billion a year for this money, and the 
demand is not going away even though some States had legislated 
products away from it.
    Mrs. Maloney. Are they going on the Internet to get this 
loan?
    Mr. Flores. Absolutely. They are looking at whatever option 
is available, and the Internet is a growing option. It is very 
convenient, they don't have to go search for a storefront. And 
I think a key point to remember is that this market is growing, 
that the Washington Credit Union League estimates a 2.8 million 
a year increase in their unbanked and underbanked communities.
    Chairwoman Capito. Thank you. Mr. Edwards?
    Mr. Edwards. Thank you, Chairwoman Capito. If I could just 
respond to the previous comment of Mr. Flores, payday loans and 
overdraft fees are not interchangeable. The first payday loan 
may be an initial choice the consumer makes. But the structure 
and unaffordability of that first loan results in a financial 
debt trap for subsequent payday loans. With respect to an 
overdraft fee, the research indicates that it is unintentional. 
And the typical overdraft fee is about $34 for, let's say, 
maybe, a $17 overdraft. We are talking about servicing the 
unbanked and underbanked. And we have research that shows that 
a leading cause of people to become unbanked or lose their bank 
accounts is because of the excessive cost associated with 
overdraft fees. So I would disagree that payday loans and 
overdraft loans are somehow interchangeable and alternate forms 
of small-dollar credit.
    With respect to research, the Pew Foundation recently 
released a report that sampled about 100 would-be borrowers and 
asked them, it was 100 would-be borrowers that are located in 
States that either heavily regulate payday loans, or completely 
outlaw payday loans. And out of that 100 borrowers, 95 of those 
did not to go online lenders and only 5 of those did. So what 
that shows is that there is an actual low percentage of a low 
number of borrowers who are actually seeking out online payday 
loans in instances where the storefront payday lenders are 
actually outlawed.
    Mrs. Maloney. Thank you. Mr. Berlau?
    Mr. Berlau. Yes, I think that is such a good question. What 
are the alternatives if you restrict credit or don't allow new 
forms of credit, so thank you for asking that, Congresswoman 
Maloney. And I am going to dispute my fellow witness, Mr. 
Edwards. I think the evidence does show that overdraft fees are 
and late fees and bounced checks are frequently a substitute 
for payday loans, unfortunately. I reference in my written 
testimony the Federal Reserve of Kansas City's Senior Economist 
Kelly Edmiston and others who have written about that, in 
States with highly restrictive laws as far as credit and payday 
loans.
    Mrs. Maloney. Thank you my time is almost up. Ms. Bishop, 
or Ms. Jackson?
    Ms. Bishop. My research is behind my counter every day, 
serving the needs of my customers and consumers. But I have a 
question, and that is, whatever type of online loan we are 
talking about here, I don't care, payday, small, whatever, if 
there is a national Federal charter that is applied for by 
companies that are legitimate, and that are trying to do the 
right thing. The ones in Macau are not going to apply for that. 
And the consumer is still not going to know who they are 
dealing with. When you go to the Internet, you all know that 
this pops up here, that pops up there, and people have the 
tendency to click on them. Sometimes, it clicks on itself for 
you. People who are not legitimate are not going to get that 
way because of a Federal charter.
    Ms. Jackson. Mrs. Maloney, if I may, we are the largest 
online lender here domestically, and we offer State-by-State 
options for consumers. We are attempting to do better. We would 
like to offer longer-term loans. We have scoured all 50 States 
to see where that is feasible, and there are about 15 States 
where we can offer a longer-term loan. Right now, you asked 
about the size of the marketplace, 61 percent of online small-
dollar loans are done by non-domestic players, and that is only 
going to continue to grow.
    So in order to protect consumers, to let them know that 
they are dealing with an OCC-regulated Internet company where 
there is a place to call if they have concerns with the CFPB, 
or the OCC, that is what we are trying to accomplish here 
today.
    Chairwoman Capito. Thank you. Mr. Renacci?
    Mr. Renacci. Thank you, Madam Chairwoman. And I want to 
thank the witnesses. Just a couple of comments I heard while 
you were talking. Mr. Flores, you said we need to give the 
consumer credit for making these decisions that they make as 
far as short-term loans. Mr. Edwards, you said payday loans are 
a choice consumers make. It is interesting because I took the 
time to actually go talk to those individuals who are going to 
these payday loans and using this service and using this 
product. These are everyday, hard-working Americans who are 
just short on cash, not on a regular basis, sometimes just on 
an emergency basis, who really appreciate the service, they 
want this service, they really don't want the government 
meddling in it much more. They are happy with the service that 
they have right now.
    I was interested because if you spend a half hour just 
talking to the consumers as you said who make these choices, 
and as Mr. Flores said, give them the credit to make those 
choices, I am concerned in your conclusion, you said indeed 
this legislation--and this is to Mr. Edwards--indeed this 
legislation offers nothing beneficial for consumers. On the 
contrary, it would lead to direct consumer harm. Can you 
explain that?
    Mr. Edwards. Sure. And let me just make sure I clarify with 
respect to my previous comments regarding the choice. That is 
within the context of looking at payday loans with respect to 
overdraft fees. Overdraft fees research has shown are 
unintentional, and I want to make sure we are clear with 
respect to the distinction I was drawing there.
    In terms of the harm, if you are talking about consumers 
who are in financially fragile households, who are often living 
from paycheck to paycheck, the purpose and intent of this 
legislation draws that demographic. These are people who can 
ill-afford to be trapped in long-term debt.
