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




 
                      RENT-A-BANK SCHEMES AND NEW

                    DEBT TRAPS: ASSESSING EFFORTS TO

                    EVADE STATE CONSUMER PROTECTIONS

                         AND INTEREST RATE CAPS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 5, 2020

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-81
                           
                           
                           
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]       
 
 
                           
                           ______                       


             U.S. GOVERNMENT PUBLISHING OFFICE 
42-805 PDF           WASHINGTON : 2021                          
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             ANN WAGNER, Missouri
GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri              BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
JIM A. HIMES, Connecticut            SCOTT TIPTON, Colorado
BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
DENNY HECK, Washington               TOM EMMER, Minnesota
JUAN VARGAS, California              LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
RASHIDA TLAIB, Michigan              DAVID KUSTOFF, Tennessee
KATIE PORTER, California             TREY HOLLINGSWORTH, Indiana
CINDY AXNE, Iowa                     ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois                JOHN ROSE, Tennessee
AYANNA PRESSLEY, Massachusetts       BRYAN STEIL, Wisconsin
BEN McADAMS, Utah                    LANCE GOODEN, Texas
ALEXANDRIA OCASIO-CORTEZ, New York   DENVER RIGGLEMAN, Virginia
JENNIFER WEXTON, Virginia            WILLIAM TIMMONS, South Carolina
STEPHEN F. LYNCH, Massachusetts      VAN TAYLOR, Texas
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
                   
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 5, 2020.............................................     1
Appendix:
    February 5, 2020.............................................    49

                               WITNESSES
                      Wednesday, February 5, 2020

Aponte-Diaz, Graciela, Director of Federal Campaigns, Center for 
  Responsible Lending............................................     5
Johnson, Creola, Professor, The Ohio State University Moritz 
  College of Law.................................................     8
Knight, Brian, Director and Senior Research Fellow, Program on 
  Innovation and Governance, Mercatus Center at George Mason 
  University.....................................................    10
Limon, Hon. Monique, Chair, Banking & Finance Committee, 
  California State Assembly......................................     6
Saunders, Lauren, Associate Director, National Consumer Law 
  Center.........................................................     9

                                APPENDIX

Prepared statements:
    Aponte-Diaz, Graciela........................................    50
    Johnson, Creola..............................................    68
    Knight, Brian................................................    77
    Limon, Hon. Monique..........................................    80
    Saunders, Lauren.............................................    91


                    RENT-A-BANK SCHEMES AND NEW DEBT

                   TRAPS: ASSESSING EFFORTS TO EVADE

                     STATE CONSUMER PROTECTIONS AND

                           INTEREST RATE CAPS

                              ----------                              


                      Wednesday, February 5, 2020

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the committee] presiding.
    Members present: Representatives Waters, Maloney, Sherman, 
Meeks, Scott, Green, Perlmutter, Himes, Heck, Vargas, 
Gottheimer, Lawson, Tlaib, Porter, Axne, Pressley, McAdams, 
Wexton, Adams, Dean, Garcia of Illinois, Garcia of Texas, 
Phillips; McHenry, Wagner, Lucas, Posey, Luetkemeyer, Huizenga, 
Barr, Tipton, Williams, Hill, Zeldin, Loudermilk, Mooney, 
Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, 
Steil, Gooden, Riggleman, Timmons, and Taylor.
    Chairwoman Waters. The Committee on Financial Services will 
come to order. Without objection, the Chair is authorized to 
declare a recess of the committee at any time.
    Today's hearing is entitled, ``Rent-A-Bank Schemes and New 
Debt Traps: Assessing Efforts to Evade State Consumer 
Protections and Interest Rate Caps.''
    I will now recognize myself for 4 minutes for an opening 
statement.
    In November of last year, the Federal Deposit Insurance 
Corporation (FDIC) and the Office of the Comptroller of the 
Currency (OCC) issued a proposed rule that would provide legal 
cover for predatory rent-a-bank schemes, where payday lenders 
partner with banks to peddle harmful short-term, triple-digit 
interest rate loans in States that have reasonable and often 
voter-approved interest rate caps to protect consumers. Even if 
a State, like my home State of California, has passed a law 
setting a usury rate cap, this rule would allow lenders to 
ignore the law and to import high-rate, high-risk, and 
otherwise illegal loans back into the State. Low-income 
consumers, who are already struggling, will pay the price.
    American consumers used to be able to look to their 
regulators to protect them from these kinds of predatory 
schemes. Not so under the Trump Administration, where consumer 
protection takes a back seat to consumer predation. And Trump's 
regulators are working overtime to make sure the bad actors 
have a clear path to trap millions of Americans in unending 
debt.
    This anti-consumer rule is just the latest to benefit 
predatory payday lenders. When Trump's acting Chief of Staff, 
Mick Mulvaney, was running the Consumer Financial Protection 
Bureau (CFPB), he did everything he could for predatory payday 
lenders, including withdrawing a lawsuit against a group of 
deceptive payday lenders who were allegedly ripping off 
consumers with loans with interest rates as high as 950 percent 
a year.
    It is no wonder that a CEO of a notorious payday lender 
thought nothing of submitting her resume to be considered as 
the next CFPB Director, but the job instead went to Kathy 
Kraninger, who is no doubt making that CEO proud. Director 
Kraninger has both delayed and proposed to undermine key 
provisions of the CFPB's important payday, small-dollar, and 
car title rules, which would have curbed abusive payday loans. 
And 101 House Democrats wrote to Director Kraninger to call on 
her to reconsider her efforts, but she has not relented.
    Today, we will examine the implications of regulators' 
actions to open the payday loan floodgates and the impact this 
will have on States with sensible interest rate caps. We will 
also discuss H.R. 5050, the Veterans and Consumers Fair Credit 
Act, Congressman Garcia's bipartisan bill to place a Federal 36 
percent annual percentage rate usury cap on payday loans and 
car title loans, and extend the protections that active-duty 
servicemembers have under the Military Lending Act to all 
consumers across the country. It is long overdue for Congress 
to take action to ensure that all Americans are protected from 
harmful payday products with sky-high interest rates.
    So, I look forward to hearing from our witness panel of 
advocates and experts.
    I now recognize the ranking member of the committee, the 
gentleman from North Carolina, Mr. McHenry, for 4 minutes.
    Mr. McHenry. Madam Chairwoman, thank you for holding this 
hearing. I think it is important and essential that Congress 
understand how the banking industry is evolving in response to 
technological innovation. It also is essential to help Congress 
understand its role to ensure all consumers benefit from 
advances in technology. So, I think it is a meaningful 
conversation that we can have today.
    Technological innovation over the past few decades has 
enabled faster, more accurate credit underwriting for a much 
broader population of borrowers. Much of this innovation has 
been driven by industry newcomers that have developed a new 
idea or business model, faster in time than it takes to get a 
bank charter. So, these newcomers often partner with banks.
    Bank/non-bank partnerships can make sense for several 
reasons. First, economic: Because of their deposit-based 
funding, banks tend to have the cheapest possible cost of 
capital among all capital allocators.
    Second, capacity: Banks have relatively large balance 
sheets, enabling them to absorb new loans rapidly.
    Third, expertise, and expertise still matters. Banks are 
expert lenders. In other words, they are proficient in such 
tasks as underwriting, compliance, and securitizing or selling 
loans into the secondary market.
    One other major reason that fintech partners with banks is 
that special legal status banks have had for well over a 
century--actually, a century and a half. Since the passage of 
the National Bank Act, Congress has given special privileges to 
banks, and that includes regulatory certainty about what 
interest rates banks are permitted to charge on a loan. When 
conducted properly, the benefits from this arrangement can be 
cost savings for fintechs and banks, better competition among 
banks, and better, faster, and cheaper banking products for all 
consumers.
    The best way to make sure that these partnerships live up 
to their promise is to provide a clear regulatory framework 
under which they can operate. To that end, I want to commend 
the recent efforts of the OCC and the FDIC for their proposed 
rulemaking that helps restore clarity to a segment of the 
market. Their proposed rules would clarify what we all thought 
we knew before 2015: that when a bank sells, assigns, or 
otherwise transfers a loan that was valid when it was made, 
that loan does not become invalid because of the transfer. This 
is a common-sense rule of contracting that has existed for over 
100 years, until 2015, when the Second Circuit Court's Madden 
decision decided that, no, banks cannot be sure that their 
loans hold any value when sold.
    The Madden decision has been roundly criticized on its 
legal reasoning, but more importantly, economists have now 
measured the negative impact to consumers in the three States 
governed by this bad Madden decision. The uncertainty caused by 
the result has driven lenders away from those States. Borrowers 
with FICO scores below 625 have seen a 52 percent reduction in 
credit availability. Furthermore, personal bankruptcy filings 
rose by 8 percent more in those States, relative to States 
outside the Second Circuit. We can clearly see the harm that 
results when lenders are faced with regulatory uncertainty.
    I am pleased that we are hearing from experts today about 
the need for clear rules of the road. Technology is the key for 
greater financial inclusion, and while we must provide 
oversight and certainty, we cannot fear innovation because we 
don't understand it.
    I yield back.
    Chairwoman Waters. I now recognize the Chair of our 
Subcommittee on Consumer Protection and Financial Institutions, 
Mr. Meeks, for one minute.
    Mr. Meeks. Thank you, Chairwoman Waters. Despite a decade 
of economic growth, over 40 percent of American families don't 
have savings for a $400 emergency. This problem is compounded 
by the dramatic rate at which bank branches are closing 
nationwide and the rapid disappearance of small community banks 
and minority banks which serve marginalized communities at a 
far greater rate than megabanks, creating banking deserts and 
depriving these communities of access to credit and financial 
services.
    As a result, check-cashing stores, pawn brokers, auto title 
lenders, and payday lenders often fill the gap. Payday lenders 
are especially harmful, trapping borrowers in unsustainable 
debt traps. We need to regulate payday lenders and address the 
terrible harm they cause across the country. But in doing so, 
we must ensure that something viable fills the gap. This 
committee has long advocated for bringing more people into the 
regulated banking space, ensuring that consumer protection, 
anti-discrimination, and fair banking practice laws are all 
applicable and enforceable.
    This is a very real and urgent priority for me, and I thank 
the witnesses and look forward to their testimony.
    Chairwoman Waters. I now recognize the subcommittee's 
ranking member, Mr. Luetkemeyer, for one minute.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman. Thanks in 
large part to the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, financial institutions have largely exited the 
small-dollar lending space. However, some financial 
institutions have managed to continue providing these products 
through partnerships with fintech firms that help with 
underwriting, marketing, and lending. Now, it seems my 
colleagues on the other side of the aisle are going after these 
partnerships to push banks out of small-dollar lending 
altogether.
    If that wasn't enough, the Majority is considering 
legislation to enact an APR rate cap on all loans. Using an 
APR, in my opinion, is a misleading measurement of any loan 
under a year in length, and only serves to hide the true cost 
of a small-dollar loan from consumers. Where is the 
transparency in that?
    On one hand, my colleagues are attempting to eliminate bank 
involvement in small-dollar lending, pushing consumers into 
less-regulated spaces, and on the other hand, they want to 
eliminate the ability for non-bank entities to offer small-
dollar loans. If they succeed, you have to ask the question, 
where will the unbanked and underbanked go to access credit? I 
don't think any of us will appreciate and like the answer to 
that question.
    With that, Madam Chairwoman, I yield back.
    Mr. Meeks. [presiding]. I would now like to introduce our 
witnesses and welcome you to this committee: Ms. Graciela 
Aponte-Diaz, who is the director of Federal campaigns for the 
Center for Responsible Lending; Ms. Lauren Saunders, who is the 
associate director at the National Consumer Law Center; 
Professor Creola Johnson, who is the President's Club Professor 
of Law at the Moritz College of Law at the Ohio State 
University; Assemblymember Monique Limon, from the California 
State Assembly, who is serving as Chair of the Banking and 
Finance Committee; and Brian Knight, director and senior 
research fellow for the Program on Innovation and Governance at 
the Mercatus Center at George Mason University.
    Each of you will have 5 minutes to summarize your 
testimony, and when you have one minute remaining, a yellow 
light will appear. At that time, I would ask you to wrap up 
your testimony so that we can be respectful of both the 
witnesses' and the committee members' time. And without 
objection, all of the witnesses' written statements will be 
made a part of the record.
    Ms. Diaz, you are now recognized for 5 minutes to present 
your oral testimony.

    STATEMENT OF GRACIELA APONTE-DIAZ, DIRECTOR OF FEDERAL 
           CAMPAIGNS, CENTER FOR RESPONSIBLE LENDING

    Ms. Aponte-Diaz. Good morning, Chairwoman Waters, Ranking 
Member McHenry, and members of the committee. My name is 
Graciela Aponte-Diaz, and I am the Director of Federal 
Campaigns for the Center for Responsible Lending (CRL). CRL is 
a nonprofit research and advocacy organization dedicated to 
protecting home ownership and family wealth by fighting 
predatory lending practices. For nearly 20 years, I have 
dedicated my career to fighting for low-income families and 
communities of color. I, myself, grew up low-income, with a 
single mom who was trying to make ends meet. Luckily, she was 
never a target of abusive payday or high-cost installment loans 
because she lives in Maryland, a State that bans these 
products.
    In fact, 16 States, plus the District of Columbia, do not 
allow payday loans, and the vast majority of States have 
interest rate caps on installment loans. Active-duty 
servicemembers are also protected from predatory loans through 
the bipartisan Military Lending Act (MLA). Unfortunately, some 
lenders have found a way to continue to target vulnerable 
consumers, despite State laws, through rent-a-bank schemes.
    Here is how a rent-a-bank scheme works. A predatory, 
nonbank lender decides that they want to lend at higher rates 
than what is allowed by State law, frequently, loans of 100 
percent APR or more, even in States that have a 36 percent 
interest rate cap or less. They find a bank that is willing to 
originate the loans, because federally-insured banks are 
exempted from State interest rate laws.
    After the loan is processed, the bank sells the loan or 
receivables back to the nonbank. The nonbank handles marketing, 
consumer interactions, and servicing. The nonbank lender is the 
public face of the loan, and neither the customers nor the 
general public are aware of the motions behind the scenes to 
legitimize a loan that would otherwise be illegal.
    Nonbank lenders, such as Elevate, OppLoans, Enova, 
LoanMart, and World Business Lenders currently lend at 
outrageous rates in States where those rates are illegal under 
State law. Through the use of rent-a-bank schemes with banks 
regulated by the FDIC and the OCC, neither regulator appears to 
have done anything to shut down these abuses.
    I would like to share three examples of high-cost loan 
documents that I have seen firsthand from borrowers with whom I 
have worked.
    A disabled Marine veteran was targeted with a $5,000 loan 
at an APR of 115 percent, and a ridiculously long term of 84 
months. As stated in her loan documents, that resulted in a 
cost of $42,000 to borrow just $5,000 over 7 years. Not 
surprisingly, she was unable to keep up with these unaffordable 
payments and ended up in bankruptcy.
    In another example, a single mother was targeted for a 
$2,500 loan with an APR of more than 100 percent. After 5 
years, she paid back $14,000, but was unable to save for her 
daughter's college tuition.
    And finally, a Spanish-speaking man was lured into a store 
that said, ``Se habla espanol,'' which means, ``We speak 
Spanish.'' However, no one spoke Spanish, and all of the loan 
documents were in English. He walked out with a $2,700 loan at 
123 percent APR. Worse, it was secured by the title of his 
truck. He had to pay back $10,000 over a 5-year term or risk 
his only mode of transportation to work.
    These are just some examples of a now-too-common loan that 
is being offered online or through storefronts that are 
disproportionately located in communities of color. This is not 
access to credit. This is not access to innovation. This is 
access to debt.
    Fortunately, there are ways to stop these abusive lending 
practices. First, we need the FDIC and the OCC to take 
enforcement actions against these predatory lenders that are 
using rent-a-bank schemes and offering illegal loans in States 
with rate caps. Second, the FDIC and the OCC should rescind 
their proposal that does nothing to address this abuse, and, in 
fact, emboldens predatory lenders to engage in rent-a-bank 
schemes. Third, Congress should swiftly pass H.R. 5050, a 36 
percent interest rate cap bill for veterans and all consumers.
    And finally, the FDIC should preserve its 2005 payday loan 
guidelines, its 2007 guidelines advising of a rate cap of 36 
percent, and its 2013 guidelines, advising of ability to repay 
for all bank payday loans.
    Let me thank the committee again for the opportunity to 
address these scams and real-life situations. I look forward to 
your questions.
    [The prepared statement of Ms. Aponte-Diaz can be found on 
page 50 of the appendix.]
    Mr. Meeks. I now recognize Assemblymember Limon for 5 
minutes.

