[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


  FINANCING THROUGH FINTECH: ONLINE LENDING'S ROLE IN IMPROVING SMALL 
                        BUSINESS CAPITAL ACCESS

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

                                HEARING

                               BEFORE THE

        SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                            OCTOBER 26, 2017

                               __________

  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
                               

            Small Business Committee Document Number 115-044
              Available via the GPO Website: www.fdsys.gov
                   
                   
                               __________
                                

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        TRENT KELLY, Mississippi
                             ROD BLUM, Iowa
                         JAMES COMER, Kentucky
                 JENNIFFER GONZALEZ-COLON, Puerto Rico
                          DON BACON, Nebraska
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                      RALPH NORMAN, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                       DWIGHT EVANS, Pennsylvania
                       STEPHANIE MURPHY, Florida
                        AL LAWSON, JR., Florida
                         YVETTE CLARK, New York
                          JUDY CHU, California
                       ALMA ADAMS, North Carolina
                      ADRIANO ESPAILLAT, New York
                        BRAD SCHNEIDER, Illinois
                                 VACANT

               Kevin Fitzpatrick, Majority Staff Director
      Jan Oliver, Majority Deputy Staff Director and Chief Counsel
                     Adam Minehardt, Staff Director
                           
                           
                           C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Dave Brat...................................................     1
Hon. Dwight Evans................................................     2

                               WITNESSES

Mr. William Phelan, President and Co-Founder, PayNet, Inc., 
  Skokie, IL.....................................................     3
Ms. Katherine Fisher, Partner, Hudson Cook, Hanover, MD..........     4
Mr. Trevor Dryer, CEO, Mirador, Portland, OR.....................     6

                                APPENDIX

Prepared Statements:
    Mr. William Phelan, President and Co-Founder, PayNet, Inc., 
      Skokie, IL.................................................    15
    Ms. Katherine Fisher, Partner, Hudson Cook, Hanover, MD......    36
    Mr. Trevor Dryer, CEO, Mirador, Portland, OR.................    42
Questions and Responses for the Record:
    Questions and Responses from Hon. Steve Chabot and Hon. Nydia 
      Velazquez to Mr. Trevor Dryer..............................    49
Additional Material for the Record:
    ETA SB Lending Infographic 2017..............................    53
    ETA Joint SBL Survey.........................................    55
    Filling the Gap - Usman Ahmed, Thorsten Beck, Christine 
      McDaniel, and Simon Schropp................................    56
    PayPal Government Relations..................................    70
    Responsible Business Lending Coalition.......................    73

 
  FINANCING THROUGH FINTECH: ONLINE LENDING'S ROLE IN IMPROVING SMALL-
                        BUSINESS CAPITAL ACCESS

                              ----------                              


                       THURSDAY, OCTOBER 26, 2017

                  House of Representatives,
               Committee on Small Business,
                   Subcommittee on Economic Growth,
                                   Tax, and Capital Access,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:04 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Dave Brat 
[chairman of the Subcommittee] presiding.
    Present: Representatives Brat, Luetkemeyer, Evans, and 
Clarke.
    Chairman BRAT. Good morning. I would like to call this 
hearing to order.
    And I think we will get underway. I don't know if you are 
all familiar with this place, but we have votes this morning at 
about 10:30. So we will just go, and we may have to let out for 
a few minutes and reconvene after votes. We are not expecting a 
huge vote series, but it will probably be 20 or 30 minutes, 
just so you all know what is heading our way.
    Let's just start off and dig in. I will try to get through 
some of this rapidly.
    Small-business access to capital has always been a top 
priority for this Committee. Access to capital gives small 
businesses the resources they need to keep the lights on, 
purchase inventory, pay their employees, and expand their 
business. For decades, small-business owners typically went to 
their local community bank to receive this capital. These banks 
were the backbone of how Main Streets across this Nation were 
created.
    However, the amount of community banks in the United States 
has fallen dramatically in recent years, and regulations such 
as Dodd-Frank have made it more difficult for small businesses 
to acquire loans through traditional means. Therefore, many 
small businesses have had to resort to other means to acquire 
capital.
    One private-sector solution that has grown considerably in 
recent years to address this credit gap is online lending. 
While it is difficult to estimate the size of this industry, 
online lenders originated an estimated $5 billion to $7 billion 
in loans to small businesses in 2015, and it is expected to 
become a $50 billion industry by 2020.
    While this is an emerging industry with several types of 
business models to assess risk, mitigate lender exposure, and 
obtain the capital to lend to small businesses, online lenders 
typically offer smaller loans with rapid approval and funding 
times.
    This morning, we will hear from a distinguished panel of 
witnesses who will give their perspective on recent trends in 
the small-business online lending industry and how it fits into 
the overall small-business credit market. I appreciate the 
witnesses' being here today.
    Thank you all very much for coming. I look forward to your 
testimony.
    I now yield to the ranking member for his opening remarks.
    Mr. EVANS. Thank you, Mr. Chairman.
    Access to capital is critical to the success of small 
business. However, obtaining conventional credit can be 
particularly difficult for many small firms. Lending 
requirements are much tighter now than they were before the 
financial crisis, and small businesses, especially startups, 
are still considered a risky bet by many lenders.
    Although FinTech provides significant advantages, there are 
some drawbacks. FinTech lending platforms reserve the right to 
reject small-business applications, just like traditional 
banks. In 2014, the Federal Reserve found only 8 percent of 
business loan applications are accepted by the larger platform. 
Today's hearing will provide members with an opportunity to 
learn about the online lending market and how it has helped 
increase access to capital for small businesses.
    Today, many firms are turning to alternative lending that 
operates on an online lending platform. These services have 
made hundreds of millions of dollars available to small firms 
by offering a number of benefits over traditional sources but 
do have some drawbacks. I look forward to hearing from our 
witnesses on ways to improve the marketplace and increase 
access to capital for the nation's job creators and innovators.
    Thank you, Mr. Chairman. I yield back.
    Chairman BRAT. Thanks.
    If Committee members have an opening statement prepared, I 
ask they be submitted for the record.
    I would like to take a moment to explain the timing lights 
for our panel today. You will each have 5 minutes to deliver 
your testimony. The light will start out green. When you have 1 
minute remaining, the light will turn to yellow. And, finally, 
at the end of your 5 minutes, it will turn red. I ask that you 
try to adhere to that time limit as best you can.
    And, with that, we will get off to our testimony.
    Our first witness today is Mr. William Phelan, the 
president and co-founder of PayNet, Incorporated, in Skokie, 
Illinois. PayNet provides small-business credit data analysis 
to a variety of clients. He also serves on the Advisory Council 
on Agriculture, Small Business, and Labor to the Federal 
Reserve Board of Chicago.
    Thank you for being here this morning. You are recognized 
for 5 minutes. Thank you.