    If they are taking out financial services, and research has 
shown that they are doing it nowadays to cover actual everyday 
living expenses like rent or utilities, if they are doing that 
and they are standing in debt about 5 or 6 months per year, 
taking out maybe 8 loans if we are just talking about payday 
loans, for instance, that is problematic. It doesn't do the 
consumer any good because they are constantly either flipping 
that loan, paying off the loan and taking out a new one. That 
puts them in a cycle of long-term debt, and that is a huge 
problem. And I don't think that would be do a consumer any 
good. To be quite frank, it is a concern, you can even argue, 
of national interest.
    Mr. Renacci. That is interesting, Mr. Edwards, because you 
are talking for the same consumer that I talked with who said 
that they appreciated that loan, and that they were very happy 
to have it. So sometimes--when I get back in the district, they 
talk about how Washington is disconnected. Sometimes, we just 
have to go and listen to the people using the services.
    Mr. Edwards. But Representative, if could I interrupt for a 
second, the consumers that you are talking to and they say they 
appreciate those loans, I would be curious to know the follow-
up question, if they appreciate being charged sometimes in 
certain instances triple digit APRs if you look at it, and then 
being associated with the fees that they have and standard debt 
for quite some time, I think the answer might be a little bit 
different.
    Mr. Renacci. I will tell you what the answer is, because 
one of them said to me, would you be willing to give me $100 if 
I gave you $107 back in a week? And it is an interesting 
response that you have to think about. Because we talk about 
this high APR, but we are talking about short-term loans, and 
how many people are willing. Some of these people do have low 
credit, so I think when you talk to them you will find out, you 
will get some interesting answers.
    Mr. Berlau, I guess I am a little concerned, and I want to 
see, do you have any concerns that the CFPB may take steps to 
even further constrain the offering of short-term, low-dollar 
loan products?
    Mr. Berlau. Yes. As a matter of fact, I do have concerns 
about that. We are--I should say that my organization is 
involved in a constitutional challenge to the CFPB because we 
think the structure lacks accountability. But as far as this 
bill goes, and some of the other concerns about it, I think 
that it makes clear that this doesn't affect for good or ill 
what the CFPB is planning to do; it is just another alternative 
to offer these loans, and then the CFPB would have final say.
    So yes, I am, but this bill doesn't address that, but it 
does do very good things as far as creating alternatives, which 
then the CFPB would be able to have a say on as well.
    Mr. Renacci. Ms. Jackson, do you feel whether it is the 
CFPB or the States if they further restrict this type of 
credit, that it will be more difficult for these individuals 
that I talked with to obtain short-term credit?
    Ms. Jackson. We have seen real evidence that attempts to 
limit rates, attempts to limit usage, have just exploded the 
illegal or unlicensed lending market. We saw that with military 
lending which was mentioned here earlier today. We cannot make 
loans to the military because the rates are so low. And what 
happened is military members would go online and get loans from 
offshore lenders.
    So we would like to be able to, again, have safe and sound 
lending requirements, but you can't do it when the rate gets so 
low. Also in California, they passed an installment loan law 
which was great, but there has only been one license 
application since because the rate was too low. So again, back 
to my scenario, what do you do if you need $1,000? Residents 
from California still have to go to payday lenders, or go find 
a higher level loan or pay back an amount right away. So we put 
consumers at a disadvantage when we try to protect them.
    Mr. Renacci. Thank you, I yield back.
    Chairwoman Capito. Mr. Watt?
    Mr. Watt. Thank you, Madam Chairwoman. It seems to me that 
we are having two discussions here, one of which I am not sure 
why we are having it. I am not sure I understand how subjecting 
something to Federal regulation is going to increase credit 
availability; that is one question. Mr. Renacci raised an 
interesting point about government meddling in their choices. 
Most of my constituents would rather have the State government 
meddling in their choices than they would the Federal 
Government meddling in their choices. And this bill proposes a 
Federal charter that preempts State law, which makes me raise 
the same concerns that I raised when we were debating the Rent 
to Own legislation in this committee.
    I just don't understand the rationale for it. And I 
understand the rationale for it even less now that we have 
passed Dodd-Frank and have a Consumer Financial Protection 
Bureau, which is a Federal agency that would regulate these 
entities. I would have understood it a year ago or 2 years ago, 
before we had the CFPB.
    I don't know that I think the OCC would be any better 
Federal regulator than the CFPB would be. And I wouldn't want 
either one of them to preempt State law, especially if that 
law, that State law had a higher threshold of protection for 
consumers.
    And so I guess I am having trouble understanding the 
rationale for this bill in general. I raised these questions, 
obviously I lost, because the bill--the Rent to Own bill passed 
out of here with almost absolute preemption. This bill, as I 
understand it, has pretty much absolute Federal preemption, 
too. And while we would take small lenders, small credit people 
and give them an optional Federal charter, I just--I don't 
understand it.
    So Ms. Jackson, tell me how you think this is going to 
increase credit availability to consumers?
    Ms. Jackson. Congressman Watt, it is going to help us keep 
pace with technology and what is being offered on the Internet.
    Mr. Watt. So you think the Consumer Financial Protection 
Bureau doesn't have the capacity to do that, and the OCC does?
    Ms. Jackson. First, from what I understand, the OCC has 
licensing authority, that is why the OCC is looked at as the 
regulator. The CFPB will look at the products to determine the 
consumer protection measures within those--
    Mr. Watt. So my State has a licensing authority, why would 
I opt for OCC licensing over my State which has traditionally 
operated in this area, the same point Ms. Bishop has raised 
here? Why would I want the OCC to be licensing a pawnshop, or a 
payday lender when my State doesn't even allow payday lending?
