[Senate Hearing 117-743]
[From the U.S. Government Publishing Office]
S. Hrg. 117-743
NEW CONSUMER FINANCIAL PRODUCTS AND THE IMPACTS TO WORKERS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING NEW CONSUMER FINANCIAL PRODUCTS, THE STRUCTURE OF NEW
CONSUMER FINANCIAL PRODUCTS, EXISTING REGULATORY AND LEGAL FRAMEWORKS,
AND THEIR IMPACT ON HOUSEHOLDS
__________
SEPTEMBER 13, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
53-615 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
----------
TUESDAY, SEPTEMBER 13, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 23
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 24
WITNESSES
Rachel Gittleman, Financial Services Outreach Manager, Consumer
Federation of America.......................................... 6
Prepared statement........................................... 26
Responses to written questions of:
Senator Warnock.......................................... 89
Penny Lee, CEO, Financial Technology Association................. 7
Prepared statement........................................... 50
Responses to written questions of:
Senator Daines........................................... 91
Todd J. Zywicki, George Mason University Foundation Professor of
Law, George Mason University Antonin Scalia School of Law...... 9
Prepared statement........................................... 59
Responses to written questions of:
Senator Daines........................................... 93
David H. Seligman, Executive Director, Towards Justice........... 10
Prepared statement........................................... 78
Responses to written questions of:
Senator Sinema........................................... 93
Senator Warnock.......................................... 95
Senator Daines........................................... 96
Additional Material Supplied for the Record
Statement submitted by Briana Gordley............................ 97
Statement submitted by BreAnn Scally............................. 99
Statement submitted by Cassie Pennings........................... 101
Statement submitted by Ram Palaniappan, CEO, Earnin.............. 104
(iii)
NEW CONSUMER FINANCIAL PRODUCTS AND THE IMPACTS TO WORKERS
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TUESDAY, SEPTEMBER 13, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:15 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Committee on Banking, Housing, and
Urban Affairs will come to order. We apologize for the delay
this morning. We do not like to start the hearing late but
sometimes we have to.
So we thank the four of you for joining us. Good to see all
of you. Some of you have been in front of this Committee before
or have worked around here before, so welcome, especially to
those of you.
This hearing is in a hybrid format. Our witnesses are in
person. Members have the option to appear in person or
virtually.
Hard work should pay off for everyone. That is the American
dream. That is what the dignity of work is all about. It is a
concept that Pope Leo XIII spoke of in the late 19th, early
20th centuries, and a concept popularized by Dr. King.
And when work has dignity, you can support yourself, your
family, and your future. But we all know what has happened over
the last four decades. Corporate profits have gone up. The
stock market has soared. Executive compensation has exploded.
But wages have not kept up with the cost of living.
Millions of workers with full-time jobs who aspire to the
middle class cannot join it, no matter how hard they work. And
even people we may define as middle class do not feel much
security and stability.
And when workers are forced to find ways to make up for the
gap between what they are paid and what they should earn, what
are they left with?
Debt.
Sometimes people will have to borrow money. Products that
are well-designed, transparent, and regulated can help workers
pay off an unexpected car repair, or help with the grocery
bill, or cover a medical expense.
But as we heard at our listening session with workers last
week in this Committee, too often these products are not well
designed, they are rarely transparent, and they are not well
regulated.
For too many workers, the only credit products available
lead to more debt and more financial instability. We have
discussed in this Committee the impact predatory payday lenders
have on working families.
Today, we examine the impact some newer consumer financial
products have on workers. Companies tell us these new products
are innovative, they are easy to use, they will give people
more options. But so often, ``innovation'' is just a new way
for companies to make money, while trapping people in debt.
Newer credit products, like ``Buy Now, Pay Later,'' could
help consumers pay for products in installments, with strong
consumer protections.
Yet many of these products come with hidden fees, they lack
transparency, and they are not underwritten properly. Ads
encourage consumers to use these plans for multiple purchases,
at multiple online stores, racking up debt they cannot afford
to repay.
Consumers like Briana Gordley. As a college student, Briana
started off with one of these loans. First one BNPL company,
then two, then three. One company told her they were raising
her credit limit from $100 to $1,000.
Initially, 18-year-old Briana was not too concerned. As she
put it, if the companies ``believed in my ability to repay my
debt, then I did too.'' With the approval of more and more
credit, Briana was juggling $1,500 in loans with different
payment dates throughout the month, and her account kept
getting overdrawn.
Briana's story gets to the core of the problem. With little
to no underwriting, the ``Buy Now, Pay Later'' companies do not
know if they are the only ones a consumer has credit with. And
without proper term disclosures, a consumer is left in the
dark.
For this model to work for consumers, we need real rules
companies must follow, and we need proper disclosures.
Then there are new consumer products that use a so-called
``tip model,'' structuring themselves to deliberately avoid
disclosing their terms, specifically avoiding important
disclosures required by the Truth in Lending Act. Products like
cash advances, overdraft coverage, and Earned Wage Advances--
that are not offered in conjunction with employers--use a model
where consumers are asked to pay a ``tip'' to the lender,
instead of a fee or interest rate to use the products.
Companies claim that because a tip is not presented as a
finance charge or interest rate, Truth in Lending and other
consumer protection laws, like the Military Lending Act, do not
apply. The tip is just ``voluntary,'' they say. But these tips
are not voluntary at all. It is just a way to cheat the system
and hide the true cost to workers.
Employer-based Earned Wage Advances with strong consumer
protections can help workers cover unexpected expenses or
emergencies, though the better alternative would simply be for
the companies to pay their workers enough to live on.
And then there are debt products that are so predatory, so
offensive, they should have no place in our financial system,
schemes like Training Repayment Agreement Provisions,
appropriately known as ``TRAPs.''
I will say this for that term that was invented--it is
truth in advertising. These provisions in employment contracts
allow employers to recoup the cost of training employees who
leave the job. It is an offensive concept.
It is the employer's job to train their workers. On-the-job
training is not some special perk for workers. It is a smart
investment for companies.
TRAPs require workers to pay back their employers for
training if they leave their job within a certain period of
time, saddling workers with debt. It is just a modern-day
version of the scrip that left coal miners exhausted,
destitute, and trapped by their employers.
Remember what Tennessee Ernie Ford sang about owing his
soul to the company store: ``You load 16 tons, what do you get?
Another day older and deeper in debt.''
Employers use TRAPs to prevent workers from pursuing higher
paying or better opportunities. They decide how much the
training would supposedly cost on the market and go after their
workers, threatening their credit and economic mobility.
Last week, Cassie Pennings from Colorado told Members of
the Committee about her experience with TRAPs. Ms. Pennings
pursued her calling as a nurse during the COVID-19 pandemic. At
the start of her job, her employer made Ms. Pennings sign an
employment contract, and buried in the fine print, it said that
if she left before 2 years, she would be indebted to her
employer for $7,500 for the supposed training they provided.
When Ms. Pennings decided to leave her nursing job after a
year because of a bad work environment, her employer took
$1,000 out of her second-to-last paycheck to pay back her
``training.'' That was half of her paycheck. Her former
employer told her they will send the rest of the amount to
collections. Last I checked, indentured servitude was illegal
in the United States, but it looks like some enterprising
companies are rebranding it, with these new employment
contracts.
And that is the focus of today's hearing, to ensure that
so-called ``innovation'' is not a substitute for good pay and
does not come at the cost of workers' dignity of work.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman and thank you for
kindly delaying the start of this hearing. Thank you to the
witnesses for your patience. I was unavoidably delayed. I
appreciate the accommodation.
Today's hearing, of course, is about new consumer financial
products. In the last decade, we have seen financial
institutions develop technology-oriented solutions to meet
consumer needs. These new choices create a more competitive
marketplace--all to the benefit of consumers.
As long as consumers have truthful and accurate information
about financial products, it is the consumers who are best
positioned to decide what products to use. Any regulation of
financial products should fit the product type, make room for
innovation, and maximize consumer choice. Too often, however,
the response from some of my friends on the other side of the
aisle is to see something new and panic.
Let us talk about some of these new products. One of them,
is called ``Buy Now Pay Later,'' or BNPL. BNPL typically allows
consumers to make purchases now, often online, and repay them
in four interest-free installments later.
This service can be a very attractive way for consumers to
manage their cash-flows to obtain goods and services without
having to pay interest. That is especially true for consumers
who do not have or do not want to use a credit card for such
purchases. This may explain why BNPL is most popular among
younger consumers, who have shorter credit histories. If
customers are late with payments, BNPL companies sensibly
suspend further purchases until they are paid, and some charge
a late fee. Interestingly, BNPL companies do not primarily make
their money from consumers at all, but rather from retailers,
who pay them a small percentage of transactions to offer the
service to customers. Retailers are willing to do this because
they do not have to pay credit card interchange fees on BNPL
payments, and offering BNPL can increase sales and customer
loyalty.