  STATEMENT OF THE HONORABLE MONIQUE LIMON, CHAIR, BANKING & 
          FINANCE COMMITTEE, CALIFORNIA STATE ASSEMBLY

    Ms. Limon. Thank you. Thank you for holding this hearing 
and inviting me to testify on how rent-a-bank schemes undermine 
State consumer protection efforts. My name is Monique Limon. I 
serve in the California State Legislature as an Assemblymember 
and as Chair of the Committee on Banking and Finance.
    High-cost consumer loans have created havoc for California 
families over the last decade. Driven by the desire to avoid 
the forthcoming CFPB rule, the payday lending industry began to 
aggressively market larger, longer-term loans to vulnerable 
consumers who were trying to pick up the pieces caused by the 
Great Recession.
    The average size of these loans is about $3,000, with an 
annual interest rate of 100 to more than 200 percent. While 
these high-interest rates are unconscionable, I am more 
concerned by how often consumers default on these loans. As we 
dug through the data, we found that more than one-third of 
borrowers could not repay their loans, representing more than 
100,000 Californians each year. Failing to repay a loan exposes 
consumers to serious negative consequences like aggressive debt 
collection, ruined credit scores, vehicle repossessions, and 
even bankruptcy.
    While consumers try to find a way out of this turmoil, 
high-cost lenders are able to stay profitable because of the 
extremely high rates and fees that they charge. Over the past 
several years, the California Legislature attempted to address 
this problem by establishing a ceiling on interest rates, 
similar to policies adopted by dozens of red and blue States 
across this country. It took us 3 years and 5 different bills 
before we found the right balance to keep responsible lenders 
in the market while also protecting consumers from high fees 
and defaults.
    Last year, I introduced a bill that caps rates on loans in 
the $2,500 to $10,000 range at 36 percent plus the Federal 
funds rate. This bill received strong bipartisan support from a 
broad coalition of lenders, consumer groups, faith leaders, 
veterans organizations, and community groups across the State. 
On the strength of this coalition, the bill passed with broad 
support and was signed into law by our governor.
    In summary, the effort was thoughtful, and was deliberate. 
The Legislature considered multiple options until we found the 
right balance. But now that the new law is in place, high-cost 
lenders are looking to exploit gaps and ambiguities in the 
administration of Federal banking laws that would allow these 
lenders to evade State laws and continue with business as 
usual. When left unchecked, these rent-a-bank schemes 
perpetuate the system of misaligned incentives that allows 
lenders to profit, even when many of their customers fall into 
default.
    Both the FDIC and the OCC have stated that they do not 
support bank partnerships designed to evade State laws. But 
those agencies need to back up their words with actions. Until 
they act, there will continue to be a small number of banks and 
lenders who try to dodge State laws.
    Before I conclude, I want to be clear that I do not believe 
that all bank partnerships are bad. Bank partnerships that 
create products where the interested borrowers and lenders are 
aligned can be a healthy part of the financial system. However, 
at the very least, bank partnerships must be limited to banks 
that follow the FDIC's 2007 guidance on offering affordable, 
small-dollar loans which encourage banks to offer small-dollar 
credit with APRs that do not exceed 36 percent.
    The Federal Government has the ability to fix the problem 
of the rent-a-bank schemes with solutions that protect State 
sovereignty, protect consumers, and create a fair and 
competitive credit market with all lenders playing by the same 
rules.
    Thank you for bringing attention to this issue. I am 
hopeful that Congress can work with the FDIC to ensure that a 
handful of supervised banks are not being used to undermine 
State consumer protection laws across this country.
    [The prepared statement of Ms. Limon can be found on page 
80 of the appendix.]
    Mr. Meeks. Thank you for your testimony. I now recognize 
Professor Johnson for 5 minutes.

    STATEMENT OF CREOLA JOHNSON, PROFESSOR, THE OHIO STATE 
                UNIVERSITY MORITZ COLLEGE OF LAW

    Ms. Johnson. Good morning. I am Professor Creola Johnson at 
the Ohio State University College of Law. I was the first 
academic to write a law review article about payday lending. It 
was based on my research, which was funded by the university, 
where we actually took out payday loans. And what I discovered 
through this research of payday lenders surveyed in Franklin 
County, Ohio, is that they had two primary goals: first, to get 
the consumer to sign up for a loan without understanding the 
consequences of what they were signing up for; and second, to 
get the consumer on the hook to pay as long as possible at 
triple-digit interest rates.
    As has been mentioned, the rent-a-bank schemes are part of 
keeping consumers in the dark. The consumer goes to a physical 
store, interacts with a lender that is a nonbank entity, and 
has no interactions at all with the bank that is in the 
background. As I put in my remarks, this is part of the overall 
mission of keeping people in the dark, keeping the consumer in 
the dark.
    As a result of my research, I concluded that rent-a-bank 
schemes allow nonbank lenders to get away with charging triple-
digit or quadruple-digit interest rates, and not only so but to 
keep consumers on the hook, and I describe these practices in 
three main areas. I call them ``debt entrapment practices,'' 
and by that, I mean practices that seek to get a consumer on 
the hook, and by that, I mean they are approved for credit in a 
minimal amount of time.
    Someone mentioned a few minutes ago that we are able to do 
this quickly. You are able to do it quickly because you are not 
actually focusing on the ability of the consumer to pay back 
the loan. Debt entrapment practices also include issuing large 
amounts, at triple-digit interest rates, and short maturity 
dates. In other words, paying back the loan in a short period 
of time where the majority of customers cannot pay back that 
debt and keep up with their ongoing expenses.
    The second category of illegal practices are what I call, 
``treadmill practices.'' These practices are designed to keep a 
continuing stream of payments coming in from the borrower. They 
include multiple rollovers--extending the loan date multiple 
times--back-to-back loan transactions, rapacious electronic 
debits to the consumer's bank accounts, and illegal garnishment 
of consumer wages.
    Third, criminalization practices. These practices include 
making the consumer feel that they need to fear imminent arrest 
unless they comply with the nonbank lender's demands. These 
include threatening to prosecute consumers for crimes, filing 
police reports against them for criminal charges, and misusing 
civil contempt proceedings to obtain arrest warrants against 
consumers.
    These three practices--debt entrapment, debt treadmill, and 
debt criminalization practices--are what nonbank lenders want 
to do, and they want to be able to hide behind the banks to 
perpetrate these practices. Let us keep in mind that these 
nonbanks are not subject to regulatory oversight by the FDIC or 
the OCC, so they should not be able to get away with these 
practices by hiding behind a preemption doctrine.
    This is important for us to focus on, not just new 
technology but focus on protecting the State sovereignty, to 
protect consumers from usurious interest rates in these 
practices that I just spoke about, and to protect consumers 
based on all of these consumer protection laws in all 50 
States, and U.S. Territories. And yes, we want to balance that 
with allowing for reasonably priced credit products for 
consumers. But they have to be balanced against the State 
sovereignty and State consumer protection laws.
    Thank you for allowing me to speak, and I look forward to 
your questions.
    [The prepared statement of Ms. Johnson can be found on page 
68 of the appendix.]
    Mr. Meeks. Thank you for your testimony. Ms. Saunders, you 
are now recognized for 5 minutes.

  STATEMENT OF LAUREN SAUNDERS, ASSOCIATE DIRECTOR, NATIONAL 
                      CONSUMER LAW CENTER

    Ms. Saunders. Thank you. Chairwoman Waters, Chairman Meeks, 
Ranking Member McHenry, and members of the committee, thank you 
for inviting me to testify today on behalf of the low-income 
clients of the National Consumer Law Center (NCLC).
    Today, we are facing the biggest threat in decades to 
States' historic power to protect Americans from predatory 
lending, rent-a-bank lending. Interest rate limits are the 
simplest and most effective protection against predatory 
lending, and are strongly supported by American voters of all 
stripes.
    At the time of the American Revolution, every State had 
interest rate caps, and the vast majority still do today. For 
example, on a $500, 6-month loan, 45 States and the District of 
Columbia limit the rate at a median of 37.5 percent. At the end 
of the 20th Century, however, most banks were exempted from 
State rate caps, and rent-a-bank lending began as the latest in 
a long line of attempts to evade State usury laws.
    Short-term payday lenders first tried using rent-a-bank 
schemes 20 years ago, but the bank regulators shut them down. 
Yet in today's environment, high-cost lenders across the 
country are again using a small number of rogue banks to offer 
loans at astonishing rates that they cannot offer directly, and 
that banks would not offer in their own branches.
    My fellow witnesses have described some of the loans being 
offered to consumers. I would like to focus on the rent-a-bank 
lender that the OCC and the FDIC are actively supporting: World 
Business Lenders. The FDIC and the OCC filed an amicus brief 
supporting World Business Lenders and its right to charge a 
Colorado business 120 percent on a $550,000 loan, because the 
loan was originated by the Bank of Lake Mills and assigned back 
to World Business Lenders, the same bank, by the way, that the 
FDIC had sanctioned for targeting our servicemembers.
    We have discovered several cases involving similar facts. A 
World Business Lenders agent approaches a small business and 
offers a loan. The paperwork shows that the loan comes from an 
FDIC-supervised bank, Bank of Lake Mills or Liberty Bank, or 
OCC-supervised Axos Bank. The bank quickly assigns the loan 
back to World Business Lenders. These loans, ranging from 
$20,000 to $400,000, are secured by a mortgage on the home of 
the small-business owner at astonishing rates: 72 percent for a 
general contractor in Florida; 73 percent for a New York owner 
of a medical supply company; 92 percent for a couple in 
Massachusetts. Many of these small business owners are facing 
foreclosure, like a REALTOR in New York who was buried by a 
$90,000 mortgage at 138 percent APR.
    Many States prohibit these rates on second mortgages by 
nonbank lenders, but World Business Lenders argues that as the 
bank's assignee, it can charge outrageous rates.
    This is the lender that the OCC and the FDIC are 
supporting, with the same arguments that they are using to 
justify their proposed new interest rate rules. These proposed 
rules are in no way necessary to address legitimate secondary 
markets. We see no problem in those markets. What we do see is 
an explosion of predatory rent-a-bank lending undermining power 
that States have had for nearly 250 years. The FDIC's and the 
OCC's support for World Business Lenders tells us exactly who 
is eager to step into the bank's shoes: predatory lenders.
    So, what can Congress do? First and foremost, pass H.R. 
5050, the Veterans and Consumers Fair Credit Act, to cover all 
lenders, banks and nonbanks, with a 36 percent interest rate 
cap. That is still a high rate, and the bill will not stop all 
evasions of State usury laws. But an upper limit of 36 percent 
will cut off the most egregious abuses of the bank charter that 
facilitate predatory lending.
    Second, stop the FDIC and the OCC from facilitating rent-a-
bank lending, and support States' historic power to limit 
interest rates.
    Third, pass H.R. 1423, the Forced Arbitration Injustice 
Repeal Act, which will restore consumers' and small businesses' 
access to the courts when predatory lenders violate the law.
    Thank you for inviting me to testify today. I look forward 
to your questions.
    [The prepared statement of Ms. Saunders can be found on 
page 91 of the appendix.]
    Mr. Meeks. Thank you for your testimony. Mr. Knight, you 
are recognized for 5 minutes.

STATEMENT OF BRIAN KNIGHT, DIRECTOR AND SENIOR RESEARCH FELLOW, 
PROGRAM ON INNOVATION AND GOVERNANCE, MERCATUS CENTER AT GEORGE 
                        MASON UNIVERSITY

