    [Senate Hearing 117-700]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-700

      PROTECTING AMERICANS FROM DEBT TRAPS BY EXTENDING THE MILITARY'S 36
                     PERCENT INTEREST RATE CAP TO EVERYONE

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

      EXAMINING EXTENDING THE MILITARY'S 36 PERCENT INTEREST RATE CAP TO
               EVERYONE TO PROTECT ALL AMERICANS FROM DEBT TRAPS

                                   __________

                                 JULY 29, 2021

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

         [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                              ______

                 U.S. GOVERNMENT PUBLISHING OFFICE
     52-996           WASHINGTON : 2023

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                         SHERROD BROWN, Ohio, Chairman

    JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
    ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
    JON TESTER, Montana                  MIKE CRAPO, Idaho
    MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
    ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
    CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
    CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
    TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
    KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
    JON OSSOFF, Georgia                  JERRY MORAN, Kansas
    RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                         STEVE DAINES, Montana

                         Laura Swanson, Staff Director

                     Brad Grantz, Republican Staff Director

                           Elisha Tuku, Chief Counsel

                            Jan Singelmann, Counsel

                     Dan Sullivan, Republican Chief Counsel

                       Hallee Morgan, Republican Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                            THURSDAY, JULY 29, 2021

                                                                       Page

    Opening statement of Chairman Brown..............................     1
            Prepared statement.......................................    42

    Opening statements, comments, or prepared statements of:
        Senator Toomey...............................................     3
            Prepared statement.......................................    43

                                   WITNESSES

    Representative Glenn Grothman of Wisconsin.......................     6
        Prepared statement...........................................    45
    Representative Jesus G. ``Chuy'' Garcia of Illinois..............     7
        Prepared statement...........................................    46
    Representative Barry Loudermilk of Georgia.......................     9
        Prepared statement...........................................    47

    Hollister K. Petraeus, Former Assistant Director for
      Servicemember Affairs, Consumer Financial Protection Bureau....    12
        Prepared statement...........................................    48
        Responses to written questions of:
            Senator Crapo............................................    90
    Ashley Harrington, Federal Advocacy Director and Senior Counsel,
      Center for Responsible Lending.................................    13
        Prepared statement...........................................    53
        Responses to written questions of:
            Chairman Brown...........................................    91
            Senator Crapo............................................    93
            Senator Tillis...........................................    94
    Richard Williams, President and CEO, Essential Federal Credit
      Union..........................................................    15
        Prepared statement...........................................    69
    Bill Himpler, President and CEO, American Financial Services
      Association....................................................    17
        Prepared statement...........................................    71
    Thomas W. Miller, Jr., Jack Lee Chair in Financial Institutions
      and Consumer Finance, Mississippi State University.............    19
        Prepared statement...........................................    80
    David Pommerehn, General Counsel and Senior Vice President,
      Consumer Bankers Association...................................    20
        Prepared statement...........................................    87

                  Additional Material Supplied for the Record

    Letters submitted in support of the Veterans and Consumers Fair
      Credit Act.....................................................    96

                                     (iii)

      PROTECTING AMERICANS FROM DEBT TRAPS BY EXTENDING THE MILITARY'S 36
                     PERCENT INTEREST RATE CAP TO EVERYONE

                                  ----------

                            THURSDAY, JULY 29, 2021

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10 a.m., via Webex and in room 538,
    Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
    the Committee, presiding.

              OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

        Chairman Brown. Please sit. The Senate Committee on
    Banking, Housing, and Urban Affairs will come to order. I have
    never had witnesses stand out of respect or out of something,
    Chuy. I do not know what the three of you were standing for,
    but thank you for that.
        This hearing is in a hybrid format. Appreciate the three
    Members of Congress being in person. We have some witnesses
    testifying in person, some by video.
        For those joining remotely, a few reminders: Once you start
    speaking, there will be a slight delay before you are displayed
    on the screen. To minimize background noise, please click the
    mute button until it is your turn to speak or ask questions.
    You should all have one box on your screens labeled ``clock''
    that will show how much time is remaining.
        As we are here, those of us in person, our speaking order
    will be as is traditional, by seniority of the Members here
    when the gavel came down and then by seniority of Members
    arriving later. We alternate Democrat, Republican, back and
    forth.
        Fifteen years ago, this Committee held a hearing looking
    for solutions to protect members of the military and their
    families from abusive lenders that went out of their way to
    target servicemembers. The then Chair of the Banking, Housing,
    and Urban Affairs Committee, Richard Shelby, described these
    practices as ``predatory lending schemes that target
    financially inexperienced consumers and make loans without
    regard to the consumers' ability to repay.'' Another Member of
    this Committee, Senator Martinez of Florida, described these
    high-interest loans as ``unconscionable.'' Senator Elizabeth
    Dole highlighted the efforts her home State of North Carolina
    had taken to shut down high-interest payday lending.
        Following that hearing, a bipartisan consensus emerged.
    Congress passed the Military Lending Act, which President Bush
    signed into law in 2006. That spurred action from both parties
    around the country. States of all sizes in all regions passed
    laws protecting consumers from high-interest, predatory loans.
    Since 2010, Montana, South Dakota, Colorado, Nebraska,
    California, Illinois, all passed laws to cap interest rates and
    consumer loans at 36 percent. And like the Military Lending
    Act, these State laws were passed with overwhelming bipartisan
    support. Seventy-two percent of Montana voters, 75 percent of
    South Dakota voters, 77 percent of Colorado voters, 83 percent
    of Nebraska voters, all supported ballot issues to cap interest
    rates at 36 percent.
        Of course, of course, the payday lending lobby did not give
    up. They spent every day since then trying to come up with new
    schemes to evade these laws, to exploit loopholes. They got an
    assist from the last Administration. Fortunately, a bipartisan
    group of Senators, including Members from this Committee,
    worked to overturn the Administration's giveaway to the payday
    lobby, the so-called True Lender Rule. It would have allowed
    predatory lenders to evade State interest rates caps. We put a
    stop to that specific scheme, but again the industry does not
    give up, not when their profits depend on tricking Americans
    out of their money.
        We need national protections. Now is the time for this
    Committee to again lead the country by passing a Federal law
    establishing a 36 percent interest rate cap on all consumer
    loans. That is why I and so many of our colleagues joined under
    the leadership of Senator Reed, who is Chair of the Senate
    Armed Services Committee and the most senior Member on this
    Committee, to introduce the Veterans and Consumers Fair Credit
    Act.
        Senator Reed's legislation, our legislation, builds on the
    success of the MLA. It extends its 36 percent cap to everyone,
    including to veterans and surviving family members left out of
    the original law. This Act is supported by more than 100
    consumer, community, civil rights organizations as well as
    military and veterans service organizations. This bill is also
    supported by a broad coalition of faith organizations,
    including the Southern Baptist Ethics and Religious Liberty
    Commission, the National Association of Evangelicals, the
    National Baptist Convention, the National Conference of
    Catholic--the U.S. Conference of Catholic Bishops. And, like
    the MLA, it is bipartisan.
        Our bill's lead sponsors in the House--the two members who
    are here, Republican Glenn Grothman, welcome, and Democrat Chuy
    Garcia, welcome--are both here to testify before this
    Committee.
        We know the tired arguments against the bill. They are the
    same ones we heard from the Military Lending Act. During the
    2006 hearing, the payday industry claimed we would cut off
    access to credit to servicemembers; that did not happen.
    According to a May 21 Department of Defense report, the MLA is
    currently working as intended. We will hear from Mrs. Petraeus
    about that. And servicemembers continue to have ample access to
    necessary credit.
        We will hear those talking points again today, I am sure,
    because that is all the lobbyists on this have. It is an
    argument we welcome. We do want to cutoff access to loans at
    high interest rates, so high they ruin people's lives. That is
    kind of the whole point here.
        Payday lenders do not offer access to responsible credit
    that consumers can afford to pay. They offer the opposite,
    products that trap consumers in a cycle of debt. We have heard
    the same stories. Consumers end up renewing their loans over
    and over, paying more in fees than the original loan amount. We
    know that 75 percent of loans go to borrowers who take out 11
    or more loans each year.
        Yesterday, I spoke with Ohioan Gloria Olivencia, a mother
    from Lorain. She took out a payday loan to pay her bills. She
    ended up trapped in a cycle of debt. She paid $1,200 in
    interest on a loan that was 500-some dollars. She shared the
    story of her daughter who took out a $200 car loan and ended up
    living in fear that her car would be repossessed. She had been
    unable to get to work to earn the money to pay off the loan. As
    she said, ``It is easy to get a loan. It is not so easy to get
    out of it.''
        These Ohioans' experiences sound a lot like the business
    model laid out in this actual training manual from payday
    lender ACE Cash Express. You can see the trap that people fall
    into.
        Another argument we hear is that no one can be profitable
    offering loans at 36 percent. Really? Thirty-six percent is
    still pretty darn high and will make any company plenty of
    money. I ask my colleagues to think about their own credit
    cards or mortgages or loans they have taken out. I am betting
    nobody on this panel has paid anything like 36 percent on any
    of those loans.
        Federal credit unions across the country offer payday
    alternative loans at rates between 18 and 28 percent. Some
    banks have begun to do the same. Even the American FinTech
    Council supports our bill. Their members offer short-term loans
    at rates appreciably under 36 percent.
        Fifteen years ago, Republicans on this Committee described
    high-interest payday loans as ``predatory'' and
    ``unconscionable.'' If these loans are predatory and
    unconscionable when made to servicemembers, as Senator Reed
    always points out, they are also predatory and unconscionable
    when made to anybody, to a veteran, to a surviving family
    member, or to a mother trying to get her car repaired so she
    can keep getting to work.
        Our Committee took bipartisan action to protect
    servicemembers. I am optimistic we can do that together to
    protect all Americans we serve from debt traps.
        And in closing, I would like to enter into the record,
    letters in support of the Veterans and Consumers Fair Credit
    Act from the Faith and Just Lending Coalition, the American
    FinTech Council, the Military and Veterans service
    organizations, and a coalition of 188 consumer, community,
    civil rights, labor, and small business organizations. Without
    objection, those will be entered into the record.
        Senator Toomey.

             OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

        Senator Toomey. Thanks, Mr. Chairman. And let me just start
    off by a word of thanks to both of our staffs for the very
    intense work they have been engaged in the last, I do not know,
    48 hours or so. I think we have essentially reached an
    agreement on a transit title for this infrastructure bill, and
    our staffs worked very, very hard to get us there. So I want to
    thank them.
        I also want to thank all of our witnesses, both panels. A
    special thanks to Congressman Loudermilk for joining us today
    to explain and speak to the very significant damage this
    proposal would inflict on Americans and our economy generally.
        You know, it is a fundamental principle of economics that
    markets discover prices. Sellers want to sell their products
    for as much as they can possibly get. It is competition with
    other sellers that forced them to lower their prices until they
    get to about the lowest price they can and still stay in
    business.
        Now the exception to that is when there are monopolies or
    virtual monopolies, which usually only exist when Government
    creates or facilitates them. Nevertheless, history is littered
    with examples of Government planners and their failed attempts
    to override markets and set prices. They fail for many reasons
    but mainly because they generate huge unintended consequences
    and inevitably harm the very people they are supposed to be
    trying to protect.
        Proponents of a 36 percent interest rate cap seem to think
    it would result in borrowers getting cheaper credit. That is
    certainly not the case. In fact, those most in need would
    simply lose access to credit. If a lender cannot recoup its
    costs, the lender will not make the loan. Studies have found
    that a loan under $2,600 is usually a money loser for the
    lender at a 36 percent interest rate, and that is because there
    are fixed costs that are associated with the loan regardless of
    its size. A bank policy institute has estimated that issuing a
    3 month $100 loan would cost a typical bank $35 to issue. Now
    if you express that as annual percentage rate, that is about
    140 percent, meaning a 36 percent rate cap would make it
    illegal to offer that loan. So the loan will not get made.
        And many would suffer if they lost access to small loans. A
    2020 Federal Reserve study revealed that 35 percent of adults
    could not cover an unexpected $400 expense using cash, savings,
    or the equivalent. Who would be at most risk of losing access
    to the credit? It would be the 30 percent of U.S. consumers who
    have a subprime credit score and the more 1 in 10 Americans who
    are credit-invisible.
        Moreover, while I am skeptical about the evidentiary value
    of unverified complaints, I would point out that personal
    loans, payday loans, and title loans each account for less than
    1 percent of consumer complaints in the CFPB's database, which
    certainly suggests that consumers are not vocally dissatisfied
    with them.
        Here is another example that highlights the inflexibility
    and the problem of an annual percentage rate cap. Consider a
    renter who is $100 short on rent on the first of the month but
    will not get paid until the second of the month. Well, in order
    to avoid a $50 late fee, she might opt to borrow $100 at a cost
    of $15, paid back anytime over the next several months. If it
    is 3 months, that would be equivalent to a--that would be
    calculated as a 60 percent annual percentage rate. Well, this
    happens to be a real product that is offered by a real major
    American bank, and it appears that it would be illegal under
    the proposed 36 percent annual percentage rate cap. Therefore,
    instead of paying $15 to the bank, the renter would be forced
    to pay $50 to her landlord. Congratulations.
        The effects would be far more severe using the all-in rate
    cap that the Military Lending Act, known as the MLA, imposes.
    Even though it is called an annual percentage rate, an all-in
    APR like this encompasses far more than just interest expense.
    It includes fees, finance charges, and the cost of ancillary
    products like credit insurance. As a result, a supposed 36
    percent rate cap functions like a much lower limit.
        Now this is particularly evident for credit cards.
    Including even a modest annual fee in the all-in APR
    calculation can cause an ordinary credit card to appear to
    exceed 36 percent.
        And what is more, virtually all other Federal and State
    laws use a standard annual percentage rate calculation, not the
    all-in calculation. The result is an all-in rate cap of 36
    percent would preempt even those States that have interest caps
    that are seemingly set at a similar rate with the sole
    exception of Illinois.
        So while some argue that the MLA should apply universally,
    servicemembers are not actually reflective of the general
    population in a number of ways. For one, they have a reliable
    income source and different factors affect their readiness to
    deploy on a moment's notice, different than most consider when
    ordering their finances.
        And what is more, research on the MLA's effects suggest
    that the MLA has an adverse effect on servicemembers. A survey
    of servicemembers showed that the percentage of servicemembers
    suffering financial distress more than doubled from 16 percent
    before the MLA's passage to 34 percent 5 years later and about
    51 percent of all military families have been denied credit
    specifically because of the MLA. And research by West Point
    professors found that payday lending had not adversely affected
    servicemembers.
        Although proponents claim extending the MLA to all
    consumers would help veterans, veterans groups have disagreed.
    In 2019, a number of veterans groups opposed legislation to
    extend the MLA, with several noting that veterans have more
    difficulty accessing capital than others.
        The fact is Congress should not be restricting, but rather
    expanding, access to credit. Regulators have already made it
    very, very difficult for banks to offer small-dollar credit,
    and relatively few do. Although federally chartered credit
    unions can offer payday alternative loans, an NCUA-approved
    small-dollar product, fewer than 600 credit unions nationwide
    offer them. And in the first half of 2020, the all-in APR for
    these loans, including fees, exceeded 36 percent. So
    presumably, under this legislation, this entire category of
    small-dollar lending by credit unions would become illegal.
        At the end of the day, taking choices away from consumers
    just is not a good idea. Instead, it hurts the very people it
    is supposed to help. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Toomey, and thank you
    for your words about the transit title that we were able to
    negotiate last night. Brad Grantz and Laura, our staff
    directors on both sides, assisted by Nicole and Dan and Homer
    and Ben, were working until late at night, and thank you for
    that. And I think the members on both sides of the aisle will
    be pleased with the outcome.
        I will introduce the three House colleagues joining us
    today on our first panel: The Honorable Glenn Grothman
    represents Wisconsin's 6th congressional District, currently
    serving his fourth term in Congress, he serves on the House
    Oversight and Reform Committee, Education Committee, and Budget
    Committee. Welcome, Congressman Grothman.
        The Honorable Jesus ``Chuy'' Garcia represents Illinois's
    4th congressional District, serving his second term, serves on
    the House Financial Services Committee, Natural Resources
    Committee, and Transportation and Infrastructure Committee.
    Welcome, Congressman Garcia.
        And Barry Loudermilk represents Georgia's 11th
    congressional District, serving his fourth term in Congress,
    serves on House Financial Services Committee and House
    Administration Committee. Welcome, Congressman Loudermilk.
        Congressman Grothman, you are recognized for 5 minutes.

        STATEMENT OF REPRESENTATIVE GLENN GROTHMAN OF WISCONSIN

        Mr. Grothman. Chairman Brown, Ranking Member Toomey,
    distinguished Members of the Committee, thank you for inviting
    me to testify in support of the 36 percent cap.
        Prohibitions against usury or excessively high interest
    rates have been around since Biblical times. It is hard to
    imagine a situation in which it is advisable to take out a loan
    for over 36 percent. While I normally do not like the Federal
    Government regulating business, the fact that so many loans
    today are online kind of leaves us with no choice but to have
    the Federal Government get involved.
        I am sure you will be contacted by lobbyists for the payday
    loan industry. They will tell you they are providing a
    necessary service.
        We have talked about all the caps in individual States as
    well as the caps provided in the Military Lending Act. Despite
    these caps, I hear of no disasters happening in other States.
    There is a reference here in my testimony to a study of what
    happened in South Dakota after South Dakota imposed caps, and
    you can see it was no great disaster.
        One can say that one needs access to credit, but I would
    argue that we have too much credit in this country as it is and
    a lot of times the answer is not to take out so much credit.
    Throughout my time in the Wisconsin legislature and now in
    Congress, I have been told borrowers rarely take out--I have
    been told these borrowers take out loans for one-time
    emergencies.
        According to a study by the Pew Charitable Trusts, they
    released a report titled ``Payday Lending in America: Who
    Borrows and Where They Borrow and Why''. They ask, who are the
    borrowers, demographically, how people borrow, and how much
    they spend and why they use payday loans. And I think if you
    look at that, you will see they are largely not because of one-
    time emergencies. They get themselves in a position in which
    this is paying for ongoing expenses. And as the result, it
    shows that you should be looking for credit either elsewhere or
    just the amount you spend. It is not because of the car
    breakdown or something like that.
        In States with strong legal protections, the result is: A
    large decrease in payday loan usage; borrowers are not driven
    to seek payday loans online or from other sources; 2.9 percent
    of adults reported payday loan usage in States with the most
    stringent regulations compared to 6.3 percent in moderately
    regulated States and 6.6 percent in States with the least
    regulation.
        I will leave you with this interesting anecdote. I am
    always reminded of my days--I always kind of remind myself of
    my days as a State legislator when this topic came up. One of
    my staffers doing research on the topic showed up at a payday
    loan store. She was told by an employee, ``Do not tell your
    husband. It is really not a very good idea.'' So that I always
    get kind of a kick out of.
        Some people would say that, being a conservative
    Republican, why can you be for this? And nobody in this room
    would argue that we should not be regulating some financial
    packages. Right? There are certain insurance contracts that we
    regulate. We do not let anybody sell any insurance contract in
    the world because we realize there are some that are just
    unconscionable.
        OK, offers to purchase. We regulate what is in an offer to
    purchase because we do not want something that is
    unconscionable in there.
        I think the reason people get confused a little bit on the
    payday loan thing is they think to them it is so obvious that
    you should not take a loan for 100 or 150 percent, that, why do
    we not let this be a legal product? But what is obvious to some
    of us is not obvious to all of us. And it is not difficult--I
    am sure you will have people later testifying today--to find
    examples of people who wound up in these 150, 200 percent
    jobbies that find it very difficult to get out from under them.
        And I think the industry knows that very well. I know in
    the county I used to live the number one use of small claims
    court used to be the payday lenders. Eventually, they just let
    people not pay. It is part of the cost of doing business.
        But in any event, I really appreciate you bringing this,
    allowing us to testify on this bill. Good luck because I do
    think Americans, sometimes the Americans least able to afford
    it, lose tremendous amounts of interest. And, thank you again.
        Chairman Brown. Thank you, Congressman Grothman.
    Congressman Garcia.

        STATEMENT OF REPRESENTATIVE JESUS G. ``CHUY'' GARCIA OF
                                ILLINOIS

        Mr. Garcia. Good morning to all and thank you for inviting
    me to join the conversation this morning. A special thanks to
    Chairman Brown and Ranking Member Toomey for convening this
    conversation, and of course, a thanks to all of my fellow
    witnesses that will be speaking today.
        I applaud my colleagues in the Senate for introducing the
    Veterans and Consumers Fair Credit Act, and I look forward to
    reintroducing it in the House shortly.
        Capping interest rates on consumer loans is important to me
    for a simple reason. My community needs it. I represent a
    working class district in Chicago, in suburban Cook County. My
    constituents are mostly Latino and largely immigrant but also a
    lot of diversity. They know all about the dangers of predatory
    lending. Let me explain.
        Rents in my district have skyrocketed since the Great
    Recession. One neighborhood that I represent, Logan Square, has
    lost more than 10,000 Black families and 20,000 Latino families
    since 2010. Wages simply are not keeping up with the cost of
    living. All too often, working class communities must turn to
    loans to fill the gaps. Families take out loans with double or
    triple-digit interest rates to pay for the necessities of life,
    and they quickly find themselves in a cycle of debt they cannot
    repay.
        That is what happened to Billie Aschmeller from
    Springfield, Illinois, who took out a loan for less than $600
    to buy a coat, a crib, and a car seat for her pregnant daughter
    but ended living in her car due to the 300 percent annual
    interest rate on the loan. This is what we call ``debt traps,''
    loans that trap working class people in a cycle of debt.
        And these lenders focus on Black and Brown communities like
    mine. They know we are not paid what we are worth. They know we
    do not have as much access to credit. And this year a study in
    Houston found that payday and title lending web sites featured
    Latinos in more than 30 percent of their pictures even though
    Latinos make up only 20 percent of their customers in Texas.
    Meanwhile, 75 percent of mainstream banks did not feature a
    single Latina or Latino individual. That is a pretty stark
    difference, and the communities I represent need relief from
    these debt traps.
        The good news is that States are acting. I am very proud
    that my State of Illinois, Governor Pritzker, signed an
    interest rate cap bill into law. This has been a key priority
    for my constituents as well as consumer advocates, civil rights
    leaders, and religious organizations. Studies show it is
    already keeping people out of debt traps.
        And it is not a ``red State'' or ``blue State'' issue
    either. Just last year, as you have pointed out, Mr. Chairman,
    82 percent of Nebraskans passed a ballot measure to cap
    interest rates at 36 percent. They joined States like Arkansas
    and South Dakota that put the interests of their citizens over
    the interests of predatory lenders. It is an important step.
        And I am proud that both houses, the House and Senate,
    passed my resolution to repeal the OCC's so-called True Lender
    Rule and allowed States to protect their consumers, but we need
    a national standard that protects consumers across the country
    from getting trapped by mountains of debt they cannot repay. It
    is time for Congress to act.
        During the Obama administration, the CFPB did a great work
    to improve regulations around payday lenders, and I hope that
    the Biden administration picks up where they left off. But only
    Congress has the power to step in and say, enough is enough.
    Our communities are suffocated by double and triple-digit
    interest rates. It holds us back from prosperity and a full
    economic recovery. The time to act is now.
        Before Congress passed the Military Lending Act in 2006,
    lenders trapped servicemembers in cycles of debt while they
    served our country. It is a shame it took so long to protect
    our men and women in uniform from triple-digit interest rates,
    but Congress capped those loans at 36 percent. It worked, and
    it provided us with a robust model for regulating consumer
    loans. It is time to extend these same protections to veterans,
    to servicemembers' families, and other consumers.
        I applaud Senators Brown and Reed for introducing the
    Veterans and Consumers Fair Credit Act. I look forward to
    introducing it in the House. Let us protect our communities
    from these high interest rates. Thank you.
        Chairman Brown. Thank you, Congressman Garcia. Congressman
    Loudermilk, welcome.