Another newer financial product that provides consumers
with short-term funding is Earned Wage Access, or EWA. This
service can be an appealing alternative to payday loans for
workers who want an advance on their wages. Many people do not
have savings available to pay for unexpected expenses that can
arise in between pay periods, like car repairs or medical
bills. EWA can help consumers to meet such expenses and others
by advancing them the amount of income they have already earned
at that point in the pay period.
There are various EWA products available. In some cases,
employers select and pay the fee for the service as an employee
benefit, while in others, consumers must pay the fee.
According to a recent study, the average fee a user paid
per advance was $2.59 to $6.27. That is less than 5 percent of
the amount advanced.
In short, marketplace competition has successfully
generated more and cheaper options for many consumers to meet
their needs. This is a reminder that market competition is
typically better at helping consumers than the Government,
whether the product or service is in the financial sector or
some other category.
Other newer financial products include forms of credit that
have existed for a long time, but with innovations in how they
are provided. In recent years, financial institutions,
primarily community banks, have begun to partner with financial
technology companies, or fintechs, to offer improved products
and reach more consumers.
Bank-fintech partners offer a large variety of credit
products, including small-dollar, personal, auto, and small
business loans, as well as credit cards, mortgages, and home
equity credit lines. These partnerships can generate
significant consumer benefits by lowering the price of
financial products, expanding consumer choice, and increasing
competition. Often they provide access to credit for higher-
risk borrowers, such as consumers with lower incomes or no
credit histories, all through a highly supervised financial
institution.
Unfortunately, some bureaucrats and some lawmakers react
with hostility to almost any new financial products. Democrats
in Congress have pejoratively branded all bank-fintech
partnerships, in general, as ``rent-a-bank'' schemes. Last
year, they overturned an OCC rule that provided regulatory
certainty for these partnerships. Unfortunately, by attacking
legitimate bank-fintech partnerships, our Democratic colleagues
risk restricting access to needed credit for lower-income
consumers.
And then there is the CFPB. Under Director Chopra, the CFPB
has repeatedly demonstrated hostility to innovation in consumer
finance markets. For example, Director Chopra has replaced the
CFPB's Office of Innovation with a new ``Office of Competition
and Innovation'' in order to advance his efforts to involve the
CFPB in antitrust and competition law, which is outside its
jurisdiction. He also sidelined the Office of Innovation's
programs to foster responsible innovation, such as no action
letters and regulatory ``sandboxes.''
I am also concerned the CFPB will bring this reactive,
anti-innovation perspective to its scrutiny of new financial
products. Already, it has made public statements that suggest
hostility toward BNPL and other products. All of this hostility
to new financial products is further evidence of the
condescension and paternalism that we see sometimes in
financial regulation.
Individual consumers are better positioned than any
bureaucrat or politician to understand their own individual
needs and preferences, and to make their own choices. Some of
my colleagues ignore the benefits consumers derive from access
to more choices in a more dynamic marketplace.
The best form of consumer protection is a robust,
competitive market. That is why instead of curtailing new
financial products, regulation should facilitate innovation and
consumer choice.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Ranking Member Toomey. I will
introduce the four witnesses. Left to right, Ms. Rachel
Gittleman is the Financial Services Outreach Manager for the
Consumer Federation of America. She leads CFA's advocacy and
outreach on high-cost lending, payday loans, and other banking
and credit issues. Welcome, Ms. Gittleman.
Ms. Penny Lee is CEO of Financial Technology Association.
She served previously as Chief Strategy Officer of 1776, a
technology incubator. She previously served as senior advisor
to Senator Majority Leader Harry Reid. Ms. Lee, welcome.
Professor Todd Zywicki is somewhat of a regular in this
Committee. He is George Mason University Foundation Professor
of Law at the Scalia School of Law. He is a senior fellow at
Cato, chair of the CFPB Taskforce on Federal Consumer Financial
Law in 2020. Mr. Zywicki, welcome.
Mr. David Seligman is the Executive Director of Toward
Justice. He has litigated several class and collective actions
to attack systemic injustices in the labor market. He clerked
for Chief Judge Patti Saris of the District of Massachusetts.
Mr. Seligman, welcome.
And Ms. Gittleman, if you would begin your testimony.
Thank you.
STATEMENT OF RACHEL GITTLEMAN, FINANCIAL SERVICES OUTREACH
MANAGER, CONSUMER FEDERATION OF AMERICA
Ms. Gittleman. Chairman Brown, Ranking Member Toomey, and
Members, thank you for the opportunity to testify before you
today. I am Rachel Gittleman, Financial Services Outreach
Manager at Consumer Federation of America, a nonprofit
association of national, State, and local consumer groups
focused on advancing consumer interests through research,
advocacy, and education.
New consumer credit products are exploding across market
areas. Some of the fee models, schemes, and provisions
discussed today are inherently deceitful and predatory. Others
may help certain consumers manage their finances but even those
are not risk-free.
Regardless, at their core, each of the products discussed
today are credit. They provide funding, or the promise of
funding, today, and are repaid later, and should be covered by
basic consumer protections at the State and Federal level,
especially given that they are disproportionately used by and
marketed to lower-income consumers and consumers of color.
Buy Now, Pay Later products allow consumers to pay a
portion of a purchased item up front and the rest of the debt
in three, often interest-free, installments over a set period.
But they lack underwriting for a consumer's ability to repay,
leading to unmanageable amounts of debts. Consumers can face
cascading fees, negative credit reporting, debt collection, and
difficulty with disputes and refunds.
Earned Wage Advance products are funds advanced by a third
party to a consumer before their regular payday. Fee-based
Earned Wage Advances are ostensibly a lower-cost form of a
payday loan, requiring workers to pay to get paid, and they can
lead to the same cycle of reborrowing as other balloon payment
loans. Even free EWA products may still create a hole in next
week's paycheck, leading to a cycle of debt.
Fake Earned Wage Advance overdraft protection and other
cash advance products that collect tips are simply disguising
finance charges under a new name. Tips are not truly voluntary,
as they are structured so that it is difficult to avoid
tipping. Consumers feel obligated to tip, like in a restaurant
or service setting, but unlike those setting tips do not go to
another human being but rather to the company's bottom line.
The true cost is not true to consumers, and tips add up
quickly, costly nearly as much as traditional payday loans in
some instances.
Hidden deep inside employment contracts, Training Repayment
Agreement Provisions trap consumers in low-paying jobs by
requiring repayment of large fees for on-the-job training or
orientations. This debt is enforced if a consumer leaves,
either voluntarily or not, before an arbitrarily determined
date. TRAPs indebt the consumer to the employer with the threat
of high interest rates, attorney and collection fees, or
withholding of other benefits.
Importantly, these products are credit and should be viewed
and regulated as such. Failing to do so will lead to further
evasions of credit laws. Therefore, CFA recommends that State
and Federal regulators supervise fintech provider to ensure
they are compliant with credit, fair lending, and consumer
protection laws as well as not engaging in unlawful
discrimination or unfair, deceptive, or abusive acts or
practices.
Regulators should closely examine evasive pricing models,
providers should only offer products after determining a
consumer's ability to repay, and loans should be structured in
an affordable way with proportional penalty fee. The cost of
credit should be portrayed to consumers as an annual percentage
rate so that they can compare products. Consumer data should be
used in a responsible, transparent manner. State and Federal
regulators should collect, analyze, and publish data to better
understand and illuminate the risks of these products. And
State and Federal regulators should work together, across
agencies and levels of Government, to ensure consumers are
protected and predatory actors are held accountable.
Oversight is especially needed as each of these products is
either disproportionately used by or marketed to low-income
consumers and consumers of color. Without meaningful holistic
underwriting, affordable repayment options, and price
transparency, products may do more to exacerbate financial
exclusion rather than promote financial inclusion.
Each of these products should not be allowed to use the
guise of innovation, the cover of a lengthy employment
contract, or a borrowed label to shield themselves from Federal
and State oversight and regulation.
Thank you for your consideration, and I am happy to take
any questions.
Chairman Brown. Thank you, Ms. Gittleman.
Ms. Lee, welcome.
STATEMENT OF PENNY LEE, CEO, FINANCIAL TECHNOLOGY ASSOCIATION
Ms. Lee. Thank you, Chair Brown, Ranking Member Toomey, and
Members of the Committee, today, for allowing me to testify. I
am the Chief Executive Officer of the Financial Technology
Association, a nonprofit trade association representing
industry leaders shaping the future of finance.
As we have seen, fintech adoption has surged over the past
few years. Nine in ten consumers use financial technology to
manage their finances. Consumers confirm it saves them time and
money. Seventy-three percent say it helps them make better
financial decisions, and 71 percent say it helps reduce
financial stress.
Today, unfortunately, Americans are more likely to report
they are worse off financially than they were a year ago. With
prices rising, millions continue to struggle to make ends meet,
and cashflow stress makes it difficult for many Americans to
cover essential costs while waiting on a biweekly or even
monthly paycheck.
