[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                     
          
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                   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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