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


                  ENDING DEBT TRAPS IN THE PAYDAY AND
                      SMALL DOLLAR CREDIT INDUSTRY

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

                                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
                          
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                             __________
                               

                    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
                      SMALL DOLLAR CREDIT INDUSTRY

                              ----------                              


                        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 

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]