Fortunately, fintech is creating new tools for consumers to
improve their financial security. Financial innovation allows
the single mom the ability to buy medicine for a sick child or
a parent the ability to purchase new school supplies that
better fit their household budgets and finances.
I will focus my remarks today on a few particular areas of
fintech innovation in the Buy Now, Pay Later, and Earned Wage
Access spaces.
Buy Now, Pay Later, BNPL, is an alternative payment option
enabling consumers to manage their cashflow and avoid paying
high interest rates and fees. As you alluded to, the typical
pay-in-four model provides small, low-cost, short-term payment
options, usually four installments over 6 to 8 weeks, with no
extra fees if the consumer pays on time. BNPL generates the
vast majority of its revenue from partnerships with merchants,
not consumer fees.
According to Morning Consult poll conducted on behalf of
the FTA, more than three-quarters of BNPL users have a
favorable opinion of the service and trust it to do the right
thing for consumers. Seventy-seven percent of adults using
multiple BNPL companies said it actually makes it easier to pay
for purchases.
The Financial Health Network's recent study found that 99
percent of BNPL users understood the terms and conditions of
the service, 96 percent had no difficulty making payments, and
only 4 percent were late or missed one or more payments.
Importantly, BNPL also supports America's small businesses
by enhancing the customer experience, facilitating economic
activity, and driving consumer satisfaction. BNPL products are
also subject to consumer protection regulations, including
anti-money laundering, fair lending, debt collection, privacy,
fair treatment of consumers, and electric fund transfers. They
are also subject to similar State consumer protection laws.
I will switch now to another financial product that we
mentioned, Earned Wage Access. EWA is a critical area of
innovation that offers workers flexibility through on-demand
and early access to their already earned wages, helping them
make timely payments and avoid overdrafts and manage any short-
term financial shock. EWA services can provide consumers with a
more flexible and less-expensive way to avoid missing a bill or
sliding into debt. Without these services, 44 percent of
consumers would be unlikely to pay their bills on time, and 38
percent would consider going into overdraft.
EWA services are non-recourse and do not charge interest.
That means consumers have no legal obligation to repay, and
providers cannot take legal action to collect payments.
All EWA product models are subject to consumer protections,
including fair treatment of customers laws, UDAAP laws.
On behalf of FTA's member companies I appreciate the
opportunity to engage with the Committee today on these
important issues. Fintech innovations are driving competition
and providing consumers greater choice that results in lower
costs and better financial outcomes. We strongly believe that
balance and thoughtful regulation is key to long-term success
for all involved stakeholders. I look forward to helping inform
this important discussion today. Thank you.
Chairman Brown. Thank you, Ms. Lee.
Mr. Zywicki, welcome.
STATEMENT OF TODD J. ZYWICKI, GEORGE MASON UNIVERSITY
FOUNDATION PROFESSOR OF LAW, GEORGE MASON UNIVERSITY ANTONIN
SCALIA SCHOOL OF LAW
Mr. Zywicki. Thank you, Chairman Brown and Ranking Member
Toomey. It is a pleasure to appear with you again today. Thank
you.
Fintech, I think, is a very exciting development generally,
and I think the products that we are focusing on today, EWA and
BNPL, are good examples of the potential for fintech to improve
consumer welfare, especially with respect to consumers who
traditionally have been excluded, who have thin files or no
files for credit, and also importantly, are very important
vehicles for promoting innovation but also competition against
incumbent providers who can often get lazy if they do not have
somebody nipping at their heels.
I think the reality in this country is that middle-class
consumers do pretty well in consumer credit markets today.
Obviously, there are issues around the margins, but with
respect to mortgages, credit cards, and the like the markets
are transparent, competitive, plenty of choice, plenty of
innovation. Consumers have very little trouble finding the
products they want.
But a perennial issue in American history is what to do
with people who do not necessarily qualify for these top-notch
and high-quality products that we have, and this has been an
issue that has occurred again and again in America, and we see
it with respect to the issues that these fintech providers are
providing, which is, first, what to do with wage workers who
live paycheck to paycheck--and life does not occur on 2-week
cycles and sometimes you need money in between for bills and
emergencies and the like--as well as people who have
opportunities to purchase valuable products, and in particular
consumer durable products can be seen as a capital good by a
household. The value of a washing machine may be the most
important investment you ever make in your life, if you think
about the alternative being the schlep to the laundromat every
weekend. And BNPL is a good example of that.
And so what a lot of these products are doing are basically
providing very useful, low-cost, and convenient solutions to
problems that have been around for a long time. BNPL can be
seen as an update of the old personal finance company or retail
installment loan. And EWA is a very good solution to the
problem of what was originally wage loans, and now essentially
are filled by payday loans.
And what we have recognized over time, and that history has
taught us is innovation really is the way in which we have
improved welfare for all American consumers, but particularly
lower-income consumers. A good example was the development of
credit scoring and credit reporting, systemized credit
reporting systems in the '70s, which dramatically increased
competition, expanded access to people who traditionally were
not buddies with the bank manager and so could not get a credit
card. And also especially for broke-down discrimination, and
promoted equality in markets by basically getting rid of the
old sort of ways in which lending was done and replacing it
with FICO scores and other algorithmic lending.
And so I think there is great potential for these products.
I think they have proven themselves. I think so far consumers
have shown that they are using them in a very valuable way. EWA
users report, at least, that they are less likely to take
overdrafts, less likely to use payday loans, less likely to pay
bills late. That is obviously worth monitoring, going forward,
but they seem to be using it as an opportunity to smooth and
sync up their income with their expenses.
BMPL, so far, is more of a frothy market so far, but so far
it has really been a godsend, it seems, for a variety of
reasons, which is, first, during the pandemic, BNPL purchases
rose dramatically as people moved to online shopping, and it
shows a very important flexibility in the consumer financial
marketplace.
There has also been an especially high uptake by younger
consumers, and younger consumers, nowadays, because of various
reasons, including various regulations such as the Durbin
amendment, the CARD Act, younger consumers have less access to
credit cards and the like, less access to bank accounts and the
like. And so I think BNPL has really stepped in to not only
make it less necessary for them to access those products but
also has allowed them to continue to shop and get the things
that they need. So it has provided a useful solution to that.
And I think the final lesson I would say today is over time
when new products emerge they tend to be somewhat frothy, and
there tends to be a lot of variety in pricing. Over time,
competition and innovation tends to lead toward more
standardization on its own, and my big concern at this point
would be premature regulations that freeze the market, that
impose unnecessary costs where regulations may be archaic and
designed for products that are not around anymore and ill-
suited to this regulation.
So I want to close by commending the CFPB very strongly for
starting off by issuing an RFI, starting with the research,
understanding what these products are, who these consumers are,
what the risks are, before plunging in. I think while we should
have aggressive enforcement, consumer protection laws, I think
we should be wary of premature regulation.
Thank you for the opportunity to appear today.
Chairman Brown. Thank you, Mr. Zywicki.
Mr. Seligman, welcome. Good to have you.
STATEMENT OF DAVID H. SELIGMAN, EXECUTIVE DIRECTOR, TOWARDS
JUSTICE
Mr. Seligman. Good morning, Chairman Brown, Ranking Member
Toomey. I am the Executive Director of Toward Justice.
Some tout employer-driven debt as an innovation of
corporate employers in the financial services sector that we
should celebrate and seemingly insulate from regulatory
oversight. They suggest that these forms of debts are essential
to workers who need access to credit to ends meet, training to
advance their careers, or the costs of starting up a job.
But workers' difficulty meeting financial demands and
advancing professionally do not arise because they do not have
access to credit. They arise because far too many workers still
do not earn a living wage or have a predictable schedule that
will allow them to meet their most basic financial obligations.
And far too many corporate employers, even as corporate profits
balloon, seek to shift onto their workers their own costs,
while undermining the most critical component of a worker's
dignity and bargaining power, the ability to seek out other
work that will pay them more and treat them better.
To appreciate the importance of oversight and vigorous
enforcement of worker and consumer protections we should
understand employer-driven debt, broadly. Employer-driven debt
affects workers like nurse Cassie Pennings, whose story you
heard earlier. Ms. Pennings contracted with a hospital where
she worked, including a Training Repayment Agreement Provision,
like the contracts of thousands and thousands of other
workers--truck drivers, hair stylists, social workers, and
employees of PetSmart, among others. By trapping workers in
these jobs these arrangements run counter to the principles of
fair competition that we have heard so much about today.
Employer-driven debt also affects the immigrant cleaning
workers who come through my organization's doors, complaining
that they were sold a sub- minimum-wage job, dressed up as a
cleaning company franchise, and that, in told, they could
finance the startup costs and franchise fees through their
purported franchisor, who then trapped them in a vicious cycle
of debt and modern-day indentured servitude.
Employer-driven debt affects countless retail and service
workers whose work schedules are unpredictable and variable,
making it hard for them to make ends meet. But instead of a
fair schedule or a consistent living wage, their employer
offers them short-term loans to bridge the gap, loans whose
true costs are often not disclosed.