    Ms. Jackson. In North Carolina, Congressman Watt, 
installment lending is not prevalent, so the longer-term loans 
that most people would want some additional options would be 
available through the Federal charter. Installment loan--
    Mr. Watt. What additional options are you talking about 
would be available that aren't currently available if we 
created a Federal charter for--I don't understand that?
    Ms. Jackson. Some States, again, it is not addressed to the 
usury laws, or the limits do not allow an installment loan. 
Right now if people would like to have a longer-term loan, they 
would have to go to the Internet for States that don't provide 
a licensed lender. So as a national chartered lender, I would 
be able to offer that, they would look for the union label, or 
whatever we would want to say that CFPB or OCC regulated 
entity. If it is not available in their State, they will go to 
the Internet, they will get what they see.
    Mr. Watt. Forgive me for just saying, you have not 
convinced me of this. Of course, they have been trying to 
convince me for 3 years on Rent to Own that this is a good 
idea. I think this is a terrible idea.
    Ms. Jackson. Congressman, we respect your opinion. What is 
happening, though, is in the marketplace, online, 61 percent of 
the market is being served by non-domestic lenders.
    Chairwoman Capito. The gentleman's time has expired. Mr. 
Luetkemeyer for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman. The previous 
panel talked about credit history. Ms. Jackson, would you like 
to address that with regards to people who utilize your 
service, they establish a credit history by paying their loans 
off on time or picking up two or three more as a result and 
eventually move on, or take advantage of a more traditional 
loan at some point. Can you give me a little credit history 
analysis how that helps?
    Ms. Jackson. Currently, the short-term lending product is 
anything less than 30 days. It typically will not include 
people's credit, because the credit bureaus do not want to take 
that data. And so we are finding that being a struggle for 
consumers to try to figure out how to use these products and 
improve credit.
    What we envision with this charter is to allow for those 
longer-term products, the fact that bureaus we already know 
that we talked to will accept that data so we can graduate 
people from the smaller short-term loans, into, again, maybe a 
midway product where they could get their credit built so then 
they can deal with a bank.
    So we do have to think about how consumers build their 
credit, and how can they do it with non-bank credit products, 
because if you don't have credit, you are not going to get a 
bank loan, so how do you transition consumers, and we are 
extremely interested in trying to figure that out.
    Mr. Luetkemeyer. As a former bank regulator and someone in 
the banking industry for 30 years, I have made probably 
thousands of these small loans, because I come from a little 
bitty small town, with a small bank. We don't have a pawnbroker 
in our town; we don't have a payday lender or a small loan 
lender. We are it. And so, I have dealt with this all my life. 
And we sat there across the table from a young lady who is 
stuck in a situation, a single mother, has no way to make her 
car payments because she doesn't have a car because her husband 
just left her last night and she is sitting there in front of 
you. She needs some money to be able to go out and buy a car to 
be able to get to work, to be able to pay the bills for the 
baby she has in her arms. How do you solve that problem? You 
solve it with being able to provide credit. Access to credit 
for people like that in an emergent situation, this is what we 
are trying to do today. It is interesting to me to listen to 
some of the comments. Mr. Edwards, did you read the bill by any 
chance?
    Mr. Edwards. I did.
    Mr. Luetkemeyer. Where in there did we circumvent the CFPB?
    Mr. Edwards. Congressman, as you well know, the CFPB, under 
Section 1024 of Dodd-Frank is tasked with supervising non-bank 
entities. And under your bill, having the OCC to supervise, 
examine, prescribe rules and regulations, and to allow the OCC 
to approve a product sounds like it is encroaching upon what is 
written in Dodd-Frank already.
    Mr. Luetkemeyer. If you go back and read 4(k), the CFPB has 
full regulatory authority over all consumer financial 
protection under laws that regulate these lenders. There is no 
change, there is no taking away of this. All we are doing, as 
Ms. Jackson said, the documentation to issue the charter under 
the OCC--
    Mr. Edwards. There is obfuscation in terms of what the CFPB 
is tasked to do under Dodd-Frank
    Mr. Luetkemeyer. There is no intent to circumvent the law, 
and the law in this bill specifically spells that out.
    Very quickly, my time is about gone here. I have one quick 
question. Mr. Berlau, you made a comment that this would 
encourage entrepreneurs. I was curious how you see this 
encouraging entrepreneurs?
    Mr. Berlau. I do, in two ways. First I see, and if Ms. 
Bishop has a cost estimate of how much it would cost a small 
lender to get licensure from the OCC under this bill, I would 
like to see it and perhaps we can make some improvements. But I 
scrutinize legislation for cost of small business, and I see 
nothing where even one pawnshop can't apply for the OCC and 
become a national lender and offer consumers more choices.
    And the other way is, as I mentioned in testimony, in the 
written testimony, Thomas Durkin of the Federal Reserve has 
found that actually auto title loans are utilized not only by 
consumers, but by landscaping businesses, by plumbers, and 
others who don't have a line of credit with a big bank, and 
utilize short-term loans in a similar way as consumers do. And 
of course, a lot of small businesses use credit cards--49 
percent, so this would just create a lot more options for non-
banks for them.
    Mr. Luetkemeyer. Thank you. And just one following comment. 
