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



 
                 TRANSPARENCY IN SMALL BUSINESS LENDING

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                      
                             UNITED STATES
                             
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 9, 2020

                               __________

                               
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


            Small Business Committee Document Number 116-090
             Available via the GPO Website: www.govinfo.gov
             
             
             
             
                            ______

             U.S. GOVERNMENT PUBLISHING OFFICE 
 41-344                WASHINGTON : 2021              
             
             
             
                   HOUSE COMMITTEE ON SMALL BUSINESS

                 NYDIA VELAZQUEZ, New York, Chairwoman
                         ABBY FINKENAUER, Iowa
                          JARED GOLDEN, Maine
                          ANDY KIM, New Jersey
                          JASON CROW, Colorado
                         SHARICE DAVIDS, Kansas
                         KWEISI MFUME, Maryland
                          JUDY CHU, California
                       DWIGHT EVANS, Pennsylvania
                        BRAD SCHNEIDER, Illinois
                      ADRIANO ESPAILLAT, New York
                       ANTONIO DELGADO, New York
                     CHRISSY HOULAHAN, Pennsylvania
                         ANGIE CRAIG, Minnesota
                   STEVE CHABOT, Ohio, Ranking Member
   AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
                          TROY BALDERSON, Ohio
                          KEVIN HERN, Oklahoma
                        JIM HAGEDORN, Minnesota
                        PETE STAUBER, Minnesota
                        TIM BURCHETT, Tennessee
                          ROSS SPANO, Florida
                        JOHN JOYCE, Pennsylvania
                       DAN BISHOP, North Carolina

                 Melissa Jung, Majority Staff Director
   Justin Pelletier, Majority Deputy Staff Director and Chief Counsel
                   Kevin Fitzpatrick, Staff Director
                   
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Nydia Velazquez.............................................     1
Hon. Steve Chabot................................................     3

                               WITNESSES

Ms. Luz Urrutia, CEO, Opportunity Fund, San Jose, CA, testifying 
  on behalf of the Responsible Business Lending Coalition........     5
Ms. Yanki Tshering, Executive Director, Business Center for New 
  Americans, New York, NY........................................     7
Mr. Adam Levitin, Professor of Law, Georgetown University Law 
  Center, Washington, DC.........................................     8
Mr. Michael Hiles, Founder and Chief Executive Officer, 10XTS, 
  Cincinnati, OH.................................................    10

                                APPENDIX

Prepared Statements:
    Ms. Luz Urrutia, CEO, Opportunity Fund, San Jose, CA, 
      testifying on behalf of the Responsible Business Lending 
      Coalition..................................................    34
    Ms. Yanki Tshering, Executive Director, Business Center for 
      New Americans, New York, NY................................    43
    Mr. Adam Levitin, Professor of Law, Georgetown University Law 
      Center, Washington, DC.....................................    49
    Mr. Michael Hiles, Founder and Chief Executive Officer, 
      10XTS, Cincinnati, OH......................................    60
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Center for Monetary and Financial Alternatives...............    64
    Statement by Johnathon Bush, Not Just Cookies, Chicago, 
      Illinois...................................................    69
    Statement by the Responsible Business Lending Coalition......    71


                 TRANSPARENCY IN SMALL BUSINESS LENDING

                              ----------                              


                      WEDNESDAY, SEPTEMBER 9, 2020

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., via 
Webex, Hon. Nydia M. Velazquez [chairwoman of the Committee] 
presiding.
    Present: Representatives Velazquez, Finkenauer, Kim, 
Davids, Mfume, Chu, Evans, Schneider, Delgado, Houlahan, Craig, 
Chabot, Radewagen, Balderson, Hern, Stauber, Burchett, Spano, 
and Bishop.
    Chairwoman VELAZQUEZ. Good afternoon.
    I call this hearing to order.
    Without objection, the Chair is authorized to declare a 
recess at any time.
    I want to thank you for joining us this afternoon for this 
official remote hearing. I want to make sure to note some 
important requirements. Let me begin by saying that standing 
House and Committee rules and practice will continue to apply 
during remote proceedings. All members are reminded that they 
are expected to adhere to these standing rules, including 
decorum.
    With that said, during the covered period as designated by 
the Speaker, the Committee will operate in accordance with 
House Resolution 965, and the subsequent guidance from the 
Rules Committee in a manner that respects the rights of all 
members to participate. House regulations require members to be 
visible through a video connection throughout the proceeding, 
so please keep your cameras on.
    Also, if you have to participate in another proceeding, 
please exit this one and log back in later. In the event a 
member encounters technical issues that prevent them from being 
recognized for their questioning, I will move to the next 
available member of the same party, and will recognize that 
member at the next appropriate time slot, provided they have 
returned to the proceeding.
    If a witness loses connectivity during testimony or 
questioning, I will preserve their time as staff address the 
technical issue. I may need to recess the proceedings to 
provide time for the witness to reconnect. Finally, remember to 
remain muted until you are recognized to minimize background 
noise.
    With that, let's jump in.
    Affordable capital fuels new start-ups and helps existing 
businesses expand into new markets and grow their customer 
base. And we know that when capital is accessible on fair 
terms, small businesses can do what they do best, strengthen 
our communities and fuel our economy. However, predatory 
lending practices and lack of oversight can put many small 
businesses out of business. Last summer, our Committee examined 
the use of confessions of judgement by predatory online 
lenders. That hearing highlighted how merchant cash advance 
companies and online lenders have been able to skirt state and 
federal laws, and include predatory loan terms on small 
business owners.
    That hearing crystallized my belief that there needs to be 
more transparency, accountability, and oversight, in the small 
business lending arena. We all know that the internet and 
technology has changed our lives for the better, allowing 
consumers and businesses to buy virtually any product online, 
access healthcare, and even educate our children.
    That also is true for how we manage our finances. I am sure 
that everyone participating today has recently gone online to 
pay a bill, get a home mortgage quote, or sent money to a 
friend or family member. Small businesses, many of whom the 
large traditional money center banks do not serve, has turned 
to the internet for capital to start a business or operate an 
existing one.
    Today's discussion is also extremely timely as economic 
uncertainty due to COVID-19 remains high. Access to credit for 
small firms may be even more challenging than usual. In this 
unique environment, online, or FinTech lending, has continued 
to grow, and remains an attractive option for small businesses 
seeking capital. For small business borrowers, the biggest 
advantage of FinTech is the ability to access capital after 
being denied a loan by a traditional lender.
    In many cases, FinTech lenders are able to meet the needed 
payroll, inventory, or overhead needs of a small business, and, 
in some cases, disburse funds in as little as 48 hours. FinTech 
lenders are also likelier to make small-dollar loans generally 
considered too small to be profitable by most banks, but which, 
predominantly, go to women and minority-owned small businesses. 
With minority owners being almost twice as likely to apply for 
a loan online versus a traditional lender, it is critical for 
them to be able to seek capital online, and be assured the 
terms are fair, transparent, and affordable.
    However, as this Committee has explored, there are also 
potential risks for small firms seeking capital online. Aside 
from confessions of judgment abuses, observers have noted a 
considerable lack of transparency in the underwriting process 
for many FinTech small business loans. It remains unclear 
whether lenders, or other actors, in the space are using 
certain information about applicants to discriminate.
    Furthermore, not all FinTech lenders disclose the cost of 
capital in a way that is clearly presented and easy to 
understand for all small business borrowers. An economy where 
small businesses are sometimes paying 200 or 300 percent 
interest rates to keep their business running is not an economy 
that is working for all. It is a result of a patchwork of state 
laws, a lack of a federal regulator, and no federal law 
preventing exorbitant interest rates. It has become clear to 
us, and this Committee, through examples we have seen in prior 
hearings and in our interactions with business owners in our 
own districts, that small business owners applying for loans 
online are just as vulnerable as anyone to deceptive practices 
and unfair terms and have a right to a full and fair disclosure 
of all terms just like consumers.
    Just because they do not have an army of financial and 
legal professionals, like big businesses, does not mean they 
should be left to fend for themselves when seeking credit. We 
all know that in order to maximize competition in a 
marketplace, all actors need to have as much and as accurate 
information as possible.
    The same applies in the market for small business loans if 
you are the borrower, you need as much and as accurate 
information about your loan options as possible in order to 
make the best decision for your business. That is why, earlier 
this summer, I introduced the Small Business Lending Disclosure 
and Broker Regulation Act, which will expand the Truth in 
Lending Act protections and disclosures, or TILA, that 
currently apply for consumers who also apply for small business 
loans.
    My bill will bring needed transparency to small business 
credit markets, ensuring entrepreneurs understand their 
obligations and rights when they sign up for a loan. I should 
point out that these efforts are already underway at the state 
level, with California enacting a similar bill into law 2 years 
ago, and another version recently passed the New York State 
legislature, and is awaiting approval by Governor Cuomo.
    It is long overdue that we take this fight for fairness on 
behalf of small businesses to the federal level. In this 
pandemic, entrepreneurs have faced, and will continue facing, 
some of the most difficult and uncertain economic conditions 
ever, and it is vital we ensure predatory lenders do not 
exploit this situation by enticing small businesses into unfair 
and unsustainable loans.
    Fortunately, some lenders already conduct the business of 
online lending in a responsible way, and are able to do it 
sustainably while making a positive impact on their 
communities. We will hear from one of those lenders soon. We 
will also hear from legal experts and advocates who will 
illustrate the impact of applying TILA to small business loans 
on minority communities, since small businesses usually 
represent one of the few wealth-building opportunities for 
people of color, and, in many cases, can serve as an official 
community center for the neighborhood.
    I look forward to today's discussion. Again, I want to 
thank the witnesses for joining us today, and now yield to the 
Ranking Member, Mr. Chabot, for his opening statement, and I 
will ask members to please mute their mics. Thank you.
    Mr. Chabot, you are now recognized.
    Mr. CHABOT. Thank you, Madam Chairwoman, for holding this 
important hearing on the impact of FinTech and online lending 
on the Nation's small businesses. As the current Ranking Member 
and former Chair of this Committee, I have had the pleasure to 
speak directly with small business owners for many years, both 
in my district and across the country. Whether it is talking to 
small business owners or their employees, their input is 
critical in determining best way to support our small 
businesses, which are the backbone, after all, of this Nation's 
economy.
    To say that America's small businesses have some of the 
hardest working people in the entire country would be an 
understatement. They rise early. They stay late to meet the 
challenges of their customers daily. They are also responsible 
for creating two out of every three new private-sector jobs in 
the country. To meet the needs and expectations of their 
customers and to grow and thrive, these small businesses 
require, as you mentioned, access to capital.
    Unfortunately, Main Street businesses continue to report 
that capital access is one of their greatest challenges. 
Moreover, the current COVID-19 crisis has exacerbated this 
problem for our Nation's job creators. And, of course, access 
to capital continues to be one of the top issues that this 
Committee tackles, and, fortunately, under your leadership and 
previously under mine, in a bipartisan manner, because we are, 
I think, the most bipartisan Committee in Congress, and that is 
why we get the most done.
    That is why today's hearing on FinTech and online lending 
is so important. As small businesses faced local and State 
shutdowns due to COVID-19, this Congress and President Trump 
unveiled the PPP, Paycheck Protection Program, to assist small 
businesses and their workers, for my State, Ohio, to your 
State, New York, to Florida, to Texas, to California, and all 
across the entire country. By utilizing private sector lenders, 
PPP was able to deliver financing quickly, and, for the most 
part, effectively. While there were only a limited number of 
FinTech companies participating in the program, [inaudible] 
delivered literally billions of dollars for America's small 
businesses.
    Given the FinTech's growing popularity, it is critically 
important for this Committee to examine their role moving 
forward. These companies are driving innovation within our 
financial ecosystem. They are utilizing data to make rapid 
lending decisions. Conversations on disclosure requirements are 
necessary to ensure transparency is appropriate, and to protect 
America's small businesses as well. So that is obviously 
something that we need to consider as we consider this 
important issue. I am looking forward to discussing all of 
these topics today, including how these types of lenders should 
operate within the confines of the SBA existing programs.
    Additionally, I am hopeful our conversations today help 
determine how FinTech and online lending is regulated, if that 
is going to occur, at the Federal level. We know that all the 
witnesses have busy schedules, so we appreciate them joining 
with us here today virtually.
    And with that, Chairwoman Velazquez, thank you for holding 
this hearing.
    And I yield back.
    Chairwoman VELAZQUEZ. Thank you, Mr. Chabot.
    I would like to take a moment to explain how this hearing 
will proceed. Each witness will have 5 minutes to provide a 
statement, and each Committee member will have 5 minutes for 
questions. Please ensure that your microphone is on when you 
begin speaking, and that you return to mute when finished.
    With that, I would like to thank our witnesses for taking 
time out of their busy schedules to join us. Our first witness 
is Ms. Luz Urrutia, CEO of Opportunity Fund, a CDFI and SBA 
lender based in San Jose, California. Opportunity Fund is one 
of the largest nonprofit lenders in the country and recently 
established a partnership with two large FinTech companies. 
Welcome, Ms. Urrutia.
    Our second witness is Ms. Yanki Tshering, Executive 
Director of the Business Center for New Americans, a CDFI and 
SBA micro lender serving New York City. Beyond helping 
underserved entrepreneurs access affordable capital, Ms. 
Tshering was also recently a key advocate in the efforts before 
the New York State legislature to advance true lending 
protections for businesses across the state. I particularly 
thank you, Ms. Tshering, for your advocacy on behalf of all New 
York entrepreneurs, and welcome you before us today.
    Our third witness is Professor Adam Levitin. Professor 
Levitin is the professor of law at the Georgetown University 
Law Center, with a focus on banking and finance law, bankruptcy 
law, and consumer protection. As an expert in this field, he 
has testified before Congress on numerous occasions, including 
last Congress before the Financial Services Committee on this 
issue.
    Welcome back to the Small Business Committee, Professor 
Levitin, and I look forward to hearing your views on the 
interplay between FinTech and small business lending.
    Finally, I would like to turn it over to the Ranking 
Member, Mr. Chabot, to introduce our last witness.
    Mr. CHABOT. Thank you, Madam Chair.
    Our final witness will be Michael Hiles. Mr. Hiles is the 
founder and Chief Executive Officer of 10XTS here in 
Cincinnati, Ohio. 10XTS is a software start-up company that is 
focused on blockchain technology and FinTech. Mr. Hiles has a 
long history of working within Cincinnati's technology sector. 
Prior to founding 10XTS, Mr. Hiles worked in the software 
development at Sabre Systems. He founded a web development 
company called Soft Links Interactive and worked at Proware.
    Mr. Hiles was also responsible for setting up the 
Cincinnati chapter of Founder Institute, which assists business 
through the incubator and accelerator models. Mr. Hiles, I want 
to thank you for taking time out of your busy schedule to be 
with us today. It was my honor to speak with you recently on 
another call, and we look forward to your testimony here this 
afternoon.
    And I yield back.
    Chairwoman VELAZQUEZ. Thank you, Mr. Chabot.
    Now I would like to begin by recognizing Ms. Urrutia for 5 
minutes. Thank you, Ms. Urrutia.

