    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                    FINTECH AND TRANSPARENCY IN SMALL BUSINESS
                                     LENDING

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

                                    HEARING

                                   BEFORE THE

                         SUBCOMMITTEE ON OVERSIGHT,
                       INVESTIGATIONS, AND REGULATIONS

                                     OF THE

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  HEARING HELD

                                 JULY 13, 2022

                                   __________

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                Small Business Committee Document Number 117-060
                 Available via the GPO Website: www.govinfo.gov

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    48-010                     WASHINGTON : 2022

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

                       HOUSE COMMITTEE ON SMALL BUSINESS

                     NYDIA VELAZQUEZ, New York, Chairwoman
                              JARED GOLDEN, Maine
                              JASON CROW, Colorado
                             SHARICE DAVIDS, Kansas
                             KWEISI MFUME, Maryland
                            DEAN PHILLIPS, Minnesota
                             MARIE NEWMAN, Illinois
                           CAROLYN BOURDEAUX, Georgia
                             TROY CARTER, Louisiana
                              JUDY CHU, California
                           DWIGHT EVANS, Pennsylvania
                         CHRISSY HOULAHAN, Pennsylvania
                              ANDY KIM, New Jersey
                             ANGIE CRAIG, Minnesota
                            SCOTT PETERS, California
                  BLAINE LUETKEMEYER, Missouri, Ranking Member
                             ROGER WILLIAMS, Texas
                            PETE STAUBER, Minnesota
                            DAN MEUSER, Pennsylvania
                            CLAUDIA TENNEY, New York
                           ANDREW GARBARINO, New York
                             YOUNG KIM, California
                             BETH VAN DUYNE, Texas
                             BYRON DONALDS, Florida
                             MARIA SALAZAR, Florida
                          SCOTT FITZGERALD, Wisconsin
                              MIKE FLOOD, Nebraska

                     Melissa Jung, Majority Staff Director
                Ellen Harrington, Majority Deputy Staff Director
                         David Planning, Staff Director

                                C O N T E N T S

                               OPENING STATEMENTS

                                                                       Page

    Hon. Dean Phillips...............................................     1
    Hon. Beth Van Duyne..............................................     2

                                   WITNESSES

    Mr. Sean Salas, Chief Executive Officer and Co-Founder, Camino
      Financial, Los Angeles, CA.....................................     5
    Ms. Joyce Klein, Senior Director, Business Ownership Initiative,
      Aspen Institute, Washington, DC................................     6
    Ms. Diane Paterson, Regional Director, Twin Cities Small Business
      Development Center, Minneapolis, MN............................     8
    Dr. John Griffin, James A. Elkins Centennial Chair in Finance,
      McCombs School of Business, The University of Texas, Austin, TX    10

                                    APPENDIX

    Prepared Statements:
        Mr. Sean Salas, Chief Executive Officer and Co-Founder,
          Camino Financial, Los Angeles, CA..........................    23
        Ms. Joyce Klein, Senior Director, Business Ownership
          Initiative, Aspen Institute, Washington, DC................    26
        Ms. Diane Paterson, Regional Director, Twin Cities Small
          Business Development Center, Minneapolis, MN...............    33
        Dr. John Griffin, James A. Elkins Centennial Chair in
          Finance, McCombs School of Business, The University of
          Texas, Austin, TX..........................................    35
    Questions for the Record:
        None.
    Answers for the Record:
        None.
    Additional Material for the Record:
        Electronic Transactions Association (ETA)....................    39
        Innovative Lending Platform Association......................    42
        Letter from Members of Congress to Dave Uejio, Acting
          Director, Consumer Financial Protection Bureau.............    49
        National Association of Federally-Insured Credit Unions
          (NAFCU)....................................................    53
        African American Alliance of CDFI CEOs letter................    55
        African American Chamber of Commerce letter..................    58
        Responsible Business Lending Coalition letter................    61