I know, Mr. Edwards, you made the comment a while ago that 
people who overdraft normally do it unintentionally. I can tell 
you for over 30 years in the banking business, they are 
supposed to keep a checkbook and make sure that they don't 
write more checks than they have money in the bank. It is not 
unintentional; it is irresponsible.
    Mr. Edwards. If I could respond to that, Representative. 
The financial institutions are not supposed to reorder 
transactions from high to low causing consumers to overdraft, 
unfortunately. And that is a situation which is costing 
consumers countless amounts of money, and courts have slapped 
fines upon some of the larger institutions.
    Chairwoman Capito. The gentleman's time has expired. Mr. 
Baca?
    Mr. Baca. Thank you very much, Madam Chairwoman. Just to 
ask one of the same questions I would like to ask Mary Jackson, 
it was sort of asked, but many of the opponents of the bill 
would like to simply frame this bill as a payday bill and talk 
about the problems of specific products. This is done even 
though the traditional payday loans are prohibited. However, 
what is lost in the debate is the innovation aspect. Currently, 
many national banks and large credit unions are provided the 
ability to operate on a Federal platform that allows them to 
come up with new products to better serve the customers. And of 
course, this only works for those who have access to mainstream 
financial services. Can you talk about the aspects of this 
bill? And would the Federal standards created by this bill 
allow for the same increased innovation, specifically to serve 
consumers who need credit for expenses that cost more than the 
typical payday loan?
    Ms. Jackson. Yes, Congressman Baca. The Federal charter, 
again, is designed to drive innovation, it is very difficult 
for banks and credit unions to do that because they put 
deposits at risk. So they are going to be more circumspect on 
who they are going to lend money to; they are going have higher 
credit score standards. And there has been so much in this 
space to try to analyze the ability for consumers to repay. We 
have so much more data out there. We have a team of 10 people, 
our analytics team, who looks at the data all the time to 
determine if we can make that loan and the customer's ability 
to pay us back. So there has been so many dynamic things that 
have happened in our sector and we would like to share that in 
a national way.
    We would also like to be able to perform some of these 
services as a marketer servicer to banks so they can grow their 
portfolios and grow their banking business. But when you put 
deposit at risk, and when you put FDIC insurance at risk for 
these types of loans, it is very difficult. We believe we can 
do that in partnership or directly with consumers.
    Mr. Baca. Thank you. And one of the questions asked, it is 
very difficult to determine, how many times or how many payday 
loans have actually been offered, because we know that is 30 
days. So there is no way of monitoring how many of those have 
been done. But right now, isn't it very hard for small-dollar 
lenders to know how many loans a consumer has taken out unless 
they actually go to the same place? However, the chartered 
institutions would be--have a strong Federal oversight, and 
wouldn't it lead to greater transparency and more complete 
credit history for consumers?
    Ms. Jackson. Again, folks in the non-bank sector who 
underwrite unsecured loans are going to use all kinds of data 
points, companies like Teletrack, where companies do put in how 
much a person has borrowed with the payday loan. We use that 
type of service to determine if we are going to be the third 
lender on the list, is that a good idea? It usually isn't. So 
with that said, the technology, the ability to offer more 
choices to consumers is important. I am not sure if I answered 
your question.
    Mr. Baca. Right. But the ability to track and know how many 
loans the individuals, we would be able to do it. It would be a 
lot easier than the way the system is under the payday lending 
because you wouldn't know how many loans that person has had 
because there isn't that transparency and oversight. Having a 
charter, we would be able to determine how many loans that 
person has actually obtained.
    Ms. Jackson. Right. Under a charter, you can offer a 
longer-term loan, the credit bureaus will take that data and 
then you will have what you need to make sure that, again, they 
have the ability to pay, looking at that credit history.
    Mr. Baca. Because payday lending can only offer it up to 30 
days, what is it? 30 days? Less than 30 days? And the only 
others that I know of are long-term loans. Do you know anybody 
else who offers long-term loans to individuals who may have bad 
credit? Any of you on the panel?
    Ms. Jackson. Oh, I can offer--
    Mr. Baca. Loan sharks, right? Loan sharks. We don't want to 
get a loan shark. We want them to establish credit, deal with 
their credit scores as well, and this is what happens to many 
individuals, they end up going to a loan shark because they can 
only get $400 from a payday lender, they can get anywhere 
between $500 to 3,000 which is the average cost, because when 
it comes down to just going a grocery store, buying groceries, 
it is almost $500 just to buy groceries not to mention any 
other kind of payment that you have.
    Ms. Jackson. Congressman, even in installment loaning, we 
did have a witness here from Nebraska, and they do have 13 
license installment lenders there. But it has to be a secured 
loan, and it also has a 16 percent per annum, but because it is 
a banking entity, they don't have to show their origination 
fees or other fees as part of the calculation. We need a 
bigger, honest dialogue about what the loans look like in 
comparison to costs in APRs and fees, what is included and what 
is not.
    Mr. Baca. I know that my time has expired, but doesn't this 
bill specifically allow chartered institutions to offer 
products that will allow and promote building of savings of 
credit and history scores?
    Ms. Jackson. Yes, sir.
    Mr. Baca. I agree with you; that is why there is bipartisan 
support for this.
    Chairwoman Capito. I couldn't tell by the way you posed 
that question.
    Mr. Huizenga?
    Mr. Huizenga. Thanks, Madam Chairwoman, I am not quite sure 
how I follow up that softball. Ms. Bishop, I do apologize. I 
came in right after your testimony. But I want to have you 
explore a little bit about what you believe is--whether it is a 
threat somehow to your business, will it put the pawn industry 
out of business, and just hear a little bit about that and get 
some other opinions on that as well.