STATEMENTS OF LUZ URRUTIA, CEO, OPPORTUNITY FUND, TESTIFYING ON 
  BEHALF OF THE RESPONSIBLE BUSINESS LENDING COALITION; YANKI 
     TSHERING, EXECUTIVE DIRECTOR, BUSINESS CENTER FOR NEW 
     AMERICANS; ADAM LEVITIN, PROFESSOR OF LAW, GEORGETOWN 
  UNIVERSITY LAW CENTER; AND MICHAEL HILES, FOUNDER AND CHIEF 
                    EXECUTIVE OFFICER, 10XTS

                    STATEMENT OF LUZ URRUTIA

    Ms. URRUTIA. Good afternoon, Chairwoman Velazquez, Ranking 
Member Chabot, and Committee members. My name is Luz Urrutia, 
and I am the CEO of Accion Opportunity Fund and Opportunity 
Fund. Opportunity Fund is a CDFI and the Nation's leading 
nonprofit small business lender. We believe small amounts of 
money, and the right financial advice can have lasting changes 
in peoples' lives, drive economic mobility and build stronger 
communities.
    Last year, we deployed $120 million in 3,200 loans mostly 
to minority immigrants and women-owned businesses. Accion 
Opportunity Fund is also a founding member of the Responsible 
Business Lending Coalition, a group of nonprofit and for-
profits in the industry committed to transparency and 
innovation in small business lending.
    Before COVID-19, small businesses were already facing 
significant challenges, accessing responsible capital. Main 
Street financial institutions do not generally lend directly to 
underserved small businesses for a variety of reasons--tight 
credit boxes, small dollar amounts, lack of profitability, 
risky industries. But since the Great Recession, many banks 
left communities, and FinTechs and online lenders stepped in to 
fill the gap. There is no argument that these lenders have 
transformed the marketplace by speeding access to capital, and 
some of them, not all, being transparent and responsible.
    Unfortunately, it has also created many unprincipled 
lenders that are wreaking havoc across Main Street, charging 
exorbitant rates and providing products that lack proper 
disclosures and transparency. After COVID, we believe the 
lending landscape will be altered even further. Banks will 
tighten their credit boxes even more. Many FinTechs and 
merchant cash advances providers will retrench or fail due to 
their capital structures and portfolio losses. The result will 
be that underserved small businesses will have an even bigger 
challenge accessing capital.
    To meet this capital need, Accion Opportunity Fund believes 
that innovative partnerships with responsible FinTechs will be 
crucial. An example is Opportunity Fund's partnership with 
Lending Club, a one-of-a-kind partnership between a nonprofit 
CDFI, and a responsible, for-profit, publicly traded FinTech 
lender. Lending Club has the marketing reach and partnerships 
to provide an accessible digital experience for small 
businesses in need.
    Opportunity Fund combines its credit assessment tools and a 
high touch customer service model to provide small businesses 
with responsible credit and transparent rates. The partnerships 
provide capital and technical assistance to businesses whose 
needs may not be met, or might pay significantly more with 
other providers.
    More than 50 years ago, Congress enacted the Federal Truth 
in Lending Act to protect Americans from scrupulous lenders, 
making deceptive offers of credit. Unfortunately, we do not 
have those same protections for the Nation's small businesses. 
Opportunity Fund analyzed the data set of alternative loans 
held by small business owners who came to us hoping to 
refinance. We found that unregulated lenders were charging an 
average APR, annual percentage rate, of 94 percent with an 
average monthly loan payment nearly double the borrowers' net 
incomes. One loan was priced at an astounding 350 percent. 
These loans put many small business owners in a crushing cycle 
of debt.
    Take Deanna Irish, owner of Wine Tour Drivers, in 
Sacramento, California. Deanna took a $25,000 online loan that 
cost her $2,000 a month. She was able to refinance with 
Opportunity Fund cutting her payment to $900. Since then, she 
has been able to pay off her loan. These high rates are unfair 
and deceptive, often hidden under layers of misinformation. 
Federal research also finds that small businesses are often 
misled by disclosure quoting non-APR rates. The inability to 
compare prices on an apples-to-apples basis, and lack of 
transparency, stymies free market competition that could lower 
prices and spur financial services innovation.
    I want to thank the Chairwoman for introducing the Small 
Business Lending Disclosure and Broker Regulation Act of 2020, 
which will deliver much needed protections to small businesses. 
Research also shows it will bring over $3.8 billion in savings 
to nearly 800,000 small business annually, including hundreds 
of millions in savings for over 158,000 minority-owned small 
businesses. The legislation could not come at a better time, 
when many business owners are desperately seeking for ways to 
remain solvent. An uninformed business decision for a financing 
choice could be the difference between survival and failure. We 
applaud California and New York for passing legislation 
mandating transparency in small business lending, however, a 
State-by-State approach hampers innovation and increases costs 
for lenders. This national approach is much needed to provide 
clear and concise national regulations that protect all small 
businesses equally and allow responsible lenders to innovate 
and create quality products.
    I encourage all of our leaders in Congress to work together 
to pass the Small Business Lending Disclosure and Broker 
Regulation Act of 2020.
    Thank you.
    Chairwoman VELAZQUEZ. Thank you, Ms. Urrutia.
    Ms. Tshering, you are recognized for 5 minutes.

                  STATEMENT OF YANKI TSHERING

    Ms. TSHERING. Thank you. Thank you, Chairwoman Velazquez, 
Ranking Member Chabot, and distinguished members of the 
Committee. Thank you for inviting me to speak with you today 
about the lack of transparency in small business lending, and 
the urgent need to provide entrepreneurs with the information 
they need to make informed decisions.
    My name is Yanki Tshering, and I am the executive director 
of the Business Center for New Americans, a treasury-certified 
Community Development Financial Institution and Small Business 
Administration micro lender and community advantaged lender 
based in New York City.
    In addition to my role leading BCNA, I have also served on 
the board of the New York State CDFI coalitions since 2015. 
BCNA was founded to help hard-working immigrants and refugees 
pursue the American dream. Over two decades, we have provided 
financial counseling and loans to help clients to start or grow 
a business, buy a home, or save for the future. BCNA serves 
exceptionally diverse clients. Our micro and small business 
clients range from the street vendor who comes in once a year 
to borrow $500 to fund his inventory of roses for Valentine's 
Day to the deli owner operating six grocery stores with 80 
employees.
    Since we were founded, BCNA has made over $33 million in 
micro and small business loans, and provided training and 
advice to over 10,000 businesses. One of those businesses is 
Haute Knit whose owner, Vladimir Teriokhin, produces knitted 
garments for New York design houses. Vlad was initially 
thrilled when he was approved for a $35,000 loan from an 
alternative FinTech lender that he found online, but gradually 
realized to his horror that he was paying over 61 percent in 
annualized interest.
    When Vlad came to BCNA 3 years ago to ask us about a loan, 
part of which he would use to pay off that high interest loan, 
we were shocked to learn that he was also required to pay the 
full amount of interest and fees, even if he was able to prepay 
the loan, something he didn't understand when he signed off for 
the loan.
    We are happy to have been able to help him with financing 
that loan and many more for affordable terms that are 
transparent and fair. Unfortunately, now, more than ever, small 
businesses are suffering from a lack of access through 
responsible transparent credit. The Truth in Lending Act, 
originally passed in 1968, requires lenders to clarify, 
disclose their pricing, and terms for consumer loans, but does 
not apply to financing for commercial loans.
    This means that small business owners like Vladimir are 
left to face a Wild West of unregulated and increasingly 
complex financial products without any consistency in how the 
lenders explain, or present their products to borrowers.
    We regularly assist clients who have encountered 
alternative loan products, such as merchant cash advances that 
they did not understand at times with dire consequences. 
Larger, more established businesses are able to hire attorneys 
and accountants to translate confusing term sheets, but as 
members of the Committee know very well, the overwhelming 
majority of small and micro businesses don't have the funds for 
that level of legal assistance.
    This is why we are very happy to be here today in support 
of Chairwoman Velazquez's recently introduced Small Business 
Lending Disclosure and Broker Regulation Act, which will ensure 
that no small business is left behind and extend sensible 
disclosure protection to entrepreneurs nationwide.
    Thank you.
    Chairwoman VELAZQUEZ. Thank you, Ms. Tshering.
    Now we recognize Professor Levitin for 5 minutes.