               FINTECH AND TRANSPARENCY IN SMALL BUSINESS LENDING

                                  ----------

                            WEDNESDAY, JULY 13, 2022

                  House of Representatives,
                   Committee on Small Business,
                             Subcommittee on Oversight,
                               Investigations, and Regulations,
                                                        Washington, DC.
        The Subcommittee met, pursuant to call, at 10:04 a.m., in
    Room 2360, Rayburn House Office Building, Hon. Dean Phillips
    [chairman of the Subcommittee] presiding.
        Present: Representatives Velazquez, Phillips, Newman,
    Bourdeaux, Chu, Craig, Meuser, Van Duyne, Donalds, and
    Fitzgerald.
        Chairman PHILLIPS. All right. Good morning, everybody. I am
    going to call the meeting to order. And without objection, the
    Chair is authorized to declare a recess at any time.
        I want to begin by noting some important requirements.
    Standing House and Committee rules will continue to apply
    during hybrid proceedings. All Members are reminded that they
    are expected to adhere to these rules, including decorum. House
    regulations require Members to be visible through a video
    connection throughout the proceeding. So please keep your
    cameras on. Also, please remember to remain muted until you are
    recognized to minimize background noise.
        In the event a Member encounters technical issues that
    prevent him or her from being recognized for their questioning,
    I will move to the next available Member of the same party, and
    I will recognize that Member at the next appropriate time slot
    provided that they have returned to the proceeding. And with
    that, I will begin with my opening statement.
        Increasing the flow of capital to American small businesses
    is one of this Committee's foundational goals. When
    entrepreneurs can secure financing on reasonable terms, they
    create jobs, expand their businesses, and move the economy
    forward. Unfortunately, most American business owners feel that
    they cannot adequately access capital. According to a 2022
    Federal Reserve Survey, 59 percent of small employer firms said
    they have unmet financing needs. So we must find ways to fill
    that gap and deliver more funding to small firms on safe and
    responsible terms.
        Massive developments in financial technology, commonly
    known as fintech, have shown real promise for expanding access
    to credit for small firms. Over the years, entrepreneurs have
    flocked to fintechs for their capital needs. One study found
    that by 2016, non-bank lenders had a market share of close to
    60 percent in the small business lending sector. During the
    PPP, Paycheck Protection Program, we witnessed the ability of
    fintechs to make small-dollar PPP loans to small businesses,
    particularly those in underserved communities, more effectively
    than traditional banks could.
        Small businesses often turn to fintechs for their speedy
    approval process, more diverse financing options, and
    alternative metrics for credit worthiness. However, while
    fintech lending has helped many entrepreneurs, concerns are
    growing that industry practices may harm and even target small
    businesses.
        For instance, the speed at which fintech lenders deploy
    capital can come at a very substantial cost. A conventional
    bank loan typically carries an APR of 4 to 13 percent. For
    fintechs, APRs for online loans and other financing products
    can start at 7 percent, and can climb higher than 100 percent.
    These terms are not always clear to small businesses. As many
    online lenders provide little or no information upfront to
    perspective borrowers about the loan or the product and often
    use metrics other than APR to disclose the cost of capital.
        Some online lenders also engage in predatory practices that
    put small businesses particularly at risk. For example,
    merchant cash advances, MCAs, allow a lender to receive a fixed
    percentage of future sales until the financing is repaid. The
    extremely high interest rates and daily repayments associated
    with MCAs can cause businesses to enter into an out-of-control
    debt spiral.
        Furthermore, many MCA lenders require that borrowers sign
    an obscure legal instrument known as a confession of judgment
    to get the money. By signing that, borrowers waive their legal
    rights regarding any legal dispute that might arise. And when a
    court enforces the confession of judgment, it locks a small
    firm into that unsustainable debt cycle and ultimately forces
    the business to close.
        Small Business advocates also worry about the lack of
    transparency around fintech underwriting. The data and
    algorithms that control automatic underwriting can pull
    unrelated information, like who an applicant follows on social
    media, or the number of criminal records in an applicant's ZIP
    Code. These underwriting practices lack transparency and have
    the potential to unfairly deny credit to protected groups or
    make those products more expensive for all.
        As the fintech sector evolves, Congress must keep and
    ensure industry practices are not unfairly taking advantage of
    the entrepreneurs, especially those who may be vulnerable to
    abusive practices.
        So today, I look forward to discussing the benefits and
    risks of fintech lending for small businesses, and what this
    committee can do to both protect and expand opportunities for
    entrepreneurs. With that, I would like to yield to the Ranking
    Member, Ms. Van Duyne, for her opening statement.
        Ms. VAN DUYNE. Thank you very much, Mr. Chairman. A little
    over an hour ago, the latest CPI numbers peaked at a whopping
    year over year increase of 9.1 percent. Maybe more shocking is
    that inflation rose 1.3 percent from just a month ago. This
    month's surging inflation is just the latest in a long line of
    pain inflicting economic numbers that have come under President
    Biden's leadership. At this point, one thing is clear: Small
    businesses in our communities cannot prosper, let alone survive
    if this administration's current policies and frivolous
    spending continue.
        Over a year ago, Congress forced through their $1.9
    trillion reconciliation package. Americans now feel the full
    inflationary effects that Republicans were warning of. Filling
    up at the gas station is now a shocking experience. Grocery
    store visits cost over 12 percent more, and housing prices are
    almost untenable. There is no doubt we are now paying for this
    administration's free-money policies.
        And, unfortunately, it seems that we have reached the point
    of deja vu. As labor shortages and supply-chain troubles
    persist, we are back to the talks of another $1 trillion
    reconciliation package. If that wasn't bad enough, Democrats
    plan to include tax increases on small businesses in this
    proposed bill.
        While details are still developing, I want to say loud and
    clear, that any changes or expansions of the net investment
    income tax will be a tax on small businesses' pass-through
    entities.
        When I visit the small businesses that make North Texas one
    of the quickest growing areas in the United States, they tell
    me the same thing: The government needs to stay out of the way.
    As we are all well aware, small business owners are some of the
    best America has on offer. And yet, they struggle to be
    optimistic when it seems they are working against a tough
    economy and a government that just won't listen.
        According to a survey by NFIB, the number of small business
    owners expecting business conditions to improve has continued
    to go down, decreasing every month this year. Every American
    knows this is a difficult moment, but luckily, we can turn the
    tide back in favor of economic growth. We can put small
    businesses back in the driver's seat by ending the trillions of
    dollars in reckless spending and aggressively reforming
    regulations.
        In addition to these challenges, access to capital remains
    an important issue for American small businesses, and as it
    could be the difference between business expansion or business
    stagnation.
        As today's hearing title suggests, Small Business Lending,
    must include an examination of just how small business fairness
    over the last 2 years during the COVID-19 pandemic, and how
    fintech lenders performed during the Paycheck Protection
    Program. And anything less would shortchange this topic.
        Given at this Oversight Committee hearing, I would be
    remiss not to mention my disappointment that we have yet to
    hear from Secretary Yellen regarding her legal and statutory
    requirement to testify.
        Across the board, these are important issues and topics
    that deserve the attention of this Subcommittee and Members of
    Congress. And I look forward to today's conversation. I would
    like to thank all of the witnesses that are here today. And
    thank you, Mr. Chairman, I yield back.
        Chairman PHILLIPS. Thank you, Ms. Van Duyne. The gentlelady
    yields back. And with that, I would like to introduce our
    witnesses today. Our first witness is Mr. Sean Salas, Chief
    Executive Officer and Co-Founder of Camino Financial, a
    digitally native Community Development Financial Institution,
    known as CDFIs, with a variety of small business loan offerings
    for firms of all sizes, including solopreneurs, a signatory of
    the Small Business Borrowers Bill of Rights, Camino is an
    example of how to lend to small businesses online in a fair and
    transparent manner. We welcome you, Mr. Salas.
        Our second witness is Ms. Joyce Klein, Senior Director of
    the Business Ownership Initiative at the Aspen Institute. A
    central focus of her work over 20 years includes examining the
    role of business ownership and micro finance in addressing the
    challenges of racial inequity and the racial wealth gap. She
    was also instrumental in helping start the Responsible Business
    Lending Coalition which advocates for responsible practices and
    transparency in the small business lending sector. We welcome,
    you, Ms. Klein, and look forward to your testimony.
        Our third witness is Ms. Diane Paterson, the Regional
    Director Of the Twin Cities Small Business Development Center,
    SBDC, at the University of St. Thomas in Minneapolis,
    Minnesota. In her capacity, she counsels small business owners
    on locating funding sources for working capital and expansion
    and is certified as an economic development finance
    professional and revolving loan fund expert by the National
    Development Council. She is also a former business owner
    herself, and brings a valuable multifaceted perspective to our
    discussion of these important issues. We welcome, you, Ms.
    Paterson, and thank you for joining us today.
        I would now like to yield to the Ranking Member, Ms. Van
    Duyne, to introduce our final witness.
        Ms. VAN DUYNE. Thank you, Mr. Chairman. Our next witness is
    John Griffin. Dr. Griffin is the James A. Elkins Centennial
    Chair in Finance at the McCombs School of Business at the
    University of Texas in Austin, with a focus on banking,
    international finance, and structured finance. Dr. Griffin has
    been a professor at Arizona State University, Yale University,
    Hong Kong University of Science and Technology, and Harvard
    Business School. In addition to teaching, Dr. Griffin has
    conducted extensive research in published findings on numerous
    banking topics, including the 2008, 2009 financial crisis. His
    and his team's most recent research examines the intersection
    of fintech lending within the Paycheck Protection Program also
    known as PPP.
        Dr. Griffin, thank you for joining us today. I look forward
    to your testimony. I would also like to thank all the witnesses
    for joining us. And, Mr. Chairman, I yield back.

       STATEMENTS OF SEAN SALAS, CHIEF EXECUTIVE OFFICER AND CO-
       FOUNDER, CAMINO FINANCIAL; JOYCE KLEIN, SENIOR DIRECTOR,
    BUSINESS OWNERSHIP INITIATIVE, ASPEN INSTITUTE; DIANE PATERSON,
       REGIONAL DIRECTOR, TWIN CITIES SMALL BUSINESS DEVELOPMENT
     CENTER; AND JOHN GRIFFIN, JAMES A. ELKINS CENTENNIAL CHAIR IN
     FINANCE, MCCOMBS SCHOOL OF BUSINESS, THE UNIVERSITY OF TEXAS.

