    [House Hearing, 116 Congress]
    [From the U.S. Government Publishing Office]

                      ENDING DEBT TRAPS IN THE PAYDAY AND
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    =======================================================================

                                    HEARING

                                   BEFORE THE

                      SUBCOMMITTEE ON CONSUMER PROTECTION
                           AND FINANCIAL INSTITUTIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 30, 2019

                                   __________

           Printed for the use of the Committee on Financial Services

                              Serial No. 116-20

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                                 __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    37-519 PDF                  WASHINGTON : 2020

    --------------------------------------------------------------------------------------

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             PETER T. KING, New York
    GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
    WM. LACY CLAY, Missouri              BILL POSEY, Florida
    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
    AL GREEN, Texas                      BILL HUIZENGA, Michigan
    EMANUEL CLEAVER, Missouri            SEAN P. DUFFY, Wisconsin
    ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
    JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
    BILL FOSTER, Illinois                ANDY BARR, Kentucky
    JOYCE BEATTY, Ohio                   SCOTT TIPTON, Colorado
    DENNY HECK, Washington               ROGER WILLIAMS, Texas
    JUAN VARGAS, California              FRENCH HILL, Arkansas
    JOSH GOTTHEIMER, New Jersey          TOM EMMER, Minnesota
    VICENTE GONZALEZ, Texas              LEE M. ZELDIN, New York
    AL LAWSON, Florida                   BARRY LOUDERMILK, Georgia
    MICHAEL SAN NICOLAS, Guam            ALEXANDER X. MOONEY, West Virginia
    RASHIDA TLAIB, Michigan              WARREN DAVIDSON, Ohio
    KATIE PORTER, California             TED BUDD, North Carolina
    CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
    SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
    AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
    BEN McADAMS, Utah                    JOHN ROSE, Tennessee
    ALEXANDRIA OCASIO-CORTEZ, New York   BRYAN STEIL, Wisconsin
    JENNIFER WEXTON, Virginia            LANCE GOODEN, Texas
    STEPHEN F. LYNCH, Massachusetts      DENVER RIGGLEMAN, Virginia
    TULSI GABBARD, Hawaii
    ALMA ADAMS, North Carolina
    MADELEINE DEAN, Pennsylvania
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    DEAN PHILLIPS, Minnesota

                       Charla Ouertatani, Staff Director
         Subcommittee on Consumer Protection and Financial Institutions

                      GREGORY W. MEEKS, New York, Chairman

    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    WM. LACY CLAY, Missouri              FRANK D. LUCAS, Oklahoma
    DENNY HECK, Washington               BILL POSEY, Florida
    BILL FOSTER, Illinois                ANDY BARR, Kentucky
    AL LAWSON, Florida                   SCOTT TIPTON, Colorado, Vice
    RASHIDA TLAIB, Michigan                  Ranking Member
    KATIE PORTER, California             ROGER WILLIAMS, Texas
    AYANNA PRESSLEY, Massachusetts       BARRY LOUDERMILK, Georgia
    BEN McADAMS, Utah                    TED BUDD, North Carolina
    ALEXANDRIA OCASIO-CORTEZ, New York   DAVID KUSTOFF, Tennessee
    JENNIFER WEXTON, Virginia            DENVER RIGGLEMAN, Virginia

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        April 30, 2019...............................................     1
    Appendix:
        April 30, 2019...............................................    43

                                   WITNESSES
                            Tuesday, April 30, 2019

    Haynes, Reverend Dr. Frederick Douglass III, Senior Pastor,
      Friendship-West Baptist Church.................................     6
    McDonald, Todd O., Senior Vice President and Board Director,
      Liberty Bank and Trust Company, on behalf of the National
      Bankers Association............................................    10
    Peterson, Christopher L., John J. Flynn Endowed Professor of Law,
      University of Utah, S.J. Quinney College of Law; and Director,
      Financial Services, and Senior Fellow, Consumer Federation of
      America........................................................    12
    Reeder, Garry L. II, Vice President, Center for Financial
      Services Innovation............................................    14
    Sherrill, Robert, CEO, Imperial Cleaning Systems.................    15
    Standaert, Diane M., Executive Vice President and Director of
      State Policy, Center for Responsible Lending...................     9
    Whittaker, Ken, Southeast Michigan Organizing Director, Michigan
      United; and former payday loan consumer........................     8
    Zuluaga, Diego, Policy Analyst, Center for Monetary and Financial
      Alternatives, Cato Institute...................................    17

                                    APPENDIX

    Prepared statements:
        Haynes, Reverend Dr. Frederick Douglass III..................    44
        McDonald, Todd O.............................................    47
        Peterson, Christopher L......................................    51
        Reeder, Garry L. II,.........................................    67
        Sherrill, Robert,............................................    78
        Standaert, Diane M...........................................    80
        Whittaker, Ken...............................................    94
        Zuluaga, Diego...............................................    95

                  Additional Material Submitted for the Record

    Waters, Hon. Maxine:
        Written testimony of the Honorable Richard J. Durbin, a U.S.
          Senator from the State of Illinois.........................    98
        Written statement of the Maryland Consumer Rights Coalition..   102
        Written statement The Pew Charitable Trusts..................   107

                      ENDING DEBT TRAPS IN THE PAYDAY AND
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                                  ----------

                            Tuesday, April 30, 2019

                 U.S. House of Representatives,
                    Subcommittee on Consumer Protection
                            and Financial Institutions,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 3:14 p.m., in
    Room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks
    [chairman of the subcommittee] presiding.
        Members present: Representatives Meeks, Scott, Velazquez,
    Clay, Foster, Tlaib, Pressley, Wexton; Luetkemeyer, Barr,
    Tipton, Williams, Loudermilk, Budd, Kustoff, and Riggleman.
        Ex officio present: Representatives Waters and McHenry.
        Also present: Representatives Green of Texas and Hill of
    Arkansas.
        Chairman Meeks. The Subcommittee on Consumer Protection and
    Financial Institutions will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time. Also, without
    objection, members of the full Financial Services Committee who
    are not members of this subcommittee are authorized to
    participate in today's hearing.
        Today's hearing is entitled, ``Ending Debt Traps in the
    Payday and Small Dollar Credit Industry.''
        And I just want to apologize to my colleagues and to our
    panelists for the late arrival. We had a codel that had some
    problems, so we literally just landed and came here. I thank
    you for your patience.
        I now recognize myself for 4 minutes to give an opening
    statement.
        To Ranking Member Luetkemeyer and the members of the
    subcommittee, welcome to this hearing on, ``Ending Debt Traps
    in the Payday and Small Dollar Credit Industry.''
        This hearing gets at the heart of the intersection between
    Main Street and Wall Street. As was the case with our last
    hearing on CRA modernization, this hearing offers us an
    opportunity to consider the challenges faced by everyday
    American families, far too many of which struggle to make ends
    meet.
        According to a recent Federal Reserve report on the
    economic well-being of U.S. households, 10 percent of adults
    experience hardship because of monthly changes in income. Four
    in ten adults cannot cover an unexpected expense of $400
    without selling something or borrowing money. Over one-fifth of
    adults are not able to pay all of their current month's bills
    in full, and over one-fourth of adults skip necessary medical
    care due to financial hardship.
        These numbers paint a stark picture of the financial health
    and resilience of American households. Indeed, despite a
    growing economy, the data shows that middle-class and lower-
    middle-class American families are falling behind.
        The financial vulnerability of such a large segment of
    American households should not make them easy targets for
    predatory lenders. Congress and relevant agencies have an
    obligation to ensure access to financial products that do not
    wreck the lives and finances of our constituents. American
    workers deserve access to financial services products that can
    serve as a foundation to building a better future for
    themselves and their families. It is in this context that
    today's hearing considers payday loans, car title loans, and
    other small-dollar loan products.
        Over a period of 5 years, engaging broadly with communities
    and stakeholders and reviewing over one million comment
    letters, the CFPB developed a payday rule aimed at curbing the
    most abusive practices of the payday industry, including
    requiring that payday lenders assess a borrower's ability to
    repay.
        There is ample research that shows that the ability to
    repay, combined with amortizing loans, are key to protecting
    consumers from falling into debt traps. As such, it was deeply
    disappointing to see first, Mr. Mulvaney, and then Ms.
    Kraninger, the current CFPB Director, move to rescind these key
    provisions from the payday rule and delay the rule itself.
        Congress established the Consumer Financial Protection
    Bureau (CFPB) in the Dodd-Frank Wall Street Reform Act in the
    wake of the greatest financial crisis since the Great
    Depression, specifically so that financial services consumers
    would know they have one agency tasked with the sole mission of
    protecting consumer interests.
        It is hard to see how the actions of the Bureau, under Mr.
    Trump's leadership team, is fulfilling its core mission of
    putting consumers first.
        The testimony of the panel of experts today paints a
    portrait of the health and vulnerability of average American
    households and shines an important light on some of the worst
    predatory practices in payday, car title, and small-dollar
    lending, and puts forth policy recommendations for our
    consideration.
        Today's witnesses will also speak to the important role of
    community banks and fintech. These are important issues that
    need not be a partisan issue. All of us, as Members of
    Congress, have constituents struggling to earn a living,
    finding themselves in a growing banking desert and caught in
    payday debt traps.
        Today's hearing is an opportunity to consider how best to
    serve these constituents. I very much look forward to
    discussing these issues further today with the panel of
    witnesses and members of the subcommittee.
        And with that, I now recognize the ranking member of the
    subcommittee, Mr. Luetkemeyer, for his opening statement.
        Mr. Luetkemeyer. Thank you, Mr. Chairman.
        Over the years, I have heard countless stories from my
    constituents who rely on small-dollar, short-term loans in
    times of financial hardship. When there is an unexpected auto
    repair, a hospital bill, or a broken air conditioner, many
    families simply have nowhere else to turn. Each year, more than
    12 million Americans utilize small-dollar loans when they need
    short-term financial assistance.
        Unfortunately, the reputation of the entire small-dollar
    lending industry has been sullied by a few bad actors
    exercising deceptive lending practices. This small group has
    caused an industry that provides access to credit for millions
    of Americans to be villainized. In fact, under the previous
    Administration, DOJ and FDIC officials specifically singled out
    payday lenders under Operation Choke Point and attempted to cut
    off these legally operating businesses from the financial
    services industry.
        My colleagues on the other side of the aisle will call for
    the payday industry to be severely regulated on the Federal
    level and are proposing legislation that will place additional
    requirements on short-term loans. I would caution against this
    approach.
        History has shown that regulations have consequences. We
    have seen over the years that traditional financial firms have
    largely gotten out of the business of small-dollar, short-term
    loans due to the cost of regulations.
        This is clearly a demand for short-term lending products,
    particularly to low- and moderate-income individuals.
        According to the Federal Reserve, 4 in 10 adults in 2017
    would be forced to borrow, sell possessions, or not be able to
    pay if faced with a $400 emergency expense.
        Before this committee considers any legislation related to
    the requirements or regulations of short-term lending, we must
    fully examine how it will impact the industry and the consumers
    who depend on these products.
        I am particularly concerned about a draft proposal before
    the committee today which would cap the APR at 36 percent for
    all consumer credit transactions.
        First, an APR is not an effective tool to measure a loan
    that typically lasts 2 to 4 weeks.
        Second, the interest attached to these loans should be
    viewed as a service fee. If a plumber comes to my house and
    fixes one pipe in 30 minutes and then charges me $50, did I pay
    him $100 an hour or did I pay him a $50 service fee?
        There is no question consumers should be protected by
    effective regulations that safeguard their financial wellbeing.
    However, regulations that curb choice and stifle access to
    credit have no place in our economy. According to CFPB's
    February 2019 rulemaking on small-dollar lending, the
    majority's hearing memo, 17 States and the District of Columbia
    have either banned payday loans or have regulations that do not
    allow payday lenders to sustain their business models.
        Restricting the availability of short-term credit will not
    solve the financial problems facing so many American families
    but it will push them toward riskier and unregulated products.
        If the Federal Government takes a similar approach to these
    17 States, and small-dollar, short-term products are regulated
    out of existence, where will the 12 million Americans who
    utilize small-dollar loans go to to get the financial services
    they need?
        This is a question that this subcommittee and the witnesses
    in front of us must focus on today.
        Thank you, Chairman Meeks, for holding this hearing.
        And I thank you, the panel, for appearing before us. I look
    forward to a robust discussion.
        And I yield back the balance of my time.
        Chairman Meeks. Thank you. I now recognize the gentleman
    from Georgia, Mr. Scott, for one minute.
        Mr. Scott. Thank you, Mr. Chairman.
        First of all, I want to welcome you back home. I understand
    it was quite a challenging trip. It's good to have you back
    safe and sound.
        This is an important hearing as we try to grapple with ways
    in which we can make sure everybody, regardless of where they
    fit in the economic stream, can enjoy and participate
    meaningfully in our grand economic system. Unfortunately, that
    is not so true for those who fall at a certain level within the
    lower income and middle income of having access.
        And this is why I have, along with my Republican
    colleagues, introduced a couple of very important bills: the
    Improving Access to Traditional Banking Act of 2019; and the
    FinTech Act, along with my colleague, Mr. Barry Loudermilk.
        I look forward to getting into this very meaningful
    hearing.
        Thank you, Mr. Chairman.
        Chairman Meeks. I now recognize the ranking member of the
    full Financial Services Committee, the gentleman from North
    Carolina, Mr. McHenry.
        Mr. McHenry. Welcome back, Mr. Meeks. Thank you for being
    here and thanks for holding this hearing. And thank you,
    Ranking Member Luetkemeyer, for your leadership as well.
        Research conducted by the Pew Charitable Trust found that
    62 percent of payday loan customers will be forced to delay
    bill payments if payday loans became unavailable. There are
    real lives at stake, and access to credit is limited. So for
    consumers with less than pristine credit or for those who are
    credit invisible or underbanked, financial choices are severely
    impaired and limited.
        Misguided regulation--in fact, misguided law often limits
    access to credit in a way that is not in the best interest of
    borrowers.
        We will hear firsthand today from Robert Sherrill, who is
    the only person on the witness stand who has actually relied on
    a payday loan. He has a story to tell and it's a very powerful
    story.
        Moreover, new technologies have emerged to foster greater
    financial inclusion by helping customers through microloan
    financing, advance payment alternatives, and data-driven
    underwriting. Those are useful and good models. The truth is,
    we need to help people save. And that is in our national
    interest. But we also need folks who do fall behind to be able
    to get short-term lending so they can get back into a stable
    situation.
        So with that, Chairman Meeks, thank you for your
    leadership. And I yield back.
        Chairman Meeks. Thank you.
        I would now like to welcome our witnesses. And I think that
    we have a great panel. I am looking forward to hearing from
    them.
        First, we have the Reverend Dr. Frederick Douglass Haynes
    III, who is a pastor, a passionate leader, a social activist,
    an orator, and an educator engaged in preaching the gospel,
    fighting against racial injustice, and who is committed to
    economic justice, empowerment in underserved communities, and
    who has been touching and transforming the lives of the
    disenfranchised for over 35 years. Dr. Haynes serves as Senior
    Pastor of Friendship-West Baptist Church in Dallas, Texas.
        Mr. Kenneth Whittaker is a community and political activist
    who has spent the last 14 years fighting for racial justice for
    the ``99 percent of us,'' to use his words. He currently serves
    as the Southeast Michigan organizing director at Michigan
    United and Michigan Peoples Campaign.
        Mr. Whittaker has traveled the country training activists,
    inspiring new leaders, and developing the skills of those
    building the progressive movement. Mr. Whittaker is a lifelong
    Detroiter, where he still proudly resides with his wife, his
    partner in raising six young adults, including five college
    students and one Navy seaman.
        Ms. Diane Standaert is executive vice president and
    director of state policy at the Center for Responsible Lending.
    Ms. Standaert directs CRL's State-level policy agenda to
    advance responsible lending policy and practices across all of
    CRL's issues. She also oversees CRL's work on issues of small-
    dollar lending. She is a graduate of the Florida State
    University and holds a JD degree from the University of North
    Carolina School of Law.
        Mr. Todd O. McDonald serves as senior vice president and
    board director at Liberty Bank and Trust of New Orleans. He
    began his career at Liberty Bank and Trust 13 years ago. He is
    intimately involved in the company's high-level corporate
    strategy decisions that ultimately affect the long-term growth
    and sustainability of the bank.
        In addition to his work at Liberty Bank and Trust, Mr.
    McDonald is active in real estate, technology, and fast food.
    He received his BS in Business Management from Morehouse
    College and a Masters in Business Administration from
    Northwestern Kellogg School of Management.
        Next, we have Mr. Chris Peterson, the John J. Flynn Endowed
    Professor of Law at the University of Utah, S.J. Quinney
    College of Law, in Salt Lake City, Utah.
        Professor Peterson was on leave from 2012 to 2016 serving
    as Special Advisor in the Office of the Director at the
    Consumer Financial Protection Bureau, and the Office of Legal
    Policy in Personnel and Readiness in the United States
    Department of Defense, and as Senior Counsel for the
    Enforcement Policy and Strategy in the Consumer Financial
    Protection Bureau Office's of Enforcement. Mr. Peterson is a
    Senior Fellow of the American Bar Association's Consumer
    Financial Services Committee.
        Mr. Gary Reeder II is vice president for policy and
    innovation at the Center for Financial Services Innovation.
        Mr. Reeder sets the strategic direction and is responsible
    for the execution of CFSI's innovation portfolio and policy
    activity. He leads the Financial Solutions Lab, a community of
    startups, financial services companies, and nonprofit
    organizations building solutions to improve financial health in
    America.
        Mr. Reeder's broad experience in regulatory matters stems
    from his work at the CFPB, the FDIC, the U.S. Treasury, and in
    the asset management industry.
        He holds a BA in history from Yale College, and an MBA from
    Columbia Business School.
        Mr. Robert Sherrill is the chief executive officer of
    Imperial Cleaning Systems. A Nashville native, Mr. Sherrill has
    overcome many challenges. As a young man, Mr. Sherrill served
    time in a Federal penitentiary where he vowed to make a change
    for his family and himself.
        Upon his release, he opened Imperial Cleaning Services, a
    commercial cleaning, restoration, and janitorial company based
    in Nashville, Tennessee, where he serves as President and CEO.
        He has been recognized as one of Nashville's ``40 under
    40,'' and as the Black Chamber of Commerce's Rising Star. He is
    also the president of Impact Youth Outreach, a nonprofit
    organization working to combat youth crime.
        And lastly, we have Mr. Diego Zuluaga, a policy analyst at
    the Center for Monetary and Financial Alternatives in the Cato
    Institute, where he covers financial technology and consumer
    credit. Prior to joining Cato, he was the head of financial
    services and tech policy at the Institute of Economic Affairs
    in London.
        Originally from Bilbao in Northern Spain, he holds a BA in
    economics and history from McGill University, and an MSc in
    financial economics from the University of Oxford.
        Thank you, witnesses, for being here.
        I want to remind you that your oral testimony will be
    limited to 5 minutes. And without objection, your written
    statements will be made a part of the record
        I now recognize for 5 minutes, the Reverend Dr. Haynes.