STATEMENTS OF WILLIAM PHELAN, PRESIDENT AND CO-FOUNDER, PAYNET, 
INC., SKOKIE, ILLINOIS; KATHERINE FISHER, PARTNER, HUDSON COOK, 
 HANOVER, MARYLAND; AND TREVOR DRYER, CHIEF EXECUTIVE OFFICER, 
                   MIRADOR, PORTLAND, OREGON

                  STATEMENT OF WILLIAM PHELAN

    Mr. PHELAN. Thank you, Mr. Chairman. Thank you for that 
introduction.
    The financial crisis, as you all state, disrupted the 
credit markets. Traditional banks, as you also mentioned, and 
even large banks were preoccupied and didn't find lending to be 
as profitable. FinTechs jumped in, as you said, Chairman, to 
fill the credit gap, but they have their own challenges as 
well.
    Let me just briefly talk about the credit conditions for 
small businesses right now. There is less investment being 
taken by small businesses right now. From the period 2015 to 
2017, small-business investment is actually down 1 percent, 
versus 2005 to 2007 where it was up 12 percent. Having said 
that, the financial health of small businesses is extremely 
strong right now. Their days-past-due are actually better than 
they were before the recession.
    Very briefly, let me just mention the size of this market. 
It is important to understand the sheer scope of the small-
business credit market. We estimate over $1 trillion in total 
credit. Banks make up the biggest portion of that, about $700 
billion; commercial finance, about $250 billion. And 
alternative finance, or FinTech, is about $5 billion to $7 
billion right now.
    Briefly, you mentioned the banks and the challenges they 
have had. They undergo a credit process. The credit process 
consists of 28 different steps. It can cost a bank $5,000 to 
$7,000 to complete one credit application, so it is a very 
expensive process for a bank. And then they have to spend a lot 
of time actually reviewing those loans, and that is another 
$1,000 of cost per review.
    You mentioned the credit gap, as well, in your opening. I 
would like to point out that Harvard Business School conducted 
a research study called ``The Decline of Big Bank Lending to 
Small Businesses: Dynamic Impacts on Local Credit and Labor 
Markets.'' This was authored by Jeremy Stein, an ex-Fed 
Governor, and two of his colleagues.
    What they found was that fewer businesses expanded 
employment as the large big-four banks pulled back on providing 
capital. Unemployment rates rose; wages fell. The effects were 
concentrated in industries like manufacturing. As a result, 
small banks, nonbank finance companies, and FinTechs jumped in 
to fill that gap. And so there is evidence of this shown in 
this Harvard study.
    Wages are lower and that still persists, which means there 
is more work to be done.
    You mentioned in your memo the size of FinTech, at $5 
billion to $7 billion, so I won't dwell on that. They do make 
traditional loans. They make working capital loans. There are 
several coalitions that have banded together to make disclosure 
available, such as the Innovative Lending Platform Association, 
the Responsible Business Lending Coalition, and the Electronic 
Transaction Association. And they have all instituted 
disclosures to help understand the cost of this capital.
    Very briefly, I want to point out the credit quality of the 
type of businesses that uses FinTech. We have seen their credit 
quality improved from 2009 through 2016. The credit scores were 
about 660 back in 2009; they were almost 670 in 2016. We have 
seen the FinTechs actually increase the balance of the loans 
that they are providing small businesses. They were in the 
$20,000 size; now they are at the $65,000 size. We have also 
seen them expand the length of the loans that they are 
providing. These were previously very short-term loans, 6-
month-type loans. Now they are averaging of 15 months.
    We have seen that the businesses that they lend to are 
actually longer-established businesses. This was really 
interesting in some of the research, that showed they are 
lending to businesses that have been in business for 10 or more 
years to the tune of about 70 percent of their borrowings going 
to those kinds of businesses, versus 77 percent for banks. And 
they are expanding into diverse industries. We are seeing 
lending into retail, health care, accommodation & food, 
construction, professional services, wholesale trade, 
transportation, administration, and manufacturing.
    Very briefly, we at PayNet conducted a study that looked at 
what happens to businesses that borrow from online, or FinTech, 
lenders. And we see that about 80 percent of them have actually 
climbed the credit ladder and have seen their credit and their 
financial health improve over that timeframe. So that was an 
important finding from the study.
    But we also note that there is a long way to go for 
FinTechs to be successful. They have done a good job developing 
the technology, but they still have work to do on acquiring 
accounts, and obtaining access to capital. And they are on the 
road towards making this disclosure, which I think is an 
important part of what they have to do to further bolster their 
business models.
    With that, I will wrap up my comments. Thank you.
    Chairman BRAT. All right. Thank you, Mr. Phelan. We 
appreciate your testimony. That was very good.
    Next is Katherine Fisher, partner with Hudson Cook, LLP, in 
the Hanover, Maryland, office, where she is primarily focused 
on the areas of consumer financial services and small-business 
financing.
    Thank you very much for being here this morning, and you 
may begin your comments. Thank you.