        STATEMENT OF REPRESENTATIVE BARRY LOUDERMILK OF GEORGIA

        Mr. Loudermilk. Chairman Brown, Ranking Member Toomey, and
    Members of the Committee, thank you for the opportunity to be
    with you today and to testify in this Committee.
        My district is in northwest Georgia, and it is a snapshot
    of different types of American life. I have urban and rural,
    high income, low income, families who have been in Georgia for
    five generations and immigrants who have just arrived in
    America for the first time. I am here to tell you that a
    national 36 percent interest rate cap would be devastating to
    my constituents and would harm the very people it is intended
    to help.
        We often hear that a 36 percent interest rate cap would
    cause short-term, small-dollar consumer loans to disappear.
    That is not hypothetical; that is real. To break even on a
    $2,600 loan, factoring in losses and the cost of producing the
    loan, lenders have to charge a 36 percent APR. In other words,
    if a maximum APR is 36 percent, lenders will experience a net
    loss on loans under $2,600 because the break-even APR for those
    loans is more than 36 percent. This would have wide-ranging
    consequences, none of which are good for consumers. Many
    lenders simply would not offer small loans anymore, or
    consumers would be forced to borrow more money than they need
    or have a longer-term loan to get the APR under 36 percent.
        This theory has been proven correct in practice. When the
    State of Oregon established an interest rate cap in 2007,
    access to credit decreased dramatically, borrowers switched to
    inferior alternatives, and consumers, on average, were
    financially harmed more than they were helped.
        There is no question that consumers have a significant need
    for small-dollar credit. Current Federal Reserve data indicates
    that more than one-third of American adults would not be able
    to pay for a $400 emergency expense without having to borrow
    money, and tens of millions of Americans do not qualify for
    traditional bank loans.
        A 36 percent interest rate does sound high, but that is
    because the annual percentage rate is an inappropriate and
    misleading way to measure the cost of a short-term loan. The
    terms of these loans are usually much less than 1 year. So
    measuring the cost in annual increments is like saying a $100-
    a-night hotel room is actually a $36,500-a-year hotel room.
        Take, for example, a $500 loan with a term of 3 months and
    a $55 fee. That results in a 44 percent APR, and under this
    bill, that loan would be illegal nationwide. Furthermore, the
    military APR includes both interest and fees, which overstates
    and distorts the true cost.
        Under a 36 percent all-in rate cap, credit cards with
    interest rates as low as 25 percent would be impacted, which
    risks eliminating access to credit cards for more than a
    quarter of subprime borrowers in Georgia and half of subprime
    borrowers nationwide.
        What do Americans frequently use small-dollar installment
    loans to pay for? Weddings, funerals, emergency car repairs and
    medical bills. Who are we to tell our constituents that they
    can no longer access credit to cover these expenses?
        I should also take a moment to dispel the commonly stated
    myth that opposition to a national interest rate cap is rooted
    in a desire to protect payday lenders. Georgia has an outright
    ban on payday lending. So that has nothing to do with my
    opposition to this bill. Instead, my constituents have been
    fortunate to access affordable personal loans thanks to the
    growth of bank fintech partnerships and nationwide online
    lending programs. But if this bill becomes law, my constituents
    will not have access to installment loans or any other type of
    short-term, small-dollar credit.
        Finally, I find it incredibly ironic that the Majority is
    attempting to override State laws with this bill. Just a few
    weeks ago, they described the OCC True Lender Rule as ``a
    shameful attack on States' ability'' to determine their own
    policies. It is disappointing to see my colleagues selectively
    pick and choose when they think State laws matter and when they
    do not. The States, the CFPB, and multiple other agencies
    regulate these loans rigorously, and there is no justification
    for legislating them out of existence.
        Thank you again for the opportunity to testify before the
    Committee.
        Chairman Brown. Thank you, Congressman Loudermilk. Thank
    you to all three of the Members of Congress. Really appreciate
    your joining us, the staff with them.
        You are dismissed and as the other witnesses would make
    their way to the table, please. Thank you again.
        And Senator Tester, while the staff is setting up name tags
    and people are looking forward, would like a minute to speak.
        Senator Tester. I appreciate that, Mr. Chairman, and I
    appreciate you and the Ranking Member having this hearing. I
    also appreciate your work in negotiations on transportation. I
    very much thank you for--both of you for your efforts.
        Chairman Brown. And yours, too.
        Senator Tester. I just want to thank our witnesses for
    being here today, especially Professor Miller, who is a native
    Montanan.
        I just want to bring up one issue. First of all, it is
    clear that we need to protect consumers from bad actors and
    unscrupulous practices. We should be focused on doing that
    while making sure folks--while making sure that working folks
    can still get access to small-dollar loans at fair terms so
    that they are not putting their financial stability at risk
    when they have an emergency or unexpected expense that they
    cannot cover.
        I think what we need to also consider in this bill, though,
    is an issue that impacts Indian Country, and it is called
    ``sovereignty,'' which is fundamental to who they are. And the
    sovereignty issue sets Native Americans in a bit of a different
    category that I think we can accommodate, but we have to
    realize that there is a challenge here.
        For example, Plain Green Loans, which is owned and operated
    by the Chippewa Cree Tribe, it is one of the biggest businesses
    on the Rocky Boy's Indian Reservation, which is about 25 miles
    away from where I live, gives good jobs, good-paying jobs, to a
    place that has about 80 percent unemployment, by the way, and
    invests in youth programs, does a lot of really good work. The
    way this bill is written, it could potentially have very
    negative impacts on them.
        So my suggestion is, as this bill moves forward, as we have
    this hearing today, as we massage this bill to make this bill
    better, that we get some Indian tribes in here to talk about
    the impacts on them.
        With that, I just want to thank you, Mr. Chairman. Take
    care. Thanks.
        Chairman Brown. Thank you, Senator Tester.
        I will introduce the witnesses for our second panel. Three
    of them are in person, as we see; three of them will be
    testifying remotely.
        Mrs. Holly Petraeus served 6 years Assistant Director at
    the Consumer Financial Protection Bureau, heading up its Office
    of Servicemember Affairs. She previously worked as the Director
    of the Better Business Bureau's Military Line to conduct
    outreach to military communities across the country. Of course,
    welcome, Mrs. Petraeus.
        Ms. Ashley Harrington is the Federal Advocacy Director,
    Senior Counsel at the Center for Responsible Lending, where her
    portfolio includes general consumer lending issues. Welcome,
    Ms. Harrington.
        Richard Williams is the President and CEO of Essential
    Federal Credit Union. Essential is a $360 million federally
    chartered credit union in Baton Rouge, with approximately
    40,000 members. Welcome, Mr. Williams.
        Bill Himpler is the President and CEO of the American
    Financial Services Association. He has been active in engaging
    on the policy issues that impact AFSA's member companies'
    ability to offer affordable credit. Welcome, Mr. Himpler.
        Professor Thomas Miller is a senior affiliated scholar at
    Mercatus Center at George Mason, where his research focuses on
    small-dollar loans. He is also a professor of finance at
    Mississippi State University. Welcome to Mr. Miller, Professor
    Miller.
        And David Pommerehn is General Counsel and Senior Vice
    President for the Community Bankers Association. His expertise
    covers a wide range of Federal legislative and regulatory
    issues associated with the area of consumer financial services.
    Welcome to you, Mr. Pommerehn.
        We will begin the testimony with Mrs. Petraeus. Thank you
    for joining us.

     STATEMENT OF HOLLISTER K. PETRAEUS, FORMER ASSISTANT DIRECTOR
    FOR SERVICEMEMBER AFFAIRS, CONSUMER FINANCIAL PROTECTION BUREAU

        Mrs. Petraeus. Good morning, Chairman Brown, Ranking Member
    Toomey, and other distinguished Members of the Committee. Thank
    you for inviting me to speak to you today.
        I first got interested in short-term lending over 15 years
    ago, when I was running the national military program for the
    BBB. A 2005 study of payday loan stores across the United
    States found them to be gathered outside military bases ``like
    bears at a trout stream,'' and the impact on the troops'
    finances was a military readiness issue. A 2006 DoD report on
    predatory lending concluded that ``there are hundreds of
    thousands of servicemembers using predatory loan products.
    Self-regulation, fine print, opt-out provisions, and cosmetic
    protections are not effective.''
        Congress' answer was the Military Lending Act of 2006,
    which capped small-dollar, short-term loans to active duty
    military and their dependents at a military annual percentage
    rate of 36 percent. DoD first focused on what they considered
    the three most harmful products: closed-end payday loans with
    terms of 91 days or fewer, closed-end auto title loans with
    terms of 181 days or fewer, and closed-end tax refund
    anticipation loans.
        It did not take lenders long to figure out that the 2007
    rule would be easy to evade. They simply had to make auto title
    loans 182 days, and they were not covered. Similarly, payday
    loans for over 91 days escaped coverage. A CFPB report in 2014
    detailed some egregious examples, to include a $485 loan to a
    servicemember in Texas, where he had to pay back $1,428 in just
    under 6 months, and a $2,575 auto title loan in Illinois to the
    spouse of a servicemember, with a finance charge of $5,720.
        There also was no specific guidance as to who would enforce
    the MLA, which meant that nobody did. So Congress gave MLA
    enforcement authority to those Federal agencies that were
    already charged with enforcing the Truth in Lending Act. It
    also directed DoD to review the 2007 rule. The new DoD rule of
    2015 extended MLA coverage to almost all forms of consumer
    credit and closed off the loopholes that had been exploited by
    lenders.
        I still remember the furious opposition from the payday
    lending industry. They were unwilling to lend at anything close
    to 36 percent and predicted dire financial outcomes for
    military families affected by the lack of short-term credit.
    But did that happen? In a DoD report published last month the
    answer is ``no.'' It said, ``The Department believes the MLA is
    currently working as intended and that servicemembers continue
    to have ample access to necessary credit. Survey results
    generally reflect decreased use of high-cost credit products
    and improved financial condition among servicemembers over
    time.''
        I also took a look at the annual reports of two military
    aid societies, Army Emergency Relief and the Navy-Marine Corps
    Relief Society, for the last 8 years, to see if they had
    experienced a big surge in aid applicants or in the amount of
    financial aid they granted, which could be indicators of post-
    MLA financial distress. For both societies, those numbers had
    actually declined since 2015.
        And I see no evidence that military personnel have turned
    to loan sharks or the Mob since the MLA took effect, another
    prediction. Instead, they seem to have found other sources for
    the money: family, nonprofits, credit unions with low-interest
    loans, worked out a delayed payment schedule with their
    creditors, or decided not to borrow after all.
        Short-term lenders often portray themselves as a helping
    hand during an emergency. The last time I went to Fort Campbell
    Army Post before 2015, I counted an astounding 22 fast-cash
    lenders in a 4-mile stretch outside the gate. Does anyone think
    they were all Good Samaritans? Of course not. They were there
    to make money by offering easy and expensive loans. And make
    money they did under theory of ``If you build it, they will
    come.''
        So many of the testimonials sent to the CFPB from payday
    loan customers began with the words, ``They gave me cash.''
    That Statement always disturbed me because the lenders were not
    giving away cash. They were loaning it to those customers at a
    very high interest rate and counting on them not being able to
    pay it back 2 weeks later.
        A CFPB study in 2013 found that the average payday loan
    borrower was in debt at 199 days per year. Nearly half of the
    borrowers in the study had more than 10 transactions a year
    while 14 percent had 20 or more.
        Lenders will try to persuade you that their products are
    helpful, not harmful, but I hope you will listen to the
    nonprofits. Ask faith leaders in your State how they feel. And
    if we judge by the 83 percent of Nebraska voters who chose last
    year to outlaw payday lending, you may find that a lot of your
    voters have an opinion that is not what you are hearing from
    the lending industry today.
        Many borrowers are using payday loans to cover living
    expenses or discretionary spending, not emergencies, and the
    average borrower pays repeatedly to rent the same money. It is
    time for Congress to extend to all Americans the protections of
    the MLA and set reasonable loan rates of 36 percent or less
    that will provide those who need credit a true helping hand and
    loans that they have the chance to pay off successfully. Thank
    you.
        Chairman Brown. Thank you, Mrs. Petraeus.
        Ms. Harrington is recognized. Thank you for joining us in
    person.

     STATEMENT OF ASHLEY HARRINGTON, FEDERAL ADVOCACY DIRECTOR AND
             SENIOR COUNSEL, CENTER FOR RESPONSIBLE LENDING

        Ms. Harrington. Thanks so much. Good morning, Chairman
    Brown, Ranking Member Toomey, and Members of the Committee. I
    am Ashley Harrington, Director, Federal Advocacy, and a senior
    policy counsel at the Center for Responsible Lending. I
    appreciate the opportunity to discuss predatory high-cost
    lending today.
        Payday and car title lenders charge around 300 percent APR
    and strip away nearly $8 billion in fees annually from people
    typically earning just $25,000 a year. Seventy-five percent of
    these businesses' fees are generated from people stuck in more
    than 10 loans a year. This is the debt trap, and it is how
    payday lenders succeed, by making sure their customers fail.
        High-cost installment loans are no different. These loans
    are for much larger dollar amounts, with rates of 100 percent
    or higher and with repayment periods of 6 months to 7 years.
        The high interest rate combined with the long repayment
    period turns these loans into interest-only or even negatively
    amortizing loans. Borrowers pay thousands of dollars toward
    interest with nothing going toward the principle for years, and
    defaults are extraordinarily high.
        Many online installment lenders seek to disguise their
    harmful lending practices under the guise of fintech innovation
    while making excessively priced loans with direct access to a
    borrower's bank account and no safeguards of affordability. But
    let us be clear. These are marketing terms. They do not wipe
    away the harm caused by these unaffordable loans.
        Payday lending, in many ways, is playing out the same way
    that the mortgage crisis did. Predatory lenders purport to
    provide access to credit in communities of color. Lax
    regulation enables lenders to target these communities and
    offer loans on predatory terms that are designed to strip
    wealth, not build it. Bottom line, high-cost lending
    disproportionately harms Black and Latino communities,
    exploiting and perpetuating the racial wealth gap.
        Policy trends at the State and Federal level for more than
    a decade have been to rein in the harms of these unsafe loans,
    ranging from Congress' 2006 passage of the Military Lending Act
    to voter-enacted 36 percent rate caps in Nebraska, Colorado,
    South Dakota, Montana, and Arizona, all passed with
    overwhelming bipartisan support. In total, 32 States plus D.C.
    capped rates at 36 percent or less for a $2,000 loan. Eighteen
    States plus D.C. have interest rate caps of 36 percent or less
    that apply to payday loans.
        Some States with caps, like my home State of North
    Carolina, experimented with permitting payday lending, then
    determined their citizens were better off without those loans.
    And after North Carolina reinstituted its rate cap, data showed
    that people turned to other safer options, both credit and
    noncredit, to deal with financial shortfalls, and former
    borrowers said they were better off without these loans. And
    experiences in other States post-rate cap tell the same story.
        Support for a rate cap is also strong across party lines.
    National polling data, as well as State ballot measures,
    repeatedly show this. Among registered voters, 70 percent of
    Republicans and 72 percent of Democrats support a rate cap of
    36 percent on payday and installment loans. It is also
    supported by a broad, ideologically diverse coalition of faith,
    consumer, civil rights, and small business groups, adamant that
    predatory, high-cost lending must end. And they have long-
    advocated that a 36 percent Federal interest rate limit is the
    most effective way to do it.
        Evidence from the real world is clear. The only access this
    predatory lending provides is access to debt. It is wealth
    stripping that fuels financial exclusion, not inclusion.
    Borrowing a payday loan makes a person more likely to face a
    cascade of harms, including delinquency on other bills, abusive
    debt collection, loss of a bank account, loss of a car, and
    even bankruptcy.
        Make no mistake. High-cost loans are not rungs up the
    ladder to better credit. Rather, they knock the ladder out from
    under their borrowers, pushing the financial mainstream further
    out of reach.
        It is past time that Federal lawmakers took the steps
    needed to protect consumers across this country from the
    devastating impact of predatory, high-cost lending. Just like
    pulling weeds from a garden allows the flowers to bloom,
    ridding the market of predatory loans clears space for
    responsible credit products and for borrowers and communities
    to thrive.
        I want to thank Chairman Brown, as well as Senators Reed,
    Van Hollen, and Merkley for their leadership in protecting
    borrowers from predatory lending with the Veterans and
    Consumers Fair Credit Act. I look forward to your questions.
        Chairman Brown. Thank you, Ms. Harrington. Mr. Williams,
    remote, is recognized for 5 minutes.

      STATEMENT OF RICHARD WILLIAMS, PRESIDENT AND CEO, ESSENTIAL
                          FEDERAL CREDIT UNION

        Mr. Williams. Good morning, Chairman Brown, Ranking Member
    Toomey, and Members of the Committee. My name is Richard
    Williams, and I am President and CEO of Essential Federal
    Credit Union. Essential is a federally chartered credit union
    with a community field of membership serving the metropolitan
    area of Baton Rouge, Louisiana. We serve 40,000-plus members
    and have assets in excess of $350 million. We are a certified
    community development financial institution, certified by the
    United States Treasury Department, and a low-income designated
    credit union by the National Credit Union Administration.
        We are also a proud member of Inclusiv. Inclusiv is a
    national network of 400 credit unions, member-owned, regulated
    financial cooperatives, with a mission of helping low and
    moderate-income people and communities achieve financial
    independence through credit unions providing access to safe and
    affordable financial products and community development
    services. Expanding access to financially vulnerable or
    formerly excluded individuals--that is, those who may have no
    other alternative than predatory lenders--is at the heart of
    what Inclusiv credit unions do. Collectively, these credit
    unions are reaching more than 14 million American households
    with safe and responsible products and services designed to
    help borrowers to succeed with their credit needs and financial
    lives.
        Today, I will share with you the harm we see high-cost
    loans cause in our communities, the role we play as a credit
    union in addressing these harms, and why our communities would
    benefit from the enactment of a Federal 36 percent interest
    rate cap as proposed by the Veterans and Consumers Fair Credit
    Act.
        In 2019, we testified in support of House Bill 528 before
    the Louisiana House of Representatives to lower the maximum
    annual consumer loan interest to 36 percent, including fees and
    other charges. We were joined in our effort with support from a
    broad coalition of faith leaders, civil rights organizations,
    and social service providers. If the legislation had passed,
    Louisiana would have joined several other States in protecting
    its residents from harmful predatory loans.
        We continue to believe that it is possible and reasonable
    to offer small-dollar loans under 36 percent as proposed by
    this bill because we do this. Our current payday alternative
    loan provides members easy access to funds to meet a variety of
    emergency needs at a rate significantly less than the rate of
    payday lenders and with the ability to offer our loan in
    compliance with the proposed bill. In addition to extending the
    loan, we also provide the member a financial literacy component
    to assist them in making better financial decisions in their
    daily lives. We have found our program to be profitable and
    beneficial to our membership.
        I would like to offer some testimonials from our members
    about our payday alternative loan product which is branded
    Ready Cash:
        ``The Ready Cash loan helped me by allowing me to utilize
    Essential instead of a finance company at a much higher
    interest rate,'' Mr. Joseph C. Tilley.
        ``The Ready Cash loan from Essential has helped more in--
    more than in one way. It has provided the emergency funds to
    help me get back on track as well as build my credit,'' Ms.
    Adrianne Hayes.
        ``Having extended time to repay our Ready Cash loan back as
    compared to the shorter repayment window with the payday lender
    helped me get back on track sooner,'' Ms. Mellanee Nation.
        We hear from our members every day about the challenges
    they face in making ends meet. This means putting food on the
    table and paying recurring bills. They are experiencing
    financial distress that does not go away in 2 weeks and is
    certainly made harder when they are trapped in a payday loan
    that takes large payments every 2 weeks or by a car title
    lender which forces the borrower into even tougher situations
    of facing threats of having their car seized. These extractive
    loan mechanisms do not help people make progress in their
    journey to financial security. Rather, it is quite the
    opposite.
        Instead, what Essential is able to do with our small-dollar
    loan is not only to have it reasonably priced so that people
    can both pay it back and meet their other needs but also build
    a relationship with us to build their credit and eventually
    have wealth building opportunities such as buying a car or a
    home.
        States like Louisiana are grappling with the effects on
    their economies of predatory lenders, and successes in other
    States with a rate cap point a way forward. These lenders, many
    of whom are headquartered outside of our State, pump marketing
    dollars to convince Louisiana residents they do not have other
    good alternatives.
        As I mentioned earlier, we joined with numerous voices
    across the State to urge Louisiana to enact a rate cap of 36
    percent. Despite the outcry from Louisianans all across the
    State to rein in the harms of these loans, the legislature
    refused to do so, and as such, high-cost lenders continue to
    drain our economies and pocketbooks of people already working
    to simply get by.
        It is not just here in Louisiana that share these concerns.
    They permeate throughout the South and other communities. For
    example, from our neighbors in Mississippi, we hear stories of
    how these high-cost loans disrupt the lives of borrowers but
    also their families and communities. This includes a mother
    whose car was repossessed by a car title lender, which in
    places like the rural South results in the inability to get to
    work or to the store; or an elderly woman on Social Security,
    whose car title loan payments consumed nearly half of her
    $1,300 monthly income; or another stuck in 11 payday loans at a
    single time, causing tremendous anxiety and stress in addition
    to the financial strain. These stories could fill up pages and
    underscore the need for a solution.
        In conclusion, we join with other CDFIs and credit unions
    in supporting a national interest rate cap. Additionally, there
    are many community development credit unions ready to meet the
    small-dollar borrowing needs of consumers. I would like to
    thank the Committee for allowing me this time to speak.
        Chairman Brown. Thank you, Mr. Williams.
        Mr. Himpler is recognized for 5 minutes, in person. Thank
    you for joining us.