     STATEMENT OF THE REVEREND DR. FREDERICK DOUGLASS HAYNES III,
             SENIOR PASTOR, FRIENDSHIP-WEST BAPTIST CHURCH

        Mr. Haynes. Thank you, Chairman Meeks, Ranking Member
    Luetkemeyer, and all of the distinguished members of this
    subcommittee.
        It would be iniquitous and immoral for someone who has been
    knocked down to receive handcuffs when they have out of
    desperation asked for a hand up. The payday loan industry is
    guilty of such unjust and unethical practices. They prey upon
    the desperation of the poor who are already disadvantaged.
    Payday predators hijack the hopes of the vulnerable and
    revictimize them by baiting them into a debt trap. These
    hunters of the helpless are guilty of dealing bad hands with
    bad plans, to use the language of Kendrick Lamar.
        As Pastor of Friendship West in Dallas, I have heard too
    many share their experience of being exploited and ensnared in
    the payday debt trap. One of my members, a 74-year-old senior
    citizen who is feisty and fiercely independent, discovered she
    didn't have the money to pay a bill. She saw a commercial for a
    payday loan and felt it was an answer to prayer.
        Now she feels like the devil has answered her prayer. She
    is on a fixed income, and when the repayment was due, she
    didn't have enough and had to take out another loan to pay the
    first one. She ended up with a dozen loans.
        When she approached me for help one Sunday after church,
    this once proud senior saint with good credit was ashamed and
    tearful. She showed me the paperwork. I was appalled. The
    interest rate was 620 percent. She was dealt a bad hand with a
    bad plan. She was hurting for help. She took the bait of the
    payday loan and became trapped in debt that made her bad
    situation so much worse.
        I could call the roll, but I will proceed.
        Payday predators are a part of a hostile takeover of the
    unbanked and underserved. This exploitive industry targets and
    saturates communities already suffering from economic
    apartheid. I am not exaggerating when I say that when the
    vulnerable are drowning in desperation, the payday industry
    throws a life preserver weighted with iron of usurious interest
    rates. The average annual interest rate for payday loans in the
    United States, 391 percent APR, is absurd and outrageous.
        Payday and car title loans use a predatory business model
    in order to create a long-term cycle of debt at triple-digit
    interest rates. These short-term loans were never designed to
    be paid back in a short period of time. A fact check of the
    average number of payday loans per borrower in each State tells
    this sinful story. It is oxymoronic that in the land of the
    free, debt traps are set for the vulnerable.
        Of course, the payday predators will put the spotlight on
    the rare exceptions who have been able to dodge the debt trap.
    But that should not blind us to the many who are in the shadows
    of a financial nightmare that never seems to end as their bank
    accounts are overwhelmed with overdraft fees or closed down.
    Some fall into bankruptcy. Many lose their cars to
    repossession. It is time for a new plan for those who have been
    dealt a bad hand.
        The 2017 CFPB rule is a plan that simply requires that
    before payday and car title lenders make certain loans, they
    assess whether potential customers can afford to pay them back
    with the finance charges, given the customer's income and other
    expenses. What a novel concept. This is a commonsense
    foundation of responsible lending. The rule is a good plan that
    protects many of our nation's families from the worst impacts
    of triple-digit interest debt traps set by payday and car title
    lenders.
        A coalition of citizens committed to protecting consumers
    have mobilized to push for strong reforms of predatory
    practices. Included in this coalition of conscience of those
    personal impacted by debt trap practices, advocates for low-
    income families, veterans, the elderly, responsible businesses,
    and faith-based groups. We are appalled that the CFPB would
    propose ripping out the heart of the rule in favor of allowing
    payday lenders to continue to exploit those who are struggling
    and vulnerable.
        We are calling for strong protections so those who
    experience an emergency don't end up drowning in debt they
    cannot repay. We are called to protect families from financial
    predators, and a 36 percent rate cap would leave no one behind
    and ensure that they cannot be preyed upon when life happens.
        Friendship West has a credit union. We offer small-dollar
    loans for those who are vulnerable at an interest rate of 28
    percent. A business model that is just works for all.
        Please, let's protect the vulnerable, lest we hear Jesus
    say, ``I was hungry and you gave me a payday loan. I was given
    a bad hand, and you gave me a bad plan.''
        [The prepared statement of Reverend Haynes can be found on
    page 44 of the appendix.]
        Chairman Meeks. Thank you. And now I recognize Mr.
    Whittaker, whom I understand also had received payday loans in
    the past.
        Mr. Whittaker, you are recognized for 5 minutes.

       STATEMENT OF KEN WHITTAKER, SOUTHEAST MICHIGAN ORGANIZING
       DIRECTOR, MICHIGAN UNITED; AND FORMER PAYDAY LOAN CONSUMER

        Mr. Whittaker. Thank you, Chairman Meeks.
        Chairwoman Waters, Ranking Member McHenry, Chairman Meeks,
    thank you. Ranking Member Tipton and members of the
    subcommittee, it is an honor to be here today.
        My name is Ken Whittaker, and I am from Detroit, Michigan.
    As Chairman Meeks said, I am a hardworking husband and a father
    of six brilliant young adults, five of whom are college
    students, and one of whom is waiting at home for me to return
    so that he can go to MEPS to leave for the Navy of this great
    country.
        Years ago I was working in IT at the University of Michigan
    when I withdrew money from my paycheck and proceeded to lose
    that cash out of my pocket as I pulled out a $20 bill to buy a
    hotdog for my young son. Unfortunately, I took out a payday
    loan of $700 to cover that loss. That turned out to be a very
    big mistake that truly altered the course of my life. I found
    out that I could not pay off that first loan without
    reborrowing to make ends meet until the next paycheck.
        This began a cycle of debt which lasted over a year. Soon,
    I was paying $600 a month in fees and interest. I eventually
    closed my bank account to limit the payday lender's ability to
    draw money directly from my account, leaving my family without
    the cash for rent, for groceries, and for other essential
    bills. This led to debt collection calls and a judgment. My tax
    return was garnished, making things that much worse for my
    family. All told, that original $700 loan cost me over $7,000.
        I spoke out about my experience. At the time, the Consumer
    Financial Protection Bureau was developing a rule that would
    require lenders to make loans based on customers' ability to
    repay and that they could afford. To me, that requirement only
    makes sense, and that is how all lending should be.
        Having been through this experience myself, I know how
    devastating payday lending can be. It is quite disturbing to me
    that the current leadership of the CFPB is threatening to
    repeal the rule that we lobbied so hard for to protect us.
        I strongly support keeping the 2017 CFPB rule. I also
    support the proposal to cap annual interest rates at 36 percent
    to stop predatory lenders from trapping customers into high-
    cost loans that can ruin their financial lives.
        Since the day I bought that hotdog for my son, we have
    worked to make things better for working families. Coming full
    circle, my son and his siblings are here today with me in D.C.,
    as we have been fighting for fairness and justice.
        Please support strong reform of predatory payday and car
    title lending for people like me. We work hard to support our
    families and make finances stable, and this kind of lending
    only makes it harder.
        Thank you for allowing me to share my story today, and I
    urge you to protect working families and put people over
    profits.
        [The prepared statement of Mr. Whittaker can be found on
    page 94 of the appendix.]
        Chairman Meeks. Thank you.
        Ms. Standaert, you are recognized for 5 minutes.