                 STATEMENT OF KATHERINE FISHER

    Ms. FISHER. Thank you. Chairman Brat, Ranking Member Evans, 
and Committee members, thank you for the opportunity to present 
testimony today regarding financing through FinTech, online 
lending's role in improving small-business capital access.
    I am here today on behalf of the Commercial Finance 
Coalition, a group of responsible finance companies that 
provide needed capital to small- and medium-size businesses 
through innovative methods.
    Small businesses face a gap credit in credit availability. 
Commercial Finance Coalition member companies are trying to 
close this gap and help spur entrepreneurship so more Americans 
can own and operate their own businesses.
    In my testimony today, I will provide an overview of the 
types of financing available to small businesses, with an 
emphasis on some of the more innovative financing options. I 
also will address existing regulation on small business, which 
is sufficient to protect small businesses.
    First, small businesses need choices. Small businesses 
benefit from having different types of financing available. A 
business owner who is planning for longer-term capital needs 
may choose to apply for a loan guaranteed by the Small Business 
Administration. These SBA loans are relatively low-cost. They 
range typically from $25,000 to $5 million. To apply for an SBA 
loan, the loan applicant must submit a business plan, and the 
business owner must often use her house as collateral for the 
loan.
    In contrast, a business owner who has short-term capital 
needs may choose to apply for a loan from a nonbank lender or 
to sell future receivables to a merchant cash-advance company. 
These types of transactions are typically higher-cost than 
traditional SBA loans and are in smaller dollar amounts. To 
apply for one of these loans, or MCAs, the applicant usually 
must submit bank statements showing several months' worth of 
revenue, and the business can receive funds in a matter of 
days.
    MCA companies--these are merchant cash-advance companies--
are primarily balance sheet funders who have an interest in the 
success of the business. MCAs are also unique because they 
allow the merchant to adjust the terms of the transaction to 
match their revenue.
    Whatever the type of financing a business owner chooses, 
banks alone are not addressing the needs of small business. 
Other financing sources are finding success because small 
businesses demand them. This demand shows that small businesses 
are being underserved by the traditional funding sources.
    The MCA and commercial lending spaces are sufficiently 
regulated by existing Federal and State laws and regulations. 
Both MCA companies and commercial lenders must comply with laws 
and regulations affecting nearly every aspect of their 
transactions, from marketing and underwriting through servicing 
and collections.
    Even when they comply with every applicable law and 
regulation, small-business lenders must also be wary of the 
Federal Trade Commission's powerful authority to prevent unfair 
or deceptive acts or practices. Commercial lenders must comply 
with additional Federal regulation, and many States subject 
them to comprehensive licensing and regulatory schemes.
    For example, on the Federal level, commercial lenders must 
comply with the Equal Credit Opportunity Act and its 
implementing Regulation B, which prohibits discrimination 
against protected classes of people in the extension of credit. 
The Equal Credit Opportunity Act and Reg B apply to business 
credit and provide protection specifically for business 
borrowers.
    Another example is the Fair Credit Reporting Act, which 
requires a funder to have a permissible purpose to pull a 
consumer report for a sole proprietor or for an individual 
guarantor of a business transaction. This is particularly 
relevant in the world of small-business finance, where the 
business is often organized as a sole proprietor or the 
individual owner will serve as a guarantor in the event that 
the business defaults.
    Finally, many States require a license to make a loan to a 
business, limit the interest rates lenders may charge to 
business borrowers, or both. And with State licensing programs 
comes regulatory oversight. States that regulate lending also 
typically limit the terms of loans, require disclosures and 
loan documents, and limit the fees that creditors may impose. 
Most State laws regulating lending apply to loans with smaller 
dollar values, and these are exactly the types of loans upon 
which small businesses rely.
    I am very optimistic that FinTech and alternative finance 
will fill the void for those underserved by traditional banks 
and financial institutions, providing much-needed access to 
capital for small businesses.
    Thank you.
    Chairman BRAT. Thank you, Ms. Fisher. We appreciate your 
testimony as well. Thank you very much.
    And I will now yield to our ranking member for the 
introduction of the final witness.
    Mr. EVANS. Thank you, Mr. Chairman.
    Our last witness is Mr. Dryer, CEO of--the company is 
Mirador? Did I get that right?
    Mr. DRYER. Mirador.
    Mr. EVANS.--Mirador Finance in Portland, Oregon.
    Mr. Dryer received his B.A. in history and literature from 
Harvard University before receiving his J.D. from Stanford 
University Law School.
    Thank you for being here this morning, and you may begin. 
Thank you, Mr. Dryer.