        STATEMENT OF BILL HIMPLER, PRESIDENT AND CEO, AMERICAN
                     FINANCIAL SERVICES ASSOCIATION

        Mr. Himpler. Can you hear me? Can you hear me? Chairman
    Brown, Ranking Member Toomey, and Members of the Committee, I
    want to thank you for the opportunity to testify today. At the
    outset, I want to apologize to the Members if my voice is a
    little rough. I spent a lot of time practicing to be ready for
    this hearing today. It is a great pleasure to be before you
    today to talk about how traditional installment lenders offer
    the oldest and safest form of small-dollar credit to
    hardworking Americans.
        And there has been a lot of discussion about payday. I am
    not here to throw payday under the bus today, or any day, but
    installment lending is very different from payday. It is a
    product that is offered by banks, credit unions, and finance
    companies that put their own money at risk. The intention of
    this legislation has been targeted at payday, but it has a
    broad-ranging impact that will eliminate access to small-dollar
    credit from any institution.
        A 2019 Federal Reserve study found that many adults,
    particularly people of color, may not withstand even small
    financial disruptions. Nearly 40 percent of adults reported
    difficulty covering an unexpected $400 expense. For more than a
    century, the installment lenders have served customers with
    safe and affordable loans. Consumer finance companies, that I
    mentioned just a second ago, make more than three times as many
    personal loans to subprime borrowers than do credit unions,
    which are often cited as the small-dollar credit solution. In
    fact, CUNA President Jim Nussle, a former Member of Congress,
    recently said that rate caps such as the bill that we are
    talking about today would reduce access to such credit.
        Congress passed the Community Reinvestment Act to encourage
    financial institutions to serve underserved neighborhoods that
    you are concerned with and you should be concerned with. AFSA
    members have been in, and continue to be in, those
    neighborhoods, and 9 out of the 10 customers that we serve in
    those neighborhoods are performing. We are there to help.
        This credit lifeline would be dramatically hindered under a
    36 percent rate cap on covered consumer loans. Nearly one in
    three Americans do not have a prime or excellent credit score.
    Fifty-three million adults have a thin or no credit file at
    all. And despite what Mr. Williams said, credit unions are
    looking for people that have a credit history. These folks
    would go unserved by everybody if this cap went into place.
    When reputable, small-dollar lenders cannot serve underbanked
    or subprime customers, the customers are left to turn to
    unregulated or illegal, predatory lenders.
        A 2020 survey by the National Foundation for Credit
    Counseling, the guys that help people in a hard situation,
    found that active duty servicemembers were more than twice as
    likely to take out a cash advance or payday loan in 2020 than
    in 2019. That tells you the MLA is not working.
        And in fact, the most recent report from the DoD that they
    just put out earlier this month still did not provide any
    empirical data. We have been asking the Pentagon for 10 years
    to provide data on how the MLA is performing. Why will they
    not?
        These borrowers, active duty servicemembers, said that they
    use these loans, the cash advance or the payday loan, because
    they had no other options.
        As the National Commission on Consumer Finance noted, as
    the CFPB's Taskforce on Consumer Credit Stated, as the Federal
    Reserve, banks, nonbank lenders, and credit unions have all
    noted, especially recently, APR caps at 36 percent or below are
    unworkable for reputable lending institutions.
        Traditional installment lending helps hardworking Americans
    cover necessities or unexpected expenses. Installment loans are
    transparent, with easy-to-understand terms, fixed rates, equal
    payments, no prepayment penalties, and defined payoff dates
    averaging between 12 to 18 months. The average loan amount is
    about $2,000. There is no balloon payments, no hidden costs.
    And we work with the borrower to determine their ability to pay
    up front. And we look at their credit history, their repayment
    history, and it is reported. Their performance is reported to
    the credit bureaus, which takes care of those borrowers with
    thin files to improve their credit profile.
        For such small-dollar loans, the quality, affordability,
    and soundness of the loan is best judged by its length and
    monthly payment, not its interest rate. The annual percentage
    rates are a function of time and not cost. And let us face it;
    at the end of the day, it is the cost that matters to the
    consumer and determines their ability to repay.
        Say you borrow $100 and are charged $1 in interest. If you
    pay that loan off in 1 year, it is 1 percent. Nobody argues
    with that. You pay it off in a month, it is 12 percent. If you
    pay it off tomorrow, Chairman Brown, it is a 365 percent APR.
    It is $1; that does not change but vastly different APRs. APR
    is not the type of measurement that we should be using to judge
    the quality of these loans. It should be the cost.
        Analysis by the Federal Reserve study found that with a 36
    percent rate cap consumers would be unable to obtain a loan of
    less than $3,000. They would be forced to borrow large amounts,
    larger amounts than they need, with higher costs, longer
    repayment periods, despite having a lower APR.
        Access to financial services is a cornerstone of the
    American way of life. For many consumers, such access enables
    opportunities that might otherwise be out of reach. Credit
    access should not be a privilege for the elite. When someone
    who is underbanked, has less than perfect credit, or does not
    have access to a needed loan, it is not a consumer protection
    victory; it is a civil rights loss.
        All consumers deserve access to safe and affordable and
    reliable credit, and AFSA, the American Financial Services
    Association, stands ready to work with the members of this
    Committee to ensure that everybody has that opportunity. Thank
    you, Mr. Chairman.
        Chairman Brown. Thank you, Mr. Himpler.
        Professor Miller, remote, is recognized for 5 minutes.
    Thanks for joining us.

    STATEMENT OF THOMAS W. MILLER, JR., JACK LEE CHAIR IN FINANCIAL
    INSTITUTIONS AND CONSUMER FINANCE, MISSISSIPPI STATE UNIVERSITY

        Mr. Miller. Chairman Brown, thank you. Thank you, Ranking
    Member Toomey and Members of the Committee. And thank you,
    Senator Tester. Our Montana blood runs deep.
        My central message to you today is this: Interest rate caps
    do not make loans less expensive. They make loans less
    available.
        We can see this through an example that Milton Friedman
    used in the tomato market. Suppose Congress passes a law that
    says tomatoes cannot sell for more than two cents per pound.
    Instantly, we will have a shortage of tomatoes. Why? Because
    the revenue under this law of selling tomatoes for two cents
    does not cover the cost of producing tomatoes. So setting the
    price of tomatoes at two cents a pound does not make tomatoes
    less expensive. It makes tomatoes less available.
        The same logic Professor Friedman uses for tomatoes applies
    to loans. Setting the rate lenders can charge for loans does
    not make loans less expensive. It makes loans less available.
    It is simple arithmetic. If the revenue received from the loan
    is less than the cost of producing the loan, lenders will not
    produce the loan. If the lenders do not produce the loan,
    access to credit is lost.
        There are two specific examples. A recent publication by
    the Federal Reserve shows that break-even installment loan size
    is about $2,600 at a 36 percent APR. But suppose a consumer
    only needs to borrow $500 or $1,000. Access to these
    installment loan sizes is lost under a 36 percent interest rate
    cap.
        At a 2-week payday loan for $100 at 36 percent, the
    interest paid is $1.38. In 2009, Ernst & Young studied this and
    found that the cost of producing a payday loan is about $14.
    The cost far exceeds the revenue. So under a 36 percent APR
    cap, consumer demand will continue to exist, but the legal
    supply will dry up.
        I think the goal should be to help subprime consumers keep
    access to credit. Actions such as an interest rate cap hurt a
    large number of constituents. For example, according to the
    FDIC, about 19 percent of all U.S. households were classified
    as underbanked in 2017. So for one in five households in
    America, access to small-dollar, nonbank-supplied loans is
    vital.
        Congress can legislate away the supply of small-dollar,
    nonbank loans, but the demand for credit remains. If there is
    demand for loans but no available supply, what will consumers
    do? Perhaps they will delay going to the doctor or the dentist,
    or they will delay taking a pet to a veterinarian. Perhaps they
    will not buy needed school supplies for their children. Perhaps
    they will defer necessary maintenance or repairs to their home
    or vehicle. These hardships have real impact on people's lives.
        Good credit clearly increases the quality of life. Access
    to small-dollar credit products helps subprime consumers build
    their ability to become prime consumers and be able to borrow
    from banks. Access to small-dollar loans helps consumers build
    and repair their credit rating, and so as they repay the loan,
    their credit scores improve. Every ladder has rungs. If the
    lowest credit rung is missing, how can consumers climb the
    credit building ladder?
        The rhetoric on interest rate caps does not match the
    arithmetic or the research. A high interest rate does not mean
    high-dollar cost to a consumer. Consider a loan for $300 to be
    repaid with 3 monthly installments of $120. The interest paid
    on this loan is $20 per month. Does $20 per month sound high or
    shocking or unaffordable? The APR on this loan is about 118
    percent, however. That might sound high and shocking, but the
    extra cost to the consumer is only $14 in interest per month as
    compared to similar loan that has a 36 percent APR.
        But here is the catch. The loan at the 36 percent APR is
    unprofitable. It will not be offered. Therefore, it is not an
    option for consumers. I remind us all, we spend dollars; we do
    not spend ``percents.''
        A belief in the effectiveness of an interest rate cap
    endures, but beliefs are not facts. Professor Harold Black and
    I summarized a large body of rigorous, peer-reviewed, academic
    research addressing arguments made by interest rate-capped
    advocates. We find little evidence supporting any of their
    arguments.
        In 2015, two researchers from the United States Military
    Academy found that access to payday loans did not increase bad
    outcomes. I quote, ``Our analysis,'' they conclude, ``suggests
    no significant benefits to servicemembers from the MLA.''
        In conclusion, I urge Congress to press for much more
    research on interest rate caps before making decisions on them.
    Congress can call for Government and independent researchers to
    build a mosaic of transparent research results on the effect of
    interest rate caps, and this way, Congress can be assured that
    they are following the science concerning the impact of an
    interest rate cap. Thank you, and I stand ready to answer
    questions.
        Chairman Brown. Thank you, Professor Miller.
        Mr. Pommerehn is recognized for 5 minutes, remote. Thank
    you for joining us, sir.

