    [Senate Hearing 117-743]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-743

           NEW CONSUMER FINANCIAL PRODUCTS AND THE IMPACTS TO WORKERS

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

                                    HEARING

                                   before the

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

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                       ON

        EXAMINING NEW CONSUMER FINANCIAL PRODUCTS, THE STRUCTURE OF NEW
    CONSUMER FINANCIAL PRODUCTS, EXISTING REGULATORY AND LEGAL FRAMEWORKS,
                         AND THEIR IMPACT ON HOUSEHOLDS

                                   __________

                               SEPTEMBER 13, 2022

                                   __________

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

                     [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

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

                                   ______

                     U.S. GOVERNMENT PUBLISHING OFFICE

    53-615 PDF                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

                     Dan Sullivan, Republican Chief Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                            Pat Lally, Hearing Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                          TUESDAY, SEPTEMBER 13, 2022

                                                                       Page

    Opening statement of Chairman Brown..............................     1
            Prepared statement.......................................    23

    Opening statements, comments, or prepared statements of:
        Senator Toomey...............................................     3
            Prepared statement.......................................    24

                                   WITNESSES

    Rachel Gittleman, Financial Services Outreach Manager, Consumer
      Federation of America..........................................     6
        Prepared statement...........................................    26
        Responses to written questions of:
            Senator Warnock..........................................    89
    Penny Lee, CEO, Financial Technology Association.................     7
        Prepared statement...........................................    50
        Responses to written questions of:
            Senator Daines...........................................    91
    Todd J. Zywicki, George Mason University Foundation Professor of
      Law, George Mason University Antonin Scalia School of Law......     9
        Prepared statement...........................................    59
        Responses to written questions of:
            Senator Daines...........................................    93
    David H. Seligman, Executive Director, Towards Justice...........    10
        Prepared statement...........................................    78
        Responses to written questions of:
            Senator Sinema...........................................    93
            Senator Warnock..........................................    95
            Senator Daines...........................................    96

                  Additional Material Supplied for the Record

    Statement submitted by Briana Gordley............................    97
    Statement submitted by BreAnn Scally.............................    99
    Statement submitted by Cassie Pennings...........................   101
    Statement submitted by Ram Palaniappan, CEO, Earnin..............   104

                                     (iii)

           NEW CONSUMER FINANCIAL PRODUCTS AND THE IMPACTS TO WORKERS

                                  ----------

                          TUESDAY, SEPTEMBER 13, 2022

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10:15 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. The Committee on Banking, Housing, and
    Urban Affairs will come to order. We apologize for the delay
    this morning. We do not like to start the hearing late but
    sometimes we have to.
        So we thank the four of you for joining us. Good to see all
    of you. Some of you have been in front of this Committee before
    or have worked around here before, so welcome, especially to
    those of you.
        This hearing is in a hybrid format. Our witnesses are in
    person. Members have the option to appear in person or
    virtually.
        Hard work should pay off for everyone. That is the American
    dream. That is what the dignity of work is all about. It is a
    concept that Pope Leo XIII spoke of in the late 19th, early
    20th centuries, and a concept popularized by Dr. King.
        And when work has dignity, you can support yourself, your
    family, and your future. But we all know what has happened over
    the last four decades. Corporate profits have gone up. The
    stock market has soared. Executive compensation has exploded.
        But wages have not kept up with the cost of living.
    Millions of workers with full-time jobs who aspire to the
    middle class cannot join it, no matter how hard they work. And
    even people we may define as middle class do not feel much
    security and stability.
        And when workers are forced to find ways to make up for the
    gap between what they are paid and what they should earn, what
    are they left with?
        Debt.
        Sometimes people will have to borrow money. Products that
    are well-designed, transparent, and regulated can help workers
    pay off an unexpected car repair, or help with the grocery
    bill, or cover a medical expense.
        But as we heard at our listening session with workers last
    week in this Committee, too often these products are not well
    designed, they are rarely transparent, and they are not well
    regulated.
        For too many workers, the only credit products available
    lead to more debt and more financial instability. We have
    discussed in this Committee the impact predatory payday lenders
    have on working families.
        Today, we examine the impact some newer consumer financial
    products have on workers. Companies tell us these new products
    are innovative, they are easy to use, they will give people
    more options. But so often, ``innovation'' is just a new way
    for companies to make money, while trapping people in debt.
        Newer credit products, like ``Buy Now, Pay Later,'' could
    help consumers pay for products in installments, with strong
    consumer protections.
        Yet many of these products come with hidden fees, they lack
    transparency, and they are not underwritten properly. Ads
    encourage consumers to use these plans for multiple purchases,
    at multiple online stores, racking up debt they cannot afford
    to repay.
        Consumers like Briana Gordley. As a college student, Briana
    started off with one of these loans. First one BNPL company,
    then two, then three. One company told her they were raising
    her credit limit from $100 to $1,000.
        Initially, 18-year-old Briana was not too concerned. As she
    put it, if the companies ``believed in my ability to repay my
    debt, then I did too.'' With the approval of more and more
    credit, Briana was juggling $1,500 in loans with different
    payment dates throughout the month, and her account kept
    getting overdrawn.
        Briana's story gets to the core of the problem. With little
    to no underwriting, the ``Buy Now, Pay Later'' companies do not
    know if they are the only ones a consumer has credit with. And
    without proper term disclosures, a consumer is left in the
    dark.
        For this model to work for consumers, we need real rules
    companies must follow, and we need proper disclosures.
        Then there are new consumer products that use a so-called
    ``tip model,'' structuring themselves to deliberately avoid
    disclosing their terms, specifically avoiding important
    disclosures required by the Truth in Lending Act. Products like
    cash advances, overdraft coverage, and Earned Wage Advances--
    that are not offered in conjunction with employers--use a model
    where consumers are asked to pay a ``tip'' to the lender,
    instead of a fee or interest rate to use the products.
        Companies claim that because a tip is not presented as a
    finance charge or interest rate, Truth in Lending and other
    consumer protection laws, like the Military Lending Act, do not
    apply. The tip is just ``voluntary,'' they say. But these tips
    are not voluntary at all. It is just a way to cheat the system
    and hide the true cost to workers.
        Employer-based Earned Wage Advances with strong consumer
    protections can help workers cover unexpected expenses or
    emergencies, though the better alternative would simply be for
    the companies to pay their workers enough to live on.
        And then there are debt products that are so predatory, so
    offensive, they should have no place in our financial system,
    schemes like Training Repayment Agreement Provisions,
    appropriately known as ``TRAPs.''
        I will say this for that term that was invented--it is
    truth in advertising. These provisions in employment contracts
    allow employers to recoup the cost of training employees who
    leave the job. It is an offensive concept.
        It is the employer's job to train their workers. On-the-job
    training is not some special perk for workers. It is a smart
    investment for companies.
        TRAPs require workers to pay back their employers for
    training if they leave their job within a certain period of
    time, saddling workers with debt. It is just a modern-day
    version of the scrip that left coal miners exhausted,
    destitute, and trapped by their employers.
        Remember what Tennessee Ernie Ford sang about owing his
    soul to the company store: ``You load 16 tons, what do you get?
    Another day older and deeper in debt.''
        Employers use TRAPs to prevent workers from pursuing higher
    paying or better opportunities. They decide how much the
    training would supposedly cost on the market and go after their
    workers, threatening their credit and economic mobility.
        Last week, Cassie Pennings from Colorado told Members of
    the Committee about her experience with TRAPs. Ms. Pennings
    pursued her calling as a nurse during the COVID-19 pandemic. At
    the start of her job, her employer made Ms. Pennings sign an
    employment contract, and buried in the fine print, it said that
    if she left before 2 years, she would be indebted to her
    employer for $7,500 for the supposed training they provided.
        When Ms. Pennings decided to leave her nursing job after a
    year because of a bad work environment, her employer took
    $1,000 out of her second-to-last paycheck to pay back her
    ``training.'' That was half of her paycheck. Her former
    employer told her they will send the rest of the amount to
    collections. Last I checked, indentured servitude was illegal
    in the United States, but it looks like some enterprising
    companies are rebranding it, with these new employment
    contracts.
        And that is the focus of today's hearing, to ensure that
    so-called ``innovation'' is not a substitute for good pay and
    does not come at the cost of workers' dignity of work.
        Senator Toomey.

             OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

        Senator Toomey. Thank you, Mr. Chairman and thank you for
    kindly delaying the start of this hearing. Thank you to the
    witnesses for your patience. I was unavoidably delayed. I
    appreciate the accommodation.
        Today's hearing, of course, is about new consumer financial
    products. In the last decade, we have seen financial
    institutions develop technology-oriented solutions to meet
    consumer needs. These new choices create a more competitive
    marketplace--all to the benefit of consumers.
        As long as consumers have truthful and accurate information
    about financial products, it is the consumers who are best
    positioned to decide what products to use. Any regulation of
    financial products should fit the product type, make room for
    innovation, and maximize consumer choice. Too often, however,
    the response from some of my friends on the other side of the
    aisle is to see something new and panic.
        Let us talk about some of these new products. One of them,
    is called ``Buy Now Pay Later,'' or BNPL. BNPL typically allows
    consumers to make purchases now, often online, and repay them
    in four interest-free installments later.
        This service can be a very attractive way for consumers to
    manage their cash-flows to obtain goods and services without
    having to pay interest. That is especially true for consumers
    who do not have or do not want to use a credit card for such
    purchases. This may explain why BNPL is most popular among
    younger consumers, who have shorter credit histories. If
    customers are late with payments, BNPL companies sensibly
    suspend further purchases until they are paid, and some charge
    a late fee. Interestingly, BNPL companies do not primarily make
    their money from consumers at all, but rather from retailers,
    who pay them a small percentage of transactions to offer the
    service to customers. Retailers are willing to do this because
    they do not have to pay credit card interchange fees on BNPL
    payments, and offering BNPL can increase sales and customer
    loyalty.
        Another newer financial product that provides consumers
    with short-term funding is Earned Wage Access, or EWA. This
    service can be an appealing alternative to payday loans for
    workers who want an advance on their wages. Many people do not
    have savings available to pay for unexpected expenses that can
    arise in between pay periods, like car repairs or medical
    bills. EWA can help consumers to meet such expenses and others
    by advancing them the amount of income they have already earned
    at that point in the pay period.
        There are various EWA products available. In some cases,
    employers select and pay the fee for the service as an employee
    benefit, while in others, consumers must pay the fee.
        According to a recent study, the average fee a user paid
    per advance was $2.59 to $6.27. That is less than 5 percent of
    the amount advanced.
        In short, marketplace competition has successfully
    generated more and cheaper options for many consumers to meet
    their needs. This is a reminder that market competition is
    typically better at helping consumers than the Government,
    whether the product or service is in the financial sector or
    some other category.
        Other newer financial products include forms of credit that
    have existed for a long time, but with innovations in how they
    are provided. In recent years, financial institutions,
    primarily community banks, have begun to partner with financial
    technology companies, or fintechs, to offer improved products
    and reach more consumers.
        Bank-fintech partners offer a large variety of credit
    products, including small-dollar, personal, auto, and small
    business loans, as well as credit cards, mortgages, and home
    equity credit lines. These partnerships can generate
    significant consumer benefits by lowering the price of
    financial products, expanding consumer choice, and increasing
    competition. Often they provide access to credit for higher-
    risk borrowers, such as consumers with lower incomes or no
    credit histories, all through a highly supervised financial
    institution.
        Unfortunately, some bureaucrats and some lawmakers react
    with hostility to almost any new financial products. Democrats
    in Congress have pejoratively branded all bank-fintech
    partnerships, in general, as ``rent-a-bank'' schemes. Last
    year, they overturned an OCC rule that provided regulatory
    certainty for these partnerships. Unfortunately, by attacking
    legitimate bank-fintech partnerships, our Democratic colleagues
    risk restricting access to needed credit for lower-income
    consumers.
        And then there is the CFPB. Under Director Chopra, the CFPB
    has repeatedly demonstrated hostility to innovation in consumer
    finance markets. For example, Director Chopra has replaced the
    CFPB's Office of Innovation with a new ``Office of Competition
    and Innovation'' in order to advance his efforts to involve the
    CFPB in antitrust and competition law, which is outside its
    jurisdiction. He also sidelined the Office of Innovation's
    programs to foster responsible innovation, such as no action
    letters and regulatory ``sandboxes.''
        I am also concerned the CFPB will bring this reactive,
    anti-innovation perspective to its scrutiny of new financial
    products. Already, it has made public statements that suggest
    hostility toward BNPL and other products. All of this hostility
    to new financial products is further evidence of the
    condescension and paternalism that we see sometimes in
    financial regulation.
        Individual consumers are better positioned than any
    bureaucrat or politician to understand their own individual
    needs and preferences, and to make their own choices. Some of
    my colleagues ignore the benefits consumers derive from access
    to more choices in a more dynamic marketplace.
        The best form of consumer protection is a robust,
    competitive market. That is why instead of curtailing new
    financial products, regulation should facilitate innovation and
    consumer choice.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Ranking Member Toomey. I will
    introduce the four witnesses. Left to right, Ms. Rachel
    Gittleman is the Financial Services Outreach Manager for the
    Consumer Federation of America. She leads CFA's advocacy and
    outreach on high-cost lending, payday loans, and other banking
    and credit issues. Welcome, Ms. Gittleman.
        Ms. Penny Lee is CEO of Financial Technology Association.
    She served previously as Chief Strategy Officer of 1776, a
    technology incubator. She previously served as senior advisor
    to Senator Majority Leader Harry Reid. Ms. Lee, welcome.
        Professor Todd Zywicki is somewhat of a regular in this
    Committee. He is George Mason University Foundation Professor
    of Law at the Scalia School of Law. He is a senior fellow at
    Cato, chair of the CFPB Taskforce on Federal Consumer Financial
    Law in 2020. Mr. Zywicki, welcome.
        Mr. David Seligman is the Executive Director of Toward
    Justice. He has litigated several class and collective actions
    to attack systemic injustices in the labor market. He clerked
    for Chief Judge Patti Saris of the District of Massachusetts.
    Mr. Seligman, welcome.
        And Ms. Gittleman, if you would begin your testimony.
        Thank you.