Workers cannot address the harms of employer-driven debt on
their own. They are deterred by pervasive misclassification,
forced arbitration clauses, and the threats that their employer
will punish them through aggressive debt collection, whether or
not the contractual provision permitting that collection would
ever be enforced by a court.
It is imperative, therefore, that Federal agencies provide
regulatory oversight and vigorous enforcement in this space.
The Consumer Financial Protection Bureau can guard against
unfair, abusive, and deceptive practices related to these
products, look out for predatory employer-driven debt
arrangements that target immigrants and people of color in
violation of the Equal Credit Opportunity Act, and ensure that
protections like the Fair Debt Collection Practices Act apply
to employers' efforts to aggressively collect debts that trap
workers.
Agencies like the FTC and Department of Justice can police
and regulate the market for employer-driven debt that unfairly
and illegally impedes worker mobility or even that keeps
workers trapped in violation of laws, prohibiting trafficking
and peonage.
Finally, when employer-driven debt seeks to recoup the
employer's costs it may be an illegal kickback against workers'
wages, in violation of minimum wage laws. In the case of
Training Repayment Agreement Provisions, when, as is often the
case, the underlying training is not principally for the
employee's benefit but it is instead standard training for the
benefit of the employer, the employer-driven debt is likely a
minimum wage violation. In these cases, the U.S. Department of
Labor can ensure that employers do not keep workers trapped in
jobs through threats to collect such debts.
Workers do not care if we understand their challenges as
consumer protection challenges or labor challenges or
competition law challenges. What matters to them is that
Government is there to police abuses of corporate power and
level the playing field.
We appreciate this Committee's attention to this important
matter.
Chairman Brown. Thank you, Mr. Seligman.
Some questioners may be hybrid. I am sure you are aware of
that.
Let us start with Ms. Gittleman. With new consumer
financial protections the Committee is discussing, to products
the Committee is discussing today, it is important at the
outset to establish what type of financial products that they
are. So my question for you, Ms. Gittleman, first question, are
Buy Now, Pay Later, Earned Wage Access, and other type of
products that use the tip model you discussed, are they a form
of credit that falls within the purview of existing consumer
protections?
Ms. Gittleman. Yes. Thank you for the question. Each of the
products discussed today are, in fact, credit, and should be
treated as such by both consumers and regulators alike.
Chairman Brown. Mr. Seligman, are TRAPs, which lead the
consumer in debt for their employment training, is that
considered credit?
Mr. Seligman. Yes, absolutely, and they should be covered
by consumer protections. I will say that some employers may
argue that the underlying training is not for the benefit of
the employee, the personal benefit of the employee, and is in
the benefit of the employer. But in those cases, again, the
TRAP is a violation of minimum wage laws, and that is why it is
so important that we have coordination between the Department
of Labor and the CFPB on these issues.
Chairman Brown. Thank you. As you both have said, these
products are credit and relevant consumer protections, like
TILA and the Military Lending Act and State usury caps should
apply. I am glad, as you mentioned in your testimony, that
CFPB, under the leadership of Director Chopra, has launched an
inquiry on some of these products. It is acting like the
consumer watchdog that that job was created to be.
Mr. Seligman, training the TRAPs, Training Repayment
Agreement Provisions, raise the troubling prospect of an
economy in which employers prey upon their workers' optimism to
bind workers to their firms, turning debt into a tool for
coercion, limiting economic mobility. You have discussed that.
My question is, by saddling workers with debt, limiting
their freedom to move, or search for a job, do TRAPs limit
worker mobility? If you would comment on that.
Mr. Seligman. Absolutely, and, in fact, I think that is the
purpose on the employer side. We often see that the debt at
issue far exceeds the value of the training. In a recent case,
for example, a trucking company sought to collect $6,500 from
workers for whom it paid training costs that did not exceed
$2,500. So it is not an effort to recoup the reasonable cost of
training but very obviously, on its face, an effort to trap
workers.
Chairman Brown. So how does limited worker mobility impact
individual households? You have said what this means for
employers. It obviously means limited mobility for employees.
How does that impact individual households? How does that
impact the broader economy?
Mr. Seligman. Thank you. The costs of these types of
arrangements, which indenture workers, can be devastating. We
have spoken to workers who are trapped in abusive employment
relationships, to workers who are not being paid a living wage,
who are not being paid what they are owed. That can be
incredibly traumatizing for workers.
Additionally, there are lots of data from the noncompete
context which identify how these types of arrangements suppress
wages. We know that they also interfere with the ability of
competitors to hire workers that will increase productivity and
be paid more and treated better.
Chairman Brown. Expand on that a little bit more, how it
threatens wages and salaries and then how it undermines future
job opportunities. Walk that out a little for us.
Mr. Seligman. Absolutely. One of the most important tools
that any workers has in the employment relationship, core to
their bargaining power, is the threat of exit, the threat of
being able to go and work somewhere else. Employers understand
this. In an effort to suppress wages, even as their profits
grow, many employers have sought to artificially undermine
worker mobility. And as a consequence, that traps workers in
jobs in which they are not treated as well as they ought to be
but also in a labor market in which they do not have the power
to earn the wages they are owed.
Chairman Brown. And you can see how these provisions, these
actions, undermine the dignity of work and what that means for
workers. As I said before, I look forward to seeing the results
of CFPB's inquiry and how we move forward. CFPB is obviously
looking at consumer protections but also antiworker practices.
Last question, Ms. Gittleman. Earlier this week, Briana
Gordley from Texas testified that the Buy Now, Pay Later credit
she took out was initially manageable until a variety of BNPL
companies approved her for more than $1,500 in credit combined.
She was a college student at the time she took out those loans.
Does that sort of underwriting meaningfully assess a borrower's
ability to repay? For example, do these companies assess
whether a consumer has multiple BNPL loans with different
providers?
Ms. Gittleman. No. Most providers do not meaningfully
assess a consumer's ability to repay. As it stands right now
there is no way for companies to verify how many loans
consumers have across different providers, and for many
providers consumers need only provide a payment form, verify
their identity, and do a soft credit check, which again does
not meaningfully assess a consumer's ability to repay.
Chairman Brown. Thank you. And considering that one-third
of consumers who use BNPL missed one or more payments, and of
those consumers 72 percent reported a decline in their credit
score, it seems that those underwriting standards need
strengthening.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Mr. Zywicki, you
know, it seems to me that a lot of the innovations in fintech
are designed, in many cases, to provide a service to people who
seem to be mostly left out of existing financial products, or
at least with respect to credit. And it is disruptive to the
incumbent players but it creates whole new opportunities for
these consumers.
So could you just share for us, what do you think is the
best way to think about regulating? Take the BNPL, or, for that
matter, the Earned Wage Access. How should we think about going
about the regulation so that we do not stifle innovation of
these products or the next generation that we have not thought
of yet?
Mr. Zywicki. Thank you for that question which I think is
the big question on the table here. And I first want to agree
and associate myself with your observation which is that I
think the great promise of fintech is with respect to
traditionally underserved consumers, which is, again, the
market works pretty well for middle-class consumers, upper
middle-class consumers. We have plenty of options, high-quality
options and the like.
But it has always been this problem of serving underserved
consumers, and the real problem as always been the cost. It is
very costly to make small loans. There are a lot of fixed costs
involved in making loans. And fintech potentially unlocks that
by providing low-cost options, slick, kind of transparent,
competitive options that do not have a lot of overhead and the
like.
And so what my big concern is, is taking regulations,
regulatory structure that is very archaic, that really dates
back to the 1970s, which is the world of sort of pen-and-paper,
maybe early prototype computers, and trying to take that
regulatory scheme, which is already pretty creaky around the
edges and does not work very well and does not fit a lot of
products very well, and trying to impose that on the new
fintech economy I think could really be a problem, which is it
is not really designed for that.
Bad regulation can have costs with very few offsetting
benefits, and I think the real issue we should be focusing on
is ensuring that we are protecting consumers, so sometimes that
means we should be doing more aggressive enforcement and less
reliance on information, promoting competition, promoting
innovation and the like.
Senator Toomey. And just to be clear, so are you aware of
data that suggests that the consumers who actually use BNPL
facilities tend to be younger, lower income, maybe have a
history of credit problems? Are they, in fact, the people who
have a more difficult time obtaining credit?
Mr. Zywicki. Absolutely. They seem to be the people relying
on it the most. There are some middle-class people who are kind
of doing it as a gimmick, I think. But really the value
proposition here is for lower-income, younger, traditionally
excluded consumers.
Senator Toomey. OK. So then it becomes important that these
consumers understand what it is they are getting themselves
into. That is certainly important.
Ms. Lee, are you aware of evidence regarding whether or not
consumers actually understand the terms of the transaction? I
am referring specifically to BNPL products.