     STATEMENT OF DAVID POMMEREHN, GENERAL COUNSEL AND SENIOR VICE
                PRESIDENT, CONSUMER BANKERS ASSOCIATION

        Mr. Pommerehn. Thank you, Chairman Brown, Ranking Member
    Toomey, and Members of the Committee. I am David Pommerehn,
    General Counsel at the Consumer Bankers Association, and I
    appreciate the opportunity to testify at today's hearing. CBA
    is the voice of the retail banking industry, whose products and
    services provide access to credit for millions of consumers and
    small businesses. Our members operate in all 50 States, serve
    more than 150 million Americans, and collectively hold two-
    thirds of the country's total depository assets.
        As we discuss today, a fundamental aspect of lending and a
    cornerstone of prudent banking practices is the ability of
    banks to price for risk. While well intentioned, a cap on
    interest rates is not an effective policy for protecting
    against negative outcomes for consumers. Banks in the United
    States are highly regulated entities that carefully and
    appropriately price risk before extending credit to anyone.
    Placing a cap on the price in the form of an all-in maximum
    annualized percentage rate does not mean that consumers will
    get loans at lower rates. It simply means that consumers may
    not get loans at all. Research today demonstrates that interest
    rate caps reduce credit availability and create negative
    outcomes for the populations their proponents intend to
    benefit.
        While many products are impacted by the proposed rate caps,
    today I am going to focus on two products that will most
    certainly be affected: short-term, small-dollar products and
    consumer credit cards.
        Today, the need for accessible small-dollar credit for
    consumers has never been greater. The recovering economy has
    left consumers with less of a cushion for emergencies and
    reduced credit options, making access to reasonably priced,
    small-dollar liquidity products even more important. By now, we
    are all familiar with the many reports, including those by the
    Federal Reserve Board, indicating that nearly half of all
    American adults say they cannot cover an unexpected expense of
    $400.
        Accordingly, policymakers have encouraged banks to enter
    into, or remain in, the small-dollar lending market. Over the
    years, banks have worked with regulators to carefully design
    products to ensure consumers strong safeguards at reasonable
    prices. Low and moderate-income communities, and those seeking
    small-dollar emergency funds, are most often impacted.
        The 36 percent rate cap leaves banks unable to adequately
    price for risk in order to viably offer affordable short-term
    credit. For a loan product to be sustainable, as we discuss
    today, banks must be able to recover costs. These costs not
    only include the amount loaned but also costs related to
    compliance, determining a borrower's ability to repay, customer
    service, IT, underwriting, administration, and defaults,
    including losses. An inflexible APR cap that incorporates fees,
    as well as the risk-based interest rate available to the
    borrower, make it exceedingly difficult for responsible lenders
    to extend credit to those in need.
        Policymakers should consider the consumer benefit of bank-
    offered, short-term, small-dollar loans and the true cost of
    making them. For example, a $50 loan at a fee of just 5 percent
    and with a term of 30 days carries an APR of nearly 70 percent,
    nearly twice the proposed cap. This $50 may have covered a
    utility bill, a difference in a car payment, paid for gas to
    get work, or more. One can see that this $2.50 is well worth
    the benefit to the borrower in these contexts.
        Another product, credit cards, will also be adversely
    affected by the proposed caps. The consumer credit card market
    today offers a wide variety of products designed to meet the
    needs of different consumers at a variety of price points. Many
    customers choose cards with an annual membership fee because
    such products offer noncredit-related features such as reward
    programs, travel and dining benefits, and insurance. While
    ostensibly designed to curb predatory lending practices,
    extending the MLA's all-in APR to this type of consumer lending
    would have the negative and untended consequence of limiting
    choice for consumers and reducing the availability of these
    credit cards, rewards, and benefits.
        As outlined, the proposed all-in APR, or MAPR, is not
    simply a 36 percent rate cap on interest. Unlike the standard
    calculation of APR under the Truth and Lending Act, an MLA's
    all-in APR incorporates various fees that may be charged on the
    account, including the annual membership fee. Because the MAPR
    is calculated on an annualized basis, membership fees that are
    charged once a year are treated as though they were impressed,
    I am sorry, imposed every month. This means that if a customer
    has a balance in the month in which an annual fee is assessed
    even a small fee can cause the MAPR to exceed 36 percent.
        In conclusion, banks provide safe, accessible, well-
    regulated, high-quality, consumer credit products. Before
    Congress considers any extension of MLA rate caps, a better
    understanding of the possible negative impacts on consumer
    access to credit is needed. Thank you for allowing me to
    testify today, and I look forward to your questions.
        Chairman Brown. Thank you, Mr. Pommerehn. And I apologize
    to you for introducing you earlier as from the Community
    Bankers. I know you are from the Consumer Bankers Association.
    I do know the difference, and I apologize for that.
        Ms. Harrington, I want to start with you as we begin the
    questions. We have seen supermajorities of voters in State
    after State, several of us have mentioned that, support the 36
    percent rate cap. It is clear the public wants these
    protections in very different kinds of States. What is driving
    this overwhelming support at the State level?
        Ms. Harrington. Thanks for that question. You hear me OK?
        Chairman Brown. Yes.
        Ms. Harrington. I think it is widespread recognition of the
    harms these--of the harms of these loans. These ballot
    initiatives have bipartisan support because people see the
    harms. And in fact, in States where we have rate caps, we see
    that people do not want predatory lending back. We have--since
    the rate cap in South Dakota, 2 years later CRL went back, and
    those same voters said they would vote for it again. They would
    keep this rate cap. Over 70 percent of Republicans said they
    would vote for this again because they see the harms and these
    purported benefits do not outweigh them.
        That is why you have such a diverse coalition supporting
    this--supporting these rate caps. You have consumer groups. You
    have civil rights groups. You have faith groups. You have
    veterans groups. You have small business groups because
    everyone sees how these--how these loans drain billions of
    dollars in fees from hardworking Americans and strip wealth
    from them.
        Even State legislators are passing this on a bipartisan
    basis. We saw this most recently in Illinois. So this is
    something that everyone should support. It is common sense.
        Chairman Brown. Thank you, Ms. Harrington.
        Mrs. Petraeus, thanks for your service for so many years in
    so many ways. I want to talk to you about the impact of MLA on
    servicemembers, and you talked about it in your testimony. We
    heard 15 years ago in this Committee's hearing--I was not here
    then, but we heard from the payday trade association that a 36
    percent interest rate cap would push legitimate lenders out of
    the market and drive servicemembers into the arms of loan
    sharks. They made the same arguments about the 2015 regulation
    that strengthened MLA. Did these predictions come true? What
    has been the experience of people who served our country since
    we passed these protections?
        Mrs. Petraeus. Well, I think it is best evidenced by the
    Department of Defense report that was published just last
    month. They are saying that it is working, that servicemembers
    have access to credit, and that they have seen decreased use of
    high-cost products and an improved financial condition in
    servicemembers over time.
        I found that NFCC report that was cited rather
    inexplicable. I have to wonder if they looked at nonactive duty
    military when they said that they were twice as likely to take
    out payday loans in 2020. If they were, then there are a lot of
    companies that are breaking the law in offering the products to
    them. It may be a regulation issue. I will point out that my
    old agency has done a couple of enforcement actions on--against
    companies that offered products against the law. And you know,
    I just find it fairly inexplicable.
        I will say you have 150,000 and more new recruits every
    year. So it is constantly going to be an education to them to
    know what the--you know, what is legal for them to be offered
    and what is not. And I think you will have people take
    advantage of that.
        But according to the Department of Defense assessment and
    what I cited from the Military Aid Societies, it has not
    triggered any kind of financial crisis for the military
    existing under the current Military Lending Act.
        Chairman Brown. Thank you. Mr. Williams, I want to turn to
    you--thank you, Mrs. Petraeus--with the Essential Federal
    Credit Union. Talk about the support that you provide to your
    members, including payday alternative loans at affordable
    interest rates. Do you have credit union members come to you,
    seeking help after they have gotten into a payday debt trap?
    Then, if you would, in answering that question, tell us about
    your interest rate you charge for payday alternative loans, Mr.
    Williams. Thank you.
        Mr. Williams. Yes, Chairman, we--well, I cited a couple
    examples where I gave some testimony from our members who were
    in payday loan situations, clearly where it was very stressful
    for them because of the short repayment time that the payday
    lender was giving them.
        But what we try to do is kind of do a comprehensive
    approach with all of our members. We bring them in. We do some
    financial counseling with them. We try to understand what all
    of their expenses look like in order for us to try to figure
    out the best way to structure the payday alternative loan that
    we have, the Ready Cash product. And we look to build long-term
    relationships with all of our members.
        So the objective is that if you are coming to us via a
    payday or alternative loan product, the Ready Cash product, we
    are not trying to keep you in that product for a very long
    time. We are trying to get you reestablished and trying to move
    you to some of our more traditional products at lower rates.
        We do offer the product at the NCUA-regulated rate of 28
    percent. We try to make sure that they are matching with a
    program or product that is going to help that member get out of
    that payday lending trap. So we do work with them closely in
    trying to make sure that they are able to service the loan that
    we are giving them in helping them make that transition. But it
    is all about us building a relationship. And the program has
    been very profitable from the standpoint that we have been able
    to cover our costs with respect to losses, and we plan on
    continuing to offer it in the foreseeable future.
        Chairman Brown. I thank you, Mr. Williams.
        Senator Toomey is recognized.
        Senator Toomey. Thanks, Mr. Chairman. You know, it strikes
    me that while there is no doubt a fundamental and philosophical
    disagreement on this Committee as to whether or not it is a
    good idea for the Government to dictate the cost of, in this
    case, credit, I hope that through this discussion it is
    becoming increasingly obvious that the all-in APR is a badly
    flawed and misleading measure of cost.
        So, Professor Miller, let me turn to you. It seems to me
    from the point of view of a financial institution that is
    extending credit there are various categories of expenses that
    are associated with extending credit, including the marginal
    cost of doing so. The interest expense in funding the loan is
    an obvious one. Losses that inevitably occur in some percentage
    of cases is an obvious one. And while those presumably vary
    depending on the size of the loan, there are administrative and
    processing expenses that are much more likely to be fixed
    costs.
        So, Professor Miller, I wonder if you could comment on
    whether that is true. Is it true that a loan, whether it is a
    $5,000, $4,000, $3,000 or $1,000 loan, might very well have
    essentially a component of the cost of providing that loan that
    is fixed and does not in fact vary with the amount of the loan?
    Is that your belief, Professor Miller?
        Mr. Miller. Yes, Senator Toomey, it is my belief. When you
    are operating a bricks-and-mortar loan operation, you have
    expenses during the month upcoming that will be paid regardless
    if we have--if there is any business that walks in the door. So
    costs are pretty constant from month to month. Over time, over
    a year or so, the costs can be changed but not in a short run.
        Senator Toomey. And Mr. Himpler, you made, I think, a very
    powerful illustration of the way the APR inevitably is also a
    function of time and a very, very modest cost, if paid off
    quickly, under this calculation, is multiplied as though it
    occurs repeatedly when in fact it does not. Is that a fair
    description of what happens?
        Mr. Himpler. Yes, Senator, it very much. I was--one of the
    things that constantly plagued me in this debate--and we saw it
    from the members of the House, and I have great respect for
    them--is how they interplayed the use of interest rate and APR.
    APR is a function of time, as I demonstrated in my example.
    What we really need to do is look at cost, and that is measured
    in dollars and cents.
        Congressman Garcia mentioned a constituent that took out a
    $600 loan at a 300 percent APR for 6 months. I did the
    calculations while I was waiting to testify. What we are
    looking at in that product is a 6-month loan, about $100
    payment per month, which you know, in an APR, comes out to 300
    percent. But in terms of interest, it is less than 50 percent.
    That is still high, but it is a function of the size of the
    loan that Dr. Miller just spoke to.
        Senator Toomey. It shows how the math gets distorted by
    this.
        Mr. Himpler. Right. But there is a big difference between
    50 percent and 300 percent----
        Senator Toomey. Right.
        Mr. Himpler ----for the exact same loan.
        Senator Toomey. Right. Mr. Pommerehn, again the mechanism
    of this all-in APR calculation has very, very strange impacts
    on credit cards in some cases. You alluded to this in your
    testimony, but it is my understanding that this calculates--
    that the all-in APR approach calculates the APR by a reference
    to the balance carried in a given month and it compares that
    with the fee charged in that month even if that fee is an
    annual fee. So in effect, it treats an annual fee as though it
    were imposed 12 times over the course of the year when, of
    course, it is not.
        So a lot of people choose a credit card that has an annual
    fee because they like maybe the rewards program that is
    associated with that. Could you address what the impact of this
    approach of calculating the all-in APR would have on some of
    the most popular credit cards in America? That was for Mr.
    Pommerehn. You are----
        Mr. Pommerehn. Yeah, I am sorry. Can you hear me?
        Senator Toomey. Yes.
        Mr. Pommerehn. Yeah, I am sorry. It will certainly have a
    large impact on availability. I mean, as you--as you alluded
    to, any card that imposes a fee of any sort, which most reward
    cards do, has the potential of violating an all-in APR such as
    the MAPR with the Military Lending Act, and card issuers would
    certainly hesitate to offer them. The proposed caps would have
    a likely effect with any of these rewards programs, for
    everyone, just because running afoul of that MAPR is certainly
    an outcome that most lenders will want to take the risk for.
        Senator Toomey. And I will close on this, Mr. Chairman. My
    understanding is that in the military case the MLA sort of
    contemplates this problem and considers like a grandfather or
    an escape clause if there are multiple credit cards offering
    similar products at similar prices. But if you have innovated
    and you have come up with a new idea for which there is not a
    whole range of comparable alternatives, then my concern is you
    would be captured by this. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Toomey.
        Senator Reed, the sponsor of the bill, is recognized for 5
    minutes.
        Senator Reed. Thank you very much, Mr. Chairman.
        Ms. Harrington, we have discussed and alluded to the issue
    of the debt trap that people are caught in. According to data
    that I have seen from the Consumer Financial Protection Bureau,
    80 percent of payday loans are rolled over, which is
    essentially suggesting that it may be the business plan of
    these companies to get a situation and a client who they know
    even beforehand will not be able to effectively make the payoff
    or, you know, be in this situation of rollover. Have you seen
    that evidenced in your work, in your studies?
        Ms. Harrington. Thank you, Senator. Absolutely. The vast
    majority of fees, over 75 percent of the fees, are drained from
    people who have been stuck in over 10 loans a year. So for most
    people in real life--we are not talking about hypotheticals. We
    are not talking about tomatoes. We are talking about real
    people in real life with real examples. These are not short-
    term loans. These are long-term debt traps. They are designed
    for consumers to fail. That is the entire business model of the
    industry. That is how they make their profit. That is how they
    drain billions of dollars in fees.
        Senator Reed. Well, and the other argument is that--well,
    one of the other arguments is that access to credit would be
    severely constrained. In your home State of North Carolina, the
    situation was from 1997 to 2001 they lifted the ban, then they
    reimposed the ban. And I had the opportunity to question the
    attorney general, Mr. Stein, in April 21, and he indicated that
    he saw no evidence of a lack of access to credit. Is that
    substantiated by your research or just your personal knowledge
    of the North Carolinians?
        Ms. Harrington. Absolutely. It is true in North Carolina.
    It is true in South Dakota. It is true in all the States where
    we see rate caps. Borrowers are not clamoring for payday
    lending to come back. They are not--they are not claiming that
    they are not saying that there is a big reduction in access to
    credit.
        In fact in South Dakota, we saw the opposite. Right? When--
    after the cap, we saw other lending options open up. We saw the
    community thrive in other ways as well. We saw small businesses
    open up, things like community gardens. We saw the community
    grow and borrowers thrive in so many different ways. And that
    is why when you go back to all of these States they say: No, we
    want our rate cap. This is helpful, we know. We have seen the
    harms.
        And that is exactly what happened in North Carolina. They
    tried it, and nobody wanted it. It was not helpful, and in fact
    it was extremely predatory and detrimental to millions of
    people.
        Senator Reed. Thank you. Mrs. Petraeus, first, let me
    commend you for your extraordinary work as the first head of
    the Servicemembers Affairs Office in the Consumer Financial
    Protection Bureau. So thank you very much.
        And on these topics, you outrank your husband. You are a
    five-star. OK?
        Mrs. Petraeus. Thank you.
        Senator Reed. We have heard a lot about what is defective
    about the APR used, et cetera. You have had the experience of
    seeing it in practice with the military close up. In both the
    data you are aware of and your own impressions, has it caused
    the lack of access to credit? Has it denied servicemembers fair
    access in the marketplace?
        Mrs. Petraeus. Again, as I said in my Statement, not that I
    can ascertain or not what the DoD, with tremendous access to
    data on the military, can ascertain.
        I also want to mention the all-in APR, the MAPR. There was
    a reason for that. It was because, originally, lenders were
    again getting around the interest rate cap by piling on a ton
    of extra fees, services, and ancillary products, mandatory
    insurance policies, and some really creative ones where they
    were requiring you to sign up for an internet service deal as
    part of your loan or they were requiring you to order something
    from a catalog that they had.
        I remember reading an article. A reporter actually went and
    said, can I see the catalog? Well, the store rooted around in
    the back cupboards for quite a while and finally produced this
    really beat-up catalog with things like pleather jackets and
    stuff in there. Nobody was actually going to ever order or
    receive those items, but that was another way that they were
    getting around the straight APR calculation.
        So that was the reasoning behind the MAPR, that it would
    not allow creative lenders to evade the intent of the
    legislation by piling on a bunch of extra products and
    services.
        So from my research and the 8 years of reports from the
    military aid societies, their requests for assistance and the
    amount given out has not gone up after the 2015 rule. It went
    down. I just feel that, yes, it has been a success. It is
    protecting our servicemembers.
        Frankly, if you build it, they will come. You know? And
    they will not necessarily spend that money on what you might
    think. When I lived at Fort Belvoir Army Post, there were all
    sorts of ads that came in the mail from lenders, advertising
    cash for Christmas, cash for Easter, or one particularly
    interesting one, ``Do not be the only person at the bachelor
    party without cash.'' So these are not, you know, people
    offering a helping hand in an emergency in many cases. They see
    a market, and they wanted to exploit it. And the military was a
    young, inexperienced population that for quite a while was a
    cash cow.
        So I feel that the MLA has been a great success, and I
    would like to see it extended to veterans, retirees, and all
    Americans because I think they also deserve not to be trapped
    in the cycle of debt that they cannot get out of.
        Senator Reed. Thank you very much. Thank you, Mr. Chairman.
        Chairman Brown. You cannot say they are not creative.
        I will recognize Senator Moran for 5 minutes. I need to
    step out and do a couple questions to Ag nominees. So after
    Senator Moran is Senator Warren and Senator Tillis and then
    Senator Smith if I am not back by then. So Senator Moran is
    recognized for 5 minutes.
        Senator Moran. Chairman, thank you. A few weeks ago, this
    Committee led an effort to overturn the True Lender Rule the
    OCC published last year, which gave some clarity to the
    personal loan marketplace in the context of a national banking
    framework that has existed for about 150 years. Some of my
    colleagues at that time were very concerned about State rights
    and the prerogative of each State to establish its own usury
    law. Yet, here we are today, just about 4 weeks later,
    considering a proposal to establish a Washington-knows-best,
    one-size-fits-all interest rate cap that could not be more
    inconsistent with States' rights and federalism.
        Professor Miller, as you know, the last decade, many States
    have spent considerable time and energy modernizing their
    small-dollar lending rules, ensuring that they see--as they see
    fit for their residents, the safety of loan products, while not
    eliminating access to credit for lower credit score
    individuals. In your opinion, Professor, is an all-in 36
    percent national cap rate consistent with States making the
    decisions and respect for the work of those States' reform
    efforts to ensure the availability of small-dollar lending?
        Mr. Miller. That is a great question, Senator. If we impose
    a Federal interest rate cap, that does ignore all the work at
    the State level. And the States know their own populations
    better than people in Washington, DC, frankly. So I think the
    States have every right to set interest rate caps and set
    lending rules and monitor the lenders that operate in their
    States.
        Senator Moran. Thank you for that answer. Let me turn to
    this question. The hearing is for the purpose of considering
    expanding the Military Lending Act to all consumer lending
    transactions--because the MLA has allegedly produced great
    benefits for the servicemember community over the last few
    years. I certainly care about that servicemember community. I
    live near one or in one. I have chaired and now the ranking
    Republican on the Veterans' Committee.
        Where in the public record can I find hard data--I am
    directing this to Mr. Himpler. Where can I find hard data
    showing the impact of MLA's all-in cap rate--rate cap on the
    servicemembers community?
        It is my understanding that DoD contractually prohibits the
    release of de-identified, aggregated credit bureau data in its
    administration of the MLL database. Why would we not first want
    to know how MLA has impacted the community to which it has been
    applied before we consider applying it to all consumers? Mr.
    Himpler.
        Mr. Himpler. Thank you, Senator Moran. And the American
    Financial Services, as well as yours truly, cares about
    servicemembers as well. My father, who passed away last year,
    was a veteran of the Navy, and I think the proudest moment I
    ever saw from him was coming to D.C. on an honor flight after
    serving in Korea. We have got thousands of employees in our
    industry that are veterans, veterans' families, and the like.
        With respect to contracting, I believe you are correct, but
    the prohibition that you are talking about I believe is
    specific to the institutions that are required to get the data
    on whether or not a potential borrower is a servicemember.
        But to your base question as to where the data is, sir, I
    said it in my testimony; I will say it again. With all due
    respect to all of the testimony that we have heard, there is no
    data. I love the military. It is a small percentage of the
    population. I beg Members of the Committee that if you consider
    this legislation going forward please get the data from the
    DoD, the empirical data, on how the Military Lending Act is
    impacting servicemembers and their families.
        And if I am wrong, I will come here and admit that I am
    wrong. But we cannot move from a small segment of the
    population, without data, to the entire financial services
    system. You are playing with fire.
        Senator Moran. Mr. Himpler, let me follow up with something
    in Mrs. Petraeus's testimony. At the end of her testimony, she
    has this assertion: ``There are so many better ways to borrow
    money: a credit card, a bank or credit union, family, a relief
    society.'' Is there not a point to be made there that opposing
    a federally mandated price control because there are so many
    options, there is plenty of alternative credit available, or am
    I missing something?
        Mr. Himpler. Great question, Senator. And again I have
    great respect for Mrs. Petraeus. We have known each other for a
    while now. The--I am not going to sit here today and say that
    my companies and other institutions that are not members of my
    association cannot loan at 36. We can, but the smallest loan
    size that you are going to see is $3,000.
        Mr. Williams testified that his credit union is offering
    loans at a smaller increment. He did indicate that these were
    loans offered to his members. He has access to their deposit
    accounts. If they do not make a payment, he can access their
    bank account. OK?
        What we are talking about is providing access to credit to
    53 million people that have no credit score or a thin file. I
    have members that have hundreds of thousands of new customers
    every year that come in with no credit score. They are not
    going to get a loan at a credit union. They are not going to
    get a loan from anywhere. But we put them in a loan, we take a
    chance on them, and within a month they have got a credit
    score.
        Our chief competition, sir, is not the payday folks. It is
    the credit unions when our members graduate to being banked.
    And that is what we all want. Thank you, sir.
        Senator Moran. Thank you.
        Senator Warren. I think it goes to me. Thank you. So I
    appreciate the work that Chairman Brown and Senator Reed are
    doing to fight for consumers all across this country. Today's
    hearing is about protecting consumers from predatory lending,
    and this is a fight we cannot let up on. And that means finally
    banning the rent-a-bank schemes that allow payday and fintech
    leaders--lenders to escape State interest rate caps. It means
    cracking down on discriminatory lending. And it means holding
    bad actors accountable for unscrupulous behavior against
    consumers.
        But I think it is worth taking a step back and thinking
    about who we are talking about when we focus on consumers and
    who we are not. Consumer loans, those taken out for personal,
    family, or general household use, are subject to a variety of
    Federal laws to ensure that consumers have the information that
    they need to make sound financial decisions and to protect them
    from deceptive and predatory practices. A lot of law around
    that.
        So, Ms. Harrington, if I take out a $25,000 loan from an
    online lender to take care of, let us say, some home repairs,
    what does my lender have to tell me about the loan?
        Ms. Harrington. Well, they have to tell you a lot of
    things. They have to disclose the APR, how it is calculated.
    They have to disclose, you know, the total repayment amount
    over the lifetime of the loan and things like that under the
    Truth in Lending Act.
        Senator Warren. OK. Now what about if I take out a $25,000
    loan to expand the small childcare business that I run out of
    my home, maybe to help me do accessibility improvements or to
    take on another employee? Does my lender for this small
    business have to follow the same requirements and clearly
    disclose the APR and what my repayment amount is, Ms.
    Harrington?
        Ms. Harrington. No. So business loans are not generally
    covered by the same Federal consumer protections like the Truth
    in Lending Act as other--as consumer loans.
        Senator Warren. So here I have taken out two $25,000 loans,
    but I did not get the same protection on small business loans
    as I did on my personal loan. The Government seems to assume
    that a small business owner will have the time and the legal
    expertise to uncover every trick in the fine print and the
    power to fight off every scam and that that small business
    owner does not need the protection that otherwise they would
    have had when they took out a personal loan.
        But this is a very blurry distinction because most small
    business borrowing is based on the owner's personal credit.
    According to a survey by the Federal Reserve, 88 percent of
    small businesses rely on their owners personal credit score to
    obtain financing; 90 percent of owners put up a personal
    guarantee or on collateral that is collateral often like their
    home that they and their families live in.
        Also, remember the majority of small businesses apply for
    loans of less than $100,000. So we are not talking about giant
    businesses who come armed with a fancy legal team here.
        So let me ask, Ms. Harrington, it seems to me that we
    should be thinking about a lot of small business borrowers in
    the same way that we think about consumer borrowers. How does
    the lack of consumer protection for these small business
    borrowers leave them vulnerable to predatory lending?
        Ms. Harrington. I think you are absolutely right, Senator.
    We absolutely have to be thinking about how we help small
    business owners in addition to consumers. CRL supports TILA for
    small businesses. We also support a strong CFPB small business
    lending data collection rule. Many small business owners are
    very vulnerable to unaffordable loans that will destroy their
    business and their credit.
        But we should also keep in mind that many owners of the
    smallest businesses and business owners of color, as you
    mention, not just relying on their own personal scores, they
    also have to rely on personal loans. Many of them also have to
    rely on online vendors and fintech lenders because of the
    disparities in access to small business credit. And so because
    they are more likely to get credit through these entities, the
    VCFCA will provide some of that much-needed protection for them
    even as we work to ensure that there is more--there are even
    more protections for small business owners.
        Senator Warren. Well, thank you very much, Ms. Harrington.
        We need to keep fighting to protect consumers from
    predatory lending, but we cannot leave out small businesses and
    simply leave them at the mercy of anyone who wants to scam
    them. That is why we need to take a close look at the gaps that
    exist in protections for small business owners and consider
    solutions like extending consumer credit protections to small
    business loans, enforcing interest rate caps for both consumers
    and small business loans, and holding financial predators
    accountable, whether they are taking advantage of consumers or
    small businesses. Thank you very much, Mr. Chairman.
        Chairman Brown. Thank you, Senator Warren.
        Senator Tillis of North Carolina is recognized.
        Senator Tillis. Thank you, Mr. Chairman. In North Carolina,
    we were the first State to outlaw payday lending in 2001. I
    think the Chairman referenced the fact that it was sunset after
    about a 3-year experiment. We also have a 30 percent APR cap on
    lending in North Carolina. To that end, I share my concerns
    that were expressed by Senator Moran over a Federal overreach
    of what I think can be managed within the States.
        Mr. Himpler, I agree with you that we need to get hard data
    out of the DoD. Mrs. Petraeus said all indications are that it
    is working. But a Harris poll, I think it was conducted in
    2019, published in 2020, before there would be any distortions
    that could have been caused by COVID, found that 51 percent of
    all military families reported they had been denied credit
    specifically due to the provisions in the MLA. That would be a
    nice statistic to get confirmed by the DoD.
        They go on to say that between 2014 and 2019 the percentage
    of military families suffering financial distress doubled from
    16 percent to 34 percent. To put that in individual terms, that
    is from 40,000 in 2014, before the MLA was implemented, to
    200,000 in 2019, also a very interesting fact that needs to be
    substantiated, and I think the DoD is best positioned to do it.
        The last one, in 2017, a West Point research study found
    evidence indicating access to payday loans, again illegal in
    North Carolina, decreased the probability of involuntary
    separation from the Army by 10 percent.
        I think there is a lot of interesting information we need
    to get from the DoD to even understand if the MLA is working
    and whether or not we should scale it to the whole of the
    American economy.
        Mrs. Petraeus, I know you served in the CFPB and thank you
    for your past and continued service. You may be aware the CFPB
    Taskforce on Federal Consumer Law issued their annual report
    earlier this year. There was one passage that struck me as
    interesting. I would like to get your view on it.
        It read, ``After reviewing millennia of history, centuries
    of economic theory, and decades of empirical analysis, the
    Taskforce concludes that the problem of providing small-dollar
    credit to wage-earners at what others consider to be
    'reasonable' prices is not only a perennial problem but is
    probably also unsolvable. Either small-dollar credit can be
    provided at market prices that take into account its production
    costs, it can be provided by massive governmental intervention
    at a cost that has never yet been politically acceptable (and
    which still would have to contend with operating costs), or it
    will not be provided at all. Legislative or regulatory mandates
    to set different prices cannot change those realities.'' What
    is your opinion on that finding in the taskforce report?
        Mrs. Petraeus. Senator, I am not aware of that particular
    taskforce. I did retire from the Bureau 4 years ago. I will say
    that the ideological bent that they took during the past 4
    years was one that I did not agree with in many cases. Again, I
    would have to see that in context to know what they were
    speaking about, but----
        Senator Tillis. If I would be--actually, if you do have the
    opportunity. I understand you may not have seen it, but I would
    be interested if I could perhaps get your reply for the record.
        Ms. Harrington. And, sir, if I could, on that particular
    point?
        Senator Tillis. Let me just finish one, and then I will
    make sure that the Chairman lets you add onto it.
        I think the other thing that we are talking about when we
    talk about it is popular to set an interest rate at 36 percent,
    that we may not be fully informing those who have taken that
    position. Of course, you want to cap an interest rate, but I do
    think that we have to get into the distortion of the interest
    rate based on how it is calculated and get to a discussion of
    costs.
        I wonder if Mr. Himpler's example, if it was laid out, if
    it would be as popular if you also understood the consequences
    of not being to provide a financial instrument to a population
    that will most likely be underbanked or unbanked if we
    overreach on this.
        Ms. Harrington, go ahead and add your response. And,
    welcome. I hope you love my State. I hope you love the State as
    much as I do.
        Ms. Harrington. Oh, I am a Tar Heel through and through.
    Don't you worry.
        I think we just have to be really concerned about that
    report. That taskforce was convened in a way that was not in
    compliance with all other Federal taskforces. It was very
    ideologically bent for that--for that reason. A lot of the--and
    a lot of the methods in there and the surveys that it used are
    not necessarily what I think researchers would call sound.
    There is a lot of concerns about the way some of that was
    conducted.
        Senator Tillis. Well, if you could for the record----
        Ms. Harrington. And I would also----
        Senator Tillis. If you could for the record get more
    specific about that, I would be interested in seeing that.
        Mr. Himpler, I will let you.
        Mr. Himpler. I would just like to say one thing, sir, about
    the taskforce. I take umbrage with characterizing the
    ideological bent of that taskforce. The taskforce had members
    on it that have over 100 years of consumer protection
    experience with the Federal Government as career employees. One
    of the members of that taskforce was a Federal Reserve
    economist who spans not only the commission's--the United
    States Commission's Report on Consumer Credit from 1968 to the
    present day. You cannot get any more stellar academic research
    than was put forward by these hardworking Government employees.
        Senator Tillis. Well, if perhaps you all--Mr. Chair, if
    perhaps all of you could provide me a response for the record--
    I see two who had a concern with it. Mr. Himpler, you did not--
    it would be very helpful so that I can get my own head around
    the report. Thank you, Mr. Chair.
        Chairman Brown. Thank you, Senator Tillis.
        Senator Smith is recognized, from Minnesota.
        Senator Smith. Thank you, Chair Brown, and thank you so
    much for this hearing. You know, I am very glad to be a
    cosponsor of the Veterans and Consumers Fair Credit Act. I hear
    from Minnesotans all the time about how important this would be
    to help to protect people from predatory lending practices.
        Ms. Harrington, I would like to start with you. According
    to Pew Charitable Trusts, in Minnesota, Black Minnesotans are
    twice as likely to have a payday lender near them in comparison
    to the rest of the population. And as we know, that in
    Minnesota, 8 of 10 payday loans are not repaid when they come
    due, trapping borrowers, as you described, in a cycle of debt
    that can end up costing them thousands and thousands of
    dollars.
        And of course, this is not unique to Minnesota. Data from
    the Consumer Financial Protection Bureau shows payday lending
    debt traps are occurring at the same rate all over the country.
        It is not an accident either that this is the case.
    According to new research from the University of Houston School
    of Law, payday lenders disproportionately target their ads to
    Blacks and Latinos.
        So, Ms. Harrington, can you talk a little bit about what we
    have learned about specifically the effects of payday lending
    in communities of color, and is it true from your research and
    experience that these lenders often target Black and Brown
    borrowers?
        Senator Smith. That is exactly what they do. And we have
    seen how high-cost lending exacerbates and further entrenches
    racial wealth disparities. This is what we would call predatory
    inclusion, and what it leads to is financial exclusion. It
    pushes people even further out of the financial mainstream.
    Payday lenders set up shop in Black and Brown communities,
    communities that have historically been disinvested--have
    historic experience of disinvestment at every level, from the
    Federal level to the State level to the institutional level.
    And so we see that these are where the payday lenders set up,
    and they are more likely to locate in Black and Brown
    neighborhoods even when we control for income. So we see this
    play out, and we see how this pushes people who are already in
    a two-tiered financial system further into that lower tier.
        Senator Smith. I could not agree more. I think that is
    exactly what we see in communities in my State.
        And I am wondering. Let me just follow up on that. Do you
    see a link between the systemic lack of access to credit and
    lending and financial services that we see in communities of
    color with these locations of these predatory lenders in the
    very same communities that often do not have access to so-
    called mainstream financial services?
        Ms. Harrington. I think that is absolutely true. We also
    see that they saturate these communities. Right? You can go to
    some Black and Brown communities, and there is a payday lender
    on every corner. They saturate them with their advertising.
    They spend millions of dollars on marketing, and they target
    Black and Brown consumers. And so in addition to passing the
    VCFCA, we should also look at how we make sure that all banking
    institutions best serve all communities.
        Senator Smith. Correct. I think I could not agree with you
    more.
        I think that there is a direct link between this
    conversation and the deep wealth inequities that we see in our
    country. So many times that opportunity to build wealth comes
    from the ability to buildup credit and, therefore, be able to
    qualify for a mortgage so that you can own your own home. In my
    home city of Minneapolis, the home ownership gap between Black
    families and White families is 52 points. I think that this is
    all part of the same challenge that we have.
        Let me just follow up on some of the questions that have
    been asked a little earlier and see if I can get at this. There
    has been a question raised about why would we want a national
    interest rate cap, that somehow it is a better idea to let
    States be the laboratories of democracy. And, Ms. Harrington,
    could you tell me, is there a--I mean, why would we want a
    national rate cap, and do you think there is a difference in
    how predatory lending affects a family in, say, North Carolina
    compared to Minnesota?
        Ms. Harrington. Absolutely. And so I just want to point out
    the VCFCA extends the Military Lending Act, and it sets a
    floor, not a ceiling. So it absolutely enables States to have,
    and to continue pass, stronger protections. So in States that
    have better interest rate caps and lower limits, those are
    fine, and States can continue to do that. There is a long
    history in consumer protection law of the Federal Government
    doing just that, being that floor, so that States can have
    that--have their traditional opportunity of doing more.
        Senator Smith. Thank you very much. I agree with that.
        And, Mrs. Petraeus, let me just quickly see if I can ask
    you, is there evidence to demonstrate the value of the MLA to
    protect servicemembers from predatory lending?
        Mrs. Petraeus. I think the evidence is the absence of harm,
    really, which is again what the Department of Defense just a
    month or so ago reported on and again failed to see any harm as
    reflected through the military aid societies. In fact, gosh, a
    decade ago, the head of the Navy-Marine Corps Relief Society
    testified here very strongly in favor of limiting what he
    called access to the--I think, ``the payday debt trap'' and
    saying that he wished it were extended to retirees and
    veterans, which of course, is what you are considering today.
        So I would like to also weigh in on the issue of the State
    laws. I think those States especially with a big military
    presence, which I have tended to look at, year after year have
    to fight back attacks on their State laws in their State
    legislatures. And if they did have the protection, frankly, of
    a national standard, I think imagine the time they would get
    back from not having to again fight challenges repeatedly. And
    frankly, military leaders in their States have often gone and
    weighed in year after year, saying, please keep these
    protections; they are valuable. So I just wanted to add my two
    cents.
        Senator Smith. Thank you for that clarification. I really
    appreciate it.
        Thank you, Mr. Chair.
        Chairman Brown. Thank you, Senator Smith.
        Senator Cortez Masto is recognized, from Nevada.
        Senator Cortez Masto. Thank you. Thank you, Mr. Chair.
    Thank you to the panelists for this great discussion.
        I want to focus on one specific area to start with and this
    distinction as to why Federal credit unions should be exempted
    but not State credit unions. And so let me start with that
    conversation, and Ms. Harrington, let me ask you this. When the
    NCUA created its payday alternative loan program in 2019, it
    was controversial, and the NCUA board passed it 2 to 1, with
    now Chairman Harper opposing it.
        My question is there is more than 100 consumer and civil
    rights groups opposed to the PAL's proposal. The leader of the
    organization said he feared that consumers might end up with
    debt traps due to PAL's higher loans than the 15 to 18 percent
    usury standard. What has been the experience with these PAL's
    loans? Have there been complaints? I am curious what you are
    seeing now.
        Ms. Harrington. I think our experience has been, thus far,
    they just--they do not pose as high a risk of making predatory
    high-cost loans. There is a regulatory regime in place. So it
    is pretty--it is appropriate for us that they are excluded from
    the VCFCA. So as of right now, the harms that we are seeing in
    the payday lending and in the high-cost installment lending
    industry are not the--are not being seen with the PAL's
    program.
        Senator Cortez Masto. OK. Thank you. And then let me ask to
    all of the witnesses, can anyone point to a rent-a-credit-union
    scheme on payday installment loans so far? I am curious. Has
    anybody heard of any of that happening with credit unions?
        Mr. Himpler. Senator? Senator, I was in a meeting with
    Director Cordray probably 6 or 7 years ago with a
    representative from the credit unions, and she told the
    Director that use of the PAL loans was not very widely spread.
        Senator Cortez Masto. OK. Thank you. And so I guess my
    question, Mr. Williams, let me ask you. Mr. Williams, why does
    the proposed bill exempt Federal credit unions?
        Mr. Williams. Senator, I really cannot speak to why it
    exempts Federal credit unions at all. I cannot tell you the
    reason behind that. I can say that the program that we have in
    place that has been approved by NCUA has provided a lot of
    benefits to our members, and has allowed them to get out of
    these situations with payday lenders and car title lenders, and
    has actually improved their financial standing.
        Senator Cortez Masto. And so can I ask then, maybe Mrs.
    Petraeus and Ms. Harrington, should State-chartered credit
    unions receive an exemption as well?
        Mrs. Petraeus. I am going to defer to Ms. Harrington. That
    is not an issue that I am particularly familiar with the
    qualities of.
        Senator Cortez Masto. Thank you.
        Mrs. Petraeus. And it is nice to see you again after many
    years.
        Senator Cortez Masto. You as well. Thank you for all your
    good work.
        Ms. Harrington.
        Ms. Harrington. First, we have not seen any rent-a-credit-
    union schemes, to answer your question. State-chartered credit
    unions should be in because again federally chartered credit
    unions already have a regulatory regime in place that--and they
    already have an interest rate cap in place. CRL is actually
    affiliated with a State-chartered credit union that is very
    much in support of the VCFCA.
        Senator Cortez Masto. OK. Thank you. And let me just--in
    general, I am so concerned about the debt traps, and I have to
    go back to this as my background and experience in my State of
    Nevada as attorney general. Mrs. Petraeus, thank you so much
    because your work out at Nellis with our military, all across
    the State, really was focused on how we protect our men and
    women in the military from these types of debt traps and being
    taken advantage because it is happening. It is happening.
        And so, Mr. Himpler, let me ask you, do you think that
    financial institutions are creating some sort of--some are
    creating some sort of debt traps?
        Mr. Himpler. Not all institutions are created equal.
        Senator Cortez Masto. But some are.
        Mr. Himpler. Pardon?
        Senator Cortez Masto. But some are.
        Mr. Himpler. Some are--no, no. They are not all created
    equal, so I am not going to--I cannot speak to all
    institutions.
        Senator Cortez Masto. Any of your member services----
        Mr. Himpler. No, no.
        Senator Cortez Masto. Any of the members within your
    organization----
        Mr. Himpler. Within our organization----
        Senator Cortez Masto. ----created a debt trap?
        Mr. Himpler. No. We have the oldest and safest form of
    consumer credit. We have been serving members, our customers,
    for over 100 years.
        Senator Cortez Masto. So what do you do to ensure that a
    member service is on good behavior and not creating some sort
    of debt trap and negative financial incentive for individuals?
    Do you push information out or talk about this and identify
    those bad players?
        Mr. Himpler. By virtue of being a member of a national
    trade association, our members want to be good corporate
    citizens. You know, we----
        Senator Cortez Masto. But let me just say this. As somebody
    who was attorney general, and I worked with associations. There
    are good players and bad players. And there is a burden on the
    association as well, not just the enforcers, to take action and
    weed out the bad players. So what are you doing for your
    association to ensure that individual members are not engaging
    in those bad practices that really lead to debt traps?
        Mr. Himpler. As part--as part of their membership, our
    members agree to best practices, where they work in the
    installment stage, where they work with customers to budget.
    They take into consideration income and expenses. They consider
    debt-to-income ratio, payment-to-income ratio, in terms of
    determining their ability to repay, and report to credit
    bureaus.
        We have got 53 million adults in the United States that
    either have no credit profile or a thin credit profile.
        Senator Cortez Masto. Oh, no, you do not have to tell me
    that. I am from Nevada. I have the largest unbanked population,
    but I do not want them to be taken advantage of. And I want the
    good players to be there to help them, but I do not want the
    bad ones.
        You know, this just frustrates me at times because it is
    the associations' responsibility as well. It is your
    responsibility, just as it is every enforcer and all of our
    responsibility, to hold those bad players accountable when they
    are engaging in bad practices, including ``rent-a'' schemes and
    rent-a-bank schemes.
        But I do not hear you talking about, or even identifying,
    that it occurs, and that concerns me. That concerns me.
        Mr. Himpler. Yeah, may I----
        Senator Cortez Masto. And my time is up. I appreciate the
    indulgence. Thank you.
        Chairman Brown. Thank you, Senator Cortez Masto.
        Senator Van Hollen is recognized, from Maryland, for 5
    minutes.
        Senator Van Hollen. Thank you, Mr. Chairman, Ranking Member
    Toomey, and to all of our witnesses. Thank you.
        And I agree not all financial institutions are created
    equal or act equally. But it is also indisputable, I believe,
    from the evidence we have seen in this Committee, the testimony
    we have seen in this Committee, hearing from constituents
    around the country, that millions of Americans are bilked out
    and cheated out of lots of money by predatory lenders, payday
    lenders, and others, which is why many States have adopted
    these usury caps, including my State of Maryland, and adopted
    them when they are voted by referendum by large, large
    bipartisan majorities.
        I think people understand what is--that people who are in
    great distress can be unfairly taken advantage of, and it is
    part of our job to make sure that that does not happen.
        There was an effort that we saw under the previous
    administration to essentially allow rent-a-banks to circumvent
    those protections at State levels, and I was pleased to team up
    with Senator Brown and others and make sure that we overrode
    the effort to undermine those protections that are in place.
        But what this bill is intended to do is provide nationwide,
    uniform protection. And speaking of uniforms, I do want to read
    for you from a May 2021 DoD report about the existing MLA, and
    I am quoting:
        ``The Department believes the MLA is currently working as
    intended and that servicemembers continue to have ample access
    to necessary credit. Survey results generally reflect decreased
    use of high-cost credit products and improved financial
    condition among servicemembers over time. Engagements with DoD
    financial educators and counselors indicate fewer seek
    assistance for financial challenges or debt resulting from
    high-cost credit markets. Military aid societies, which provide
    financial assistance, similarly report fewer requests for
    assistance related to high-cost credit products. To date, the
    Department has no indication that servicemembers and their
    families lack adequate access to necessary, responsible
    credit,'' May 2021.
        Mr. Himpler, do you have any reason to dispute those
    findings by DoD with respect to the military credit?
        Mr. Himpler. Senator, it is great to see you and thank you
    for the question. I appreciate it. As I said earlier in my
    testimony, I have the greatest respect for the military. My
    father served in Korea in the Navy.
        That report that you cited, and every other report we have
    seen from the Defense Department since the enactment of the
    Military Lending Act in 2007, does not cite any empirical data.
    The survey that you mentioned in the question that you asked me
    references a survey. It does not even provide a reference to
    the data that is behind the survey itself.
        If we are going to take legislation from a smaller segment
    of the population--I believe the military is about 1 percent of
    the population--and extend it to the entire population, sir, we
    need to see the data. All we are asking for is transparency,
    sir.
        Senator Van Hollen. So let me ask you this. Do you think
    that we should repeal the current protections for military,
    current enlisted military?
        Mr. Himpler. I will answer this way, Senator. The National
    Foundation of Credit Counselors, folks that are the white hats
    that work with people who are in trouble, recently issued their
    own report that says that, in 2020, twice as many active
    servicemembers took out payday loans or cash advance--and I
    will admit I do not know how they got that because they are
    prohibited under the Military Lending Act. Twice as many in
    2020 as they did in 2019.
        Senator Van Hollen. Well, all I--as you point out, whoever
    was providing those loans was breaking the law. Right?
        Mr. Himpler. I cannot speak----
        Senator Van Hollen. Look, I am--you are disputing the
    findings in this report. We will definitely follow up. I can
    tell you I have not heard from enlisted----
        Mr. Himpler. Senator?
        Senator Van Hollen. You are disputing the findings here, or
    you are saying they do not have the backup. We will pursue
    that. But I do not get complaints from active duty military, in
    Maryland or around the country, about the fact that they are
    not having access to credit. I think people have appreciated
    these protections.
        And the idea behind the bill is very simple. If we agree,
    which apparently you do not or you may dispute, if we agree
    that this is important protection for active duty military,
    should we not extend that same protection to every other
    American? That is the idea behind this bill. Thank you, Mr.
    Chairman.
        Chairman Brown. Thank you, Senator Van Hollen.
        Senator Warnock of Georgia is recognized for 5 minutes.
        Senator Warnock. Thank you so much, Chairman Brown. As
    Chair of the Subcommittee on Financial Institutions and
    Consumer Protection, I am very concerned about predatory payday
    and car title lending that target our most vulnerable
    communities, contributing the wealth gap. I have witnessed the
    harms of these loans on families, first hand, as a pastor.
        I am proud to say that Georgia has long been a national
    leader in the fight against predatory lending, imposing a
    strict 10 percent usury limit on small-dollar loans. In fact,
    Georgia has generally banned payday lending, and in 2004
    Georgia lawmakers, on a bipartisan basis, closed loopholes used
    by payday lenders to charge triple-digit interest rates and
    reaffirmed their commitment to keeping payday lending out of
    the State, increasing fines and criminal penalties for lenders
    making small loans at illegal interest rates. These strong
    laws, supported both by Republicans and Democrats in Georgia,
    protect Georgians from payday lending and saved Georgians over
    $284 million annually, boosting our economy.
        That is why I am proud to cosponsor this 36 percent rate
    cap bill introduced today by Senator Reed. This bill imposes
    the national interest cap rate already enjoyed by members of
    the military.
        Ms. Harrington, given Georgia's already strong consumer
    protection laws, how will this Federal rate cap bill further
    protect other consumers in Georgia?
        Ms. Harrington. Thank you for the question, Senator. I
    think Georgia absolutely has strong protections against payday
    lending, and we--and we are so glad--and we were so glad to be
    a part of many of those battles. But they do have a loophole,
    which is--which is true in a lot of States, and that loophole
    is for car title lenders. Car title lenders in Georgia can
    actually charge up to 300 percent interest, and this is
    stripping about 199----
        Senator Warnock. You said 300 percent?
        Ms. Harrington. 300 percent interest. And this is stripping
    about $199 million a year from Georgia residents.
        And so this bill would actually close that loophole. We
    have seen this here. We have seen this in other States. We saw
    it in Maryland. Predatory lenders will find a loophole, and
    they will use it. So this is the most effective way of ending
    the debt trap while also protecting--while also ensuring that
    the States that do have better protections are still able to
    have those.
        Senator Warnock. Ms. Harrington, a loan of 36 percent in my
    view still seems really high. Why 36 percent, and why not a
    lower interest rate cap? And also, can you say more about how
    these predatory loans perpetuate the racial wealth gap?
        Ms. Harrington. Yeah, absolutely. So I think the 36 percent
    has a long and well-recognized history in America, dating back
    100 years. But we would agree with you. It is absolutely really
    high on anything but really small loans. When you are talking
    about the longer-term installment loans, which are for higher
    amounts, 36 percent is actually quite a bit.
        I think we worked with a--there was a--we worked with a
    veteran out in California, who took out a $5,000 loan, 115
    percent interest, ended up paying back $42,000 over 7 years. I
    think we would all agree that that is a predatory loan. And so
    we definitely agree with you, and we would--and we think there
    should be lower caps, and we should be thinking about how we
    protect even on those--on those higher loans.
        And on the racial wealth gap, this absolutely is
    exacerbating and further entrenching racial wealth disparities.
    We have seen how these payday lender set up shop and target
    Black and Brown communities. They are feeding off of
    communities that have been resource-starved for decades,
    communities that have been redlined, communities that are now
    experiencing the worst of the COVID-19 crisis. And they
    compound those harms by putting them in this debt trap and
    pushing them even further out of the financial mainstream.
        When you have a payday--when you--payday loan borrowers are
    more likely to go--to have delinquent bills, to have their
    accounts overdrawn and then closed, to experience bankruptcy.
    And that is disproportionately happening to Black and Brown
    borrowers, which is even more confusing when we know that Black
    and Brown borrowers are the most--are even more likely to be
    unbanked and not even have checking accounts.
        Senator Warnock. Thank you so much. And it is hard to
    overstate the importance of this work, particularly coming out
    of the pandemic.
        I have one more brief question. Georgia is home to over
    140,000 military servicemembers, who benefit every day from the
    Military Lending Act. Georgia is also home to almost one
    million veterans. That means that 1 in 10 Georgians is serving,
    or has served, our Nation in uniform. And I believe that every
    one of them and their families deserve the same level of
    protection from predatory lenders.
        Mrs. Petraeus, first, thank you for your decades of service
    to our Nation and for your testimony. You noted the higher
    scale of suicide among veterans and it ties often to financial
    issues as well as higher rates of bankruptcy among veterans
    than the general population. If the Veterans and Consumers Fair
    Credit Act is enacted and this critical protection is expanded
    to all Americans, what do you believe the effect will be on the
    veteran population?
        Mrs. Petraeus. Well, first of all, Senator, let me thank
    you for the fact that the very first public announcement you
    made after being elected mentioned the military community. As a
    lifetime member of that community, I appreciated that very
    much.
        And I do extend that community to veterans. You know, they
    are all--they all served. And it is disturbing that they are
    more apt to declare bankruptcy. Their finances are not very
    good. I have some theories about that, including the fact that
    you do not get paid much in the military and your spouse does
    not really have an opportunity to develop a career.
        And I am a great example. I actually started working in my
    50s, after moving 24 times in 37 years. Most military spouses
    just are not going to earn a great income. So they will not
    have that to fall back on. And some of them will also be
    caregivers for that veteran.
        So financial stress is definitely associated with suicide
    rates. I cannot help but think that providing these more robust
    protections would truly benefit the veteran community as well
    and just provide them a little bit of protection from when they
    have financial problems going out and signing up for a loan
    that is going to charge them an exorbitant amount of interest
    and make it very difficult for them to pay it back and
    basically make their situation even worse.
        Senator Warnock. Thank you so much. You represent the human
    face of this work. You understand, first hand, it is important.
    I hope that we can work on a bipartisan basis, as we have done
    in Georgia, to protect all consumers. Thank you for your
    service and your testimony.
        Chairman Brown. Thank you, Senator Warnock.
        Thanks to the witnesses, all six of you, three remote,
    three here. Thank you for providing testimony and answering
    questions.
        A number of you mentioned the $400, that huge numbers of
    Americans, high percentages, tens of millions of Americans,
    cannot afford $400 for a car repair or some emergency. If we
    are concerned that too many people cannot afford a car repair
    or a medical bill or another emergency, the solution is not to
    trap them in a cycle of debt; it is to raise their wages.
        My colleagues who are so worried about America's lack of
    financial security I hope join us in the work we are doing to
    finally give workers some bargaining power so they can get paid
    more. The work we did in the American Rescue Plan, with
    President Biden, I think we are making progress raising
    people's pay. We have a long way to go.
        For Senators who wish to submit questions for the record,
    those questions are due 1 week from today, Thursday, August
    5th. To witnesses, you have 45 days to respond to any
    questions.
        Thank you again to all six of you and to the three Members
    of Congress.
        With that, the meeting is adjourned.
        [Whereupon, at 12:12 p.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                  PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
        Fifteen years ago, this Committee held a hearing looking for
    solutions to protect members of the military and their families from
    abusive lenders that went out of their way to target servicemembers.
        Then-Chairman Shelby described these practices as ``predatory
    lending schemes . . . that target financially inexperienced consumers
    and make loans without regard to the consumers' ability to repay . . .
    ''. Sen. Martinez of Florida described these high-interest loans as
    ``unconscionable.'' And Sen. Elizabeth Dole highlighted the efforts her
    home State of North Carolina had taken to shut down high-interest,
    payday lending.
        Following that hearing, a bipartisan consensus emerged--and
    Congress passed the Military Lending Act, which President Bush signed
    into law in 2006.
        That spurred action from members of both parties around the
    country--States of all sizes, in all regions passed laws protecting
    consumers from high-interest, predatory loans.
        Since 2010, Montana, South Dakota, Colorado, Nebraska, California,
    and Illinois have all passed laws to cap interest rates on consumer
    loans at 36 percent.
        And like the Military Lending Act, these State laws were passed
    with overwhelming bipartisan support:

