Rent-a-Bank Schemes and New Debt Traps (House Hearing)
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RENT-A-BANK SCHEMES AND NEW
DEBT TRAPS: ASSESSING EFFORTS TO
EVADE STATE CONSUMER PROTECTIONS
AND INTEREST RATE CAPS
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
FEBRUARY 5, 2020
Printed for the use of the Committee on Financial Services
Serial No. 116–81
(
U.S. GOVERNMENT PUBLISHING OFFICE
42–805 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK MCHENRY, North Carolina,
NYDIA M. VELÁZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut SCOTT TIPTON, Colorado
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
DENNY HECK, Washington TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
RASHIDA TLAIB, Michigan DAVID KUSTOFF, Tennessee
KATIE PORTER, California TREY HOLLINGSWORTH, Indiana
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois JOHN ROSE, Tennessee
AYANNA PRESSLEY, Massachusetts BRYAN STEIL, Wisconsin
BEN MCADAMS, Utah LANCE GOODEN, Texas
ALEXANDRIA OCASIO-CORTEZ, New York DENVER RIGGLEMAN, Virginia
JENNIFER WEXTON, Virginia WILLIAM TIMMONS, South Carolina
STEPHEN F. LYNCH, Massachusetts VAN TAYLOR, Texas
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESÚS ‘‘CHUY’’ GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
CHARLA OUERTATANI, Staff Director
(II)
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CONTENTS
Page
Hearing held on:
February 5, 2020 .............................................................................................. 1
Appendix:
February 5, 2020 .............................................................................................. 49
WITNESSES
WEDNESDAY, FEBRUARY 5, 2020
Aponte-Diaz, Graciela, Director of Federal Campaigns, Center for Responsible
Lending ................................................................................................................. 5
Johnson, Creola, Professor, The Ohio State University Moritz College of Law . 8
Knight, Brian, Director and Senior Research Fellow, Program on Innovation
and Governance, Mercatus Center at George Mason University ..................... 10
Limon, Hon. Monique, Chair, Banking & Finance Committee, California State
Assembly ............................................................................................................... 6
Saunders, Lauren, Associate Director, National Consumer Law Center ............ 9
APPENDIX
Prepared statements:
Aponte-Diaz, Graciela ...................................................................................... 50
Johnson, Creola ................................................................................................ 68
Knight, Brian .................................................................................................... 77
Limon, Hon. Monique ....................................................................................... 80
Saunders, Lauren ............................................................................................. 91
(III)
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RENT-A-BANK SCHEMES AND NEW DEBT
TRAPS: ASSESSING EFFORTS TO EVADE
STATE CONSUMER PROTECTIONS AND
INTEREST RATE CAPS
Wednesday, February 5, 2020
U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 10:10 a.m., in room
2128, Rayburn House Office Building, Hon. Maxine Waters [chair-
woman of the committee] presiding.
Members present: Representatives Waters, Maloney, Sherman,
Meeks, Scott, Green, Perlmutter, Himes, Heck, Vargas,
Gottheimer, Lawson, Tlaib, Porter, Axne, Pressley, McAdams,
Wexton, Adams, Dean, Garcia of Illinois, Garcia of Texas, Phillips;
McHenry, Wagner, Lucas, Posey, Luetkemeyer, Huizenga, Barr,
Tipton, Williams, Hill, Zeldin, Loudermilk, Mooney, Davidson,
Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil,
Gooden, Riggleman, Timmons, and Taylor.
Chairwoman WATERS. The Committee on Financial Services will
come to order. Without objection, the Chair is authorized to declare
a recess of the committee at any time.
Today’s hearing is entitled, ‘‘Rent-A-Bank Schemes and New
Debt Traps: Assessing Efforts to Evade State Consumer Protections
and Interest Rate Caps.’’
I will now recognize myself for 4 minutes for an opening state-
ment.
In November of last year, the Federal Deposit Insurance Cor-
poration (FDIC) and the Office of the Comptroller of the Currency
(OCC) issued a proposed rule that would provide legal cover for
predatory rent-a-bank schemes, where payday lenders partner with
banks to peddle harmful short-term, triple-digit interest rate loans
in States that have reasonable and often voter-approved interest
rate caps to protect consumers. Even if a State, like my home State
of California, has passed a law setting a usury rate cap, this rule
would allow lenders to ignore the law and to import high-rate,
high-risk, and otherwise illegal loans back into the State. Low-in-
come consumers, who are already struggling, will pay the price.
American consumers used to be able to look to their regulators
to protect them from these kinds of predatory schemes. Not so
under the Trump Administration, where consumer protection takes
a back seat to consumer predation. And Trump’s regulators are
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working overtime to make sure the bad actors have a clear path
to trap millions of Americans in unending debt.
This anti-consumer rule is just the latest to benefit predatory
payday lenders. When Trump’s acting Chief of Staff, Mick
Mulvaney, was running the Consumer Financial Protection Bureau
(CFPB), he did everything he could for predatory payday lenders,
including withdrawing a lawsuit against a group of deceptive pay-
day lenders who were allegedly ripping off consumers with loans
with interest rates as high as 950 percent a year.
It is no wonder that a CEO of a notorious payday lender thought
nothing of submitting her resume to be considered as the next
CFPB Director, but the job instead went to Kathy Kraninger, who
is no doubt making that CEO proud. Director Kraninger has both
delayed and proposed to undermine key provisions of the CFPB’s
important payday, small-dollar, and car title rules, which would
have curbed abusive payday loans. And 101 House Democrats
wrote to Director Kraninger to call on her to reconsider her efforts,
but she has not relented.