Ms. Lee. There have been two different studies recently,
one from the Financial Health Network which said 99 percent of
the consumers who use BNPL products understood the terms and
conditions. And recently, just this last weekend, Morning
Consult did a survey as well and they found that 94 percent of
the consumers that used BNPL products understood the terms and
conditions. I think that is a very high mark of people that
really understand what these products are about, what their
obligations are, and have full understanding of the terms.
Senator Toomey. So I know there are some people who are
concerned that these BNPL companies take advantage of
consumers, but let us think about the transaction here. First
of all, typically it is zero cost, there is no interest rate
paid, the fee that is paid and the income to the BNPL company
typically comes from the merchant, who has plenty of incentives
to pay that fee.
So I guess the risk to a consumer would be if you do not
make a payment on time you could get hit with a late fee. So
what do we know about how prevalent late fees are, how many
consumers are hit with them, how big a percentage of BNPL
companies' incomes derives from late fees?
Ms. Lee. A couple of different things I will try to unpack
there. As far as on the late fees, what we know from, in
general, the industry standard, less than 4 percent actually
incur a late fee.
Senator Toomey. Less than 4 percent of consumers.
Ms. Lee. Less than 4 percent of consumers using a BNPL
product incur a late fee. So 90 percent of those using do not
incur. They pay on time, and they are able to manage and fit
their budget accordingly. And so that is why you are seeing the
increased use of these is because it is allowing them to fit
their budgets.
As far as on the derision of how much of the companies
derive their revenue from that, around 85 to 87 percent of
companies derive from merchant fees. There are other fees put
into there, either a late fee or otherwise, but 85 to 87
percent of a BNPL company comes from merchant fees.
Senator Toomey. Thank you very much. Thank you, Mr.
Chairman.
Chairman Brown. Senator Warren, from Massachusetts, is
recognized.
Senator Warren. Thank you, Mr. Chairman. So last month,
President Biden made the historic decision to cancel up to
$20,000 in student loan debt, and this is going to deliver
life-changing relief for as many as 43 million middle-class,
working-class Americans. It is going to be nurses and truck
drivers, nail technicians, and millions of people who were not
able to finish their degrees.
So while families are breathing a sigh of relief,
corporations that made billions of dollars off a broken student
loan system are now busily laying new traps in a shameless,
last-ditch effort to try to line their pockets.
Navient, one of the world's largest and worst loan
servicers, is now leading the way. According to reports,
immediately after the cancellation was announced Navient sent
multiple emails to borrowers encouraging them to refinance
their Federal loans under Navient's private lender, NaviRefi,
with the promise of lower interest rates.
Ms. Gittleman, your organization has a long history of
protecting consumers from student debt scams so I want to ask
you. Let us say a borrower decides to take Navient up on their
offer and refinances their Federal loans with a NaviRefi
tomorrow. What would this mean for cancellation under President
Biden's plan?
Ms. Gittleman. Thank you, Senator Warren, for the question.
If they refinance with NaviRefi then they will essentially be
replacing their Federal student loans with a private student
loan. Because only Federal student loans are eligible for
cancellation, that means they may no longer be eligible for
that cancellation. That is a huge loss for borrowers eligible
for cancellation, but Navient only mentioned this in the fine
print at the bottom of those emails.
Senator Warren. So they could be forfeiting $10,000 to
$20,000 worth of debt cancellations. In other words, right
after the President announced student loan cancellation,
Navient sent out notices to people who could be eligible,
encouraging them to refinance so they would not be eligible for
debt cancellation.
We do not know at this point exactly which borrowers
Navient sent these emails to, although I have sent a letter
asking for more information from Navient. But it appears that
instead of sending borrowers information to help them get the
cancellation that they may be entitled to, Navient pushed
borrowers toward loans that could, at best, complicate their
ability to get cancellation.
Ms. Gittleman, does Navient make more or less money if its
borrowers get their loans canceled?
Ms. Gittleman. The future of Navient's lending business
depends on its ability to take the most creditworthy people,
with Federal student loans and refinance them into private
loans. Every borrower who is debt-free as a result of President
Biden's action is one fewer prospective customer for Navient.
More broadly, the better the deal the Federal Government
offers borrowers with Federal student loans, the less
opportunity Navient has to sell people its private loans.
Senator Warren. So I just want to underscore what you just
said. Every borrower who is debt-free is one less borrower for
Navient to profit from. I think that was a fair summary. Is
that right? So no wonder Navient is trying to steer borrowers
away from cancellation.
Look, this is outrageous behavior, and it is why I sent
letters to Navient and to other loan servicers yesterday,
asking them what steps they are taking to ensure that consumers
receive timely and accurate information about their loans and
their eligibility for cancellation.
By the way, this is not the first time that Navient has
been caught trying to take advantage of borrowers. Between 2009
and 2019, there were at least 10 incidents where Navient, or
its corporate predecessor, Sallie Mae, was accused of or fined
by Federal and State regulators for actions that ripped off
borrowers, including steering borrowers to repayment options
that actually made it harder for them to pay back their loans,
failing to report borrowers complaints, and harming disabled
veterans' credit reports.
Policymakers need to keep a close eye on servicers to
ensure that borrowers are protected as they await debt
cancellation, and I am going to continue fighting to make sure
that happens.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warren.
Senator Warner, from Virginia, is recognized.
Senator Warner. Thank you, Mr. Chairman, and I appreciate
you holding this hearing. I think back. You know, I have been
on the Committee for a long time now, and when we used to look
at the nonbank sector we thought about it in the commercial
sense, you know, asset-backed securities, CDOs, repos, and
there were some benefits there. But then what we saw in the
financial crisis they were also the source of a lot of economic
meltdowns.
We have seen since the financial crisis, and that is one of
the reasons why I appreciate you holding this hearing, is that
we have seen now a migration in the nonregulated part of the
financial industry a massive amount of new consumer products
come up in this area. As a matter of fact, banks' share of
mortgage originations fell from 91 percent to 32 percent. The
share of small business loans and unsecured loans dropped by 10
percent from the regulated industries. And we have seen this in
a whole host of new areas.
We have spent some time, and I think I have still got to
get more education on issues like crypto, but we have seen
specialized fintechs, peer-to-peer networks, frankly some of
the big tech firms getting into the payment space, and some of
these things bring real benefits. But I think we focus
sometimes on almost exclusively the benefits and not on some of
the challenges.
The truth is I think there are reasons that we have
regulated financial institutions, and with that regulation
while there are burdens there also comes, I think, some
benefits.
I want to start again with you, Ms. Gittleman. Your
testimony states that new products are ``exploding across
consumer markets.'' How should we keep an eye on these new
products, recognizing a lot of consumers like them, do not care
whether it comes from regulated entities or nonregulated
entities. But my concern is how do we make sure that we are
guarding the protections for the consumers in this nonregulated
banking sector?
Ms. Gittleman. Thank you for the question, Senator Warner.
You know, we have Federal and State regulators, and regulation
and oversight of markets benefits everyone. There is more
competition. Regulated entities have a clear expectation of
what is allowed and what is permitted. And consumers benefit
from being protected and knowing that they are protected.
We have appreciated the CFPB's inquiry into BNPL providers,
and we look forward to seeing what research they found. But we
would also encourage them to supervise the fintech lenders that
we are talking about today, under various different authorities
and that are in my written testimony. But we would encourage
them to supervise each of these industries so that consumers
are protected and that the regulated entities have a very clear
sense of what is permitted.
Senator Warner. I know I was a big advocate a number of
years back of more experimentation in the fintech sector, and I
know there was probably some disagreement even on my side of
the aisle about when OCC was talking about kind of voluntary
charters, and some critique that that would be almost
regulation lite. I personally think we maybe ought to revisit
that because at least it sweeps some of these entities into
some regulatory structure.
I fear that the kind of, whether it be CFPB or this
hodgepodge of State regulations, does not give the clarity that
we need. And I would like, basically, the rest of the panel to
address, from your organization's standpoint, with the
proliferation of these new products--and again, consumers
probably not caring at the end of the day whether it is a
fintech, a bank, a credit union. They just want to get the
product. But how do we make sure that we put some framework
around this.
Very nice to see you, Ms. Lee, in your new role, and I
would love to hear from the rest of the panel on that subject.
Ms. Lee. Good to see you, Senator. And on that subject I
would say that there is, you know, with the products that we
are talking about today, in particular but larger, there are
three different ways. One is to enter into State agreements
with money transfer licenses, and that would put them in, once
they are licensed and they are also under examination for the
abilities of which they do, which is on the money transfer.
They can enter into bank fintech partnership. When the
enter into bank fintech partnerships they are subject to the
oversight of the State and Federal banking system, overdraft
and other things, and to ensure the fairness, safety, and
soundness.
And then third, to your point, they can go pursue their own
charter, their own banking charter, whether that be through the
OCC, through an ILC, or through other means. I would say many
of our member companies seek that. Unfortunately, there has not
necessarily been a moratorium but there has been a very slow
acceptance of having special purpose or other types of national
bank charters. Many fintech companies are asking to be in the
more regulated space to be able to fit the purpose of what they
are trying to accomplish. We would welcome the opportunity for
the various different regulatory bodies to be able to approve
those so that you can have a fullness and understanding of what
these partnerships look like.