    Mr. Knight. Thank you. Good morning, Chairwoman Waters, 
Subcommittee Chair Meeks, Ranking Member McHenry, and members 
of the committee. Thank you for inviting me to testify today.
    My name is Brian Knight, and I am the director of the 
Program on Innovation and Governance, and a senior research 
fellow at the Mercatus Center at George Mason University. Much 
of my research focuses on the role of technological innovation 
in the provision of financial services.
    The key point I want to leave you with is that innovation 
and competition in lending, of which the bank partnership model 
is a key part, is helping to improve access to credit, 
especially for borrowers poorly served by the traditional 
market. We are witnessing an important evolution in the credit 
markets, powered by innovative firms partnering with banks, 
frequently smaller banks. Fintech firms, many partnering with 
banks, now account for 38 percent of unsecured personal loan 
balances, up from only 5 percent, 5 years ago. There is 
evidence that these partnerships allow some borrowers to access 
credit on better terms than they would receive from a 
traditional lender. There is also evidence that these 
partnerships allow for greater access to credit for borrowers 
in parts of the country that are underserved by traditional 
lenders, and that innovative lending can be less racially 
discriminatory than traditional lending.
    These partnerships are mutually beneficial for both the 
fintech firm and the bank. The bank receives access to 
technology beyond what it could develop on its own; access to 
customers outside of its immediate geographic area, helping it 
to diversity its business; better management of its balance 
sheet; and enhanced servicing capacity. Fintech firms receive 
assistance with regulatory compliance and the ability to do 
business nationwide, under a consistent regulatory regime in 
conjunction with their bank partner.
    It is important to keep in mind that these relationships 
are highly regulated. Fintech firms that partner with banks are 
frequently regulated under the Bank Service Company Act and are 
subject to examination by the bank's Federal regulator for the 
services the fintech firm provides to the bank.
    Additionally, the fintech partner is frequently subject to 
examination by a State bank regulator if the partner bank is 
State-chartered, and is covered by consumer protection laws 
enforced by the Consumer Financial Protection Bureau (CFPB) and 
the Federal Trade Commission (FTC). Likewise, the bank is 
accountable for the actions of its fintech partner, taken in 
furtherance of that partnership. Bank regulators have shown 
themselves to be willing and able to police bank partnerships 
and hold both banks and their partners accountable for bad 
acts.
    While these partnerships between banks and innovative 
technology companies have displayed significant promise, they 
have been threatened by recent litigation that has disrupted 
long-settled expectations. In the case of Madden v. Midland 
Funding, the United States Court of Appeals for the Second 
Circuit held that New York law governed a loan that was 
originally issued validly by a bank under Delaware law, and 
therefore, the loan was usurious, when it was sold to a debt 
collector after default. In effect, the court held that the 
legality of a validly-made loan could change, depending on who 
held it after it was made, even if the terms of the loan itself 
did not change.
    This holding has been criticized as an incorrect 
interpretation of the law by the Federal Deposit Insurance 
Corporation (FDIC), the Office of the Comptroller of the 
Currency (OCC), and the Obama Administraton's solicitor 
general.
    While this case does not directly deal with the type of 
bank partnerships at the heart of innovative lending, it 
appears to have had a significant and negative impact on credit 
markets because it calls into question the ability of banks to 
sell their loans to fintech partners. One study found that, in 
the wake of the Madden decision, funding for marketplace loans 
aimed at borrowers with FICO scores under 700 decreased 
significantly in New York and Connecticut compared to outside 
the Second Circuit, because of concerns that any loan made to 
those borrowers may become invalid if sold to a nonbank 
marketplace lender.
    A subsequent study found a reduction in marketplace lending 
credit available to New York and Connecticut residents, 
especially low-income residents, as well as an increase in 
personal bankruptcies, a phenomenon that the authors of the 
study linked to the inability of low-income borrowers to access 
credit in order to refinance debt or address exigent 
circumstances like medical bills.
    These unfortunate results highlight the potential harm of 
impeding increased innovation and competition in credit 
markets. Consumer protection is essential, but denying 
consumers access to credit does not necessarily protect them, 
because it does not remove the underlying issues motivating the 
need for credit. Rather, allowing more innovation and 
competition in credit markets, especially to those 
insufficiently served by traditional products, presents a 
better path to what we all want: a credit market that allows 
consumers to make informed choices that best serve their needs.
    Thank you again for the opportunity to testify, and I look 
forward to your questions.
    [The prepared statement of Mr. Knight can be found on page 
77 of the appendix.]
    Mr. Meeks. Thank you, and I thank all of the witnesses for 
their testimony. I now recognize myself for 5 minutes for 
questions.
    Your testimony today has been very good, and I am sitting 
here listening and trying to dig through where and what will be 
the best way to go. One of the things that I have been trying 
to do, especially on the subcommittee, is try to make sure that 
there is access to credit in low- and moderate-income 
communities, and we have found, to a large degree, that that 
came from minority depository institutions (MDIs).
    There are only 20 MDIs left today, and during that hearing 
that we had, it was 20 that are left. And I agree with what 
most of you said, when you look at payday lending and the title 
and pawn shops, especially when it comes to small-dollar loans, 
that is where folks in my community go when they try to borrow 
some money. And generally, the MDIs have more accessibility in 
working with them. When they testified here, they said it may 
be better for them to have partnerships, especially when 
dealing with technology.
    So my first question will go to Ms. Johnson. I don't know 
whether your research had shown what effect this would have on 
minority depository institutions in regards to, if there was a 
rate cap at 36 percent, what effect would that have on their 
viability, remaining in the community, and/or what other 
incentives can be utilized so that they can feel it is okay to 
do business with a small-dollar loan with a lower interest 
rate?
    Ms. Johnson. If I understand your question correctly, you 
are asking what impact would an interest rate cap have in 
minority communities?
    Mr. Meeks. Minority depository institutions, minority 
banks.
    Ms. Johnson. Right. My research does not deal specifically 
with those types of organizations. I don't know if any of my 
colleagues could speak to that.
    Mr. Meeks. Ms. Aponte-Diaz, do you--
    Ms. Aponte-Diaz. Yes. Hello. I can speak to our credit 
unions or our partners' Self-Help Federal Credit Union offers 
loans capped at 18 percent, and they are able to do that for--
we did a special program for DACA recipients at 18 percent at 
the top, depending on their credit, and we are able to do that 
and provide lower interest rate loans for--
    Mr. Meeks. And is that for small-dollar loans?
    Ms. Aponte-Diaz. Small-dollar loans. Yes, a DACA loan is 
about $600.
    Mr. Meeks. Let me ask another question, because one of the 
things that I had hoped, back when we had the financial crisis 
and we created the CFPB, was that we would have someone that 
would be fighting for consumers. Unfortunately, I think that we 
have moved back from, say, some of the rules that were being 
put down by Director Cordray. Under Director Cordray's CFPB, 
particularly for the payday rule, it was anchored by two 
pillars: ability to repay, which is tremendously important, and 
that is what got us in trouble before with these no-doc loans; 
and capping at three the number of loans that lenders could 
make in quick succession. He was indicating that this would get 
at the heart of the payday industry's debt trap business model.
    Assemblymember Limon, what would you say about what the 
CFPB was saying under Director Cordray's leadership?
    Ms. Limon. Thank you. I do want to comment on your previous 
point. I can tell you that with the State law in California 
that was passed at 36 percent plus Federal rate, we still have 
a $2 billion industry for just California alone. I can't tell 
you how many of those are minority-owned banks but the space is 
still there for lending. So, I want to be clear that there are 
still some options.
    And as far as Director Cordray's direction, the ability-to-
repay underwriting is absolutely important to this space and to 
this market, and certainly capping the number of loans that 
people take out at one time is another way to address this. 
These are elements that we have explored in the State of 
California and elements of which we are supportive. They are 
not written into the law that was passed, but there are 
different elements that can further address the security of 
ensuring payback.
    Mr. Meeks. So if he was still here, are the rules that he 
was putting in place--do you believe it would been a failure or 
a success in the rule as he had outlined it?
    Ms. Limon. Success.
    Mr. Meeks. Thank you. I am out of time, and so I now 
recognize the gentleman from California, excuse me, the ranking 
member from North Carolina--
    Mr. McHenry. Very different. We are getting some California 
jobs though.
    Mr. Meeks. --Mr. McHenry.
    Mr. McHenry. We are getting some California jobs, and I am 
so grateful for that.
    Anyway, Mr. Knight, in your written testimony you speak of 
the spread of the bank/fintech partnership model as having a 
number of benefits, including better credit terms for 
consumers, improved access, and some of the technological 
advantages that we see in other areas outside of consumer 
lending, right? So, there are a lot of benefits afforded to 
this model.
    But looking at this, in 2015, the Second Circuit had a 
ruling in Madden v. Midland that a loan to a New York resident 
was valid when it was made by a bank, but became invalid once 
it was sold by the bank to a nonbank third party, right? This 
came as a surprise to many. Why?
    Mr. Knight. Because it upset a well-settled expectation 
that, one, banks can sell loans, that that is the power of a 
bank and that they can sell the loan and the loan remains 
valid, and that is an important criteria.
    Mr. McHenry. Why can they sell a loan?
    Mr. Knight. Well, they need to sell loans for a host of 
reasons--balance sheet management, risk management. In the case 
of Madden, this loan had gone into default, so they wanted to 
move it off of their balance sheet so they could shed the risk. 
There is a profitability argument there, particular for smaller 
banks which don't necessarily have the deposit base to sit on a 
whole bunch of loans. So, it has long been recognized that 
selling a loan is part and parcel of being a bank, that is the 
ability to sell the loan as a bank prong.
    The second prong, which the Second Circuit really didn't 
deal with, is the common law of valid-when-made doctrine, which 
generally says that a loan, if it is valid when it is made, 
does not become usurious because of a downstream transaction.
    Mr. McHenry. Okay. So is that a payday issue, a payday 
lending issue of valid-when-made? Is that all this is about?
    Mr. Knight. No. This applies to--
    Mr. McHenry. To every loan.
    Mr. Knight. --every loan.
    Mr. McHenry. Okay. And a loan is an asset on a bank's 
balance sheet.
    Mr. Knight. Correct.
    Mr. McHenry. Right. So the issue of valid-when-made is how 
old? How longstanding is this practice?
    Mr. Knight. The early 19th Century court cases refer to it 
as this longstanding maxim, but I don't know how far back it 
goes.
    Mr. McHenry. So how does this affect the banking system if 
it becomes the national norm?
    Mr. Knight. It could severely limit the ability of a bank 
to sell a loan, because under the logic of the Madden decision, 
the bank could only sell the loan and have it remain valid if 
the recipient could have made that loan themselves. So in that 
case, you basically have banks selling to other banks, and not 
just any bank. It would have to be a bank that, under that 
bank's home State law, could have made that loan. Which means, 
one, you can't move that risk outside the banking system. You 
are just trading it among banks. And two, that significantly 
diminishes the ability of a bank to sell a loan at what should 
be its appropriate market value.
    Mr. McHenry. Okay. But this issue gets conflated with a 
number of issues that are hotly litigated across States. Is 
that not the case?
    Mr. Knight. Right. It has been validly made it has been 
conflated with the ability of a bank to sell a loan 
statutorily, and it has been conflated with the True Lender 
doctrine, and they are all related but they are also all 
distinct.
    Mr. McHenry. What is True Lender?
    Mr. Knight. The True Lender--so, valid-when-made is about 
what happens to the loan after it is sold, because if the loan 
isn't valid in the first place, valid-when-made doesn't apply. 
True Lender is an emerging doctrine that even if the bank 
technically makes a loan, it is not considered the true lender 
under certain circumstances by some courts. And the emerging 
doctrine is a predominant economic interest test, so if the 
bank does not have the predominant economic interest test in 
the loan when the loan is made, or shortly thereafter, some 
courts will say, ``Well then, bank, you weren't the true 
lender. The party that has the predominant economic interest 
was, in fact, the true lender, and so we will look to see if 
that party could have made the loan.''
    Mr. McHenry. Okay. So resolving this issue of valid-when-
made is distinct from True Lender?
    Mr. Knight. Yes, it is.
    Mr. McHenry. And to this end, what we have seen in the 
Second Circuit jurisdictions of New York, Connecticut, and 
Vermont is that the availability of credit has gone down, that 
rates have gone up, and it has had a negative effect on 
consumers. And that is according to the Stanford-Columbia-
Fordham study of this. Is that correct?
    Mr. Knight. Both that study and a subsequent study.
    Mr. McHenry. Thank you. I yield back.
    Mr. Meeks. The gentleman's time has expired. I now 
recognize the gentleman from California, Mr. Sherman, who is 
also the Chair of our Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets, for 5 minutes.
    Mr. Sherman. Thank you. It is interesting to see the 
argument made that if fewer payday loans are made, consumers 
are hurt. That jumps to a conclusion. But the fact is that 
wages are too low, and people often are knowledgeable but poor. 
What are you going to do? Sell your truck? Rely on overdraft 
protection? Fall behind on your rent? Or go to one of these 
payday loans or similar loans?
    I don't think APR is the best way to evaluate the cost of 
short-term loans. I think the minority made that point. For 
example, I pay a $2 fee to use a particular ATM. If I spent 15 
minutes extra time, I could go to my own bank's ATM. So I am 
borrowing the money, $200, for 15 minutes, and paying $2 to do 
that. That is, what, about 100,000 percent interest. It is not 
because--the bank is getting a fair fee. The owner of the 
machine is getting a fair fee. They have to have the machine 
there. They are entitled to what I think is a fair fee to save 
me from having to wait for my money for another 15 minutes.
    The position of the OCC seems outrageous when they say that 
they can adopt any regulation to facilitate banks' ability to 
operate across State lines. I will throw out one example. Are 
we going to have a position where if a bank makes a loan on a 
piece of real estate, that State and local law can't change the 
zoning of that real estate, because that would hurt the bank? 
And if a bank ever were to make a loan, then forever, that 
property would be exempt from down-zoning.
    The OCC is taking an outrageous position on this, but they 
want us to listen to them on LIBOR and other issues. The OCC's 
position is, well, if you are a bank, you are not going to be 
subject to State and local regulations to protect consumers, 
and we are going to make sure that there is no Federal 
protection for consumers. And if you engage in a business 
practice to roll over the loan 26 times a year, year after 
year, well, that is just fine as long as a bank is involved 
that is making some money, and we are facilitating banks and 
making banks more profitable.
    Let me ask my own California Assemblymember. We have taken 
some real actions in California. What do people do when they 
need money to pay to keep the lights on?
    Ms. Limon. People still have access to credit. As I 
mentioned, there is still a $2 billion credit space in 
California under the rate cap.
    Mr. Sherman. Is that $2 billion of all consumer loans, or 
how do you define it?
    Ms. Limon. For small-dollar lending.
    Mr. Sherman. Small-dollar lending, not credit cards.
    Ms. Limon. Small-dollar lending.
    Mr. Sherman. And when you say ``small,'' you mean under 
$5,000? Under $2,000? Under what?
    Ms. Limon. Under $10,000.
    Mr. Sherman. Under $10,000. Is there space there for people 
who need to borrow $500, because I would hate to borrow $5,000 
if I need $500.
    Ms. Limon. Under $10,000 includes the $500.
    Mr. Sherman. Yes, but is there a vibrant industry in 
California where I can get a $500 loan, if I don't need a 
$10,000 loan?
    Ms. Limon. There is an industry, and regrettably the 
industry, at this moment, for $300 and under, and above, if it 
is under the 36 percent, is a very healthy one. We haven't done 
anything about addressing payday proper. The bill that we have 
passed in California is about the $2,500 to $10,000 space, 
which is the highest-used product, the highest-growing product 
in the State of California.
    Mr. Sherman. I would point out to my colleagues that it 
looks like OCC wants to push this regulation through, but a 
provision on an appropriations bill preventing them from doing 
that would be the best way to make sure that we don't have a 
situation, as we do today, where there is no Federal 
regulation, and an agency dedicated to making a lot more money 
for banks is going to allow them to evade California law and 
other law.
    It would be one thing if the OCC was applying this after 
we, in Congress, consider the Garcia bill and others, and have 
reasonable Federal rules. Then, the OCC would be saying, 
``Well, you are a bank. That means nationally.'' But to have a 
zero consumer protection rule for everything shows that the OCC 
needs to be reined in, hopefully by a provision in the 
appropriations bill.
    I yield back.
    Mr. Meeks. The gentleman's time has expired. I now 
recognize the gentlewoman from Missouri, Mrs. Wagner, for 5 
minutes.
    Mrs. Wagner. I thank the Chair. According to a 2017 survey 
by the FDIC, 25 percent of U.S. households, or 32 million 
Americans--and I will say again, 32 million Americans--are 
either unbanked or underbanked. These households might have a 
checking or a savings account but they also obtain financial 
products and services outside of the formal banking system. A 
minority of these households do not even have a bank account 
with an insured institution.