                   STATEMENT OF TREVOR DRYER

    Mr. DRYER. All right. Chairman Brat and Ranking Member 
Evans, thank you for the opportunity to testify today. It is 
really an honor to be here.
    As mentioned, my name is Trevor Dryer. I am the CEO of 
Mirador, which is a small business headquartered in Portland, 
Oregon. Mirador is a white-label, third-party service provider 
working with regional, midsized, and community banks, credit 
unions, and nonprofit CDFIs. Mirador is dedicated to the 
proposition that regulated financial services companies want to 
serve small businesses in their communities.
    Mirador is not a lender. Our platform focuses on improving 
the engagement and experience between borrower and lender, 
supporting commercial term loans, SBA-backed loans, working 
capital lines of credit, commercial real estate loans, and 
small-dollar loans.
    When a borrower goes to one of our customers' branches or 
to their website to apply for a business loan, they are routed 
onto the Mirador platform. However, they likely won't even know 
they have left the bank site, and we want it that way.
    Borrowers can follow simple steps to fill out the 
application, and Mirador technology completes a credit memo by 
pulling additional data from public records, credit bureaus, 
accounting software, bank accounts, and the IRS, which is 
returned to a bank's loan officer with a simple indication of 
credit worthiness based on the lender's credit criteria.
    We are paid for every credit memo we complete without 
regard to the final outcome of the application.
    The benefit to our bank customers is a vast reduction in 
the time and cost to process the loan. For the borrowers, they 
benefit from an equally steep reduction in the time it takes to 
go from the application to the funding of the loan.
    As we grow our client base, we are creating a network of 
partners, borrowers, and lenders passing along customers to 
ensure that any small business can gain access to credit from a 
regulated institution without having to go through the time and 
trouble of starting the application process over each time. 
This is also a unique way to increase awareness of low-cost 
lenders, such as leader CDFIs, that traditionally do not engage 
in marketing activities.
    Innovation in the area of small-business lending is 
improving acces to capital. However, a number of issues still 
negatively system impact this market and place the borrower at 
a disadvantage. To that end, I proffer a few recommendations to 
further remove pain points for small-business borrowers and 
lenders.
    First, I strongly encourage the IRS to automate the 4506-T 
process for a third party to obtain a tax transcript. 
Congressmen McHenry and Blumenauer, as well as the ranking 
member of this Committee, Congresswoman Velazquez, introduced 
H.R. 3860, the IRS Data Verification Modernization Act of 2017, 
requiring the IRS to automate the Income Verification Express 
Service process by creating an API, or application programming 
interface, which would reduce the paperwork and the waiting 
period that currently burdens lenders and borrowers alike.
    Second, working with the New York Business Development 
Corporation, we have identified an opportunity to increase 
referrals of those borrowers unable to gain access to credit 
through traditional methods to a mission-based nonprofit lender 
by providing Community Reinvestment Act, or CRA, consideration 
for referrals. Currently, banks do not receive CRA credit from 
referring borrowers to CDFIs or other qualified institutions 
when these loans are too risky for the bank to underwrite. 
Given the economic development missions of CDFIs to support 
small businesses, a successful referral from a bank is 
something that regulators should incentivize.
    Third, the law should allow credit reports to travel with 
referred loan applications. When applying for a loan, numerous 
credit inquiries occur from the various lenders considering the 
borrower's request even though the borrower is seeking a single 
loan. Currently, each lender has to pull a credit report even 
if the loan is a referral. The more inquiries, the greater the 
impact on a credit score. As a credit score gets lowered, the 
cost of capital increases and becomes more difficult to obtain.
    Finally, I encourage you to further incentivize the SBA to 
improve their technology in making the agency's lending process 
more efficient and borrower-friendly. SBA-backed products 
remain a vital source of capital for small businesses, 
particularly newer businesses and startups. However, the 
process and technology used are cumbersome and can deter many 
lenders and borrowers from participating. The private sector, 
including Mirador, has developed world-class matching 
technology, ensuring that borrowers end up approved by a lender 
under the most appropriate terms and conditions. The SBA should 
be encouraged to look to the private sector for technology 
solutions to improve the borrower experience in their flagship 
programs, SBA One and SBA Lender Match.
    Once again, thank you so much for this incredible 
opportunity, and I am happy to answer your questions.
    Chairman BRAT. Super. Thank you, Mr. Dryer. We appreciate 
your testimony as well.
    And I think for the questions I am first going to yield to 
my colleague Mr. Luetkemeyer. He has a special interest and 
expertise in this area, and we will lead off with some 
questions.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today in your Committee.
    Ms. Fisher, I am kind of curious, you are advocating, or 
represent anyway, the merchant cash advance folks. Is that 
correct?
    Ms. FISHER. Yes.
    Mr. LUETKEMEYER. Would you describe a cash advance as a 
loan or an investment? Or how would you classify that?
    Ms. FISHER. Sure. Thanks for asking that.
    A merchant cash advance is not a loan. It is a purchase of 
the right to receive future income from a business. So a small-
business owner can enter into a transaction with a merchant 
cash advance funder under which the small-business owner sells 
a percentage of its future income. And the merchant cash 
advance company then will receive that portion of the small 
business' revenue as the small business makes the revenue.
    It is a very helpful product for small businesses, in that 
payments are not unconditionally required. The payments to the 
merchant cash advance company are required only to the extent 
that the small business actually creates revenue.
    Mr. LUETKEMEYER. Okay. Fantastic.
    So I know that in Mr. Phalen's testimony he talks about a 
SMART Box. And I am all for disclosures. I think the 
individual, the business needs to know what they are getting 
into. I think that is important. But I know in the SMART Box 
there is an APR disclosure. How do you disclose an APR with a 
merchant advance product?
    Ms. FISHER. That is a good question. A merchant cash 
advance product is not an appropriate----
    Mr. LUETKEMEYER. It is not a loan, so, therefore, you don't 
really have an APR, right?
    Ms. FISHER. And, also, there is no definite term.
    Mr. LUETKEMEYER. Okay.
    Ms. FISHER. So, because a small business is required to 
deliver a portion of their receipts as those receipts are 
created, we can't know when those receipts will be created. And 
things can happen; like, there can be a tough winter in 
Minnesota and business slows down for businesses there and so 
receipts trickle in more slowly than expected.
    So putting an APR as a measurement on a transaction with no 
definite term is not the most helpful----
    Mr. LUETKEMEYER. We are trying to fit a square peg into a 
round hole, aren't we?
    Ms. FISHER. Yeah.
    Mr. LUETKEMEYER. You know, I deal with a lot of small-
dollar lending, and I chair the Financial Institutions 
Subcommittee in Financial Services, and so I deal with this 
stuff all the time. You know, for a long time, I--and I 
actually chaired the Financial Services Committee back in 
Missouri when I was back in the State house. And I have always 
dealt with the problem with APR disclosures for small-dollar 
lending anything less than a year. You know, APR, the letters 
stand for ``annual percentage rate.'' How do you have an annual 
percentage rate on something that is not done on an annual 
basis? It is done for 2 or 3 weeks or 6 months at a time. I 
really struggle with this.
    And I think, you know, quite often, the APR has been 
misrepresented. Because, at the end of the day, if I have a 
leaky faucet at home and I call my plumber up and he charges 50 
bucks, you know, to stop by my doorstep--if goes in and says, 
``Oh, you have a tap I just have to fix,'' so within 5 minutes, 
you know, 10 minutes there, he fixed my faucet, now, did he 
charge me 50 bucks to stop by and pay for his trip out and his 
experience and all his tools and all of that, or did he charge 
me $300 an hour?
    That is the disproportionality of an APR and the 
misrepresentation of what is going on with this service charge 
for small-dollar lending, which, you know, in your situation 
here, quite frankly, isn't going to apply because of the 
business model that you have.
    So that is my concern with APRs. I think for small-dollar 
lending or anything that is less than a year, I think it is an 
irrelevant thing. And I hope that that can be something that a 
SMART Box can be able to be fixed so it doesn't do more harm 
than good, because I think it misrepresents what is actually 
going on there.
    Mr. Dryer, you made a comment a minute ago with regards to 
credit bureau inquiries. And I think this is a very, very 
important point, from the standpoint that the more inquiries 
that an individual has or business has, it sometimes can have a 
negative impact on that person or that business' ability to get 
credit. Would you like to elaborate on that just a little bit?
    Mr. DRYER. Sure.
    Mr. LUETKEMEYER. It seems counterintuitive, because you are 
trying to find a way to help people, and actually hurt them by 
going through the credit bureau.
    Mr. DRYER. That is right. We see, typically, because of the 
rules that don't allow one lender to share a credit report with 
another, that small businesses often have to apply to several 
lenders in order to find one that fits their credit parameters, 
their lending parameters. And so you will see sometimes, when 
they are looking for the same $50,000 loan, they had to apply 
to five or six lenders, and, as they go through the process, 
more credit inquiries, lowering their FICO score, which----
    Mr. LUETKEMEYER. So how would you fix that for your small 
businesses? Because this is really important, because they are 
trying to get started, they are struggling, and yet if they 
actually try and go someplace and get some funds and that 
individual or company or entity goes to the credit bureau, it 
is actually a mark against them. How do you solve that problem?
    Mr. DRYER. I would solve it by allowing the credit report 
to be transferred from lender to lender. If you are applying 
for a single loan, even if it is with multiple lenders, that 
should be one credit inquiry, in my view. And if you can allow 
the borrower to kind of take that data with them, that would, I 
think, solve, largely, the problem.
    Mr. LUETKEMEYER. I appreciate that.
    Thank you, Mr. Chairman. My time has expired.
    Chairman BRAT. Thank you.
    I will now yield to the ranking member, Mr. Evans, for 5 
minutes.
    Mr. EVANS. Thank you, Mr. Chairman.
    Ms. Fisher, I wanted to probe a little bit more on what my 