      STATEMENT OF RACHEL GITTLEMAN, FINANCIAL SERVICES OUTREACH
                MANAGER, CONSUMER FEDERATION OF AMERICA

        Ms. Gittleman. Chairman Brown, Ranking Member Toomey, and
    Members, thank you for the opportunity to testify before you
    today. I am Rachel Gittleman, Financial Services Outreach
    Manager at Consumer Federation of America, a nonprofit
    association of national, State, and local consumer groups
    focused on advancing consumer interests through research,
    advocacy, and education.
        New consumer credit products are exploding across market
    areas. Some of the fee models, schemes, and provisions
    discussed today are inherently deceitful and predatory. Others
    may help certain consumers manage their finances but even those
    are not risk-free.
        Regardless, at their core, each of the products discussed
    today are credit. They provide funding, or the promise of
    funding, today, and are repaid later, and should be covered by
    basic consumer protections at the State and Federal level,
    especially given that they are disproportionately used by and
    marketed to lower-income consumers and consumers of color.
        Buy Now, Pay Later products allow consumers to pay a
    portion of a purchased item up front and the rest of the debt
    in three, often interest-free, installments over a set period.
    But they lack underwriting for a consumer's ability to repay,
    leading to unmanageable amounts of debts. Consumers can face
    cascading fees, negative credit reporting, debt collection, and
    difficulty with disputes and refunds.
        Earned Wage Advance products are funds advanced by a third
    party to a consumer before their regular payday. Fee-based
    Earned Wage Advances are ostensibly a lower-cost form of a
    payday loan, requiring workers to pay to get paid, and they can
    lead to the same cycle of reborrowing as other balloon payment
    loans. Even free EWA products may still create a hole in next
    week's paycheck, leading to a cycle of debt.
        Fake Earned Wage Advance overdraft protection and other
    cash advance products that collect tips are simply disguising
    finance charges under a new name. Tips are not truly voluntary,
    as they are structured so that it is difficult to avoid
    tipping. Consumers feel obligated to tip, like in a restaurant
    or service setting, but unlike those setting tips do not go to
    another human being but rather to the company's bottom line.
    The true cost is not true to consumers, and tips add up
    quickly, costly nearly as much as traditional payday loans in
    some instances.
        Hidden deep inside employment contracts, Training Repayment
    Agreement Provisions trap consumers in low-paying jobs by
    requiring repayment of large fees for on-the-job training or
    orientations. This debt is enforced if a consumer leaves,
    either voluntarily or not, before an arbitrarily determined
    date. TRAPs indebt the consumer to the employer with the threat
    of high interest rates, attorney and collection fees, or
    withholding of other benefits.
        Importantly, these products are credit and should be viewed
    and regulated as such. Failing to do so will lead to further
    evasions of credit laws. Therefore, CFA recommends that State
    and Federal regulators supervise fintech provider to ensure
    they are compliant with credit, fair lending, and consumer
    protection laws as well as not engaging in unlawful
    discrimination or unfair, deceptive, or abusive acts or
    practices.
        Regulators should closely examine evasive pricing models,
    providers should only offer products after determining a
    consumer's ability to repay, and loans should be structured in
    an affordable way with proportional penalty fee. The cost of
    credit should be portrayed to consumers as an annual percentage
    rate so that they can compare products. Consumer data should be
    used in a responsible, transparent manner. State and Federal
    regulators should collect, analyze, and publish data to better
    understand and illuminate the risks of these products. And
    State and Federal regulators should work together, across
    agencies and levels of Government, to ensure consumers are
    protected and predatory actors are held accountable.
        Oversight is especially needed as each of these products is
    either disproportionately used by or marketed to low-income
    consumers and consumers of color. Without meaningful holistic
    underwriting, affordable repayment options, and price
    transparency, products may do more to exacerbate financial
    exclusion rather than promote financial inclusion.
        Each of these products should not be allowed to use the
    guise of innovation, the cover of a lengthy employment
    contract, or a borrowed label to shield themselves from Federal
    and State oversight and regulation.
        Thank you for your consideration, and I am happy to take
    any questions.
        Chairman Brown. Thank you, Ms. Gittleman.
        Ms. Lee, welcome.

     STATEMENT OF PENNY LEE, CEO, FINANCIAL TECHNOLOGY ASSOCIATION

        Ms. Lee. Thank you, Chair Brown, Ranking Member Toomey, and
    Members of the Committee, today, for allowing me to testify. I
    am the Chief Executive Officer of the Financial Technology
    Association, a nonprofit trade association representing
    industry leaders shaping the future of finance.
        As we have seen, fintech adoption has surged over the past
    few years. Nine in ten consumers use financial technology to
    manage their finances. Consumers confirm it saves them time and
    money. Seventy-three percent say it helps them make better
    financial decisions, and 71 percent say it helps reduce
    financial stress.
        Today, unfortunately, Americans are more likely to report
    they are worse off financially than they were a year ago. With
    prices rising, millions continue to struggle to make ends meet,
    and cashflow stress makes it difficult for many Americans to
    cover essential costs while waiting on a biweekly or even
    monthly paycheck.
        Fortunately, fintech is creating new tools for consumers to
    improve their financial security. Financial innovation allows
    the single mom the ability to buy medicine for a sick child or
    a parent the ability to purchase new school supplies that
    better fit their household budgets and finances.
        I will focus my remarks today on a few particular areas of
    fintech innovation in the Buy Now, Pay Later, and Earned Wage
    Access spaces.
        Buy Now, Pay Later, BNPL, is an alternative payment option
    enabling consumers to manage their cashflow and avoid paying
    high interest rates and fees. As you alluded to, the typical
    pay-in-four model provides small, low-cost, short-term payment
    options, usually four installments over 6 to 8 weeks, with no
    extra fees if the consumer pays on time. BNPL generates the
    vast majority of its revenue from partnerships with merchants,
    not consumer fees.
        According to Morning Consult poll conducted on behalf of
    the FTA, more than three-quarters of BNPL users have a
    favorable opinion of the service and trust it to do the right
    thing for consumers. Seventy-seven percent of adults using
    multiple BNPL companies said it actually makes it easier to pay
    for purchases.
        The Financial Health Network's recent study found that 99
    percent of BNPL users understood the terms and conditions of
    the service, 96 percent had no difficulty making payments, and
    only 4 percent were late or missed one or more payments.
        Importantly, BNPL also supports America's small businesses
    by enhancing the customer experience, facilitating economic
    activity, and driving consumer satisfaction. BNPL products are
    also subject to consumer protection regulations, including
    anti-money laundering, fair lending, debt collection, privacy,
    fair treatment of consumers, and electric fund transfers. They
    are also subject to similar State consumer protection laws.
        I will switch now to another financial product that we
    mentioned, Earned Wage Access. EWA is a critical area of
    innovation that offers workers flexibility through on-demand
    and early access to their already earned wages, helping them
    make timely payments and avoid overdrafts and manage any short-
    term financial shock. EWA services can provide consumers with a
    more flexible and less-expensive way to avoid missing a bill or
    sliding into debt. Without these services, 44 percent of
    consumers would be unlikely to pay their bills on time, and 38
    percent would consider going into overdraft.
        EWA services are non-recourse and do not charge interest.
    That means consumers have no legal obligation to repay, and
    providers cannot take legal action to collect payments.
        All EWA product models are subject to consumer protections,
    including fair treatment of customers laws, UDAAP laws.
        On behalf of FTA's member companies I appreciate the
    opportunity to engage with the Committee today on these
    important issues. Fintech innovations are driving competition
    and providing consumers greater choice that results in lower
    costs and better financial outcomes. We strongly believe that
    balance and thoughtful regulation is key to long-term success
    for all involved stakeholders. I look forward to helping inform
    this important discussion today. Thank you.
        Chairman Brown. Thank you, Ms. Lee.
        Mr. Zywicki, welcome.