        72 percent of Montana voters,

        75 percent of South Dakota voters,

        77 percent of Colorado voters,

        And 83 percent of Nebraska voters all supported ballot
            initiatives to cap interest rates at 36 percent in their
            States.

        Of course the payday lobby didn't give up.
        They've spent every day since then trying to come up with new
    schemes to evade these laws and exploit loopholes.
        And they got an assist from the last Administration.
        Fortunately, a bipartisan group of Senators--including Members from
    this Committee--worked to overturn that Administration's giveaway to
    the payday lobby, the so-called true lender rule.
        It would have allowed predatory lenders to evade State interest
    rate caps.
        We put a stop to that specific scheme.
        But we know this industry isn't going to give in--not when their
    profits depend on tricking Americans out of their money.
        We need national protections.
        Now is the time for this Committee to again lead the country, by
    passing a Federal law establishing a 36 percent interest rate cap on
    all consumer loans.
        That's why I, and so many of our colleagues, joined Senator Reed,
    Chair of the Senate Armed Services Committee, to introduce the Veterans
    and Consumers Fair Credit Act.
        Our legislation builds on the success of the Military Lending Act,
    and extends its 36 percent cap to everyone--including to the veterans
    and surviving family members left out of the original law.
        The Veterans and Consumers Fair Credit Act is supported by more
    than 100 consumer, community, and civil rights organizations, as well
    as military and veterans' service organizations.
        The bill is also supported by a broad coalition of faith
    organizations, including:

        The Southern Baptist Ethics and Religious Liberty
            Commission;

        The National Association of Evangelicals;

        The National Baptist Convention;

        And the U.S. Conference of Catholic Bishops.

        And like the Military Lending Act, it's bipartisan--our bill's lead
    sponsors in the House, Republican Glenn Grothman and Democrat Chuy
    Garcia, are both here to testify before this Committee today.
        We know the tired arguments against the bill--they're the same ones
    we heard about the Military Lending Act.
        During the 2006 Committee hearing, the payday industry claimed we
    would cut off access to credit to servicemembers.
        That didn't happen.
        According to a May 2021 Department of Defense Report to Congress,
    the Military Lending Act is ``currently working as intended and . . .
    Servicemembers continue to have ample access to necessary credit.''
        We'll hear those talking points again today, I'm sure, because
    that's all the lobbyists have.
        It's an argument we welcome: Yes, we do want to cut off access to
    loans at interest rates so high that they ruin people's lives. That's
    the whole point.
        Payday lenders don't offer access to responsible credit that
    consumers can afford to repay.
        They offer the opposite: products that trap consumers in a cycle of
    debt.
        We've all heard the same stories: Consumers end up renewing their
    loans over and over, and paying more in fees than the original loan
    amount.
        We know that more than 75 percent of loans go to borrowers who take
    out 11 or more loans each year.
        Yesterday I spoke with Ohioan Gloria Olivencia, a mother from
    Lorain.
        She took out a payday loan to pay her bills, and ended up trapped
    in a cycle of debt.
        She paid $1,200 in interest on a loan that was originally between
    $500 and $600.
        She also shared the story of her daughter, who took out a $200 car
    title loan, and ended up living in fear that her car would be
    repossessed, and that she'd be unable to get to work to pay off the
    loan.
        As she said: ``it's easy to get a loan--it's not so easy to get out
    of it.''
        These Ohioans' experiences sound a lot like the business model laid
    out in this actual training manual, from payday lender ACE Cash
    Express.
        Sure looks like a cycle of debt to me.
        Another argument we hear from the payday lobby is that no one can
    be profitable offering loans at 36 percent interest.
        Really? 36 percent is still pretty darn high, and will make any
    company plenty of money.
        I'd ask my colleagues to think about their own credit cards or
    mortgages or loans they've taken out--I'm betting your rates were a
    whole lot lower than 36 percent.
        Federal credit unions across the country offer payday alternative
    loans at rates between 18 and 28 percent. Some banks have begun to do
    the same.
        Even the American Fintech Council supports our bill--their members
    offer short-term consumer loans at rates under 36 percent.
        Fifteen years ago, Republicans on this Committee described high-
    interest payday loans as ``predatory'' and ``unconscionable'' when made
    to active duty servicemembers.
        If these loans are ``predatory'' and ``unconscionable'' when made
    to servicemembers, then they're also predatory and unconscionable when
    made to anybody--

        to a veteran,

        to a surviving family member,

        or to a mother trying to get her car repaired so she can
            get to work.

        Our Committee took bipartisan action to protect servicemembers.
        I'm optimistic we can come together again to protect all the
    Americans we serve from debt traps.
        I would like to enter into the record letters in support of the
    Veterans and Consumers Fair Credit Act from:

        Faith in Just Lending Coalition,

        American Fintech Council,

        Military and Veterans' service organizations,

        And a coalition of 188 community, consumer, civil rights,
            labor, and small business organizations.
                                     ______

                PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
        Thank you Mr. Chairman. I'd like to thank all of our witnesses,
    especially Congressman Loudermilk, for speaking today to explain the
    significant damage this proposal would do.
        It is a fundamental principle of economics that markets discover
    prices. Sellers compete until they reach the lowest prices that will
    let them stay in business. The only exceptions are under monopoly
    conditions, which generally only exist when the Government creates or
    facilitates them.
        Nevertheless, history is littered with examples of Government
    planners' failed attempts to set prices. They fail because they
    generate huge unintended consequences, which inevitably harm the very
    people they are supposed to protect.
        Proponents of a 36 percent interest rate cap seem to think it would
    result in borrowers getting cheaper credit, but that's just not the
    case. In fact, those most in need would simply lose access to credit.
    If a lender can't recoup its costs, it won't make the loan.
        Studies have found a loan under $2,600 is a money loser for the
    lender at 36 percent interest. That is because there are fixed costs to
    issuing a loan, regardless of its size.
        The Bank Policy Institute has estimated that a issuing a 3-month,
    $100 loan would cost a typical bank $35 to issue. Expressed as an
    annual percentage rate, or APR, this is roughly 140 percent, meaning a
    36 percent rate cap would make it impossible to offer.
        Many would suffer if they lost access to small loans. A 2020
    Federal Reserve study revealed that 35 percent of adults could not
    cover an unexpected $400 expense using cash, savings, or the
    equivalent.
        Who would be most at risk of losing access to credit? The 30
    percent of U.S. consumers who have a subprime credit score, and the
    more than 1 in 10 Americans who are ``credit invisible.''
        This particularly harms minorities. For example, in 2020 only 21
    percent of Black households had a credit score above 700.
        Moreover, while I am skeptical of the evidentiary value of
    unverified complaints, the fact that Personal loans, Payday loans, and
    Title loans each account for fewer than 1 percent of consumer
    complaints in the CFPB's database certainly suggests consumers are not
    dissatisfied with them.
        Here's another example that highlights the inflexibility of an APR
    cap. Consider a renter who is $100 short on rent on the first of the
    month, but will not be paid until the second. To avoid a $50 late fee,
    she might opt to borrow $100 at a cost of $15 paid back any time over
    the next 3 months. That would be a 60 percent APR. This is a real
    product that a major American bank offers. But it appears that would be
    illegal under the proposed 36 percent APR rate cap. Therefore, instead
    of paying $15 to the bank, the renter would be forced to pay $50 to her
    landlord.
        The effects would be far more severe using the ``all-in'' rate cap
    the Military Lending Act, known as the MLA, imposes. Even though it is
    called an APR, an ``all-in'' APR like this encompasses far more than
    interest. It includes fees, finance charges, and the cost of ancillary
    products like credit insurance.
        As a result, a supposed 36 percent rate cap functions like a much
    lower limit. This is particularly evident for credit cards, including
    even a modest annual fee in the ``all-in'' APR calculations can cause a
    credit card to exceed 36 percent.
        What's more, virtually all other Federal and State laws use a
    standard APR calculation. As a result, an ``all-in'' rate cap of 36
    percent would preempt even those States that have interest caps that
    are seemingly set at a similar rate, with the sole exception of
    Illinois.
        While some argue that the MLA should apply universally,
    servicemembers are not reflective of the general population. By
    definition they have a reliable income. And, different factors affect
    their readiness to deploy on a moment's notice than most people
    consider when ordering their finances.
        What's more, research on the MLA's effects suggests that the MLA
    has had adverse effects on servicemembers. A survey of servicemembers
    showed that the percentage of servicemembers suffering financial
    distress more than doubled, from 16 percent before the MLA's passage to
    34 percent five years later. Approximately 51 percent of all military
    families had been denied credit specifically because of the MLA. And,
    research by West Point professors found that payday lending had not
    adversely affected servicemembers.
        Although proponents claim extending the MLA to all consumers would
    help veterans, veterans groups have disagreed. In 2019, a number of
    veterans' groups opposed legislation to extend the MLA, with several
    noting that veterans have more difficulty accessing capital than
    others.
        Congress should not remove, but expand, access to credit.
    Regulators have made it very difficult for banks to offer small-dollar
    credit.
        Although Federally chartered credit unions can offer Payday
    Alternative Loans, an NCUA-approved small-dollar product, fewer than
    600 credit unions nationwide offer them, and in the first half of 2020
    the ``all-in'' APR for these loans, including fees, actually exceeded
    36 percent.
        At the end of the day, taking choices away from consumers just
    doesn't work. Instead, it hurts the very people it's supposed to help.
                                     ______