                   STATEMENT OF ADAM LEVITIN

    Mr. LEVITIN. Chairwoman Velazquez, Ranking Member Chabot, 
and members of the Committee, good afternoon. Thank you for 
inviting me to testify before you today.
    My name is Adam Levitin. I am a law professor at Georgetown 
University, where I teach courses in commercial law and 
financial regulation. For over 50 years, consumer credit has 
been governed by an extensive Federal regulatory regime of 
disclosure, substantive term regulation, and supervision of 
lenders. There is no equivalent regulatory regime for business 
loans. The lack of regulation of business lending is, in large 
part, because businesses are presumed to be more sophisticated 
entities than consumers, and, therefore, less needing of 
governmental protections. Yet, there is a considerable range of 
financial and legal sophistication among businesses and the 
reason that a borrower takes out a loan does not determine the 
borrower's ability to otherwise protect his or her interests.
    Small businesses, in fact, often resemble consumers in 
terms of limited information, sophistication, and market power 
in credit markets. Moreover, small business borrowing is often 
personally guaranteed by the small business's owner. The lack 
of regulation leaves small business vulnerable to abusive 
practices of the sort that were prohibited in consumer credit 
markets in the 1960s and 1970s. It makes sense to recognize 
that small businesses need many of the same sorts of 
protections as consumer borrowers to ensure that they can enjoy 
fair, efficient credit markets. And that is precisely what the 
Chairwoman's bill, a Small Business Lending Disclosure and 
Broker Regulation Act would do.
    Most importantly, the Chairwoman's bill would extend the 
centerpiece of Federal consumer credit regulation, the Truth in 
Lending Act, to small business loans. The Truth in Lending Act 
requires, among other things, the standardized disclosure of 
the cost of credit in the form of the finance charge and the 
annual percentage rate, or APR. That is an annualized measure 
of the finance charges as a percentage of the principal 
obligation.
    Standardization of credit cost disclosure is important, 
because it enables borrowers to more readily understand and 
compare various credit offers available on an apples-to-apples 
basis, so that the borrowers can make an informed decision 
about using credit. Informed use of credit is essential for 
ensuring robust price competition, which is the first line of 
consumer protection.
    Let me give you an example of what the world could look 
like without standardized credit cost disclosure. If I were to 
tell you that a loan cost 10 percent without telling you more, 
you could not tell if that meant 10 percent annually, 10 
percent monthly, or 10 percent weekly; much less, if that 10 
percent were compounded and with what frequency. That actually 
leads to very different effective interest rates. Without 
compounding, the 10 percent monthly figure would translate to 
120 percent annually, and the weekly figure, to 520 percent 
annually.
    So the imprecision of stating 10 percent interest allows 
for abuses of consumers. Let me illustrate this with a story of 
small business from Sarasota, Florida called Homes by DeRamo. 
And this is the story experience with a predatory small 
business lender, called World Business Lenders, that operates 
in partnerships with various banks that rent out their banking 
charters to enable the nonbank lender to evade State laws.
    So the DeRamos got a loan from World Business Lenders 
through a small Wisconsin bank with two branches, called Bank 
of Lake Mills. It had no connection whatsoever with Florida. 
And the pricing of the DeRamos' loan was never disclosed as an 
annual percentage rate. Instead, it was disclosed in terms of a 
daily percentage rate, and that appeared as a 12-digit decimal 
figure of just over 0.33 percent. Annualized, however, that 
translates into 121 percent APR.
    That 121 percent APR figure never appeared anywhere in the 
DeRamos' loan documents, however. Moreover, even the daily 
percentage rate, was never prominently disclosed. It was buried 
in the midst of legalese. No interest rate whatsoever appeared 
on the summary term sheets for the loan. Instead, the only 
percentage figure that appeared was for 15 percent prepayment 
penalty and that is the figure that the DeRamos believed was 
the interest rate on the loan.
    So the Chairwoman's bill would address this sort of abuses 
that occurred with the DeRamos' loan, by requiring disclosure 
of credit cost in standardized terms. It would also prohibit 
the sort of gotcha-type of enormous prepayment penalties for 
same lender refinancing as the DeRamos experienced. And most 
importantly, I think, it would extend the scope of the Consumer 
Financial Protection Bureau's regulatory authority so that the 
CFPB can supervise the larger participants in the small 
business lending and use its power to prohibit unfair and 
deceptive acts of practices as a gap filler.
    I would urge the Committee to take up the Chairwoman's 
bill, which is an excellent point for bringing much needed 
protection to small business borrowers.
    Thank you.
    Chairwoman VELAZQUEZ. Thank you, Professor Levitin. Now we 
recognize the gentleman, Mr. Hiles, for 5 minutes.