                        STATEMENT OF SEAN SALAS

        Chairman PHILLIPS. Thank you, Ms. Van Duyne. And now to
    you, Mr. Salas, you are recognized for a 5-minute opening
    statement.
        Mr. SALAS. Thank you, Chairman Phillips and Ranking Member
    Van Duyne, and other Members of the Subcommittee. I really
    appreciate it, and I am honored to be here today. My name is
    Sean Salas, and I am the co-founder and CEO of Camino
    Financial.
        Camino Financial is a fintech lending platform that
    empowers entrepreneurs to grow their business and boost access
    to capital for underserved communities. Our microloans provide
    small business owners with the flexible financing they need to
    thrive in a competitive market.
        We are a national Community Development Financial
    Institution, or CDFI, that is pioneering affordable credit
    through technology and AI. Our mission is simple: To build
    generational wealth in underserved communities. We take a
    digital first approach, and applications are 100 percent
    online. We predominantly serve entrepreneurs in California, but
    our digital first approach allows us to serve businesses in
    other states.
        Today, I am proud to say that we are one of the largest
    Latino-focused small business lenders in the U.S. Over the last
    6 years, we have helped over 9,500 small businesses, deploying
    over 200, almost $200 million in capital. We have also created
    one of the largest bilingual content hubs that offers
    entrepreneurs over 1,200 bilingual articles related to business
    and entrepreneurship that reaches hundreds of thousands of
    website visitors per month. We provide a camino, or a pathway
    to capital by educating our borrowers. This pathway involves
    providing resources that teach them how to formalize their
    business and access the tools they need to get on a path to
    qualify for larger, lower interest rate loans.
        I founded Camino Financial with my brother, Kenny, while
    completing our MBAs at Harvard Business School. We are the
    proud sons of a Mexican entrepreneur who truly sought the
    American Dream. Our mother opened over 30 restaurants in
    Southern California while raising six children. Imagine that.
    Unfortunately, when I was 12 years old, her entire business
    collapsed. She moved us to Mexico to restart our lives despite
    us being U.S. citizens.
        The moment Kenny and I graduated from high school in
    Mexico, we decided to immigrate back to the U.S. to pursue what
    my mom had lost, the American Dream. We were lucky enough to be
    admitted to UC Berkeley, and after, build our careers in
    finance. While working in finance, we realized the capital gap
    of investing in micro businesses in minority communities. So we
    decided to leverage our MBA experience to incubate Camino
    Financial to help businesses like my mother's grow to a point
    where they can access a broader suite of wealth-building
    solutions.
        Now for context, the average Latino business earns around
    $250,000 in revenue per year. That is about half of the
    national average. Most Latino-owned businesses are micro
    businesses, not even small businesses, with four or less
    employees. Banks and larger institutions--and larger
    institutional investors do not actively service this lower end
    of the market, comprising over 97 percent of Latino businesses
    with the unmet credit demand north of $20 billion.
        I would like to share a few examples of entrepreneurs we
    help. Letesha, a business owner and restaurant owner, needed a
    business loan during a busy season to hire and train more
    staff. She never received a business loan and needed guidance.
    After submitting her application, a Camino Financial business
    loan specialist called her within minutes to walk her through
    the process so that she can train and hire more staff.
        Prior to working with us, Baldemar, who owns a car repair
    and maintenance shop, used personal loans for his business.
    After realizing that personal loans were not sufficient for his
    business, he worked for Camino Financial to buy him into and
    increase his company's efficiencies and profits.
        People like Letesha and Baldemar reach out to Camino
    Financial because of our easy digital application, because we
    are a digital-first company, and a lot of our business is done
    online. How that is said, transparency is critical to our
    success. That is why we joined the responsible business lending
    coalition. That is also why we support the efforts of
    Chairwoman Nydia Velazquez to create protections for small
    business owners. We believe that borrowers should have access
    to responsible loans and information that allows them to
    uniformly compare and select the financing that makes sense for
    them.
        I should also note that in California, we are already
    required to disclose much of our information to help protect
    borrowers. And while I am not here to discuss our competitors,
    I will say that California interest and fee disclosures are not
    hindering our business, they are leveling the playing field. In
    the end, our business is about helping entrepreneurs achieve
    the American Dream. It is my hope that we can continue to grow
    while helping many more budding entrepreneurs live that
    American Dream. Thank you for your time and the privilege to
    speak today.
        Chairman PHILLIPS. Thank you, Mr. Salas. And with that, I
    welcome you, Ms. Klein. You are recognized for 5 minutes for
    your opening statement.

                        STATEMENT OF JOYCE KLEIN

        Ms. KLEIN. Thank you. Chairman Phillips, Ranking Member Van
    Duyne, and Members of the Committee, thank you for inviting me
    to appear before the Oversight Investigation and Regulation
    Subcommittee today to speak with you about the importance of
    transparency and the role of financial technology in small
    business lending. My name is Joyce Klein, and I am the senior
    director of the Aspen Institute's Business Ownership
    Initiative.
        At the Business Ownership Initiative, we work to understand
    the needs of and the barriers facing the most underserved small
    businesses, and to develop solutions for reaching them. We have
    been doing this work at the Aspen Institute for 30 years, and
    over that time, we see many changes in the financial services
    landscape. But one constant is that entrepreneurs still face
    challenges in accessing capital, and this is particularly true
    for certain types of entrepreneurs. It is true for women, for
    people of color, for immigrants, for those in rural
    communities.
        I also serve as the Chair of the Responsible Business
    Lending Coalition which is a network of nonprofit and for-
    profit lenders, like Sean in Camino, investors and small
    business advocates. And we share a commitment to innovation of
    small business lending, but also concerns about the rise of
    irresponsible small business lending practices. And so my
    remarks today draw from both our work at the Aspen Institute,
    and from the work of the Responsible Business Lending
    Coalition.
        So when considering the implications of fintech for small
    business lending, it is important to focus on financial
    technology in its broadest sense, which involves the
    application of digital technologies to financial transactions.
    And, today, virtually every small business lender, whether they
    are a bank or a credit union or a CDFI or a fintech firm or
    some other type of commercial finance company is using
    financial technology. And there are many ways in which
    financial technology can help expand access to capital to those
    who have been excluded from or marginalized in our capital
    markets.
        But through our work, we have learned that if the goal is
    to expand access to responsible capital, it is not the type of
    institution that is providing the financing or whether and how
    they use technology that is most important. What is most
    important is getting the financing products right and the
    financial practices right.
        So with regard to products, we have seen progress in
    increasing lending to underserved businesses is when lenders
    offer smaller loans, and they underwrite by focusing on cash
    flow and a flexible approach to credit histories, rather than
    by focusing on collateral, equity, and credit scores. And the
    right practices are also essential in reaching segments of the
    small business market that haven't been reached by banks. And
    this is where CDFIs are particularly adept, and it is where
    fintech can bring technology that is accessible and user-
    friendly. But we have to balance greater access with borrower
    protections.
        The economics of smaller-dollar small business lending are
    really challenging, and that creates pressure to sometimes use
    practices that can be abstractive or even predatory.
        And so this brings me back to our work at the RBLC where we
    have created the Small Business Borrowers Bill of Rights. BBOR
    puts the small business at the center of the financing
    transaction, identifying six rights we believe should be
    upheld. And the first among these is the right to transparent
    pricing and terms.
        The RBLC has been a part of diverse coalitions that have
    been successful in passing small business truth-in-lending
    legislation in California and in New York. And the RBLC is
    grateful for the work that Chairwoman Nydia Velazquez has done
    to promote transparency and responsible practices in small
    business financing, including her leadership in introducing
    H.R. 6054, the Small Business Lending Disclosure Act of 2021,
    which would require lenders to disclose information that
    enables small businesses to make informed choices.
        The original Truth-in-Lending Act was not applied to
    commercial financing because it was assumed that businesses had
    financial expertise that consumers did not. And while that is
    true for some businesses, it is not true for most. So most
    small businesses in the U.S. are sole proprietors; they are not
    corporations; and they are home daycare centers and cleaning
    and landscape businesses and food trucks and small retail
    shops, hair and nail salons. They do their own books and
    finances. They may, but they may not even have access to a
    part-time bookkeeper or accountant to help them.
        And with the emergence of new small business lending,
    financing products has come at greater variation in how those
    products are structured in place. And so, we believe it is
    vital that when small business owners seek financing, they have
    the information to fully understand the cost and the terms of
    each offer to compare across those products, and make the best
    choice for their business. And essential to that is the
    disclosure of APR, Annual Percentage Rate, which is the only
    metric that allows borrowers to make apples-to-apples
    comparisons across products.
        And I would note that lack of transparency actually
    inhibits competition. Market competition relies on price
    disclosure. Without transparent disclosure on pricing that
    allows borrowers to compare costs, financing companies don't
    have an incentive to innovate and compete on price. So as a
    result, financing----
        Chairman PHILLIPS. Ms. Klein, your 5 minutes has expired.
    So if you could wrap it up.
        Ms. KLEIN. Thank you so much for the ability to testify
    today, and I look forward to answering your questions. Thank
    you.
        Chairman PHILLIPS. Thank you. Thank you very much. And now
    I recognize my fellow Minnesotan, Ms. Paterson, for 5 minutes
    for your opening statement.