     STATEMENT OF DIANE M. STANDAERT, EXECUTIVE VICE PRESIDENT AND
        DIRECTOR OF STATE POLICY, CENTER FOR RESPONSIBLE LENDING

        Ms. Standaert. Thank you, Chairman Meeks, Ranking Member
    Luetkemeyer, and Ranking Member McHenry.
        Thank you for the opportunity to testify today. My name is
    Diane Standaert. I am the director of State policy and
    executive vice president of the Center for Responsible Lending
    (CRL).
        The Center for Responsible Lending is a nonprofit,
    nonpartisan policy and research organization dedicated to
    building family wealth through the elimination of abusive
    lending practices.
        Our organization's nearly 20 years of research on payday
    and car title loans show consistently two things: one, these
    loans are a debt trap by design; and two, the harms of these
    debt trap products further economic inequality and further the
    racial wealth gap.
        Payday and car title loans charge 300 percent annual
    percentage rates and strip away around $8 billion in loan fees
    from people typically earning about $25,000 a year. The bulk of
    these fees are generated by the debt trap.
        Seventy-five percent of all payday loan fees are due to
    borrowers stuck in more than 10 loans a year. The typical car
    title loan is refinanced 8 times. Low-income borrowers then
    suffer a cascade of financial consequences, delinquency on
    other bills, having their bank account closed, and even
    bankruptcy. For car title lenders, an astonishing one in five
    borrowers have their cars seized.
        Borrowers have described this debt trap in their own words
    as soul crushing, a hole you can't get out of, and a living
    hell.
        As borrowers suffer these harms, the role of private equity
    has increased to fuel the engines of this industry. What people
    see at the street level as a small lender storefront is
    actually the tentacles of private equity extracting billions of
    dollars a year from people already struggling to make ends
    meet.
        And research has shown time and time again that payday and
    car title loan storefronts disproportionately locate in black
    and Latino communities, even when they have the same or higher
    income as white neighborhoods.
        Thankfully, policy trends at the State and Federal level
    for more than a decade have been to rein in the harms of these
    unsafe loans, ranging from the 2006 passage of the 36 percent
    rate cap for the Military Lending Act to protect our Active
    Duty military families, to voter-affirmed rate caps of 36
    percent in States like South Dakota, Colorado, Arizona,
    Montana, and others.
        Today, 16 States plus the District of Columbia enforce caps
    of 36 percent or less covering nearly 100 million people with
    this most effective protection against the harms of these
    loans. Since 2005, no State has legalized payday lending.
        Today, I would like to emphasize four important points.
    Payday and car title lenders have situated themselves
    intentionally to perpetuate our country's two-tiered financial
    services system. The harms and consequences of these loans
    exacerbate the wealth gap and disproportionately burden
    communities of color. Older Americans and people on fixed
    incomes are also particularly vulnerable.
        To reduce these harms, the predatory nature must be
    addressed head on. Competition and alternatives will not lower
    the cost of 300 percent interest rate loans.
        Finally, the States, Congress, and Federal regulators all
    have a role to play in ensuring that people are not ensnared in
    these debt traps.
        We are thankful for Senator Durbin's leadership in
    proposing a 36 percent rate cap that does not override strong
    State laws. Congress and Federal regulators must reject any
    proposal that in the name of innovation or otherwise preempts
    stronger State law.
        Today, on behalf of more than 700 organizations
    participating in the Stop the Debt Trap campaign, we call on
    the Consumer Financial Protection Bureau to implement, not
    delay, not repeal, its 2017 payday rule, which simply requires
    lenders to verify that borrowers have the ability to repay the
    loan.
        This commonsense notion of ensuring a loan is affordable is
    the bedrock of responsible lending, and it is strongly
    supported by voters all across this country, with 75 percent
    support among Republicans and Democrats alike. The fact that
    payday and car title lenders resist such a notion confirms
    everything we know about the lending business model.
        In summary, policymakers have a choice, siding with the
    vast majority of voters and borrowers who oppose the payday
    loan debt trap or siding with the predatory lenders who charge
    300 percent annual interest rates.
        Thank you for your time.
        [The prepared statement of Ms. Standaert can be found on
    page 80 of the appendix.]
        Chairman Meeks. Thank you.
        I now recognize Mr. McDonald for 5 minutes.

    STATEMENT OF TODD O. MCDONALD, SENIOR VICE PRESIDENT AND BOARD
      DIRECTOR, LIBERTY BANK AND TRUST COMPANY, ON BEHALF OF THE
                      NATIONAL BANKERS ASSOCIATION

        Mr. McDonald. Chairman Meeks, Ranking Member Luetkemeyer,
    Ranking Member McHenry, and members of the subcommittee, good
    afternoon and thank you for this opportunity to testify on the
    small-dollar lending industry.
        My name is Todd McDonald. I am a senior vice president and
    board director at Liberty Bank and Trust Company. I am also a
    board member of the National Bankers Association (NBA), the
    leading trade association for the country's minority depository
    institutions (MDIs).
        The NBA's mission is to serve as an advocate for the
    nation's MDIs on all legislative and regulatory matters
    affecting our member institutions as well as the communities
    they serve.
        Small-dollar lending has become a fast-growing source of
    consumer credit in the United States and a key to financial
    inclusion, particularly for those underserved communities.
        Unfortunately, existing Federal law does not limit the
    interest rate nonbank lenders can charge on loans of $2,500 to
    $10,000. This lack of interest rate cap has resulted in a
    recent explosion of loans with annual interest rates in the
    range of 100 percent to 225 percent and above.
        While 35 States have imposed caps on nonbank lenders, there
    is still a significant gap in protections for customers.
        As a CDFI that serves a largely low- and moderate-income
    consumer base that often utilizes these high-cost products,
    Liberty often works to help our customers get out of these
    predatory loans and into more manageable instruments. This
    dynamic is one of many reasons why we have created our own
    small-dollar loan product called the Freedom Fast Loan.
        The Freedom Fast Loan was created in 2008 because we saw a
    demand for a responsible small-dollar product in the markets
    that we serve. Our customers use Freedom Fast Loans for
    everything from funeral expenses to consolidation loans for
    other high-interest debt like credit cards and payday loans.
    The average loan is just over $6,000, and the average interest
    rate is right at 12.6 percent. Our APR never exceeds 34.3
    percent, and we serve customers with credit ranging from the
    low 500s over to 700 Beacon scores. We also report payments to
    the credit bureaus so our customers can build their credit
    while using our product.
        In order to scale our Freedom Fast product, and for
    community banks to provide similar options, we believe that
    there are steps Federal banking regulators and Congress must
    take in order to facilitate the kind of robust marketplace
    where community banks can compete with predatory small-dollar
    lenders.
        The Credit Union National Administration's PALS program and
    the findings from the FDIC's Small-Dollar Loan Pilot Program
    should provide the basis for regulators to consider a small-
    dollar regulatory regime tailored to community banks like our
    member institutions.
        Even our Freedom Fast Loans attracted scrutiny in the past
    from regulators, despite it meeting an obvious credit need in
    the markets we serve. To that end, we believe that a sandbox
    approach from banking regulators that allows community banks to
    develop responsible small-dollar alternatives tailored to the
    credit needs of our communities would be a welcome next step in
    carving out a role for mission-oriented lenders to provide
    responsible alternatives.
        In addition to a sandbox for community banks, we would also
    urge Congress to fully fund the Small Dollar Loan Program
    authorizing grants for loan loss reserves for CDFIs seeking to
    provide responsible small-dollar alternatives. Technical
    assistance grants for CDFIs seeking to provide payday
    alternatives for expenses like underwriting software and other
    administrative costs would be definitely encouraged.
        According to the OCC, U.S. consumers borrow nearly $90
    billion every year in short-term debt, typically ranging from
    $300 to $5,000. Due to the cost in the increasing regulations,
    many banks have withdrawn from this market, resulting in
    consumers turning to alternative lenders as a last resort.
        Within the right environment, banks can provide affordable
    short-term loan options that can help consumers with their
    financial needs while establishing a path to more mainstream
    financial products. However, it is very important that
    policymakers create a regulatory atmosphere where these loans
    are profitable for banks that take on this customer niche and
    do not lead to additional regulatory burdens.
        Policymakers should also create an environment where
    community banks can partner with responsible nonbank lenders to
    fill the obvious need in this lending space.
        Thank you for your time.
        [The prepared statement of Mr. McDonald can be found on
    page 47 of the appendix.]
        Chairman Meeks. Thank you.
        Mr. Peterson, you are now recognized for 5 minutes.

      STATEMENT OF CHRISTOPHER L. PETERSON, JOHN J. FLYNN ENDOWED
     PROFESSOR OF LAW, UNIVERSITY OF UTAH, S.J. QUINNEY COLLEGE OF
       LAW; AND DIRECTOR, FINANCIAL SERVICES, AND SENIOR FELLOW,
                     CONSUMER FEDERATION OF AMERICA

        Mr. Peterson. Thank you, Chairman Meeks.
        Also, thank you, Ranking Member Luetkemeyer and Ranking
    Member McHenry. It is an honor to be here today. Thank you very
    much for holding this hearing and also for attending the
    hearing.
        I would like to begin with two quick statistics to get
    started. First, the average interest rate of the New York
    City's so-called La Cosa Nostra organized crime families and
    their organized loan sharking syndicates, at the height of
    their power in 1960s, was 250 percent, a very high interest
    rate.
        But by way of comparison, the average interest rate
    nationwide in storefront payday loan stores is probably about
    420 percent APR, nearly twice as expensive as what the so-
    called mob charged.
        And all throughout the vast majority of American history,
    for over 200 years, virtually every State in the Union did not
    tolerate interest rates at those prices. We had usury limits in
    all 13 original American colonies. All of the signatories to
    the Declaration of Independence, every delegate to the
    Constitutional Convention, all of those guys went straight back
    to their States where they had interest rate limits of between
    6 to 7 or 8 percent or thereabouts.
        It wasn't until the beginning of the 20th century where we
    started to raise those interest rate limits to about between 18
    to 42 percent, and 36 percent was the tried and true interest
    rate limit all throughout the Great Depression. The Greatest
    Generation--the so-called Greatest Generation that went and
    fought the second world war, they all came back to States that
    had interest rate caps of about 36 percent, even on the
    smallest, most expensive loans.
        Without those interest rate caps, the problem is that
    people fall into debt traps. If there is one thing I could get
    you to look at, it is the screenshot that I have included in my
    written testimony. This screenshot is from an auto title lender
    that made a $1,971 loan to a woman. I have changed her name for
    her privacy. She was a client. She borrowed this money because
    she was behind on her bills. It had an interest rate of 300
    percent.
        She worked as a receptionist, made about $11 an hour as a
    receptionist. Month after month, she kept paying back as much
    money as she could. She made $400, $500, $480 payments.
    Overall, she paid $4,635 on this original $1,900 loan. But
    because of the simple power of a 300 percent interest rate, the
    lender only applied $1.16 to the principal balance of her loan.
        And then afterwards, the lender still continued to claim
    that she owed another $2,422.05, even though she had paid back
    over $4,000. This is money that she is making $11 an hour as a
    receptionist. She was still deeper in debt than when she
    originally began that loan. That is not freedom. That is a
    trap. It is a debt trap.
        And a second point I would like to make is that across this
    nation, a supermajority of Americans, both Republicans and
    Democrats, agree that we need to restore our traditional, old-
    fashioned interest rate caps, our usury laws, that had
    protected so many people from all across this country
    throughout the vast majority of our history. That is about 3 in
    4--about 73 percent of Americans in virtually every public
    opinion poll that has ever been conducted. And every time there
    has ever been a ballot initiative on a ballot where the public
    actually got to vote, they have always voted in favor of usury
    limits.
        That means that in every one of your districts, a
    supermajority of your constituents support imposing a
    traditional interest rate cap, which leaves me with the
    question of, are you going to go along with them, with what the
    public wants, or are you going to vote as legislation comes up
    in this Congress to protect the payday lenders that charge
    triple-digit interest rate caps and have prices that are higher
    than the New York City loan sharks charged?
        And then I will end on one thing. I would urge you to
    consider, as a template for moving forward--think about looking
    at the Military Lending Act. You know, the people who defend
    freedom in this country, the United States military, respected
    on both sides of the aisle, their people were falling into
    trouble because of these predatory debt traps, and they put a
    stop to it. They got over, they lobbied, and they got Congress
    to pass an interest rate limitation on loans to servicemembers.
    That limitation is now in effect. And I am proud to say that I,
    along with a number of other people, helped work on drafting
    those regulations. And it has done a great job for our
    servicemembers. They still have plenty of access to credit.
        It is time for Congress to learn a little bit about what
    freedom and free markets means from the people who defend our
    freedom. Freedom is not the same thing as a debt trap. And in
    Congress, we need to remember that and restore traditional,
    old-fashioned commonsense usury laws to protect our citizens
    all across this country.
        Thank you for your time.
        [The prepared statement of Mr. Peterson can be found on
    page 51 of the appendix.]
        Chairman Meeks. Thank you, Mr. Peterson.
        Mr. Reeder, you are now recognized for 5 minutes.

      STATEMENT OF GARRY L. REEDER II, VICE PRESIDENT, CENTER FOR
                     FINANCIAL SERVICES INNOVATION

        Mr. Reeder. Chairman Meeks, Ranking Member Luetkemeyer, and
    subcommittee members, thank you for allowing me the opportunity
    to share some thoughts and insights on the small-dollar credit
    industry and its impact on Americans' financial health.
        Small-dollar credit has been a core part of my work for
    over a decade and is deeply entwined with my experience growing
    up in rural North Carolina. Some of my earliest memories
    involve accompanying my grandmother in her brown 1973 Ford
    Maverick every payday to pay her lenders. She, like so many
    other people in my community, had limited access to mainstream
    financial services.
        As the son of a Baptist Minister, I also saw up close the
    real-world needs of our most vulnerable brothers and sisters.
    Nearly every week, someone came up after service seeking help
    paying rent, buying diapers or getting gas.
        Since my family, like many others, lived paycheck to
    paycheck, our ability to help one another was limited by our
    own lack of resources.
        I ask that we keep these people and the millions of
    Americans like them in mind as we bring our different
    perspectives to the table in an effort to improve the financial
    health of all Americans.
        As we all know, financial services has the ability to
    protect us from economic ruin and enable us to build better
    lives for ourselves, our families, and our communities.
    However, far too often financial services, particularly credit
    and our antiquated payment system, make people's lives more
    difficult.
        I am the vice president of policy and innovation at the
    Center for Financial Services Innovation, a leading authority
    on consumer financial health. We are a trusted resource for
    business leaders, policymakers, and innovators, united in a
    mission to improve the financial health of their customers,
    employees, and communities.
        Our largest initiatives include the Financial Solutions Lab
    and U.S. Financial Health Pulse. The Financial Solutions Lab is
    a seed-stage fintech accelerator focused on advancing the
    financial health of low- and moderate-income and historically
    disadvantaged consumers.
        The U.S. Financial Health Pulse is an annual snapshot of
    how Americans manage their financial lives with actionable
    insights to improve financial health.
        Our research suggests that a variety of different needs and
    use cases underlie the demand for small-dollar credit and that
    many of them are symptomatic of one or more dimensions of poor
    financial health.
        Payday lenders, auto title lenders, pawn shops, and other
    subprime lenders have dominated the provision of small-dollar
    credit for much of the last 30 years. Many of the products they
    have offered are rarely underwritten, rely on cycles of
    continuous use, and harsh collection practices that both
    exploit and perpetuate borrowers' financial distress. Auto
    title loans are particularly concerning because of the
    potential loss of a car in the event of default.
        Fortunately, the consumer finance industry is in the midst
    of a dramatic change as a result of the ever-increasing speed
    of technological innovation and the broadening and deepening of
    data availability.
        Fintech startups and innovative incumbents are developing
    and testing products that have the potential to meet the
    financial needs of underserved households. However, innovation
    must be tempered with appropriate standards and oversight.
        In an attempt to address those standards, we have developed
    our own compass principles for small-dollar credit. We believe
    high-quality products have seven core characteristics: first,
    the loan is underwritten; second, the loan amortizes; third,
    lenders make money when the customer succeeds; fourth, payment
    history should be reported to the credit bureaus; fifth, no
    fine print; sixth, multiple channels for applications and
    payment for customers; and seventh, customer service that meets
    the needs of the customer and not just the lender.
        In closing, I want to thank the committee for the
    opportunity to share my thoughts on this important topic and
    remind all of us that we are here to get this right for
    consumers rather than to make each other wrong.
        I look forward to your questions.
        [The prepared statement of Mr. Reeder can be found on page
    67 of the appendix.]
        Chairman Meeks. Thank you, Mr. Reeder.
        Mr. Sherrill, you are now recognized for 5 minutes.