                   STATEMENT OF MICHAEL HILES

    Mr. HILES. Chairwoman Velazquez, Ranking Member Chabot, and 
members of the Committee, thank you for the invitation to 
testify at this hearing.
    My name is Michael Hiles, and I am the CEO of 10XTS, a 
Cincinnati-based FinTech/RegTech company building blockchain 
solutions for financial records. The SBA's admirable effort to 
rapidly mobilize financial stimulus through EIDL and PPP loans 
demonstrates how small business funding is clearly an essential 
lifeline to a thriving economy. When American small business is 
unable to access capital, single moms, immigrants, and regular 
ordinary people suffer. The SBA is historically partnered with 
banks as the origination and servicing agents for lending 
programs. While this approach has generally allowed the SBA to 
serve a wider market, the administration can only be as 
effective in delivering services and support as their partners. 
Therein lurks the problem faced by the SBA.
    The PPP program experienced significant delays in 
delivering financial relief to small businesses due to many 
banks' inability to adjust business operations in an agile 
fashion and fairly deliver funds in a diverse and inclusive 
ways. We directly experience these frustrations.
    Legacy banks are already in the throes of compressive 
disruption. They are not in a position to quickly respond to 
rapid, disruptive changes in the market. The resulting 
permanent branch closures and downsizing has been an alarm bell 
for many. In 2018, Gartner published a report indicating that 
by 2030, 80 percent of the traditional financial services firms 
will close, become commoditized, or exist formally, but will 
not compete effectively in the market.
    With so many consolidations, banks have struggled to merge 
redundant, legacy IT systems. The largest banks are a 
hodgepodge of too-big-to-fail technology strung together with 
little to no standardization. As a result, institutions are 
weighed down with inefficient fragmented processes. Our 
hypothesis at 10XTS is that a bevy of problems are mostly based 
on how information, records, documents, and data are stored, 
managed, shared within, and between other organizations and 
customers. Trusted information is still mostly another human 
vouching for the authenticity of documents and data.
    Facing increasing regulatory scrutiny, banks have been 
reluctant to drive innovation due to the inherent compliance 
risks. Financial services industry already spends more than 
$270 billion per year in compliance and regulatory obligations. 
Legacy systems limit the simple automation and straight-through 
processing from front end to the back office. Proprietary 
systems complicate the adoption and integration of emerging 
tech like blockchain, AI, robotic processing, and API-based 
micro services. In short, legacy information systems reduce a 
bank's ability to innovate and improve value for their 
customers and partners.
    Meanwhile, there are now approximately 60 million 
Generation Z banking customers who control $45 billion in 
annual spending. With the oldest of them nearing age 24, these 
young adults literally have no recollection of life prior to 
the internet, social media, and mobile tech. Gen Z expects 
highly transactional services, placing more value upon 
convenience over traditional branch-based relationship-driven 
banking.
    In consideration of these things and other things, I offer 
the following recommendations: One, coordinate efforts with the 
U.S. Treasury and Federal Reserve Bank in establishing a 
sandbox environment, and a decentralized national network of 
financial records. Without a definitive path of its own, 
relying on the financial services industry to provide tech 
solutions means the SBA is at risk for future 
disenfranchisement of the growing market of digital-first 
business' owners who rely upon tech solutions for fast, 
efficient business operation.
    Similar to the early communications standards that became 
the internet and web, a collaborative approach to building a 
commercial lending and financial records network by the SBA, 
Treasury, tech companies, and banks could accelerate a more 
verdant, efficient, and trustworthy financial system. Through 
collaboration, the SBA is in a position to establish new 
standards for financial document and information networks, data 
interoperability, robotic process automation, and exchange.
    Firms that optimize customer data, robotic processes, and 
provide new solutions can offer timely and relevant support for 
the SBA's programs. With data-driven and digital-only models, 
challenger firms are in a better position to adapt to rapid 
change and unforeseen circumstances.
    Number two, leverage and improve upon small business 
innovation research, SBIR programs, to foster FinTech and 
RegTech innovation. The SBA has an opportunity to collaborate 
with technology companies to provide proof of concepts for the 
direct delivery of automated services. However, Federal 
contracting, grant, or regulatory policies can be quite 
prescriptive when it comes to defining technology and solution 
requirements.
    Instead, Congress should establish goals for the outcomes 
of innovation programs and then strive to support businesses 
that offer effective, affordable technology solutions. While 
contracting vehicles already exist, they can be prohibitive for 
small companies to pursue due to the amount of resources 
required. As we have seen with recent SBIR innovations and 
instant procurements and streamlined processes within the Air 
Force, tapping into a wider national brain trust for innovation 
can be achieved through thoughtful improvements through the 
existing processes.
    As we deliberate national small business, funding, banking, 
technology, and even monetary policies, Congress should invest 
in these opportunities, accelerate them where possible, and 
ensure the financial and regulatory standards and technology of 
the future continue to be led by American ingenuity and 
resolve.
    Thank you, again, for inviting me to testify, and I look 
forward to addressing each of your individual questions.
    Chairwoman VELAZQUEZ. Thank you, Mr. Hiles. Thank you all 
for everything you have shared with us. I will begin by 
recognizing myself for 5 minutes.
    Ms. Urrutia, the goal of my bill is to bring transparency 
and understanding of pricing terms and conditions to small 
business lending nationally. How would increased transparency 
have a unique impact on borrowers of color, immigrant 
entrepreneurs, and other vulnerable communities?
    Ms. URRUTIA. First, I want to start by saying that 
underserved small businesses, particularly the minorities, 
immigrant, and women-owned do not generally maintain existing 
banking relationships. I think this was recently brought to 
light after looking at the results of who received PPP loans. 
Unfortunately, we saw that many minority immigrants and women-
owned business who tried to apply with banks were left at the 
back of the line, or declined altogether. There is also plenty 
of research from many sources showing that these underserved 
communities are most negatively impacted when it comes to 
accessing responsible and affordable capital.
    The Brookings Institute research shows that minority and 
women-headed households generally have lower levels of 
household wealth, making external borrowing more difficult. It 
also shows that these two segments have increasingly difficult 
times accessing responsible capital. Similarly, the U.S. 
Department of Commerce, Minority Business Development Agency 
shows that minority and women-owned businesses are less likely 
to receive loans, more likely to receive lower amounts, and 
more likely to be denied when compared to nonminority 
businesses.
    Chairwoman VELAZQUEZ. Thank you. Thank you. I just need to 
go on with other questions. Thank you so very much.
    Ms. Tshering, you noted that nonprofit lenders are left 
helping small businesses pick up the pieces due to the lack of 
transparency and abusive lending practices in online lending. 
Can you elaborate on some of the terms these FinTech products 
have that hurt small business borrowers?
    Ms. TSHERING. So what we found and it is the CDFI Business 
Center For New Americans, which I represent, but also all--we 
have a coalition of CDFIs in New York State, and we work very 
closely together. What we found is the, you know, lack of 
transparency of the actual interest rate. And I think we had 
someone who just spoke, the professor, who explained in detail, 
you know, very often the fact that the interest rate is a daily 
interest rate is not conveyed clearly to the borrower.
    So when you actually--you don't have the ability to compare 
apples to apples. So a borrower may look at a CDFI's loan 
product offerings and see 8-1/4 percent, and 10 percent, and 
when they see the interest rate that is conveyed to them by a 
FinTech, or an online, or some other lender, they are very 
confused. So, you know, we greatly feel what we are asking for 
is transparency and fairness. We are not condemning the FinTech 
sector. We are condemning and bringing to light the bad 
behavior.
    The other thing that we were shocked to find out, and I 
have to point this out, was the fact that even if we stepped 
in, a CDFI stepped in and was willing to make a loan to 
refinance, this loan with this exorbitant interest rates 
because of what the client on the borrower small business owner 
had signed on, it was still liable for the entire fees and 
interest for the term of the loan.
    Chairwoman VELAZQUEZ. Thank you, Ms. Tshering.
    Ms. Urrutia, in an effort to increase transparency in small 
business lending, an unexpected degree of disagreement has a 
reason with respect to annual percentage rate, or APR, 
disclosures. Some have argued that a total cost of capital 
metric is appropriate, but others have argued that an APR 
cannot be calculated for certain products.
    What is your response, and why is it so important that APR 
specifically be disclosed to borrowers? Do you believe it is 
more accurate or useful metric for borrowers in comparing loan 
products?
    Ms. URRUTIA. They are providing capital over time for a fee 
just as lenders are. For a long time, the merchant cash advance 
industry has long claimed that their products are different to 
get around regulations that are intended to protect their 
customers. This is just another example of that avoidance. A 
lot of conversation focuses on the nuances of the product 
themselves. Are they an MCA? Are they a daily debit? What are 
the product features? This financing is mostly very high cost 
and doing more harm than good.
    You know, customers need to be educated. The best 
businesses educate their customers because that allows them to 
make informed decisions. APR is definitely a metric that helps 
borrowers understand how much they are paying, and be able to 
compare apples to apples, one product to another.
    Chairwoman VELAZQUEZ. Thank you. Thank you. My time has now 
expired, and maybe if we go to a second round of questioning, I 
will be able to ask question for the witnesses that I haven't 
gotten to yet.
    Now, the Ranking Member, Mr. Chabot, is recognized for 5 
minutes.
    Mr. CHABOT. Thank you, Madam Chairwoman, and I will begin 
with Mr. Hiles.
    Mr. Hiles, Cincinnati is a modest-sized city. How is 
Cincinnati come to be such a significant driver of financial 
innovation? What advantages have you found here in this area?
    Mr. HILES. Madam Chairwoman, Ranking Member, thank you for 
the question.
    Cincinnati has a great legacy of financial technology. In 
1976, that was the start of the electronic trading with the 
Cincinnati stock exchange. In fact, Cincinnati is recognized as 
being the first independent software vendor company in history, 
Cincom Systems. So it has a wonderful technology legacy that 
was followed through. In 1977, Fifth Third Bank launched the 
very first ATM network, the Genie Network, which has become 
fairly ubiquitous now throughout the world for accessing cash 
through trusted networks. Separately, I am honored to have been 
on the team that was the first to ever connect a court judicial 
case management system to the world wide web and allow a clerk 
of courts case management search look-up, and we won a 
Smithsonian Computer World Laureate award for that.
    So we have got a tremendous history of firsts, and that is 
one of the reasons that we are now also advocating the 
establishment of a decentralized network of records as a way to 
really provide proof and efficacy of financial identities, 
entity information, assets, and, ultimately, transactions, so 
that they can be queried instantly by regulators, but then also 
ensure the security and the efficacy of documents and data as 
they are passed between institutions and organizations and 
individuals.
    So that hopefully answers the question, Ranking Member. 
Thank you.
    Mr. CHABOT. Thank you very much.
    Ms. Urrutia, I will go to you next. Could you expound upon 
the partnership that Opportunity Fund has with LendingClub and 
Funding Circle and how that those partnerships have helped 
reach small businesses across the country?
    Ms. URRUTIA. Sure. We established a one-of-a-kind 
partnership where we were able to take LendingClub customers 
that applied for a loan and got denied, primarily for credit 
reasons, in the background we were able to check them to decide 
if we could provide them a prequalification offer. In essence, 
we were a second look for a FinTech lender. They brought the 
marketing and, their digital capabilities, and we brought our 
high-touch customer service and our ability to underwrite 
credit for these underserved consumers, giving access to credit 
to borrowers that, otherwise, would have been turned down.
    And for certain borrowers that we cannot handle because 
their loan sizes are greater and/or they are prime creditworthy 
customers, we would send them to another lender, such as 
Funding Circle for them to underwrite; again, better expanding 
access as well as providing transparent rates and affordable 
loans.
    Mr. CHABOT. Thank you very much.
    Ms. Tshering, I will go to you next. As we have seen, 
COVID-19 has acutely impacted small businesses across the 
Nation. This is especially true for the country's smallest 