    Ms. Bishop. We feel that it would create an unlevel playing 
field in the market where you have a Federal charter holder who 
is not subject to the same licensing regulations, fees, and 
examination that an individual pawnbroker is on a daily basis 
through their State, in my case, my State banking department, 
my city license, my county license. In some States, there is a 
requirement for continuing education for pawnbrokers. That 
would not be required of a Federal charter.
    Mr. Huizenga. This is purely bad lawyering maybe, not 
knowing the answer to the question before you ask it, but my 
impression is that it is not common to have a pawn owner own in 
multiple States in that kind of thing, is that accurate?
    Ms. Bishop. Most of our 1,800 to 2,000 members of the 
National Pawnbrokers Association are small, independent, 
family-owned businesses, maybe two or three shops, maybe up to 
a dozen, and usually not across State lines. In some cases, 
they do have shops in multiple States, but not usually.
    Mr. Huizenga. Mr. Berlau or Ms. Jackson or anybody else, do 
you believe this is a threat to the pawn industry?
    Mr. Berlau. Congressman--
    Mr. Huizenga. I need you a little closer to the microphone 
so we can hear you in the room, but not everybody--
    Mr. Berlau. Congressman Huizenga, if I can offer an 
analogy. Sometimes you have banks with just one branch who get 
chartered by the Federal Government, the OCC, we hear First 
National, others and sometimes there are very large State 
banks, so I do not--and I scrutinize legislation like this for 
what burden it places on small business, see what the burden is 
on a small pawnshop or lender applying to the OCC and being 
able to carry that charter and being able to offer some 
innovative products, that small businesses, small lenders 
develop.
    Mr. Edwards. If I may respond, what this bill is a threat 
to, it is a threat to financially fragile households staying 
afloat.
    Mr. Huizenga. Do you believe that the pawn industry has 
that same threat? Have you seen Pawn Stars? Because if you are 
talking about $7 on a $100 loan as being a threat, what about 
walking in and saying you know what, I don't have time to wait 
for it to get pawned, my $1,000 item, I have to sell it for 
$500, because I understand the person owning the store has to 
make a profit. And the only way for them to look at it is 
pretty much doubling their money, is that not a threat?
    Mr. Edwards. As I mentioned before, it is a direct threat 
to the financial viability of low-income households.
    Mr. Huizenga. Which is, pawning or--
    Mr. Edwards. This bill.
    Mr. Huizenga. Do you have a problem with the industry or a 
problem with the bill?
    Mr. Edwards. The way the bill is drafted, yes, sir, we have 
a problem with this particular piece of legislation. It is not 
so much the industry. What we are concerned about is, if loans 
are made, they have to be sustainable loans, transparent loans, 
loans that are not designed to perpetuate financial debt traps. 
And what this legislation would do is it would grant the 
charter holders essentially a national hall pass to go where 
they want, and when they want, and do on a Federal level what 
they haven't been able to do, or some instances, it has been 
scatter shot on a State level.
    Mr. Huizenga. But you would acknowledge that some States 
have much tighter and some have much looser laws, correct?
    Mr. Edwards. There are varying--amongst the 50 State 
jurisdictions, there are varying laws. But this particular 
piece of legislation would allow the charter holders to 
circumvent those laws, and that is a problem because the States 
have a keen interest in this, they are on the ground, they are 
on the front lines combating some of the more toxic abusive 
products. And they know what is best for their citizens.
    Mr. Huizenga. So I assume, you like what happens in 
Chairwoman Capito's State of West Virginia where it is not 
allowed, but maybe don't like what is happening in another 
State that has absolutely no restriction. How do we maybe 
balance that out?
    Mr. Edwards. I tell what you we like, we like to see 
consumers in loans that they can afford, no balloon payments, 
no loans with exorbitant APRs. Those are the things that are 
not good for the consumers and make them worse off than they 
were before they took out a loan.
    Chairwoman Capito. Mr. Meeks?
    Mr. Meeks. Thank you, Madam Chairwoman. I am sorry; I have 
been listening to some of the hearing up in my office and 
running around from meeting to meeting. But I felt compelled to 
make sure that I get back here to ask a few questions. But 
also, in listening, I think that I have lived the life, I sit 
up here as a Member of Congress today, in a nice suit, et 
cetera. But I come from public housing, my parents didn't have 
a lot of money, and they lived from paycheck to paycheck. And 
certain times, certain things would happen, they needed some 
money and they had no options.
    The option is to go out to a loan shark or someone else, 
and if you don't pay it back, they are going to beat you in the 
head, that is my experience. And I find that poor people 
especially have no options when they are trying--they are smart 
people, in fact, they know how to rob Peter to pay Paul. In my 
household, that is what you did: robbed Peter to pay Paul to 
make sure you could make it to the next day. The fact of the 
matter is, if that wasn't the case, I might not be sitting here 
today because certain times, my parents had to rob Peter to pay 
Paul to help me get through school. If they didn't, the school 
would have put me out if tuition wasn't paid. You have to 
figure out how you get certain things done.
    So that becomes extremely important because the whole idea, 
I think, is to put the loan shark, as my good friend Mr. Baca 
indicated, out of business. Now if you wanted to do something 
that, let's say make all the banks, make all the banks give low 
or small loans, they won't do it. Why? Because it is not in 
their interest. They can't make money from it or whatever the 
deal. Nobody talks about that, but if you made all the banks 
give short-term loans to help individuals who needed to just 
make it for a month or so, then we might not be here.