colleagues just talked about. When applying for finance, does 
your industry get personal guarantees that lenders and other 
industries receive?
    Ms. FISHER. Thank you for that question.
    In the merchant cash advance industry, there typically are 
personal guarantees, but they are of a different sort than with 
a loan. As I explained before, with a merchant cash advance 
transaction, the business is only obligated to deliver revenue 
to the extent the business creates that revenue. So the 
personal guarantee is not a personal guarantee of payment.
    The business owner also makes certain promises, such as 
they won't divert revenue, you know, they won't open multiple 
bank accounts and do funny things with their money. So the 
guarantee is a guarantee of those types of promises, not the 
guarantee of repayment.
    Mr. EVANS. So does that lack of collaboration affect your 
business model?
    Ms. FISHER. No. I think it affects it in a positive way, in 
that it helps only ensure that the business owner, who 
typically is the person who can control in a small business 
whether they are opening multiple bank accounts, is standing 
behind those promises. But it doesn't change the nature of the 
product being not absolutely repayable.
    Mr. EVANS. Uh-huh.
    This is to the entire panel, and I will start with you.
    Are you aware of the Small Business Borrowing Bill of 
Rights? And do you think its tenets include commonsense tools 
to protect small businesses and provide transparency?
    Ms. FISHER. Thank you.
    I am aware of the Small Borrowers Bill of Rights. I haven't 
read it in a while, so I am not familiar with exactly what it 
says. I think that, as I recall, there are certain things about 
it that are very good. There are certain things about it--I 
think it mentions APR, so that would be something that I would 
disagree with.
    The good news is there are many different industry groups 
who are working on best practices. And, although they don't 
agree with every practice, they are working hard on coming 
together for best practices as a whole. So that is a positive 
thing.
    Mr. EVANS. Okay.
    Other people want to respond to that?
    Mr. PHELAN. Sure. Yes. Thank you, Congressman.
    We also are aware of all the different disclosures that are 
underway now in the industry, and I mentioned some of them in 
my opening remarks. And there are different tools for assessing 
the cost of these types of loans. We think that the more those 
tools are made available, the better for the businesses to 
assess the cost of credit.
    I think somebody here mentioned that businesses have all 
kinds of credit needs and financial needs, and it is hard to 
distill this down into any one kind of point of view that can 
encompass all these different capital needs or credit needs for 
businesses. And so, providing the disclosure and having the 
tools available make a lot of sense as a way to help clarify 
the cost for the business.
    Mr. EVANS. Mr. Dryer?
    Mr. DRYER. Yes, we applaud the efforts of the industry to 
create more transparency and disclosure. At the end of the day, 
that, to me, is what is important, is the small business 
understanding what they are getting into.
    I think the challenge is, when you have regulated entities 
that are subject to regulations requiring a certain disclosure 
and then you have industry groups that have taken a different 
approach, it can become very confusing for a small business if 
they are looking at multiple lenders to really understand the 
true costs and the terms of the loans. And we see that can be, 
you know, quite confusing.
    I don't have a great solution for that, but I think the 
more that a small business can be allowed to, you know, compare 
proverbial apples to apples, the better it is for the borrower.
    Mr. EVANS. Thank you.
    Mr. Chairman, I yield back the balance of my time.
    Chairman BRAT. Thank you, Mr. Evans.
    I think we are actually doing all right on the voting 
clock. They are still talking on the floor, so we have done 
well today.
    I will ask a bit of a technical question, and then in the 
back of your minds--you are up here in D.C.; Federal 
Government, Federal law, et cetera, regulations. At the end, 
maybe just suggest how we can be helpful to you moving forward, 
what we can do better, and that.
    But I will just start off with more of a narrow question. 
We will start with Mr. Phelan and work down.
    Currently, the Consumer Financial Protection Bureau, CFPB, 
is in the process of implementing Section 1071 of Dodd-Frank, 
which would require financial institutions, including online 
lenders, to gather and submit demographic data of borrowers to 
the government.
    What concerns, if any, do you have with this provision? And 
how would it affect both small financial institutions and small 
businesses?
    Mr. PHELAN. Thank you for that question.
    Yes, we have worked a little bit with the CFPB to help them 
understand this data-collection requirement. It is complex, and 
what we find is that the data doesn't exist today, so it is 
hard to say where exactly to go to obtain it right now.
    We think that the challenge is in creating this massive set 
of information and that, it is going to put a burden on the 
businesses, ultimately, to report this in the transaction. 
There will be some requirements to collect it directly from the 
business. The business is really the only source to get it, 
because no other sources exist right now.
    Then there is the challenge of being able to create this 
massive data warehouse. And there are different ways to do it. 
What we have discussed with the CFPB, is to utilize current 
technology that exists right now to collect this information. 
And once that is collected, it must then be crafted into a 
finished product that provides an understanding of what is 
going on in the lending markets and to understand fair credit, 
lending activity.
    So the concerns are that it is going to be a massive 
project, and it is going to be a very substantial change for 
both the business and, I think, even to the CFPB to thoroughly 
understand the information from this data set.
    Chairman BRAT. Great. Thank you much. I apologize for the 
alarm. I have never heard it go off like that before.
    But I think I am going to yield my time to Member Yvette 
Clarke from New York right now. She is with us, and I want to 
make sure we get her questions in, if she has any for you 
today. Thank you.
    Ms. CLARKE. Certainly. I thank you very much, Mr. Chairman, 
and I thank Ranking Member Evans.
    I thank our expert witnesses for appearing here today.
    We know that the world has changed dramatically over the 
past decade alone. We have seen rapid technological advances 
that have allowed us to access the world in the palm of our 
hands. However, we have also seen generations of family wealth 
wiped out due to the mortgage foreclosure crisis.
    At the center of all of this lies the financial 
technological industry. This crucial industry offers the 
promise of easier access to capital for people to open 
businesses, afford college, and launch new products. However, 
it also means that lenders could be exposed to new forms of 
fraud and borrowers could face new forms of soft 
discrimination/implicit bias by focusing on nontraditional 
lending factors that structurally disadvantage specific 
communities.
    Our goal as elected Representatives of the American people 
is to ensure that the government creates clear, fair, and 
effective rules to maximize access to capital while minimizing 
risk and discrimination that results from bias.
    So my first question is to Mr. Phelan.
    Can you please describe what nontraditional factors FinTech 
lenders may look toward in making investment decisions? For 
instance, is there some means of explaining the story behind 
late payments within the confines of your application process?
    Mr. PHELAN. Thank you. Thank you for that question.
    First, I will start with just the nature of a small 
business. A lot of times, small businesses lack the financial 
statements in an audited format. They don't really have the 
need to present audited financial statements and undertake all 
that expense that a public company does. With that as a 
starting point, lenders are looking to do a credit assessment. 
They are looking to conduct an assessment about the ability to 
repay the loan.
    So, if you put those two together, first you have to go to 
various sources of data to assess the credit of the borrower. 
And these sources provide information mentioned in the credit 
memo, things like credit bureau information, both on the 
personal and the commercial side. There is commercial credit 
data that can be used very effectively. Secondly, there are 
very creative things done by the FinTechs around collecting 
financial cash-flow information through the bank statements. 
They can actually look at the cash flows of the business 
through the bank statements.
    There are other sources that I think have been more hyped 
than reality, things like social media, that are interesting 
from a credit assessment standpoint, but are unproven. And so I 
think those are challenges that have not really been fully 
vetted yet.
    And then there are other forms of payment records, like the 
short-term trade payable information, such as shipping bills, 
phone bills, light bills, things like that.
    What I think is interesting about online lending is that 
the online lenders really never see their applicant. They don't 
meet them face-to-face, which is far different than the 
community bank structure. In the community bank, you walk into 
the branch, you meet the banker face-to-face. And with the 
online lenders, this is all done online. It is all done really 
through the information and data that doesn't provide a view 
into the business itself and important characteristics, other 
than, you get name, address, phone number, and name of the 
business. You get the payment records and maybe some public 
filing information, too. And so that can be distilled down to 
create some very credible and reliable credit assessments.
    Ms. CLARKE. Very well. Thank you.
    Ms. Fisher, in your prepared testimony, you went into 
detail about the complexity of merchant cash advances, which 
allows for businesses to sell their future receipts for cash up 
front. Yet you also claim they are already sufficiently 
regulated at the Federal and State level.
    Are there any changes that you would like to see made to 
the way in which the government regulates MCAs?
    Ms. FISHER. Thank you for that question.
    My view is that Federal regulation of merchant cash 
advances is sufficient. There are Federal laws that touch the 
merchant cash advance transaction, as I mentioned, throughout 
the transaction, from marketing to underwriting to servicing 
and collection. So I don't have any suggested changes.
    Thank you.
    Ms. CLARKE. Very well.
    Mr. Chairman, I yield back. Thank you.
    Chairman BRAT. Thank you very much.
    And sorry for the rushed feel today. I apologize. On fly-
out days, we usually leave about noon, but, today, for some 
reason, it happened a little early. And so I just want to thank 
you all for your participation and good spirits today and the 
excellent testimony you all provided.
    I ask unanimous consent that members have 5 legislative 
days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 10:42 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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                 House Small Business Committee