                      STATEMENT OF DIANE PATERSON

        Ms. PATERSON. Good morning, and thank you, Chairman
    Phillips, and Ranking Member Van Duyne. My name is Diane
    Paterson, and I am the regional director of the Small Business
    Development Center in the Twin Cities in Minnesota. We have
    been an SBDC for over 31 years. The SBDC program is a national
    program that is a matching partnership program with the SBA and
    organizations of higher ed.
        We work with all kinds of businesses, small to medium
    generally, startup to exit planning. So we have seen a lot of
    businesses. We worked with a lot of businesses during the
    recession, and we certainly had a great deal of businesses
    coming to us during the pandemic.
        With today's online credit-lending environment where many
    fintech services offer a 4-minute application and 24-hour
    turnaround to access funds, the SBDC has seen small business
    owners navigating confusing fine print, adverse interest rates,
    thwart loan terms, and prepayment penalties. These lending
    practices are especially harmful to small, young, less
    profitable, and minority-owned businesses, who already struggle
    to access financing because they lack the business history or
    collateral that traditional banks require. Yes, the ease and
    speed with which small business borrowers can access fintech
    credit is appealing. These businesses tend to use this loan
    option in conjunction with other forms of credit, making them
    financially vulnerable.
        The application process for a traditional lender takes
    days. The approval process itself can take weeks or longer
    depending on the meeting schedule of the loan committee.
    Standing in stark contrast, two fintech options, biz to credit,
    and blue line advertise 4- and 5-minute completion times
    respectively. Both promise next-day availability of funds.
        While fintech loans address pain points in the loan
    application process, these loans subject the borrowers to much
    higher interest rates and other terms that cause many to
    default. The biggest issue in fintech lending practices is the
    lack of transparency in the price of their products. As
    consumers, we are accustomed to seeing rates of 5-1/2 to 6-1/2
    APR. This commonly understood Annual Percentage Rate
    terminology is familiar. It makes sense. Fintech borrowers read
    rates ranging from 3-1/2 to 4-1/2 percent and assume their APR.
    What they do not realize is the fintech rates are regularly
    calculated on a daily basis. That results in a lending
    relationship that subjects the borrower to an interest rate in
    the range of 58 to 63 percent. Simply put, fintech lending
    practices are an issue with this daily calculation, the first
    of several fine-print problems.
        OnDeck interest rates are posted at 3-1/2 to 5 percent, but
    in reality, they range from 24.6 to 58.6 percent. Kabbage, on
    the other hand, advertises a loan fee instead of an interest
    rate. Lending Club charges 9.77 percent to 35.71 percent
    interest, but then assigns an additional loan origination fee
    ranging from 1.99 percent to 8.99 percent.
        The cost of fintech credit is high. The terminology is
    confusing. Adding more fuel to the fire is the repayment terms,
    which are traditionally very short. Fintech loan terms
    typically are 6 to 12 months. This greatly impacts the level of
    the borrower's monthly debt service. While many fintech lenders
    offer weekly installments, that doesn't change the reality that
    these payments are often too large for a small business' cash
    flow to digest.
        To illustrate, a client of the Small Business Development
    Center founded a craft brewery operation making a gluten-free
    beer. Due to the nature of their product, we were unable to
    brew beer using other craft brewer's equipment during the
    start-up phase. As such, they financed new machinery using a
    $375,000 loan from a bank. The taproom was an instant revenue
    generator. But the revenue from distribution lagged behind
    their projections. They approached their bank for a second loan
    for $100,000 working capital to bridge in the distribution side
    of the business caught up----
        Chairman PHILLIPS. Ms. Paterson, your time is up. If you
    could wrap it up, we would appreciate that.
        Ms. PATERSON. Yes. So thank you very much. The debt service
    for that business was $11,208 a month. That is still too high.
    But thank you, and I look forward to your questions.
        Chairman PHILLIPS. Thank you, Ms. Paterson. And you I
    recognize Dr. Griffin for 5 minutes for your opening statement.