    Lack of access to banking continues to worsen as branches 
close across our country. Access to safe and affordable 
financial services is absolutely critical, especially among 
families with limited wealth, whether they are looking to 
invest in education or simply manage the ups and downs of life.
    Mr. Knight, in your testimony you stated that the bank 
partnership model allows for greater access to credit for 
borrowers in parts of the country that are underserved by 
traditional lenders. Could you please elaborate more on how 
these partnerships help those without access to mainstream 
banking services?
    Mr. Knight. Absolutely. Thank you for that question, ma'am. 
Based upon the research I have seen, where the partnerships 
bear fruit is that a relatively modest-sized bank that could 
never make the sort of financial commitment to build out their 
technology on their own is able to partner with a technology 
firm that is able to put forward an internet platform that can 
penetrate just about anywhere, particularly with the increasing 
penetration of the internet and smart devices, and that enables 
borrowers who are in areas where maybe banks have retrenched or 
are otherwise underserved to access relatively high-quality 
credit over the internet, who couldn't necessarily do that via 
a traditional bank branch model.
    And so, that allows your modest-sized bank, which is good 
at banking but not so great at technology and scope, to partner 
with a fintech company that is great at technology and scope 
and is not a bank, and it is two great tastes that often taste 
great together.
    Mrs. Wagner. You have given us kind of the outline of how 
the pieces are put together in terms of this bank partnership. 
How does the actual constituent benefit? How does this model 
work for them, those who are, in fact, underserved in so many 
of these communities?
    Mr. Knight. First, it gives them more options and more 
potential lenders competing for their business. Competition has 
been shown to frequently drive down prices and credit, just--
    Mrs. Wagner. Drive down prices and credit.
    Mr. Knight. Yes. You will also see, and there is evidence, 
that many of these firms are using innovative underwriting to 
better serve groups that are not necessarily well-served by 
your traditional FICO-based underwriting model. So for those 
groups, they will see better underwriting that is both more 
accurate and also frequently cheaper.
    Then, they have ease of access and convenience, and it can 
often be relatively quick to access these loans.
    Mrs. Wagner. So they can get that money when they need it, 
expeditiously, for the, as I call it, ups and downs of life.
    Mr. Knight. That is correct, and an example from the small-
business space is that one of the things that these small-
business loans, and to be completely clear, on the small-
business side, these loans are often more expensive than a 
small-business bank loan. But a lot of these businesses could 
not get a small-business loan because they need less money, and 
the bank would take much, much longer to approve the loan, so 
they are paying for convenience and a right-sized loan.
    Mrs. Wagner. In my limited time, is it possible for banks 
to evade State law if they have bank preemption?
    Mr. Knight. No. They are operating on the basis of Federal 
law, and Congress has made a choice to grant both State and 
Federal banks certain authorities.
    Mrs. Wagner. And you have already talked about what will 
happen to access to affordable credit if bank partnerships are 
prohibited by Congress. It will go away. Is that correct?
    Mr. Knight. It would certainly be crimped.
    Mrs. Wagner. And who would step in to fill that void?
    Mr. Knight. Probably an alternative provider or an illegal 
provider, or--
    Mrs. Wagner. An illegal provider. Thank you. My time has 
expired.
    Mr. Meeks. The gentlelady's time has expired. The gentleman 
from Georgia, Mr. Scott, is now recognized for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. I want to follow up on 
a point of questioning that I agree on with Chairman Meeks, and 
also my colleagues, Mr. Sherman and Mrs. Wagner. We have been 
working in this committee for many years against predatory 
lending, but what we have found out is that we need to do a 
rifle approach to solving this problem and not a scatter gun 
that could bring innocent bystanders in who are actually out 
here doing a remarkable job, providing credit access and 
lending to the very people that we are concerned about 
protecting from the predatory lenders.
    Let me start with you, Ms. Limon. When it comes to the 
creation of new financial products, are there not other pro-
consumer features to products that policymakers should focus on 
beyond the APR, things like fee transparency, limitation on 
debt rollovers? Are those not also important aspects for us to 
explore as we look to incent innovation and expand services to 
the unbanked and underserved?
    Ms. Limon. Yes. Those are also important elements to 
consider.
    Mr. Scott. And now, let me get to the heart of the matter 
here. In your written testimony, you describe feedback from 
some lenders in your State, stating that they preferred an 
interest rate cap to underwriting guardrails.
    Our concern on this committee is around access to credit. 
And I have heard from lenders, I have heard from online 
lenders, and I have heard from banks, and as my chairman, Mr. 
Meeks, mentioned, we have had our African-American bankers 
here--and we have not had a new African-American bank in a 
quarter of a century--who are very concerned about this rate 
cap and their ability to provide access to credit for the very 
people that we want to provide with credit. They feel that they 
may be unable to fulfill demand for credit under such 
circumstances, particularly for the low-income consumers who 
are already having many challenges.
    I call your attention to a 2018 study by the World Bank 
that found that binding interest rate caps below market values 
can reduce overall credit supply. I am sure you may be familiar 
with that. A separate study, looking at the experience in 
Chile, found that the impact was felt most profoundly by the 
youngest, least educated, and poorest families, the very 
families that you and I both are concerned about.
    And also let me add this. Because the underwriting costs 
are strained by the rate cap, the lender must make larger loans 
in order to make the loan profitable. This means that consumers 
may take out a larger loan than they need, which can place our 
consumers in a financially precarious position. And the rate 
cap extends broadly to most types of credit and is not narrowly 
targeted--that is our concern--to the payday lenders, and rate 
caps cause a loss of credit availability, particularly for non-
prime, sub-prime consumers who pose a greater risk of default. 
And this is because the lender cannot afford to offset the 
underwriting costs due to the rate cap.
    All I am saying is that we can't dismiss these concerns; we 
have to deal with them. So what I want to kind of hear from 
you, Ms. Limon, is what information did you have prior to 
passing your law that led you to believe the rate cap would not 
restrict access to credit?
    Ms. Limon. The very principle of our law is that high 
interest rates cause higher defaults for the very same families 
that we are trying to serve. And so, that is a concern. We saw 
over 20,000 Californians have a car repossessed and over 
100,000 Californians go into default because of these loans.
    Mr. Scott. And do you--
    Mr. Meeks. The gentleman's time has expired.
    Mr. Scott. Thank you, sir.
    Mr. Meeks. The gentleman from Florida, Mr. Posey, is 
recognized for 5 minutes.
    Mr. Posey. Thank you, Mr. Chairman. Our topic today 
illustrates one of the great paradoxes of regulations. On the 
one hand, our government has sought to regulate prices to 
protect consumers, only to find out that doing that restricts 
the supply of the good or service and actually hurts those whom 
they seek to protect. And, in an everyday perspective, a lot of 
consumers would jump for joy if Congress passed a law that said 
you couldn't charge over $1 a gallon for gasoline. A lot of 
people would be really excited and say, ``You really did the 
right thing.''
    But we know what would happen, don't we? You would have 
zero gasoline. And so, is it better to pay more than $1 for a 
gallon of gasoline or not have any gasoline?
    In that regard, I ask unanimous consent to enter into the 
record a 1970 Newsweek article by the late Milton Friedman, 
entitled ``Defense of Usury.''
    Mr. Meeks. Without objection, it is so ordered.
    Mr. Posey. Thank you, Mr. Chairman. There are two more 
items I would like to put in the record. The first is Rolf 
Nugent's classic paper that appeared in the Harvard Business 
Review in 1930, that showed how half-percentage reductions in 
maximum interest rates across three States was correlated with 
funding for small loan needs of low-income people and the 
unfortunate growth in bootleg lenders.
    And finally, a 1975 paper from the Florida State University 
Law Review that details the history of small-loan regulation in 
Florida. This paper details the ways that market innovators got 
around rate ceilings. The articles will help remind us that 
regulating small-dollar loans has a wide range of unintended 
consequences, including denying many low-income people the 
loans that they need.
    Mr. Meeks. Without objection, it is so ordered.
    Mr. Posey. Thank you, Mr. Chairman. These papers also 
underscore another important aspect of our hearing, and that is 
regulatory arbitrage. Interest rate caps in one or more States 
make incentives for market lenders to innovate to make loans to 
residents of those States who need them. They have done this in 
partnership with banks in other States.
    Mr. Knight, what role do small-dollar lenders or loans play 
in our economy? Do they provide essential financial services?
    Mr. Knight. Small-dollar credit can provide essential 
financial services for borrowers. There is definitely evidence. 
I should say that for small-dollar credit, particularly, say, 
storefront payday, the economic evidence is mixed as to whether 
access is a good thing or a bad thing, but it is pretty clear 
that for at least some borrowers, it can be absolutely 
essential.
    Mr. Posey. Okay. I believe that the regulation of interest 
rates, as I mentioned, is a real paradox, and some States seek 
to protect consumers and they make money unavailable to them, 
unfortunately. This two-edged sword is difficult to balance 
sometimes. Which aspect do you believe is more important, 
protecting from high interest rates or protecting from credit 
scarcity?
    Mr. Knight. I believe that protecting from credit scarcity 
is frequently more important. I believe that in a functioning, 
competitive, and well-regulated market, there is definitely a 
role for regulation to play, consumers should be able to access 
credit and that they will be able to address their credit 
needs, because frequently they are accessing credit to avoid a 
greater harm. There is always the option to not take a loan, 
but if you are taking a loan to avoid a greater harm, that loan 
should be available to you.
    Mr. Posey. The CFPB has delayed the ability-to-repay 
mandatory underwriting provisions until November. CFPB 
originally proposed to rescind the entire rule. Can you 
evaluate the underwriting provisions in terms of benefits, 
costs, and impact on consumer credit availability?
    Mr. Knight. Sir, I am afraid I cannot do that. I have not 
done a sufficient study of that to have an informed opinion.
    Mr. Posey. Okay. In fairness, Ms. Limon, would you care to 
respond?
    Ms. Limon. I'm sorry. Can you repeat the question that you 
would like me to respond to?
    Mr. Posey. Yes. It was talking about the delay of the CFPB 
rule, that they had the ability to pay rule.
    Ms. Limon. We would like to see that in California, and 
that has actually been a challenge to us, and part--not full, 
but part of the reason we also stepped up to pass our own rate 
cap law.
    Mr. Posey. Okay. Thank you very much. Mr. Chairman, I see 
my time has expired.
    Mr. Meeks. The gentleman yields back. The gentlewoman from 
North Carolina, Ms. Adams, is recognized for 5 minutes.
    Ms. Adams. Thank you, Mr. Chairman, and I want to thank all 
of the participants today for sharing with us your ideas.
    Let me, first of all, ask Ms. Limon, in addition to your 
work on predatory lending, you have also been leading a 
conversation in California about strengthening the oversight 
authority of the State financial regulator, particularly in 
light of the Trump Administration's efforts to weaken consumer 
financial protection and the CFPB's role in enforcement. Can 
you talk briefly about why California feels the need to act, 
and what you hope to accomplish by strengthening the State's 
role in protecting consumers in the financial marketplace?
    Ms. Limon. Thank you. Last year, I introduced a bill that 
would have developed a California version of the CFPB. In light 
of the Administration taking action on some of the work that we 
expected to be coming down, California has really seen a need 
to step up. With almost 40 million people in the State of 
California, we know that we are a big portion of the market 
share for a lot of this lending space, and so we feel that it 
is very important to protect consumers, and as a State, we have 
had to step up in the absence of Federal oversight and 
regulation.
    Ms. Adams. Okay. So it is my understanding that California 
had been trying for a number of years to get a rate cap in 
place. What do you think were the key components of your 
efforts last year to get the bill over the finish line, and was 
there bipartisan support for the new California law?
    Ms. Limon. Thank you. There was strong bipartisan support 
for this bill, and we built a coalition that I think was very 
strong. Over 2 decades of having this conversation, with 
multiple bills introduced in the last 3 years, we put together 
a coalition that included, among others, veterans' groups, and 
the Urban League. We had many groups at the table, including 
responsible lenders, who told us time and time again that they 
could work within the interest cap rate and provided options 
for consumers in California.
    Ms. Adams. Okay. Well, great. I served in the North 
Carolina House for about 20 years so I understand how important 
it is to bring stakeholders to the table. Otherwise, they say 
you are on the menu. But thank you for that.
    Ms. Saunders, NCLC has previously highlighted some high-
cost mortgage loans, as high as 138 percent APR made to small 
business owners through a rent-a-bank scheme. Would you please 
tell us more about these loans, the terms, and the 
circumstances in which they were made?
    Ms. Saunders. Sure. First mortgage loans are deregulated 
and there is no rate cap, but many States do limit the rates 
for second mortgages. And yet, there is a nonbank lender, World 
Business Lenders, that is using a couple of banks, OCC-
supervised Axos Bank, and in the past, FDIC-supervised the Bank 
of Lake Mills in Wisconsin, to entrap small business owners 
with really horrendous loans.
    For example, Jacob Adoni in New York, was looking for a 
personal loan, but he was forced to reference his business in 
the loan documents. He ended up with a $90,000 loan at 138 
percent, and he is facing foreclosure. And that is an illegal 
loan in New York, but the claim is that because the loan was--
the paperwork showed it came from a bank and then it was 
assigned back to the lender, that makes it legal.
    Elissa Speer is facing foreclosure in Connecticut because 
of a $20,000 loan at 121 percent, supposedly for her 
restaurant, which she didn't own a restaurant, but they trumped 
up these loan documents claiming that a leaf blower was 
equipment for a restaurant.
    These are the kinds of things that we are seeing predatory 
lenders do, using banks as a fig leaf.
    Ms. Adams. Thanks very much. Ms. Saunders, where are we now 
with the ability-to-repay standard in the 2017 rule? Is it 
important for us to fight for this, and what other features are 
necessary?
    Ms. Saunders. It is absolutely necessary for us to fight 
for it. In the absence of a rate cap, the CFPB's ability-to-
repay rule, a very modest rule that simply caps the number of 
loans and has a common-sense rule, that the lender should 
consider a person's ability to repay, should go into effect. It 
has been saved by the court. The CFPB has threatened to repeal 
it, and we need to put it into effect.
    Ms. Adams. Thank you. Ms. Aponte-Diaz, CFPB Director 
Kraninger will be appearing before our committee tomorrow. What 
questions would you recommend we ask her about these issues? 
You have 20 seconds.
    Ms. Aponte-Diaz. For Ms. Kraninger?
    Ms. Adams. Yes.
    Ms. Aponte-Diaz. She was on the board that approved the 
FDIC proposed rule, so we would ask her to rescind that rule 
and also to move forward with the ability-to-repay payday rule.
    Ms. Adams. Great. Thank you very much. Mr. Chairman, I 
yield back.
    Mr. Meeks. The gentlelady's time has expired. I now 
recognize the gentleman from Missouri, Mr. Luetkemeyer, for 5 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Ms. Limon, you 
made a statement a minute ago when you were talking about your 
bill from California. My understanding is that the bill was 
signed October 11, 2019. Is that correct?
    Ms. Limon. Yes.
    Mr. Luetkemeyer. And it only regulates loans between $2,500 
and $10,000. Is that correct?
    Ms. Limon. That is correct.
    Mr. Luetkemeyer. Okay. Mr. Sherman from California asked 
you about $300 loans a while ago, and I didn't really hear you 
give him a good answer to that. You don't regulate the $300 
loans, though. Is that correct?
    Ms. Limon. We have not done anything around payday loans.
    Mr. Luetkemeyer. Okay. That was not the impression we got 
from your testimony and your earlier comments. Also, you said 
that you have a $2 billion industry. Have you studied--and I 
doubt that you have, since the most you could have studied 
would be 4 months here, since the law was signed--what kind of 
effect it has had on small-dollar lending yet?
    Ms. Limon. The $2 billion that I referenced is the lenders 
that are lending within the rate cap, so just to be clear, the 
industry is bigger--
    Mr. Luetkemeyer. Okay. But have you seen an effect on this? 
I would imagine you haven't, at this point.
    Ms. Limon. The data will not come out for another year.
    Mr. Luetkemeyer. Okay. So we really can't say whether it 
has or has not helped it, at this point.
    Ms. Limon. What I can say is what the existing market is 
under the rate cap, and that is $2 billion.
    Mr. Luetkemeyer. Very good. My concern is--and I think you 
have found the sweet spot there, because a George Washington 
University study says that the break-even point for a 36 
percent APR is $2,600. So, you are where the break-even point 
is, so it is interesting that you have that.
    Also, there is a UK study that my good friend from Georgia, 
I think, is referencing here. The UK put into effect, in 2015, 
a 100 percent rate cap, and then the Financial Conduct 
Authority did an assessment on it and found that the value and 
number of short-term dollar loans fell 50 percent in 6 months. 
I am guessing you are going to see a significant decline in 
loans in this $2,500 to $10,000 area as well.
    And one of the things that concerns me is the 
misrepresentation of the cost of the loan. APR, in my judgment, 
if you are talking about a loan that is less than one year, is 
irrelevant, and I will give you an example. If you have a leaky 
faucet in your house, you call the plumber up. He comes out, 
turns a tap, and 10 minutes later, he walks out the door and 
hands you a bill for $50. Now, was that a surcharge, Ms. 