      STATEMENT OF ROBERT SHERRILL, CEO, IMPERIAL CLEANING SYSTEMS

        Mr. Sherrill. Good afternoon, Chairman Meeks, Ranking
    Member Luetkemeyer, and members of the subcommittee.
        My name is Robert Sherrill, and I am grateful for the
    opportunity to be able to speak to you about my experience with
    payday and title loans.
        I am not sure if I am the only person on this panel who has
    actually used these products, but I hope that with my testimony
    I can shed some light on how important they were for me at the
    time when I had no other options.
        Payday and title loans helped me when I had nowhere to else
    to turn. I might not be here if these forms of credit were not
    available to me.
        In your invitation letter to me, you asked me to discuss
    research describing the various harms consumers may suffer when
    utilizing these products. I cannot talk about research, but I
    can talk about my personal experience.
        When I took out my payday loan, I knew what it would cost
    me. While I have not taken out a payday loan recently, I still
    know what they cost. Given my circumstances at the time and the
    lack of other options, I determined that this basic small loan
    was the best option for me. In fact, it was a cheaper and
    easier solution than the available alternatives. I am lucky
    that there was a lender available that would loan to someone
    like me in my circumstances.
        But let me get back to the beginning of my story. When I
    was young, nobody taught me about money and finances, which is
    a situation not uncommon to many people. Because of family
    issues and hard times, I ended up raising myself and getting
    involved in selling drugs, which ultimately led to me going to
    prison. I am not proud of this, but it is an important part of
    my experience.
        When I got out of prison, the deck was stacked against me.
    I was a felon with no credit, no education, and very little
    income.
        I would ask you to put yourself in a lender's shoes. Would
    you have made a loan to me? Would you have offered me a
    lifeline? Would you have given me credit with nothing to prove
    I was creditworthy but my word?
        Due to my release and probation requirements, I found a job
    as a food busser at a local Italian restaurant. I worked very
    hard day-to-day to make ends meet. After a year, I was given a
    10-cent raise. It was then I knew I had to make a change in my
    life.
        When I started my business, no one would give me a loan. I
    knew this because I applied and I was rejected several times.
    Most banks wouldn't even let me open an account. The only
    account I could get was with the credit union, because I pled
    my case.
        Because of my history, the only company willing to front me
    the money I needed was a local payday lender in Nashville
    called Advance Financial. If Advance Financial had not been an
    option, I would likely not be here testifying to you today.
        It is unfair for anyone to assume that everyday people
    don't know what they are getting into or what repayment terms
    of a loan are going to be. That assumption is based on the
    conclusion that ordinary people are uneducated or too
    unsophisticated to make smart financial decisions.
        In my situation, I was tracking every dollar I had. I knew
    when money was coming in and I knew when it was going out. I
    knew that I would have to repay the loans that I took out.
        When I went to Advance Financial, every part of the process
    was explained clearly and fairly, including when payments were
    due, how much they would be, and how much it would cost me for
    the loan.
        Today, the business that I started with a payday loan is
    Nashville's premier construction and commercial cleaning
    service. I am a minority certified business belonging to the
    Chamber of Commerce, the Better Business Bureau, and
    Nashville's Rotary Club. Now, I qualify for lines of credit and
    other types of loans. I have developed a solid business
    foundation. But it is all because of the lifeline that Advance
    Financial gave me when no one else would give me the time of
    day.
        I have also come to learn from being in business that
    sometimes a market determines what things cost. Many today will
    probably ask if I would like these types of loans to be
    cheaper. Well, there are a lot of things in life that I wish
    were cheaper. But forcing these lenders out of business would
    not make loans cheaper; it would only hurt people in a
    situation like I was in.
        I want to repeat what I said at the beginning of this
    statement. I understood what a payday loan was going to cost me
    when I took it out, and I understood when I had to pay it back.
    The best consumer protection that I got was to have someplace
    to go that was willing to make a loan to me, and to explain the
    loan I got.
        I can also tell you that if I had not had that option--
    [audio malfunction].
        Chairman Meeks. The microphone must have gone out.
        Give him 30 seconds to wrap up.
        Mr. Sherrill. If you eliminate these loans and these
    lenders, where do you expect people to turn for a lifeline? I
    had tried everything else. For many people like me, these
    products are a first step towards getting things back together.
    People choose them because they are better than the
    alternatives. If they weren't, they wouldn't exist.
        We should trust people to choose what is best for their own
    situations, not take options away from them, because the most
    expensive credit is the credit you cannot get when you need it.
        Thank you.
        [The prepared statement of Mr. Sherrill can be found on
    page 78 of the appendix.]
        Chairman Meeks. Thank you.
        And Mr. Zuluaga, you are recognized for 5 minutes.

    STATEMENT OF DIEGO ZULUAGA, POLICY ANALYST, CENTER FOR MONETARY
               AND FINANCIAL ALTERNATIVES, CATO INSTITUTE

