[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






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                               ______
                                 

                 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


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

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                 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.
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    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.
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    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]