firms. I have introduced legislation that considers the 
smallest of small businesses, those that have 10 or fewer 
employees.
    As Congress looks to assist these smallest of hard-hit 
businesses during this emergency period, do you have any 
suggestions as to what we could consider why these smallest 
businesses have a particularly hard way to go?
    Ms. TSHERING. That is a great question. Thank you.
    So one thing I want to, you know, thank everyone who is 
involved in passing the CARES Act, one of the provisions that 
is not talked as much about as the PPP--we hear so much about 
the PPP loans, was under the CARES Act, anyone who was funded 
with the loan from funds from the SBA were able to get 6 months 
of loan repayments assistance under the CARES Act.
    So, that was a lifeline for small businesses that had a 
loan funded by the SBA, many of the EIDL loans, others were 
really, really helpful, but when we speak to our clients and 
other clients of other CDFIs, the area where most of the 
businesses seem to really need help is some form of rent 
relief. And what they have also said over and over, again, is, 
Yes, we do not need more debt, you know. We would love to have 
a program which would, you know, provide some equity, help us 
pay off the 4 months of rent that we owe, and some of the 
expenses so we can get back on track.
    Mr. CHABOT. Thank you very much. My time is expired, Madam 
Chair.
    I yield back.
    Chairwoman VELAZQUEZ. Thank you. The gentleman's time has 
expired.
    Now we recognize the gentlelady from Kansas, Ms. Davids, 
for 5 minutes.
    Ms. DAVIDS. Thank you, Chairwoman Velazquez and Ranking 
Member Chabot, for holding this hearing today. The COVID-19 
pandemic has certainly illustrated and exacerbated many of the 
challenges that our small businesses face in their ordinary 
day-to-day operations, whether we are talking about access to 
capital, starting a business, keeping the doors open in an 
emergency, and we are seeing just how hard those challenges can 
be.
    FinTech, I think, presents a unique and exciting 
opportunity for lenders to better reach and serve small 
business owners who are often in search of small loans, things, 
you know, loans that are under $1 million, and FinTech lenders 
are often able to speed up the typical loan turnaround time, 
which can be critical for small businesses with tight margins.
    But, as we know, the FinTech industry, as it grows and 
adapts, we have a responsibility to ensure that those 
opportunities for small business lending are equitable and that 
they are fair. And so, Ms. Urrutia, I would really love to hear 
from you about how we ensure that FinTech and online lenders 
offer fair and clearly understood terms, and making sure that 
they are remaining accessible to small lenders and you were 
kind of touching on this earlier when you were talking about 
the transparency that the Chairwoman was asking about, but 
also, just in terms of making sure that folks understand the 
terms that they are signing up for, how we educate folks on 
that.
    Can you talk a little bit about that?
    Ms. URRUTIA. Sure. Thank you.
    First, there are many reputable national lenders. CDFIs and 
FinTechs alike, who deliver solutions online to customers 
throughout this country in both rural and urban communities. 
And these organizations, ourselves included, we meet borrowers 
where they are and when they need us. And we have been and will 
continue to be committed to transparency in our lending 
activities. Examples of many of these lenders are members of 
the Responsible Business Lending Coalition, which is a network 
of more than 110 nonprofit and for-profit lenders, investors, 
and small business advocates that share a commitment to 
innovation in small business lending, and we also are concerned 
about the rights of small businesses. The 50-plus lenders in 
the group currently provide borrowers in need of loan capital 
with transparent disclosures.
    The second point I will make is that we strongly believe 
that an educated customer is our best customer. By being 
transparent, we help them to understand how to pay loans back, 
which means more people can get credit as a result. For us and 
for these lenders, customer success drives business success.
    Ms. DAVIDS. Oh, really quickly, I would like to hear a 
little bit more about--I am really interested in making sure 
that small business owners are able to trust that they are 
interacting with a lender that is really going to either meet 
them where they are at or educate them in a way that is 
necessary.
    Can you talk a little bit more about that? The Responsible 
Lending Coalition sounds really interesting. Are there other 
groups out there that are doing similar work?
    Ms. URRUTIA. Yes, and I would say that under the 
Responsible Business Lending Coalition, we created--the 
Business Borrower Bill of Rights, which outlines six principles 
of what responsible lending would look like. It does not mean 
that other lenders that have not signed on to this bill are not 
doing responsible lending, but I think that the BBoR will serve 
as a guideline for small businesses when taking out a loan to 
understandf if, the loan meets this criteria?
    Ms. DAVIDS. And then, Ms. Tshering, I saw you nodding your 
head a bit. I would love to hear from you on this.
    Ms. TSHERING. Yes.
    So, you know, I want to point out, as Luz referred, that 
many who have not signed on to this, you know, small business 
lender Bill of Rights, but they believe in what we are asking 
for. And we are not, you know, condemning the FinTech sector, 
as I said before. What we are saying is, we want some rules in 
place to affect and make sure there is no bad behavior, which 
impacts very negatively on small business owners.
    Ms. DAVIDS. Yeah. I appreciate that, and it sounds like 
there are a lot of--when I was hearing about the partnerships 
with folks like Lending Tree and other online folks, I think 
that it sounds as though, there is--again, I said this earlier, 
a lot of opportunities for access and growth just making sure 
we are making that a fair and equitable process.
    Thank you so much for your responses.
    And I yield back.
    Chairwoman VELAZQUEZ. The gentlelady yields back.
    Now we recognize the gentlelady from American Samoa, Mrs. 
Radewagen, for 5 minutes.
    Mrs. RADEWAGEN. Thank you, Chairwoman Velazquez and Ranking 
Member Chabot, for holding this hearing, and I, too, want to 
welcome the panelists.
    For Ms. Urrutia, in your testimony, you state that small 
business owners are sometimes shut out of a traditional 
financial system. Why do you believe some lenders do not 
consider them good candidates for traditional lending products? 
And small businesses are--well, as Congress continues to 
discuss PPP and the next round of COVID relief, what should we 
concentrate on that would provide the most assistance to small 
businesses?
    Ms. URRUTIA. Sure. Yes. Banks generally have a very 
specific criteria under which they make loans. They look at 
FICO scores, and there are a lot of small business owners and 
individuals that don't have one--primarily those that either 
new to credit or, immigrant communities. Second, they are 
looking at size of loans. The loans we are talking about are 
very small microloans. It is really hard to make those loans 
profitable. Also, many of these minority-owned businesses are 
in industries that pose a greater risk for banks, even though, 
we would disagree with that statement based on our own 
experience.
    So, the overall profitability and the overall segment that 
we are talking about has needs that the banks are just not set 
up to serve. As a result, these small businesses are going to 
alternative lenders to seek the credit that they need; online, 
MCAs, FinTechs. In terms of PPP, we believe that there are 
several things to improve. We do believe that there needs to be 
the ability for businesses to access a second PPP loan. We also 
believe that to incentivize lenders to make smaller loans, 
lenders should get paid a minimum fee of $2,500. As an example, 
at Opportunity Fund, our average loan for PPP was $15,000, 
okay.
    The average loan on the second round was 73,000 for the 
industry as a whole, and even larger in the first round. So, to 
incentivize lenders to make smaller PPP loans, there should be 
a process to forgive any loans under $150,000. That will help 
lenders be willing to make those smaller loans.
    Mrs. RADEWAGEN. Thank you, Chairwoman Velazquez. I yield 
back the balance of my time.
    Chairwoman VELAZQUEZ. The gentlelady yields back. Now we 
recognize the gentleman from Maryland, Mr. Mfume, for 5 
minutes.
    Mr. MFUME. Well, Madam Chair, thank you very much. You are 
very gracious with your time. I hopped on a little late because 
I have had conflicting meetings this day, and so in deference 
to the members on our side that may have been here earlier 
before me, I would yield until the next round.
    Chairwoman VELAZQUEZ. I recognize the gentlelady from 
California, Ms. Chu, for 5 minutes.
    Ms. CHU. Thank you, Madam Chair.
    Well, Ms. Tshering, I am so glad you are on this panel 
today because your organization is a Community Advantage lender 
serving immigrant and minority business owners. What this 
hearing today shows is that it is so important for us to 
support the Chairwoman's Small Business Lending Disclosure Act 
ASAP.
    And I have also introduced legislation, along with my 
colleague, Representative Spano, that would authorize the 
Community Advantage program for 5 years, which has been 
operating as a pilot program successfully since 2011.
    Now, we are facing a long recovery from COVID-19, and we 
need to be bold about giving small businesses, especially 
underserved small businesses, more opportunities to access SBA 
capital.
    So, you know, we have an interest in making sure the 
Community Advantage program remains live. And as a Community 
Advantage lender, can you speak to the potential of this 
program to play a part in the economic recovery for small 
businesses, especially those owned by immigrants and people of 
color, and especially when they may be potentially taken 
advantage of by unscrupulous FinTech lenders?
    Ms. TSHERING. So, thank you. So, the Community Advantage 
product is a great product. We are relatively new to the 
product. We have been making these loans for 2 years. But what 
I have to say, we were pleasantly surprised once we started 
processing them, how efficiently we got a response as to 
whether something was approved or not, if a loan was approved, 
or if documents were missing. And I think it has a great role 
to play in the recovery efforts.
    New York, here, businesses are reopening. We are making, 
you know, emergency microloans funded by the SBA. We are also a 
very active lender with funds, awards from the Treasury, the 
CDFI fund at the U.S. Department of Treasury. But the CA, 
Community Advantage program, has a great role to play.
    And I think, you know, if more of the business owners were 
aware of the product, certainly there is some time involved in 
underwriting the loan, but that makes sense because, you know, 
you really have a responsibility to make sure that the borrower 
has the ability and, you know, is able to repay before you make 
the loan to the business.
    Ms. CHU. Thank you for that.
    And, Ms. Urrutia, as the only member from California on 
this committee, I would like to ask you about SB-1235, which 
was signed into law in my home State in 2018, and was the 
country's first truth-in-lending law specifically for small 
business. And I know your organization was very instrumental in 
the passage of this bill in my State.
    Of course, this legislation did address the misleading 
advertising practices by requiring lenders to disclose the true 
estimated cost of their products on an annualized basis, and it 
laid the groundwork for a similar effort in New York State. 
And, of course, I commend Chairwoman Velazquez for spearheading 
these disclosure requirements here in Congress because we 
certainly need it on a national basis.
    So, can you tell us how the bill is doing and expound on 
the lessons learned from SB-1235 in California, and how we can 
apply those lessons to the Federal level?
    Ms. URRUTIA. SB-1235 has not been fully implemented yet in 
California, but, transparency is what we all were looking for. 
That is why when this bill was passed, there was no opposition 
to enacting some of the disclosures.
        -What we saw is that high-cost lenders continue to 
        oppose it because their APRs will be much higher than 
        the rates that they disclose now. As I said earlier, 
        the Federal Reserve found instances of providers 
        claiming that a 4 percent ``fee rate'' of 4 percent, 
        when the estimated APR was 45 percent, or a ``factor 
        rate'' of 1.15 when the estimated APR was 70 percent. 
        The Fed found these rates are confusing.
    So, when we introduced this bill, I think that the reason 
we found support is because consumers and small businesses 
deserve the right to know their options and what they are 
buying so they can make informed decisions. And we are looking 
forward to successful and full implementation of the bill in 
California.
    Ms. CHU. Thank you. I yield back.
    Chairwoman VELAZQUEZ. The gentlelady yields back.
    I now will recognize the gentleman from Ohio, Mr. 
Balderson, for 5 minutes.
    Mr. BALDERSON. Thank you, Chairwoman. Chairwoman, I 
appreciate you doing this committee today, and I look forward 
to listening. It has been good today.
    My first question will go to Mr. Levitin. In your 
testimony, you briefly discuss personal guarantees. At the SBA, 
personal guarantee is utilized with many of the government 
guaranteed lending products. Can you provide more detail about 
its role in traditional lending products?
    Mr. LEVITIN. Sure. Personal guarantees are--commonly are 
very frequently used as business lending because the small 
businesses--in many situations, the dividing line between what 
is a small business asset and what is a personal asset gets--it 
can be fussy. That is one reason.
    For example, a contractor who buys a Ford F-150 or 
something might use it for work, but he is also going to use it 