        Mr. Zuluaga. Thank you, Chairman Meeks, Ranking Member
    Luetkemeyer, and members of the subcommittee for the
    opportunity to testify before you this afternoon.
        My name is Diego Zuluaga, and I am a policy analyst at the
    Cato Institute Center for Monetary and Financial Alternatives.
        Creating the conditions for a dynamic and competitive
    market for short-term credit is essential to promoting
    financial security and financial inclusion.
        At a time when 24 percent of American families and 50
    percent of low-income families lack enough liquid savings to
    cover a $400 emergency expense, broad and immediate access to
    credit is a matter of great urgency.
        Furthermore, with 8.4 million households unbanked and
    another 24 million underbanked, a share of that emergency
    credit is bound to come from nonbanks, including payday and
    vehicle title lenders.
        Payday loans are often one of very few options available to
    cash-strapped households. Sixteen percent of payday borrowers
    use these loans to cover emergencies, while 69 percent borrow
    to pay for recurring items, such as rent and utility bills.
        Payday loans offer a way to cope with unexpected events and
    month-to-month income volatility, which is a reality for more
    than a third of low-income households.
        While the media often describe payday loans as predatory,
    the evidence suggests otherwise. Professor Ronald Mann of
    Columbia Law School, in a study quoted extensively by the
    Consumer Financial Protection Bureau, finds that 60 percent of
    payday borrowers accurately estimate the time it will take them
    to repay the loan. And importantly, there is no systematic bias
    in their predictions of repayment, so borrowers overestimate
    roughly as much as they underestimate the time it will take
    them to repay.
        Professor Mann's results contradict the assertion that
    payday borrowers are misled by predatory lenders or that they
    suffer from some behavioral bias. The academic literature, in
    fact, on payday lending finds that these loans are helpful to
    borrowers and that payday loan bans are harmful, at least as
    often as it finds the opposite.
        Payday borrowers make the best of limited options. As
    Professor Lisa Servon of the University of Pennsylvania writes,
    ``The question is whether expensive credit is better than no
    credit at all.'' Like Professor Servon, I worry that placing an
    interest cap on short-term credit would altogether remove
    access to emergency funds for the most vulnerable Americans.
        Now, I have had the opportunity to study in detail the
    impact of payday loan interest rate caps in the United Kingdom.
    While U.K. regulators expected loan volume to decline by just
    11 percent after the introduction of an interest cap, it
    dropped by 56 percent. That is 5 times what regulators
    estimated within 18 months. The number of borrowers dropped by
    53 percent, versus 21 percent, which was the estimate.
        Now, given that the regulators' forecast aimed for the
    ``optimal amount of payday borrowing,'' this miscalibration of
    the cap's impact almost surely left hundreds of thousands of
    payday borrowers worse off.
        I worry that the Bureau's payday rule, which predicts loan
    volume to drop by up to 68 percent, but expects most borrowers
    to retain access to payday facilities, will actually prove
    similarly overly optimistic and the consequences of regulatory
    error could be very damaging, as the U.K. case demonstrates.
        Low usury caps were once widespread across American credit
    markets. But progressive reformers in the early 1900s
    recognized that caps harm low-income people by throwing them
    into the hands of loan sharks. Gradually, they persuaded
    legislators to lift or remove interest caps, helping a formal
    market for short-term credit to flourish.
        Placing a cap on small-dollar loans today risks leaving
    vulnerable households at the mercy of either family members or
    unscrupulous providers, or otherwise forcing them to go without
    basic necessities.
        Policymakers can, however, do more to promote financial
    inclusion, and I welcome efforts to bring a greater focus on
    underserved households to financial regulators. For example, I
    think the CFPB and the Federal Deposit Insurance Corporation
    should conduct a joint review of the regulatory costs to banks
    of maintaining deposit accounts. This will permit them to
    compare the cost of regulation with its benefits and to
    determine whether financial regulation excludes low-income and
    minority borrowers who are overwhelmingly represented among the
    ranks of the unbanked.
        But I wouldn't limit this work to fostering access to
    depository institutions, important as such access is. Financial
    innovations like mobile money accounts have delivered
    impressive results around the world. And with 94 percent of
    Americans now owning a cellphone, mobile accounts could bring
    essential financial services to households which, for reasons
    related to cost or trust or both, do not own a bank account.
        Mobile payments could therefore help low-income consumers
    avoid account fees and gradually gain access to other financial
    services and build a credit record.
        Thank you. I would be happy to answer any questions.
        [The prepared statement of Mr. Zuluaga can be found on page
    95 of the appendix.]
        Chairman Meeks. Thank you.
        And I now recognize myself for 5 minutes to ask questions.
    Let me first say that I listened very intently to everyone on
    this panel, and I did not hear one person say that those who
    are in low-income areas, et cetera, should not have access to
    some financial services, not one.
        What I did hear is some say that we do have basically--they
    didn't use these words, but we have some who will con people;
    we have some who will just come and try to confuse people for
    their own benefit, for their own basis. And so they don't mind
    whether or not someone gets trapped in a loan that they can't
    get out of because that is not their interest, not that
    individual. Their interest is to make as much money as they can
    at the expense of someone else.
        And so when we had the Dodd-Frank Act, what we did was, we
    said we were going to create the Consumer Financial Protection
    Bureau so that somebody can review this, because we know we
    have good people, we have bad people, so that somebody could
    review it and make an impartial, if you will, determination, to
    make sure that you could continue to do business, if that is
    what you wanted to do, but to also serve someone who needed a
    loan.
        Now, one of the things--and one of the reasons why we are
    here is that immediately the CFPB, after the change of
    Administrations, got rid of the unfair, deceptive, or abusive
    acts or practices and how that was defined. So if you get rid
    of that, you have a fixed game, because you have a situation
    where on one side--and yes Mr. Sherrill, I agree with you that
    some people know how to manage their money and some don't. That
    is a fact. And as a matter of public policy, we have to look
    out and protect those who don't.
        I would also say--and my question would go to Mr. McDonald,
    because one of the basic tests would be ability to pay. If
    somebody comes--and I would now ask you this question later,
    Mr. Sherrill--and I have no ability to pay--I have no idea how
    I am going to pay you back, no because nobody is going to give
    you any money, not if they are serious. But you have to show
    some ability to pay it back.
        That is how we got in the financial crisis, the worst
    financial crisis since the Great Depression, in 2008, when
    people were giving no-doc loans, and it almost brought our
    financial institutions, our financial services and this country
    to its knees.
        Mr. McDonald, you work in these communities and you have a
    financial institution. What is the best way you would think to
    make sure that someone has the ability to pay when you make a
    loan at your facility?
        Mr. McDonald. So we follow a couple of different
    guidelines, but we definitely ask for verification of income,
    via a copy of their paystub or a W-2 or 1099.
        Chairman Meeks. So you do check to make sure that they have
    a job or some kind of way to pay?
        Mr. McDonald. Absolutely.
        Chairman Meeks. All right. Now, Mr. Reeder, in my limited
    time, because I listened--your testimony was so riveting, I had
    to take up my time earlier with that comment.
        But I want to make sure--I wear this suit now, but I come
    from public housing. My parents were poor, okay? And I can
    remember that they had loan sharks back then. And so it wasn't
    money; they'd take your limb, too. But I also could know when
    they were getting ripped off.
        I am looking at ways to make sure that we have some ability
    for financial services in the community. Fintechs have been
    talked about, but fintechs unregulated have the same problems.
        Can you give us some ideas on how fintechs should be
    regulated or how they could be helpful in this industry?
        Mr. Reeder. Sure. Thank you, Mr. Chairman.
        In terms of regulation, obviously a number of financial
    institutions are regulated at the State level. But it is true,
    for purposes of Dodd-Frank, that many institutions in what
    people broadly call fintech are not covered persons under Dodd-
    Frank for the CFPB. So one piece there is that the CFPB would
    need to write a larger participant rule for a number of these
    institutions in order to supervise them. And for many people
    who have been regulators, supervision is a very powerful tool
    to both understand what the institutions are doing, but more
    importantly what are the outcomes for the consumer.
        So I think that is a capability that the Federal Government
    has today, if the CFPB were to write a larger participant rule.
        Chairman Meeks. Thank you. I am out of time, and I
    recognize the ranking member of the subcommittee, Mr.
    Luetkemeyer, for 5 minutes for questions.
        Mr. Luetkemeyer. Thank you, Mr. Chairman. I think most of
    the testimony today has centered around the cap, the APR of 36
    percent or higher rates that we are talking about. And to me it
    is a little difficult to accept the arguments from the
    standpoint that when you are looking at a short-term loan, to
    me, that is very similar to a service charge.
        In my testimony, in my opening comment, I said, look, if
    you have a plumbing problem at your house, you call the
    plumber. And he comes and he fixes it within 30 minutes and
    charges you 50 bucks. Did he charge you 50 bucks or did he
    charge you $100 bucks an hour. To me, he charged me 50 bucks
    because it took him that long to get there, he had to pay for
    his tools, pay for his insurance, he had to pay for his
    workmen's comp, he had to pay for his gas and oil to get there.
    It is a service charge to provide that product.
        And so I think today when we use APR on short-term lending,
    it is a disservice to everybody. To me, personally, I don't
    think you need to be using an APR unless it is an annual--
    unless you are over 12 months. If it is a 12-month loan or
    more, you use an APR. Anything less than that has to be a
    service charge.
        What does it cost to put the loan on the books? Mr.
    McDonald, you are in the banking business, what does it cost
    you to put a loan on the books, a small-dollar loan? Does it
    cost 15 bucks? Is that going to cover it?
        Mr. McDonald. I don't have that exact number. However, it
    does cost money to market to those individuals and also use our
    back office to book those loans, yes.
        Mr. Luetkemeyer. So there is a cost there that has to be
    covered, otherwise that service is not going to be provided. So
    you get into the situation of, well, we don't have any services
    or the loans are misused or abused. The CFPB in the fall of
    2018, their own members, so that is 7/10th of 1 percent were
    the complaints received by CFPB on smaller loans or payday
    loans, which is consistently one of the lowest of the various
    financial products according to CFPB.
        When I was in the State House in Missouri, as a State rep,
    my committee oversaw--I was the chairman of the Financial
    Services Committee, and what I always did every year was go
    look at the complaints with regards to banks, payday lending,
    and all the different services that were seen by the division
    of finance. Payday lending was always the lowest number of
    complaints of any of the financial groups.
        So I think we are looking at something here that is a
    worthwhile service. Mr. Sherrill, you tell a compelling story.
    Where would you have gone if you wouldn't have had the
    opportunity to have that loan? What was your next step if you
    didn't get the loan?
        Mr. Sherrill. Coming from where I come from, my next step
    was going back to the streets. The only thing that stands
    between the streets and the pawn shop is payday lending, that
    is it, that is all we have, so you have to do what you have to
    do.
        Mr. Luetkemeyer. So what we need to do in your mind would
    be help folks have more access to credit. If we need to tweak
    the laws, need to improve it, that would be the way to go
    rather than trying to dismiss it. And you talked about the APR
    as well, you had some compelling testimony. Can you elaborate
    on that a little bit?
        Mr. Sherrill. Yes. I mean, the payday loan I got was just
    for a couple of weeks. It wasn't for a year. I have never known
    anyone to receive a payday loan for a year. So I would be
    confused when people say APR, I kind of think about buying a
    car or something like that, but--
        Mr. Luetkemeyer. I know when I was in the House in
    Missouri, we redid the payday lending laws. We were actually
    model legislation for the whole country for a long time. And
    one of the things that we did was put a box on the form that
    showed what the actual cost of the loan was going to be, how
    much you were actually going to pay with interest and charges.
    So there was a disclosure. To me, that is helpful to you, to
    actually see the costs. You said you looked at it, and you knew
    what it was going to cost you.
        Mr. Sherrill. Yes, when I went in there they explained to
    me, this is what we are giving you. This is what we expect back
    at this time. If you don't pay it back, then this is what
    happens. You sign something that you understand this before
    they give you any money.
        Mr. Luetkemeyer. Mr. Reeder, in your testimony you note
    that an annualized percentage rate is a very poor tool for the
    small-dollar lending market. Would you like to explain that a
    little bit?
        Mr. Reeder. Sure. APR was really created to compare like
    financial products to one another, so it is a shopping tool. If
    I were to get a 30-year fixed-rate mortgage from Bank A, and a
    30-year fixed-rate mortgage from Bank B, I would be able to
    take the APR and compare to understand what were the interest
    rates and the charges. So that is what it was designed for. The
    problem becomes, as the term gets shorter and shorter, the APR
    becomes geometric, so it increases rapidly.
        Mr. Luetkemeyer. Okay. I have one more quick question. Mr.
    Zuluaga, you talked about the UK and how they estimated that
    the loan volume would decline slightly and it went over 56
    percent. Where did those people go who no longer have access to
    credit?
        Mr. Zuluaga. Mostly to family members, from the research
    that has been done afterwards. But those are the people who
    have access to alternative options. A lot of people just go
    without.
        Mr. Luetkemeyer. They go without. What about some of the
    unscrupulous folks on the streets or on offline lending, which
    is unregulated. Is that possible as well?
        Mr. Zuluaga. It could be possible, it's very hard to
    monitor, or course, and that is one of the challenges. At least
    now we can monitor a lot of these lenders and they are in the
    open. Thank you.
        Mr. Luetkemeyer. Thank you. Thank you Mr. Chairman.
        Chairman Meeks. The gentleman's time has expired. I now
    recognize the Chair of the full Financial Services Committee,
    the Honorable Maxine Waters, for 5 minutes.
        Chairwoman Waters. Thank you very much, Mr. Chairman. Dr.
    Haynes, as Senior Pastor at Friendship-West Baptist Church, you
    moderated a panel I convened of interfaith leaders to address
    predatory lending in American communities, and working with
    members of your community in Dallas, Texas, many of whom have
    been targeted by predatory payday loan and auto title loan
    stores.
        You stated that, ``We want access to credit, but it must be
    quality credit. Anything less adds to the stress of the
    desperate and the needy. Well-crafted and compassionate
    legislation can weed out the predators, and enable more
    responsible and reputable lenders to thrive while rendering a
    helpful service to communities.''
        Can you tell us about the terrible consequences of falling
    into payday debt traps, and your efforts as a faith leader to
    help these vulnerable consumers?
        Mr. Haynes. Thank you, Madam Chairwoman. First and
    foremost, of course, when you fall into the debt trap, one of
    the things that accelerates the downward spiral are the
    overdraft fees, not to mention the fact that I have had a
    number of persons come to me, and along with their overdraft
    fees, some have just basically had their bank accounts wiped
    out. They were pressured. They were called on-the-job. Not to
    mention, family members were harassed. And so this is something
    that is predatory.
        And so what we are calling for is a system. One of the
    things that I have heard repeatedly from the opposition is that
    we have some who do well because they had no other option. And
    my point is, you always have some who are good enough to beat
    the system. But if the system is broken, you want to correct
    the system. Tupac Shakur talked about a rose out of concrete.
    Well, if one rose can burst through the concrete, we salute
    that rose. But what about the rest of the seeds who don't make
    it? And that is why we are concerned about a predatory industry
    that continues to harass individuals into deeper and deeper
    debt.
        And so, again, they are asking for a life preserver and
    they end up with one made of iron that causes them to sink
    further and further in debt.
        Chairwoman Waters. Wow. Well, Pastor, let me ask you this.
    As we have wrestled with this very, very troubling problem in
    this country, and as we have fought off the payday lending
    industry, et cetera, we have had people come to us with
    different ideas and different proposals. One of them that seems
    to be emerging is, what about limiting payday lending interest
    rates to 36 percent the way they do for veterans?
        Mr. Haynes. Right.
        Chairwoman Waters. Have you had a chance to think about
    that?
        Mr. Haynes. Oh, without question. Not only that, but even
    in our church, we have a credit union, a Federal credit union,
    and we offer micro loans, small-dollar loans. And our interest
    rate is 28 percent. It is a great business model because it is
    moral and just. Thirty six percent is a moral and just interest
    rate. It is a model that will work as opposed to prey on
    individuals. It is a model that will help them to do what the
    payday industry claims they want to do, and that is is to get
    out of debt--get out of the debt trap, and at the same time,
    move forward in their lives. And so 36 percent, I think, is not
    only moral, it is just, and it is doable.