    Subcommittee on Economic Growth, Tax and Capital Access

``Financing Through Fintech: Online Lending's Role in Improving 
                Small Business Capital Access.''

                        October 26, 2017

                   Testimony by Trevor Dryer

                     CEO, Mirador Financial

    Introduction

    Chairman Brat and Ranking Member Evans, thank you for the 
opportunity to testify today on the role fintech plays in 
helping small business access capital. It is an honor to be 
here sharing the insights and experience we have accumulated 
working in this important space.

    My name is Trevor Dryer and I am the CEO of Mirador, a 
small business of 24 employees, headquartered in Portland, 
Oregon. In the regulated banking space, Mirador is a 3rd party 
service provider and is treated as such by bank examiners. The 
cloud-based Mirador platform is a ``white label'' technology 
solution marketed under a bank, credit union or CDFI's brand, 
enabling them to profitably originate small business loans as 
low as $2,500, and offer competitive rates by using technology 
to facilitate some of the more labor-intensive parts of the 
loan-making process, creating a fast and easy experience for 
the small business borrower.

    Mirador is not a lender. Our technology supports each of 
the following services for customers who are lending: customer 
acquisition, application (both online and in branch), loan 
origination, underwriting, pre-screening or ``decisioning,'' 
and decline referrals. As a front-end solution with extensive 
back-end functionality, all aspects of our platform focus on 
improving the engagement and experience between borrower and 
lender. Our technology supports: commercial term loans, SBA 
backed loans, working capital/lines of credit, commercial real 
estate loans, and small dollar loans.

    Our platform is highly-customizable and reflects the 
existing credit criteria established by our customers. Our role 
in the loan-making process provides us with unfettered 
sightlines into current small business lending trends including 
types of businesses looking for capital, geographic 
distribution of a sample size of small business loans, credit 
availability, and the risk appetite for different types of 
institutions. I can you from my professional work and my 
personal experience, access to affordable capital remains a 
major hurdle for small businesses around the United States.

    Our customers are regional, mid-sized and community banks, 
credit unions, CDFI's and other mission-based lenders. Their 
customers are the small businessmen and women in the 
communities they service who are seeking loans for as little as 
a couple thousand dollars, up to several hundred thousand 
dollars or more.

    Mirador is dedicated to the proposition that regulated 
financial services companies want to serve small businesses in 
their communities, and are equipped to do so at competitive 
rates with robust consumer protections. Due to a number of 
factors including regulatory costs, small business loans below 
a certain dollar amount are unprofitable for regulated 
financial services entities. However, with the help of 
Mirador's technology, our customers make smaller loans 
profitable once again, increase the profitability for larger 
loans, improve the customer experience for borrowers, and 
utilize supplemental underwriting, techniques and data sources 
helping more lenders ``get to yes'' for qualified small 
businesses.

    Borrower Experience

    When a lender partners with Mirador, they license our 
platform. Again, the platform is highly customizable. We import 
the lender's credit criteria and integrate the platform into 
the bank's preferred origination channels, whether in-branch, 
online or mobile.

    Once integrated, applicants seeking a business loan apply 
through the bank portal either directly on the bank's website, 
or working with an employee who takes the application 
information in-branch. Though routed onto the Mirador rails, 
the borrower's experience remains on the bank's website with 
the ``Powered By Mirador'' phrase and logo at the bottom of the 
screen. All of the branding, marketing and compliance 
disclosures are determined by the bank and bank regulators.