    The reality is those banks don't exist. Therefore, if you 
don't have a bill like this, there are no options. So the 
person who is poor, who wants to rob Peter to pay Paul, has no 
options and wants to do the right thing, so therefore they may 
go to someone who ultimately is really bad for them.
    So with the voice of knowing what my life has been, trying 
to figure it out. Mr. Flores, let me bring you into the 
discussion. If a bill like H.R. 6139 is not adopted, tell me, 
do you know of any other viable approach for ensuring that 
individuals like myself in the past, or my family, underserved 
consumers, who are unable to obtain smaller loans from banks 
who are typically currently have only an limited number of 
relatively high-cost credit alternatives from non-bank lenders, 
that are allowed by State laws and had a broad range of more 
innovative and affordable credit laws in terms of their needs.
    If we don't do this, if we don't pass something like this, 
what other alternatives or options would someone like my family 
have when I was growing up, that they would have today if we 
don't pass a bill like this?
    Mr. Flores. There are very few options. As a matter of 
fact, on page 22 of my report, this for the five boroughs of 
Manhattan, it shows where the bank branches are and are not, 
and the bank branches are leaving the communities, the low- to 
moderate-income communities where a lot of where your 
constituents live. And so the only people who are there 
providing loans are the alternative financial services 
providers. And they cannot get the same service from State to 
State because of the vagaries of State legislation.
    And so we need to offer something that allows the options. 
We are not mandating somebody to go out and get a loan, whether 
it is an overdraft, a payday loan, or installment loan or title 
loan. All we are saying is we are giving them options based 
upon their specific needs to do what is in their best interest.
    Mr. Meeks. Let me ask this question too, because I think I 
heard the last panel, there was an OCC witness concerned about 
the applicability of consumer protection laws and standards 
under this bill, under H.R. 6139. Under this bill, and I open 
this up to anyone, would NCCCs be subject to the Equal Credit 
Opportunity Act? Would they be subject to the Truth in Lending 
Act, or how about the Fair Credit and Billing Act? I throw it 
out to anybody.
    Ms. Jackson. Congressman, we are now. If you are a State 
license lender, you are following these Federal laws and we 
will continue to do so.
    Mr. Edwards. Congressman, if I can briefly respond, as the 
bill is drafted, it lists these credit companies which must 
comport with some of the laws that you mentioned, which are 
about 18 statutes that were transferred to the CFPB, but what 
it does not mention specifically with respect to the CFPB is 
UDAAP authority, and I think that is problematic because the 
CFPB has invested with this particular authority to regulate, 
to make sure that it stamps out any unfair deceptive abuses or 
practices. And this bill specifically does not mention that and 
that is problematic.
    So if I could back up one second and respond to your 
previous point about being a single-family household and not 
having many credit options. I, too, grew up that way and my mom 
often visited a pawnbroker, and sometimes the TV was there and 
sometimes it wasn't, I missed Saturday morning cartoons and 
that was it. But thankfully she did not seek out a payday 
lender, it would have kept her and us in long-term debt.
    Chairwoman Capito. The gentleman's time has expired. Mr. 
Grimm?
    Mr. Grimm. Thank you, Madam Chairwoman. Just so I can get 
some perspective on this, Ms. Bishop, maybe you can help me. 
Approximately how many $2,000 loans does the average pawnbroker 
make in a year?
    Ms. Bishop. Thanks for that question. And this kind of goes 
back to what your colleague spoke about, Pawn Stars and the 
television shows. What you see on TV is not what happens every 
day, and actually, our statistics are that on the average, pawn 
loans are redeemed 85 to 90 percent of the time across the 
country. They are not--not everybody is bringing in a Civil War 
cannon to sell to somebody.
    Mr. Grimm. I'm sorry, my time is really short. The 
question, though, is how many $2,000 loans a year on average 
would a pawn--
    Ms. Bishop. It depends where you are located. In my 
particular instance, a $1,000 loan would be a big loan for me. 
In more metropolitan areas, say, New York and Los Angeles and 
so forth, a $2,000 loan would not be out of the ordinary. How 
many times a year, I have no--
    Mr. Grimm. Percentage-wise compared--I am assuming where 
you are, an average loan is probably $300 or $400.
    Ms. Bishop. Actually nationwide, the average pawn 
transaction is between $100 to $150.
    Mr. Grimm. So compared to that, is it a very small 
percentage nationwide?
    Ms. Bishop. That would be making $2,000 loans?
    Mr. Grimm. Yes.
    Ms. Bishop. Yes.
    Mr. Grimm. Okay. And I think that is a big part of what we 
are here discussing today is that the mid-size loans, there is 
a tremendous void, there is a complete lack of options for 
people. And we just heard that is a small amount of what 
pawnbrokers are doing.
    Ms. Bishop. But it is not a small amount compared to the 
licensing and everything that we have to do under our State 
laws.
    Mr. Grimm. Okay.
    Ms. Bishop. We would still have to do things that a Federal 
charter holder wouldn't.
    Mr. Grimm. Do you think pawn loans should be the only 
option for American consumers of modest means?
    Ms. Bishop. No, sir.
    Mr. Grimm. What other options does your company have for 
consumers who need small loans but don't have any collateral?
    Ms. Bishop. Our State legalizes payday loans, and it has 
been that way for about 10 years. I am in a town of about 4,000 
people. There are six payday stores in that town, there are 
four community banks, and one credit union.