                       STATEMENT OF JOHN GRIFFIN

        Mr. GRIFFIN. Chairman Phillips, Ranking Member Van Duyne,
    and Members of the Committee, thank you for inviting me to
    appear before the Small Business Subcommittee to speak to you
    about fintech lending. I am John Griffin, a forensic finance
    professor at the University of Texas, and also a founder of
    Integra FEC, a small consulting business which investigates
    financial fraud.
        This testimony is based on my academic paper with co-
    authors Professor Sam Kruger and Prateek Mahajan, entitled,
    ``Did fintech Lenders Facilitate PPP Fraud?'' It is found with
    links from my website and SSRN.
        I will briefly summarize some of the main findings of our
    paper, and then discuss the potential policy implications. Our
    paper analyzes the SBA's Paycheck Protection Program, called
    PPP, based on four main metrics of potential misreporting,
    which are cross-verified with and against each other, and with
    seven additional indicators. The main findings of the paper are
    first: Misreporting indicators consistently concentrate in
    fintech lenders. Overall, fintechs are 6.5 times more likely to
    process misreported loans.
        Second, misreporting is not a simple function of disbursing
    funds quickly in early 2020. To the contrary, misreporting
    steadily increased throughout the program. At the end of the
    PPP program, in May of 2021, the level of suspicious lending
    through fintechs are four times the level at the start of the
    program.
        Third, the four main measures place the magnitude of likely
    fraud at $64 billion, but our additional indicators and
    analysis point to $117 billion. Since these analyses use only
    public data and take a conservative approach, the total amounts
    are likely even larger.
        Finally, we find that suspicious loans are being
    overwhelmingly forgiven by the SBA at similar rates to other
    loans. An extremely few are prosecuted. A key result can be
    seen in Figure 2 from our paper which is reproduced also in my
    report. The red and light yellow are fintech lenders, and the
    lenders in gray are traditional banks. The top 12 lenders with
    the most misreporting are all fintech and are all shown at the
    left of the graph.
        Though there are also some problems at traditional banks,
    most traditional banks are to the middle and to the right of
    the graph with consistently lower levels of misreporting.
    Interestingly, however, not all fintech lenders have high rates
    of misreporting.
        Our findings have important policy implications. First, the
    PPP program did not include robust verification requirements.
    This led to substantial cost to taxpayers, particularly in
    2021, when there was less concerns to distribute refunds
    quickly.
        Second, fintech lending, no praise for getting funds out
    quickly, needs substantial improvement in due diligence
    practices. Two fintech lenders with an established track record
    persistently have low rates of misreporting, indicating that
    online lending itself need not be substandard.
        Third, three leading academic papers cited in my report
    showed that the PPP saved relatively few jobs at an extremely
    high cost per job. Along with our evidence, this indicates that
    the PPP program was an ineffective use of taxpayer dollars and
    should cause the lender to reconsider the efficacy of future
    SBA lending programs.
        Fourth, incentives of some of the PPP appear misaligned in
    the fintech lenders with few employees relatively little track
    record and lax due diligence procedures made billions of
    dollars disbursing fraudulent loans. In my opinion, the fintech
    organizations and individuals who facilitated such activities
    should not be allowed to engage in future government programs.
        Fifth, with the increasing scale of fraud through time
    indicates that the fraudsters targeted the program, and current
    penalty and enforcement systems are not effective. If a system
    is not changed for future SBA lending programs, the most likely
    outcome is even more of the same. Government agencies can
    assist in transparency by making more detailed data widely
    available.
        Finally, though we should try to design better systems for
    the future, fraudsters typically find new holes in the system.
    This is why I believe that serving justice for financial crime
    is not simply old-fashioned, backward-looking as some might
    think, but rather, forward-looking as well. Our analysis shows
    that less than 1 in 10,000 loans with a misreporting indicator
    has been prosecuted. Without prosecuting the organizations and
    networks of individuals who stole billions of dollars from U.S.
    taxpayers, these same individuals will most likely amount even
    more cost for society going forward. Additionally, justice
    serves the warning to others and deters future crime.
        Much more can and must be done. Other important details can
    be found in our academic paper online. Thank you for your
    attention to these important issues. I look forward to further
    questions.
        Chairman PHILLIPS. Thank you, Dr. Griffin. And thanks to
    all of our witnesses. We appreciate everything that you have
    shared with us. I will now begin by recognizing myself for 5
    minutes.
        My first question is to you, Ms. Paterson. We all know the
    SBA has not yet allowed fintechs to participate in programs
    other than PPP, but they have clearly shown potential in
    expanding access to capital for small businesses. However,
    their involvement in the wider small business lending sector
    and in PPP specifically have also raised serious fraud and
    transparency-related concerns as we have heard in testimony.
    You detail in your testimony that guidelines to set uniformity
    in fintech lending practices specific to the cost of capital
    would be worthy solutions to this issue.
        So my question is, what should the SBA and this Committee
    specifically focus on as it deliberates on the potential
    involvement of fintech, specifically, in SBA lending programs,
    particularly given that in SBA lending programs, the agency
    often sets the underwriting terms?
        Ms. PATERSON. Primarily, and all the witnesses mentioned
    this, is the transparency piece, as well as a recording piece.
    We really don't have good data regarding the default rate of
    fintech loans. We surmise that it is much higher than
    traditional lending, but we really don't have that data. But
    from a borrower's standpoint, the transparency is key. When you
    tell a client that their interest rate is 58.6, and they
    thought it was 4.5, that is a--that is really hard for that
    business to digest. The other thing that we are seeing is once
    we--the borrower understands the terms that they have signed on
    to are the prepayment penalties, which can be as high as 20
    percent. And so, when they recognize that they are paying 60
    percent interest rate, and they want to refinance that loan,
    they have difficulty doing so because you have principal plus
    the prepayment penalty. And so we don't see them refinanced. I
    have only seen one, and that was actually that craft brewery,
    because the bank was nervous that they would not get their
    original 375 back. So I just think from a regulatory
    standpoint, I love the accessibility of fintech loans, but we
    need that transparency so that borrowers truly understand the
    loan documents that they are signing, the interest rate, and
    what that impacts if the term is only 6 months to a year.
        Chairman PHILLIPS. All right. Thank you, Ms. Paterson. So
    now, Mr. Salas, I will turn to you on the same subject. Like
    many of us believe that online lenders should adopt the same
    disclosure and transparency policies of traditional banks. And
    some of them, some fintechs have already adopted those. But can
    you detail for all of us some of the policies that you have
    adopted and the importance of those policies relative to this
    issue?
        Mr. SALAS. Absolutely. So as I mentioned earlier, we are
    already regulated under truth-in-lending-like laws in
    California where we disclose to our Members in a clear and
    simple manner terms. And one of the most critical, what I would
    say metrics in pushing transparency and creating a level
    playing field, is APR. We believe that APR is comparable across
    different credit products. That every lender needs to use their
    best commercial efforts to disclose that APR at their earliest
    convenience. And we have not been hindered at all from the
    business perspective in that disclosure. And we have found that
    by having that requirement under law, it creates for more fair
    and competitive marketplace which ultimately benefits the
    borrower.
        Chairman PHILLIPS. I appreciate it. Thank you. And with my
    1 minute left, Dr. Griffin, to you, your chart and report on
    fintechs and fraud was quite stunning to me. And not all
    fintech lenders, although, in that chart have high misreporting
    rates. Two of them, in fact, were among the better in the
    entire graph. So what features distinguish the fintechs with
    low misreporting rates from those with high misreporting rates
    in your estimation?
        Mr. GRIFFIN. Great question, actually. I think the
    difference is two of the lenders that have very low
    misreporting rates will actually establish businesses that have
    been in the fintech business for a while. And most of the
    lenders with low rates of misreporting were kind of new lenders
    that developed--had little track record, little reputation to
    protect, and probably little in a way of established
    procedures. And so, with little reputation to protect, and
    nothing but potential or probably low potential of being
    prosecuted, some of these fintech lenders seem to have just
    opened the door to rampant mortgage fraud.
        Chairman PHILLIPS. Okay. Thank you, sir. And with that, my
    time is expired. And now I recognize the gentlewoman from Texas
    and the Ranking Member of this Committee, Rep. Van Duyne, for 5
    minutes.
        Ms. VAN DUYNE. Thank you, Mr. Chairman. Dr. Griffin, I
    would like to start by looking at some of your findings. In
    your testimony, you state that, quote, ``Misreporting is not a
    simple function of getting money out the door quickly in 2020.
    In fact, the fraud at the end of the month of the program in
    May 2021 is four times the level at the start of the program,''
    end quote. This is an astounding finding and one that is really
    not discussed very widely. Can you talk to us more about why