to take his kids to school, and to get groceries and the like. 
It is both--it may be registered in the business's name, but 
the business is really hard to separate from the person, and 
that is why you often see personal guarantees for all 
businesses where the credit of the business is just tied up 
with the credit of the person.
    I don't think a personal guarantee is, in any way, a 
problem. I want to be clear about that. But when you start 
having personal guarantees it can make it look a lot more like 
[inaudible] than if, you know, a large--Coca-Cola were to go 
and take out a multimillion dollar loan.
    Mr. BALDERSON. Thank you. I will follow up for you. What 
small business provision should Congress concentrate on while 
discussing the next COVID relief package?
    Mr. LEVITIN. I think the key--maybe the most important 
problem small businesses are facing is rent, and that is not an 
easy problem, because you have small businesses that, through 
no fault of their own, are facing real problems with their 
rent, and you have landlords who, through no fault of their 
own, are finding their own liquidity stressed because of the 
COVID problems. I don't, unfortunately, have a good solution 
for you on this, but that is, I think, where a lot of attention 
needs to be paid.
    Mr. BALDERSON. Okay. Well, thank you.
    My next question is for Mr. Hiles. Mr. Hiles, thank you for 
being here today. What do you believe are the factors that are 
driving change within the country's banking and lending system?
    Mr. HILES. Madam Chairwoman, Representative Balderson, 
thank you for the question.
    There is a confluence of different factors affecting the 
banking system right now. As I stated in my initial testimony, 
one of the problems through consolidation for Main Street to 
Wall Street has been the development of these gigantic too-big-
to-fail patchwork quilts of disparate financial IT systems in 
the way that the documents and the data are managed become very 
expensive to maintain.
    And we have seen instances where very large banks have 
spent upwards to $1 billion in an attempt to launch a fully 
automated digital bank from the inside out. And we know that 
from the technology standpoint, the technology innovation 
generally takes place outside of large institutions and then 
becomes acquired or absorbed within as we are able to innovate 
and pivot.
    There are other compressive factors, you know, the risks 
from a regulatory cost standpoint and, you know, not clear 
guidance. We have struggled with standards in technology. We 
have had a little bit of a national dialogue, in particular, 
around blockchain. There has been an attempt to bring to the 
floor a previous legislation that defines even the taxonomy of 
blockchain and cryptocurrency and trying to inject some 
definitions into the mix.
    I would like to also remind the committee that FinTech, in 
and of itself, is not necessary alternative lending. FinTech is 
just financial technology that powers an efficient way for even 
traditional financial firms to continue to operate.
    Mr. BALDERSON. Thank you very much for your answer.
    Madam Chair, I will yield back my remaining time. It is 
pretty short. So thank you very much for all of you being here 
today.
    Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
    Now we recognize the gentleman from Pennsylvania, Mr. 
Evans, for 5 minutes.
    Mr. EVANS. Thank you, Madam Chairperson. Thank you for your 
leadership on this issue.
    The question I want to start off is with the professor from 
Georgetown. Mr. Levitin, can you describe the pros and cons of 
using FinTech for lending? What can business owners do right to 
now protect themselves from predatory lending? And I would like 
to get others to respond to that too.
    Mr. LEVITIN. So, as Mr. Hiles was saying a second ago, 
FinTech simply--it is actually not a very useful term because 
it is so vague. It just means bringing technology to the lend--
to financial services, and that can mean a whole range of 
things. In the lending context, it usually is used to refer to 
online lenders. But a website is hardly, you know, 
revolutionary technology at this point.
    Often when we think of FinTech lenders we--people are 
referring to lenders that are using alternative underwriting 
data, so that they are able to maybe underwrite loans for 
borrowers that do not have traditional credit scores or have 
thin credit files, and also, lenders using particularly 
automated underwriting.
    And these two things, the automated underwriting and the 
use of alternative underwriting data, enables both cheaper 
underwriting and faster underwriting, and underwriting of 
populations that might not otherwise be served by the 
traditional lending market.
    Potentially, that is all really good, right. There is a lot 
of potential upside to FinTech. The problem is that FinTech 
has--it can be both good and bad, and you have--just as in the 
regular banking market, you can have abusive practices. You can 
have those, too, with FinTech.
    And with FinTech lenders, often they are not operating with 
a banking license, so their regulation will vary. It is going 
to be on the State level primarily. And what that means they 
are actually subject to can just--there is substantial 
variation depending on how they do this.
    Additionally, some FinTech lenders are not banks, but they 
partner with a bank. These bank partnerships are sometimes 
called rent-a-bank arrangements, where the bank acts as the 
front. It makes the loan and then immediately sells the loan, 
and the loan was made on spec for the FinTech. What that allows 
the FinTech to do, it allows it to evade State regulations.
    So the example I give in any opening statement of the 
DeRamos' business loan, the 121 percent interest rate, well, 
Florida has an 18 percent usury cap. It actually applies--
unlike many States, Florida's usury cap applies to business 
loans as well as to consumer loans.
    How is a 121 percent APR loan made there? Well, because 
banks are exempt from State usury laws. And by having the 
little tiny Wisconsin community bank with just two branches in 
Wisconsin be the formal lender, and then a few days later, sell 
the loan to the FinTech, the FinTech was able to at least make 
an argument that it was not subject to the State's usury laws.
    And, unfortunately, over the summer, the Office of 
Comptroller of the Currency and the Federal Deposit Insurance 
Corporation both put finalized rulemakings that pretty much 
blessed this process, and are giving a green light to bad 
actors in the financial services space rather than trying to, 
you know, squeeze out the bad actors and have an open field for 
the good actors.
    Mr. EVANS. So maybe somebody can go real quick. I have a 
minute. So can I get you to respond the pros and cons on it?
    Mr. LEVITIN. Can you repeat that, sir? I didn't hear it.
    Mr. EVANS. Is anybody else giving comments on the pros and 
cons of FinTech along the panel?
    Ms. URRUTIA. I would just say that FinTechs have done a 
great job of leveraging technology and data analytics to scale 
lending to underserved communities in markets where banks have 
left, and they have become banking deserts. And they have the 
reach and many are responsible.
    The problem that we have as responsible lenders is with 
those online and FinTech providers that are not transparent in 
their disclosures. And with those who say that why don't we 
just talk about the cost of credit and the dollar amount, 
recognizing that that is not a good, fair comparison, because a 
6-month loan is very different than a 5-year term loan, and so 
you have to look at APR in order to be able to compare apples 
to apples.
    Mr. EVANS. I yield back the balance of my time.
    Chairwoman VELAZQUEZ. The gentleman yields back.
    Now we recognize the gentleman from Oklahoma, Mr. Hern, for 
5 minutes.
    Mr. HERN. Thank you, Madam Chairwoman. I really appreciate 
you doing this meeting today, and Ranking Member Chabot, and 
our witnesses for testifying today.
    As a business owner for over 35 years before getting into 
Congress 2 years ago, I am certainly very familiar with the 
complexities associated with obtaining access to capital 
through the loan programs that are out there and available.
    I am also--as a cofounder of a small community bank, I also 
understand the compliance standards and the financial risk our 
lenders face on the other side. So I have a unique perspective 
of being on both sides of this for over 20 years now.
    These financial risks have grown significantly, due to 
small businesses utilizing online lending more frequently, 
which often creates quicker means to obtaining loans, as each 
of you have described, is more appealing to younger 
demographics of business owners. If it is usually that easy and 
that automated, there is usually something of suspicion behind 
it, and I think that is what has been so appetizing about these 
type of loans.
    Unfortunately, online lending comes with a lack of 
transparency and increased ambiguity regarding long-term 
agreements, again, as we have been speaking to today. Going 
forward, as our society's reliance on the digital marketplace 
continues, it is essential that we increase transparency so 
that small businesses better understand the terms of online 
lending agreements.
    Compliance standards are also a growing problem, as our 
Nation's banks have been overregulated since the passage of 
Dodd-Frank, and they have become worse during the coronavirus 
crisis. While the PPP and auto programs have helped businesses 
remain open and for employees who are unemployed, a quick 
turnaround in processing these loans has placed even more 
standards on many banks, causing them to work extra hours and 
adding to the overall compliance cost.
    So, to ensure more efficiency and transparency with SBA 
lending, we need to reduce the burdensome regulation for banks 
and strive to innovate. And this brings me to the first 
question.
    Mr. Hiles, in your testimony, you note that the need for 
the SBA to be more innovative and work with technology 
companies to foster FinTech and RegTech solutions, if the SBA 
is to innovate through online platforms, how do we ensure that 
we are not overregulating causing more burdens for banks, yet 
also to ensure there is transparency for small businesses 
within loan agreements?
    Mr. HILES. Madam Chairwoman, Representative Hern, thank you 
for the question. We are advocates of leveraging technology 
that exists today that allows for the immutable mathematical 
proof of documents and data. I think of it as the underlying 
technology beneath cryptocurrencies, but applied in an 
enterprise fashion for compliance purposes.
    This allows a mathematical way to encrypt the information, 
and then decentralize it to, you know, essentially hack-proof 
it. I don't like to say that word because it is not true, but 
at least elevate a much higher level of security around that 
information.
    This also provides for a proof of information and data from 
a regulatory standpoint as an examiner would be provided with a 
token key to the network to access specific records on a real-
time basis. It would seem that from a transparency standpoint 
these kinds of innovations would be a dream come true for both 
small financial institutions who already struggle with 
technology innovation. As a community bank, they don't have the 
R&D budgets. And then from an administrative standpoint, to 
help leverage some of these new technologies, to also work in a 
far more efficient fashion as an administration. These are the 
kinds of things that we look forward to in the future with the 
ability to, you know, proof documents and data.
    Mr. HERN. Thank you.
    Mr. Levitin, my second question, I will start with you on 
this and we will see where time goes, but this is regarding 
increased lending flexibility for banks. What are some of the 
actions the government can take to reduce current regulatory 
burdens on banks to increase the flexibility within lending 
leading to quicker turnaround for loan processing, as that 
seems to be one of the appetizing things to the FinTech 
industry right now?
    Mr. LEVITIN. So I am not actually aware of any particular 
regulation that slows down the speed of underwriting. There may 
be just internal technological and operating procedures that do 
so, but I am unaware of anything in terms of Federal regulation 
that requires a delay between when the bank decides to make a 
loan and when there can be a disbursement, or about how fast a 
bank can undertake an underwriting process.
    There are certain things that, you know, pretty much any 
lender is going to be required to abide by, such as anti-money 
laundering regulations, but those should not be creating a 
particular delay once the necessary documents are submitted to 
a lender.
    Mr. HERN. Madam Chairwoman, I yield back the balance of my 
time. Actually, I have none left.
    Chairwoman VELAZQUEZ. The gentleman yields back.
    Now we recognize the gentleman from Illinois, Mr. 
Schneider, for 5 minutes.
    Mr. SCHNEIDER. Thank you, Madam Chair. And thank you and 
the Ranking Member for hosting this important hearing.
    I want to thank our witnesses for joining us today.
    This summer, I had the privilege to host a number of 
virtual roundtables with, in particular, minority business 
owners in my district. And in these, time and again, we heard a 
common theme that these small businesses, especially minority-
owned businesses, had nowhere to turn for financial assistance.
    Now, the big businesses were getting ahead of them in line 
at the banks and accessing PPP, at least in the first round. 
Many submitted their paperwork, only to get skipped over, and 
they really struggled. In the second round, they did a little 
bit better.
    But the data supports the conclusions. Only 12 percent of 
black and Latino business owners pulled between April 30 and 
May 12 said that they had received the funding they had 
requested, while about 1 quarter received some funding. In 
contrast, half of all small businesses reportedly receiving 
Federal reports through the PPP program.
    So we passed PPP. We had additional help that we hoped to 
offer through the Heroes Act, but nothing has yet to come. And 