Saunders, or did he charge you $300 an hour for that service?
    Ms. Saunders. I think that the rent-a-bank loans that we 
are talking about--
    Mr. Luetkemeyer. I am asking you a question. Is it a 
service charge for him coming to your home with his truck, his 
equipment, his knowledge, and his tools, fixing your faucet, or 
did he charge you $300 an hour?
    Ms. Saunders. Well, he hasn't offered you a loan, so no, it 
is not an interest rate.
    Mr. Luetkemeyer. That is not the question I asked. I asked 
whether he is charging you by the hour or whether he is 
charging you a service charge.
    Ms. Saunders. People charge in various ways. You can charge 
by the hour or you can charge a surcharge, and--
    Mr. Luetkemeyer. Okay. You don't want to answer the 
question. The answer is, it is a service charge, which is 
exactly what any kind of a loan less than a year should be. It 
should be disclosed as a service charge. I would argue that you 
are hiding the true cost of the loan, hiding behind an APR, 
because that customer doesn't know what the true cost of it is. 
If it is $5 per 100, $10 per 100, $20 per 100, whatever it is, 
if you don't disclose that in a way they can understand, they 
will never know. Who knows what a 200 percent--let me give you 
an example.
    You have a $400 loan, which is the average that most people 
can't afford to cover anymore. And if you charge them $20, do 
you know off the top of your head what kind of interest rate 
that would be?
    Ms. Saunders. It depends on how long it has been--
    Mr. Luetkemeyer. Over 14 days, 2 weeks. That is the normal 
rate.
    Ms. Saunders. Twenty dollars for a $400 loan?
    Mr. Luetkemeyer. Yes, 14 days.
    Ms. Saunders. You know, under pressure, I can't do the 
math. I can tell you that 15 for 100 is--
    Mr. Luetkemeyer. Okay. It is 120 percent.
    Ms. Saunders. Okay.
    Mr. Luetkemeyer. A while ago, we just established that the 
average is going to cost you $35. So, here we have a loan that 
is below the cost. Do you think they are going to make that 
loan if it is below the cost?
    Ms. Saunders. What they would probably do is make a better 
loan, that is a longer-term loan, that gives you time to pay it 
back.
    Mr. Luetkemeyer. No. The customer doesn't want--you see, 
that is the problem that you are getting into here. You are 
trying to drag them into something different. The customer just 
walks in and wants a 14-day loan until he gets to payday, and I 
will show you here in just a minute that there is a reason for 
this. And if you only use that amount of money, that is all you 
want, why should you drag the customer into something they 
don't want? That is my concern.
    Ms. Saunders. APRs give people the ability to compare the 
same amount of money--
    Mr. Luetkemeyer. APRs hide the true cost of the loan. I 
will argue that until--
    Ms. Saunders. And I would argue the other way around 
because it is usually--
    Mr. Luetkemeyer. Professor Johnson, I have a comment for 
you, before I end my testimony here. You are talking about 
having gone out and surveyed some different payday loan 
institutions. I would recommend to you, for reading, ``The 
Unbanking of America,'' by Lisa Servon. She went out and did 4 
months in 2 separate locations of check cashers and payday 
lenders. She had the same sort of preconditioned, pre-thought 
process that you have displayed today with regard to your 
testimony, and she came up with a completely different view of 
what happened. I suggest that you read that.
    Mr. Meeks. The gentleman's time has expired.
    Mr. Luetkemeyer. Thank you very much, Mr. Chairman.
    Mr. Meeks. The gentlewoman from Michigan, Ms. Tlaib, is 
recognized for 5 minutes.
    Ms. Tlaib. Thank you. Professor Johnson, who funded your 
research?
    Ms. Johnson. The Ohio State University.
    Ms. Tlaib. The university academics. I really pay attention 
to who is funding various research and books and things of that 
nature.
    I want to focus on the truth today. We are calling this the 
rent-a-bank method, correct?
    Ms. Johnson. Yes.
    Ms. Tlaib. When someone is intentionally committing an act 
that is clearly illegal and uses someone else to do it, isn't 
that still a crime?
    Ms. Johnson. Yes.
    Ms. Tlaib. So, the truth is that the rent-a-bank is 
actually a criminal scheme, correct? Do you not agree, Mr. 
Knight?
    Mr. Knight. It depends on the nature of the action.
    Ms. Tlaib. Got it.
    Mr. Knight. I don't want to give you a misleading answer.
    Ms. Tlaib. That is okay. I will make sure to tell my son 
that hiding behind someone else when he is part of the crime--
that he is still part of a criminal scheme if he does that. So 
you can all continue to say it depends, but the truth is you 
have State law that is being circumvented by these banks that 
are really targeting the most vulnerable communities, people 
that we represent. We are not here representing the banks and 
big corporations. We are elected by the people, not by them.
    On December 5th and 6th, FDIC Chairwoman McWilliams had 
testified before various committees and was asked several 
questions about FDIC-supervised banks that are helping high-
cost lenders evade State interest, abusing in these 
terminologies, really, to commit crimes, to basically sit back 
and watch them do it, whether or not their proposal that they 
submitted encourages those criminal schemes.
    I specifically asked Chair McWilliams about these criminal 
schemes happening in my State, in Michigan, where we have 
really strong interest caps, and it is really important. We 
have a huge amount of working-class, middle-class families who 
are being targeted. Chair McWilliams said the agency, ``frowns 
upon arrangements between banks and nonbank lenders for the 
sole purpose of evading state law.'' Great. Let's see that in 
action, right?
    Ms. Aponte-Diaz, does this satisfy your concerns about the 
so-called rent-a-bank criminal scheme, is what I am going to be 
calling it, because that is the truth?
    Ms. Aponte-Diaz. Absolutely not. It has been lip service to 
date. There have been no enforcement actions on these rent-a-
bank schemes from the FDIC, and the proposed rule actually is 
going to embolden predatory lenders to enter into more rent-a-
bank schemes.
    And if you don't mind, I just wanted to add to the many 
questions around access to credit. We recently did a study in 
South Dakota where voters, through a ballot initiative, voted 
77 percent that they wanted a 36 percent rate cap. We came back 
3 years later to ask folks how they felt about that, and 82 
percent of the folks in the poll said that they are very happy 
with the 36 percent and they wouldn't change it. We saw, still, 
an increase in lending--not just stable but an increase in 
lending, in South Dakota. And so, I just wanted to add that as 
well.
    Ms. Tlaib. And I think, Ms. Aponte-Diaz, we can do a lot of 
polling and surveys. That seems not to matter here. And it is 
the truth. It seems to me that there is a lack of a sense of 
urgency in trying to help middle-class families not become 
targets of these criminal schemes. And it may be corporations, 
it may be folks. But I will tell you, my residents get labeled 
these kinds of really awful names and so forth, and kind of get 
brushed off. But boy, if it is a corporation, a CEO, a bank, a 
predatory lender, it seems like we kind of give them a pass. 
And I feel very strongly about this.
    Do you think FDIC's McWilliams is being straight with 
Congress about the criminal rent-a-bank scheme when, I believe 
the quote was, `It is up to states to decide what rate caps are 
appropriate, if any, or whether or not the states want to opt 
out of that ability of the interest rates to be preserved when 
an out-of-state entity purchases the loan product.'' There is a 
lot of stuff here. But it is because of this that a Utah bank 
can simply claim that the loan was made in Utah because that is 
where the charges are imposed, and payments sent, but it is 
really in the fine print of the contract. It literally is on 
paper that they are circumventing the law. It is blatantly, in 
your face, a criminal scheme.
    What more can we do, because it is very obvious that is 
exactly what is happening?
    Ms. Aponte-Diaz. Chairwoman McWilliams mentioned this opt-
out, but States should not have to opt out. California spent 3 
years going through the democratic process, and Colorado and 
South Dakota, through the ballot initiative. We should not have 
to go through these extra steps.
    Ms. Tlaib. No. It undermines--
    Mr. Meeks. The gentlelady's time has expired.
    Ms. Tlaib. Thank you, Mr. Chairman.
    Mr. Meeks. The gentleman from Kentucky, Mr. Barr, is now 
recognized for 5 minutes.
    Mr. Barr. Thank you. I am stunned. I have never heard 
interest rate preemption that is specifically authorized under 
Federal law, the National Banking Act and the Federal Deposit 
Insurance Act, ever described as a criminal scheme. But 
nevertheless, I learn something new every day here.
    Mr. Knight, many of the other witnesses here today have 
offered this narrative that banks in these partnerships are 
merely passive participants who allow bad actors to use their 
charters to prey on consumers. The title of this hearing, in 
fact, suggests that banks play no significant role in these 
partnerships. But in reality, the relationships we are 
discussing today are genuinely innovative partnerships that 
allow banks to provide access to credit to portions of the 
population previously underserved by financial institutions, or 
stuck with predatory payday lenders, check-cashing businesses, 
or pawn shops. In many cases, banks provide significant value 
to both their partners and the consumers, including by 
developing underwriting standards, retaining a portion of the 
risk on their books, and maintaining high standards of customer 
service.
    Would you please discuss how banks play an important, 
active role in these bank fintech partnerships that we are 
discussing today, and discuss how banks have skin in the game?
    Mr. Knight. Yes. Thank you very much. Yes, I think that 
there is a concern that these partnerships are basically a bank 
handing a nonbank lender a stack of stationery and saying, ``Go 
for it.'' And if that is the case, that is against the law, and 
the regulators already have tools to police it.
    In reality, many of these partnerships are a collaborative 
effort between a bank and what amounts to sort of a vendor who 
can help them, from a technology perspective, from an 
underwriting perspective, with the utilization of technology, 
from a marketing perspective, and then from a balance sheet 
management perspective, which are things that banks contract to 
third parties all the time.
    Mr. Barr. And then, banks have additional capital and they 
have underwriting expertise.
    Mr. Knight. They have capital. They have underwriting 
expertise. They have regulatory expertise.
    Mr. Barr. Yes.
    Mr. Knight. The have the ability to help the fintech firm 
manage the efforts.
    Mr. Barr. Well, let's just follow the logic of the critics 
that this is truly only passive conduct on the part of the 
bank. And I think by passivity they mean the loans are not kept 
in portfolio. But banks are passive in a number of other asset 
classes, and I don't hear our witnesses leveling charges of 
rent-a-bank for these activities. Consider a mortgage. Fannie 
Mae and Freddie Mac have very specific rules for what kinds of 
paper they will buy. Are they involved in a rent-a-bank when 
they insist on specific loan terms for mortgages, and then 
purchase them a few days after the loans are extended? Should 
we shut down that system and insist that Fannie and Freddie 
enter the direct lending market?
    Mr. Knight. No.
    Mr. Barr. Okay. Let me ask you, Mr. Knight, in your 
testimony you note that the Madden decision resulted in the 
reduction of credit availability to residents in States within 
the Second Circuit, and that the rate of personal bankruptcy 
filings increased due to a lack of available funding options 
for borrowers. Would the FDIC and the OCC's proposed rules to 
clarify valid-when-made help reverse these credit availability 
issues?
    Mr. Knight. They would help.
    Mr. Barr. And tell me, what would happen to the credit 
markets, particularly in terms of liquidity, when originators 
and purchasers of loans are not certain about the permissible 
interest rate for those loans?
    Mr. Knight. I think what we are seeing is that it dries up, 
and particularly for the riskier loans, the loans that would 
have to be priced at a somewhat higher interest rate, because 
there are concerns about their validity. People are not going 
to invest money in a loan that they are not certain will remain 
valid.
    Mr. Barr. So the vibrancy of a secondary market is directly 
contingent upon the valid-when-made doctrine?
    Mr. Knight. Well, some combination of the valid-when-made 
doctrine and the ability of a bank to sell a loan and have it 
remain valid, which is a statutory power.
    And, sir, if I may note, one more important thing in that 
partnership.
    Mr. Barr. Sure.
    Mr. Knight. The bank has to own the credit model. The bank 
has to be the ultimate decision-making party. They own that 
regulatorily. They are responsible for the loans that are made. 
And if it isn't that way, that is against the law, and they are 
in trouble, and there are tools available to police that 
already, and the FDIC and the OCC have shown a willingness to 
do so.
    Mr. Barr. Mr. Knight, final question. I represent a 
relatively rural district. I have some urban and suburban parts 
in my district as well, but I do think about my rural 
constituents a lot, in the context of access to financial 
services. A recent Federal Reserve study shows that 51 percent 
of the counties in the U.S. saw net declines in the number of 
bank branches between 2012 and 2017, and these declines in bank 
branches disproportionately hit rural communities. Another 
report by researchers from the Fed found that online fintech 
lending has penetrated areas that could benefit from additional 
credit supply, including those areas that have lost bank 
branches.
    As banks are closing and consolidating, how are fintech/
bank partnerships able to fill the void and service rural 
customers?
    Mr. Meeks. The gentleman's time has expired. The 
gentlewoman from Massachusetts, Ms. Pressley, is now recognized 
for 5 minutes.
    Ms. Pressley. Thank you, Mr. Chairman, and thank you to our 
witnesses for being here today.
    It seems there is no lack of creativity when it comes to 
the financial industry's desire to exploit those facing 
hardship. To be clear, unless you believe that poverty is a 
character flaw, there is absolutely no justification for 
triple-digit interest rate installment loans. The unfortunate 
reality is that if 40 percent of Americans cannot afford a $400 
emergency, then there are larger structural issues at play. 
People are not being paid enough for their work to be able to 
live, let alone save. In times of struggle, the options 
shouldn't be a debt trap interest rate or nothing at all.
    This is particularly frustrating when States like my own, 
the Commonwealth of Massachusetts, go to great lengths to 
protect consumers from predatory lenders. Massachusetts 
maintains criminal usury laws, capping small loans at 23 
percent interest while making it a crime to assist in providing 
a predatory loan, implicating the lender and the bank.
    Ms. Johnson, how does this compare to protections in other 
States you have looked at?
    Ms. Johnson. In response, I wanted to say that, yes, this 
isn't something new. The Pennsylvania attorney general sued 
Think Finance, who had rent-a-bank partnership with First Bank 
of Delaware, and rent-a-tribe partnerships, in other words, 
partnering with Native American tribes in order to charge 
triple-digit interest rates. The lawsuit is going forward 
against Think Finance as a criminal enterprise with this 
partnership with the Native American tribes. So, that is not 
something foreign. We have criminal usury statutes.
    And in response to your question, we have some States suing 
civilly. We have some States suing criminally. But either way 
it goes, consumers need to be protected through these statutes 
to protect consumers from triple-digit interest rates.
    Ms. Pressley. Absolutely, and I still hear from folks in my 
district, Massachusetts 7th, and across the State, about the 
continued availability and marketing of these predatory loans.
    There is also a question of what happens when the debt from 
these loans is sold. So Ms. Saunders, how might a debt 
collector's pursuit of the purchased loan differ from that of a 
lender illegally operating in the State?
    Ms. Saunders. Debt buyers who buy charged-off debt are 
obviously going after people who are struggling the most and 
who often have been the target of predatory lending. And we 
have heard a lot of talk about the Madden case. Well, debt 
buyers are buying charged-off credit card debt for pennies on 
the dollar. They do not need to charge outrageous interest 
rates on top of that, and certainly the Madden court was 
correct that it doesn't hurt banks not to let debt buyers 
continue to pile on to people who have been the target of 
predatory lending.
    Ms. Pressley. I think we eliminated debtors' prisons in 
something like 1833. But last December, ProPublica published 
their report entitled, ``The New Debtors' Prisons,'' 
highlighting University of Utah law professor Christopher 
Peterson's work on the skyrocketing abuse of the States' small 
claims courts.
    And I ask for unanimous consent to submit this article for 
the record, Mr. Chairman.
    Mr. Meeks. Without objection, it is so ordered.
    Ms. Pressley. Mr. Peterson's research is just one more case 
study into our continued criminalization of poverty and the 
weaponization of the legal system against those who are already 
living on the margins.
    Ms. Saunders, do you believe that what we are seeing in 
Utah can spill over into States with stronger consumer 
protection?
    Ms. Saunders. Yes. Unfortunately, we are seeing that Utah 
is the center of a lot of this predatory rent-a-bank lending. 
We have FinWise Bank there and others that are enabling debts 
of thousands of dollars, tens of thousands of dollars, over 
years, at 160 percent APR or higher. There is a $4,500 loan 
that will cost $13,000 to repay. APRs matter.
    And if the lack of oversight and rate caps in Utah can 
spread across the country, then every State, including your 
own, will be the subject of predatory lending.
    Ms. Pressley. Back in 2017, Massachusetts Attorney General 
Maura Healey settled with the State's then-largest debt 
collector for $1 million for egregious abuse of the State's 
small claims courts to collect from folks whose incomes were 
exempt.
    Ms. Saunders, what does it mean to have exempt income, and 
what are the unique risks of these aggressive collection 
practices to vulnerable communities?
    Ms. Saunders. Exempt income is income that you need for 
basic necessities--food, medicine, rent--and income that, like 
Social Security, other forms of pension, public benefits, and 
certain amounts of wages, are exempt from collectors, because 
we don't believe that people should have to starve because they 
are in debt.
    Ms. Pressley. That is right. It seems that this is less 
access to credit or really just access to debt.
    Mr. Meeks. The gentlelady's time has expired.
    Ms. Pressley. Thank you.
    Mr. Meeks. The gentleman from Texas, Mr. Williams, is now 
recognized for 5 minutes.
    Mr. Williams. Thank you, Mr. Chairman. Interest rates are 
the price of obtaining credit. I am a small-business owner in 
Main Street America. I have been in business for 50 years and 
have never had one day in my business life that I have been out 
of debt.
    In any line of business, price is determined by calculating 