         STATEMENT OF TODD J. ZYWICKI, GEORGE MASON UNIVERSITY
     FOUNDATION PROFESSOR OF LAW, GEORGE MASON UNIVERSITY ANTONIN
                          SCALIA SCHOOL OF LAW

        Mr. Zywicki. Thank you, Chairman Brown and Ranking Member
    Toomey. It is a pleasure to appear with you again today. Thank
    you.
        Fintech, I think, is a very exciting development generally,
    and I think the products that we are focusing on today, EWA and
    BNPL, are good examples of the potential for fintech to improve
    consumer welfare, especially with respect to consumers who
    traditionally have been excluded, who have thin files or no
    files for credit, and also importantly, are very important
    vehicles for promoting innovation but also competition against
    incumbent providers who can often get lazy if they do not have
    somebody nipping at their heels.
        I think the reality in this country is that middle-class
    consumers do pretty well in consumer credit markets today.
    Obviously, there are issues around the margins, but with
    respect to mortgages, credit cards, and the like the markets
    are transparent, competitive, plenty of choice, plenty of
    innovation. Consumers have very little trouble finding the
    products they want.
        But a perennial issue in American history is what to do
    with people who do not necessarily qualify for these top-notch
    and high-quality products that we have, and this has been an
    issue that has occurred again and again in America, and we see
    it with respect to the issues that these fintech providers are
    providing, which is, first, what to do with wage workers who
    live paycheck to paycheck--and life does not occur on 2-week
    cycles and sometimes you need money in between for bills and
    emergencies and the like--as well as people who have
    opportunities to purchase valuable products, and in particular
    consumer durable products can be seen as a capital good by a
    household. The value of a washing machine may be the most
    important investment you ever make in your life, if you think
    about the alternative being the schlep to the laundromat every
    weekend. And BNPL is a good example of that.
        And so what a lot of these products are doing are basically
    providing very useful, low-cost, and convenient solutions to
    problems that have been around for a long time. BNPL can be
    seen as an update of the old personal finance company or retail
    installment loan. And EWA is a very good solution to the
    problem of what was originally wage loans, and now essentially
    are filled by payday loans.
        And what we have recognized over time, and that history has
    taught us is innovation really is the way in which we have
    improved welfare for all American consumers, but particularly
    lower-income consumers. A good example was the development of
    credit scoring and credit reporting, systemized credit
    reporting systems in the '70s, which dramatically increased
    competition, expanded access to people who traditionally were
    not buddies with the bank manager and so could not get a credit
    card. And also especially for broke-down discrimination, and
    promoted equality in markets by basically getting rid of the
    old sort of ways in which lending was done and replacing it
    with FICO scores and other algorithmic lending.
        And so I think there is great potential for these products.
    I think they have proven themselves. I think so far consumers
    have shown that they are using them in a very valuable way. EWA
    users report, at least, that they are less likely to take
    overdrafts, less likely to use payday loans, less likely to pay
    bills late. That is obviously worth monitoring, going forward,
    but they seem to be using it as an opportunity to smooth and
    sync up their income with their expenses.
        BMPL, so far, is more of a frothy market so far, but so far
    it has really been a godsend, it seems, for a variety of
    reasons, which is, first, during the pandemic, BNPL purchases
    rose dramatically as people moved to online shopping, and it
    shows a very important flexibility in the consumer financial
    marketplace.
        There has also been an especially high uptake by younger
    consumers, and younger consumers, nowadays, because of various
    reasons, including various regulations such as the Durbin
    amendment, the CARD Act, younger consumers have less access to
    credit cards and the like, less access to bank accounts and the
    like. And so I think BNPL has really stepped in to not only
    make it less necessary for them to access those products but
    also has allowed them to continue to shop and get the things
    that they need. So it has provided a useful solution to that.
        And I think the final lesson I would say today is over time
    when new products emerge they tend to be somewhat frothy, and
    there tends to be a lot of variety in pricing. Over time,
    competition and innovation tends to lead toward more
    standardization on its own, and my big concern at this point
    would be premature regulations that freeze the market, that
    impose unnecessary costs where regulations may be archaic and
    designed for products that are not around anymore and ill-
    suited to this regulation.
        So I want to close by commending the CFPB very strongly for
    starting off by issuing an RFI, starting with the research,
    understanding what these products are, who these consumers are,
    what the risks are, before plunging in. I think while we should
    have aggressive enforcement, consumer protection laws, I think
    we should be wary of premature regulation.
        Thank you for the opportunity to appear today.
        Chairman Brown. Thank you, Mr. Zywicki.
        Mr. Seligman, welcome. Good to have you.