one of the biggest themes, or concerns I heard in these 
conversations, was the fear that nothing would come and they 
would be left hanging.
    So my first question, and maybe I will start with Ms. 
Urrutia, is how successful do you think the second round of PPP 
funding was in targeting these underserved communities?
    Ms. URRUTIA. [Inaudible] a lot of different places. 
Minority-owned businesses and the most vulnerable ones that we 
are talking about do not generally have banking relationships. 
As a result, the banks were only supporting their customers 
first. So that is why your comment that they stood at the back 
of the line, they stayed in the back of the line, for the most 
part.
    Also, if you look at the average size of loans that were 
made, in the second round, it was $73,000. Our average loan 
size was $15,000, and we deployed about 1,000 loans in a 6-week 
period.
    And so we must ensure that PPP funds go to the smallest, 
most vulnerable small businesses, because they are the ones 
that are minority-owned, and they are the ones that really need 
it, and that is why we are supporting that a second PPP loan be 
authorized.
    We are also asking that PPP loans under $150,000, be 
automatically forgiven. Those businesses are the ones that need 
the most relief in order to get back on their feet.
    And then, the other piece is an administrative fee. As you 
know, 5 percent was paid by SBA to loans under $350,000. In our 
case, we made a $15,000 loan. Five percent is $750. That does 
not cover the cost of processing the loans and working with 
these borrowers that need so much help to ensure that they can 
get approved.
    Mr. SCHNEIDER. Thank you.
    And maybe, because I think my next one is somewhat of an 
academic question, I will turn to Professor Levitin. But, you 
know, as we are looking forward, we are looking to the next 
package. In the minute and a half left, can you touch on, you 
know, the needs that businesses might have in the next round, 
how we could better structure this program to serve these 
underserved businesses, and what we might do also to create a 
more efficient, effective process to make sure these businesses 
have access to the loans?
    Mr. LEVITIN. So, there is a bit of a MacGyver problem here 
where you have got to work with the tools you have at hand. We 
can't start setting up an entire new financial system from 
scratch.
    Given the tools that are at hand, I think that PPP made the 
best of what it could from a bad situation. And while I am not 
generally enthusiastic about using--relying on private 
financial institutions to carry out Federal aid programs--I 
think we have seen problems with that in the past, for example, 
with mortgage servicers and Federal foreclosure relief--I think 
that, you know, the goal for the next round has to be figuring 
out a way that the banks that participate in PPP or any 
expansion of that will reach out not just to their existing 
clients, but try and serve new clients, and see this as an 
opportunity for developing new banking relationships.
    Mr. SCHNEIDER. Great. Thank you.
    And my time is expired, so I will yield back. But first, 
let me just, again, thank our witnesses today and thank the 
Chairwoman and the Ranking Member for this hearing.
    Chairwoman VELAZQUEZ. Time has expired. Now we recognize 
the gentleman from Minnesota, Mr. Stauber, for 5 minutes.
    Mr. STAUBER. Thank you, Chairwoman Velazquez and Ranking 
Member Chabot. I really appreciate your leadership during this 
really difficult time for COVID-19, and the small business 
owners throughout the Nation, the 30 million of them.
    Mr. Levitin, you just talked about the banking industry. 
You know, during this COVID-19, we have relied on our small 
community lending banks to, you know, help with these PPP loans 
with not a lot of help or guidance from the SBA at times, and I 
think they did a really good job under the circumstances. From 
your comments, I hope you agree with that. I think you stated 
that. Is that correct? Did I hear you correctly?
    Mr. LEVITIN. [Inaudible] on the implementation of the PPP 
program to take a position there. So I just want to--I am going 
to say, my answer would be no comment.
    Mr. STAUBER. Okay. And that is fine, because I want to put 
forth my congratulations and support for community banks and 
lending institutions that helped 51 million people keep their 
jobs and helped almost 10 million, 9-plus million businesses to 
stay open during this time.
    And I would just say this, here is a question. The small 
businessmen and women across this Nation, they are the engine 
of our economy. The members of this committee understand that. 
I would ask anybody this question: Do you think, because small 
businessmen and women are the engine of our economy on Main 
Street America, is there anybody on the panel of experts here 
that feel there is a need for small businesses to be protected 
from COVID-19-related lawsuits? Anybody--this is directed to 
any one of the witnesses.
    Ms. URRUTIA. Can you say more about--when you say protected 
from COVID-19 losses, what do you mean?
    Mr. STAUBER. Lawsuits.
    Ms. URRUTIA. Lawsuits.
    Mr. STAUBER. Lawsuits.
    Ms. URRUTIA. Okay.
    Mr. STAUBER. Anybody? Any of the three witnesses?
    Ms. TSHERING. Are you talking about lawsuits from employees 
or from, you know, customers or--yeah.
    Mr. STAUBER. From the general public. Somebody comes in, 
you own a small business, you are following the CDC recommended 
guidelines. You have payments to make to the lending 
institutions that helped you get through, and there is a 
lawsuit--COVID-related lawsuit stating your business--I went 
into your business and got COVID. Tell me about your thoughts 
on that.
    Ms. TSHERING. Yeah. So what we found is when we have asked 
our clients, you know, what sort of concerns do you have when 
you are operating your business, this is the last thing on 
their mind, you know, because they all have reopening plans; 
they, you know, have signs about masks, they have, you know, 
plastic barriers. That is the last concern on their mind.
    Their concern is the rent they owe. And I think we had the 
professor also mention, we found that rent, you know, rent for 
the last few months, the debt that they have is the biggest 
concern among our small business owners.
    And the other concern we have is, you know, hopefully there 
will be more relief for them. But we--you know, I manage a 
CDFI, and there are hundreds of CDFIs throughout the U.S.
    Mr. STAUBER. So----
    Ms. TSHERING. They should--you know, they could be funded--
yeah.
    Mr. STAUBER. Ma'am.
    Ms. TSHERING. Yeah. Go ahead.
    Mr. STAUBER. Let me ask maybe the question more directly. 
Is that something as a small business supporter, like you are, 
is that something you would support protecting the small 
businesses from these types of lawsuits? Because your 
experience where you are at, and my experience from talking to 
our Chamber of Commerces are much different. And so, I would 
say that it is a priority that when they open, when they follow 
the CDC guidelines that they aren't in lawsuits.
    So I will be more direct: Do you support the protection, 
the liability for small businesses from lawsuits for COVID-19 
only when they follow CDC guidelines? Anybody?
    Yeah. So that is--your--the silence is deafening here, and 
that is the concern. That is the real concern we have across 
America. We talk about support for small businesses. Well, here 
is an opportunity to protect them. We have given our small 
businesses relief that they needed, in fact, the three-page PPP 
for those small minority-owned businesses that don't have a 
human resource department to be able to access there.
    And so my question was, we are doing all this upfront. Do 
you know that of 30 million small businesses across this Nation 
probably 25 million, 28 million of the small businesses could 
not even handle one lawsuit?
    So we know they are the engine of our economy, and it 
strikes me that all three of you are silent on my question.
    Ms. TSHERING. So can we--yeah. We would like to give this 
more thought and get back to you, so we are very clear about 
what exactly you mean. And, you know, we appreciate your 
concern for small businesses, so we would like to get back to 
you on this.
    Mr. STAUBER. I appreciate that. I am a small business owner 
for 31 years. And as Professor Levitin said, it is not easy, 
but we need that stability and the certainty to be able to even 
keep our doors open. And I think you would all agree with that.
    I think that is--the last question I have, and I know I 
have a little bit of time here, are there any archaic laws that 
you see on the books that we should remove, that you as--from 
your expertise, that we should remove to help small businesses 
not only succeed, but also access to capital in an easier 
fashion like the PPP loans, the three-page loan to get that 
access to--that capital to the small businesses that need it? 
Anybody?
    Mr. HILES. I will take that one very quickly. I think that 
Congress and the Securities Exchange Commission and, you know, 
the dialogue that is happening around equity funding is a 
positive step in the right direction with the realignment of 
what constitutes an accredited investor. I think that there 
needs to be more of a crowdfunding focused approach to some of 
the smaller businesses in particular.
    That being said, even working with some of the Title 3 JOBS 
Act crowdfunding portals represents a pretty significant 
upfront, front-loaded expense to mount a marketing campaign and 
get through the statutory requirements in order to launch a 
crowdfunding campaign for even a very small amount of funding. 
Cost of capital tends to run fairly high.
    Mr. STAUBER. Okay. Does anybody else want to tackle that 
one? Okay. I just----
    Chairwoman VELAZQUEZ. Time has expired.
    Mr. STAUBER. Thank you, Madam Chair.
    Chairwoman VELAZQUEZ. Thank you.
    Now we recognize the gentleman from Tennessee, Mr. 
Burchett, for 5 minutes. You need to unmute yourself, sir.
    Mr. BURCHETT. I think we skipped the order there. I think a 
Democrat should be next. I hate to cut in front of one of my 
colleagues across the aisle.
    Chairwoman VELAZQUEZ. No. I have recognized everyone.
    Mr. BURCHETT. Oh, okay. So I am last. Oh, well, I should be 
more offended then. I apologize. I will remember that 
offensiveness to the next meeting. No, you are wonderful, 
Chairlady. I always enjoy being on with you, ma'am. I am sorry 
we are not in person.
    I guess I am wondering about how do we increase our 
access--I am just going to ask all of the panelists there, if 
we can just start at one end and go to the other. How do we 
increase access to capital for business and limit our risk for 
lenders?
    And I guess I would be interested really in our minority 
community. It seems like the percentage and the volume of loans 
go--it seems they are at a disproportionate amount, some of 
those folks, and I would be--I anxiously await your answers.
    Ms. URRUTIA. I can start. I think a number of ways. First 
of all, make sure that CDFIs have the proper funding that they 
need. CDFIs are ensuring access to credit for impacted 
businesses in rural communities, underserved small businesses. 
We are offering affordable loans, technical assistance, and a 
lot of other services that are needed, and we need to be 
properly funded and have leverage and balance sheet capacity to 
support the lending.
    So in support of CDFIs, a supplemental appropriation of $1 
billion to the CDFI Fund will allow CDFIs across the country to 
leverage $12 billion in capital that will be deployed to 
communities in need. That is the first thing.
    The second thing is make sure that section 1071 of Dodd-
Frank is passed so that lenders report on the amount of lending 
that they are doing to minority and women-owned businesses. We 
need to have visibility so that we can understand what the 
problems are and correct them.
    We also should be looking at reauthorizing the State Small 
Business Credit Initiative, SSBCI. After the Great Recession, 
this was a great program. It provided over $1.5 billion to 
State-led small business financing programs, and it gave a lot 
of flexibility to lenders to leverage that capital as loan loss 
reserves to support over $8 billion in small business loans.
    So, I think that this is a great opportunity for public and 
private sector partnerships to come together through access to 
funding for CDFIs and loan loss reserves so that we can feel 
comfortable and continue to increase lending in these 
communities.
    Mr. BURCHETT. Okay. Thank you. Anyone else?
    Ms. TSHERING. So, you know, as a CDFI that works with 
minority and women-owned businesses, I would like to second 
what Luz just recommended about supporting CDFIs. And they are 
all, several hundred of them, or maybe even more than several 
hundred, spread all over the United States, rural, urban, you 
know, and they really understand the clients they work with, 
the businesses that need some hand-holding. And eventually, 
many of them are bankable and able to get larger loans from 
banks, so I really support that suggestion.
    Mr. LEVITIN. I would also like to echo the point about 
section 1071 of Dodd-Frank. It is way past time for the 
Consumer Financial Protection Bureau to have implemented the 
data collection on small business lending, which is just the--
it is the necessary precondition for trying to police the small 
business lending market for discriminatory lending. And without 
that data, it is just not easy to do any kind of meaningful 
fair lending enforcement.
    Mr. BURCHETT. All right. I guess, Mr. Hiles, I will ask you 
the last question. I don't think I have got 30 seconds. But 
have the online lenders in the FinTech industry experienced a 
higher demand for capital from new businesses, and how is the 
industry managing the existing investments in companies that 
have made significant operational changes?
    Mr. HILES. There has, indeed, been a significant growth. 
Thank you for the question, Representative, Madam Chair. There 
has been a significant growth in usability, and as I indicated 
in my initial testimony, we expect those numbers to continue to 
climb as the younger generation, who is far more transactional, 