Senator Warner. If the other panel members could quickly
address that.
Mr. Zywicki. Thank you. I will be brief. Thank you for that
question. I agree. It is a big problem, the hodgepodge of State
regulations when it comes to fintech. Fintech only really works
on a national basis, to make the economics work.
As the chairman of the CFPB Task Force, I think somewhat
controversially, we recommended that the CFPB be given
chartering authority for nonbank financial services
institutions. I believe the OCC fintech charter could work. I
also fear that if the OCC is in charge that the big banks will
co-op the process to impose unnecessary burdens on them.
And so I would suggest considering something like the CFPB
be given the authority to charter nondepository consumer
financial providers.
Senator Warner. Mr. Seligman.
Mr. Seligman. Thank you, Senator. You asked what frameworks
apply, and I would suggest that in most cases we have the
frameworks. These products are credit, as Ms. Gittleman
testified to, and we should not allow the fact that they are
dressed up in fintech terms or sometimes bound up with the
employment relationship to alter our perspective on that
critical point.
Senator Warner. I know my time has expired, Mr. Chairman, I
have also been looking at the question. There are a lot of
ancillary products that are kind of sold into the regulatory
industry, and there is actually an affiliation of regulators
that look at how those products are sold in. That might be an
area I need to learn a lot more about, but it might be another
framework.
Because we are talking about consumer protections here, we
can make the same kind of question about cyber protections in
this area, and the idea of this whole sector going without any
framework of oversight, I frankly do not think the hodgepodge
State regulatory system is going to meet the mark. But I
appreciate you holding the hearing.
Chairman Brown. Thank you, and thanks always for your
insight, Senator Warner.
Senator Reed, from Rhode Island, is recognized.
Senator Reed. Thank you very much, Mr. Chairman, and thank
you to the panel.
Ms. Gittleman, I have introduced S. 2508, the Veterans and
Consumers Fair Credit Act, with Chairman Brown and several
members of the Committee, and this legislation would establish
a nationwide interest rate cap of 36 percent, with the goal of
eliminating predatory loans from our consumer credit markets.
We already have something similar to this with the Military
Lending Act, where we are protecting our service men and women
with this same limit.
Can you give us some examples of the new, emerging products
that appear to be consumer-friendly but in practice are
predatory and really exceed 36 percent?
Ms. Gittleman. Thank you, Senator Reed, for this question
and for your advocacy on the Veterans and Consumers Fair Credit
Act, and Chairman Brown as well.
Finance products that use the tip model are an example of
this. Pricing can look very affordable on the outset but can
reach as high as traditional payday loans.
Other loans that we have not necessarily talked about today
but I addressed in my written testimony that are offered online
or through a smartphone application and especially those that
use the rent-a-bank scheme to peddle high-interest loans, even
in States where those rates are illegal.
Senator Reed. You mentioned the rent-a-bank arrangements,
can you describe how they avoid the State usury limits?
Ms. Gittleman. Sure. Banks are largely exempt from State
interest rate caps, and high-cost lenders have used this
exemption to launder their loans through banks in order to
evade State interest rate laws. This is not a true bank
partnership like Ranking Member Toomey was speaking about. The
high-cost lender has the predominant economic interest in the
loan. They are doing the majority of the underwriting, reaping
the majority of the benefit, taking on the majority of the
risk. And they either name the bank at the very end of the
agreement or they pass the loan through the bank in order to
evade that State interest rate cap.
Last year, Congress, in the bipartisan rebuke, rebuked
these partnerships, these rent-a-bank schemes, but the Veterans
and Consumers Fair Credit Act would protect consumers from
these high-interest loans that are evading State interest rate
caps.
Senator Reed. There is another product that is becoming
more prominent. That is the Buy Now, Pay Later. These loans
allow consumers to split payments for products like electronics
and clothing into four equal installments, typically, that are
due every 2 weeks. They have been very, very popular in the
pandemic. In fact, according to the Mercator Advisory Group,
$55 billion in Buy Now, Pay Later credit was extended in the
last year in the United States, and they are projected an
expansion more $100 billion by 2024.
Which consumer protections laws apply to Buy Now, Pay Later
loans and which do not?
Ms. Gittleman. We would argue that most consumer protection
laws should apply to Buy Now, Pay Later. As it is being
structured more and more like open-end credit, TELA should
apply with finance charges and mandatory arbitration
agreements. Military Lending Act should apply. As it is
commonly used by consumers of color, ECOA, the Equal Credit
Opportunity Act should apply.
Since many products require or include authorization for
payments to be automatically deducted, the Electronic Funds
Transfer Act should apply. For products that allow consumers to
consent to debt collection in the initial terms and agreement,
the Fair Debt Collection Practices Act should apply. And
finally, Federal regulators should supervise Buy Now, Pay Later
providers and ensure that they are not engaging in unfair,
deceptive, or abusive acts and practices or unlawful
discrimination.
Senator Reed. It is also my understanding that the BNPL
lenders do not report to the credit bureaus in any standardized
fashion, which complicates evaluating the credit of an
individual for other types of loans. Is that accurate?
Ms. Gittleman. So we are in the beginning processes of
having that Buy Now, Pay Later data incorporated into credit
reports. It is not done in a standardized manner. Each of the
credit reporting bureaus have their own format of incorporating
and using that data. And it might both not only have
underwriting consequences but also credit reporting and credit
scoring consequences as well. FICO scores of credit reports
that have incorporated said data have lowered slightly, and it
just illustrates that, at best, the current credit reporting
system is an awkward fit for Buy Now, Pay Later.
It is not traditionally what fits into the credit reporting
system. So this needs to be done thoughtfully to ensure that
consumers are protected.
Senator Reed. Well, thank you very much. Thank you, Mr.
Chairman.
Chairman Brown. Thank you, Senator Reed.
Senator Van Hollen is recognized, from Maryland. He is
recognized from his office, I believe.
Senator Cortez Masto, of Nevada, is recognized from her
office.
Senator Cortez Masto. Thank you, Mr. Chairman. Thank you to
the panel members for helping to facilitate this conversation.
And by the way, if some of my colleagues do not remember, I do,
in 2007, when there were new financial products that were
offered by Wall Street called mortgage-backed securities. And
then they were followed by other financial products--teaser
rates, adjustable-rate mortgages, interest-only loans to
borrowers--that led to the subprime mortgage meltdown that
caused a recession starting in 2007. So I do think it is
appropriate for us to be having this conversation today, and so
appreciate the panelists here for their comments so far.
Mr. Seligman, let me start with you. I have done some work
around franchises, and I have been long concerned about unfair
practice related to some franchise businesses. I do not know if
you have seen but I issued a report in 2021 called ``Strategies
to Improve the Franchise Model, Preventing Unfair and Deceptive
Practices.''
Now let me just say, there are some models that are just
very good business models, but as always there are some
predatory-modeled predators within the system, and those are
the ones I am highlighting.
So Mr. Seligman, let me ask you this. How can the promise
of an independent franchise sometimes become a way to trap
workers in jobs with low wages and crushing debt?
Mr. Seligman. Thank you, Senator, and first let me say I
appreciate your work in this space, standing up for small
businesses and for workers. Very often we see the predatory
franchise opportunities target those who have been left behind
by our labor market, who are excluded from some of our most
hard-fought labor protections, disproportionately immigrants
and people of color. Predatory companies can go to them and
they can say, ``Look, the traditional employment opportunities
have not provided you with a path to financial success, and so
instead let me sell you on a purported entrepreneurial
opportunity, the opportunity to own a small business, to become
a franchisee.'' Instead, these companies will trap workers in
arrangements where the companies exert extraordinary control,
where the workers do not have the ability to set their own
prices or even sometimes communicate directly with their
clients. And instead of being paid wages, the predatory
companies will often say, ``You owe us a franchise fee. And
because those franchise fees can be so high, we are going to
finance those fees for you. We are going to loan you the money
to pay for the upfront costs.'' This can create a really
vicious cycle of predatory debt and effectively involuntary
servitude.
Senator Cortez Masto. Well, thank you, and I appreciate
your comments because it is an area where I would hope my
colleagues would join me. I have some legislation to help us
level that playing field and just get more information out to
potential franchisees, so thank you. Let me jump to Training
Repayment Agreement Provisions and how it is impacting nursing.
The U.S. Bureau of Labor Statistics reported that we need more
than 179,000 nurses to meet our national shortage, and many
reasons contribute to the shortage. However, I was shocked to
see the prevalence of the Training Repayment Agreement
Provisions among nurses with repayments as high as $20,000. So
Ms. Gittleman, can you expand on the use of TRAPs in the health
care profession?
Ms. Gittleman. Sure. Thank you for the question, Senator.