      STATEMENT OF DAVID H. SELIGMAN, EXECUTIVE DIRECTOR, TOWARDS
                                JUSTICE

        Mr. Seligman. Good morning, Chairman Brown, Ranking Member
    Toomey. I am the Executive Director of Toward Justice.
        Some tout employer-driven debt as an innovation of
    corporate employers in the financial services sector that we
    should celebrate and seemingly insulate from regulatory
    oversight. They suggest that these forms of debts are essential
    to workers who need access to credit to ends meet, training to
    advance their careers, or the costs of starting up a job.
        But workers' difficulty meeting financial demands and
    advancing professionally do not arise because they do not have
    access to credit. They arise because far too many workers still
    do not earn a living wage or have a predictable schedule that
    will allow them to meet their most basic financial obligations.
    And far too many corporate employers, even as corporate profits
    balloon, seek to shift onto their workers their own costs,
    while undermining the most critical component of a worker's
    dignity and bargaining power, the ability to seek out other
    work that will pay them more and treat them better.
        To appreciate the importance of oversight and vigorous
    enforcement of worker and consumer protections we should
    understand employer-driven debt, broadly. Employer-driven debt
    affects workers like nurse Cassie Pennings, whose story you
    heard earlier. Ms. Pennings contracted with a hospital where
    she worked, including a Training Repayment Agreement Provision,
    like the contracts of thousands and thousands of other
    workers--truck drivers, hair stylists, social workers, and
    employees of PetSmart, among others. By trapping workers in
    these jobs these arrangements run counter to the principles of
    fair competition that we have heard so much about today.
        Employer-driven debt also affects the immigrant cleaning
    workers who come through my organization's doors, complaining
    that they were sold a sub- minimum-wage job, dressed up as a
    cleaning company franchise, and that, in told, they could
    finance the startup costs and franchise fees through their
    purported franchisor, who then trapped them in a vicious cycle
    of debt and modern-day indentured servitude.
        Employer-driven debt affects countless retail and service
    workers whose work schedules are unpredictable and variable,
    making it hard for them to make ends meet. But instead of a
    fair schedule or a consistent living wage, their employer
    offers them short-term loans to bridge the gap, loans whose
    true costs are often not disclosed.
        Workers cannot address the harms of employer-driven debt on
    their own. They are deterred by pervasive misclassification,
    forced arbitration clauses, and the threats that their employer
    will punish them through aggressive debt collection, whether or
    not the contractual provision permitting that collection would
    ever be enforced by a court.
        It is imperative, therefore, that Federal agencies provide
    regulatory oversight and vigorous enforcement in this space.
    The Consumer Financial Protection Bureau can guard against
    unfair, abusive, and deceptive practices related to these
    products, look out for predatory employer-driven debt
    arrangements that target immigrants and people of color in
    violation of the Equal Credit Opportunity Act, and ensure that
    protections like the Fair Debt Collection Practices Act apply
    to employers' efforts to aggressively collect debts that trap
    workers.
        Agencies like the FTC and Department of Justice can police
    and regulate the market for employer-driven debt that unfairly
    and illegally impedes worker mobility or even that keeps
    workers trapped in violation of laws, prohibiting trafficking
    and peonage.
        Finally, when employer-driven debt seeks to recoup the
    employer's costs it may be an illegal kickback against workers'
    wages, in violation of minimum wage laws. In the case of
    Training Repayment Agreement Provisions, when, as is often the
    case, the underlying training is not principally for the
    employee's benefit but it is instead standard training for the
    benefit of the employer, the employer-driven debt is likely a
    minimum wage violation. In these cases, the U.S. Department of
    Labor can ensure that employers do not keep workers trapped in
    jobs through threats to collect such debts.
        Workers do not care if we understand their challenges as
    consumer protection challenges or labor challenges or
    competition law challenges. What matters to them is that
    Government is there to police abuses of corporate power and
    level the playing field.
        We appreciate this Committee's attention to this important
    matter.
        Chairman Brown. Thank you, Mr. Seligman.
        Some questioners may be hybrid. I am sure you are aware of
    that.
        Let us start with Ms. Gittleman. With new consumer
    financial protections the Committee is discussing, to products
    the Committee is discussing today, it is important at the
    outset to establish what type of financial products that they
    are. So my question for you, Ms. Gittleman, first question, are
    Buy Now, Pay Later, Earned Wage Access, and other type of
    products that use the tip model you discussed, are they a form
    of credit that falls within the purview of existing consumer
    protections?
        Ms. Gittleman. Yes. Thank you for the question. Each of the
    products discussed today are, in fact, credit, and should be
    treated as such by both consumers and regulators alike.
        Chairman Brown. Mr. Seligman, are TRAPs, which lead the
    consumer in debt for their employment training, is that
    considered credit?
        Mr. Seligman. Yes, absolutely, and they should be covered
    by consumer protections. I will say that some employers may
    argue that the underlying training is not for the benefit of
    the employee, the personal benefit of the employee, and is in
    the benefit of the employer. But in those cases, again, the
    TRAP is a violation of minimum wage laws, and that is why it is
    so important that we have coordination between the Department
    of Labor and the CFPB on these issues.
        Chairman Brown. Thank you. As you both have said, these
    products are credit and relevant consumer protections, like
    TILA and the Military Lending Act and State usury caps should
    apply. I am glad, as you mentioned in your testimony, that
    CFPB, under the leadership of Director Chopra, has launched an
    inquiry on some of these products. It is acting like the
    consumer watchdog that that job was created to be.
        Mr. Seligman, training the TRAPs, Training Repayment
    Agreement Provisions, raise the troubling prospect of an
    economy in which employers prey upon their workers' optimism to
    bind workers to their firms, turning debt into a tool for
    coercion, limiting economic mobility. You have discussed that.
        My question is, by saddling workers with debt, limiting
    their freedom to move, or search for a job, do TRAPs limit
    worker mobility? If you would comment on that.
        Mr. Seligman. Absolutely, and, in fact, I think that is the
    purpose on the employer side. We often see that the debt at
    issue far exceeds the value of the training. In a recent case,
    for example, a trucking company sought to collect $6,500 from
    workers for whom it paid training costs that did not exceed
    $2,500. So it is not an effort to recoup the reasonable cost of
    training but very obviously, on its face, an effort to trap
    workers.
        Chairman Brown. So how does limited worker mobility impact
    individual households? You have said what this means for
    employers. It obviously means limited mobility for employees.
    How does that impact individual households? How does that
    impact the broader economy?
        Mr. Seligman. Thank you. The costs of these types of
    arrangements, which indenture workers, can be devastating. We
    have spoken to workers who are trapped in abusive employment
    relationships, to workers who are not being paid a living wage,
    who are not being paid what they are owed. That can be
    incredibly traumatizing for workers.
        Additionally, there are lots of data from the noncompete
    context which identify how these types of arrangements suppress
    wages. We know that they also interfere with the ability of
    competitors to hire workers that will increase productivity and
    be paid more and treated better.
        Chairman Brown. Expand on that a little bit more, how it
    threatens wages and salaries and then how it undermines future
    job opportunities. Walk that out a little for us.
        Mr. Seligman. Absolutely. One of the most important tools
    that any workers has in the employment relationship, core to
    their bargaining power, is the threat of exit, the threat of
    being able to go and work somewhere else. Employers understand
    this. In an effort to suppress wages, even as their profits
    grow, many employers have sought to artificially undermine
    worker mobility. And as a consequence, that traps workers in
    jobs in which they are not treated as well as they ought to be
    but also in a labor market in which they do not have the power
    to earn the wages they are owed.
        Chairman Brown. And you can see how these provisions, these
    actions, undermine the dignity of work and what that means for
    workers. As I said before, I look forward to seeing the results
    of CFPB's inquiry and how we move forward. CFPB is obviously
    looking at consumer protections but also antiworker practices.
        Last question, Ms. Gittleman. Earlier this week, Briana
    Gordley from Texas testified that the Buy Now, Pay Later credit
    she took out was initially manageable until a variety of BNPL
    companies approved her for more than $1,500 in credit combined.
    She was a college student at the time she took out those loans.
    Does that sort of underwriting meaningfully assess a borrower's
    ability to repay? For example, do these companies assess
    whether a consumer has multiple BNPL loans with different
    providers?
        Ms. Gittleman. No. Most providers do not meaningfully
    assess a consumer's ability to repay. As it stands right now
    there is no way for companies to verify how many loans
    consumers have across different providers, and for many
    providers consumers need only provide a payment form, verify
    their identity, and do a soft credit check, which again does
    not meaningfully assess a consumer's ability to repay.
        Chairman Brown. Thank you. And considering that one-third
    of consumers who use BNPL missed one or more payments, and of
    those consumers 72 percent reported a decline in their credit
    score, it seems that those underwriting standards need
    strengthening.
        Senator Toomey.
        Senator Toomey. Thank you, Mr. Chairman. Mr. Zywicki, you
    know, it seems to me that a lot of the innovations in fintech
    are designed, in many cases, to provide a service to people who
    seem to be mostly left out of existing financial products, or
    at least with respect to credit. And it is disruptive to the
    incumbent players but it creates whole new opportunities for
    these consumers.
        So could you just share for us, what do you think is the
    best way to think about regulating? Take the BNPL, or, for that
    matter, the Earned Wage Access. How should we think about going
    about the regulation so that we do not stifle innovation of
    these products or the next generation that we have not thought
    of yet?
        Mr. Zywicki. Thank you for that question which I think is
    the big question on the table here. And I first want to agree
    and associate myself with your observation which is that I
    think the great promise of fintech is with respect to
    traditionally underserved consumers, which is, again, the
    market works pretty well for middle-class consumers, upper
    middle-class consumers. We have plenty of options, high-quality
    options and the like.
        But it has always been this problem of serving underserved
    consumers, and the real problem as always been the cost. It is
    very costly to make small loans. There are a lot of fixed costs
    involved in making loans. And fintech potentially unlocks that
    by providing low-cost options, slick, kind of transparent,
    competitive options that do not have a lot of overhead and the
    like.
        And so what my big concern is, is taking regulations,
    regulatory structure that is very archaic, that really dates
    back to the 1970s, which is the world of sort of pen-and-paper,
    maybe early prototype computers, and trying to take that
    regulatory scheme, which is already pretty creaky around the
    edges and does not work very well and does not fit a lot of
    products very well, and trying to impose that on the new
    fintech economy I think could really be a problem, which is it
    is not really designed for that.
        Bad regulation can have costs with very few offsetting
    benefits, and I think the real issue we should be focusing on
    is ensuring that we are protecting consumers, so sometimes that
    means we should be doing more aggressive enforcement and less
    reliance on information, promoting competition, promoting
    innovation and the like.
        Senator Toomey. And just to be clear, so are you aware of
    data that suggests that the consumers who actually use BNPL
    facilities tend to be younger, lower income, maybe have a
    history of credit problems? Are they, in fact, the people who
    have a more difficult time obtaining credit?
        Mr. Zywicki. Absolutely. They seem to be the people relying
    on it the most. There are some middle-class people who are kind
    of doing it as a gimmick, I think. But really the value
    proposition here is for lower-income, younger, traditionally
    excluded consumers.
        Senator Toomey. OK. So then it becomes important that these
    consumers understand what it is they are getting themselves
    into. That is certainly important.
        Ms. Lee, are you aware of evidence regarding whether or not
    consumers actually understand the terms of the transaction? I
    am referring specifically to BNPL products.
        Ms. Lee. There have been two different studies recently,
    one from the Financial Health Network which said 99 percent of
    the consumers who use BNPL products understood the terms and
    conditions. And recently, just this last weekend, Morning
    Consult did a survey as well and they found that 94 percent of
    the consumers that used BNPL products understood the terms and
    conditions. I think that is a very high mark of people that
    really understand what these products are about, what their
    obligations are, and have full understanding of the terms.
        Senator Toomey. So I know there are some people who are
    concerned that these BNPL companies take advantage of
    consumers, but let us think about the transaction here. First
    of all, typically it is zero cost, there is no interest rate
    paid, the fee that is paid and the income to the BNPL company
    typically comes from the merchant, who has plenty of incentives
    to pay that fee.
        So I guess the risk to a consumer would be if you do not
    make a payment on time you could get hit with a late fee. So
    what do we know about how prevalent late fees are, how many
    consumers are hit with them, how big a percentage of BNPL
    companies' incomes derives from late fees?
        Ms. Lee. A couple of different things I will try to unpack
    there. As far as on the late fees, what we know from, in
    general, the industry standard, less than 4 percent actually
    incur a late fee.
        Senator Toomey. Less than 4 percent of consumers.
        Ms. Lee. Less than 4 percent of consumers using a BNPL
    product incur a late fee. So 90 percent of those using do not
    incur. They pay on time, and they are able to manage and fit
    their budget accordingly. And so that is why you are seeing the
    increased use of these is because it is allowing them to fit
    their budgets.
        As far as on the derision of how much of the companies
    derive their revenue from that, around 85 to 87 percent of
    companies derive from merchant fees. There are other fees put
    into there, either a late fee or otherwise, but 85 to 87
    percent of a BNPL company comes from merchant fees.
        Senator Toomey. Thank you very much. Thank you, Mr.
    Chairman.
        Chairman Brown. Senator Warren, from Massachusetts, is
    recognized.
        Senator Warren. Thank you, Mr. Chairman. So last month,
    President Biden made the historic decision to cancel up to
    $20,000 in student loan debt, and this is going to deliver
    life-changing relief for as many as 43 million middle-class,
    working-class Americans. It is going to be nurses and truck
    drivers, nail technicians, and millions of people who were not
    able to finish their degrees.
        So while families are breathing a sigh of relief,
    corporations that made billions of dollars off a broken student
    loan system are now busily laying new traps in a shameless,
    last-ditch effort to try to line their pockets.
        Navient, one of the world's largest and worst loan
    servicers, is now leading the way. According to reports,
    immediately after the cancellation was announced Navient sent
    multiple emails to borrowers encouraging them to refinance
    their Federal loans under Navient's private lender, NaviRefi,
    with the promise of lower interest rates.
        Ms. Gittleman, your organization has a long history of
    protecting consumers from student debt scams so I want to ask
    you. Let us say a borrower decides to take Navient up on their
    offer and refinances their Federal loans with a NaviRefi
    tomorrow. What would this mean for cancellation under President
    Biden's plan?
        Ms. Gittleman. Thank you, Senator Warren, for the question.
    If they refinance with NaviRefi then they will essentially be
    replacing their Federal student loans with a private student
    loan. Because only Federal student loans are eligible for
    cancellation, that means they may no longer be eligible for
    that cancellation. That is a huge loss for borrowers eligible
    for cancellation, but Navient only mentioned this in the fine
    print at the bottom of those emails.
        Senator Warren. So they could be forfeiting $10,000 to
    $20,000 worth of debt cancellations. In other words, right
    after the President announced student loan cancellation,
    Navient sent out notices to people who could be eligible,
    encouraging them to refinance so they would not be eligible for
    debt cancellation.
        We do not know at this point exactly which borrowers
    Navient sent these emails to, although I have sent a letter
    asking for more information from Navient. But it appears that
    instead of sending borrowers information to help them get the
    cancellation that they may be entitled to, Navient pushed
    borrowers toward loans that could, at best, complicate their
    ability to get cancellation.
        Ms. Gittleman, does Navient make more or less money if its
    borrowers get their loans canceled?
        Ms. Gittleman. The future of Navient's lending business
    depends on its ability to take the most creditworthy people,
    with Federal student loans and refinance them into private
    loans. Every borrower who is debt-free as a result of President
    Biden's action is one fewer prospective customer for Navient.
        More broadly, the better the deal the Federal Government
    offers borrowers with Federal student loans, the less
    opportunity Navient has to sell people its private loans.
        Senator Warren. So I just want to underscore what you just
    said. Every borrower who is debt-free is one less borrower for
    Navient to profit from. I think that was a fair summary. Is
    that right? So no wonder Navient is trying to steer borrowers
    away from cancellation.
        Look, this is outrageous behavior, and it is why I sent
    letters to Navient and to other loan servicers yesterday,
    asking them what steps they are taking to ensure that consumers
    receive timely and accurate information about their loans and
    their eligibility for cancellation.
        By the way, this is not the first time that Navient has
    been caught trying to take advantage of borrowers. Between 2009
    and 2019, there were at least 10 incidents where Navient, or
    its corporate predecessor, Sallie Mae, was accused of or fined
    by Federal and State regulators for actions that ripped off
    borrowers, including steering borrowers to repayment options
    that actually made it harder for them to pay back their loans,
    failing to report borrowers complaints, and harming disabled
    veterans' credit reports.
        Policymakers need to keep a close eye on servicers to
    ensure that borrowers are protected as they await debt
    cancellation, and I am going to continue fighting to make sure
    that happens.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Warren.
        Senator Warner, from Virginia, is recognized.
        Senator Warner. Thank you, Mr. Chairman, and I appreciate
    you holding this hearing. I think back. You know, I have been
    on the Committee for a long time now, and when we used to look
    at the nonbank sector we thought about it in the commercial
    sense, you know, asset-backed securities, CDOs, repos, and
    there were some benefits there. But then what we saw in the
    financial crisis they were also the source of a lot of economic
    meltdowns.
        We have seen since the financial crisis, and that is one of
    the reasons why I appreciate you holding this hearing, is that
    we have seen now a migration in the nonregulated part of the
    financial industry a massive amount of new consumer products
    come up in this area. As a matter of fact, banks' share of
    mortgage originations fell from 91 percent to 32 percent. The
    share of small business loans and unsecured loans dropped by 10
    percent from the regulated industries. And we have seen this in
    a whole host of new areas.
        We have spent some time, and I think I have still got to
    get more education on issues like crypto, but we have seen
    specialized fintechs, peer-to-peer networks, frankly some of
    the big tech firms getting into the payment space, and some of
    these things bring real benefits. But I think we focus
    sometimes on almost exclusively the benefits and not on some of
    the challenges.
        The truth is I think there are reasons that we have
    regulated financial institutions, and with that regulation
    while there are burdens there also comes, I think, some
    benefits.
        I want to start again with you, Ms. Gittleman. Your
    testimony states that new products are ``exploding across
    consumer markets.'' How should we keep an eye on these new
    products, recognizing a lot of consumers like them, do not care
    whether it comes from regulated entities or nonregulated
    entities. But my concern is how do we make sure that we are
    guarding the protections for the consumers in this nonregulated
    banking sector?
        Ms. Gittleman. Thank you for the question, Senator Warner.
    You know, we have Federal and State regulators, and regulation
    and oversight of markets benefits everyone. There is more
    competition. Regulated entities have a clear expectation of
    what is allowed and what is permitted. And consumers benefit
    from being protected and knowing that they are protected.
        We have appreciated the CFPB's inquiry into BNPL providers,
    and we look forward to seeing what research they found. But we
    would also encourage them to supervise the fintech lenders that