less relationship-focused, wish to leverage the technology that 
has been in their hands since they were literally born as 
children to access all manner of capital.
    And so, from that standpoint, we see there being nothing 
but a growth path forward for everything from online 
alternative lending to fully automated, full digital banking, 
and even non-lending banking as seen with some of the recent 
legislation in the State of Wyoming with special purpose 
depository institutions, you know, really remix the notion of 
what banking is from a services versus a lending-risk 
standpoint. Thank you for the question.
    Mr. HERN. I yield back my time, Chairlady. Thank you, 
ma'am.
    Chairwoman VELAZQUEZ. The gentleman's time has expired.
    Now we are going to go to a second round of questioning, 
and I welcome the members to stay on. I will recognize myself 
for 5 minutes.
    Professor Levitin, last Congress, you testified before us 
on the Financial Services Committee on the use of the rent-a-
bank scheme that allows FinTech lenders to get around state 
usury law. Can you explain the mechanics of those transactions 
to us, and how this scheme enables predatory lenders to 
continue operating unchecked?
    Mr. LEVITIN. Absolutely, Madam Chairwoman. So every State 
in the country has some sort of usury law. They vary 
substantially--but here is the basic thing you need to 
understand about them: Banks are not subject to State usury 
laws. I put in a little asterisk. It is a little more 
technically complicated, but that is the basic takeaway. Banks 
are not subject to State usury laws. Nonbanks are subject to 
State usury laws.
    In a rent-a-bank arrangement, a nonbank will partner with a 
bank, and here is the terms of the partnership: The bank will 
make loans according to the specifications of the nonbank. It 
may even use an underwriting platform that is licensed to it by 
the nonbank, where basically the nonbank has done all the 
programming and has set all the terms of the underwriting.
    The nonbank will do the marketing, it will service the 
loans, and it will also purchase the loans or purchase an 
economic interest, such as a participation interest, in the 
loans from the bank, so that all the bank is really doing is 
being an origination agent. Its name is on the loan documents 
originally. And maybe it provides very--you know, the original 
funding for a very short period of time. Maybe it holds a 10 
percent or 5 percent economic interest in the loans going 
forward.
    But for all real purposes, the nonbank is the lender, and 
it is using the bank as a front to make the loans. And the 
reason it does that is because then that gives it a legal 
argument, which is a contested one, but it gives it a legal--it 
gives the nonbank a legal argument that the bank is the true 
lender, and that, therefore, the loan is not subject to State 
usury laws, and that the nonbank is not subject to State 
licensure requirements, and that the loan is not subject to 
other State consumer protections, such as limitations on 
rollovers, in the case of payday loans.
    Chairwoman VELAZQUEZ. How does the lack of federal 
regulation allow this practice to continue unchecked?
    Mr. LEVITIN. Well, historically, if you went back about 17 
years, in 2003, the Office of Comptroller of the Currency 
cracked down on these kind of arrangements, which were being 
used by online payday lenders. And the Office of Comptroller of 
the Currency stopped every national bank that was involved in 
doing this kind of rent-a-bank from doing this.
    A few years later, the FDIC stopped all the State-chartered 
insured banks from doing this. I was actually an expert witness 
for the FDIC in some litigation about this.
    We have since had a change in management at the OCC and 
FDIC, and the change in view about the dangers of predatory 
lending. And the OCC and FDIC have intervened in usury 
litigation to try and protect rent-a-bank schemes.
    And this last summer, they both finalized regulations 
that--and I emphasize these regulations have already been 
challenged by the Coalition of State Attorneys General, but 
these regulations, if upheld, will basically bless this kind of 
rent-a-bank arrangement.
    And they say if the bank's name is on the loan, it doesn't 
matter what the real facts are, it doesn't matter that the bank 
did absolutely nothing with the loan, we are going to treat it 
as a bank loan.
    Chairwoman VELAZQUEZ. Thank you.
    Mr. LEVITIN. And that just allows the banks to rent out 
their Federal regulatory privileges, which isn't how the system 
should work.
    Chairwoman VELAZQUEZ. Thank you. Thank you very much.
    Ms. Tshering, as someone who played a key role in the push 
for New York's TILA for Small Business that awaits Governor 
Cuomo's signature, I just want to ask you, what are some of the 
hallmarks of the New York legislation that you think must 
remain in any federal legislation?
    Ms. TSHERING. Well, one thing for sure, something we have 
been--you know, each witness has said over and over again, you 
know, very important that we are able--you know, a borrower is 
able to compare apples to apples. So key is the APR, so they 
are able to see what the loan is going to cost. The second is, 
you know, no prepayment penalties.
    What we are asking for asking for is transparency. And as 
you, and earlier, Ranking Member Chabot referred to, you know, 
we are talking about business owners. This is an opportunity 
for them to build assets and wealth. But what happens is when 
they take on these loans, which are, you know, not very clear 
about what the costs are involved, then they are really 
stripped of their assets.
    Chairwoman VELAZQUEZ. Thank you.
    Ms. TSHERING. So what we are asking for is very simple: We 
are asking for transparency and clarity.
    Chairwoman VELAZQUEZ. Thank you. Thank you. My time has 
expired. Now I recognize the Ranking Member, Mr. Chabot, for 5 
minutes.
    Mr. CHABOT. Thank you, Madam Chairman. Thank you.
    And I will go to Mr. Hiles. Mr. Hiles, as you know, a 
number of FinTech companies did participate in the PPP program, 
the Paycheck Protection Program. Moving forward with respect to 
the SBA and their other existing programs, like the 7A loans 
program, the 504 loan program, the microloan program, those 
types of things, how do you see FinTech now fitting into those 
programs in the future? And how would you like to see, you 
know, that relationship progress, FinTech and the SBA?
    Mr. HILES. Chairwoman, Ranking Member Chabot, thank you for 
the question, and that is a good question. A couple of things. 
One is that, as I stated in my initial testimony, that SBA is 
going to continue to be subjected to the--call it 
idiosyncrasies and the disruption that is taking place in the 
financial institution, and the financial services market right 
now for those myriads of market forces and technology reasons.
    The opportunity to define standards first as opposed to 
being necessarily highly prescriptive about the technology but 
then working with the--not only the financial institutions, but 
the technology providers and the folks that build technology, 
to innovate and come up with new solutions that would optimize 
the management of the documents and the data and all of the 
loan applications, the borrowing applications, you know, all of 
the TRID compliance, everything that goes along with these 
loans from a documentation standpoint, but then optimize and 
bring a high degree of efficiency and optimization as an 
administration, and then be a leader that sets the standard 
forth about those programs beneath which the FinTech industry, 
and then ultimately, the traditional financial services 
industry, can follow suit and operate.
    If you are looking for the private sector to establish 
these kinds of standards and then adopt them, I think that we 
have leaked pretty far in terms of technology innovation and 
where we are at, and we are scrambling to figure out how to 
incorporate that into traditional organizations.
    And now is a time for leadership. And much like the Federal 
Government established the standards that ultimately became the 
internet and the world wide web, we are in the throes of 
potentially doing the same with finance and financial records. 
And so, I would highly admonish the stakeholders across the 
board to consider this type of opportunity right now with the 
industry.
    Mr. CHABOT. Thank you.
    And then, finally, as Congress continues to examine the 
role of your industry, FinTech companies, do you have any 
recommendations for us? And, you know, especially relative to 
regulations, you know, more regulations versus the trend that 
we have tried to establish in government in recent years is to 
reduce unnecessary regulations or duplicative things, you know, 
so we don't kill the goose that laid the golden egg here for 
the economy and otherwise. So do you want to weigh into that 
with the additional time I have available to you here?
    Mr. HILES. Certainly. Thank you. There would be a couple of 
key areas. One of the things that we like to do is we like to 
start with the regulation first, and then work our way 
backwards into the technology itself. And I think that there is 
this resistance to technology in general. It is frightening. It 
is hard to understand. And the idea that people are using 
technology to necessarily skirt the regulations isn't 
necessarily true. Once again, it goes back to those standards.
    I have seen some interesting things coming out of OCC and 
interim Director Brooks talking about how payment providers 
would ultimately end up with some form of de facto charter. I 
know that that has raised a lot of red flags with banking--you 
know, division of bankings with the States already.
    So it is going to be an interesting dynamic to see how we 
get there in terms of getting past the logjam that exists with 
banking and tech now. Do we leapfrog it forward with technology 
companies that become financial institutions? Not real sure at 
this point.
    But Congress does absolutely have an opportunity to lead 
the discussion as opposed to being responsive and waiting for 
the--hopefully, you know, at some point, there would be a 
solution, but historically, that has tended to be not 
necessarily the case when it comes to standard setting, and 
that is where I believe the Small Business Administration has 
the opportunity to really drive this conversation forward.
    Mr. CHABOT. Thank you very much.
    And, Madam Chair, I think my time is expired, and I do have 
a 3:00 commitment, so I will be dropping off shortly.
    Chairwoman VELAZQUEZ. Yes.
    Mr. CHABOT. But I thought this was an excellent hearing. I 
want to thank all the witnesses for their fine testimony. I 
yield back.
    Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
    Now we recognize the gentleman from Pennsylvania, Mr. 
Evans, for 5 minutes. You need to unmute.
    Mr. EVANS. Okay. Can you hear me now?
    Chairwoman VELAZQUEZ. Yes, we can hear you.
    Mr. EVANS. Yes. I just want to follow up to something that 
the Chairwoman was talking to the professor regarding what you 
described about State policy and Federal policy. How do 
financial technology leaders ensure compliance with equal 
credit opportunities and unfair banking rules? Is what I heard 
in the discussion you were having with the Chairwoman, is that 
the same situation?
    Mr. LEVITIN. No, that is not. So there is no--the rent-a-
bank situation does not enable nonbanks to evade fair lending 
laws. They are still subject to--whether it is the bank or the 
nonbank partner, someone there is subject to fair lending laws. 
The problem on the fair lending side is that the--that if you 
want to do fair lending enforcement or looking for disparate 
impact, you need to have data.
    And section 1071 of the Dodd-Frank Act enacted a decade ago 
calls for the collection by the Consumer Financial Protection 
Bureau of data on small business lending. Unfortunately, the 
Consumer Financial Protection Bureau has not yet implemented 
the regulations necessary to effectuate that, so we don't have 
any data being collected.
    I would suggest that, you know, at least a temporary 
stopgap measure would be for any further Federal assistance 
that is given out under, sort of, additional--I am not sure 
what we are going to call it--CARES Act round 2 or what have 
you, HEROES Act, any additional--that there be requirements 
that lenders start collecting and submitting data on the race, 
the ethnicity, and the gender at least of the parties that are 
assisted, so we have a better understanding of where money is 
flowing and making sure that it is being made available 
equitably to everyone in society.
    Mr. EVANS. Thank you.
    And I yield back the balance of my time. Thank you, Madam 
Chairperson. Thank you for your leadership.
    Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
    Let me thank all of our witnesses today for their 
testimony. We have explored some of the risks FinTech lending 
presents for small businesses, and also some of the benefits. 
It has become clear to me that there is a way to leverage those 
benefits, greater speed, affordability, and accessibility, and 
translate them into gains for small business owners.
    Also, we have heard from lenders who can sustainably make 
these loans, create the partnerships necessary to bring the 
mission-based lending model online, and help the small 
businesses grow and create jobs without resorting to deceptive 
or abusive practices.
    However, it also remains clear to me that much more needs 
to be done in this space to eliminate unfair and abusive 
practices by predatory lenders who have no interest in helping 
small businesses grow or helping a community flourish, only to 
enrich themselves at the cost of the small businesses.
    Congress must follow the lead of New York and California 
who are actively working to ensure a safe, fair, and affordable 
small business lending market.
    I ask unanimous consent that members have 5 legislative 
days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    If there is no further business before the Committee, we 
are adjourned.
    [Whereupon, at 2:55 p.m., the Committee was adjourned.]
    
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