many different factors. A business must cover the cost of 
hiring employees, keeping inventory, and paying taxes, just to 
name a few.
    Tom Miller, of Mississippi State University, stated, 
``Although a 36 percent interest rate might sound high and 
profitable, personal installment loans are profitable at that 
rate only if the loan exceeds a certain size threshold. If we 
set a national rate cap at 36 percent, many of those innovative 
products that are filling a need for many people in our 
economy, would no longer be profitable and would cease to 
exist.
    ``Rather than increase government intervention with a 
national rate cap, we should allow capitalism and the free 
market to determine the price of obtaining credit. This is 
called competition.''
    Before I continue with my questions, Mr. Knight, are you a 
proponent of capitalism or are you a socialist?
    Mr. Knight. I am a proponent of capitalism.
    Mr. Williams. Thank you very much. That is a great answer. 
We are doing good this year.
    This issue is about personal and financial freedom. If we, 
in Congress, set an arbitrary rate cap on what we think is too 
high an APR, we are limiting customer choice and saying that 
the government knows your financial situation better than you 
do. Unfortunately, some of my colleagues seem to believe that 
if we legislate high APR loans out of the marketplace, the 
demand for these products will simply go away.
    However, statistics show that millions of Americans lack 
the ability to pay for a $400 emergency expense. We should be 
spending our time on legislation that allows people to save 
more of their hard-earned money and build personal wealth, 
rather than limiting the options available to them when they 
are most in need of assistance.
    Mr. Knight, can you elaborate on what population would be 
most hurt by enacting a national interest cap, and what would 
happen to their availability of credit?
    Mr. Knight. Yes. In terms of access to credit, the 
population that would be most likely to suffer would be the 
more marginal borrowers, your relatively less affluent, your 
relatively young. Underrepresented groups would likely see a 
reduction in access to credit.
    Mr. Williams. A Bloomberg analysis showed that 5 years ago, 
22 percent of Wells Fargo's consumer loans were made to 
customers with credit scores below 680. Today, this number has 
shrunk to 11 percent. Traditional financial institutions are 
having to avoid riskier lending after greater pressure from 
regulators following the financial crisis, and more government 
involvement. Unfortunately, these changes have made obtaining 
credit much harder for a person of that population.
    So Mr. Knight, can you explain how greater bank 
partnerships can help solve this issue, and the benefit to 
consumers that it would create?
    Mr. Knight. Yes. There is a benefit in two ways, 
potentially: one, better access to assessment underwriting on 
the front end; and two, better balance sheet management and 
servicing on the back end. So a bank is able to leverage a 
partnership to access customers, underwrite them, service them, 
and move the credit off of their balance sheet into either a 
loan sale or a securitization, which is very similar to what we 
do with any number of other things like credit cards, car 
loans, et cetera, and then have that loan serviced. And this 
allows, particularly smaller banks, to access these markets, 
which allows for greater competition in the credit markets.
    Mr. Williams. And most people deal with smaller banks. Mr. 
Knight, in your testimony you talk about innovation and the 
benefits of bank partnerships with fintech companies. There is 
a misconception that these partnerships operate outside the 
bounds of any laws. So, could you talk briefly about some of 
the third-party guidance that currently exists, and how it 
helps protect consumers?
    Mr. Knight. Sure. Both the OCC and the FDIC have strong 
third-party guidance that both places a strong burden on the 
bank to manage its partner and the conduct with its partner, 
and holds the bank accountable for the auctions of its partner 
as if the bank did it themselves.
    Also, under the Bank Service Company Act, to the extent 
that the partner is providing services for a bank, be it 
marketing, underwriting, or servicing, or something like that, 
that partner is also subject to examination by the bank 
regulator. And if you talk to some of these firms, you will see 
that they have bank regulators coming in to visit them.
    Mr. Williams. I yield back. Thank you for being a 
capitalist.
    Mr. Meeks. The gentleman yields back. The gentleman from 
Illinois, Mr. Garcia, is now recognized for 5 minutes.
    Mr. Garcia of Illinois. Thank you, Mr. Chairman. I live a 
half-block from Main Street in a Chicago neighborhood, and I 
have seen how predatory payday loans and sky-high interest 
rates are trapping too many consumers into debt traps. 
Consumers might take out a small-dollar loan to meet a short-
term need, only to find that they can't keep up with the 
triple-digit interest rate on that loan. Soon, they are forced 
to take out another loan to meet the need, stacking debt on top 
of debt, and trapping them in a vicious cycle.
    Ms. Saunders, can you tell us very briefly two instances of 
what happens when people get caught up in a debt trap, and what 
are the hardships and health consequences that consumers face?
    Ms. Saunders. Sure. When they get into a debt trap, they 
have trouble meeting other expenses. Especially when they have 
very aggressive payday lenders or debt collectors after them, 
they may have trouble buying medicine or buying food or paying 
for their rent. In addition, these predatory lenders often 
require access to their bank account, and they take out money 
before they have paid for expenses, and they are going to incur 
overdraft fees and NSF fees.
    Mr. Garcia of Illinois. Thank you. One major reason why I 
think it is so important for this committee to pass my bill, 
the Veterans and Consumers Fair Credit Act, is that the 
protections in the Military Lending Act have been shown to 
work. Veterans and military groups support my bill because they 
are familiar with the research showing that the Military 
Lending Act protects active duty servicemembers from predatory 
loans and so pushes them towards healthier forms of credit.
    Assemblywoman Limon and Ms. Aponte-Diaz, what alternatives 
to payday loans exist out there that comply with the 36 percent 
rate cap but make sure that people get the credit that they 
need without falling into a debt trap, and how have consumers 
fared in States with strong interest rate caps in place?
    Ms. Limon. Thank you, and I want to point out that 
California has the California Pilot Program for Affordable 
Small Dollar Credit, and we have had that in place for a number 
of years, and that caps loans under $2,500 to 36 percent. So, 
that exists. It is a market that has been increasing over the 
last few years, and what we have also seen is that businesses 
are looking for regulatory stability to keep investing in this 
space.
    Mr. Garcia of Illinois. Thank you.
    Ms. Aponte-Diaz. And I will just add, I am from a State, 
Maryland, which has never had payday loans or high-cost 
installment loans, and there are multiple other ways to access 
credit. There are credit cards. There are also credit unions, 
and to your point, minority depository institutions, and credit 
unions are not charging more than 36 percent.
    There is also just the targeting--the marketing done by 
these high-cost lenders is why it is concentrated in 
communities of color. It is on your phone. It is on our radio 
stations. It is everywhere. So this is sort of what our 
community thinks, this is what is available. But there is a lot 
more. There are emergency programs for utility companies. There 
are nonprofits, churches, and a lot of other things. But we are 
bombarded with the marketing from these high-cost lenders.
    Mr. Garcia of Illinois. Thank you. A little bit of history 
on this issue for a moment. In 1978, Robert Bork, a well-known 
jurist in our country, argued and won a Supreme Court case that 
allowed banks to exploit high-interest rates.
    Here is how Binyamin Applebaum described what happened next 
in his book, ``The Economists' Hour'': ``Citicorp's vice 
chairman compiled a list of five states that had lenient laws 
or might be willing to write new laws. One of the five names on 
the list was South Dakota, which was already moving to get rid 
of its interest rate caps. The bill sailed through the 
legislature and was signed into law.
    ``But that wasn't enough. Under Federal law, banks needed 
an invitation to enter a new state. Citicorp executives flew to 
South Dakota and promised to bring 400 jobs.--you may have 
heard that earlier--The company gave the text of the desired 
invitation to South Dakota's Governor, Bill Janklow. The 
necessary legislation was introduced on the last day of the 
legislative session in 1980, passed by both houses, and the 
same day signed into law by Janklow before the sun went down. 
He also declared that the need for jobs was an emergency, so 
the law took effect immediately.''
    Four hundred jobs saved the State of South Dakota. Ever 
since then, South Dakota has exported high interest rates to 
consumers all over the country. So, that is why we are 
advancing this bill. We need to learn from history and not 
repeat those mistakes.
    Mr. Meeks. The gentleman's time has expired. The gentleman 
from Tennessee, Mr. Kustoff, is recognized for 5 minutes.
    Mr. Kustoff. Thank you, Mr. Chairman, and I do want to 
thank the witnesses for appearing this morning.
    Mr. Knight, if I could, I would like to plow over some 
ground that I know that we have talked about this morning, and 
make a couple of observations. One, and again, we have talked 
about this, I think every Member of Congress has constituents 
who lack the ability to pay a $400 emergency expense. They are 
my constituents, and everybody else represents these hard-
working people as well, who literally do work paycheck to 
paycheck.
    The second observation is, as we have talked about, we have 
a number of people in our communities, for all the reasons we 
have discussed, who are becoming unbanked or underbanked. So 
again, if we look at capping interest rates at, say, 36 
percent, a couple of questions. One is, what happens to access 
to credit for those who are unbanked or underbanked, in my 
district or any other district, maybe whose credit score is 
around 600, give or take? If you could address that question 
first.
    Mr. Knight. We would expect to see a rationing effect of 
credit, so some loans would not get made because they could not 
be made profitably. We would also expect to see a distortion in 
the model of credit, because APR is just one factor in a loan. 
And so if you have to squeeze the balloon, you would see either 
larger loans being made or longer timelines being made, or some 
combination thereof.
    There is also evidence that you would see a shift from 
independent loans to loans secured by something, or loans made 
by, say, a seller. There is a CFPB working paper that shows 
that in the presence of a binding usury cap, you don't see 
subprime independent auto loans. You see the dealer, the 
subprime car dealer, be the only lender, because they can raise 
the cost of the car. So it is a smaller interest rate but 
applied to a bigger principal, which becomes a problem if you 
want to prepay the loan or default on the loan, and you end up 
buying less car for more money.
    Ms. Aponte-Diaz. Can I just add that payday lending 
actually leads to being unbanked.
    Mr. Kustoff. Thank you. Mr. Knight, if we could look from 
the historical perspective and maybe look 5, 6, 7 years ago at 
Chile, they instituted a cap rate of 36 percent on small loans, 
unsecured loans. Are you familiar with what happened in that 
country?
    Mr. Knight. There was, as expected, a rationing of credit. 
There was a reduction in access, and the reduction in access 
fell disproportionately on the relatively poor and the 
relatively young.
    Mr. Kustoff. And what further result occurred when they 
capped the rate at 36 percent?
    Mr. Knight. My recollection is that, yes, there was that 
rationing of credit. You saw fewer loans being made, and people 
had to then compensate in some other way. And there is other 
evidence and other scholarship that indicates that in the 
presence of credit rationing, particularly something like 
subprime credit rationing, people move to other alternative 
forms of credit. They don't go with a credit card. They go to 
another alternative form or something like overdraft.
    Mr. Kustoff. Thank you. So as far as usury laws are 
concerned, they essentially set a cap on the price that a 
lender can recoup from making a loan, unless, of course, the 
lender gets into fees and other charges. Can you talk about how 
those laws affect the incentives to lend in a given market?
    Mr. Knight. Yes. As I mentioned, a usury cap is going to 
disincentivize loans made to relatively risky borrowers, 
because they cannot be made profitably over the portfolio of 
loans. They are also going to incentivize either shifting to 
more fee income rather than interest rate income if the law 
allows for that, or shifting the structure of the loan to be 
generally high principal and longer term, so that while the APR 
is lower, it is actually acting on a higher principal for a 
longer period of time.
    A useful exercise is if you compare a 30-year mortgage at 4 
percent APR to a payday loan of 2 weeks at 500 percent APR, 
taken to their natural term, as interest is a percentage of 
principal, it is actually higher with the mortgage, because 
even though it is a lower APR, it is a longer loan.
    Mr. Kustoff. Thank you. My time has expired, and I yield 
back.
    Mr. Meeks. The gentleman yields back. I now recognize the 
gentleman from Texas, Mr. Green, who is also the Chair of our 
Subcommittee on Oversight and Investigations, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing as well.
    Mr. Knight, persons who are caught in this debt trap, who 
received loans that they could not afford--what do you propose 
we do for the countless number of people who are caught in 
these debt traps? Do we just write them off as persons who 
should not have engaged in this process? They should have been 
better educated? Maybe they should have made more money. 
Perhaps, they shouldn't have been poor. But what do we do? We 
have people who are being harmed when we know that things 
shouldn't be occurring as they are. The Supreme Court has 
ruled, since the 19th Century, that you cannot engage in a 
scheme to create loans that are usurious. So, what do we do?
    Mr. Knight. Thank you very much for your question, sir, and 
it is a very valid concern about the plight of people who are 
trapped in suboptimal situations. I don't mean to make light of 
it. It is a very real concern. And I would say that I think we 
are looking at sort of a two-pronged issue. One is the 
underlying macroeconomic situation.
    Mr. Green. I understand that, but let's not use my time 
explaining the micro or the macro either, of economics. Tell 
me, what do we do with the people, for the people?
    Mr. Knight. I would say that our best bet is to provide 
people with better options, because the risk we run is that you 
can legislate away the supply of credit, but you cannot 
legislate away the demand for credit. So, the solution is to 
provide better options for credit for people who are poorly 
served. I don't think anyone thinks that a payday loan is the 
pinnacle of credit, and I hope we move to something that is 
better and more broadly available.
    Mr. Green. We are talking about people now who are 
entrapped into this cycle of borrowing. We know that it is 
unlawful to develop a scheme such that a bank and a nonbank 
entity can enter into it for the purpose of having an interest 
rate that they could not ordinarily have in a given State. That 
is unlawful. So, what do we do? What do we do for the people 
who are caught in this trap?
    Ms. Aponte-Diaz. Can I add that this is a bigger problem 
than just access to loans. This is low wages, historically, in 
our country. When the gentleman speaks about Chile, if we are 
following what is recently going on in Chile, there is a huge 
inequality issue in Chile, and they are still struggling 
because of wage issues.
    So we need to not try to solve this problem by giving 
people loans of 150 percent APR. Even at 36 percent, a $10,000 
loan costs $10,000. So APRs do matter, and this is not the 
solution that we should be talking about, ``Oh, we should let 
the free market charge whatever, 100 percent.'' Thirty-six 
percent is generous. It is a very generous number to say that 
you can charge someone that amount.
    Mr. Green. Thank you. Mr. Knight, back to you. What do we 
do when we have persons who are in this position? We have at 
least one recommendation, but the other side doesn't offer any 
alternative. They don't come with a plan to help extricate 
people from the enigmatic circumstance. Their plan is leave 
things as they are. This is the way things are and they should 
continue to be. I am asking you for a plan. What do we do? 
There is a plan on the table. What do we do?
    Ms. Johnson, are you attempting to weigh in?
    Ms. Johnson. I was not, but I was just thinking in my head 
that we need to pass--if we don't want an interest rate cap, 
then we need to say that banks in partnership with nonbanks 
should not be able to do multiple rollovers, should not be able 
to extend the maturity date multiple times, should not be able 
to electronically debit people's credit cards or bank accounts 
over and over again, and should not engage in illegal 
garnishments in order to collect on the debts. In other words, 
we need to--if we are not going to have an interest rate--
    Mr. Green. With my time that I have left, pardon me for 
interrupting, I am going to challenge my colleagues on the 
other side to give us a solution as opposed to an objection. I 
yield back.
    Mr. Meeks. The gentleman's time has expired. I now 
recognize the gentleman from Tennessee, Mr. Rose, for 5 
minutes.
    Mr. Rose. Thank you, Mr. Chairman, and I thank Chairwoman 
Waters and Ranking Member McHenry for organizing this hearing 
today.
    Mr. Knight, I think as has already been discussed here 
today, the valid-when-made issue is often confused or used 
interchangeably with the True Lender issue. When Chair 
McWilliams testified in a Financial Services Committee hearing 
here in December, she tried to clarify that the FDIC's proposed 
rule did not touch the True Lender doctrine. Do you agree with 
Chair McWilliams' assertion that the True Lender question is 
outside the scope of this rulemaking?
    Mr. Knight. I do.
    Mr. Rose. Thank you. When done properly, bank partnerships 
with nonbank lenders are good for consumers, good for 
competition, and good for innovation. These partnerships and a 
healthy secondary market for loans also help extend credit to 
consumers who might not otherwise be able to access it. This 
includes many of my own constituents in the Sixth District of 
Tennessee.
    Mr. Knight, in your comment letter supporting the OCC's 
rulemaking, you noted that these bank partnerships are a 
critical aspect of the business of banking. You go on to also 
say that having these loans remain valid is critical the modern 
economy. Why is the ability to sell a loan important for banks?
    Mr. Knight. It is important for banks because it is an 
important function of safety and soundness concerns, the 
ability to shift risk off their platform in a meaningful way, 
and a potential source of revenue, particularly for smaller 
banks who don't necessarily have the deposit base to hold a 
whole bunch of loans on their balance sheet, given the 
regulatory requirements that they face.