        PREPARED STATEMENT OF REPRESENTATIVE GLENN GROTHMAN OF WISCONSIN
        Chairman Brown, Ranking Member Toomey, and distinguished Members of
    the Committee, thank you for inviting me to testify today in support of
    extending the Military Lending Act's 36 percent rate cap to all
    consumers. The history of usury prohibitions dates back to Biblical
    times. In the United States, it has been very common for individual
    States to put caps on interest.
        It is hard to imagine a situation in which it is advisable to take
    out a loan greater than 36 percent. While I normally do not like the
    Federal Government regulating business, the fact that so many loans are
    provided online today leaves the Federal Government no choice but to
    act on this issue.
        I am sure you will be contacted by lobbyists for the payday loan
    industry. They will tell you that they provide a necessary service.
    Congress passed the Military Lending Act in 2006. I am not aware of any
    problems with loan sharks abusing servicemembers because of the cap or
    military members unable to buy necessary goods. Currently, 18 States
    and the District of Columbia have rate caps. \1\ They seem to get along
    just fine. Maybe this is why when Nebraska became the 17th State to
    adopt a rate cap in November 2020, it was passed by referendum with 83
    percent support. \2\ There are Libertarians who believe ``let the buyer
    beware.'' But the Government regulates all sorts of transactions
    including insurance contracts, offers to purchase, and annuities. These
    are examples of legal documents that are regulated to prevent consumers
    from entering into foolish contracts.
    ---------------------------------------------------------------------------
         \1\ Annie Millerbernd, ``More States Pushing Interest Rate Caps on
    Payday Loans'', July 27, 2021, https://www.syracuse.com/business/2021/
    07/more-states-pushing-interest-rate-caps-on-payday-loans.html.
         \2\ Megan Leonhardt, ``Nebraska Becomes the Latest State To Cap
    Payday Loan Interest Rates'', July 27, 2021, https://www.cnbc.com/2020/
    11/04/nebraska-becomes-the-latest-state-to-cap-payday-loan-interest-
    rates.html.
    ---------------------------------------------------------------------------
        In 2016, 76 percent of voters in the State of South Dakota
    supported lowering rates on payday loans, car-title loans, and other
    costly loans. \3\ Within the first 2 years of the rate cap, the number
    of unsecured and Payday Alternative Loans in the State rose by 11
    percent, suggesting these borrowers do, in fact, have access to credit
    that is not attached to a predatory lender's pockets. \4\ The Center
    for Responsible Lending predicts the rate cap in South Dakota will save
    their people over $81 million per year in interest and fees. \5\
    ---------------------------------------------------------------------------
         \3\ Charla Rios, Diane Standaert, and Yasmin Farahi, ``The Sky
    Doesn't Fall: Life After Payday Lending in South Dakota'', July 27,
    2021, https://www.responsiblelending.org/sites/default/files/nodes/
    files/research-publication/crlthe-sky-doesnt-fall-jan2020-1.pdf.
         \4\ Charla Rios, Diane Standaert, and Yasmin Farahi, ``The Sky
    Doesn't Fall: Life After Payday Lending in South Dakota'', July 27,
    2021, https://www.responsiblelending.org/sites/default/files/nodes/
    files/research-publication/crlthe-sky-doesnt-fall-jan2020-1.pdf.
         \5\ Charla Rios, Diane Standaert, and Yasmin Farahi, ``The Sky
    Doesn't Fall: Life After Payday Lending in South Dakota'', July 27,
    2021, https://www.responsiblelending.org/sites/default/files/nodes/
    files/research-publication/crlthe-sky-doesnt-fall-jan2020-1.pdf.
    ---------------------------------------------------------------------------
        Throughout my time in the Wisconsin legislature and now in
    Congress, I have been told borrowers typically take out these loans for
    a one-time emergency. But in reality, the data suggests these loans are
    taken out for ongoing issues. In 2012, the PEW Charitable Trusts
    released a report titled, ``Payday Lending in America: Who Borrows,
    Where They Borrow, and Why''. They asked ``who borrowers are
    demographically; how people borrow; how much they spend; why they use
    payday loans; what other options they have; and whether State
    regulations reduce borrowing or simply drive borrowers online.'' \6\
    ---------------------------------------------------------------------------
         \6\ ``Payday Lending in America: Who Borrows, Where They Borrow,
    and Why'', July 27, 2021, https://www.pewtrusts.org/en/research-and-
    analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why.
    ---------------------------------------------------------------------------
        I think their findings may be eye-opening to some of you. In their
    report, PEW provided these key findings:

        1. Who Uses Payday Loans?

        12 million Americans use payday loans annually.

        On average, a borrower takes out eight loans of $375 each
            per year and spends $520 on interest.

        Most payday loan borrowers are White, female, and 25-44
            years old.

        8 percent of home renters earning $40,000 to $100,000 have
            used payday loans, compared with 6 percent of homeowners
            earning $15,000 to $40,000.

        2. Why Do Borrowers Use Payday Loans?

        69 percent used it to cover a recurring expense, such as
            utilities, credit card bills, rent or mortgage payments, or
            food.

        16 percent dealt with an unexpected expense, such as a car
            repair or emergency medical expense.

        3. Does Payday Lending Regulation Affect Usage?

        In States that enact strong legal protections, the result
            is a large net decrease in payday loan usage; borrowers are not
            driven to seek payday loans online or from other sources. \7\
    ---------------------------------------------------------------------------
         \7\ ``Payday Lending in America: Who Borrows, Where They Borrow,
    and Why'', July 27, 2021, https://www.pewtrusts.org/en/research-and-
    analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why.

        2.9 percent of adults reported payday loan usage in States
            with the most stringent regulations, compared with 6.3 percent
            in moderately regulated States and 6.6 percent in States with
            the least regulation. \8\
    ---------------------------------------------------------------------------
         \8\ ``Payday Lending in America: Who Borrows, Where They Borrow,
    and Why'', July 27, 2021, https://www.pewtrusts.org/en/research-and-
    analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why.

        I will leave you with this interesting anecdote. I am always
    reminded of my days as a State legislator when this issue comes up. One
    of my staffers doing research on this topic visited a payday loan store
    in Wisconsin. She was told by an employee, ``Don't tell your husband.
    It's really not a very good deal.''
        Thank you again for holding this important hearing today. I look
    forward to seeing the Senate advance legislation to cap rates and I
    urge my colleagues in the House to support this endeavor.
                                     ______

       PREPARED STATEMENT OF REPRESENTATIVE JESUS G. ``CHUY'' GARCIA OF
                                    ILLINOIS
        Good morning everyone, thank you for inviting me to speak here
    today. Special thanks to Chair Brown and Ranking Member Toomey for
    convening to discuss this important topic. And of course, thanks to all
    my fellow witnesses for testifying.
        I applaud my colleagues in the Senate for introducing the Veterans
    and Consumers Fair Credit Act, and I look forward to reintroducing it
    in the House shortly.
        Capping interest rates on consumer loans is important to me for a
    simple reason: my community needs it. I represent a working-class
    district in Chicago and suburban Cook County. My constituents are
    mostly Latino, and largely immigrants. They know all about the dangers
    of predatory lending.
        Let me explain. Rents in my district have skyrocketed since the
    great recession. One neighborhood that I represent, Logan Square, has
    lost more than 10,000 Black families and 20,000 Latino families since
    2010. Wages simply aren't keeping up with the cost of living. All too
    often, working class families must turn to loans to fill the gaps.
    Families take out loans with double or triple-digit interest rates to
    pay for the necessities of life, and they quickly find themselves in a
    cycle of debt they can't repay.
        That's what happened to Billie Aschmeller from Springfield,
    Illinois, who took out a loan for less than $600 to buy a coat, crib,
    and car seat for her pregnant daughter, but ended up living in her car
    due to the 300 percent annual interest rate on the loan. \1\
    ---------------------------------------------------------------------------
         \1\ Editorial, ``Hang Tough, Illinois, and Cap Interest Rates on
    Payday Loans at 36 Percent'', Chicago Sun-Times, 5/7/2021, https://
    chicago.suntimes.com/2021/3/7/22315829/hang-tough-illinois-cap-
    interest-rates-payday-loans-36-percent.
    ---------------------------------------------------------------------------
        This is what we call debt traps--loans that trap working class
    people in a cycle of debt. And these lenders focus on Black and Brown
    communities like mine. They know we're not paid what we're worth. They
    know we don't have as much access to credit.
        This year a study in Houston found that payday and title-lending
    websites featured Latinos in more than 30 percent of their pictures,
    even though Latinos make up only 20 percent of their customers in
    Texas. Meanwhile, nearly 75 percent of mainstream banks did not feature
    a single picture of a Latino individual. That's a pretty stark
    difference; and the communities I represent need relief from these debt
    traps. \2\
    ---------------------------------------------------------------------------
         \2\ David Lazarus, ``Column: There's a Racial Gap in Marketing by
    Banks and Payday Lenders, Study Finds'', Los Angeles Times, 4/9/2021,
    https://www.latimes.com/business/story/2021-04-09/racist-marketing-
    banks-payday-lenders.
    ---------------------------------------------------------------------------
        The good news is: States are acting. I'm very proud that in my
    State of Illinois, Governor Pritzker signed an interest rate cap bill
    into law. This has been a key priority for my constituents as well as
    for consumer advocates, civil rights leaders, and religious
    organizations. It's already keeping people out of debt traps. \3\
    ---------------------------------------------------------------------------
         \3\ ``Will Illinois Borrowers Find Predatory Loan Alternatives?
    They Already Are, Says Capital Good Fund's Posner'', Woodstock
    Institute, 7/23/2021, https://woodstockinst.org/news/blog/will-il-
    borrowers-find-predatory-loan-alternatives/.
    ---------------------------------------------------------------------------
        And it's not a red-State/blue-State issue. Just last year, 82
    percent of Nebraska voters passed a ballot measure to cap interest
    rates at 36 percent. They join States like Arkansas and South Dakota
    that put the interests of their citizens over the interests of
    predatory lenders.
        It's an important step. And I'm proud that both the House and
    Senate passed my resolution to repeal the OCC's so-called ``True Lender
    Rule'' and allow States to protect their consumers. But we need a
    national standard that protects consumers across the country from
    getting trapped by mountains of debt they can't repay. It's time for
    Congress to act.
        During the Obama administration the CFPB did great work to improve
    regulations around payday lenders. And I hope the Biden administration
    picks up where they left off. But only Congress has the power to step
    in and say: enough is enough. Our communities are suffocated by double-
    and triple-digit interest rates--it holds us back from prosperity and a
    full economic recovery. The time is now to act.
        Before Congress passed the Military Lending Act in 2006, lenders
    trapped servicemembers in cycles of debt while they served our country.
    It's a shame it took so long to protect our men and women in uniform
    from triple digit interest rates. But Congress capped those loans at 36
    percent--it worked, and it provided us with a robust model for
    regulating consumer loans. It's time to extend those same protections
    to veterans, servicemembers' families, and other consumers.
        I applaud Senators Brown and Reed for introducing the Veterans and
    Consumers Fair Credit Act. I look forward to introducing it in the
    House.
        Let's protect our communities from these high interest loans.
                                     ______

        PREPARED STATEMENT OF REPRESENTATIVE BARRY LOUDERMILK OF GEORGIA
        Chairman Brown, Ranking Member Toomey, and Members of the
    Committee, thank you for the opportunity to testify today.
        My district is in northwest Georgia and is a snapshot of all
    different types of American life: urban and rural, high income and low
    income, families who have been in Georgia for five generations and
    immigrants who have just arrived in America for the first time. I am
    here to tell you that a national 36 percent interest rate cap would be
    devastating to my constituents and would harm the very people it is
    intended to help.
        We often hear that a 36 percent interest rate cap would cause short
    term, small dollar consumer loans to disappear. That is not a
    hypothetical--that is reality. To break even on a $2,600 loan,
    factoring in losses and the costs of producing the loan, lenders have
    to charge a 36 percent APR. \1\ In other words, if the maximum APR is
    36 percent, lenders will experience a net loss on loans under $2,600
    because the break-even APR for those loans is more than 36 percent.
    This would have wide-ranging consequences, none of which are good for
    consumers. Many lenders simply would not offer small loans anymore, or
    consumers would be forced to borrow more money than they need or have a
    longer term loan to get the APR under 36 percent. This theory has been
    proven correct in practice. When the State of Oregon established an
    interest rate cap in 2007, access to credit decreased dramatically,
    borrowers switched to inferior alternatives, and consumers on average
    were financially harmed more than they were helped. \2\
    ---------------------------------------------------------------------------
         \1\ https://www.mercatus.org/system/files/mercatus-durkin-
    installment-cash-lending-v1.pdf
         \2\ https://papers.ssrn.com/sol3/papers.cfm?abstract-id=1335438
    ---------------------------------------------------------------------------
        There is no question that consumers have significant need for small
    dollar credit. Current Federal Reserve data indicates that more than
    one third of American adults would not be able to pay for a $400
    emergency expense without having to borrow money, \3\ and tens of
    millions of Americans do not qualify for traditional bank loans.
    ---------------------------------------------------------------------------
         \3\ https://www.federalreserve.gov/consumerscommunities/
    sheddataviz/unexpectedexpenses.html
    ---------------------------------------------------------------------------
        A 36 percent interest rate may sound high, but that is because the
    annual percentage rate is an inappropriate and misleading way to
    measure the cost of a short term loan. The terms of these loans are
    usually much less than a year--so measuring the cost in annual
    increments is like saying a $100 a night hotel room is actually a
    $36,500 a year hotel room.
        Take for example a $500 loan with a term of 3 months and a $55 fee.
    That results in a 44 percent APR, \4\ and under this bill, that loan
    would be illegal nationwide. Furthermore, the military APR includes
    both interest and fees, which overstates and distorts the true cost.
    Under a 36 percent ``all in'' rate cap, credit cards with interest
    rates as low as 25 percent would be impacted, which risks eliminating
    access to credit cards for more than a quarter of subprime borrowers in
    Georgia \5\ and half of subprime borrowers nationwide. \6\
    ---------------------------------------------------------------------------
         \4\ https://bpi.com/what-is-the-break-even-cost-of-small-dollar-
    loans
         \5\ https://www.aba.com/-/media/documents/extranet/cpc/cpc-rate-
    caps-georgia-factsheet.pdf
         \6\ https://www.aba.com/-/media/documents/extranet/cpc/cpc-rate-
    caps-georgia-factsheet.pdf
    ---------------------------------------------------------------------------
        What do Americans frequently use small dollar installment loans to
    pay for? Funerals, weddings, emergency car repairs, and medical bills.
    Who are we to tell our constituents that they can no longer access
    credit to cover those expenses?
        I should also take a moment to dispel the commonly stated myth that
    opposition to a national interest rate cap is rooted in a desire to
    protect payday lenders. Georgia has an outright ban on payday lending,
    \7\ so that has nothing to do with my opposition to this bill. Instead,
    my constituents have been fortunate to access affordable personal loans
    thanks to the growth of bank-fintech partnerships and nationwide online
    lending programs. But if this bill becomes law, my constituents will
    not have access to installment loans or any other type of short term,
    small dollar credit.
    ---------------------------------------------------------------------------
         \7\ https://www.ncsl.org/research/financial-services-and-commerce/
    payday-lending-state-statutes.aspx
    ---------------------------------------------------------------------------
        Finally, it is incredibly ironic that the majority is attempting to
    override State laws with this bill. Just a few weeks ago, they
    described the OCC true lender rule as ``a shameful attack on States'
    ability'' to determine their own policies. \8\ It is disappointing to
    see my colleagues selectively pick and choose when they think State
    laws matter and when they do not. The States, the CFPB, and multiple
    other agencies regulate these loans rigorously, and there is no
    justification for legislating them out of existence.
    ---------------------------------------------------------------------------
         \8\ https://www.vanhollen.senate.gov/news/press-releases/van-
    hollen-brown-garcia-announce-congressional-review-act-legislation-to-
    repeal-trump-era-rent-a-bank-rule
    ---------------------------------------------------------------------------
        Thank you again for the opportunity to testify, and I yield back.
                                     ______