    this is the case?
        Mr. GRIFFIN. Yes. Thank you. Yes, it surprised us as well.
    Well, it appears to be that fraudulent networks kind of ramped
    up their activities in terms of getting more and more PPP
    funds, and probably knowing which fintech lenders would rubber-
    stamp these loans. I say that because we find that in the very
    geographies in round one--in round one and two where there is
    high levels of misreporting, in those same ZIP Codes where
    there is some levels of misreporting at rounds one and two. The
    rounds increased dramatically in rounds three and four.
        So it seems--and we also find evidence that it spreads
    through social networks online. So we think that kind of people
    initially went in, got fintech loans, and then spread this
    through networks in a massive scale, and it increased over
    time. That also indicates that fraudsters are fairly
    sophisticated. And if we engage in such type of SBA lending
    again, they are going to likely target this on a massive scale.
        Ms. VAN DUYNE. Well, that actually brings me to my next
    point. I want to turn to your fourth finding which you state
    that suspicious loans are being overwhelmingly forgiven at
    similar rates to other loans and very few are being prosecuted,
    indicating that substantial reforms in SBA lending are needed.
    This is concerning. And the SBA has, indeed, fully or partially
    forgiven 90 percent of all PPP loans as of July 10, 2022. So I
    am going to use your words, do you believe that we are giving a
    free pass to the fraudsters that are abusing the programs and
    American taxpayer dollars and the nation's small businesses?
        Mr. GRIFFIN. I have no idea why all these loans are being
    forgiven, quite frankly. I mean, SBA, themselves, recognizes
    it. There is a real problem with fraudulent loans. And so we
    were kind of shocked to find the rate that loans are being
    forgiven among the likely fraudulent and non are essentially
    the same. And so, I don't understand that it would be a simple
    matter of any loan with a questionable indicator simply being
    flagged and waived to forgive that loan. And that procedure
    could take a while to thoroughly investigate.
        I think there is much--as I mentioned in our paper, we are
    only using public data. So there is also a lot of private data
    that the SBA has access to and likely indicates the problem is
    even greater than what we identified in our paper.
        Ms. VAN DUYNE. Wow. Have you or your team researched or
    examined fraud within the Economic Injury Disaster Loan
    Program, EIDL?
        Mr. GRIFFIN. We did briefly look at it, and we do think
    that there is--it is not in the paper, but we did find quite a
    bit of fraud in EIDL as well.
        Ms. VAN DUYNE. Do you have any idea? Do you have more
    information than just--I think we all----
        Mr. GRIFFIN. I don't have the exact dollar amounts on my
    table, but it was a fraction of the program. It was quite a
    large. I mean, one of our indicators is the difference in jobs
    reported to the EIDL program as well as the PPP program. So you
    will see that some--there are many borrowers who said they had
    10 jobs in their business when they reported to EIDL, and yet
    when they applied to PPP, they are only one person. And those
    loans--we also depend on timing. So these two representations
    were made almost at the same time. So it is very--there was a
    huge mismatch between the programs.
        Ms. VAN DUYNE. In my last 40 seconds, I don't believe
    Members can have a full and thorough conversation on fintech
    lending without further exploring how they performed their last
    2 years. Especially you had mentioned earlier, their
    performance from nearly $800 billion PPP. So what is some of
    the top lessons that Members should take away from PPP fintech
    research?
        Mr. GRIFFIN. Thanks. Well, I think some of the top lessons
    are that, to focus on getting money out the door quickly. It is
    not necessarily a great goal. We had traditional lending
    guidelines in place, and those lending guidelines could have
    been followed. We don't know why the traditional banks did
    better. But if you talk to people at traditional banks, they
    will say they followed the same process and procedures they
    used before. And those process and procedures, those due
    diligence procedures where banks actually had a stake and could
    lose money if the loans defaulted, those procedures seem to
    have worked a lot better.
        So, in general, I think--I don't think it is a good idea
    for the government to give out money without--and allow lenders
    to give out this money without repercussions where they also
    have a skin in the game and lose money if the loans default.
        Ms. VAN DUYNE. All right. Thank you very much. I yield
    back.
        Chairman PHILLIPS. And the gentleman's time has expired--
    the gentlelady's time has expired. I am sorry. And now I
    recognize the gentlelady from New York and the Chairman of the
    Small Business Committee, Ms. Velazquez, for 5 minutes.
        Ms. VELAZQUEZ. Thank you, Mr. Chairman, and Ranking Member.
    Ms. Klein, can you explain how underserved small businesses are
    susceptible to predatory lending practices, and why legislation
    is needed to ensure all small business loans contain fair and
    accurate disclosures about costs and terms?
        Ms. KLEIN. Yes, thank you so much for that question
    Congresswoman and Chair Velazquez. As I noted in my testimony,
    though, the Truth in Lending Act was originally not applied to
    consumer--commercial transactions because it was assumed that
    businesses had access to financial, and, in some cases, access
    to legal expertise. And that is true for large firms, but it is
    certainly not for the smallest firms. And I think both Ms.
    Paterson and Sean gave some really good examples of the kinds
    of small firms that they work with.
        And I think one of the things that is also really
    important, not only to understand is, you know, that these
    firms don't necessarily have this level of financial expertise.
    The other thing that is important to note is that in many
    cases, a small business owner's personal and their business
    finances are closely connected. So a small business owner often
    uses her personal credit score when she is applying for credit.
    She may pledge personal assets or make a personal guarantee
    against the financing that she is receiving.
        And, often, when there is a mismatch between, sort of,
    income or revenues and expenses, she is drawing on her personal
    savings, where she is choosing not to pay herself so that she
    can meet her other financial obligations. And so, I think this
    assumption of who small business owners are that is, you know,
    the reason behind--not--and sort of applying the original Truth
    in Lending Act to commercial transactions just doesn't quite
    hold up.
        So what we want is, we want business owners to be able to
    make the best choices that reflect their financial
    circumstances, their personal circumstances, their business
    circumstances. And that is why truth-in-lending-like
    disclosures are really needed for small business loans. So they
    have the information they need.
        Ms. VELAZQUEZ. Thank you. And, Ms. Klein, my legislation,
    Truth in Lending bill, gives the CFPB regulatory authority to
    include small business loans and financing products. Given that
    CFPB already has jurisdiction over the Truth in Lending Act and
    Section 1071 of the Dodd Frank Act which vastly improves small
    business lending data collection, do you agree that CFPB is the
    appropriate federal agency for overseeing this space.
        Ms. KLEIN. Yes, and I would speak here both wearing my
    Aspen Institute hat and the Responsible Business Funding
    Coalition hat. We agree that there is an extending framework at
    CFPB that is based on its oversight of existing protections to
    consumers, and that provides us a good foundation for extending
    these protections to small businesses seeking financing.
        Ms. VELAZQUEZ. My legislation will create a federal
    regulatory floor, meaning that States can enact stronger
    protections than in federal law. However, I heard that to
    prevent jurisdiction shopping by online lenders, federal law
    should establish a ceiling instead and preempt State law in
    this space. What are your thoughts on whether federal law
    should preempt States in regulating this lenders and products?
        Ms. KLEIN. So I say--our framework again as we start is to
    start with the interest of a small business owner. And from
    that perspective, your legislation H.R. 64, already does the
    most important thing, which is to require the rights of the
    disclosures that includes APR. And we think small business
    owners across the country deserve that information.
        So with regard to preemption, I am going to speak based on
    my work at the Aspen Institute, and then if like, if needed, I
    will clarify later the formal position of the Responsible
    Business Lending Coalition. But from the perspective of my own
    work, I think a federal standard is really helpful. Many
    lenders, CDFIs, fintech lenders, other lenders work in multiple
    space, in some cases, nationwide, and having one set of
    required disclosures would be more efficient for them. It would
    enable--if we want financing costs to go down over time, I
    think a strong national standard is the way to go.
        Ms. VELAZQUEZ. Thank you. And New York and California with
    both passed truth in lending laws for small business loans. And
    in implementing them, they carve out fraud plan financing and
    real estate investment property from the lost coverage. Are
    those exemptions something we should consider at a federal
    level?
        Ms. KLEIN. Thank you. I think our preference as a
    Responsible Business Lending Coalition would be to have all
    small business lenders subject to the same requirements for all
    products. I think that creates a, you know, a level, regulatory
    playing field that doesn't preference some types of products or
    lenders over others, which I think is important. However, I
    will also note we did, you know, support the financial
    legislation that passed in California and New York.
        Ms. VELAZQUEZ. Thank you. I yield back, Mr. Chairman.
        Chairman PHILLIPS. The gentlewoman yields back. And now I
    recognize the Ranking Member of the Subcommittee on Economic
    Growth, Tax, and Capital Access, the gentleman from
    Pennsylvania, Mr. Meuser for 5 minutes.
        Mr. MEUSER. Thank you very much, Mr. Chairman. I thank the