    And so, if we want, particularly smaller community and 
other banks to be more competitive going forward, they need 
options to manage that, and these bank partnerships provide 
such an option when done well.
    Mr. Rose. Earlier, Ms. Tlaib cut you off when asking about 
the illegality of these arrangements. Would you like to take a 
moment and complete your response there?
    Mr. Knight. Sure. The point I was going to make is it is 
not that--I think we need to distinguish between a rent-a-bank 
scheme and a bank partnership, because they are two separate 
things. A rent-a-bank scheme is where the bank is a passive 
party that basically just allows whomever, the nonbank lender, 
to impersonate it and just sign off on everything that is done.
    In these bank partnerships, the bank actually exercises 
ownership, discretion, and control. They are ultimately 
responsible and they ultimately have the final say, and they 
have a relationship with these partners akin to that of a 
vendor.
    Mr. Rose. I think you made an important point in your 
comment letter that I would like to highlight here today, and 
you just reiterated a few moments ago, which is that 
diminishing access to credit does not diminish the need for 
credit. I see this in my district, and I want to make reference 
to Mr. Luetkemeyer's comments earlier about what happens when 
we restrict the ability of individuals to get those small-
dollar loans that they may need, on terms that they want, which 
is to borrow for a very short period of time. I see this in my 
community all the time and I just want to stress the importance 
that we may think, when we impose statutes that limit those 
types of transactions, that they somehow go away.
    But I can assure the listeners, and our experts testifying, 
and my colleagues, that they don't go away, that people find 
ways to get the credit they need, whether that be by extending 
terms in some way or whether it be by seeking that credit 
through nontraditional sources, and that is what I often see in 
my community, where I guess so-called bootleg lenders are 
available, loan sharks, if you will, that unfortunately, we 
force borrowers to seek out when we restrict their ability to 
access the credit that they want and that they need through 
traditional terms.
    I want to conclude by just stressing that it is important 
to note that in the 115th Congress, this committee passed 
legislation, on a bipartisan basis, that would have codified 
the valid-when-made doctrine. And when that legislation, H.R. 
3299, came to the House Floor, it again passed with bipartisan 
support. And so I think we would be well-advised to keep that 
bipartisan mindset in mind. I yield back.
    Mr. Meeks. The gentleman yields back. I now recognize the 
gentleman from Florida, Mr. Lawson, for 5 minutes.
    Mr. Lawson. Thank you, Mr. Chairman. I would like to 
welcome you all to the committee. And I will start out with 
you, Ms. Saunders. Can you please explain the True Lender 
doctrine?
    Ms. Saunders. The True Lender doctrine is just a variant of 
centuries-old rules that usury law should not be evaded. The 
Supreme Court, as early as, I think, 1838, and probably earlier 
than that, has said that we are going to look beyond the form 
of a transaction, because predatory lenders are very creative, 
and we are going to prevent evasions. True Lenders is one form 
of evasion where a State-regulated lender hid behind a bank, 
but the payday lender or the regulated lender is the true 
lender.
    Mr. Lawson. Okay. Mr. Knight, did you want to comment on 
that?
    Mr. Knight. Yes. I just to elaborate that the doctrine is 
not universally applied. Some courts apply it, and some courts 
adopt a more contractual analysis of whomever the lender is on 
the contract is deemed to be the lender. As I mentioned 
earlier, it seems that the emerging trend is to look at who has 
the predominant economic interest in the loan. So if a bank 
already has a purchaser lined up for the loan, that weighs 
against the bank being the true lender in the court's mind, 
versus a loan that the bank intends to hold for a while.
    For example, the Madden decision doesn't deal with True 
Lender because the bank held the loan until it defaulted.
    Mr. Lawson. Professor Johnson, how do you feel about that?
    Ms. Johnson. The True Lender doctrine--first of all, I 
agree with my fellow witness that it is a longstanding 
doctrine. And what we are talking about with these new 
transactions, at the end of the day the payday lender or the 
nonbank lender performs all of the servicing functions, all of 
the debt collection functions. The bank itself might have an 
interest that effectively amounts to 10 percent, maybe 20 
percent of the receivables. To me, that is not a situation 
where the bank is in control. He is describing a scenario where 
the loans are on the books of the bank.
    In the cases that we are talking about, including pending 
cases--and I would direct you to read my statement where I talk 
about Kabbage, a fintech lender which has partnered with Celtic 
Bank in Utah--at the end of the day, the nonbank, Kabbage, is 
basically doing all of the lending functions, all of the 
servicing-related functions, and so Kabbage should be the true 
lender.
    Simply saying the bank is involved somehow in a way with 
the partnership does not do away with the fact that the 
predominant economic interest is still with these nonbanks. 
Therefore, if we are not going to cap the interest rates, we 
should do something else about what the nonbanks can do in 
terms of servicing these debts and collecting on these debts.
    Mr. Lawson. Professor Johnson, in capping the interest 
rates, will that provide more opportunities for individuals, 
especially in minority communities, where they have to go, 
oftentimes, to payday lenders in order to make it to their next 
paycheck?
    Ms. Johnson. Capping interest rates may drive down payday 
lenders in the community, but it doesn't mean that there are 
not other lending alternatives. As my fellow witnesses 
identified, you have millions of dollars being spent in 
advertising by the for-profit, nonbank lenders, whereas credit 
unions and some of these other entities don't have all of that 
advertising. So the person in your community may not realize 
they can just simply go to a credit union and get the same type 
of loan, except at a better interest rate, on better terms, and 
not only being paid back over a longer period of time, also 
benefitting from budgeting and other services provided by the 
local bank or community bank or credit union.
    Mr. Lawson. Ms. Limon, would you like to comment on that?
    Ms. Limon. Thank you. I would say that States are doing 
different things. There are multiple options. California has a 
pilot program. But I think that another piece that is really 
important to highlight is that as we have this conversation 
about rent-a-banks, they are really going around State laws. In 
July of 2019, before the bill had passed in California, before 
it had been signed by the governor, there was a conversation 
with these companies about how they were going to evade the 
law, and that, I think, is what we are trying to get at, how we 
ensure that these companies don't evade the law by finding a 
partner outside of the State to do business as usual and offer 
products that are not good for consumers.
    Mr. Meeks. The gentleman's time has expired.
    Mr. Lawson. Thank you.
    Mr. Meeks. I now recognize the gentleman from Georgia, Mr. 
Loudermilk, for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman, and I thank the 
panel for being here. This is a very important discussion we 
are having here, because what we need to be focused on is how 
do we make finance available, especially to most vulnerable 
communities. And I think what my friends on the other side of 
the aisle are doing is going to be harmful to those very 
communities. I am talking about rural and minority communities, 
because those are the ones that have a problem getting access 
to capital.
    And I appreciate the comment that was just made about a 
conversation of evading the law. I know of the conversation, 
but I don't know that anything has transpired with that. So, 
Mr. Knight, I would like to ask you a series of quick 
questions, because I think what has happened is we have 
demonized something that has been standard operating practice 
in the financial services market for a couple of centuries.
    Now, since we have been here today, some have tried to 
portray the OCC and FDIC rulemaking on valid-when-made as a new 
regulatory giveaway to banks. My understanding is the Madden 
decision deviated from nearly 2 centuries of precedent in 
banking law. Is that true?
    Mr. Knight. I believe so.
    Mr. Loudermilk. Do these proposed rules change the 
agencies' underlying policy, or do they simply codify the 
agencies' longstanding position?
    Mr. Knight. They codify the longstanding position.
    Mr. Loudermilk. Two centuries' worth of longstanding 
positions.
    Mr. Knight. Yes.
    Mr. Loudermilk. That has worked very well.
    Mr. Knight. Yes.
    Mr. Loudermilk. When I make a loan, I really don't care 
what happens on the back side of it, as long as my interest 
rate is the same all the way through. I am okay if it goes 
down, but I need to know that that interest rate is going to 
stay the same. And the person loaning the money to me needs to 
be profitable so they can make more money. I think that is an 
important position to have.
    Another question: Nonbank lenders are not permitted to 
export interest rates unless they are partnering with a bank or 
credit union that originates the loan, is that true?
    Mr. Knight. I would clarify that the bank or credit union 
is the one exporting the interest rates, because they are the 
lender.
    Mr. Loudermilk. So there is a bank, a regulated bank, on 
the back side of this. Correct?
    Mr. Knight. Correct.
    Mr. Loudermilk. In order to benefit from the bank's 
interest rate exportation authority, nonbank fintech lenders 
must submit to regulation as third-party service providers by 
the banking regulators, and the bank is accountable for the 
actions of its fintech partners. Is that correct?
    Mr. Knight. In the bank partnerships we are talking about, 
that is what the law says.
    Mr. Loudermilk. And that is what we are worried about, is 
these fintech partnerships.
    Do Federal banking regulators check to make sure these 
loans are made lawfully during the exam process?
    Mr. Knight. Yes.
    Mr. Loudermilk. They do. Is there widespread abuse of these 
bank partnerships by payday lenders?
    Mr. Knight. Not to my knowledge.
    Mr. Loudermilk. Do you know of any that are exporting it?
    Mr. Knight. I do not know of any.
    Mr. Loudermilk. Okay. I haven't heard of any either. 
Kabbage was brought up. I had a small business. We had lines of 
credit. We were going through a traditional bank and credit 
unions for small-business lending. After the Dodd-Frank Act, my 
business no longer qualified for those loans. Had there been a 
Kabbage available, I would have been able to save a lot of 
employees that I had to lay off because I couldn't have access 
to capital. So I think we need to be very careful in demonizing 
businesses that are actually providing funding to markets that 
traditional banks and credit unions can't.
    Ms. Aponte-Diaz. Can I add something?
    Mr. Loudermilk. I am not quite done yet. Why has the 
availability of credit decreased and personal bankruptcies 
increased in the three States since the Second Circuit made the 
Madden decision?
    Mr. Knight. Based on a recent study, the authors link it to 
the lack of access to marketplace lending and the inability of 
borrowers who would otherwise be able to either refinance an 
existing loan or deal with exigent circumstances like a medical 
bill, the inability to access credit.
    Mr. Loudermilk. And low-dollar loans are an issue. I 
apologize, but I have a short amount of time, and I always run 
out of time.
    Regarding another issue which we are talking about, a 
national interest rate cap, here is a concern I have. The 
small-dollar loans are a big problem. Forty percent of 
Americans can't afford a $2,500 emergency that they have. They 
need access to credit. The problem we have, as a George 
Washington University study indicated, is that the break-even 
APR of a $2,600 loan is 36 percent. That is the break-even APR, 
which means if you are going to borrow below that, you need to 
have some higher interest rates. Right?
    So a 36 percent national interest rate cap would 
effectively eliminate loans under this amount. A study by the 
Federal Reserve Bank of New York indicates that up to 60 
million Americans do not qualify for traditional bank--
    Mr. Meeks. The gentleman's time has expired.
    Mr. Loudermilk. Mr. Chairman, may I submit the study for 
the record?
    Mr. Meeks. Without objection, it is so ordered.
    Mr. Loudermilk. Thank you. I yield back.
    Mr. Meeks. The gentleman from Washington, Mr. Heck, is now 
recognized for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman, and I want to thank all 
the members of the panel as well for their presence today, and 
more importantly, for their advocacy on behalf of people who 
need a voice. Frankly, the older I get, the more I have come to 
the conclusion that if we are not here to give a voice to 
people who don't have one, I am not quite sure why we are here.
    I appreciate much of the conversation thus far. I 
appreciate what I think is an important element of this, which 
is the access to credit issue and the implications of this 
proposed policy, and the oft-cited data point, which 
Congresswoman Pressley cited, that 40 percent of American 
households don't have $400 to meet an emergency need. And that 
is a balancing consideration of this debate going forward.
    I do think there should be a balancing consideration of 
what is it that States have actually done, albeit too few of 
them, and the graph happens to be up right now as I speak. I am 
from Washington State, and we are pretty proud of our efforts 
at consumer protection. Years ago, we enacted a payday lending 
limitation statute, which was very hard-won. We are talking 
tooth-and-nail, knock-down, drag-out. And by just about every 
measurable account, it is working.
    Now I don't pretend to be a total expert, but here is what 
I do know. I know the reports are good from consumer 
organizations and the regulator. I know that the number of 
payday lending locations has declined by 90 percent, payday 
lending dollar volume is down 83 percent, and perhaps best of 
all, the number of complaints filed with our regulator has 
decreased from hundreds per year to 40. It seems to be working.
    That begs a question for me in the broader context of this. 
I think, Ms. Saunders, I would like to ask you, is there a 
compelling argument for State preemption, or Federal preemption 
of State statute, State policy, when there is arguably a 
comparable consumer protection regime?
    Ms. Saunders. No, there is not. As I said in my opening 
statement, it is as American as apple pie for States to have 
interest rate caps to protect their residents. All of the 
States have them. Of course, it goes back to the Bible, and 
most States have them today.
    Unfortunately, although, Washington State has good laws, 
and it is a modest law, no more than eight rollovers, and yet 
the payday lenders couldn't live on that abusive model. But in 
Washington State, although you only allow 29 percent on a 
$2,000 loan, there is a rent-a-bank lender, OppLoans, that is 
using FinWise bank in Utah, which is making 160 percent APR 
loans up to $4,000 in Washington State. And there is nothing 
under the National Bank Act that allows nonbank lenders to 
obliterate the centuries-old usury caps that States like 
Washington have, to protect your citizens.
    Mr. Heck. So your point of view, and I am asking in all 
sincerity, is that Washington State law does not protect its 
consumers to a sufficient degree, notwithstanding the data I 
shared and the reports I get?
    Ms. Saunders. The Washington State laws are quite good, but 
there are a couple of lenders that are starting to evade them 
using this rent-a-bank model. And if we don't put a lid on it 
right now, you are going to see a lot more problems.
    Mr. Heck. Isn't there a way to solve that without an 
overall rate cap?
    Ms. Saunders. Well, I think an overall rate cap would cut 
off the worst of the high-cost rent-a-bank lenders, but we also 
can simply stop banks from exporting high-rate loans into 
States like Washington that don't allow it.
    Mr. Heck. So remember my premise here, which is that we are 
here to provide and extend protection to people who are 
vulnerable. I think it is worth keeping in mind that Federal 
preemption is a two-edged sword, and that what one hand giveth, 
the other hand can taketh away.
    And I always feel compelled to remind people that if we 
want to go down the road of Federal preemption, understand 
there is another side of that coin, that if Federal preemption 
seeks to, if the policymakers seek to, they can remove those 
consumer protections.
    I have had this argument or debate or good-hearted back-
and-forth with my colleagues on this committee for quite some 
time as it relates to insurance regulation. I live in a State 
where the insurance commissioner is doing a great job, and I 
don't want somebody to come in and set a lower standard than he 
has set. And the same danger presents itself when it comes to 
this area.
    But I will take into account and further plumb your 
feedback on our law--
    Mr. Meeks. The gentleman's time has expired.
    Mr. Heck. --and I guess I am going to stop talking.
    Mr. Meeks. The gentleman from Ohio, Mr. Davidson, is now 
recognized for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman. And thank you to our 
witnesses. I appreciate your efforts to make sure we get this 
right.
    Mr. Knight, I think you said it perhaps best, that Congress 
could enact legislation that would restrict the supply of 
lending, but we wouldn't be able to dramatically affect the 
demand. And so, what happens when we have big disconnects 
between supply and demand? Normally black markets form, right? 
So, we have large black markets all around the United States, 
it is a significant part of U.S. GDP, and a lot of that is 
attributable to broken market systems. And some of those are 
the result of legislation.
    So could you highlight how a rate cap would do just that, 
limit supply without checking demand?
    Mr. Knight. Yes, absolutely. Ironically, one of the great 
progressive reforms in this very area was the Uniform Small 
Loan Law of 1916 by the Russell Sage Foundation, and their 
recognition was that usury rates were too low to attract 
legitimate lenders and that they needed to actually allow 
people to make profitable loans. And when they made those 
reforms, they were opposed by the religious leaders and all who 
wanted the much lower rates, but also loan sharks, who wanted 
to continue to operate illegally and not face legitimate 
competition. And so the risk we run if we set an interest rate 
that is binding and limits and constricts credit is that either 
we cut people out of the legal system and they have to go seek 
some inferior alternative, including loan sharks, or we have to 
distort credit products so that they are inferior to what they 
would have gotten otherwise, and, therefore, are a worse fit 
than they could have had, had we left the market.
    Mr. Davidson. Thanks for that basic explanation. And my 
colleague, Mr. Green, was highlighting what is the alternative. 
Well, the alternative is to make the economy grow, to create 
more jobs than there are people to fill them, to see wages 
rising instead of stagnant, to have wages at the bottom portion 
of the economy growing faster than wages at the top of the 
economy, to get past the broken status quo of stagnant growth 