    we are talking about today, under various different authorities
    and that are in my written testimony. But we would encourage
    them to supervise each of these industries so that consumers
    are protected and that the regulated entities have a very clear
    sense of what is permitted.
        Senator Warner. I know I was a big advocate a number of
    years back of more experimentation in the fintech sector, and I
    know there was probably some disagreement even on my side of
    the aisle about when OCC was talking about kind of voluntary
    charters, and some critique that that would be almost
    regulation lite. I personally think we maybe ought to revisit
    that because at least it sweeps some of these entities into
    some regulatory structure.
        I fear that the kind of, whether it be CFPB or this
    hodgepodge of State regulations, does not give the clarity that
    we need. And I would like, basically, the rest of the panel to
    address, from your organization's standpoint, with the
    proliferation of these new products--and again, consumers
    probably not caring at the end of the day whether it is a
    fintech, a bank, a credit union. They just want to get the
    product. But how do we make sure that we put some framework
    around this.
        Very nice to see you, Ms. Lee, in your new role, and I
    would love to hear from the rest of the panel on that subject.
        Ms. Lee. Good to see you, Senator. And on that subject I
    would say that there is, you know, with the products that we
    are talking about today, in particular but larger, there are
    three different ways. One is to enter into State agreements
    with money transfer licenses, and that would put them in, once
    they are licensed and they are also under examination for the
    abilities of which they do, which is on the money transfer.
        They can enter into bank fintech partnership. When the
    enter into bank fintech partnerships they are subject to the
    oversight of the State and Federal banking system, overdraft
    and other things, and to ensure the fairness, safety, and
    soundness.
        And then third, to your point, they can go pursue their own
    charter, their own banking charter, whether that be through the
    OCC, through an ILC, or through other means. I would say many
    of our member companies seek that. Unfortunately, there has not
    necessarily been a moratorium but there has been a very slow
    acceptance of having special purpose or other types of national
    bank charters. Many fintech companies are asking to be in the
    more regulated space to be able to fit the purpose of what they
    are trying to accomplish. We would welcome the opportunity for
    the various different regulatory bodies to be able to approve
    those so that you can have a fullness and understanding of what
    these partnerships look like.
        Senator Warner. If the other panel members could quickly
    address that.
        Mr. Zywicki. Thank you. I will be brief. Thank you for that
    question. I agree. It is a big problem, the hodgepodge of State
    regulations when it comes to fintech. Fintech only really works
    on a national basis, to make the economics work.
        As the chairman of the CFPB Task Force, I think somewhat
    controversially, we recommended that the CFPB be given
    chartering authority for nonbank financial services
    institutions. I believe the OCC fintech charter could work. I
    also fear that if the OCC is in charge that the big banks will
    co-op the process to impose unnecessary burdens on them.
        And so I would suggest considering something like the CFPB
    be given the authority to charter nondepository consumer
    financial providers.
        Senator Warner. Mr. Seligman.
        Mr. Seligman. Thank you, Senator. You asked what frameworks
    apply, and I would suggest that in most cases we have the
    frameworks. These products are credit, as Ms. Gittleman
    testified to, and we should not allow the fact that they are
    dressed up in fintech terms or sometimes bound up with the
    employment relationship to alter our perspective on that
    critical point.
        Senator Warner. I know my time has expired, Mr. Chairman, I
    have also been looking at the question. There are a lot of
    ancillary products that are kind of sold into the regulatory
    industry, and there is actually an affiliation of regulators
    that look at how those products are sold in. That might be an
    area I need to learn a lot more about, but it might be another
    framework.
        Because we are talking about consumer protections here, we
    can make the same kind of question about cyber protections in
    this area, and the idea of this whole sector going without any
    framework of oversight, I frankly do not think the hodgepodge
    State regulatory system is going to meet the mark. But I
    appreciate you holding the hearing.
        Chairman Brown. Thank you, and thanks always for your
    insight, Senator Warner.
        Senator Reed, from Rhode Island, is recognized.
        Senator Reed. Thank you very much, Mr. Chairman, and thank
    you to the panel.
        Ms. Gittleman, I have introduced S. 2508, the Veterans and
    Consumers Fair Credit Act, with Chairman Brown and several
    members of the Committee, and this legislation would establish
    a nationwide interest rate cap of 36 percent, with the goal of
    eliminating predatory loans from our consumer credit markets.
    We already have something similar to this with the Military
    Lending Act, where we are protecting our service men and women
    with this same limit.
        Can you give us some examples of the new, emerging products
    that appear to be consumer-friendly but in practice are
    predatory and really exceed 36 percent?
        Ms. Gittleman. Thank you, Senator Reed, for this question
    and for your advocacy on the Veterans and Consumers Fair Credit
    Act, and Chairman Brown as well.
        Finance products that use the tip model are an example of
    this. Pricing can look very affordable on the outset but can
    reach as high as traditional payday loans.
        Other loans that we have not necessarily talked about today
    but I addressed in my written testimony that are offered online
    or through a smartphone application and especially those that
    use the rent-a-bank scheme to peddle high-interest loans, even
    in States where those rates are illegal.
        Senator Reed. You mentioned the rent-a-bank arrangements,
    can you describe how they avoid the State usury limits?
        Ms. Gittleman. Sure. Banks are largely exempt from State
    interest rate caps, and high-cost lenders have used this
    exemption to launder their loans through banks in order to
    evade State interest rate laws. This is not a true bank
    partnership like Ranking Member Toomey was speaking about. The
    high-cost lender has the predominant economic interest in the
    loan. They are doing the majority of the underwriting, reaping
    the majority of the benefit, taking on the majority of the
    risk. And they either name the bank at the very end of the
    agreement or they pass the loan through the bank in order to
    evade that State interest rate cap.
        Last year, Congress, in the bipartisan rebuke, rebuked
    these partnerships, these rent-a-bank schemes, but the Veterans
    and Consumers Fair Credit Act would protect consumers from
    these high-interest loans that are evading State interest rate
    caps.
        Senator Reed. There is another product that is becoming
    more prominent. That is the Buy Now, Pay Later. These loans
    allow consumers to split payments for products like electronics
    and clothing into four equal installments, typically, that are
    due every 2 weeks. They have been very, very popular in the
    pandemic. In fact, according to the Mercator Advisory Group,
    $55 billion in Buy Now, Pay Later credit was extended in the
    last year in the United States, and they are projected an
    expansion more $100 billion by 2024.
        Which consumer protections laws apply to Buy Now, Pay Later
    loans and which do not?
        Ms. Gittleman. We would argue that most consumer protection
    laws should apply to Buy Now, Pay Later. As it is being
    structured more and more like open-end credit, TELA should
    apply with finance charges and mandatory arbitration
    agreements. Military Lending Act should apply. As it is
    commonly used by consumers of color, ECOA, the Equal Credit
    Opportunity Act should apply.
        Since many products require or include authorization for
    payments to be automatically deducted, the Electronic Funds
    Transfer Act should apply. For products that allow consumers to
    consent to debt collection in the initial terms and agreement,
    the Fair Debt Collection Practices Act should apply. And
    finally, Federal regulators should supervise Buy Now, Pay Later
    providers and ensure that they are not engaging in unfair,
    deceptive, or abusive acts and practices or unlawful
    discrimination.
        Senator Reed. It is also my understanding that the BNPL
    lenders do not report to the credit bureaus in any standardized
    fashion, which complicates evaluating the credit of an
    individual for other types of loans. Is that accurate?
        Ms. Gittleman. So we are in the beginning processes of
    having that Buy Now, Pay Later data incorporated into credit
    reports. It is not done in a standardized manner. Each of the
    credit reporting bureaus have their own format of incorporating
    and using that data. And it might both not only have
    underwriting consequences but also credit reporting and credit
    scoring consequences as well. FICO scores of credit reports
    that have incorporated said data have lowered slightly, and it
    just illustrates that, at best, the current credit reporting
    system is an awkward fit for Buy Now, Pay Later.
        It is not traditionally what fits into the credit reporting
    system. So this needs to be done thoughtfully to ensure that
    consumers are protected.
        Senator Reed. Well, thank you very much. Thank you, Mr.
    Chairman.
        Chairman Brown. Thank you, Senator Reed.
        Senator Van Hollen is recognized, from Maryland. He is
    recognized from his office, I believe.
        Senator Cortez Masto, of Nevada, is recognized from her
    office.
        Senator Cortez Masto. Thank you, Mr. Chairman. Thank you to
    the panel members for helping to facilitate this conversation.
    And by the way, if some of my colleagues do not remember, I do,
    in 2007, when there were new financial products that were
    offered by Wall Street called mortgage-backed securities. And
    then they were followed by other financial products--teaser
    rates, adjustable-rate mortgages, interest-only loans to
    borrowers--that led to the subprime mortgage meltdown that
    caused a recession starting in 2007. So I do think it is
    appropriate for us to be having this conversation today, and so
    appreciate the panelists here for their comments so far.
        Mr. Seligman, let me start with you. I have done some work
    around franchises, and I have been long concerned about unfair
    practice related to some franchise businesses. I do not know if
    you have seen but I issued a report in 2021 called ``Strategies
    to Improve the Franchise Model, Preventing Unfair and Deceptive
    Practices.''
        Now let me just say, there are some models that are just
    very good business models, but as always there are some
    predatory-modeled predators within the system, and those are
    the ones I am highlighting.
        So Mr. Seligman, let me ask you this. How can the promise
    of an independent franchise sometimes become a way to trap
    workers in jobs with low wages and crushing debt?
        Mr. Seligman. Thank you, Senator, and first let me say I
    appreciate your work in this space, standing up for small
    businesses and for workers. Very often we see the predatory
    franchise opportunities target those who have been left behind
    by our labor market, who are excluded from some of our most
    hard-fought labor protections, disproportionately immigrants
    and people of color. Predatory companies can go to them and
    they can say, ``Look, the traditional employment opportunities
    have not provided you with a path to financial success, and so
    instead let me sell you on a purported entrepreneurial
    opportunity, the opportunity to own a small business, to become
    a franchisee.'' Instead, these companies will trap workers in
    arrangements where the companies exert extraordinary control,
    where the workers do not have the ability to set their own
    prices or even sometimes communicate directly with their
    clients. And instead of being paid wages, the predatory
    companies will often say, ``You owe us a franchise fee. And
    because those franchise fees can be so high, we are going to
    finance those fees for you. We are going to loan you the money
    to pay for the upfront costs.'' This can create a really
    vicious cycle of predatory debt and effectively involuntary
    servitude.
        Senator Cortez Masto. Well, thank you, and I appreciate
    your comments because it is an area where I would hope my
    colleagues would join me. I have some legislation to help us
    level that playing field and just get more information out to
    potential franchisees, so thank you. Let me jump to Training
    Repayment Agreement Provisions and how it is impacting nursing.
    The U.S. Bureau of Labor Statistics reported that we need more
    than 179,000 nurses to meet our national shortage, and many
    reasons contribute to the shortage. However, I was shocked to
    see the prevalence of the Training Repayment Agreement
    Provisions among nurses with repayments as high as $20,000. So
    Ms. Gittleman, can you expand on the use of TRAPs in the health
    care profession?
        Ms. Gittleman. Sure. Thank you for the question, Senator.
    You know, these TRAPs are becoming more and more prevalent
    across different industries. They are infiltrating trucking,
    nursing, PetSmart employees, social workers, and into our
    medical field as well. And this is a form of employee-driven
    debt that not only traps consumers in that debt but also
    hinders workplace mobility and exacerbates disparities.
        Senator Cortez Masto. Thank you. And Mr. Seligman, any
    other additional comments or things that we should be doing in
    Congress to address this, if anything?
        Mr. Seligman. Thank you. Yes, I just want to emphasize that
    in many of these arrangements, especially when it comes to
    immigrant nurses, will see employers justify extraordinary
    debts and training repayment agreements by saying that the
    worker entered into them voluntarily in order to have their
    visa sponsored. Of course, it is a fundamental tenet of our
    laws in this country that you cannot sell yourself into
    indentured servitude. I think it is really important that we
    attack these practices as being unfair and illegal. And I will
    also say, of course, in this area as in so many others, forced
    arbitration is at the root of the problem. So many workers are
    trapped and their rights are violated. Even if, as I said, no
    court would ever enforce the provision that is trapping them in
    their jobs or purporting to authorize debt collection, they
    cannot do anything about that because a forced arbitration
    provision prevents them from going to court, may require them
    to arbitrate in a far-off forum, or pay the other side
    extraordinary costs.
        Senator Cortez Masto. Thank you. I know my time is up, Mr.
    Chairman, but thank you. And I could not agree more about these
    arbitration agreements that are part of these confusing
    contracts. The consumer has no choice, does not get to
    negotiate these contracts, and that is why the arbitration
    clauses are so detrimental.
        Thank you, Mr. Chairman. I appreciate it.
        Chairman Brown. Thank you, Senator Cortez Masto, and thank
    you for your reference to what happened a dozen or so years
    ago.
        Thanks to the witnesses. I would like to submit for the
    record the testimony of BreAnn Scalley of California, whose
    former employer made her sign a TRAP, putting her in debt for
    $5,500 to the employer after she resigned due to poor working
    conditions.
        I would also like to submit for the record the testimonies
    last week--I had said earlier this--last week of Briana Gordley
    and Cassie Pennings, their stories describing their struggles
    with employer-driven debt and new credit products is important
    context to what it means to be a worker living with debt.
        For Senators who wish to submit questions for the record,
    those questions are due Tuesday, September 20th. Each of you on
    the panel, if you would, have 45 days, please, to respond.
        The hearing is adjourned. Thank you for joining us.
        [Whereupon, at 11:24 a.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
        Hard work should pay off for everyone.
        That's the American dream.
        That's what the dignity of work is all about--it's a concept that
    Pope Leo XIII spoke of in the 19th century, and popularized by Dr.
    King.
        And when work has dignity, you can support yourself, your family,
    and your future.
        But we all know what's happened over the last four decades.
        Corporate profits have gone up. The stock market has soared.
    Executive compensation has exploded.
        But wages have not kept up with the cost of living. Millions of
    workers with full-time jobs who aspire to the middle class can't join
    it, no matter how hard they work. And even people we may define as
    middle class don't feel much security and stability.
        And when workers are forced to find ways to make up for the gap
    between what they're paid and what they should earn, what are they left
    with?
        Debt.
        Sometimes people will have to borrow money. Products that are well-
    designed, transparent, and regulated can help workers pay off an
    unexpected car repair, or help with the grocery bill, or cover a
    medical expense.
        But as we heard at our listening session with workers last week,
    too often these products aren't well designed, they're rarely
    transparent, and they're not well-regulated.
        For too many workers, the only credit products available lead to
    more debt and more financial instability.
        We've discussed in this Committee the impact predatory payday
    lenders have on working families.
        Today, we examine the impact some newer consumer financial products
    have on workers.
        Companies tell us these new products are innovative, they're easy
    to use, they'll give people more options.
        But so often, ``innovation'' is just a new way for companies to
    make money--while trapping people in debt.
        Newer credit products, like ``buy now, pay later,'' could help
    consumers pay for products in installments, with strong consumer
    protections.
        Yet many of these products come with hidden fees, they lack
    transparency, and they aren't underwritten properly. Ads encourage
    consumers to use these plans for multiple purchases, at multiple online
    stores--racking up debt they cannot afford to repay.
        Consumers like Briana Gordley.
        As a college student, Briana started off with one of these loans.
    First one BNPL company, then two, then three. One company told her they
    were raising her credit limit from $100 to $1,000.
        Initially, 18-year-old Briana wasn't too concerned. As she put it,
    if the companies ``believed in my ability to repay my debt, then I did
    too.''
        With the approval of more and more credit, Briana was juggling
    $1,500 in loans with different payment dates throughout the month, and
    her account kept getting overdrawn.
        Briana's story gets to the core of the problem. With little to no
    underwriting, the ``Buy Now, Pay Later'' companies don't know if
    they're the only ones a consumer has credit with. And without proper
    term disclosures, a consumer is left in the dark.
        For this model to work for consumers, we need real rules companies
    must follow, and proper disclosures.
        Then there are new consumer products that use a so-called ``tip
    model''--structuring themselves to deliberately avoid disclosing their
    terms, specifically avoiding important disclosures required by the
    Truth in Lending Act.
        Products like cash advances, overdraft coverage, and Earned Wage
    Advances--that are not offered in conjunction with employers--use a
    model where consumers are asked to pay a ``tip'' to the lender, instead
    of a fee or interest rate to use the products.
        Companies claim that because a tip is not presented as a finance
    charge or interest rate, Truth in Lending and other consumer protection
    laws, like the Military Lending Act, do not apply.
        The tip is just ``voluntary,'' they say.
        But these tips are not voluntary at all.
        It's just a way to cheat the system and hide the true cost to
    workers.
        Employer-based Earned Wage Advances with strong consumer
    protections can help workers cover unexpected expenses or emergencies--
    though the better alternative would simply be for the companies to pay
    their workers enough to live on.
        And then there are debt products that are so predatory, so
    offensive, they should have no place in our financial system--schemes
    like Training Repayment Agreement Provisions, appropriately known as
    ``TRAPs.''
        I'll say this for that term--it's truth in advertising.
        These provisions in employment contracts allow employers to recoup
    the cost of training employees who leave the job.
        It's an offensive concept.
        It's the employer's job to train their workers. On-the-job training
    isn't some special perk for workers--it's a smart investment for
    companies.
        TRAPs require workers to pay back their employers for training if
    they leave their job within a certain period of time, saddling workers
    with debt.
        It's just a modern day version of the scrip that left coal miners
    exhausted, destitute, and trapped by their employers.
        Remember what Tennessee Ernie Ford sang about owing his soul to the
    company store: ``You load 16 tons, what do you get? Another day older
    and deeper in debt.''
        Employers use TRAPs to prevent workers from pursuing higher paying
    or better opportunities. They decide how much the training would
    supposedly cost on the market and go after their workers--threatening
    their credit and economic mobility.
        Last week, Cassie Pennings from Colorado told Members of the
    Committee about her experience with TRAPs.
        Ms. Pennings pursued her calling as a nurse during the COVID-19
    pandemic.
        At the start of her job, her employer made Ms. Pennings sign an
    employment contract, and buried in the fine print, it said that if she
    left before 2 years, she would be indebted to her employer for $7,500
    for the supposed training they provided.
        When Ms. Pennings decided to leave her nursing job after a year
    because of a bad work environment, her employer took $1,000 out of her
    second to last paycheck to payback her ``training.'' That was half of
    her paycheck.
        Her former employer told her they will send the rest of the amount
    to collections.
        Last I checked, indentured servitude was illegal in the United
    States.
        But it looks like some enterprising companies are rebranding it,
    with these new employment contracts.
        And that is the focus of today's hearing: to ensure that so-called
    ``innovation'' is not a substitute for good pay and does not come at
    the cost of workers' dignity of work.
                                     ______

                PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
        Thank you, Mr. Chairman.
        Today's hearing is about new consumer financial products. In the
    last decade, we've seen financial institutions develop technology-
    oriented solutions to meet consumer needs. These new choices create a
    more competitive marketplace--all to the benefit of consumers.
        As long as consumers have truthful and accurate information about
    financial products, they're best positioned to decide what products to
    use. Any regulation of financial products should fit the product type,
    make room for innovation, and maximize consumer choice. Too often,
    however, the response from my friends on the other side of the aisle is
    to see something new and panic.
        Some newer financial products offer consumers more options for
    short-term funding. One of them is called Buy Now, Pay Later, or BNPL.
    BNPL typically allows consumers to make purchases now, often online,
    and repay them in four interest-free installments later.
        This service can be an attractive way for consumers to manage their
    cash flows to obtain goods and services without having to pay interest.
    That's especially true for consumers who don't have or don't want to
    use a credit card for such purchases. This may explain why BNPL is most
    popular among younger consumers, who have shorter credit histories. If
    customers are late with payments, BNPL companies sensibly suspend
    further purchases until they are paid, and some charge a late fee.
        Interestingly, BNPL companies do not primarily make their money
    from consumers, but rather from retailers, who pay them a small
    percentage of transactions to offer the service to customers. Retailers
    are willing to do this because they don't have to pay credit card
    interchange fees on BNPL payments and offering BNPL can increase sales
    and customer loyalty.
        Another newer financial product that provides consumers with short-
    term funding is Earned Wage Access, or EWA. This service can be an
    appealing alternative to payday loans for workers who want an advance
    on their wages.
        Many people don't have savings available to pay for unexpected
    expenses that can arise in between pay periods, like car repairs or
    medical bills. EWA can help consumers to meet such expenses and others
    by advancing them the amount of income they've already earned at that
    point in the pay period.
        There are various EWA products available. In some cases, employers
    select and pay the fee for the service as an employee benefit, while in
    others, consumers must pay the fee.
        According to a recent study, the average fee a user paid per
    advance was $2.59 to $6.27. That's less than 5 percent of the amount
    advanced.
        In short, marketplace competition has successfully generated more
    and cheaper options for many consumers to meet their needs. This is a
    reminder that market competition is typically better at helping
    consumers than the Government--whether the product or service is in the
    financial sector or another category.
        Other newer financial products include forms of credit that have
    existed for a long time, but with innovations in how they're provided.
    In recent years, financial institutions--primarily community banks--
    have begun to partner with financial technology companies, or fintechs,
    to offer improved products and reach more consumers.
        Bank-fintech partners offer a large variety of credit products,
    including small-dollar, personal, auto, and small business loans, as
    well as credit cards, mortgages, and home equity credit lines. These
    partnerships can generate significant consumer benefits by lowering the
    price of financial products, expanding consumer choice, and increasing
    competition. Often, they provide access to credit for higher-risk
    borrowers, such as consumers with lower-incomes or no credit histories,
    all through a highly supervised financial institution.
        Unfortunately, some bureaucrats and lawmakers react with hostility
    to any new financial products. Democrats in Congress have pejoratively
    branded all bank-fintech partnerships as ``rent-a-bank'' schemes.
        Last year, they overturned an OCC rule that provided regulatory
    certainty for these partnerships. Unfortunately, by attacking
    legitimate bank-fintech partnerships, Democrats risk restricting access
    to needed credit for lower-income consumers.
        And the CFPB, under Director Chopra, has repeatedly demonstrated
    hostility to innovation in consumer finance markets. For example, he's
    replaced the CFPB's Office of Innovation with a new ``Office of
    Competition and Innovation'' to advance his efforts to involve the CFPB
    in antitrust and competition law, which is outside its jurisdiction. He
    also sidelined the Office of Innovation's programs to foster
    responsible innovation, such as no action letters and regulatory
    ``sandboxes.''
        I'm also concerned the CPFB will bring this reactive, anti-
    innovation perspective to its scrutiny of new financial products.
    Already, it's made public statements that suggest hostility towards
    BNPL and other products.
        All of this hostility to new financial products is further evidence
    of the condescension and paternalism of some of my colleagues to our
    constituents. Individual consumers are better positioned than any
    bureaucrat or politician to understand their own individual needs and
    preferences, and make their own choices. My colleagues ignore the
    benefits consumers derive from access to more choices in a more dynamic
    marketplace.
        The best form of consumer protection is a robust, competitive
    market. That's why, instead of curtailing new financial products,
    regulation should facilitate innovation and consumer choice.
                     PREPARED STATEMENT OF RACHEL GITTLEMAN
      Financial Services Outreach Manager, Consumer Federation of America
                               September 13, 2022

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                        PREPARED STATEMENT OF PENNY LEE
                     CEO, Financial Technology Association
                               September 13, 2022

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                     PREPARED STATEMENT OF TODD J. ZYWICKI
       George Mason University Foundation Professor of Law, George Mason
                    University Antonin Scalia School of Law
                               September 13, 2022

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    PREPARED STATEMENT OF DAVID H. SELIGMAN
                      Executive Director, Towards Justice
                               September 13, 2022

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

           RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                         FROM RACHEL GITTLEMAN

    Q.1. Ms. Gittleman, in your testimony you mentioned that one of
    the tactics used by these lenders is disguising fees as tips.
    Are these tips truly voluntary? If not, do you believe it's
    deceptive to refer to these fees as ``tips''?