    Ranking Member Van Duyne as well for holding this hearing. And
    thanks to all of our witnesses.
        Certainly, I think we all know, small businesses today are
    facing tremendous challenges. It is somewhat of an endless list
    from inflation, to labor shortages, to all kinds of supply
    chain disruptions, unpredictable new regulations, and, of
    course, challenges to access to capital.
        So, you know, Dr. Griffin, I am very interested in your
    testimony as well as the graphs and all that you provided us.
    So when you speak of the issues from the lending on PPP, you
    meant--related to fintech as well, of course, do you think that
    there is--is there an 80/20 rule, 20 percent or 80 percent of
    the fraud was coming from 20 percent of the participants? Would
    you say that is, perhaps, fair, or maybe you can elaborate on
    that some?
        Mr. GRIFFIN. That is an interesting point. Yes. I think
    that the fraud is likely perpetuated by a smaller number of
    actors than you might think. Because our analysis shows that
    the fraud is concentrated in certain CBSAs. And even within
    those CBSAs, concentrated in certain ZIP Codes. That indicates
    that it is not just a few people getting this idea of randomly
    and applying for the loans, but rather organized networks,
    recruiting people, getting fees, maybe coordinating with other
    organizations to facilitate the fraud. So I think it is an
    organized--our evidence indicates it has an organized fashion
    to it, and that the likely number of players that were
    orchestrating, at least the rampant fraud, is probably more
    aligned with more like 5 percent of the people doing 90 percent
    of the 90 percent of the fraud.
        Mr. MEUSER. Great. Thank you. Mr. Salas, I want to ask you
    a question, if I can, please. So what do you consider to be
    your biggest concerns, or your customers' largest concerns and
    their needs for access to capital? In a way, why does your
    company exist when, you know, there is community banks and
    everything else out there?
        And also, what is your feeling about, you know, there is
    some fintechs, and some of the commentary that has been made
    here on these outrageous levels of nontransparent interest
    rates? I would like to hear your thoughts on that.
        Mr. SALAS. Absolutely. And thank you for the question. In
    our experience, entrepreneurs have some clear market demands,
    and I just want to outline what those demands are. One is
    transparency; two is simplicity; three is affordability; and
    fourth is expediency.
        At Camino Financial, we try to meet these demands for our
    borrowers in the most responsible and cost-effective way. And I
    do want to underscore to the second part of your question, the
    importance of transparency.
        I recognize that there are bad actors in this industry that
    have over-anchored on one of those particular principles, which
    has been underscored by this Committee, expediency over
    transparency. And so we are proud Members of the Responsible
    Business Lending Coalition to show united front among those
    good actors in the industry that we care about these issues,
    that our underlying intention is to leverage technology, to
    effectively bring down the cost of distributing and
    transacting, which ultimately benefits our borrowers.
        Mr. MEUSER. Okay. Good. Good. Mr. Griffin, I am going to
    come back to you for a moment. The idea of CFPB having
    authority over small business lending over fintechs, your
    thoughts? Good idea? Not a good idea? Your thoughts on that?
        Mr. GRIFFIN. Well, I realize this is a very partisan issue,
    but I do think the CFPB does play a role to provide a different
    perspective on overseeing some of the predatory practices. So I
    have noted, I investigate fraud, and I look at which
    organization--I look at--I also talk to various government
    organizations. And one pattern that I notice is sometimes one
    organization will pick up on something and someone else may
    not. And it may be because of kind of exogenous reasons. So I
    am a fan for more data being available not just to government
    organizations but to the public to analyze these matters. So--
    and I completely share----
        Mr. MEUSER. I am absolutely sorry. We are over our time.
    And I just want to say we want to get it right and not be
    partisan. And, Mr. Salas, I would like to get your response to
    that in writing or after this. And, Mr. Chairman, I yield back.
    Thank you.
        Chairman PHILLIPS. The gentleman yields back. Now I
    recognize the gentlelady from California, Ms. Chu, for 5
    minutes.
        Ms. CHU. Mr. Salas, congratulations to Camino Financial for
    recently being approved as a U.S. Treasury-certified Community
    Development Financial Institution, or CDFI. As a mission-based
    lender, you are one of a small group of fintech lenders with a
    CDFI certification demonstrating your commitment to promoting
    community development and providing responsible, affordable
    capital and technical assistance to underserved, minority-owned
    small businesses. You are also one of the few fintech lenders
    that have voluntarily signed onto a Small Business Borrower
    Bill of Rights which commits you to fair business practices,
    including disclosing the true, complete cost of your product.
        Mr. Salas, can you discuss why Camino Financial chose to
    sign onto the Small Business Borrower Bill of Rights, and how
    being a signatory benefit to business? And what would you say
    to encourage other fintech small business lenders to join you.
        Mr. SALAS. Thank you for your kind words and your question.
    I will say that becoming a CDFI has been a long-term bet that
    we know is a winning bet. It took us 3 years to get certified
    in multiple applications, as one of the first, if not the first
    digitally native CDFI with a national designation focused on
    small business lending. So we are proud to be a CDFI and
    appreciate the question.
        Why did we sign the Borrower Bill of the Rights? Simply
    put, it was the right thing to do, because it is in the best
    interest of our borrowers, and it underscores guiding
    principles or guardrails of responsible lending in our
    industry.
        And I encourage other fintechs to do the same. And if you
    don't, we are going to put you out of business.
        Ms. CHU. Well, I also appreciate the fact that Camino
    Financial is pursuing a Community Advantage lending license
    with the SBA. Community Advantage is something that could
    benefit small businesses so tremendously if they had greater
    access to it. And because fintech lenders are much more likely
    to serve the smallest businesses unable to access products from
    traditional lenders, they are kind of going after the same
    market. And compared to the misleading advertising, some
    fintech companies use to track businesses in unaffordable loans
    with high interest rates, Community Advantage loans have a
    maximum interest rate of prime plus 6.5 percent, which is far
    below the nearly 50 percent we have seen in some parts of the
    fintech market.
        Community Advantage lenders also provide their clients with
    technical assistance that some fintechs may not. I have long
    been a proponent for making Community Advantage programs
    permanent. And I was pleased to see that the SBA recently raise
    the moratorium on new lenders in the program of which you are
    one that is applying.
        Can you tell us why you are pursuing this license and about
    how bringing more lenders into Community Advantage loan
    programs--into this program could potentially help more small
    businesses out of predatory unaffordable loan products?
        Mr. SALAS. Absolutely. Excuse my excitement because I think
    this is one of the biggest opportunities to systematically
    lower the cost of capital to underserved small businesses. We
    believe that the extension in permanent implementation of the
    SBA Community Advantage Program presents a great opportunity to
    increase the accessibility.
        Let me illustrate with how I believe Camino Financial would
    apply this program. We know and acknowledge that many
    underserved small businesses, on the day of their application,
    may actually not qualify for the Community Advantage program.
    And so, why do I think and believe that it is going to
    drastically bring down the cost? It is because we call
    ourselves Camino for a reason. We are not just your starting
    point, we are your end point. It is important that we not only
    offer you an affordable and accessible loan at the onset that
    may not be an SBA loan, but gives you the path to graduate into
    an SBA loan. And, unfortunately, today, as you know, SBA
    licenses are very hard to come by unless you buy a bank. But
    there is an opportunity as a CDFI to participate in SBA loan
    programs, to be able to offer what I qualify, if not the
    lowest, some of the lowest prices available to these
    underserved communities.
        Ms. CHU. And to follow up, the Community Advantage program
    was extended for 2 years. But would making the program
    permanent provide the certificate needed for lenders to
    participate?
        Mr. SALAS. Yes.
        Ms. CHU. Thank you.
        Chairman PHILLIPS. We never heard a witness just say
    ``yes'' or ``no.''
        The gentlelady yields back.
        And with that, I recognize the gentleman from Wisconsin,
    Mr. Fitzgerald, for 5 minutes.
        Mr. FITZGERALD. Thank you, Mr. Chair.
        Dr. Griffin, I think it would be wrong for us to have the
    hearing on fintech lending and not discuss Section 1071 of
    Dodd-Frank.
        Since CFPB issued its proposed rule, I have heard from
    several financial institutions about the negative impact that
    this will have on both small banks and small businesses. Even
    CFPB Director Chopra expressed concern regarding the regulatory
    burden the proposed rule would have on small banks. But it is
    not just traditional institutions that would feel the effect of
    1071. Nonbank lenders and fintechs would meet the 25 covered
    credit transaction requirement that will be subject to the same
    data collection burdens as other financial institutions. The
    results of this proposed rule will be fewer loans and decreased
    access to credit for small businesses.
        I want to thank the Ranking Member, Ranking Member
    Luetkemeyer, for his leadership on this issue, including
    sending a letter to the director outlining the concerns of
    Small Business Committee Members with the proposed rule.
        I would also like to submit that for the record if I could,