and on to the economy that we are enjoying today. And we did 
that largely through deregulation, tax reform, and 
incentivizing investment in the United States and growth. We 
still have a long way to go, but we are making progress.
    Ms. Saunders, as you are aware, this past year Ohio passed 
a law that regulated payday lenders, or lenders in question 
related to this year. Pew, a consumer advocacy group, very 
similar to your organization, NCLC, has said that the Ohio 
legislature got payday loan reform right. The structure of the 
loan has an interest rate component plus fees.
    Here is an example of what Ohio's law allows. If you lend 
$300 for 4 months under current Ohio law, the APR could be as 
high as 161 percent, depending on what day of the month the 
loan is originated. It doesn't appear that Pew thinks a 36 
percent rate cap is the right reform. They also support bank 
lenders that charge rates at least double the 36 percent rate. 
Why is there a disconnect between Pew and NCLC?
    Ms. Saunders. I think Ohio is following the path of 
Colorado. Ohio voters voted to cap rates at 28 percent, 
overwhelmingly, back in 2008, but the payday lenders decided to 
call themselves mortgage lenders in order to be able to charge 
a fee allowed for mortgages, and they got around it. And the 
legislature, where there is a lot of big payday loan money, 
unfortunately, blessed that.
    Eventually, after a lot of hard work, going up against big 
money from predatory lenders, the Ohio Legislature came up with 
something that allows high-rate loans, like Colorado did. But 
eventually, Colorado voters voted for a 36 percent rate cap.
    Mr. Davidson. And fees. And then what will happen is the 
same challenge of black markets.
    Professor Johnson, I like your framework, and as another 
Ohio person, thanks for coming to share your expertise in the 
field. I like kind of the rubric that you laid out, but I don't 
necessarily understand the mechanisms of how it works, for 
example, debt entrapment. Could you explain how someone is 
forced to take this loan?
    Ms. Johnson. Okay. So by debt entrapment, I don't mean that 
somebody is being forced to take the loan. By that, I mean that 
you have set up a scenario where a person is signing up for a 
loan, not really understanding the consequences of that loan. 
For example, if we talked about the payday loan rule that was 
to take effect this past year, it would have required you to do 
the ability to repay, right? So underwriting, ability to repay, 
that should be something that should happen now.
    Mr. Davidson. So, sound underwriting practices would help 
make a difference. And frankly, I would like to go into a lot 
of areas where we totally disregard sound underwriting 
practices and we socialize the risk. We distribute the risk 
over everyone, including people who can qualify for lower 
rates.
    So, thanks for the hearing, and--
    Mr. Meeks. The gentleman's time has expired. The gentleman 
from California, Mr. Vargas, is now recognized for 5 minutes.
    Mr. Vargas. Thank you very much, Mr. Chairman, and thank 
you to the witnesses for being here. I apologize that I wasn't 
here earlier. I also sit on the Foreign Affairs Committee, and 
we were dealing with the unique challenges that women face in 
global health, and I wanted to be there for that presentation.
    But now that I am here, I do want to ask this. APR does 
matter, and if you don't think it matters, we don't take those 
300 percent loans. I always tell my two daughters, ``Don't 
listen to what people say. Watch what they do.'' You go to the 
beach and they say, ``Oh, the water is warm.'' I say, ``Why 
aren't you in it?'' ``Hell, no. I am not getting in that cold 
water.'' We don't take those loans, because we think they are 
predatory. That is why we don't take them.
    But I did want to talk about State rights versus Federal 
preemption. It is interesting. I have been around long enough 
to listen to Republicans always talk about strong State rights, 
except when they don't like them, and then they are against the 
State rights and the Federal Government should be involved.
    California Assemblymember Limon, you passed a law, and it 
seems to be working. Obviously, it is early on. Can you comment 
on the process you went through, and the State went through, to 
do that?
    Ms. Limon. This was a very extensive process. It has been 
tried for well over 2 decades. But we really put an incredible 
coalition together, faith groups, the Urban League, veterans' 
groups, responsible lenders, all to try to come up with a 
solution to one product, which was the fastest-growing product 
in the market, that caused the most harm to the consumer.
    And we passed this law and it was signed, and now what you 
see is that there are companies evading it. And I actually want 
to use Mr. Knight's description, if I may. He talked about the 
rent-a-bank scheme being an impersonation of the true lender. 
And based on that description, I argue that the rent-a-bank 
schemes ongoing in California will clearly show that the 
nonbank lender is the lender.
    I want to give an example of what is happening. When you 
see a title lender like LoanMart advertising their loans on a 
website, between 60 to 220 percent, and in the fine print at 
the bottom of this website you see that it says that the loan 
is made by a bank in Utah. That is what we are talking about. 
They are evading State law. The State law is very clear that it 
is 36 percent plus the Federal rate, and now they are using a 
bank outside of the State to evade an existing law.
    Mr. Vargas. Ms. Aponte-Diaz, you stated at one point that 
the underbanked actually get hurt taking these predatory loans 
because, in fact, oftentimes, they get unbanked. Could you 
explain that a little bit?
    Ms. Aponte-Diaz. Yes. I have spent the last 7 years in 
California talking to payday borrowers, to folks who have 
gotten the installment loans, and there is not one of those 
former payday borrowers who said, ``I would go back and do this 
again,'' or ``I would go to the black market.'' Once they get 
out of that debt trap, they are done with it, and look for 
better access to credit.
    I'm sorry. Can you repeat your question one more time?
    Mr. Vargas. Yes. You said that what happens, you snuck it 
in there quickly--
    Ms. Aponte-Diaz. Oh, the unbanked. Yes. I am so sorry. For 
payday lending, and increasingly installment lending, you have 
to give your bank account information so that it can be 
deducted directly from your bank account. So what we see often 
is, maybe the borrower doesn't have enough money to pay their 
rent or groceries or utilities, and the payday lenders come and 
still take that money out. And so, if there is no money in 
there, then you have your overdraft fees over and over, and 
then those lead to bank closures. So I was arguing that we are 
not trying to help the unbanked.
    Mr. Vargas. You had to sneak it in there. I just wanted to 
hear your explanation. I appreciate it. Thank you very much.
    Ms. Aponte-Diaz. Thank you.
    Mr. Vargas. I do want to ask one last question--I have 
about a minute left--the issue that you can't loan to anyone 
$2,600 or less at 36 percent because it is just not doable. 
Professor, could you comment on that, or whomever would like 
to?
    Ms. Saunders. I would just say that I don't think that is 
true. Self-Help Credit Union, an affiliate of the Center for 
Responsible Lending, certainly does it. In South Dakota and 
Montana, when the voters capped rates at 36 percent, we 
actually saw an increase in credit union small-dollar loans.
    Mr. Vargas. That is what I believed, but I have heard it 
almost as if it was coming from Moses here that this was in 
case the law. But I also have to thank you. See, most of it 
does go back to the Bible. As a former Jesuit, I appreciate 
that, and you do have usurious laws in the Bible too, that we 
don't violate.
    Mr. Knight, I have 20 seconds left, would you like to 
comment on any of that?
    Mr. Knight. I would just say that I think it is fantastic 
if credit unions can fill some of this gap, but there is a 
capacity question as to how much of the gap they can actually 
fill. And it is an open question.
    Mr. Vargas. I wanted to give the Republicans an 
opportunity, because everybody seems to just talk to you and 
not to the others. I wanted to make sure you had equal--
    Mr. Meeks. The gentleman's time has expired. The gentleman 
from North Carolina, Mr. Budd, is now recognized for 5 minutes.
    Mr. Budd. I thank the Chair. Mr. Knight, I appreciate you 
being here. So much of the discussion surrounding the Madden 
case--I think I have heard it mentioned earlier, from some of 
my colleagues--has to do with the valid-when-made doctrine, 
which says that a loan does not become valid when transferred 
to a third party. The idea behind valid-when-made is that a 
loan is valid from the beginning; it can't suddenly change when 
transferred to another person or company. And to my 
understanding, this has been part of the banking law in the 
U.S. for about 100 years. So far, so good?
    Mr. Knight. I think it has been a part for longer than 
that. If I may, I want to note one thing, just for 
completeness.
    Mr. Budd. Please.
    Mr. Knight. There is a counterargument that says that the 
early cases largely dealt with note assignment, and so the fact 
that it was two subsequent loans is relevant. I disagree with 
that.
    Ms. Johnson. But those were the early cases.
    Mr. Knight. Those were the early cases, but those cases, as 
we acknowledge, banking changes rapidly, and more recent cases 
have held that a subsequent transaction does not invalidate the 
loan. And I think if you look at sort of the notion behind it, 
there isn't a reason why a subsequent downstream transaction 
that does not change the borrower's obligations should relieve 
the borrower of their obligations.
    Ms. Johnson. The Madden decision did not involve--
    Mr. Budd. I reclaim my time. Thank you, Mr. Knight. 
However, the Madden v. Midland Second Circuit decision in 2015 
kind of branched away from this longstanding principle, and it 
ruled that loans could become invalid when sold from a bank to 
a nonbank. So as a result of this decision, credit markets have 
become volatile, many borrowers have seen their access to 
credit diminish, as we have talked about today, and it is at a 
time when we should be doing everything we can to provide small 
businesses and consumers--I even heard my colleague from 
Georgia mention that lack of capital access as a small business 
owner--better access to credit and financing alternatives. So, 
it seems unwise to put caps on consumer loans.
    So Mr. Knight, in your opinion, was the Madden decision 
wrongly decided?
    Mr. Knight. I believe it was.
    Mr. Budd. And in what ways has the Madden decision actually 
hurt low-income borrowers, hurt low-income borrowers' access to 
credit?
    Mr. Knight. Based upon the academic evidence I have seen, 
we have seen a constriction in credit and a resulting--there is 
evidence of a link to an increase in bankruptcy as people who 
need to access credit to address either an emergent situation 
or an existing loan, where they need to be able to refinance an 
existing loan, are not able to do so. And one of the weird 
wrinkles of this is that you can be under a credit card debt at 
30 percent and not be able to access a marketplace loan at 25 
percent to refinance it, because in the latter case, the bank 
is planning to sell the loan. That strikes me as nonsensical.
    Mr. Budd. So just striving for clarity here, we have this 
decision, this Madden decision. We cap these rates, trying to 
help people, because I think on both sides, we really want to 
help people here, absolutely. But it ends up hurting people? 
That is what I am hearing from you.
    Mr. Knight. It appears to be rationing credit, and that 
appears to be having a harmful result.
    Mr. Budd. More bankruptcies.
    Mr. Knight. That appears to be the evidence.
    Ms. Johnson. Can I respond to that bankruptcy--
    Mr. Budd. Great. Thank you. I want to continue on. I would 
like to make two observations and then tie them together into a 
question. The first is that it is incredibly troubling that 
millions of Americans lack the resources to pay for a $400 
emergency expense. I think we all can agree that that is very 
troubling. But today, as we speak, hard-working Americans are 
living paycheck to paycheck. When times get tough, they may 
need to borrow money from somewhere.
    The second observation is the basic principle that our 
financial services economy is built on risk-based pricing. Many 
of the people I have described have credit scores just right 
above 600, and today they have access to credit, and lenders 
lend to them in accordance with State and Federal laws designed 
to promote safe and responsible lending.
    So here is my question, Mr. Knight. If we cap the interest 
rates at 36 percent, what is going to happen to access for 
credit for the unbanked and the underbanked folks across our 
country? Will their need for credit just magically disappear, 
or is it more likely they will turn to unregulated credit if 
regulated creditors turn them down?
    Mr. Knight. The need for credit will not disappear, and so 
to the extent a borrower who previously could access credit and 
is now capped out of the market, they will either search for 
illegal or otherwise alternative credit or suffer the 
consequence that they were seeking to avoid with a loan.
    Mr. Budd. Thank you. I believe I am out of time. Thank you 
for your time.
    Mr. Meeks. The gentleman yields back. I now recognize the 
gentleman from Texas, Mr. Taylor, for 5 minutes.
    Mr. Taylor. Thank you, Mr. Chairman. I appreciate this 
hearing.
    I just wanted to quickly do a lightning round. So a bank, 
the profit margin is about 10 percent, right? And other 
businesses have higher profit margins. Some have lower profit 
margins. What is an unacceptable profit margin, in your mind, 
for payday lenders? And I will start with Mr. Knight. I am just 
looking for a number--8 percent, 10 percent, 100 percent? What 
is an unacceptable profit margin for a payday lender in your 
mind, Mr. Knight?
    Mr. Knight. I don't have a numerical answer. I'm sorry.
    Mr. Taylor. Ms. Saunders?
    Ms. Saunders. I focus on the impact on the consumer, not on 
the profit.
    Mr. Taylor. Got it. Okay. Professor?
    Ms. Johnson. No magic number. I am more concerned about the 
terms of the loan as well as the interest rate.
    Mr. Taylor. Okay. Ms. Aponte-Diaz?
    Ms. Aponte-Diaz. We have asked the payday lenders for a 
description. Like they are telling us they need to pay for 
their storefronts, for their employees, and we have asked over 
and over for details about why they have to charge 100 percent 
to make ends meet, and we have not seen the documents on that. 
But what we have seen is that there are 40 percent default 
rates on these high-cost installment loans.
    Mr. Taylor. Sorry to cut you off, but do you have a number?
    Ms. Aponte-Diaz. No.
    Mr. Taylor. I will come back to you in a second. Ms. Limon?
    Ms. Limon. No numerical number. It is to do right by the 
consumer.
    Mr. Taylor. Okay. So, there are publicly-traded payday 
lenders. Have you looked at their profit and loss statements?
    Ms. Aponte-Diaz. No.
    Mr. Taylor. Why? You can go look at their FTC filings, 
right?
    Ms. Aponte-Diaz. Right.
    Mr. Taylor. So, you have a K-1. You can go look at that. 
You haven't looked at that?
    Ms. Aponte-Diaz. I have not personally, but--
    Mr. Taylor. Okay. Mr. Knight?
    Mr. Knight. Yes. There are a couple of studies that look at 
that, and payday lenders are not particularly profitable 
relative to other finance companies. In fact, they tend to be 
significantly less profitable than more traditional finance 
companies.
    Mr. Taylor. Do you want to put a number on that?
    Mr. Knight. I don't have the exact--don't quote me on this, 
but I believe they are about a third as profitable.
    Mr. Taylor. I have seen numbers in the 8 to 12 percent 
range, in terms of profitability.
    Mr. Knight. Yes.
    Mr. Taylor. So sometimes higher than banks, sometimes lower 
than banks, but I haven't seen anything that indicates--what 
generally lowers prices is competition, right? So if you have 
lots of people competing to provide something, it drives the 
margins down to where it sort of comes to be a risk-adjusted 
rate of return. So, hey, that is an acceptable rate of return.
    And then in terms of pricing, thinking about processing a 
payday loan, if you were going to process a payday loan, you 
would need to buy a credit report, right? You would need to 
have a human being standing at a teller to fill out the forms. 
Those are some of the prices that go into not just the interest 
rate on the money but the actual processing of the form. Do you 
want to speak to that, Mr. Knight?
    Mr. Knight. My understanding, based upon the research I 
have seen, is that a lot of the expense about payday loans is 
overhead. It is location, because this is largely a 
convenience-driven business, and it is staff, because it is 
human-intensive and the hours are long. And so, yes, a lot of 
the cost is what we would consider to be overhead.
    Mr. Taylor. Right. And if we put lots of regulatory burdens 
on lenders and make it really difficult to lend, then we are 
actually making fewer competitors, and that, in turn, should 
drive up prices and make the margins higher. If it is harder to 
do, it gets more expensive, as a general rule of thumb.
    Ms. Aponte-Diaz. Excuse me, sir. Just to add, what we have 
seen is $8 billion stripped in payday lending and car title 
loans in fees across the country, so $8 billion.
    Mr. Taylor. I don't know what that means.
    Mr. Knight, just thinking about what banks do, they 
typically hire consultants to do their IT work, right? So, 
banks hire consultants to do their IT systems, their mobile 
banking applications for small regional banks. They have to go 
hire someone to go do that for them. They hire companies to do 
loan processing, to actually create the document processing 
management system. They go to outside credit bureaus to go get 
their credit reports, because they don't do that internally.
    And so, they interact with the Federal Government, with the 
SBA loan program. It is very normal for all businesses, but in 
particular, in this case, to use outside vendors to provide 
services for them. What would be the benefit to a bank to use 
an outside vendor to help them underwrite smaller loans?
    Mr. Knight. To the extent that this vendor has a good model 
and good technology--and I should note that ultimately the bank 
has to own the model. And my understanding is, from talking to 
some of these companies, the bank does own the model. They 
don't just accept the model whole cloth. They push back, they 
work on it, and it is a collaborative process. But to the 
extent that this new customer, this partner, can bring new 
technology, new capabilities, it can benefit the bank.
    Mr. Taylor. Okay. Thank you. Mr. Chairman, I yield back.
    Mr. Meeks. The gentleman yields back. All time has expired.
    Without objection, a statement from the California Attorney 
General, Xavier Becerra, and a statement from Hope Credit 
Union, both supporting the preservation of State laws that 
better protect consumers, are entered into the record.
    Without objection, it is so ordered.
    I would like to thank our distinguished witnesses for their 
testimony today. Your testimony has been very important and 
very insightful to all of the Members, I am sure.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereas, at 12:46 p.m., the hearing was adjourned.]

                            A P P E N D I X

                            February 5, 2020
                            
                            
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