    Mr. Grimm. Do you have your own company or do you just 
represent the others?
    Ms. Bishop. I have my own pawn store, yes, sir, Dollar 
Pawn.
    Mr. Grimm. Okay, at your pawn store, can I get a loan from 
you if I have no collateral?
    Ms. Bishop. You can get--I also have a payday loan license, 
and you can get a payday loan, under State supervision from the 
State of Alabama, their guidelines.
    Mr. Grimm. Okay.
    Ms. Bishop. And I pay for that license separately.
    Mr. Grimm. Mr. Edwards, you mentioned before that you were 
very concerned about the predatory nature of some of these 
loans and that the States are in a position to manage that, but 
does that mean the CFPB and the OCC can't do that?
    Mr. Edwards. No, that does not mean that at all. The 
concern here is that the OCC, under H.R. 6139, would have the 
authority to approve products, to grant national charters, and 
prescribe regulations for the charter holders. And that is a 
concern because the CFPB has the authority under Dodd-Frank to 
regulate these nondepositories.
    Mr. Grimm. But the CFPB's job, even if that charter is 
granted, is to make sure the entity that was given a charter 
is, in fact, not harming the consumer with some of the 
devastating things you said. Am I wrong? Am I misreading the 
legislation?
    Mr. Edwards. If your question is, is the specific mission 
of the CFPB to protect consumers and then force Federal 
consumer financial law, you are correct, Representative. But 
what this bill will do, it completely circumvents the CFPB's 
authority to do so with respect to certain nondepository 
entities, and that is concerning, as well as preempt some of 
the tough State consumer protection measures that are out 
there.
    Mr. Grimm. I disagree. I don't think it takes anything away 
from the CFPB, and the language in the bill is very, very clear 
on that, but my time is up. I yield back.
    Mr. Renacci [presiding]. Mr. Green for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman, and I thank the 
witnesses for appearing. Ms. Bishop, it has been revealed that 
you have hands-on experience in the sense that you actually 
operate a business. Is this correct?
    Ms. Bishop. Yes, sir.
    Mr. Green. Let me just ask by way of a show of hands, are 
there other persons who actually operate a business that will 
be impacted, operate the actual business?
    Ms. Jackson. I'm an employee of a business, a very large 
business.
    Mr. Green. Pretty large.
    Ms. Jackson. Yes, sir.
    Mr. Green. I am not trying to demean you; I appreciate what 
you have been able to accomplish.
    Ms. Jackson. A Texas-based business.
    Mr. Green. Maybe I will do some follow-up on what you said 
about a Texas-based business. Ms. Bishop, as the only person on 
the panel who actually operates a business, I detected a sense 
of urgency from you that I haven't sensed in the others, and I 
assume some of it emanates from your concern for the life of 
your business.
    You have expressed some of these concerns. Are you of the 
opinion that your business may have to go out of business if 
this occurs? If you were downsized, would you lose employees? 
What is the sense of urgency that I can sense in your 
intonations and your demeanor?
    Ms. Bishop. The sense of urgency, as I said in my 
statement, is the creation of an unlevel playing field that 
would be created by a Federal charter holder, where someone, 
one of these mega providers could provide Internet loans, could 
provide pawn loans on the Internet, payday loans on the 
Internet, and maybe they would not have to have the same 
licensing regulation examination and education requirements in 
some areas. And it would put the independent small business 
owner at a deficit.
    Mr. Green. You mentioned education--the legislation does 
not require education; in fact, it preempts these requirements 
at a State level. What type of education are you or your 
employees required to have?
    Ms. Bishop. In some States, there is a continuing education 
requirement for obtaining and keeping your pawn license. There 
is also, in some States, and Texas is one of them, a 
requirement that each employee of a pawn operation has to be 
licensed by the State as well. So all of this would not be 
subject to a Federal charter holder.
    Mr. Green. Are you speaking today for other persons who 
operate similar businesses, and do they have similar concerns?
    Ms. Bishop. I am speaking for myself, and for the National 
Pawnbrokers Association, yes, we are very concerned about the 
position that it could place small independent family-owned 
businesses in, and some of these businesses have been in 
operation for generations.
    Mr. Green. Are most of these small businesses less than 25 
people? More than 25 people? 100 people? What are we talking 
about when we say small business?
    Ms. Bishop. I guess I am probably a good example. I have 5 
employees, and that includes myself, and that can go up to 
maybe 25, 30 employees in a larger store that maybe runs longer 
hours of operation. It is an operational question, and location 
as well.
    Mr. Green. So a simple exemption for your business that 
would exclude you from this would not suffice, because your 
concern is the competitive disadvantage that you will find 
yourself having to negotiate in if this passes. Is that a fair 
statement?
    Ms. Bishop. Yes, sir.
    Mr. Green. It is just not enough to say, okay, we will let 
the pawnbrokers be exempt. Your concern is whether you will 
have existence. Is that what you are telling me?
    Ms. Bishop. Yes, sir.
    Mr. Green. And let me ask you now about how you have 
through these--how many years have you been in business?
    Ms. Bishop. Twenty-four.
    Mr. Green. Twenty-four years.
    Ms. Bishop. Yes, sir.
    Mr. Green. Do you think you know what is good for your 
business? Do you think you have a good sense of what works best 
for your business after 24 years?
    Ms. Bishop. I would certainly hope so, or I still wouldn't 
be there. I would have a show on TV.
