[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.]
A P P E N D I X
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]