    Mr. Chair.
        I would also be introducing a bill this month to repeal
    Section 1071 and require small business advocacy review panels
    to presume tailoring is necessary for rulemaking.
        Dr. Griffin, can you elaborate on how Section 1071
    reporting requirements are burdensome to small businesses?
        Mr. GRIFFIN. Yeah, thanks.
        Well, I am not an expert on 1071, but I will just say, I am
    not in favor of having additional reporting requirements for
    small businesses. I would--I favor, like, the SBA having
    authority to investigate if they see consumer or predatory
    loans, but in terms of additional reporting requirements on
    small businesses, that could be--I would see where that could
    be burdensome.
        It would seem that the kind of data that I am requiring, or
    I would like to see more public transparency of, is data that
    is already collected. In terms of when loans are made, there is
    a lot of features to those loans, and that data could be made
    available by the SBA or the CFPB or other government
    organizations so that private individuals and academics like
    myself can investigate the data and look for misreporting.
        Mr. FITZGERALD. Yeah. I mean, one of the corporations
    actually located in my congressional is Fiserv. And with the
    literally millions of transactions that happen on a daily
    basis, I think putting fintech into kind of the same category
    and then saying that the same requirements that would apply to
    any type of traditional financial institution could also be
    accommodated by these corporations is just, well, first of all,
    naive; and, secondly, once again, kind of the heavy hand of
    government stepping in and saying, You know, we are going to
    require something that quite honestly we are not even sure
    whether or not they could provide.
        So, I mean, do you think--like you said, you may not be an
    expert on the topic, but, you know, codifying Section 1071 for
    nonbank and fintech, it just doesn't seem like a good fit.
    Would you agree with that?
        Mr. GRIFFIN. You know, again, I am not comfortable making
    an up-or-down decision on it without knowing more details. But
    I would say that fintechs, along with traditional banks,
    already collect a lot of information. So I would favor whatever
    information they are existing, collecting in their loans, and
    so forth, to make all of that data available to some reporting
    agencies, and that--if they simply did that, that would not
    require additional burdens. If they are requiring to give a
    survey to all of the customers, then, yes, that would be an
    additional burden. But just taking blanket downloads of the
    data they already collect and passing that on, I think that
    would be sensible, but that is probably not what the rule is
    about. But, anyway, I will----
        Mr. FITZGERALD. Yeah. And I apologize if I am putting you
    go on the spot, and I know we are into kind of an area that no
    one has really had to dive into yet.
        But the other thing I would just say in closing is when we
    looked at the PPP program and kind of the requirements and the
    financial institutions and the oversight that was obviously in
    place when you are talking about some of the small banks and
    credit unions, there was obviously much less fraud.
        Again, I don't know how we apply these things when you are
    talking about fintech with the scale and the size of what these
    companies are doing. So, again, more of a comment than a
    question, I guess. I wish we would simply avoid that if we
    could.
        And I yield back.
        Chairman PHILLIPS. The gentleman yields back.
        And now I recognize the gentleman from Florida, Mr.
    Donalds, for 5 minutes.
        Mr. DONALDS. Thank you, Mr.--I am on? There you go.
        Thank you, Mr. Chairman.
        This is always an interesting topic for me considering the
    fact that a lot of the reasons why we are in this issue are
    respect to the new innovations is because banking regulation in
    the United States has actually been terrible. It has actually
    crippled community banking in the United States. We all know
    it. That is why you have had so many different aspects of
    innovation that have matriculated because the desire for small
    borrowers, small businesses, micro businesses, and people at
    the lower levels of our socioeconomic strata still need
    capital. They have still got to borrow money. And the banking
    system as it exists today cannot meet the demand because of the
    ridiculous regulations brought from previous iterations of
    Congress a decade ago, two decades ago, so on and so forth.
        I stand still in the position today that Dodd-Frank even
    needs to go completely, or be completely reformed because what
    it actually did was cripple the ability for capital to reach
    some of the smallest enterprises in the United States.
        That being said, Dr. Griffin, one of the reasons I have an
    issue with an expansion of CFPB's authority--which, by the way,
    the CFPB, in my view, is not constitutional because they have--
    there is no oversight authority from Congress for them to
    operate. They basically operate in the ether. And I know nobody
    likes to talk about that, but they do their own thing, and they
    literally leverage money from corporations with no oversight
    whatsoever from Congress.
        So my purview, they are an unconstitutional body, they
    should be removed. Just figured we might as well get that on
    the record right now.
        But that being said, my issue with actually expanding their
    authority is that--Dr. Griffin, do you think that it would make
    it harder for fintechs to actually be able to operate and
    provide capital to the people who still desire capital in the
    United States, specifically around small business borrowing,
    micro business borrowing? Do you think the Chairwoman's bill
    would actually make it harder for fintechs to meet the demand
    that obviously exists in the United States?
        Mr. GRIFFIN. Yeah, thanks for that question. I mean, these
    are complex topics.
        I would start by saying that I think, oftentimes, with
    regulation, there is two approaches. One is to try to create a
    lot of safeguards on the front end to prohibit potential
    problems on the back end. And there can be problems with that
    as our program--as we showed with the PPP, there were
    substantial problems with the program.
        Now, we should always think about designing better
    programs, and so forth, but I am a big advocate, as I was
    mentioning at the end of my talk, of having stronger
    consequences at the back end. And whether that comes from
    existing organizations, like the Department of Justice, the
    Securities and Exchange Commission, or other regulatory bodies,
    perhaps the CFPB, I would have that to be more repercussions
    for organizations that violate the rules, rather than creating
    a lot of regulatory tape at the front end that could actually--
    because one of the problems with that regulatory tape at the
    front end is that it does prohibit new competition and can
    actually entrench those people that are able to navigate the
    rules, entrench those people in the market and actually cause,
    you know--prohibit new competition.
        Mr. DONALDS. Well, I appreciate that.
        And one other area I want to get on real quick--and I heard
    it in one of the witness's testimony earlier today was about
    APRs, at the annual percentage rate. Listen, as a banker--a
    recovering banker, because I am not in the industry anymore
    obviously--but as a recovering banker, you cannot--it has never
    worked to apply short-term loans and subject them to APR
    calculations. The debt is only outstanding for a week, 2 weeks,
    maybe 3 weeks, and you are going to apply an annual percentage
    calculation to it? The APR, quote/unquote, might sound
    technically right, but the problem is that the credit is not
    extended for a full year. So it is--you are comparing apples
    and oranges. It just never has really made much sense to try to
    apply APR terms to some of these short-term lending instruments
    that are designed to be short-term that are short-term.
        Dr. Griffin, last question to you in the time remaining. Do
    you think that it is actually beneficial to these borrowers to
    have these APR disclosures which, in my view, are misleading
    anyway?
        Mr. GRIFFIN. Yeah, I actually disagree with you on that. I
    would like to see the APR disclosed. And if there are caveats,
    like the APR would only be for a certain period of time, they
    could disclose that, that if the loan is only for X months. But
    the one problem is, if the loan is, like, only like a month
    originally but then it extends to a longer term, then it could
    end up being an APR.
        So I do think that transparency and giving accurate
    information to borrowers and putting all of the information on
    a level playing field so that borrowers can make the
    appropriate choices--I am a finance professor, and I can tell
    you that sometimes my colleagues are confused by some of the
    terms in various documents. So I do think there is some role to
    transparency and putting things on a level playing field, for
    better competition that way, actually.
        Chairman PHILLIPS. And the gentleman's time has expired.
        And seeing no other questions, I want to thank all of our
    witnesses for being here today. New technology can expand
    access to timely credit for underserved entrepreneurs, increase
    financing options, and improve day-to-day operations for small
    businesses. But as we have seen today, these new technologies
    have also been used to take advantage of entrepreneurs.
        As a Congress, we must take steps to ensure that this
    rapidly developing sector has adequate protections for small
    businesses. Today, we have discussed several commonsense
    policies, from transparency policies to disclosure policies,
    that can help root out predatory practices and ensure fairness
    for small business borrowers around the country.
        So I look forward to working with my colleagues on both
    sides of the aisle to advance solutions that expand access to
    affordable capital while safeguarding small firms.
        Without objection, Members have 5 legislative days to
    submit statements and supporting materials for the record.
        And without any further business to come before the
    committee, without objection, we are now adjourned.
        [Whereupon, at 11:15 a.m., the subcommittee was adjourned.]

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