        Chairwoman Waters. Wow. Well, I thank you for sharing that
    with us because some of us who were not thinking about anything
    but trying to stop the payday loan industry because of all of
    the trauma and the pain that was experienced by people who were
    desperate who needed some help and would go to them, but yet
    get caught in that debt trap that you talked about, we had not
    thought a lot about doing what we do for the veterans.
        Mr. Haynes. Yes.
        Chairwoman Waters. And when I began to think about that, I
    thought I wanted you here to ask what you thought about it, to
    get your opinion because of the work that you have put into it,
    the work that your community has done, the work that the church
    has done. And I know that you have had to run some out of
    Dallas basically who were exploiting. And so now we have these
    proposals, and you have given me something to think deeper
    about. Because what you are doing in your church were with your
    loans at 28 percent, it is working, and what we have been doing
    with the veterans at 36 percent, it means that perhaps we can
    do the same with the entire industry.
        So I want to thank you for coming, I know on short notice,
    but you are so appreciated. And I certainly appreciate you, and
    thank you.
        And I yield back the balance of my time. Thank you so much,
    Mr. Chairman.
        Chairman Meeks. Thank you, Madam Chairwoman. I now
    recognize the gentleman from Colorado, Mr. Tipton, for 5
    minutes.
        Mr. Tipton. Thank you, Mr. Chairman. And I thank the panel
    for taking the time to be here. Obviously, I think all of us
    want to make sure that people are treated fairly, but we also
    have regulations, ability to repay that need to be addressed.
    And I don't want to put anybody on the spot here, but Mr.
    McDonald, you listened to Mr. Sherrill's testimony. Would you
    have made him a loan coming out of prison?
        Mr. McDonald. That depends on several factors, and
    obviously, we look at credit history, we look at repayment
    capacity--
        Mr. Tipton. Out of prison with no job, probably couldn't
    have made the loan at that time.
        Mr. McDonald. I believe he said he had a job. And we
    certainly have lent money to individuals who come from
    unfortunate backgrounds, who may not have a long history of
    income, but we have certainly made loans.
        Mr. Tipton. I am just a little interested in your model,
    you are a CDFI, right?
        Mr. McDonald. Yes.
        Mr. Tipton. All right. Do you make $100 loans?
        Mr. McDonald. No, our minimum is $500.
        Mr. Tipton. So if Mr. Sherrill needs $100, $200, to be able
    to fix his car, you won't cover that loan?
        Mr. McDonald. No, sir, not at this time.
        Mr. Tipton. Where do they go?
        Mr. McDonald. They would go to a payday lender.
        Mr. Tipton. Is that their only option?
        Mr. McDonald. In some cases.
        Mr. Tipton. Probably in most cases. Please understand, I am
    not trying to put you on the spot. It is just we do have
    regulations in place, and it is part of the only purpose of the
    committee in terms of what we are doing in terms of
    accountability on the banks and the institutions. And when you
    are talking about the interest rate that you do charge on the
    Freedom Fast loan, how does that compare to somebody with an
    800 credit score?
        Mr. McDonald. It is a tiered scale based on--
        Mr. Tipton. What would you charge for that same loan, $600,
    for somebody who has an 800 credit score?
        Mr. McDonald. Unfortunately, I don't have our rate matrix
    memorized.
        Mr. Tipton. It probably would be a lot less, though,
    wouldn't it?
        Mr. McDonald. So just in general, our short-term loan
    products will cap at 19.9 on the interest rate side, but I am
    not really sure how that will calculate out into the APR. But
    as the example that I used earlier, we have an average APR of
    34.6 percent, I believe.
        Mr. Tipton. Okay. Well, I guess the point I am trying to
    make is this obviously is a challenge for people with low
    income to be able to deal with. Mr. Sherrill, you have lived
    that life. But it is going to be some actual access to some
    capital at the times when people need it to be able to address
    that.
        In my home State of Colorado, we went through several
    iterations. In November of 2018, we passed, by referendum, a
    new law, that is going to be capping that at 36 percent
    effectively. And that was the balance that was struck to be
    able to address that in terms of a challenge for short-term
    credit products that we have.
        Mr. Sherrill, maybe you could address this a little bit
    more. In terms of the availability of payday lending, where do
    people go in the case of--if they only need that $200, $300 to
    be able to get a loan? If payday lending, as an example,
    doesn't exist, what do they do?
        Mr. Sherrill. Go back to the streets or go ask a family
    member. But I come from a low-income family. My family doesn't
    have any money. So, if it wasn't for me getting the payday
    loan, I would have gone back to the streets. That is just
    realistic.
        It sounds good in testimony for people to get up here and
    say what is being said right now, but in reality, where I am
    from, it affects many people. I am not the only one with this
    story. There are many people who use these services and use
    them responsibly, and we need to spotlight that, and then you
    would understand because there are no other options.
        Mr. Tipton. Well, Mr. Sherrill, in 2013, the Fed, the OCC,
    and the FDIC issued guidance because most banks--to stop making
    or providing products to the customers in terms of short-term
    small-dollar loans. These are institutions that are well-
    regulated and have to make sure that you have the ability to
    repay, as Mr. McDonald was talking about.
        What is a good solution to be able to fill that gap for the
    short-term loans? Should we extend that to more banks or just--
        Mr. Sherrill. I really don't know what the answer--the
    magic bullet should be. But I know taking this option away from
    low-income people or people who don't have access to credit or
    who don't have a history of credit, will be doing a disservice
    to the community.
        Mr. Tipton. Mr. Zuluaga?
        Mr. Zuluaga. Just quickly, I think banks are now very
    concerned about coming back into this because of that guidance.
    And unless there are very strong and clear signals that these
    products are going to be tolerated and accepted and not
    prosecuted, I think we will run out of options if we don't
    continue to allow payday loans.
        Chairman Meeks. The gentleman's time has expired. I now
    recognize the gentleman from Georgia, Mr. Scott, for 5 minutes.
        Mr. Scott. Thank you, Mr. Chairman. We have 56 million
    unbanked and underbanked consumers in this country. So many of
    them are victims, as has been pointed out. I think the good
    Reverend Dr. Frederick Douglass, love that name, and Frederick
    Douglass, as you may know. And your comments were right on
    target--all of your comments are.
        I have introduced two major pieces of legislation that I
    want to kind of get the witnesses' reaction on. The first one
    is the Improving Access to Traditional Banking Act of 2019. And
    what this Act would do, is it would create an office that is
    specifically tasked with examining factors contributing to
    households that are unbanked and underbanked, identifying them,
    their status, and developing the best business practices for
    improving that situation.
        Mr. Sherrill, you are right. Where else do they have to go?
    But to some of these people, if we don't provide a way and get
    that information to them. Another bill that I have is the
    Fintech Act. And as you know, and I want to get comments from
    you. Some of these fintech companies are dealing with this area
    because they are developing partnerships with some of the
    traditional banks that will not even deal with some of the
    unbanked and underbanked. So what I am saying is that there are
    things out there that we are trying to work with to get that.
        So let me just ask you, Mr. McDonald, you are from the
    National Bankers Association, tell me about this. What about
    the impact of these fintechs helping some of these people that
    traditional banks won't help? Are you aware of some of those
    partnerships there?
        Mr. McDonald. Yes, I am. And as an organization, we
    actually do encourage partnerships with fintechs, obviously, to
    a certain extent. But coupled with the technology and the know-
    how of a traditional bank, it could actually bring down the
    costs and make the costs more efficient and product and service
    more efficient and effective. And so that is how we have been
    leveraging our experience.
        Mr. Scott. Very good. Now, Mr. McDonald, let me ask you,
    from the banker's standpoint, can you tell us the importance of
    financial inclusion in the traditional banking sector, and in
    particular, how increased safety and affordability and
    convenience of financial services can have a positive impact on
    low- and moderate-income consumers?
        How can this bill--what we are trying to do with this bill
    is to try to identify the problem, bring it together, and then
    apply the necessary resources of coordination to really get to
    the heart of the matter, and make these--and try to put an end
    or at least slow down these predatory lenders. They have
    nowhere else to go because they don't have a checking account,
    they don't have a banking account. We have to create this--does
    that make sense to you?
        Mr. McDonald. Absolutely. And the National Bankers
    Association will be--open doors and we are definitely willing
    to speak further in terms of ideas and strategies around
    solving that problem. It is not an easy problem, obviously, but
    we definitely welcome ideas and strategies.
        Mr. Scott. All right. Now, Mr. Reeder, you are the
    president of the Innovation--I think--what is that, the
    technological innovation and--
        Mr. Reeder. The Center for Financial Services Innovation?
        Mr. Scott. Yes. And that is what we are trying to do. We
    are trying to use these innovators, the fintechs, the other
    areas to try to create some answers and solutions to this. Are
    we making some progress with the fintechs, what our initiatives
    would be doing, what our bill would be doing in terms of trying
    to find ways that we can increase the access of capital to
    these people, lending to them?
        Mr. Reeder. Mr. Chairman, should I answer another time, I
    know the time has expired?
        Chairman Meeks. I am going to let you finish. Go ahead. I
    have my own judgment here.
        Mr. Reeder. Yes, I think there is enormous opportunity. We
    work with companies that do things such as allowing people
    access to wages that they have already earned. We live in a
    country where people work and they are not paid for their work
    for some period of time, sometimes 2 weeks, sometimes a month.
    So we work with people to allow people access to assets that
    they already have.
        There is obviously a lot of work to help understand who is
    credit-worthy. Because of a long history of discrimination in
    this country, credit scores and other traditional means have
    biases that are embedded in them, they are very difficult to
    undue. And so there are opportunities for us to do that. So in
    my testimony, I list a number of companies that--
        Chairman Meeks. Thank you. The gentleman's time has
    expired.
        Mr. Scott. Thank you, Mr. Chairman, for the time, I
    appreciate it.
        Chairman Meeks. I now recognize the gentleman from
    Kentucky, Mr. Barr, for 5 minutes.
        Mr. Barr. Thank you, Mr. Chairman. Mr. Zuluaga, a question
    for you. Many small banks and credit unions in my congressional
    district in central Kentucky have told me that overly zealous
    supervision, over-regulation, and higher compliance costs
    stemming from the Dodd-Frank Act and other regulations have
    forced those lenders out of the small-dollar lending business,
    and out of the consumer lending space altogether. This has had
    the impact of pushing many borrowers to payday lenders and
    other forms of nonbank and noncredit union lenders.
        Is the answer for unbanked credit-challenged borrowers more
    regulation and banning higher-cost products? Or is the answer
    more competition and choice through financial deregulation? And
    as you answer that question, keep in mind the testimony from
    Ms. Standaert, who said that competition is not the answer.
        Mr. Zuluaga. Thank you for the question, Congressman. I
    think the answer is clearly more competition and more choice,
    because that drives prices down for consumers, it creates
    options that are more well-adjusted to exactly what it is that
    they need and want, and it also encourages continued innovation
    so that whatever negative features are in a financial product
    are no longer present there.
        In the particular case of small-dollar lending, it was
    mentioned before that there was a 2013 guidance from the OCC
    and the FDIC that led banks to retreat entirely from the small-
    dollar lending market, and this is in keeping with the general
    retreat of banks, as you suggested, since passage of the Dodd-
    Frank Act.
        Mr. Barr. So you are telling me that banks and credit
    unions have retreated from this space after Dodd-Frank?
        Mr. Zuluaga. The evidence that I have seen for banks,
    decidedly yes, but for credit unions, I will have to get back
    to you, because they do some different types of--they offer
    some types of alternative products, but obviously they don't
    reach everybody.
        Mr. Barr. I can tell you the credit unions and community
    banks have told me that they exited consumer lending post-Dodd-
    Frank, because of an avalanche of regulations. But let me
    explore this idea of an APR rate cap. In 2018, a major super
    regional bank in the United States began offering small-dollar
    short-term loans. The program has a limited scope to those
    customers with a current banking account. And even with the
    pricing advantages of lower capital costs and additional risk
    mitigation employed by that bank, in order for the program to
    be sustainable, the bank is charging interest rates between
    about 71 percent and 88 percent APR, more than double the 36
    percent APR rate cap that has been advocated by some.
        If a large super regional institution with all of its
    market advantages and economies of scale can't make a 36
    percent APR work, why is it realistic to think that a State-
    licensed or nonbank lender could do that?
        Mr. Zuluaga. I don't think it is realistic, Congressman.
    And in fact, I think we need to think about the small-dollar
    lender space, it is something of a spectrum, that are products
    for prime borrowers that carry low rates because they have a
    credit history and they have a record of paying back their
    debts. Some people, for various different reasons, don't
    necessarily have access to such low rates. In removing the
    options that they have, the people that will accept them as
    borrowers doesn't make them better off it. It makes it
    difficult for them to build a credit record. It makes it
    difficult for them to survive emergencies and so on.
        Mr. Barr. Reverend Dr. Haynes, thank you for your advocacy
    and work to empower people who are credit-challenged and are
    struggling financially. Let me ask you this, in the course of
    your advocacy, have you ever engaged those populations that you
    minister to, that you serve in financial literacy, specifically
    on payday loans, to say, educate those vulnerable populations
    about the difference between the interest rate if the product
    is used as it is designed, meaning that it is paid off in 2
    weeks or 4 weeks, as opposed to rolling it over, in order to
    avoid that triple digit APR, which it is never designed to be?
        Mr. Haynes. Well, yes, we have--to answer your question, we
    do have, not only financial literacy classes for those who find
    themselves in that predicament, but we also, again, offer the
    small-dollar, 28 percent loan, micro loan for those persons who
    are struggling. And a part of their getting the loan is going
    through the class.
        Mr. Barr. And Mr. McDonald, I appreciate your sandbox
    approach, and I also appreciate your advocacy for clarifying
    true lender to create liquidity in the secondary market with
    fintech. Let me ask you this, without the small-dollar loan
    program, without technical assistance grants, could you offer
    small-dollar loans, or is taxpayer assistance essential in
    order to originate and service small-dollar loans with interest
    rates below 36 percent?
        Mr. McDonald. I would not say it is essential. This is a
    specific business model that we have chosen as an organization.
    And a lot of organizations within the MBA have chosen to do so
    as well. So our profits are not at peer group levels. We have
    sort of--
        Mr. Barr. Yes, and I am sorry, my time has expired. But
    what I worry about is that without taxpayer assistance, Mr.
    Sherrill doesn't have an alternative, and he has testified to
    that today.
        And so the only model that works is having the government
    compete, and compete with private businesses and put them out
    of business. And there is a limit to the amount that taxpayers
    can provide, and so we do need private capital to provide
    access to credit for some folks. And I yield back.
        Chairman Meeks. The gentleman's time has expired. I have
    now evened it up, I gave Mr. Scott 40 seconds extra and I have
    given Mr. Barr 40 seconds extra. So now, I will go back to my
    5-minute rule. And the gentlewoman from Massachusetts, Ms.
    Pressley, is recognized for 5 minutes.
        Ms. Pressley. Thank you, Chairman Meeks. And I welcome this
    opportunity to examine the practices of this industry, which it
    seems more often than not, instead of offering a life raft has
    offered dead weight, wreaking financial havoc in any community
    that it touches. I am, however, thankful for the protections of
    my home State of Massachusetts, which has guarded against these
    debt traps. Payday loans are not allowed in my State, and my
    constituents, anywhere, are not exactly clambering for a 400
    percent interest loan.
        In fact, according to the Center for Responsible Lending
    report, consumers in Massachusetts saved more than $248 million
    in 2017 as a result of these protections.
        Ms. Standaert, can you tell me, based on your
    organization's research, how big of a role the State's rate cap
    has in creating these savings?
        Ms. Standaert. Thank you, Representative Pressley, for the
    question. A rate cap such as what Massachusetts has in place is
    the most effective protection against the debt trap, it is due
    to the rate cap that has garnered the millions of dollars of
    savings for your own residents, and it is the same rate cap
    that is saving over $5 billion a year to residents across the
    country in similar States.
        Ms. Pressley. And so where consumers do not have these
    protections, payday and small-dollar lenders have preyed on the
    desperation of the working poor, turning their need for a
    dollar today into a profit of $2 tomorrow. But as we examine
    this industry, I would be remiss if I did not acknowledge its
    disparate impact on communities of color.
        So, open to anyone on the panel who would care to comment,
    very briefly, just to better understand the common threads of
    these intrenched inequities, what is the profile of a typical
    payday loan borrower?
        Mr. Whittaker. Thank you, Representative Pressley. The