                  PREPARED STATEMENT OF HOLLISTER K. PETRAEUS
    Former Assistant Director for Servicemember Affairs, Consumer Financial
                               Protection Bureau
                                 July 29, 2021
        Chairman Brown, Ranking Member Toomey, and other distinguished
    Members of the Committee, thank you for inviting me to speak to you
    today about the Veterans and Consumers Fair Credit Act. I first got
    interested in small-dollar, short-term lending over 15 years ago, when
    I was running a national military program for the Better Business
    Bureau. The payday lending industry, which was in its infancy in the
    1980s, had exploded by the 1990s, and by the early 2000s it was hard to
    ignore the fact that payday loans shops were popping up everywhere--to
    include large numbers of them in military towns.
        Two college professors, Chris Peterson and Steven Graves, published
    an academic study in 2005 of the geographic distribution of payday loan
    stores across the United States--and found a disproportionate number of
    them to be gathered outside the gates of military bases ``like bears at
    a trout stream.'' \1\ And the impact that was having on the troops'
    finances was becoming a military readiness issue--you can't deploy if
    you're in a financial quagmire, loaded up with multiple payday loans
    that you can't repay. \2\ Some military personnel were literally
    spending their paydays running from loan shop to loan shop, using what
    little money they had to pay fees to roll their loans over for another
    2 weeks before starting the whole process again.
    ---------------------------------------------------------------------------
         \1\ Graves, Steven M., and Peterson, Christopher L., ``Predatory
    Lending and the Military: The Law and Geography of `Payday' Loans in
    Military Towns'', Ohio State Law Journal, Volume 66, p. 653, 2005,
    website: https://papers.ssrn.com/sol3/papers.cfm?abstract-id=694141.
         \2\ Bynum, Russ, ``Military Declares War on Payday Lenders'', L.A.
    Times, Dec 21, 2003, website: https://www.latimes.com/archives/la-xpm-
    2003-dec-21-adna-troopspay21-story.html.
    ---------------------------------------------------------------------------
        The National Defense Authorization Act (NDAA) of Fiscal Year 2006
    required the Department of Defense (DoD) to report on the issue of
    predatory lending to the military. DoD's report concluded that even
    ``with the amount of outreach and education currently being conducted
    by the Military Services and through partner organizations, there are
    hundreds of thousands of Servicemembers using predatory loan products .
    . . predatory lending to Servicemembers is best prevented by clear
    enforceable limitations that can be verified by financial regulators
    and understood by borrowers. Self regulation, fine print, opt-out
    provisions and cosmetic `protections' are not effective.'' \3\
    ---------------------------------------------------------------------------
         \3\ Department of Defense, ``Report on Predatory Lending Practices
    Directed at Members of the Armed Forces and Their Dependents'',
    Washington, DC, August 3, 2006, website: https://archive.defense.gov/
    pubs/pdfs/Report-to-Congress-final.pdf.
    ---------------------------------------------------------------------------
        Congress's answer to DoD's plea was the Military Lending Act of
    2006 (MLA), which capped small-dollar, short-term loans to active-duty
    military and their dependents at a Military Annual Percentage Rate
    (MAPR) of 36 percent. The MAPR was broader than a simple annual
    percentage rate (APR) calculation in order to block off work-arounds
    that lenders had already developed in States that had interest-rate
    caps, such as: adding various processing fees to the loan; requiring
    the purchase of expensive loan insurance; and sometimes requiring the
    purchase of extra products, as well. Some of those products even
    included an internet service contract or mandatory purchases from a
    catalog associated with the business. I remember driving by an old
    abandoned service station out in the country near Fort Bragg, North
    Carolina, in 2001, and wondering why it had a hand-lettered sign out
    front that said: Catalog Store. Answer: it was a payday lender's
    attempt to disguise its business in response to North Carolina's 2001
    payday lending law.
        While it was great to see the MLA enacted in 2006, DoD had a short
    amount of time to implement it, and so chose to focus on what they
    considered the three most harmful products: (1) closed-end payday loans
    with terms of 91 days or fewer and for $2,000 or less; (2) closed-end
    auto title loans with terms of 181 days or fewer; and (3) closed-end
    tax refund anticipation loans. While the 2007 MLA Rule largely worked
    when it came to those three specific products, it didn't take lenders
    long to figure out that the Rule would be fairly easy to evade. For
    example, since auto title loans were defined as loans of 181 days or
    less, lenders simply had to make their loans 182 days and they were not
    covered by the law. Similarly, payday loans were defined as loans of 91
    days or less, so--not surprisingly--lenders made their payday loans for
    a slightly longer term in order to escape coverage.
        A Consumer Financial Protection Bureau (CFPB) report in 2014
    detailed some egregious examples of legal loans that were designed to
    fall outside of MLA protections, to include: an installment loan to a
    servicemember in Texas with a 584.72 percent APR, where the borrower of
    $485 was required to pay $1,428.28 over a period of just less than 6
    months; and an auto title loan in Illinois to the spouse of a
    servicemember for a 12-month term at an APR of 300 percent (the $2,575
    loan, including a $95 lien fee, carried a finance charge of $5,720.24).
    \4\
    ---------------------------------------------------------------------------
         \4\ Consumer Financial Protection Bureau Report: ``The Extension
    of High-Cost Credit to Servicemembers and Their Families'', December
    2014, website: https://files.consumerfinance.gov/f/201412--cfpb--the-
    extension-of-high-cost-credit-to-servicemembers-and-their-families.pdf.
    ---------------------------------------------------------------------------
        There also was no specific guidance as to who would actually
    enforce the MLA--which meant that, effectively, nobody did, allowing
    lenders who chose to flout the law to do so with impunity. So Congress
    through the 2013 NDAA made several amendments to the MLA, to include
    establishing that MLA enforcement authority would go to those Federal
    agencies that were already charged with enforcing the Truth in Lending
    Act. It also directed DoD to review the 2007 Rule with a view toward
    revising and improving it. The DoD MLA Rule of 2015 extended MLA
    coverage to almost all forms of consumer credit, with just a few
    exceptions, and closed off the loopholes that had been exploited by
    lenders. \5\ \6\
    ---------------------------------------------------------------------------
         \5\ Department of Defense, 32 CFR Part 232 ``Limitations on Terms
    of Consumer Credit Extended to Service Members and Dependents; Final
    Rule'', Federal Register Vol. 80 Number 140, July 22, 2015, website:
    https://www.govinfo.gov/content/pkg/FR-2015-07-22/pdf/2015-17480.pdf.
         \6\ Consumer Financial Protection Bureau factsheet, ``What Is the
    Military Lending Act and What Are My Rights?'', April 2018, website:
    https://files.consumerfinance.gov/f/documents/cfpb--military-lending-
    act-know-your-rights-handout.pdf.
    ---------------------------------------------------------------------------
        I still remember the furious opposition from the payday lending
    industry in response to the proposed DoD rule. They submitted multiple
    comments on the Advance Notice of Proposed Rulemaking indicating that
    they were unwilling to lend at anything close to 36 percent APR and
    predicting dire financial outcomes for servicemembers who would no
    longer have access to their valuable services. According to them the
    MLA changes would spell disaster for large numbers of military
    families, who would be cast into financial ruin through the lack of
    short-term credit offerings. But did that happen?
        Per the DoD, as evidenced in a report they just published last
    month in response to a request in the 2021 NDAA, the answer appears to
    be ``no.'' \7\ I'll let the report speak for itself: ``The Department
    believes the MLA is currently working as intended and that
    Servicemembers continue to have ample access to necessary credit.
    Survey results generally reflect decreased use of high-cost credit
    products and improved financial condition among Servicemembers over
    time.'' ``In issuing its 2015 regulations, the Department recognized
    that some lenders may choose to no longer offer some of the now-broader
    scope of credit products to covered borrowers, while others may amend
    their terms and conditions to apply. Nevertheless, the Department
    believed such a step was necessary to protect Servicemembers and their
    families and that they would still have adequate access to credit.
    Several years after the implementation of those regulations, these
    borrowers continue to enjoy access to compliant credit products to meet
    their needs. They also have access to no-cost loans or grants from
    military aid societies that can address a number of financial needs.''
    ---------------------------------------------------------------------------
         \7\ Department of Defense, Office of the Under Secretary of
    Defense for Personnel and Readiness, ``Report on the Military Lending
    Act and the Effects of High Interest Rates on Readiness'', May 2021,
    website: https://finred.usalearning.gov/assets/downloads/FINRED-MLA-
    ReportEffectsHighInterestRatesOnReadiness-May2021.pdf.
    ---------------------------------------------------------------------------
        I also took a look at the annual reports of two military aid
    societies--Army Emergency Relief (AER) and the Navy-Marine Corps Relief
    Society (NMCRS)--for the last 8 years to see if they had experienced a
    big surge in aid applicants or in the amount of financial aid they
    granted, which could be indicators of post-MLA financial distress. AER
    stated in its 2015 report \8\ that it had given an average of $77
    million in assistance annually since 2008. Rather than increasing since
    then, that number was reported as $70 million or less per year in 2016
    through 2020, and the number of aid recipients served annually has not
    risen, declining from a high of 54,000 in 2013 to 40,000 in 2019.
    ---------------------------------------------------------------------------
         \8\ https://www.armyemergencyrelief.org/resource/2015-annual-
    report/
    ---------------------------------------------------------------------------
        The NMCRS annual reports show that their highest annual amount of
    financial aid was given in 2013 and 2014 ($48.5 million each of those
    years), with a steady decline each year since, down to $43.4 million in
    2018. The number of aid applicants/recipients annually has also
    declined steadily, from a high of over 65,000 in 2013 to 51,085 in
    2018. Certainly none of their reported statistics show a large increase
    in requests for aid after MLA implementation. When NMCRS President
    Admiral Steve Abbot (U.S. Navy, Retired) testified before this
    Committee almost 10 years ago, he spotlighted the success of the MLA at
    that time, as evidenced by the fact that NMCRS's annual assistance
    specifically to those stuck in what he called ``the payday loan trap''
    went from a high of $1.4 million in 2006 to just $168K in 2011. \9\ He
    expressed a desire that the provisions of the MLA be extended to
    retirees and veterans, which you are, of course, contemplating today.
    ---------------------------------------------------------------------------
         \9\ Testimony of Admiral Steve Abbot, USN (Ret) President, Navy-
    Marine Corps Relief Society Before the Senate Committee On Banking,
    Housing, and Urban Affairs, November 3, 2011, website: https://
    www.banking.senate.gov/imo/media/doc/AbbotTestimony11311.pdf.
    ---------------------------------------------------------------------------
        And there is no evidence that I can find that military personnel
    have turned to loan sharks or the Mob for loans since the MLA took
    effect--another prediction from the lending industry. Instead they seem
    to have done what many borrowers have done in States that banned payday
    lending: found other sources for the money (family, nonprofits, credit
    unions with low-interest, short-term loans, etc.); worked out a delayed
    payment schedule with their creditors; or decided not to borrow, after
    all.
        Since you are now considering a nationwide interest-rate cap on
    lending for all Americans, I'd like to talk a bit about the States'
    efforts in that area. I've already mentioned North Carolina's decision
    20 years ago to ban payday lending in their State. There was a very
    interesting study by the University of North Carolina in 2007 that
    supported that decision. It concluded that ``the absence of storefront
    payday lending has not made a significant impact on credit availability
    in North Carolina. The vast majority of households surveyed report
    being completely unaffected by the ban. We found that households have
    an array of options they use to manage financial shortfalls, and the
    absence of a single option--in this case, payday lending, has impacted
    only a few. For those impacted, over twice as many report that the
    absence of payday lending has had a positive effect on their household
    rather than a negative one.'' \10\
    ---------------------------------------------------------------------------
         \10\ Ratcliffe, Janneke, and Manturuk, Kim R., ``North Carolina
    Consumers After Payday Lending: Attitudes and Experiences With Credit
    Options'', University of North Carolina Center for Community Capital,
    November 2007, website: https://communitycapital.unc.edu/wp-content/
    uploads/sites/340/2007/11/NC-After-Payday.pdf.
    ---------------------------------------------------------------------------
        Since 2001, 17 other States and the District of Columbia have
    followed North Carolina's lead with strong protections against payday
    lending. Most recently, in November 2020 an extraordinary 83 percent of
    Nebraska voters approved a ballot measure putting a 36 percent APR
    limit on payday loans in their State. \11\ And on March 23, 2021, the
    Governor of Illinois signed The Predatory Loan Prevention Act, \12\
    which was modeled on the Military Lending Act. The Act cited the fact
    that Illinois families were paying over $500,000,000 per year in
    consumer installment, payday, and title loan fees, with an average APR
    of 297 percent.
    ---------------------------------------------------------------------------
         \11\ Leonhardt, Megan, ``Nebraska Becomes the Latest State To Cap
    Payday Loan Interest Rates'', CNBC.com, Nov 4, 2020, website: https://
    www.cnbc.com/2020/11/04/nebraska-becomes-the-latest-state-to-cap-
    payday-loan-interest-rates.html.
         \12\ Predatory Loan Prevention Act, State of Illinois, March 23,
    2021, website: https://www.ilga.gov/legislation/101/SB/PDF/
    10100SB1792ham003.pdf.
    ---------------------------------------------------------------------------
        It's worth noting that the sky-high interest rates that continue to
    be charged in those States which have not opted to limit payday loans
    certainly were not favored by the respondents to a national poll
    conducted by The Pew Trusts in 2017, where 70 percent of those surveyed
    were in favor of more regulation of payday loans. \13\
    ---------------------------------------------------------------------------
         \13\ The Pew Charitable Trusts, ``Americans Want Payday Loan
    Reform, Support Lower-Cost Bank Loans--Results of a Nationally
    Representative Survey of U.S. Adults'', April 19, 2017, website:
    https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/
    04/americans-want-payday-loan-reform-support-lower-cost-bank-loans.
    ---------------------------------------------------------------------------
        Short-term, high-interest lenders often portray themselves as good
    Samaritans offering a helping hand to those who need it during an
    emergency, but in reality their business is all about offering easy
    access to credit to anyone with a pay stub and a checking account,
    regardless of their ability to repay. The last time I went to Fort
    Campbell Army Post before implementation of the 2015 MLA Rule, I
    counted an astounding 22 fast-cash lenders in a 4-mile stretch on the
    road from Gate 1 down to Clarksville, Tennessee. Does anyone think all
    22 of them were there because their owners were good Samaritans who had
    rushed to set up outside Fort Campbell in order to extend a helping
    hand to the soldiers stationed there? Of course not. They were there
    because they saw an opportunity to make money by offering instant, easy
    and expensive loans. And make money they did, under the theory of ``if
    you build it they will come.''
        I also remember some of the direct-mail solicitations that came to
    mailboxes at Fort Belvoir, Virginia, when I was living there in 2005.
    They didn't talk about help for emergencies. Instead it was: ``Need
    money for Christmas?''; ``Need money for Easter?''; and, my personal
    favorite: ``Don't be the only person at the bachelor party without
    cash!!'' Although I'm sure some people borrow from short-term lenders
    because of an emergency car repair or family illness, many of them
    borrow for less compelling reasons and then find themselves trapped in
    a cycle of debt when they cannot repay on time.
        So many of the ``testimonials'' sent to the CFPB from payday loan
    customers when the Bureau was looking at payday lending began with the
    words: ``They gave me cash.'' That statement always disturbed me
    because the lenders weren't giving away cash! They were loaning it to
    those customers at a very high interest rate--and counting on them not
    being able to pay it back 2 weeks later. The business model that has
    made payday lenders rich is having customers pay fees repeatedly to
    rent the same money over and over again. A CFPB study in 2013 that
    looked at payday lending over a 12-month period through data on more
    than 15 million storefront payday loans found that the average payday
    loan borrower was indebted 199 days per year--certainly not the 2-week
    period that's advertised! Nearly half of the payday borrowers in the
    study had more than 10 transactions a year, while 14 percent had 20 or
    more. For the majority of payday borrowers, new loans were most
    frequently taken on the same day a previous loan closed, or shortly
    thereafter. \14\
    ---------------------------------------------------------------------------
         \14\ Consumer Financial Protection Bureau, ``Payday Loans and
    Deposit Advance Products'', April 24, 2013, website: https://
    files.consumerfinance.gov/f/201304-cfpb-payday-dap-whitepaper.pdf.
    ---------------------------------------------------------------------------
        Now with the introduction of the Veterans and Consumers Fair Credit
    Act some of you and your colleagues are asking: Why can't we do for all
    Americans what we're doing for active-duty military and their families?
    Don't veterans, military retirees, surviving spouses, and all other
    Americans deserve to be protected from a predatory lending model that
    charges outrageous interest rates and ensnares them in a debt trap? In
    2019 I worked on a bill--the HAVEN Act--that assisted veterans to
    protect their disability pensions in bankruptcy, and one of the things
    that I learned doing research for that bill is that veterans are more
    likely to declare bankruptcy than the general population \15\--so yes,
    they do need protection from high-interest loans whose costs would eat
    away at their limited finances. And so do many of their fellow
    Americans.
    ---------------------------------------------------------------------------
         \15\ Fisher, Jonathan, ``Who Files for Personal Bankruptcy in the
    United States?'' Stanford University Center for Economic Studies 17-54,
    September, 2017, website: https://www2.census.gov/ces/wp/2017/CES-WP-
    17-54.pdf.
    ---------------------------------------------------------------------------
        I should add that veterans have a higher suicide rate than the
    general population, too, and financial stress is known as a major
    contributing factor in suicide. There is research on the topic of
    suicide specifically as it relates to payday lending. One academic
    study found that gaining access to payday loans increased suicide
    attempts by 10 percent. \16\ Another academic study, using the National
    Center for Health Statistics Multiple Cause of Death Files from 1999-
    2016, found that the converse can also be statistically shown: in
    States that banned payday lending, fatal suicide and drug overdose
    rates significantly decreased relative to those in States that had not
    banned payday lending. The author found that payday lending bans led to
    a reduction of 2.1 percent in suicides and 8.9 percent in fatal drug
    overdoses. \17\
    ---------------------------------------------------------------------------
         \16\ Lee, Jaeyoon, ``Credit Access and Household Well-being:
    Evidence From Payday Lending'', University of Chicago, October 9, 2017,
    website: http://www.apjfs.org/resource/global/cafm/2017-DSC2-3.pdf.
         \17\ Lu, Thanh, ``The Effect of Payday Lending Restrictions on
    Suicide and Fatal Poisonings'', Temple University, March 23, 2020.
    ---------------------------------------------------------------------------
        I know the lenders can afford to hire the best talent to come to
    the Hill and persuade you that their products are helpful, not harmful.
    But I hope you'll listen to the nonprofits that work on consumer
    financial well-being, too. Ask the faith leaders in your State how they
    feel about the issue. Many of them will tell you of the terrible
    struggles of members of their congregation ensnared by short-term debt
    products. And, although it may embarrass them to admit it, some of your
    constituents will tell you directly how they have been impacted, too.
    If we judge by the 83 percent of Nebraska voters who chose last year to
    outlaw payday lending, or the 70 percent of respondents in the national
    Pew study who supported more regulation of the payday lending industry,
    you may well find that a large majority of the voters in your State
    have a decided opinion about high-interest, short-term lending that
    runs directly counter to the message you're hearing from the lending
    industry today.
        If people truly used payday loans in the way they're touted, as a
    way to borrow money briefly for a couple of weeks in an emergency, we
    wouldn't be here having this conversation. But they don't. Many
    borrowers are using payday loans to cover ordinary living expenses or
    even discretionary spending, not unexpected emergencies. And as the
    CFPB study showed, the average borrower pays repeatedly to rent the
    same money, month after month, for over half the year.
        There are so many better ways to borrow money: a credit card, a
    bank or credit union loan, family, a relief society. It's time for
    Congress to extend to all Americans the protections that they gave to
    the military that have worked so well, and set reasonable loan rates of
    36 percent or less that will provide those who need credit a true
    helping hand and loans that they have the chance to pay off
    successfully.
                                     ______

                    PREPARED STATEMENT OF ASHLEY HARRINGTON
     Federal Advocacy Director and Senior Counsel, Center for Responsible
                                    Lending
                                 July 29, 2021
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                     PREPARED STATEMENT OF RICHARD WILLIAMS
               President and CEO, Essential Federal Credit Union
                                 July 29, 2021
        Good morning Chairman Brown, Ranking Member Toomey, and Members of
    the Committee. My name is Richard Williams, and I am the President/CEG
    of Essential Federal Credit Union. Essential is a federally chartered
    credit union with a community field of membership serving the
    metropolitan area of Baton Rouge, Louisiana. We serve 40,000 plus
    members and have assets in excess of $350 million.
        We are a certified community development financial institution
    (CDFI) certified by the United States Treasury Department and a Low
    Income Designated (LIO) credit union by the National Credit Union
    Administration. We are also a proud member of Inclusiv. Inclusiv is a
    national network of 400 credit unions--member owned, regulated
    financial cooperatives--with a mission of helping low and mode rate--
    income people and communities achieve financial independence through
    credit unions providing access to safe and affordable financial
    products and community development services. Expanding access to
    financially vulnerable or formerly excluded individuals--that is, those
    who may have no other alternative than predatory lenders--is at the
    heart of what Inclusiv credit unions do. Collectively, these credit
    unions are reaching more than 14 million American households with safe
    and responsible products and services designed to help borrowers to
    succeed with their credit needs and financial lives.
        Today, I will share with you the harm we see high-cost loans cause
    in our communities, the role we play as a credit union in addressing
    these harms, and why our communities will benefit from the enactment of
    Federal 36 percent interest rate cap as proposed by the Veterans and
    Consumers Fair Credit Act.
        In 2019 we testified in support of House Bill 528 before the
    Louisiana House of Representatives to lower the maximum annual consumer
    loan interest to 36 percent (including fees and other charges). We were
    joined in our effort with support from a broad coalition of faith
    leaders, civil rights organizations, and social service providers. If
    the legislation had passed, Louisiana would have joined several other
    States in protecting its residents from harmful predatory loans.
        We continue to believe that it possible and reasonable to offer
    small dollar loans under 36 percent as proposed by this bill because we
    do this. Our current payday alternative loan provides members easy
    access to funds to meet a variety of emergency needs at a rate
    significantly less than the rates of payday lenders and with the
    ability to offer our loan in compliance with the proposed bill. In
    addition to extending the loan, we also provide the member a financial
    literacy component to assist them in making better financial decisions
    in their daily lives. We have found our program to be profitable and
    beneficial to our membership.
        I would like to offer some testimonials from our members about our
    payday alternative loan product which is branded Ready Cash:
        ``The Ready Cash loan helped me by allowing me to utilize Essential
    instead of a finance company at much higher interest rates.'' --Joseph
    C. Tilley
        ``The Ready Cash loan from Essential has helped me in more ways
    than one. It has provided the emergency funds to help me get back on
    track, as well as build my credit.'' --Adrianne Hayes
        ``Having extended time to repay our Ready Cash loan back as
    compared to the shorter repayment window with the payday lender helped
    me get back on track sooner.'' --Mellanee Nation
        We hear from our members every day about the challenges they face
    in making ends meet. This means putting food on the table and paying
    recurring bills. They are experiencing financial distress that does not
    go away in 2 weeks and is certainly made harder when they are trapped
    in a payday loan that takes large payments every 2 weeks. Or by a car
    title lender which forces the borrower into even tougher situations of
    facing threats of having their car seized. These extractive loan
    mechanisms do not help people make progress in their journey to
    financial security; rather it's quite the opposite. Instead, what
    Essential is able to do with our small dollar loan, is not only to have
    it reasonably priced so that people can both pay it back and meet their
    other needs, but also build a relationship with us to build their
    credit and eventually have wealth building opportunities such as buying
    a car or a home.
        States like Louisiana are grappling with the effects on their
    economies of predatory lenders, and successes in other States with a
    rate cap point a way forward. These lenders, many of whom are
    headquartered outside of our State, pump marketing dollars to convince
    Louisiana residents that they do not have other good alternatives. As I
    mentioned earlier, we joined with numerous voices across the State to
    urge Louisiana to enact a rate cap of 36 percent. Despite the outcry
    from Louisianans, all across the State to rein in the harms of these
    loans, the legislature refused to do so, and as such, high-cost lenders
    continue drain our economies and the pocketbooks of people already
    working to simply get by.
        It is not just us here in Louisiana that share these concerns. They
    permeate throughout the South and other communities. For example, from
    our neighbors in Mississippi, we hear stories of how these high cost
    loans disrupt the lives of the borrowers, but also their families and
    communities. This includes a mother whose car was repossessed by a car
    title lender, which in places like the rural South, results in the
    inability to get to work or to the store. Or an elderly woman on social
    security whose car title loan payments consumed nearly half of her
    $1,300 monthly income. Or another stuck in 11 payday loans at a single
    time, causing tremendous anxiety and stress in addition to the
    financial strain. These stories could fill up pages, and underscore the
    need for a solution.
        In conclusion, we join with other CDFIs and credit unions in
    supporting a national interest rate cap. Additionally, there are many
    community development credit unions ready to meet the small dollar
    borrowing needs of the consumer. I would like to thank the Committee
    for allowing me this time to speak.
                                     ______

                       PREPARED STATEMENT OF BILL HIMPLER
           President and CEO, American Financial Services Association
                                 July 29, 2021