You know, these TRAPs are becoming more and more prevalent
across different industries. They are infiltrating trucking,
nursing, PetSmart employees, social workers, and into our
medical field as well. And this is a form of employee-driven
debt that not only traps consumers in that debt but also
hinders workplace mobility and exacerbates disparities.
Senator Cortez Masto. Thank you. And Mr. Seligman, any
other additional comments or things that we should be doing in
Congress to address this, if anything?
Mr. Seligman. Thank you. Yes, I just want to emphasize that
in many of these arrangements, especially when it comes to
immigrant nurses, will see employers justify extraordinary
debts and training repayment agreements by saying that the
worker entered into them voluntarily in order to have their
visa sponsored. Of course, it is a fundamental tenet of our
laws in this country that you cannot sell yourself into
indentured servitude. I think it is really important that we
attack these practices as being unfair and illegal. And I will
also say, of course, in this area as in so many others, forced
arbitration is at the root of the problem. So many workers are
trapped and their rights are violated. Even if, as I said, no
court would ever enforce the provision that is trapping them in
their jobs or purporting to authorize debt collection, they
cannot do anything about that because a forced arbitration
provision prevents them from going to court, may require them
to arbitrate in a far-off forum, or pay the other side
extraordinary costs.
Senator Cortez Masto. Thank you. I know my time is up, Mr.
Chairman, but thank you. And I could not agree more about these
arbitration agreements that are part of these confusing
contracts. The consumer has no choice, does not get to
negotiate these contracts, and that is why the arbitration
clauses are so detrimental.
Thank you, Mr. Chairman. I appreciate it.
Chairman Brown. Thank you, Senator Cortez Masto, and thank
you for your reference to what happened a dozen or so years
ago.
Thanks to the witnesses. I would like to submit for the
record the testimony of BreAnn Scalley of California, whose
former employer made her sign a TRAP, putting her in debt for
$5,500 to the employer after she resigned due to poor working
conditions.
I would also like to submit for the record the testimonies
last week--I had said earlier this--last week of Briana Gordley
and Cassie Pennings, their stories describing their struggles
with employer-driven debt and new credit products is important
context to what it means to be a worker living with debt.
For Senators who wish to submit questions for the record,
those questions are due Tuesday, September 20th. Each of you on
the panel, if you would, have 45 days, please, to respond.
The hearing is adjourned. Thank you for joining us.
[Whereupon, at 11:24 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Hard work should pay off for everyone.
That's the American dream.
That's what the dignity of work is all about--it's a concept that
Pope Leo XIII spoke of in the 19th century, and popularized by Dr.
King.
And when work has dignity, you can support yourself, your family,
and your future.
But we all know what's happened over the last four decades.
Corporate profits have gone up. The stock market has soared.
Executive compensation has exploded.
But wages have not kept up with the cost of living. Millions of
workers with full-time jobs who aspire to the middle class can't join
it, no matter how hard they work. And even people we may define as
middle class don't feel much security and stability.
And when workers are forced to find ways to make up for the gap
between what they're paid and what they should earn, what are they left
with?
Debt.
Sometimes people will have to borrow money. Products that are well-
designed, transparent, and regulated can help workers pay off an
unexpected car repair, or help with the grocery bill, or cover a
medical expense.
But as we heard at our listening session with workers last week,
too often these products aren't well designed, they're rarely
transparent, and they're not well-regulated.
For too many workers, the only credit products available lead to
more debt and more financial instability.
We've discussed in this Committee the impact predatory payday
lenders have on working families.
Today, we examine the impact some newer consumer financial products
have on workers.
Companies tell us these new products are innovative, they're easy
to use, they'll give people more options.
But so often, ``innovation'' is just a new way for companies to
make money--while trapping people in debt.
Newer credit products, like ``buy now, pay later,'' could help
consumers pay for products in installments, with strong consumer
protections.
Yet many of these products come with hidden fees, they lack
transparency, and they aren't underwritten properly. Ads encourage
consumers to use these plans for multiple purchases, at multiple online
stores--racking up debt they cannot afford to repay.
Consumers like Briana Gordley.
As a college student, Briana started off with one of these loans.
First one BNPL company, then two, then three. One company told her they
were raising her credit limit from $100 to $1,000.
Initially, 18-year-old Briana wasn't too concerned. As she put it,
if the companies ``believed in my ability to repay my debt, then I did
too.''
With the approval of more and more credit, Briana was juggling
$1,500 in loans with different payment dates throughout the month, and
her account kept getting overdrawn.
Briana's story gets to the core of the problem. With little to no
underwriting, the ``Buy Now, Pay Later'' companies don't know if
they're the only ones a consumer has credit with. And without proper
term disclosures, a consumer is left in the dark.
For this model to work for consumers, we need real rules companies
must follow, and proper disclosures.
Then there are new consumer products that use a so-called ``tip
model''--structuring themselves to deliberately avoid disclosing their
terms, specifically avoiding important disclosures required by the
Truth in Lending Act.
Products like cash advances, overdraft coverage, and Earned Wage
Advances--that are not offered in conjunction with employers--use a
model where consumers are asked to pay a ``tip'' to the lender, instead
of a fee or interest rate to use the products.
Companies claim that because a tip is not presented as a finance
charge or interest rate, Truth in Lending and other consumer protection
laws, like the Military Lending Act, do not apply.
The tip is just ``voluntary,'' they say.
But these tips are not voluntary at all.
It's just a way to cheat the system and hide the true cost to
workers.
Employer-based Earned Wage Advances with strong consumer
protections can help workers cover unexpected expenses or emergencies--
though the better alternative would simply be for the companies to pay
their workers enough to live on.
And then there are debt products that are so predatory, so
offensive, they should have no place in our financial system--schemes
like Training Repayment Agreement Provisions, appropriately known as
``TRAPs.''
I'll say this for that term--it's truth in advertising.
These provisions in employment contracts allow employers to recoup
the cost of training employees who leave the job.
It's an offensive concept.
It's the employer's job to train their workers. On-the-job training
isn't some special perk for workers--it's a smart investment for
companies.
TRAPs require workers to pay back their employers for training if
they leave their job within a certain period of time, saddling workers
with debt.
It's just a modern day version of the scrip that left coal miners
exhausted, destitute, and trapped by their employers.
Remember what Tennessee Ernie Ford sang about owing his soul to the
company store: ``You load 16 tons, what do you get? Another day older
and deeper in debt.''
Employers use TRAPs to prevent workers from pursuing higher paying
or better opportunities. They decide how much the training would
supposedly cost on the market and go after their workers--threatening
their credit and economic mobility.
Last week, Cassie Pennings from Colorado told Members of the
Committee about her experience with TRAPs.
Ms. Pennings pursued her calling as a nurse during the COVID-19
pandemic.
At the start of her job, her employer made Ms. Pennings sign an
employment contract, and buried in the fine print, it said that if she
left before 2 years, she would be indebted to her employer for $7,500
for the supposed training they provided.
When Ms. Pennings decided to leave her nursing job after a year
because of a bad work environment, her employer took $1,000 out of her
second to last paycheck to payback her ``training.'' That was half of
her paycheck.
Her former employer told her they will send the rest of the amount
to collections.
Last I checked, indentured servitude was illegal in the United
States.
But it looks like some enterprising companies are rebranding it,
with these new employment contracts.
And that is the focus of today's hearing: to ensure that so-called
``innovation'' is not a substitute for good pay and does not come at
the cost of workers' dignity of work.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman.
Today's hearing is about new consumer financial products. In the
last decade, we've seen financial institutions develop technology-
oriented solutions to meet consumer needs. These new choices create a
more competitive marketplace--all to the benefit of consumers.
As long as consumers have truthful and accurate information about
financial products, they're best positioned to decide what products to
use. Any regulation of financial products should fit the product type,
make room for innovation, and maximize consumer choice. Too often,
however, the response from my friends on the other side of the aisle is
to see something new and panic.
Some newer financial products offer consumers more options for
short-term funding. One of them is called Buy Now, Pay Later, or BNPL.
BNPL typically allows consumers to make purchases now, often online,
and repay them in four interest-free installments later.
This service can be an attractive way for consumers to manage their
cash flows to obtain goods and services without having to pay interest.
That's especially true for consumers who don't have or don't want to
use a credit card for such purchases. This may explain why BNPL is most
popular among younger consumers, who have shorter credit histories. If
customers are late with payments, BNPL companies sensibly suspend
further purchases until they are paid, and some charge a late fee.
Interestingly, BNPL companies do not primarily make their money
from consumers, but rather from retailers, who pay them a small
percentage of transactions to offer the service to customers. Retailers
are willing to do this because they don't have to pay credit card
interchange fees on BNPL payments and offering BNPL can increase sales
and customer loyalty.
Another newer financial product that provides consumers with short-
term funding is Earned Wage Access, or EWA. This service can be an
appealing alternative to payday loans for workers who want an advance
on their wages.
Many people don't have savings available to pay for unexpected
expenses that can arise in between pay periods, like car repairs or
medical bills. EWA can help consumers to meet such expenses and others
by advancing them the amount of income they've already earned at that
point in the pay period.