    typical profile, I think if you look on this panel you can see
    the extremes of the profile. Mr. Sherrill has spoke about not
    having access to credit, and not having an opportunity to seek
    help in his situation. But when you provide a tool, a debt tool
    like this that is marketed as easy, accessible, and safe,
    people begin to stop looking for other options. There are many
    other options.
        People say that--well, Mr. Sherrill said that he didn't
    have family who could help him or there wasn't--they are low
    income, so there was no income. Well, there is family, there
    are friends, there is the sweat of your brow, if you need to go
    buy some clothes and sell them on eBay, there are many other
    options that are available. But when you put the easy solution
    in front of somebody and you say that this is safe, why
    continue to look for harder options?
        Ms. Pressley. Thank you, Mr. Whittaker. And picking up on
    that, since you said the magic word, ``marketing,'' I am
    curious about the marketing of these debt traps since the
    prevalence of them is in low-income communities and communities
    of color.
        So, Ms. Standaert, can you elaborate on where payday
    lenders are located and how they compete for businesses in
    these communities?
        Ms. Standaert. Yes. Thank you. Payday lenders explicitly
    state that they compete on factors such as location,
    convenience of service, and other things. Notably missing from
    the list is competition based on price. Everywhere that payday
    lenders operate, they charge the maximum rate allowed by law.
    So 300 to 400 percent interest rates, despite a bunch of them
    being clustered together. Then we also see that payday lenders
    disproportionately concentrate in communities of color.
        In California, for example, we see payday lenders locating
    at over 2 times the rate in black and Latino communities, than
    other similarly situated white communities. And this pattern
    exists all throughout the country: Michigan; Georgia; Florida;
    Louisiana; and Colorado, all have been documented. And so this
    combination of the importance of payday lending locations and
    their ability to get customers in the door.
        Ms. Pressley. Thank you. Reclaiming my time. Thank you. And
    then picking up on the Reverend's point about people, instead
    of getting a hand up, getting handcuffed. Mr. Peterson, I know
    you have done quite a bit of work on the industry's reliance on
    small claims courts, particularly in States like Utah that do
    not have interest rates or protections. So what happens when
    people can't repay? Are there criminal charges? What happens?
        Mr. Peterson. Well, I have a study coming out, it is not
    out yet, but we have been looking at collection efforts in
    small claims courts and we have been surprised to find that
    there are a lot of small claims borrowers who end up getting
    bench warrants issued for their arrest.
        Ms. Pressley. Thank you. Reclaiming my time. This is what
    is clear. In the universe with payday lending, is one answering
    the question of how to make poverty a sustainable profitable
    enterprise? A lot of people are getting rich off of keeping
    people poor. And so how do we reform anything that is based on
    that premise? The short answer is we don't.
        Thank you. I yield back.
        Chairman Meeks. The gentlelady's time has expired. I now
    recognize the gentleman from Georgia, Mr. Loudermilk, for 5
    minutes.
        Mr. Loudermilk. Thank you, Mr. Chairman. I appreciate the
    panel, there are quite a few of you up here. But I do
    appreciate this, this is a very sensitive issue. Mr. Sherrill,
    I have to say, I am inspired. Your story is incredible. I think
    you saw that your story doesn't exactly fit in the narrative
    that some would like to paint, but I am particularly inspired,
    not just by you seeing the opportunity that this nation can
    give you, but by you finding a way around the obstacles and the
    hurdles. That is what makes this country great.
        The other aspect of it is I have been where you were. I
    have been in situations where early in my life after I left the
    military, I was trying to get a small business started, and I
    didn't find anyplace just to buy groceries for my family, I
    mean, it is--I just needed it for a short time. I knew the next
    check was coming from a job I did, but I didn't have anything
    to fill the gap. So sometimes people just don't know where it
    is coming from, and I am not defending the industry, but I am
    saying, any business exists where there is a need to fill.
        And often we create the problem ourselves, being
    government, by overregulating areas to where we can't fulfill
    some of those needs, and that is one of the concerns I have.
    And the chairman in his opening remarks brought up the
    statistic that 40 percent of U.S. adults could not cover a $400
    emergency without selling property. I agree with Mr. Whittaker,
    maybe that is what you need to be doing to cover an emergency,
    if you have property.
        The problem I ran into in my situation was, I had just
    moved across the country and I had sold most everything I had
    to relocate to this new location. So we sometimes try to paint
    with a broad brush something that is--each individual person
    has a unique situation, and a lot of times these businesses
    exist to actually fulfill that need. Yes, they are charging a
    large amount--sometimes too much amount in interest, but yet,
    they are loaning to are folks who couldn't get the loan
    anywhere else.
        But, on the same hand, we are creating a situation because
    we have pretty much, through regulation, prohibited the banking
    community from making these small-dollar short-term loans. And
    I think that is part of the problem, we could relieve some of
    this if we could just allow these businesses to make these
    loans. I wrote a letter to the Federal Reserve asking and the
    FDIC last year, asking for both of them to join the OCC in
    allowing, banks, once again, to make these small-dollar short-
    term loans to constituents.
        So, quickly, Mr. McDonald, the FDIC recently accepted
    comments from stakeholders on small-dollar lending. And if the
    Federal Reserve and the FDIC explicitly stated that these loans
    are allowed, as the OCC did last year, would that encourage
    banks to get back into small-dollar lending?
        Mr. McDonald. I would certainly hope so.
        Mr. Loudermilk. Yes, I would, too. I think it would resolve
    some of the concerns that we have to give at least some folks
    an alternative. Mr. Reeder, as you know, Georgia is a hub for
    fintech and payment processing, and I also co-Chair, with my
    colleague from Georgia, Mr. Scott, the Fintech and Payments
    Caucus. When a bank or credit union partners with a fintech
    company to make these loans, do the same consumer protection
    requirements apply if the consumer got the loan directly from
    the bank?
        Mr. Reeder. If the consumer received it directly from the
    bank, yes, the OCC or the FDIC or whomever is the examiner in
    charge would have the same authority over that--
        Mr. Loudermilk. Even if there is a fintech involved
    somewhere in that process?
        Mr. Reeder. Yes. The complication here is how the product
    is structured. The other avenue for regulators is third-party
    vendor management, which is a tool that bank regulators have,
    even in the event that the legal entity is a nonbank, the
    examiner in charge usually requires third-party vendor
    management to ensure that certain protections are in place.
        Mr. Loudermilk. Okay. Thank you. Last question. Mr.
    McDonald, in your testimony you discussed a regulatory sandbox,
    which I am highly in favor of, for banks to test small-dollar
    consumer loan products. Can you elaborate in the few seconds I
    have left?
        Mr. McDonald. Sure. So if regulatory bodies sort of allowed
    us to take on more risk without identifying them as high-risk
    loans, and that is sort of the problem that we had initially a
    few years back when we started doing this specific product. The
    scrutiny came where these loans were given to individuals with
    significantly lower interest rates, and they were identified as
    those high-risk loans.
        Now, over the years our regulators have become more
    comfortable with us managing a portfolio like that within a
    much larger portfolio. So to your point, yes, a sandbox
    approach where other community banks can operate in a very
    comfortable manner would definitely be helpful.
        Chairman Meeks. The gentleman's time has expired. I now
    recognize the gentlewoman from Virginia, Ms. Wexton, for 5
    minutes.
        Ms. Wexton. Thank you, Mr. Chairman. I was glad to hear
    some testimony about the Military Lending Act (MLA), because
    that is something that really has impacted the people in my
    district in Virginia, which is the State I am from. It was
    enacted in 2007, and it imposes a 36 percent interest rate cap
    for payday loans for Active Duty servicemembers and their
    dependents. However, with the arrival of Mick Mulvaney, and
    now, Director Kraninger, the CFPB has decided to suspend MLA
    compliant supervision even though Federal law clearly directs
    that they conduct this supervision.
        Now, this is a big deal for us in Virginia because we have
    military bases. We don't really have payday lending, but as a
    result we have twice as many car title lenders, and they set up
    their shops near military bases, especially Quantico Marine
    Base, and the Norfolk Naval Base.
        Mr. Peterson, while you were at the CFPB, you worked with
    the Pentagon to help design MLA regulations. Is that correct?
        Mr. Peterson. Yes, Representative Wexton.
        Ms. Wexton. Okay. And can you describe what you were seeing
    in terms of predatory practices that were going on that you
    needed to guard against?
        Mr. Peterson. Sure. We saw a lot of evasion of the interest
    rate cap with companies that would redesign their products to
    get in the nooks and crannies of the rule to try to make triple
    digit and straight loans to our military servicemembers in ways
    that Congress had not intended, and that is why it was so
    important that we had a tight, well-drafted regulation, and
    also rigorous supervision and enforcement follow up.
        Ms. Wexton. So if CFPB is not enforcing these regulations,
    who is?
        Mr. Peterson. Well, they are claiming to enforce it. They
    are not doing preventative supervisory examinations, but the
    other prudential regulators also have supervisory authority.
    The Federal Trade Commission also has some enforcement
    authority. And also, servicemembers themselves can bring
    private causes of action to enforce that law. But it is very
    troubling that the only Federal regulator that has supervisory
    preventative examination authority over payday lenders is not
    conducting Military Lending Act compliance over those payday
    lenders and car title lenders that you just mentioned. That is
    a troubling development.
        Ms. Wexton. Thank you very much.
        Ms. Standaert, I was looking at the new Center for
    Responsible Lending updated report about payday car title
    lenders draining nearly $8 billion in fees every year. Is that
    an accurate amount for the fees that they are collecting
    annually?
        Ms. Standaert. Yes, that is correct.
        Ms. Wexton. So this is a very lucrative business model for
    these operators. Is that correct?
        Ms. Standaert. Yes, again 75 percent of these collected are
    due to borrowers stuck in more than 10 loans a year. So the
    bulk is due to the debt trap.
        Ms. Wexton. Now, there are a number of States that have
    State protections against these payday or car title borrowing
    debt traps. Most of New England has enacted such legislation,
    as well as Pennsylvania, New York, and New Jersey. What do
    people do in those States? Are they able to get credit?
        Ms. Standaert. Most importantly, consumers in those States
    are not stuck in the quicksand of the debt trap, and so they
    have--they are protected from these dangers, they have other
    options for addressing financial shortfalls, and they are able
    to move more quickly to pathways of building assets and wealth
    for their future.
        Ms. Wexton. And have you observed that the market has
    responded and that these folks still have access to credit,
    even though they are not caught in the debt trap?
        Ms. Standaert. Yes, that is correct.
        Ms. Wexton. Thank you very much. I yield back.
        Chairman Meeks. Thank you. I will now recognize the
    gentleman from North Carolina, Mr. Budd, for 5 minutes.
        Mr. Budd. Thank you, Chairman Meeks, for yielding, and for
    hosting this hearing. I also want to thank all of the witnesses
    for sticking around.
        I am particularly taken, Mr. Sherrill, by your story, and
    not just because of your background, but also because of the
    industry that you are in, and that is my family's business that
    I grew up in. And so I appreciate what you do day-in and day-
    out, and the customers and their issues and the challenges you
    face, not from a background perspective, but from the business
    perspective. And custodial and janitorial work is a tough
    business, it is a noble business, and I appreciate what you do.
    My family's business started around 1963, and it is now in its
    third generation. So you might have a legacy on your hands. I
    wish the best to you. So thanks for what you do.
        Mr. McDonald, in 2013 the OCC and the FDIC issued guidance
    placing strict restrictions on a bank's ability to offer
    deposit advanced products. So how has this decision by the
    regulators, coupled with the current regulatory environment,
    affected your bank's ability to offer small-dollar loans to
    consumers?
        Mr. McDonald. Over the years, we have become more
    comfortable in sharing our experience with small-dollar loan
    products with our regulators. And as a business model, we
    actually are okay with doing less than peer group numbers. And
    so with their approval and with their oversight, we are okay
    with doing small-dollar loans within a certain perimeter.
        Mr. Budd. I want to expand this to all of the panelists.
    Would you agree that it is good for consumers in an unforeseen
    situation where they are in immediate need of funds to allow
    highly regulated or what we think of as normal banks to offer a
    small-dollar lending product? And if we could just start from
    the right and go this way--my right.
        Mr. Zuluaga. I think it is absolutely right for that to be
    the case. My only caveat is that banks generally require a
    credit history and an experience of the borrower. So they will
    be able to help out a lot of people if the environment is
    created for that, but that doesn't mean that some people won't
    rely on alternative options because they are unbanked or
    because they do not have a credit score that is sufficient to
    obtain a loan from the bank.
        Mr. Budd. Mr. Sherrill?
        Mr. Sherrill. Can you repeat the question for me?
        Mr. Budd. Sure. So we are asking if your regular normal
    bank should be able to offer these small-dollar loans. It seems
    that since 2013, they haven't be able to due to the regulators
    making a lot of rules where they can't.
        If anybody has an opinion? If you want to weigh in, great,
    if you would like to not weigh in, that is okay as well. But if
    you have any thoughts, please?
        Mr. Sherrill. I think that if they could ,they would be
    doing it by now. Payday lending in my city is the only thing
    that is going. I don't see any other alternatives. I keep
    hearing that word though, but I don't know of any. I am a
    businessman. I am smart. I can find the money if it is there.
    It is not there.
        Mr. Budd. Thank you.
        Mr. Reeder. I would support that with the one caveat of the
    relationship between overdraft and the small-dollar credit
    offered by a bank and sort of how those two interact. But our
    organization helped design the U.S. Bank product, and I have
    been a long time supporter of small-dollar credit that is bank-
    issued.
        Mr. Budd. Thank you.
        Mr. Peterson. It is simply not accurate to say that banks
    or credit unions are not offering small-dollar loans. In fact,
    every credit card in America can be used to expand small-dollar
    credit; you just borrow a little bit of money on your credit
    card. And every credit card in America also includes a free
    payday loan for borrowers who are not maintaining a balance, a
    monthly balance, during the grace period. So you can borrow
    $100, $150, $200, $300 on your credit card and then repay that.
    Now, not everybody has access to credit cards, but banks have
    done a pretty good job of increasing availability for credit,
    and have a variety of credit cards that are available out there
    for people with subprime credit histories, especially if they
    are willing to put down a deposit on the card. It is one
    alternative; there are lots of others out there.
        So I think there are plenty of credit opportunities out
    there across the country, and that is just factually driven at
    interest rates that are below 36 percent.
        Mr. Budd. All right. Thank you.
        Ms. Standaert. Yes, banks should not start acting like the
    payday lenders on the corner. At the time before the 2013
    regulations, those direct deposit advance loans trapped people,
    on average, in 19 loans in a year at effective rates of 200 to
    300 percent. And those borrowers were also experiencing the
    harm of the overdraft. So banks should not be in the business
    of offering harmful small-dollar credit and should stay under
    the 36 percent rate cap.
        Mr. Budd. Thank you. My time has nearly expired. I will
    finish with this. Continued innovations and financial
    technology will, in my view, also create more credit
    opportunities for the consumer offering them a product at a
    lower price point.
        And I hope this committee can continue to support further
    development in this space because it should play a continued
    role in the small-dollar space, along with banks and payday
    lenders.
        I yield back. Thank you all.
        Mr. Meeks. Thank you. I now recognize the gentlelady from
    New York, Ms. Velazquez, for 5 minutes.
        Ms. Velazquez. Thank you, Mr. Chairman, and Ranking Member
    Luetkemeyer. Reverend, you mentioned that you provide micro
    loans?
        Mr. Haynes. Yes.
        Ms. Velazquez. Have you partnered with the SBA?
        Mr. Haynes. Pardon me?
        Ms. Velazquez. Have you partnered with the Small Business
    Administration?
        Mr. Haynes. No, we have not.
        Ms. Velazquez. And why is that? Would you--so the Small
    Business Administration has a micro loan program, and they
    provide money to intermediaries like you so that you could
    provide technical assistance to the borrowers, because it is
    not only about providing access to capital, but making sure
    that these individuals will succeed in their enterprises. So I
    will suggest to you that maybe you should explore that option.
        Mr. Haynes. Okay. Thank you.
        Ms. Velazquez. And so for the Republicans who are concerned
    about providing access to capital to low-income communities,
    they should advise the President not to zero-out the micro
    lending program that we have under SBA.
        Mr. Reeder, online lenders, so-called fintech lenders,
    originated almost $23 billion in small-dollar consumer and
    small business loans in 2015, according to one estimate. And as
    you know, expansion in this area has been rapid, growing 163
    percent between 2011 and 2015.
        Do you think the current regulatory environment is doing an