                                     ______

                     PREPARED STATEMENT OF DAVID POMMEREHN
    General Counsel and Senior Vice President, Consumer Bankers Association
                                 July 29, 2021
        Chairman Brown, Ranking Member Toomey, and Members of the
    Committee, I am David Pommerehn, General Counsel at the Consumer
    Bankers Association (CBA) and I appreciate the opportunity to testify
    at today's hearing. CBA is the voice of the retail banking industry
    whose products and services provide access to credit to millions of
    consumers and small businesses. Our members operate in all 50 States,
    serve more than 150 million Americans, and collectively hold two-thirds
    of the country's total depository assets.
        Banks work diligently to provide access to safe and affordable loan
    products to consumers. A fundamental aspect of lending and a
    cornerstone to prudent banking practices is a bank's ability to
    accurately price risk. Expanding rate caps to all consumers and many
    important loan products will ultimately disrupt banks' ability to
    appropriately price risk, increase the cost of credit, and limit its
    availability. Borrowers with troubled credit histories will be most
    affected by any limitation on banks' ability to price risk, reducing
    the amount of available loan offerings that are tailored to meet their
    financial needs.
    Access to Credit
        While well-intentioned, capping interest rate is not an effective
    policy for protecting against debt traps or other negative outcomes for
    consumers. Banks are highly regulated entities that are obligated to
    carefully and appropriately price lending risk before extending credit
    to borrowers. Placing a cap on that price in the form of an all-in
    maximum annualized percentage rate (APR) does not mean consumers will
    get lower rates on their loan; it means in many cases consumers will
    not have access to loans at all. Research has shown interest rate caps
    reduce credit availability and create negative outcomes for the
    populations their proponents intend to benefit, often having the worst
    impact on credit access for low- and moderate-income communities, and
    those seeking small-dollar, emergency funds. Like any financial
    product, loans have fixed costs that a financial institution must
    justify or risk insolvency. A loan for even a small amount requires
    significant upfront investment by the lender in risk management, legal
    review, servicing, and technology. Lenders must have a reasonable
    opportunity to recoup these fixed costs before justifying the extension
    of a loan. Inflexible APR caps that incorporate fees as well as the
    risk-based interest rate available to the borrower make it exceedingly
    difficult for responsible lenders to extend short-term credit.
        A Federal APR restriction may lead to less availability for certain
    popular credit cards and other products with annual rates. As in any
    normal market economy, reduced access is felt by those at the margins
    and is often not evenly distributed among consumers. Interest rate caps
    have little practical economic impact on higher-income individuals and
    those with ample access to sources of credit. However, borrowers with
    higher risk profiles or other financial challenges will not be able to
    find affordable credit options due to an APR cap, but instead will find
    fewer (or no) options among well-regulated lenders. Limited credit
    options in turn lead to more negative outcomes for individuals left
    with no recourse for their financial needs.
    Small-Dollar, Emergency Liquidity
        Today, the need for accessible small-dollar, emergency credit for
    consumers has never been greater. According to the Federal Reserve,
    nearly half of all American adults say they cannot cover an unexpected
    expense of $400. Similarly, Bankrate states ``63 percent of American
    adults say they are unable to pay an unexpected expense with their
    savings [ . . . ]'' A Financial Health Network (formerly the Center for
    Financial Services Innovation) study found more than a third of all
    households say they frequently or occasionally run out of money before
    the end of the month. Further, more than four in ten households
    struggle to keep up with their bills and credit payments.
        Our recovering economy has left consumers with less cushion for
    emergencies and reduced credit options, making access to reasonably
    priced small-dollar liquidity products even more important. While
    various entry-level credit products exist to meet a wide range of these
    needs, including traditional credit cards, personal loans, and other
    forms of credit, some consumers unfortunately cannot qualify for them.
        Accordingly, policymakers have long been encouraging depository
    institutions to enter or remain in the small-dollar lending market.
    Banks worked with regulators to developed products carefully designed
    to ensure strong safeguards at reasonable prices. Consumer demand still
    exists for a short-term loan product, and if allowed, highly regulated
    banks can make safe, affordable, and easy to access small-dollar loans
    to consumer in need.
        A 36 percent rate cap will eliminate these products. For a loan
    product to be sustainable, depository institutions must be able to
    recover costs. Costs include not only the cost of funds for a loan, but
    also fixed costs related to compliance, customer service, IT,
    underwriting, administration, and defaults (including losses). For
    example, for a 3-month $500 loan costs would generally amount to $55, a
    seemingly reasonable amount which if charged to the consumer at cost--
    without any additional risk-based interest charge--would equate to a 44
    percent rate and would be prohibited under this legislation. APR
    calculations for emergency loan products such as short-term, low-dollar
    loans are often high and are essentially misleading because they do not
    represent the value of these forms of credit to those who ultimately
    need them for emergencies.
        Accordingly, under a 36 percent interest rate cap, depository
    institutions could choose to comply by not offering small dollar loans
    or by increasing minimum loan amounts to make the APR calculation meet
    the 36 percent threshold. Because of the construct of a short-term
    loan, the interest rate must go up to recoup the lender's costs in a
    shorter amount of time. Conversely, banks can usually afford to attach
    smaller rates to larger loans because risk and cost is spread out
    though a longer term. The simple math required under and APR cap
    results in shutting out marginal borrowers or borrowers seeking less
    credit amounts for shorter terms.
        Mandating a maximum annualized rate of 36 percent would effectively
    eliminate small-dollar loans as a credit option for millions of
    financially vulnerable Americans pushing them out of the well-
    regulated, well-supervised depository industry and into inferior
    alternatives. This has been evidenced by rules promulgated by
    regulators which would require overly restrictive ability to pay
    requirements for small-dollar loans that exceed a 36 percent APR. In
    2017, the Consumer Financial Protection Bureau (CFPB) finalized a
    strict and prescriptive rule that greatly restrained lenders from
    entering the small-dollar market. The rule created conditions for loans
    exceeding 36 percent by requiring compliance costs so great they negate
    depository lenders' ability to make small-dollar loans at reasonable
    cost to consumers. The hurdles reduced efficiencies, restricted
    flexibility, and reduced consumer options for small-dollar liquidity.
    While some of these burdensome provisions were later rescinded, current
    leadership at the CFPB has indicated they will once again revisit the
    rule to reinstate barriers for loans exceeding 36 percent, leaving
    banks without a clear path and little choice but to not participate in
    this market.
        A reality many Americans and their families will face upon losing
    access to short-term credit will be the inability to meet an emergency
    financial need and incur more financial harm through unpaid bills,
    negative hits to credit histories, lost opportunities, and more.
    Credit Cards
        The consumer credit card market today offers a wide variety of
    products designed to meet the needs of different consumers at a variety
    of price points. Many customers choose cards with annual membership
    fees because such products offer non- credit-related features such as
    reward programs, travel and dining benefits, and insurance. Extending
    an all-in cap to all consumer loans will reduce the availability of
    these popular credit card rewards and benefits. The MAPR contemplated
    under this legislation is not simply a 36 percent cap on interest
    alone. Unlike the standard APR calculation under the Truth in Lending
    Act, the MAPR incorporates various fees that may be charged on the
    account, including the annual membership fee. Because the MAPR is
    calculated on an annualized basis, membership fees that are charged
    once a year are treated as though they were imposed every month. This
    means if a customer has a balance in the month in which the annual fee
    is assessed, even a small fee can cause the MAPR to exceed 36 percent.
        The Department of Defense's implementing regulations do allow for
    the exclusion of annual membership fees (and certain other fees) from
    the MAPR calculation if they are ``bona fide'' and ``reasonable for
    that type of fee.'' However, this standard is inherently subjective and
    difficult to prove: an issuer can show that its fee is ``bona fide''
    and ``reasonable'' only by demonstrating other issuers charge a similar
    fee for a similar product. In practice, this precludes issuers from
    relying on the bona fide fee safe harbor if they offer new or unique
    products or services that their competitors do not. The bona fide fee
    exception therefore inhibits innovation and reduces the diversity of
    product offerings that customers prefer and priced for the value
    delivered. If the MAPR were expanded to all consumer credit cards, the
    result will be reduced rewards and benefits and fewer consumer choices
    as issuers would be forced to adjust their product offering to reduce
    the risk that annual fees would trigger the 36 percent MAPR threshold.
    Credit-Related Ancillary Products
        For all credit transactions (open-end and closed-end) the MAPR must
    include any fee/premium for credit insurance, including single premium
    credit insurance, and for debt cancellation or debt suspension
    agreements. These amounts must be included regardless of whether such
    fees/premiums are voluntary and could be excluded from the finance
    charge under Regulation Z. In addition, for open-end credit, these
    fees/premiums must be included in the MAPR even if the products are
    obtained after the account is opened. Second, the MAPR must include any
    fee for a ``credit-related ancillary product sold in connection with''
    the credit (whether for closed-end or open-end credit), and even if
    sold after the account is opened, for open-end credit.
        To date, there is virtually no guidance on what products are deemed
    ``credit-related ancillary products sold in connection with'' a
    transaction. This overapplication included in an all-in APR such as the
    MAPR is indicative of the compliance difficulties that will ultimately
    deprive consumers of the products and services that they have come to
    expect and enjoy.
    Expansion of MLA
        It is important to acknowledge that the Military Lending Act (MLA)
    applies to only active-duty military personnel and their dependents who
    together amount to less than 1 percent of the total financial services
    marketplace. The small number of consumers covered under the MLA
    present minimal risk to banks' loss reserves when defaults occur. If
    the MLA is expanded to all consumers, the current expected credit loss
    methodology (CECL) which requires lenders to ensure any future loss is
    accounted for with a necessary capital offset, will further sideline
    needed capital and cause additional reductions in consumer lending.
        There is very little data on the impact that MLA is having on
    credit accessibility for military personnel. Even with this protected
    class, who have a consistent annual income, there is evidence of
    constricted credit availability for military service men and women. The
    National Foundation for Credit Counseling (NFCC) reported in their 2020
    Military Financial Readiness Survey that over a third (36 percent) of
    servicemembers say the pandemic has caused them to take out a payday
    loan/cash advance in the past year, something the MLA was intended to
    protect against. We strongly encourage a deeper study into the affects
    the MLA has had on credit availability to service men and women. It is
    imperative that before Congress considers any extension of MLA rate
    caps to all consumers extensive research is conducted to understand the
    real impact on consumers and financial institutions.
    Conclusion
        Banks provide access to safe, well regulated, high-quality consumer
    credit products and have invested significant resources toward
    innovating small-dollar, short-term lending options to encourage more
    consumers to enter into the banking system. An APR cap would prevent
    those most in need the ability to access small-dollar credit options.
    We encourage the Committee to further understand the full effects of a
    Federal 36 percent APR cap before considering any legislation.
        CBA remains eager to work with you on our shared commitment to
    improve financial opportunities for all Americans.
            RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM HOLLISTER K. PETRAEUS

    Q.1. In your testimony, you stated that 36 percent short-term
    small dollar loans can be an effective alternative to the
    current private market loans that are available. If this is
    true and these loans can be offered profitably by private
    industry, why aren't lenders who compete for this business
    offering the 36 percent loans and capturing the market
    currently served by other, higher interest rate small dollar
    loans?

    A.1. A Department of Defense report \1\ issued in June 2021
    provides a response to your question about whether or not
    lenders are willing to offer 36 percent loans, in this case
    once higher-interest loans to servicemembers on active duty and
    their dependents were prohibited by the Military Lending Act
    (MLA): ``In issuing its 2015 regulations, the Department
    recognized that some lenders may choose to no longer offer some
    of the now-broader scope of credit products to covered
    borrowers, while others may amend their terms and conditions to
    apply. . . . Several years after the implementation of those
    regulations, these borrowers continue to enjoy access to
    compliant credit products to meet their needs.'' ``To date, the
    Department has no indication that Servicemembers and their
    families lack adequate access to necessary, responsible credit.
    Regular consultation with Federal regulatory agencies similarly
    indicates continued access to compliant credit products.'' The
    report's conclusion that lenders are choosing to offer private
    market loans to servicemembers at a 36 percent or lower APR
    certainly implies that those lenders feel they can do so
    profitably.
    ---------------------------------------------------------------------------
         \1\ Department of Defense, Office of the Under Secretary of
    Defense for Personnel and Readiness, ``Report on the Military Lending
    Act and the Effects of High Interest Rates on Readiness'', May 2021,
    website: https://finred.usalearning.gov/assets/downloads/FINRED-MLA-
    ReportEffectsHighInterestRatesOnReadiness-May2021.pdf.
    ---------------------------------------------------------------------------
        Obviously, the profit on a loan offered at 36 percent APR
    is significantly smaller than the profit that can be earned by
    unregulated short-term small-dollar loans, many of which are
    offered by lenders that charge 390 percent APRs (and higher).
    As long as States permit high interest rates and there is no
    Federal regulation of APRs other than the MLA, many lenders
    will choose to make as large a profit as possible from their
    customers who are seeking small-dollar, short-term loans, and
    they will likely continue to charge high interest rates unless
    they are constrained by interest-rate caps such as the one
    proposed by Veterans and Consumers Fair Credit Act.
        I would hope that, should this bill pass, lenders who have
    not done so thus far will choose to offer short-term, small-
    dollar loans at 36 percent APR rather than withdraw from small-
    dollar consumer lending. If the loan term needs to be
    lengthened slightly in order for the lender to consider it
    profitable, that would still be better for the consumer than
    the payday loan model, which often turns a short-term loan into
    a long-term transaction, anyway, as borrowers pay repeatedly,
    month after month, to rent the same cash they originally
    borrowed, and end up paying APRs in the thousand-percent range.
    I would propose that lenders take a long-term view: their
    customer who is offered a chance to borrow a small sum at a
    reasonable interest rate and build a better credit score as
    they pay it back, is apt to be a loyal customer in the future.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                         FROM ASHLEY HARRINGTON

    Q.1. In May 2021, the Department of Defense (DOD) issued
    ``Report on the Military Lending Act and the Effects of High
    Interest Rates on Readiness to Congress''. \1\ That DOD's
    Report concluded the following:
    ---------------------------------------------------------------------------
         \1\ U.S. Department of Defense, ``Report on the Military Lending
    Act and the Effects of High Interest Rates on Readiness'' (May 2021),
    available at https://finred.usalearning.gov/assets/downloads/
    FINREDMLA--ReportEffectsHighInterestRatesOnReadiness-May2021.pdf.
    ---------------------------------------------------------------------------
        The Department believes the MLA, under current regulations
    issued in 2015, is working as intended. The MLA and MAPR
    support Servicemembers and families by ensuring they are not
    subject to unfair credit practices that can negatively impact
    financial readiness and, in turn, military readiness. The MAPR
    places a reasonable limit, with a long regulatory history, on
    the cost of credit that prevents covered borrowers from
    becoming trapped in a harmful cycle of debt resulting from
    egregious interest rates.
        In issuing its 2015 regulations, the Department recognized
    that some lenders may choose to no longer offer some of the
    now-broader scope of credit products to covered borrowers,
    while others may amend their terms and conditions to apply.
    Nevertheless, the Department believed such a step was necessary
    to protect Servicemembers and their families and that they
    would still have adequate access to credit. Several years after
    the implementation of those regulations, these borrowers
    continue to enjoy access to compliant credit products to meet
    their needs. They also have access to no-cost loans or grants
    from military aid societies that can address a number of
    financial needs.
        Despite the official position of the Department of Defense,
    some high-cost lender industry groups have argued that there is
    no evidence about the impact of a 36 percent usury cap on
    consumer loans, and also that Congress should wait until there
    is such evidence before moving forward with extending the
    Military Lending Act's 36 percent APR cap to all consumers.
        Is this accurate? If not, can you please describe any
    evidence of the impact of a 36 percent usury cap on consumer
    loans?

    A.1. Holly Petraeus said it best: ``The evidence is the absence
    of harm.'' There are well documented harms of payday loans
    ranging from overdraft and NSF (nonsufficient fund) fees to
    bankruptcy. The impacts of those harms drain wealth of American
    families by trapping them in an ongoing cycle of debt. In fact,
    the Center for Responsible Lending (CRL) has found that payday
    and car title lenders drain nearly $8 billion in fees every
    year. \2\
    ---------------------------------------------------------------------------
         \2\ Diane Standaert, Delvin Davis, Charla Rios, ``Payday and Car
    Title Lenders Drain Nearly $8 Billion in Fees Every Year'', Center for
    Responsible Lending 2019, available at https://
    www.responsiblelending.org/research-publication/payday-and-car-title-
    lendersdrain-8-billion-fees-every-year.
    ---------------------------------------------------------------------------
        A limit of 36 percent on APRs is a fair solution that
    protects consumers. In 18 States and the District of Columbia,
    payday loans are capped at 36 percent or less. Even more States
    cap rates at 36 percent or less on installment loans. In fact,
    every time this initiative has gone to the ballot, like in
    Montana, South Dakota, Nebraska, and other States, it has
    passed with strong bipartisan support illustrating that
    constituents want an interest rate cap. Lenders in these States
    have been able to offer loans to individuals even with these
    rate caps in place.
        Congress passed the Military Lending Act after the
    Department of Defense found that predatory lending was harming
    servicemembers' finances, which was affecting security
    clearances and ultimately reducing the Nation's military
    readiness. \3\ The DoD then significantly strengthened these
    protections in 2015 to include all payday and car title loans,
    whether short- or longer-term, as well as, generally, all
    credit subject to TILA. \4\
    ---------------------------------------------------------------------------
         \3\ U.S. Department of Defense, ``Report on Predatory Lending
    Practices Directed at Members of the Armed Forces and Their
    Dependents'' (2006), available at https://apps.dtic.mil/sti/pdfs/
    ADA521462.pdf.
         \4\ 80 FR 43560 (July 22, 2015).
    ---------------------------------------------------------------------------
        As a result, the location of payday and car title
    storefronts have shifted away from military bases but continue
    to be concentrated in and marketed to communities of color. \5\
    Indeed, the communities most affected by redlining are the same
    who are saturated by payday lenders today. Payday lenders in
    California were found 2.4 times more concentrated in African-
    American and Latino communities, even after controlling for
    income and a variety of other factors. \6\
    ---------------------------------------------------------------------------
         \5\ See, e.g., Delvin Davis, et al., ``Race Matters: The
    Concentration of Payday Lenders in African-American Communities in
    North Carolina'', Center for Responsible Lending (2005), https://
    www.responsiblelending.org/payday-lending/research-analysis/rr006-Race-
    Matters-Payday-in-NC-0305.pdf (finding that, even when controlling for
    a variety of other factors, African-American neighborhoods had three
    times as many payday lending stores per capita as White neighborhoods
    in North Carolina in 2005); Assaf Oron, ``Easy Prey: Evidence for Race
    and Military Related Targeting in the Distribution of Payday Loan
    Branches in Washington State'', Department of Statistics, University of
    Washington (2006) (concluding based on a study of Washington State
    payday lenders that ``payday businesses do intentionally target
    localities with a high percentage of African Americans.'').
         \6\ Li, et al., ``Predatory Profiling: The Role of Race and
    Ethnicity in the Location of Payday Lenders in California'', Center for
    Responsible Lending (2009), http://www.responsiblelending.org/payday-
    lending/research-analysis/predatory-profiling.pdf.
    ---------------------------------------------------------------------------
        Borrowers in States without payday loans employ a variety
    of strategies to address a cash flow shortfall at a fraction of
    the cost of payday loans. Indeed, setting a Federal ceiling to
    interest rates helps responsible lenders to thrive. For
    example, credit unions in Montana saw increases in lending
    after the State implemented its rate cap. \7\ Responsible
    lenders are better able to compete when people aren't trapped
    in heavily marketed promises of fast cash. Predatory lenders
    also create negative feedback loops for access to credit by
    driving responsible lenders out of the marketplace by putting
    themselves first in line for payment on unaffordable loans.
    ---------------------------------------------------------------------------
         \7\ National Consumer Law Center (NCLC), ``After Payday Loans: How
    Do Consumers Fare When States Restrict High-Cost Loans?'' October,
    2018. https://www.nclc.org/images/pdf/high-cost-small-loans/payday-
    loans/ib-how-consumers-fare-restrict-highcost-loans-oct2018.pdf
    ---------------------------------------------------------------------------
        The experiences of borrowers in States with rate caps show
    that eliminating the debt trap does not force consumers to
    riskier products. Studies that look at what borrowers do in the
    absence of these high-interest loans reveals a host of
    strategies used to meet cash flow shortfalls at a fraction of
    the cost of payday loans.
        One study by the NC Office of the Commissioner of Banks
    concluded that the absence of payday lending had no significant
    impact on the availability of credit and identified an array of
    financial options that low- and moderate-income consumers
    turned to during a shortfall. These included both formal
    options, for example the use of a credit card and/or cash
    advance (21 percent), and informal financial assistance such as
    help from friends and family (30 percent). \8\
    ---------------------------------------------------------------------------
         \8\ Center for Community Capital, University of North Carolina at
    Chapel Hill, ``North Carolina Consumers After Payday Lending: Attitudes
    and Experiences With Credit Options'', Prepared for the North Carolina
    Commissioner of Banks. http://ccc.sites.unc.edu/files/2013/08/NC-After-
    Payday.pdf
    ---------------------------------------------------------------------------
        Another State, Arkansas, began enforcing its usury cap of
    17 percent against payday lenders to ensure that they could no
    longer charge the excessive 300 percent APR on payday loans.
    The Southern Bancorp Community Partners surveyed 100 former
    payday borrowers from 42 municipalities across Arkansas in
    2015, seven years after the enforcement of the State's rate
    cap. These former payday borrowers reported that they now build
    savings and incomes, turn to friends and family, or use credit
    cards to meet financial emergencies as opposed to costly payday
    loans. \9\
    ---------------------------------------------------------------------------
         \9\ Covington, Meredith, and Jennifer Johnson, ``Into the Light: A
    Survey of Arkansas Borrowers Seven Years After State Supreme Court Bans
    Usury Payday Lending Rates'', Southern Bancorp Community Partners,
    April 2016. http://southernpartners.org/assets/sbcp--policy-points-vol-
    43-payday-lending-20160628.pdf
    ---------------------------------------------------------------------------
        For these and many other reasons, no State has opened its
    borders to high-cost payday or car title loans in the last 15
    years, and many States have strengthened their protections by
    enacting rate caps. These State payday loan bans save consumers
    more than $2.2 billion annually. \10\
    ---------------------------------------------------------------------------
         \10\ Davis, Delvin, and Susan Lupton, ``States Without Payday and
    Car-Title Lending Save $5 Billion in Fees Annually'', Center for
    Responsible Lending, June 2016. http://www.responsiblelending.org/
    sites/default/files/nodes/files/researchpublication/crl-payday-fee-
    savings-jun2016.pdf. A chart from this report showing fee estimates by
    State is reproduced in the Appendix.
    ---------------------------------------------------------------------------
        When discussing the impact of these loans, we cannot
    understate the long-term harm to consumers themselves. These
    include increased difficulty paying bills, delayed medical
    spending, involuntary bank account closure, higher likelihood
    of filing for bankruptcy, and decreased job performance.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                         FROM ASHLEY HARRINGTON

    Q.1. If 36 percent APR products can fill the space now served
    by higher interest private market loans, why are lenders not
    offering 36 percent APR products to those borrowers now and
    capturing the entire market?

    A.1. Curbing predatory lending levels the playing field for
    lenders that offer affordable, responsible loans. They no
    longer have to compete with the aggressive promises of fast
    cash that only make potential borrowers less likely to be able
    to take on responsible credit.
        For example, when Illinois' 36 percent APR cap on personal
    loans took effect, Andy Posner, the CEO of Capital Good Fund,
    reported that ``within days, we saw an increase in Illinois'
    daily application volume of about 70 percent.'' Posner
    continued, ``In short, more families are coming to us for
    affordable loans, both because they are seeking out
    alternatives and because it has become easier for us to market
    our products. Put another way, the marketplace has been
    leveled, benefitting consumers and equitable lenders alike.''
    \1\
    ---------------------------------------------------------------------------
         \1\ Woodstock Institute, ``Will Illinois Borrowers Find Predatory
    Loan Alternatives? They Already Are, Says Capital Good Fund's Andy
    Posner'', July, 2021. https://woodstockinst.org/news/blog/will-il-
    borrowers-find-predatory-loan-alternatives/
    ---------------------------------------------------------------------------
        Those predatory lenders that target and aggressively market
    minority communities now largely operate online or a mix of
    online and storefront. So, our concerns are amplified as they
    aim to market their products to a larger segment of the
    population, targeting households that are economically
    insecure.

    Q.2. Can lenders offer short-term loans at the 36 percent APR
    rate to all types of consumers profitably? Are you able to
    provide a detailed analysis of the revenue and cost of offering
    these loans?

    A.2. For credit to benefit consumers, it must be affordable.
    Unaffordable credit only leaves already financially distressed
    borrowers worse off. The higher the rate, the more likely the
    lender will disregard ability-to-repay; the business model can
    absorb high rates of repeat reborrowing and default--high rates
    of unaffordable loans--while the lender still profits. A rate
    cap of 36 percent provides a sensible guardrail and has strong
    Federal precedent in the Military Lending Act, which also
    minimizes compliance burden for lenders.
        This bill will not unreasonably constrain access to small
    dollar credit. It is not expected to significantly impact
    credit cards, and even subprime credit cards are typically
    priced at 36 percent or below. Federal credit union loan
    products are exempt from the bill, and banks are a growing
    source of relatively low-cost small dollar loans that that this
    bill would not impact at all. Bank of America's Balance Assist
    loan allows up to $500 with a $5 flat fee repayable over 3
    months; U.S. Bank also offers a 3-month loan at under 36
    percent; Huntington Bank is offering loans of up to $1,000 over
    a 3-month term at no charge. Like the Capital Good Fund's
    products, there are many other loan products from smaller banks
    and credit unions that are consistently priced at well under 36
    percent. \2\
    ---------------------------------------------------------------------------
         \2\ Center for Responsible Lending, ``Shark-Free Waters: States
    Are Better Off Without Payday Lending'', September 2017. https://
    www.responsiblelending.org/sites/default/files/nodes/files/research-
    publication/crl-shark-free-waters-sep2017.pdf
    ---------------------------------------------------------------------------
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
                         FROM ASHLEY HARRINGTON

    Q.1. Let me just finish one and then I'll make sure that the
    Chairman lets you add on to it. I think the other thing that
    we're talking about when we talk about it's popular to set an
    interest rate at 36 percent, that we may not be fully informing
    those who have taken that position. Of course, you want to cap
    an interest rate, but I do think that we have to get into the
    distortion of the interest rate based on how it's calculated
    and get to a discussion of cost.
        I wonder if Mr. Himpler's example, if it was laid out, if
    it would be as popular, if you also understood the consequences
    of not being able to provide a financial instrument to a
    population that will most likely be underbanked or unbanked if
    we overreach on this. Ms. Harrington--Ms. Harrington, go ahead
    and add your response. And welcome. I hope you love my State--I
    hope--I hope you love the State as much as I do.

    A.1. I'm a Tar Heel through and through, don't you worry. I
    think we just have to be really concerned about that report.
    That task force was convened in a way that was not in
    compliance with all other Federal task forces. It was very
    ideologically bent for that--for that reason.
        A lot of the--and a lot of the methods in there and the
    surveys that it used aren't necessarily what, I, researchers
    would call sound. There is a lot of concerns about the way some
    of that was conducted.

    Q.2. Well, if you--if you could for the record--if you could
    for the record get more specific about that, I'd be interested
    in seeing that.

    A.2. When the Consumer Financial Protection Bureau created the
    highly controversial Taskforce on Federal Consumer Financial
    Law, it breached ethical and legal standards expected from a
    regulator agency. The taskforce circumvented the Federal
    Advisory Committee Act entirely and was composed of individuals
    with longstanding ties and sympathies to the consumer finance
    industry.
        The Task Force's ideological blinders caused it to overlook
    the weight of the evidence showing that high-cost loans are
    detrimental to the borrowers who use them as well as a wealth
    of evidence showing that responsible lenders have found ways to
    make affordable loans within a 36 percent APR cap.
        This body's meetings and deliberations were done in secret
    allowing these representatives for industry to disguise
    themselves as full-time or permanent part-time Federal
    employees to draft recommendations on how their industries
    should be regulated by the Bureau. Indeed, the Taskforce's
    biased and secretive work caused two consumer advocacy
    organizations to challenge it in court. \1\
    ---------------------------------------------------------------------------
         \1\ See National Association of Consumer Advocates, et al., v.
    David Uejio; United States District Court for the District of
    Massachusetts No. 1:20-cv-11141 (JCB).
    ---------------------------------------------------------------------------
        The suit was led by Democracy Forward, the National
    Association of Consumer Advocates, U.S. Public Interest
    Research Group, and consumer law expert Professor Kathleen
    Engel. \2\
    ---------------------------------------------------------------------------
         \2\ See National Association of Consumer Advocates, et al., v.
    Kathleen Kraninger; United States District Court for the District of
    Massachusetts.
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