    A.1. ``Tips'' are not truly voluntary due to a variety of
    techniques companies use to make it difficult not to tip, and
    these tactics make tips inherently deceptive and deceitful.
    Companies utilize a variety of strategies to make it difficult
    not to tip or to make the consumer feel compelled to tip.
    Strategies include adding a default tip that must be removed
    each time; or denying or reducing future credit if a consumer
    fails to tip enough. Even without manipulative strategies,
    consumers are more likely to feel compelled to tip for fear of
    being treated differently or denied access in the future.
        Further, tips are not often included in product marketing
    and promotions or even in information about fees in the product
    terms and conditions, which leads consumers to believe that
    these products are free, especially when promoted with promises
    of no interest or monthly fees. By labeling a finance charge as
    a tip, providers are relying on the obligation that consumers
    often feel when tipping another human after completion of a
    service, like in restaurants or other service industries. Some
    providers further encourage that feeling by labeling tips as
    ``lender appreciation'' tips. Other providers make disingenuous
    statements about how tips support a ``community'' or will help
    other ``users make ends meet'' or deceitfully labeling tips as
    ``donations.''
        However, these tips do not go to another human being and
    are not in appreciation of a service--instead, they go to the
    company's bottom line. Further, tips are added to the repayment
    amount before the transaction is fully completed and tips are
    paid via the authorization to debit a user's account per user
    contracts. Consumers do not tip after the service has taken
    place in appreciation for good service which might make them
    more voluntary.
        Finally, the label does not change the inherent nature of
    these charges; it simply allows providers to claim otherwise.
    Tips increase the cost of credit, can add up quickly, and
    consumers have no way to compare that cost with other forms of
    credit. The ``tip'' model takes advantage of consumers' lack of
    awareness of how tips add up, especially since small tips can
    add up to a high cost over time nearing payday loan pricing and
    thus, can make it easier for consumers to get sucked into the
    cycle of debt. The pricing may also look cheap to consumers on
    its surface because it's portrayed as a flat fee rather than
    APR. It is marketed in ways to hide the true cost or dismiss
    the APR as irrelevant due to the shorter loan cycle. But these
    high charges for smaller loans result in exorbitantly high
    APRs, regardless of whether they are portrayed to consumers in
    that way. Regardless of the label, advances that charge tips
    are balloon payment loans, with repayment on the next deposit
    or other equally short schedule. Like other balloon payment
    loans, they can lead to dependency or a cycle of reborrowing,
    and high rates of overdraft and NSF fees.

    Q.2. Do you believe there is an environment where forms of
    credit such as Buy Now, Pay Later or Earned Wage Advances can
    be beneficial to consumers? Do you have any regulatory
    suggestions that could encourage innovation and safeguard
    consumers at the same time?

    A.2. These products may help certain consumers manage their
    finances but are not risk free. At their core, each of these
    products are still credit products that should be covered by
    basic consumer protections at the State and Federal level,
    including interest rate limits, underwriting for ability-to-
    repay, cost transparency, dispute rights, and fair lending
    laws.
        BNPL providers are within the scope of the Truth in Lending
    Act (TILA) and should be treated as ``Card Issuers'' subject to
    all credit card protections codified by TILA. The CFPB should
    clarify that BNPL products are credit cards, subject to the fee
    disclosures, ability-to-repay requirements, reasonable and
    proportional penalty fees, chargeback protections, dispute
    rights, standard statement requirements, and appropriate and
    helpful credit reporting practices that apply to credit cards.
    These protections would ensure that consumers have the same
    basic protections they do when using other forms of credit.
        Beyond the CARD Act, Federal and State regulators should
    provide necessary oversight and supervision of BNPL providers,
    ensuring that they are not engaging in unlawful discrimination
    or unfair, deceptive or abusive acts or practices, and are
    abiding by other consumer protection laws including the
    Military Lending Act (MLA), the Electronic Funds Transfer Act
    (EFTA), and the Fair Debt Collection Practices Act (FDCPA).
    State regulators should require lenders to abide by applicable
    licensing and usury laws. State and Federal regulators should
    make sure that lenders are not charging unfair fees or shifting
    into an abusive fee model. Finally State and Federal regulators
    should consider collecting data on these programs to better
    understand the risks associated with them.
        As for Earned Wage Advances (EWAs), we hope that the CFPB
    clarify that EWAs provide credit to consumers. Although free
    EWA products may fall outside of the scope of TILA, those that
    charge fees are within the scope. Access and expedite fees
    charged by EWA providers are finance charges that should be
    presented to consumers in terms of an annual percentage rate.
    State regulators should also regulate these fee-based earned
    wage access products as credit covered by all State credit
    regulations and laws, including usury laws.
        Regardless of structure, a product where a third-party
    advances funds to a consumer ahead of the consumer's payday and
    is then repaid in some fashion out of the paycheck is a loan.
    We are greatly concerned about the potential harms of viewing
    these fee-based earned wage access products as something other
    than credit, leading to evasion of consumer protection and fair
    lending laws. Treating EWA products as credit does not mean
    these products should not exist. It merely means that consumers
    have the same basic consumer protections and disclosures as
    they do when using other forms of credit--a concept that is
    likely already expected. Moreover, failing to regulate them as
    credit will invite payday lenders and other high-cost lenders
    to enter this market, which could lead to even more exploitive
    rates and practices.
        In addition, the CFPB should address inflated expedite fees
    either through TILA or through its authority to protect
    consumers from Unfair, Deceptive and Abusive Acts and Practices
    (UDAAP). We also recommend that the CFPB further supervise
    these fee-based EWA providers and conduct research on the
    impact of EWA programs, especially on low-income consumers and
    their ability to build wealth and achieve financial security.
        Fintech providers that purport to lend earned wages and
    seek access to a consumer's bank account, but are not employer
    integrated, are essentially a payday loan and should be
    supervised and regulated as such.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
                             FROM PENNY LEE

    Q.1. According to the Federal Reserve Bank of Atlanta, ``In
    open banking, a consumer authorizes a financial services
    company with which they have a relationship to allow designated
    third parties to access their financial data.'' \1\
    ---------------------------------------------------------------------------
         \1\  Lott, David. ``American Consumers May Soon Have Open
    Banking''. Federal Reserve Bank of Atlanta, https://www.atlantafed.org/
    blogs/take-on-payments/2022/06/06/american-consumers-may-soon-have-
    open-banking.
    ---------------------------------------------------------------------------
        What potential requirements could be imposed on third
    parties to simultaneously require the secure use of consumer
    data while also promoting new open-banking partnerships?

    A.1. FTA believes that any open banking rule should establish
    strong guidelines for consumer transparency and control,
    including that consumers be aware of all parties involved in
    data sharing and have ownership over the data they are sharing,
    with whom, and for what duration. FTA further supports
    standards-development in service of consumer rights by
    establishing baseline principles and expectations that those
    standards must meet.
        In particular, we strongly support the development and use
    of secure application programming interfaces (APIs) as the
    primary mechanism for consumers to share financial data with
    designated third parties, with screen scraping serving as a
    fall back option when a financial institution does not have an
    API, which is most common for smaller institutions.

    Q.2. What agency would likely regulate nonbank data aggregator
    fintech firms?

    A.2. While the Consumer Financial Protection Bureau is likely
    best placed to regulate a nonbank data aggregator fintech
    firm--subject to the public notice and comment rulemaking
    processes--in light of 1033 of the Dodd-Frank Act; currently,
    through bank-fintech partnerships and other arrangements,
    fintechs including data aggregators have been subjected to some
    level of oversight by Federal banking agencies.

    Q.3. Small businesses are struggling to hire in a historically
    tight labor market. Data from the Bureau of Labor Statistics
    shows that there are nearly two jobs for every unemployed
    worker. According to a recent survey by the U.S. Chamber of
    commerce, 56 percent of small businesses say they are concerned
    about recruiting and 57 percent are concerned about employee
    retention. As a result, small businesses are increasingly
    turning to offering access to Early and Earned Wage Access
    programs in order for them to remain competitive in their
    market.
        Can you describe how this new pay frequency is being used
    by employers?

    A.3. As we know, life doesn't happen in 2-week cycles. An
    employer providing an Earned Wage Access (EWA) program gives
    employees the ability to access their already earned wages
    before their next scheduled paycheck. Without EWA services 44
    percent of EWA consumers would be unlikely to pay their bills
    on time, and 38 percent would consider going into overdraft.
    EWA makes it easier, more flexible, and less expensive for
    customers to manage their spending and avoid getting into debt
    because they are simply able to access wages they have already
    earned.
        There are two predominant EWA service models--the employer-
    based and the direct-to-consumer (D2C), both serve different
    consumer needs. With an employer-based model, individual
    employers partner with an EWA provider to offer their employees
    early access to wages. When the EWA disbursement is settled
    back, employers typically deduct the repayment amount directly
    from the employee's paycheck and settle the amount back to the
    EWA provider. There are multiple no-fee options for EWA, and
    there is sometimes a nominal fee for this service, which may be
    covered by the employer, the employee, or a combination of the
    two.
        The D2C model provides early access to income directly to
    any consumer who receives recurring direct deposits from an
    employer or other business. A broader range of customers can
    access D2C, including those who do not have this benefit
    through their employer, including gig economy workers,
    freelancers, contractors, and nonprofit and public sector
    employees. Consumers may pay for this product through a monthly
    subscription fee, a fee per transaction, a voluntary tip
    amount, or a hybrid of a subscription fee plus a per-
    transaction or voluntary fee or tip.

    Q.4. Consumers benefit from having access to a wide range of
    financial services. Many of the innovative products in the
    market today, such as Early Wage Access and Earned Wage Access,
    are often coupled with other innovative solutions, such as
    credit builders or budgeting tools that help build out an
    individual's complete financial health. This holistic and
    innovative approach to financial health is often omitted when
    talking about short-term credit or financing products.
        Can you speak to some of these innovative solutions the
    industry is offering in addition to short-term financing
    solutions?