    appropriate job balancing investor protections and access to
    capital? What possible changes would you make?
        Mr. Reeder. Thank you for the question.
        A couple of things. One, I would note that small business
    credit has unique features in that it does not have the same
    protections as consumer credit. So in the case of consumer
    credit, the Truth in Lending Act applies, which requires a set
    of disclosures and requires a computation of an APR.
        That does not apply to small business credit. I think that
    is something that should be considered. On a positive note, the
    Equal Credit Opportunity Act does apply to small business
    credit. One distinction I would make in this space, which is
    very important, is that there are lenders and there are
    merchant cash advance businesses.
        Lenders are subject to the same laws as others on the State
    level as being lenders. Merchant cash advance businesses in
    general are not considered lenders for State law, and that
    creates a set of issues from a regulatory standpoint.
        Ms. Velazquez. Thank you.
        Mr. Peterson, would you like to comment?
        Mr. Peterson. Could you repeat the question, please?
        Ms. Velazquez. Is there anything we should do in the
    regulatory climate to provide investor protections and access
    to capital? What changes would you make to the current
    regulatory environment?
        Mr. Peterson. I would recommend expanding the Military
    Lending Act that is currently functioning and doing a great job
    for our active duty servicemembers right now, and expanding
    those protections to all Americans all across the country.
    There will still be plenty of access to credit and that will
    crowd out some of the worst predatory abuses.
        Ms. Velazquez. Thank you.
        Mr. Reeder, reports indicate that the average online loan
    carries an interest rate that is much higher than compared to a
    traditional bank loan. Why would a consumer or small business
    owner use an online lender even when the interest rate exceeds
    that of a traditional bank loan?
        Mr. Reeder. There are a couple of answers. Obviously, once
    again, small business and consumer are different. But I would
    say one of the issues in credit in general is just the ability
    for consumers to shop. Often, consumers don't have the
    opportunity to compare alternatives, so sometimes that is an
    issue.
        The other is that the online channel in general is faster,
    and so many people find that convenient, something that they
    are willing to pay for.
        Ms. Velazquez. So are you concerned about the possible
    predatory nature of these high-interest online loans?
        Mr. Reeder. Any credit product that ends with a consumer
    worse off than where they started is a problem.
        Ms. Velazquez. Are you concerned that providing loans of
    this nature fosters an environment similar to the build-up of
    the subprime mortgage crisis of 2008?
        Mr. Reeder. I do think that the mortgage crisis is unique
    in both its scale and its impact. However, I will say that
    having large amounts of credit that are not regulated from a
    Federal level in the case of the Truth in Lending Act could be
    problematic.
        Ms. Velazquez. Mr. Peterson?
        Mr. Peterson. Yes, I think that online loans, in particular
    the online payday lending market, is one of the most abusive
    and problematic markets in the country. The average interest
    rates in the online payday loan market are actually higher than
    they are in the storefront market.
        Ms. Velazquez. Thank you.
        Ms. Standaert and Mr. Reeder, some have noted that online
    marketplace lending could fail as an industry because these
    lenders often fail to fully inform borrowers of the terms of
    the loan and their high interest rates.
        How can we achieve transparency? How can we make sure that
    people who are getting money, borrowing money, they know the
    APR, know the terms of the loan? Would you support a borrower's
    bill of rights? What provisions would you seek to include?
        Ms. Standaert. We are most concerned with the underlining
    terms of the products and whether or not they are properly
    priced, properly underwritten, and whether or not they comply
    with State laws. One of the concerning developments in the
    marketplace industry is their partnership with out-of-State
    banks to make loans that are at rates higher than what is
    otherwise allowed by law.
        Chairman Meeks. Thank you. The gentlelady's time has
    expired.
        I now recognize the gentlewoman from the great State of
    Michigan, Ms. Tlaib, for 5 minutes.
        Ms. Tlaib. Thank you, Mr. Chairman.
        I want to thank all of you so much for being here.
        About three-fourths of payday borrowers make about $40,000
    a year. In my district, that is about 60 percent of the
    residents essentially being targeted by predatory lenders. Many
    of my neighbors who are single moms, veterans, and young
    professionals are burdened by immense student loans, teachers
    and so forth, all throughout my Wayne County community.
        And one of the things that we are seeing is that payday
    loan establishments pop up on the corners of my district, but
    literally at the doorsteps of communities, and especially
    communities of color, where there is concentrated poverty.
        Mr. Sherrill, when you talk about how there was no other
    option, I just want you to know that I think government is
    about people and it is about us creating those options that are
    better than this.
        But, also, ensuring that there is some sort of regulation
    and oversight of practices that are ready fed through corporate
    greed. Corporate greed leads to unjust practices that hurt
    residents, especially when they are pushed more into poverty.
    And every time I see my residents kind of stuck, and they have
    these flashy signs, and come on in, we will take care of you,
    at the end as soon as the sign--they don't take care of them.
    They don't help them.
        Not like credit unions and not like the Reverend's services
    through, you know, incredible service that you are doing
    through residents. So it is really important that when we talk
    about how there are no other options, it is our job to create
    those options for you.
        My question, and really, you know, the CFPB has decided to
    aid in what I call legal robbery by proposing a rule that will
    drain our communities of their hard-earned savings, instead of
    developing a system that helps the most vulnerable. And, as you
    know, so in 2007, the payday lending rule--they prevented that
    trap that we are talking about, and this is something that I
    really want to focus on in this committee hearing. We should
    not be subjecting families to that.
        Mr. Reeder, what kind of harm could low- and moderate-
    income consumers, particularly communities, be exposed to if
    CFPB's current proposal is finalized?
        Mr. Reeder. In full disclosure, I was at the CFPB, and I
    was Chief of Staff during a period in which the rulemaking was
    underway. So I want to be very clear about that. I do think
    that the rule offers enormous opportunity, probably once in a
    decade, or maybe once in a generation, to put protections in
    place that really do weigh access and protection. And that
    without that, many of us will be back in this room 10 years
    from now or 20 years from now having the same discussion when
    many of the opportunities we have in front of us are quite
    evident, and we spent almost a decade here in Washington
    working this out.
        Mr. Peterson here would know better than me, he helped
    write the rule. But that is something where it would be a great
    missed opportunity if we were unable to move forward.
        Ms. Tlaib. Thank you. Mr. Whittaker, you and I have worked
    on grassroots advocacy on just the amount of what poverty from
    water shut-offs to ensuring that we have a right to breathe
    clean air and so forth.
        One of the things that, you know--we are government, the
    public, I always feel like is stuck subsidizing the cycle of
    poverty that is created by practices like that. Does that make
    sense?
        So when we don't do our job on this end in preventing folks
    to be chained, as the Reverend called it, or being held back,
    and that is what it is by not creating alternative options, we,
    the public, is subsidizing that poverty.
        Can you talk a little bit about--because you are from the
    city I grew up in. You talk about what that looks like from the
    ground up, because I see it in our school system, I see it in
    so many ways of how poverty is costing us more money on the
    other end in trying to provide all these other services.
        Mr. Whittaker. Thank you, Representative Tlaib.
        When we divest resources from these communities, we don't
    support our schools. We close down community banks. We divest
    in community development, and then we seed these institutions
    throughout our community, and then we say that this is most
    affordable and safest option.
        Well, I would challenge you, Representatives, that if this
    is the most affordable and safest option, then I would say that
    it is evidence of decades of failure by the people that we
    elect to make decisions for us.
        I agree with you, Representative Tlaib, that it is your job
    to create these options as this country moves forward. If you
    look and you see that there is nobody at the wheel, then you
    take the wheel.
        I will end this by saying that if you continue to keep the
    lights off, the roaches will continue to feast on the crumbs of
    this country that you have created.
        Ms. Tlaib. Thank you so much. And I just would end with
    this: Close to 80 percent of Americans live paycheck to
    paycheck. And many of you at this table know that.
        I have the third poorest congressional district in the
    country, and one in every two households will face some sort of
    burden of unexpected financial emergency. And this should not
    be their last option. We should be, again, working together to
    provide alternatives and supporting what you are doing,
    Reverend, in Texas. So I, again, really appreciate it.
        And I yield back the rest of my time. Thank you.
        Chairman Meeks. Thank you.
        I now recognize the gentleman from Texas, Mr. Green, who is
    the Chair of our Subcommittee on Oversight and Investigations,
    for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman.
        Mr. Chairman, this hearing has been informative, but it has
    also been painful. And it has been painful because you and I
    know that most poor people who cannot get a payday loan do not
    take to the streets. That is highly inflammatory language. It
    is designed to say to white people that black people who don't
    get payday loans are likely to engage in criminal conduct.
        Poor people across the length and breadth of this country
    suffer in poverty without committing crimes. And to imply that
    if you can't get a payday loan, you are likely to take to the
    streets, that is a painful thing to hear. And it is
    regrettable, to be quite candid with you, that it has been
    said.
        So, Mr. Sherrill, since you want to play this game, let me
    play with you.
        Did you get your pardon from Donald Trump yet?
        Mr. Sherrill. Are you asking me a question?
        Mr. Green. Yes, sir.
        Mr. Sherrill. I wish.
        Mr. Green. You did request one, didn't you?
        Mr. Sherrill. I am working on it.
        Mr. Green. That is right. You are working on a pardon. And
    there is a reason for that. How many felonies did you have?
        Mr. Sherrill. State or Federal? I have both.
        Mr. Green. This call--
        Mr. Sherrill. I don't know.
        Mr. Green. You determine.
        Mr. Sherrill. I need to understand.
        Mr. Green. Let me just share this with you. Ordinarily, I
    would not do this. But for you to do what you have done--
        Mr. Sherrill. What is that?
        Mr. Green. To imply that people of color--because you
    happen to be a person of color--to imply that if you can't get
    a payday loan, you will take to the streets.
        Mr. Sherrill. That was my circumstance, sir.
        Mr. Green. That is for you. But don't imply that that is
    the only option for people.
        Mr. Sherrill. That is for most of the people that I know.
        Mr. Green. Well, but not for most of the people in this
    country. That is what you have done.
        Mr. Sherrill. I can only speak from my experience, sir.
    That is why I am here.
        Mr. Green. Well, you can speak from your experience, but
    you ought not try to put that experience on other people.
        Mr. Sherrill. They know it, too.
        Mr. Green. What you have done, sir, is shameful.
        Mr. Sherrill. The truth can never be shameful.
        Mr. Green. The truth is shameful when you exaggerate and
    you try to pretend that it is more than what it is. Poor people
    are not criminals just because they are poor.
        Mr. Sherrill. I didn't say that.
        Mr. Green. But that is what the implication is. If you
    can't get the loan, you are going to take to the streets.
        Mr. Sherrill. That is what I would have done.
        Mr. Green. Well, that is why you went to jail.
        Mr. Sherrill. Exactly.
        Mr. Green. Well, look--don't speak for other poor people.
        Mr. Sherrill. And I have changed my life, too, sir.
        Mr. Green. Well, I am glad you did. Let me commend you for
    that. I commend you for changing your life, and I commend you
    for getting the pardons.
        But I would ask you, dear sir, don't use that highly
    inflammatory language in such a general way.
        Mr. Sherrill. I am just trying to--
        Mr. Green. Well, but what you are doing is causing white
    people to believe that black people are going to take to the
    streets if they can't get a payday loan.
        Mr. Sherrill. Everybody--
        Mr. Green. Therefore, we should not regulate payday
    lending.
        Mr. Sherrill. Everybody uses this product--
        Mr. Green. Excuse me. Let me go on to something else.
        We don't want to see this invidious discrimination that
    takes place with reference to these loans. These lenders locate
    in black communities, they charge black communities more for
    their loans than they do in other communities.
        If you walk into a payday lender's shop, one person black
    and one white, both equally qualified, would you expect them to
    get the same type of treatment, Mr. Sherrill?
        Mr. Sherrill. Of course.
        Mr. Green. Okay. And if one is discriminated against, would
    you condone that?
        Mr. Sherrill. Of course not.
        Mr. Green. All right. Then that is one of the things that
    we are talking about, how these lenders discriminate and they
    charge black people more in fees and products than they charge
    white people. That happens.
        So if you locate on one side of town and you charge more
    than you charge on another side of town, that, too, is a
    problem. I am not saying to you that all payday lenders are
    loan sharks, but a good many are. They have found a way to
    feast on the poor, the underprivileged, and people who are
    trying to make it, who do not take to the streets.
        Thank you, Mr. Chairman. I yield back my time.
        Chairman Meeks. The gentleman's time has expired.
        Let me take this opportunity to really thank all of our
    panel members. I know Mr. Whittaker had to step out for an
    emergency.
        But I did want to get into the record--when I listened to
    all of the witnesses, I think that we have extremely diverse
    ideas and thought patterns and moving forward to try to figure
    out how do we remedy this problem.
        I didn't hear anyone, as I stated in my opening, say that
    we need to get rid of payday lenders. We say we need to get rid
    of the predatory payday lenders, those that are doing things
    that are ripping people off, where you get caught into the
    never ending debt.
        And I think that there is a lesson to be learned. And I
    think this is not whether you are a Democrat or a Republican,
    that we need to do and make sure that we take care of all
    consumers.
        I heard someone talk about how we take care of the military
    and we cap it at 36 percent. I heard Reverend Haynes say that
    he thought that might be reasonable in response to a question
    from Chairwoman Waters. I think that is something that we need
    to look at and be able to figure out in a bipartisan way.
        I think, Mr. Sherrill, the fact that you were able to turn
    your life around is admirable.
        I also think that Mr. Whittaker is admirable for what he
    has done with his kids, trying to fight for them and to make a
    better life, and from his experience, never forgetting who he
    is, going around the country, fighting for equality and racial
    justice, organizing people, because it could have been very
    easy that he could have just given up and said nothing.
        So I want to thank particularly the two individuals who
    have had different experiences with payday lending, Mr.
    Whittaker and Mr. Sherrill.
        But I would not let this go without Mr. Whittaker being
    thanked personally also because of who he is, his background,
    and his children with him, who clearly he wants to make sure
    that they have a better life.
        I want to thank the experts.
        And, Reverend, what you do on a regular basis is important.
        And for what you have been doing, Ms. Standaert, Mr.
    McDonald, Mr. Peterson, Mr. Reeder, and Mr. Zuluaga, thank you.
    It is what makes us who we are.
        Ending debt traps in the payday and small-dollar credit
    industry is important. It is ensuring that our constituents
    have access to affordable--I think that is what we are talking
    about--nonpredatory financial products, because I believe that
    is essential.
        Members of the subcommittee and witnesses today have
    pointed to several datapoints that confirm what many us know
    from our daily engagement with constituents and families we
    represent. The scope of unbanked and underbanked Americans is
    grave and should concern us all.
        The growth of banking deserts should worry us all. And the
    extent of financial vulnerability for the American households
    is on the top of the minds of this subcommittee, and I know
    also of the full Financial Services Ccommittee under the
    leadership of Chairwoman Maxine Waters.
        Today, in addition to the testimony of the panel of
    witnesses, we have considered a discussion draft of legislation
    to set a national usury rate at 36 percent, legislation
    introduced by Mr. Scott to establish an office for underbanked
    and unbanked and underserved consumers at the CFPB, and a
    letter to appropriators, which I led, requesting funding for
    the Small Dollar Loan Program under Section 1206 of the Dodd-
    Frank Act.
        These are important issues for us to consider, ensuring
    access to fair and affordable financial products and protecting
    consumers from debt traps is and should be a priority. And I
    look forward to working with all of you on these critical
    issues.
        I also, without objection, will submit for the record
    letters from the American Financial Services Association and
    from Mastercard in support of the letter to Appropriations to
    advance the loan loss reserves, to enable more than 1,000 CDS
    to participate.
        Without objection, it is so ordered.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        I ask our witnesses to please respond as promptly as you
    are able.
        This hearing is now adjourned.
        [Whereupon, at 5:26 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                April 30, 2019

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