There are various EWA products available. In some cases, employers
select and pay the fee for the service as an employee benefit, while in
others, consumers must pay the fee.
According to a recent study, the average fee a user paid per
advance was $2.59 to $6.27. That's less than 5 percent of the amount
advanced.
In short, marketplace competition has successfully generated more
and cheaper options for many consumers to meet their needs. This is a
reminder that market competition is typically better at helping
consumers than the Government--whether the product or service is in the
financial sector or another category.
Other newer financial products include forms of credit that have
existed for a long time, but with innovations in how they're provided.
In recent years, financial institutions--primarily community banks--
have begun to partner with financial technology companies, or fintechs,
to offer improved products and reach more consumers.
Bank-fintech partners offer a large variety of credit products,
including small-dollar, personal, auto, and small business loans, as
well as credit cards, mortgages, and home equity credit lines. These
partnerships can generate significant consumer benefits by lowering the
price of financial products, expanding consumer choice, and increasing
competition. Often, they provide access to credit for higher-risk
borrowers, such as consumers with lower-incomes or no credit histories,
all through a highly supervised financial institution.
Unfortunately, some bureaucrats and lawmakers react with hostility
to any new financial products. Democrats in Congress have pejoratively
branded all bank-fintech partnerships as ``rent-a-bank'' schemes.
Last year, they overturned an OCC rule that provided regulatory
certainty for these partnerships. Unfortunately, by attacking
legitimate bank-fintech partnerships, Democrats risk restricting access
to needed credit for lower-income consumers.
And the CFPB, under Director Chopra, has repeatedly demonstrated
hostility to innovation in consumer finance markets. For example, he's
replaced the CFPB's Office of Innovation with a new ``Office of
Competition and Innovation'' to advance his efforts to involve the CFPB
in antitrust and competition law, which is outside its jurisdiction. He
also sidelined the Office of Innovation's programs to foster
responsible innovation, such as no action letters and regulatory
``sandboxes.''
I'm also concerned the CPFB will bring this reactive, anti-
innovation perspective to its scrutiny of new financial products.
Already, it's made public statements that suggest hostility towards
BNPL and other products.
All of this hostility to new financial products is further evidence
of the condescension and paternalism of some of my colleagues to our
constituents. Individual consumers are better positioned than any
bureaucrat or politician to understand their own individual needs and
preferences, and make their own choices. My colleagues ignore the
benefits consumers derive from access to more choices in a more dynamic
marketplace.
The best form of consumer protection is a robust, competitive
market. That's why, instead of curtailing new financial products,
regulation should facilitate innovation and consumer choice.
PREPARED STATEMENT OF RACHEL GITTLEMAN
Financial Services Outreach Manager, Consumer Federation of America
September 13, 2022
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF PENNY LEE
CEO, Financial Technology Association
September 13, 2022
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF TODD J. ZYWICKI
George Mason University Foundation Professor of Law, George Mason
University Antonin Scalia School of Law
September 13, 2022
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF DAVID H. SELIGMAN
Executive Director, Towards Justice
September 13, 2022
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM RACHEL GITTLEMAN
Q.1. Ms. Gittleman, in your testimony you mentioned that one of
the tactics used by these lenders is disguising fees as tips.
Are these tips truly voluntary? If not, do you believe it's
deceptive to refer to these fees as ``tips''?
A.1. ``Tips'' are not truly voluntary due to a variety of
techniques companies use to make it difficult not to tip, and
these tactics make tips inherently deceptive and deceitful.
Companies utilize a variety of strategies to make it difficult
not to tip or to make the consumer feel compelled to tip.
Strategies include adding a default tip that must be removed
each time; or denying or reducing future credit if a consumer
fails to tip enough. Even without manipulative strategies,
consumers are more likely to feel compelled to tip for fear of
being treated differently or denied access in the future.
Further, tips are not often included in product marketing
and promotions or even in information about fees in the product
terms and conditions, which leads consumers to believe that
these products are free, especially when promoted with promises
of no interest or monthly fees. By labeling a finance charge as
a tip, providers are relying on the obligation that consumers
often feel when tipping another human after completion of a
service, like in restaurants or other service industries. Some
providers further encourage that feeling by labeling tips as
``lender appreciation'' tips. Other providers make disingenuous
statements about how tips support a ``community'' or will help
other ``users make ends meet'' or deceitfully labeling tips as
``donations.''
However, these tips do not go to another human being and
are not in appreciation of a service--instead, they go to the
company's bottom line. Further, tips are added to the repayment
amount before the transaction is fully completed and tips are
paid via the authorization to debit a user's account per user
contracts. Consumers do not tip after the service has taken
place in appreciation for good service which might make them
more voluntary.
Finally, the label does not change the inherent nature of
these charges; it simply allows providers to claim otherwise.
Tips increase the cost of credit, can add up quickly, and
consumers have no way to compare that cost with other forms of
credit. The ``tip'' model takes advantage of consumers' lack of
awareness of how tips add up, especially since small tips can
add up to a high cost over time nearing payday loan pricing and
thus, can make it easier for consumers to get sucked into the
cycle of debt. The pricing may also look cheap to consumers on
its surface because it's portrayed as a flat fee rather than
APR. It is marketed in ways to hide the true cost or dismiss
the APR as irrelevant due to the shorter loan cycle. But these
high charges for smaller loans result in exorbitantly high
APRs, regardless of whether they are portrayed to consumers in
that way. Regardless of the label, advances that charge tips
are balloon payment loans, with repayment on the next deposit
or other equally short schedule. Like other balloon payment
loans, they can lead to dependency or a cycle of reborrowing,
and high rates of overdraft and NSF fees.
Q.2. Do you believe there is an environment where forms of
credit such as Buy Now, Pay Later or Earned Wage Advances can
be beneficial to consumers? Do you have any regulatory
suggestions that could encourage innovation and safeguard
consumers at the same time?
A.2. These products may help certain consumers manage their
finances but are not risk free. At their core, each of these
products are still credit products that should be covered by
basic consumer protections at the State and Federal level,
including interest rate limits, underwriting for ability-to-
repay, cost transparency, dispute rights, and fair lending
laws.
BNPL providers are within the scope of the Truth in Lending
Act (TILA) and should be treated as ``Card Issuers'' subject to
all credit card protections codified by TILA. The CFPB should
clarify that BNPL products are credit cards, subject to the fee
disclosures, ability-to-repay requirements, reasonable and
proportional penalty fees, chargeback protections, dispute
rights, standard statement requirements, and appropriate and
helpful credit reporting practices that apply to credit cards.
These protections would ensure that consumers have the same
basic protections they do when using other forms of credit.
Beyond the CARD Act, Federal and State regulators should
provide necessary oversight and supervision of BNPL providers,
ensuring that they are not engaging in unlawful discrimination
or unfair, deceptive or abusive acts or practices, and are
abiding by other consumer protection laws including the
Military Lending Act (MLA), the Electronic Funds Transfer Act
(EFTA), and the Fair Debt Collection Practices Act (FDCPA).
State regulators should require lenders to abide by applicable
licensing and usury laws. State and Federal regulators should
make sure that lenders are not charging unfair fees or shifting
into an abusive fee model. Finally State and Federal regulators
should consider collecting data on these programs to better
understand the risks associated with them.
As for Earned Wage Advances (EWAs), we hope that the CFPB
clarify that EWAs provide credit to consumers. Although free
EWA products may fall outside of the scope of TILA, those that
charge fees are within the scope. Access and expedite fees
charged by EWA providers are finance charges that should be
presented to consumers in terms of an annual percentage rate.
State regulators should also regulate these fee-based earned
wage access products as credit covered by all State credit
regulations and laws, including usury laws.
Regardless of structure, a product where a third-party
advances funds to a consumer ahead of the consumer's payday and
is then repaid in some fashion out of the paycheck is a loan.
We are greatly concerned about the potential harms of viewing
these fee-based earned wage access products as something other
than credit, leading to evasion of consumer protection and fair
lending laws. Treating EWA products as credit does not mean
these products should not exist. It merely means that consumers
have the same basic consumer protections and disclosures as
they do when using other forms of credit--a concept that is
likely already expected. Moreover, failing to regulate them as
credit will invite payday lenders and other high-cost lenders
to enter this market, which could lead to even more exploitive
rates and practices.
In addition, the CFPB should address inflated expedite fees
either through TILA or through its authority to protect
consumers from Unfair, Deceptive and Abusive Acts and Practices
(UDAAP). We also recommend that the CFPB further supervise
these fee-based EWA providers and conduct research on the
impact of EWA programs, especially on low-income consumers and
their ability to build wealth and achieve financial security.
Fintech providers that purport to lend earned wages and
seek access to a consumer's bank account, but are not employer
integrated, are essentially a payday loan and should be
supervised and regulated as such.
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\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
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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.
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\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).
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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\
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\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.
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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]