    Applicants will follow simple steps to fill-in their 
information and, witht heir affirmative consent, Mirador 
technology completes a credit memo by pulling additional data 
from public records, credit bureaus, accounting software, bank 
accounts and the IRS. The credit memo is transmitted to a 
bank's loan officer with an indication of credit-worthiness--
again, based on the credit tolerances the bank has provided. 
The indication is communicated through a GREEN-YELLOW-RED 
system--green essentially indicating an approval, red a denial, 
and yellow a conditional approval pending the acquisition of 
more applicant information.

    The value to the bank is that, up to this point in the 
lending process, a bank employee has not spent time compiling 
documents, calling the applicant and calling them again to get 
more information to compile a complete credit memo. Our lenders 
report as much as a 69% reduction in time spent per 
application, and a savings of roughly $1550 per loan 
origination. Additionally, our lenders see roughly a 60% 
application completion rate, due to the significantly easier, 
less labor-intensive application process. Several lenders have 
reported seeing a 40-50% increase in loan applications after 
implementing Mirador's technology due to this higher 
application completion rate, and also being able to attract 
borrowers disinclined to go through a cumbersome application 
process.

    The value for the borrower is spending less than 10 minutes 
compiling an application, as opposed to the average time of 30 
hours. According to the Joint Small Business Credit Survey 
Report of 2016 \1\, borrowers overwhelmingly state ``difficulty 
with the application process'' and ``long wait for credit 
decision'' as the principle reasons for dissatisfaction with a 
borrowing experience, far outweighing rates or repayment terms. 
Mirador works hard to efficiently use the borrower's time.
---------------------------------------------------------------------------
    \1\ https://www.newyorkfed.org/medialibrary/media/smallbusiness/
2016/SBCS-Report-EmployerFirms-2016.pdf

    Our adaptive application experience changes and presents 
questions based on the borrower's risk. For example, as we 
collect information we may seamlessly route a borrower into a 
SBA process if too risky for a conventional term loan. We also 
use a unique algorithm in compiling the underwriting 
information for our lenders and to match a borrower with the 
lender most likely to approve a loan. If the borrower is 
generally too risky for our partner banks or credit unions, our 
technology seamlessly routes, with the borrower's consent, the 
application to a non-profit CDFI. Thanks to this routing 
ability, the borrower does not need to start the application 
process over with the new lender, thus saving significant time. 
This is also a unique way to increase awareness of low-cost 
lenders, such as CDFIs, that traditionally do not engage in 
---------------------------------------------------------------------------
marketing activities.

    Mirador also provides the bank with deeper analytics about 
their application traffic, loan performance and customer mix. 
But the real value is getting more small business loans into 
the hands of creditworthy applicants. Aside from the licensing 
fee, we are paid for every completed credit memo regardless of 
the lending decision.

    In our mission to provide more small businesses access to 
capital through traditional, regulated entities, we are working 
with various groups having a small business customer base. By 
growing our client base, we envision a neural network of 
partners, borrowers and lenders passing along customers to 
ensure that any small business can seamlessly access affordable 
credit from a traditional, regulated institution without going 
through the time and trouble of starting the application 
process over again from the start. As our network continues to 
grow and the number of small business customers increases, the 
technology provided by Mirador will only improve.

    What We're Seeing

    Often the owner of a small business is the CEO, CFO, CIO, 
CTO and likely the person handling all of the day-to-day work 
required to keep the business running. In other words, handling 
the business' finances is just one more task for the business 
owner and often is the task left to the end of the day during 
non-business hours. In fact, we have heard reports that less 
than 10% of small businesses have a CFO or someone looking 
after their finances full-time.

    A study in 2015 by the Cleveland Fed found that the #1 
complaint of small business borrowers was that the application 
process was too cumbersome, and the #2 complaint was that the 
process too long \2\. Also, the typical hours of operation for 
a bank branch overlap with the hours the business owner is 
usually trying to run their business. As such, a time consuming 
application process becomes extremely difficult.
---------------------------------------------------------------------------
    \2\ https://www.clevelandfed.org/community-development/small-
business/about-the-joint-small-business-credit-survey/2015-joint-small-
business-credit-survey.aspx

    A 2014 Federal Reserve study calculated the amount of time 
the average small business owner commits to applying for a 
small business loan. Whether the loan is $1000 or $1 million 
dollars, on average it will take over 24 hours to research, 
fill out the applications, gather documents and submit the 
necessary information needed by the bank for underwriting \3\. 
That's 24 hours just to get the process moving forward. There 
is still the approval process, underwriting and information 
verification handled by the bank.
---------------------------------------------------------------------------
    \3\ https://www.newyorkfed.org/medialibrary/media/smallbusiness/
SBCS-2014-Report.pdf

    It can take weeks for the small business owner to see 
capital, if approved. I emphasize ``if'' because underwriting 
for small businesses is tricky, time consuming and expensive. 
In fact, it will cost a bank just as much to underwrite a 
$100,000 small business loan as it does a $1 million loan, a 
cost which the Oliver Wyman consulting firm found to be between 
$1600 and $3200 per loan application, regardless of loan size 
\4\. This leaves very little incentive for the banks to offer 
small-dollar loans.
---------------------------------------------------------------------------
    \4\ https://qedinvestors.com/wp-content/uploads/2015/10/The-Brave-
100-The-Battle-for-Supremacy-in-Small-Business-
Lending--vf.pdf

    From this narrative, it is also easy to see why so many 
small businesses turn to online lending for their capital 
needs. In fact, 21% of small business loans are currently going 
to higher-priced, non-bank lenders, and this number is growing 
\5\. The online lending community provides 24 hours access, 
near-instant approvals, and quick turnaround on capital 
available in smaller cash amounts. For so many small 
businesses, this is the only logical and available--albiet 
often expensive--option to meet their capital needs.
---------------------------------------------------------------------------
    \5\ https://www.newyorkfed.org/smallbusiness/small-business-credit-
survey-employer-firms-2016

    Mirador Financial was created with these small business 
pain points in mind, but also with the understanding that 
capital offered by traditional lenders is often less expensive 
---------------------------------------------------------------------------
and carries better terms for the borrowers.

