[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
                                
                                
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                          ______

             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.
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    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.
              Additional Material Supplied for the Record
LETTERS SUBMITTED IN SUPPORT OF THE VETERANS AND CONSUMERS FAIR CREDIT 
                                  ACT
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]