    A.4. Fintech solutions have emerged as critical tools to bridge
    physical and virtual activities as people have become
    increasingly accustomed to digital access. Diverse fintech
    products and services provide novel, convenient, and expanded
    access points into the financial system for individuals,
    households, and small businesses, ranging from mobile money
    services for basic savings and payments to digital applications
    for long-term investing or securing credit. Already, a consumer
    can exchange funds, select retirement investments, get a
    mortgage, pay for food, or manage expenses using fintech
    products. Tailored products empower individuals with different
    needs and help drive equity in the cost and quality of
    available services. More specifically, payments providers are
    helping facilitate millions of daily transactions of all sizes.
    By reducing the time and effort needed for clearing and
    settlement, these solutions can process payments efficiently
    and improve the accessibility, affordability, and speed of
    moving money for consumers.
        With respect to credit access, financial technology can
    help solve well-documented credit gaps that have
    disproportionately impacted already underserved populations,
    including minority and immigrant groups who have limited or no
    traditional credit footprint. Within this context, fintech
    lenders and providers are using online and mobile platforms
    and, at times, automated underwriting and unique or
    nontraditional data to provide funding to businesses and
    individuals more streamlined and inclusively. Using these
    services, borrowers can request loans online and receive credit
    decisions faster and more consistent with their actual
    creditworthiness.
        Finally, fintechs can also be leveraged to address other
    issues. For example, using fintech services as collaboration
    platforms, businesses can partner with payment card issuers to
    improve authorization rates and reduce fraud. In addition, as
    consumer trends continue to shift toward digital payments,
    including new options like buy now pay later, ACH payments, and
    digital wallets, businesses are deploying fraud prevention
    strategies earlier in the customer journey. Patterns and
    information are identified before the transaction period to
    preempt fraud and facilitate efficient transactions.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
                          FROM TODD J. ZYWICKI

    Q.1. Deloitte's case study into Open Banking found that
    regulatory responses to changes in the fintech environment are
    often too slow and may suffer ineffectiveness as a consequence.
    \1\ To solve this, lawmakers and others involved in the
    rulemaking process should increase the use of strategic
    guidance over proper regulation. Guidance can be issued and
    updated faster than regulation, in turn allowing them to
    respond to the rapidly growing fintech market.
    ---------------------------------------------------------------------------
         \1\ Strachan, David. ``Open Banking: Disruption Is Afoot for
    Regulators as Well as Banks''. Deloitte, 10 Nov. 2017, https://
    www2.deloitte.com/uk/en/pages/financial-services/articles/open-banking-
    disruption-afoot-for-regulators-and-banks.html.
    ---------------------------------------------------------------------------
        Therefore, how do you see the role of regulation in fintech
    markets compared to guidance? How can guidance be a more
    effective tool for regulators, consumers, and fintech firms
    than regulation?

    A.1. Response not received in time for publication.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                         FROM DAVID H. SELIGMAN

    Q.1. Your testimony criticizes earned wage access products
    primarily on the basis that effective interest rate terms and
    applicable fees are not adequately disclosed to workers. In
    your opinion, what would the timing and contents of an
    effective disclosure look like for a worker who utilizes an
    earned wage access product?

    A.1. Thank you, Senator Sinema. Earned Wage Access (EWA)
    products are credit, and they are covered by consumer
    protections like the Truth in Lending Act. It is critical that
    EWA creditors provide clear disclosure of the costs of the
    credit transaction, which would include fees and effective
    interest rates. Pursuant to TILA, those disclosures must be
    made ``before the consummation of the transaction.'' Reg. Z
    1026.1(b). In the case of EWA products, this would have to
    happen before any worker agrees to enter into an Earned Wage
    Access transaction.

    Q.2. Are there additional concerns you have with earned wage
    access products beyond disclosure of fees and effective
    interest rates?

    A.2. Yes. EWA products carry risks that may not be resolved
    through disclosures alone.
        First, EWAs carry the risk of a cycle of debt and
    reborrowing. Taking an advance on the next paycheck when the
    current paycheck is not sufficient to meet basic financial
    needs could put a worker into a further financial hole,
    requiring them to take on more debt. Evidence suggests that
    workers who rely on EWA products typically use them between 12
    and 120 times per year. \1\ That reflects a concerning pattern
    in which workers using EWA products are more likely than other
    borrowers to end up in a cycle of debt. In these cases, workers
    are often not using those products to access liquidity for new
    expenses, but rather to fill gaps created by the repayment of a
    prior loan. The pattern is even more concerning because a debt
    cycle of EWA credit may impede workers from leaving their
    employment because they feel like they need to keep working off
    a loan they have already taken out, even if a different
    employer would pay them more or treat them better.
    ---------------------------------------------------------------------------
         \1\ Letter from National Consumer Law Center & Center for
    Responsible Lending to Consumer Financial Protection Bureau, RE:
    Concern about prior leadership's finding that certain financial earned
    wage access products are not ``credit'' TILA, October 12, 2021, at 5,
    available at https://www.nclc.org/wp-content/uploads/2022/10/EWA-
    letter-to-CFPB-Oct-4-2021.pdf.
    ---------------------------------------------------------------------------
        Second, EWA products may obscure low wages or unfair and
    unpredictable scheduling practices that prevent workers from
    earning consistent, predictable, and living wages.
        Third, while some EWAs do not include fees, many others do,
    either directly or through a ``tips'' model. In either case,
    the costs of these short-term loans can be extraordinary.
        Far too many workers have difficulty making ends meet. The
    costs of basic needs like housing, childcare, and health care
    are too high, and workers' wages are not keeping pace with
    corporate profits and prices. We must work to address that
    fundamental problem. Access to short-term credit products like
    EWAs is not a solution. While some EWA products may provide
    safe forms of credit, these products must be regulated and
    scrutinized, with an eye toward the specific risks they pose to
    workers and the labor market.
                                    ------

           RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                         FROM DAVID H. SELIGMAN

    Q.1. In which industries are you seeing the largest growth in
    terms of the use of training repayment agreement provisions
    (TRAPs)?

    A.1. Thank you, Senator Warnock. We are seeing an explosion of
    various forms of employer-driven debt, including training
    repayment agreement provisions. TRAPs are a subset of a broader
    category of employer-driven debt that includes breach fees and
    liquidated damages provisions that purport to require workers
    to pay extraordinary debts if they leave their job before the
    end of their contractual work period. \1\ There is little data
    on the use of employer-driven debt across our labor market--in
    part because we see so much recent growth of employer-driven
    debt--but anecdotally, we are seeing the most growth in health
    care, especially among nurses. We also see TRAPs in contracts
    with service workers, truckers, teachers, and many others.
    ---------------------------------------------------------------------------
         \1\ See, e.g., Josh Eidelson, ``Nurses Who Faced Lawsuits for
    Quitting Are Fighting Back'', Businessweek, Feb. 2, 2022, https://
    www.bloomberg.com/news/features/2022-02-02/underpaid-contract-nurses-
    who-faced-fines-lawsuits-for-quitting-fight-back.

    Q.2. I agree with Chairman Brown investing in employee training
    is something employers should do, not employees. Especially as
    we've seen historic gains in wages over the past year, this
    practice feels like a way for corporations to pass off costs to
    their workers and indirectly cut their hard-earned wages. Are
    there data that show the real wage employees are receiving when
    ---------------------------------------------------------------------------
    accounting for debt incurred and other costs from TRAPs?

    A.2. Thank you. I appreciate the question. As I testified, in
    many cases, TRAPs seek to recoup the costs of training that was
    principally for the benefit of the employer--much of this
    training does not provide the worker with a transferable
    license or degree. Employers that hold such debts over the
    heads of their workers during their employment are making wage
    payments that are in effect conditioned on the worker staying
    in their job. If they leave their job, they must kickback costs
    to the employer that the employer may not require the worker to
    bear. Employers using TRAPs in this way may not be paying
    minimum wages to those workers ``free and clear'' as required
    by Federal law CFR 531.35.
        There is not much data regarding the extent to which TRAPs
    and other forms of employer-driven debt may be suppressing
    worker wages. You are correct that such wage suppression
    includes the actual costs of the TRAP, which many workers pay
    back to their employer when they leave their jobs. But the
    recent growth in TRAPs makes it difficult to ascertain the
    amount of wages workers are kicking back to their employer.
    That is not, however, the only measure of harm to workers and
    wages. For many workers, TRAPs function like noncompete
    agreements that prevent them from seeking out other employment,
    robbing them of their bargaining power and suppressing their
    wages, even when they are not seeking out other employment.
    Recent data suggests that noncompete agreements and other
    impediments to worker mobility can cause substantial wage
    suppression. \2\ That data should also be considered in
    evaluating the harms of TRAPs. But of course, even that
    research does not capture the individualized harm that many
    workers experience when they are trapped in jobs that may be
    unsafe, unfair, or even abusive.
    ---------------------------------------------------------------------------
         \2\ See, e.g., Brian Callaci, Sergio Pinto, Marshall Steinbaum,
    and Matt Walsh, ``The Effect of No-poaching Restrictions on Worker
    Earnings in Franchised Industries'' (2022).
    ---------------------------------------------------------------------------
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
                         FROM DAVID H. SELIGMAN

    Q.1. Following up on Senator Toomey's opening remarks, while
    Democrats are labeling bank-fintech partnerships as ``rent-a-
    bank'' schemes and rescinding OCC rules that removed regulatory
    uncertainty, consumers are failing to ask for these new,
    burdensome regulations. Instead, 99 percent of consumers stated
    that they understood the terms and conditions of their BNPL and
    less than 4 percent of consumers using a BNPL incurred a late
    fee. \1\
    ---------------------------------------------------------------------------
         \1\ Lee, Penny. ``New Consumer Financial Products and the Impacts
    to Workers''. Financial Technology Association, FTA, https://
    drive.google.com/file/d/0B1agOsrt-GBtSUV1Vkt2
    MlR1U3c/view.
    ---------------------------------------------------------------------------
        How could overturning the OCC rule lead to diminished
    access to credit for low-income borrowers?

    A.1. Thank you, Senator Daines. The OCC does not have oversight
    over third-party BNPL lenders, and as far as I am aware, there
    are no OCC rules that directly regulate BNPL providers. The OCC
    provides critical regulation, supervision, and oversight of
    national banks, Federal savings associations, and Federal
    branches of foreign banks. The OCC ensures that these entities
    follow applicable laws and regulations, treat consumer fairly
    and equitably, and operate in a safe and sound manner.

    Q.2. How do burdensome regulatory structures interfere with the
    compounding rate of financial innovation?

    A.2. Everyone benefits from responsible regulations. Markets
    benefit because regulation leads to fewer predatory actors.
    Regulated entities benefit because there are clear expectations
    about what conduct is legal, which facilitates safer innovation
    and fairer competition. Finally, consumers benefit because they
    are protected from unfair and predatory financial products and
    can have more faith in the integrity of the financial services
    marketplace. Credit products, like those discussed at the
    hearing, need to be regulated and overseen from origination
    through the life cycle of the credit.

                  Additional Material Supplied for the Record

                     STATEMENT SUBMITTED BY BRIANA GORDLEY

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                      STATEMENT SUBMITTED BY BREANN SCALLY

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                     STATEMENT SUBMITTED BY CASSIE PENNINGS

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              STATEMENT SUBMITTED BY RAM PALANIAPPAN, CEO, EARNIN

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]