    Mirador currently works with 20 banks and credit union 
partners and 4 CDFIs and our network continues to grow. We 
believe our technology brings the necessary conveniences of 
online lending to the traditional financial institution space, 
offering one more option for the small business owner 
struggling to keep up with their work and make ends meet. To 
date, we have helped offer over $600 million in loans to over 
4,200 customers. These loans range from $1000 to $9.75 million 
dollars (a SBA 504 loan in a high-priced real estate market) 
with an average loan size of $123,000, both non-traditional 
products like merchant cash advance to SBA 7(a) loans. We are 
crossing the gap between small business, small dollar lending 
and traditional commercial lending.

    While innovation is clearly improving access to capital for 
small businesses, a number of issues still negatively impact 
this market and place the borrower at a disadvantage.

    To that end, I proffer three policy recommendations which 
can unlock additional capital for small businesses by further 
removing pain points for borrowers (and lenders).

    Encourage the IRS to automate the 4506T process for a third 
party to obtain a tax transcript.

    Congressman Patrick McHenry (R-NC) and Earl Blumenauer (D-
OR), as well as the ranking member of this committee 
Congresswoman Nydia Velazquez (D-NY), introduced H.R. 3860, the 
IRS Data Verification Modernization Act of 2017 requiring the 
IRS to automate the Income Verification Express Services 
Process by creating an Application Programming Interface (API), 
which would reduce paperwork and the waiting period that 
currently burdens lenders and borrowers alike.

    The current process requires a lender to submit (often via 
fax machine) a 4506-T form to the IRS, requesting a tax 
transcript which is then used to satisfy income verification 
requirements in the underwriting process. According to the IRS, 
the lender will receive a response to the request in 2 days or 
less. However, the typical experience for the lending community 
is far longer than 2 days. Forms are faxed back and forth and 
with some routinely returned for corrections based on clerical 
errors. In our experience, the 4506-T process averages around a 
week per request, and longer if the form is returned due to an 
error. In terms of the overall application process for the 
small business borrower, this delay is a significant factor in 
the decision to abandon the loan process and instead seek 
credit through an alternative source.

    The McHenry bill would simply require the IRS to move from 
a paper-based, fax system to a secure API. Only those third 
parties authorized by the IRS to pull transcripts under the 
current vetting process would be able to take advantage of the 
API. In addition, since a fee is charged ``per pull'', the IRS 
could simply increase this fee to cover the cost of converting 
to an API.

    Provide Community Reinvestment Act (CRA) consideration for 
referrals to Community Development Financial Institutions 
(CDFIs) and other covered lenders.

    Regulated banks frequently partner with CDFIs in order to 
satisfy CRA obligations with their regulators. Currently, banks 
obtain CRA consideration for providing capital investments, 
offering technical assistance and through collaboration with a 
CDFI on lending. However, banks do not receive CRA 
consideration from referring borrowers to these same CDFIs when 
these loans are too risky for the bank to underwrite.

    Our CDFI partners are seeing a rise in refinancing in the 
small business lending space. When the small business faces an 
immediate need for capital, and the traditional, regulated 
bank's process is too slow, those businesses frequently turn to 
alternative lenders where terms and interest rates are 
unfavorable. Oftentimes speed outweighs cost-of-capital when 
the alternative means missing opportunities to expand our just 
keeping the lights on and the doors open. When the urgency is 
gone, these businesses are left with high interest debt and 
payments that cut deeply into revenue. In one of many a recent 
examples provided by a partner CDFI, a refinanced loan saved a 
small business over $6300 per month in payments. That $6300 a 
month is another employee or a lease payment on new space for 
the business. On average, one of our CDFI partners reports 
saving small business borrowers an average of $3900 per month 
on the non-bank loans they refinance by extending the repayment 
term and lending at a much lower APR (typically no higher than 
13%).

    Given the economic development mission of CDFIs to support 
small businesses, a successful referral from a bank is 
something the regulators should incentivize. In collaboration 
with the NYBDC, we identified an easy and cost effective way to 
encourage these referrals is through providing CRA 
consideration. The more options provided to the small business 
borrower with minimal additional work, the better those 
businesses are served and the greater impact on the overall 
economy.

    Allow credit reports to transfer with referral loan 
applications and prohibit credit bureaus from requiring a new 
inquiry for each new lender.

    Most individuals know that credit inquiries affect their 
credit score. Unfortunately, when applying for a loan, numerous 
inquiries occur from the various lenders considering the 
borrower's request, even though the borrower is seeking a 
single loan. The more inquiries, the greater impact on a credit 
score and, as credit scores lower the cost of capital increases 
and becomes more difficult to obtain.

    When a small business applies for a loan, they expect the 
lender to pull a credit report. However, if the lender is 
unable to approve the loan but can provide a referral to 
another lender, it is reasonable to expect the credit report to 
transfer with the application. Unfortunately, the credit 
bureaus do not allow the reports to transfer and the small 
business experiences another inquiry on their credit for the 
same information already obtained for the application that was 
denied. This is an unnecessary added cost to the application 
and an unreasonable penalty to the small business.

    Unless the credit bureaus willingly change this practice of 
requiring a new credit report when a loan application is 
transferred from one institution to another, a statutory 
requirement should be considered.

    Finally, I encourage this committee to continue efforts 
directed at modernizing and simplifying the loan process 
through the SBA. The SBA remains a vital source of capital for 
small businesses, particularly newer businesses and startups. 
However, the process and technology are cumbersome and keep the 
SBA from realizing its full potential as a guarantor. Upgrades 
to their systems must continue or the SBA risks losing its 
pipeline to online lenders and other fintech players.

    SBAOne and SBALine are the flagship programs offered by SBA 
to improve the borrower experience and previous SBA 
Administrator Contreras-Sweet and current Administrator McMahon 
deserve credit for prioritizing modernization in these areas. 
SBA staff are working incredibly hard--we know them and we 
speak to them often--but need to overcome imbedded constraints 
to really modernize these services.

    The private sector, including Mirador, has developed world-
class matching technology ensuring that borrowers can be 
considered by a lender under the most appropriate terms and 
conditions. If the SBA employed this technology, I am confident 
that it would enable SBA products to reach more borrowers. SBA 
should be encouraged to look to the private sector for 
technology solutions, and to apply such solutions to improve 
efficiently and the overall borrower and lender experience in 
SBAOne and Linc. Speaking purely on behalf of my company and 
our customers, it is in our best interest for the SBA to obtain 
the best available technology.

    Once again, thank you so much for this incredible 
opportunity. As I am sure everyone on this committee knows, 
small business is the backbone of our economy. These job 
creators serve the greater good in their local communities and 
the entire US economy. We must do everything possible to ensure 
they continue to grow and thrive, creating jobs and opportunity 
for Americans.
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