    Mr. Green. Thank you. I hope that you will continue to stay 
in business.
    I genuinely am trying to find some sense of where we should 
go with all of this. And I say it to you sincerely, I have 
tried to stay through the entire hearing. There were other 
things that were tugging at me. But I want to get some sense of 
what we really should do, and I thank you for your testimony 
because you have a hands-on experience with this, and it means 
a lot to me. Thank you very much.
    Ms. Bishop. Thank you for your attention.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Renacci. I recognize Mr. Fincher for 5 minutes.
    Mr. Fincher. Thank you, Mr. Chairman.
    Where Mr. Green left off to Ms. Bishop, why again would you 
be at a disadvantage if this bill is passed? Specifically, what 
is going to put you at a disadvantage to competitors?
    Ms. Bishop. First of all, I pay well over $1,000 just for 
my licenses.
    Mr. Fincher. Your competitors would not pay that?
    Ms. Bishop. They wouldn't pay State or local licensing, no, 
sir. That is one thing right off the bat. Put a pencil to it.
    Mr. Fincher. Okay. And you would have to pay that, and they 
wouldn't?
    Ms. Bishop. Yes, sir.
    Mr. Fincher. Why wouldn't you just not pay it?
    Ms. Bishop. Because I am not a Federal charter holder, and 
if I am going to stay in business in my State, I have to be 
licensed.
    Mr. Fincher. Okay. So it just would be the license and the 
fees. That is what would put you at a disadvantage. And how 
much are those fees in a year?
    Ms. Bishop. It could also be--in my particular case, with 
one store, it is in excess of $1,000. It also could create--if 
they can operate, a large Federal charter holder can operate 
more efficiently and at less cost to them, they may be able to 
undercut the fees and services that non-Federal charter holders 
are able to offer. There is lots of potential for--there is 
blue sky.
    Mr. Fincher. I get it.
    How many stores do you have?
    Ms. Bishop. I have one.
    Mr. Fincher. You have one. And what is your gross revenue 
in a year?
    Ms. Bishop. Approximately $400,000 to $500,000.
    Mr. Fincher. Okay. And the fees are $1,000, your State fees 
are $1,000?
    Ms. Bishop. Yes.
    Mr. Fincher. Yes, sir, Mr. Flores?
    Mr. Flores. I think we are losing sight here of something, 
and that is I understand small business, I have worked with a 
lot of small banks and the threats that competition provides. 
But it seems to me that the focus should be on the consumer and 
what is best for that consumer. And if competition brings more 
efficiency, lower costs, and lower fees to the consumer, then 
who benefits?
    Ms. Bishop. We are not afraid of competition, if it is 
level.
    Mr. Fincher. Let me say this, and then I am going to let 
Ms. Jackson speak. The consumer should have a product offered 
to them that is competitive, and they should be able to choose 
for themselves. But also there is nothing wrong with 
competition, and in the free market, in our system of 
capitalism, where making a profit there is nothing wrong with, 
it is something good. But we do need to make sure that we are 
all playing by the same rules. This is kind of complicated.
    Ms. Jackson, would you like to comment?
    Ms. Jackson. One, Fran and I are good friends, and we have 
served together and worked for the pawn industry, and we have 
about 1,000 locations. But when it comes to pawn, we coexist 
today, large lenders and small lenders. We also have the zoning 
restrictions. Lots of cities don't want a pawn shop on every 
corner, so you have that restriction, and if you are nationally 
chartered, that is not going to go away.
    The other thing is when you look at the OCC license 
holders, a lot of them are the national banks, but the majority 
of the license holders under the OCC are single banks in small 
towns. So, it is like the National Bank of Tyler, the National 
Bank of Gaston. It is up to the lender whether they want to be 
State-regulated or federally-regulated.
    And believe me, if we are licensed under the OCC, we will 
have fees. We are going to have to pay for ourselves and all 
the oversight. So those fees will be realized by the national 
charters, just like they are for the banks today. Banks have to 
pay a national fee to the OCC, or they are going to pay a State 
license fee.
    Mr. Berlau. Congressman Fincher, if it does cost less, or 
if it would cost less to get a Federal charter than a State 
license, the solution under this bill for--and I am not sure it 
would be, and I think the focus should be consumers--the 
solution for a small lender would be to apply for a Federal 
charter. There are one-branch banks, small banks, lots of small 
banks, that have Federal charters, like the First National 
Bank, and there is nothing that I see in this bill imposing a 
cost burden--indeed, the situation described was that it may 
cost less--preventing a small pawn shop or lender from getting 
a Federal charter under this bill.
    Mr. Fincher. I am confident--again, you are successful in 
your businesses--that in America you will find a way to make it 
work, because that is who we are as a country. But, again, I 
think we need to be careful, walk slow. But you will have the 
choice to choose between becoming federally-chartered or 
regulated by the State. And we just appreciate the testimony 
today and thank you for your hard work.
    I yield back, Mr. Chairman.
    Mr. Renacci. Thank you.
    The gentleman yields back.
    I want to thank the members of the panel. I think your 
testimony was very informative.
    The Chair notes that some Members may have additional 
questions for today's witnesses, which they may wish to submit 
in writing. Without objection, the hearing record will remain 
open for 30 days for Members to submit written questions to 
these witnesses and to place their responses in the record.
    This hearing is now adjourned.
    [Whereupon, at 1:13 p.m., the hearing was adjourned.]







                            A P P E N D I X



                             July 24, 2012



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