Today, we will examine the implications of regulators’ actions to
open the payday loan floodgates and the impact this will have on
States with sensible interest rate caps. We will also discuss H.R.
5050, the Veterans and Consumers Fair Credit Act, Congressman
Garcia’s bipartisan bill to place a Federal 36 percent annual per-
centage rate usury cap on payday loans and car title loans, and ex-
tend the protections that active-duty servicemembers have under
the Military Lending Act to all consumers across the country. It is
long overdue for Congress to take action to ensure that all Ameri-
cans are protected from harmful payday products with sky-high in-
terest rates.
So, I look forward to hearing from our witness panel of advocates
and experts.
I now recognize the ranking member of the committee, the gen-
tleman from North Carolina, Mr. McHenry, for 4 minutes.
Mr. MCHENRY. Madam Chairwoman, thank you for holding this
hearing. I think it is important and essential that Congress under-
stand how the banking industry is evolving in response to techno-
logical innovation. It also is essential to help Congress understand
its role to ensure all consumers benefit from advances in tech-
nology. So, I think it is a meaningful conversation that we can have
today.
Technological innovation over the past few decades has enabled
faster, more accurate credit underwriting for a much broader popu-
lation of borrowers. Much of this innovation has been driven by in-
dustry newcomers that have developed a new idea or business
model, faster in time than it takes to get a bank charter. So, these
newcomers often partner with banks.
Bank/non-bank partnerships can make sense for several reasons.
First, economic: Because of their deposit-based funding, banks tend
to have the cheapest possible cost of capital among all capital allo-
cators.
Second, capacity: Banks have relatively large balance sheets, en-
abling them to absorb new loans rapidly.
Third, expertise, and expertise still matters. Banks are expert
lenders. In other words, they are proficient in such tasks as under-
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writing, compliance, and securitizing or selling loans into the sec-
ondary market.
One other major reason that fintech partners with banks is that
special legal status banks have had for well over a century—actu-
ally, a century and a half. Since the passage of the National Bank
Act, Congress has given special privileges to banks, and that in-
cludes regulatory certainty about what interest rates banks are
permitted to charge on a loan. When conducted properly, the bene-
fits from this arrangement can be cost savings for fintechs and
banks, better competition among banks, and better, faster, and
cheaper banking products for all consumers.
The best way to make sure that these partnerships live up to
their promise is to provide a clear regulatory framework under
which they can operate. To that end, I want to commend the recent
efforts of the OCC and the FDIC for their proposed rulemaking
that helps restore clarity to a segment of the market. Their pro-
posed rules would clarify what we all thought we knew before
2015: that when a bank sells, assigns, or otherwise transfers a loan
that was valid when it was made, that loan does not become in-
valid because of the transfer. This is a common-sense rule of con-
tracting that has existed for over 100 years, until 2015, when the
Second Circuit Court’s Madden decision decided that, no, banks
cannot be sure that their loans hold any value when sold.
The Madden decision has been roundly criticized on its legal rea-
soning, but more importantly, economists have now measured the
negative impact to consumers in the three States governed by this
bad Madden decision. The uncertainty caused by the result has
driven lenders away from those States. Borrowers with FICO
scores below 625 have seen a 52 percent reduction in credit avail-
ability. Furthermore, personal bankruptcy filings rose by 8 percent
more in those States, relative to States outside the Second Circuit.
We can clearly see the harm that results when lenders are faced
with regulatory uncertainty.
I am pleased that we are hearing from experts today about the
need for clear rules of the road. Technology is the key for greater
financial inclusion, and while we must provide oversight and cer-
tainty, we cannot fear innovation because we don’t understand it.
I yield back.
Chairwoman WATERS. I now recognize the Chair of our Sub-
committee on Consumer Protection and Financial Institutions, Mr.
Meeks, for one minute.
Mr. MEEKS. Thank you, Chairwoman Waters. Despite a decade
of economic growth, over 40 percent of American families don’t
have savings for a $400 emergency. This problem is compounded
by the dramatic rate at which bank branches are closing nation-
wide and the rapid disappearance of small community banks and
minority banks which serve marginalized communities at a far
greater rate than megabanks, creating banking deserts and depriv-
ing these communities of access to credit and financial services.
As a result, check-cashing stores, pawn brokers, auto title lend-
ers, and payday lenders often fill the gap. Payday lenders are espe-
cially harmful, trapping borrowers in unsustainable debt traps. We
need to regulate payday lenders and address the terrible harm they
cause across the country. But in doing so, we must ensure that
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something viable fills the gap. This committee has long advocated
for bringing more people into the regulated banking space, ensur-
ing that consumer protection, anti-discrimination, and fair banking
practice laws are all applicable and enforceable.
This is a very real and urgent priority for me, and I thank the
witnesses and look forward to their testimony.
Chairwoman WATERS. I now recognize the subcommittee’s rank-
ing member, Mr. Luetkemeyer, for one minute.
Mr. LUETKEMEYER. Thank you, Madam Chairwoman. Thanks in
large part to the Dodd-Frank Wall Street Reform and Consumer
Protection Act, financial institutions have largely exited the small-
dollar lending space. However, some financial institutions have
managed to continue providing these products through partner-
ships with fintech firms that help with underwriting, marketing,
and lending. Now, it seems my colleagues on the other side of the
aisle are going after these partnerships to push banks out of small-
dollar lending altogether.
If that wasn’t enough, the Majority is considering legislation to
enact an APR rate cap on all loans. Using an APR, in my opinion,
is a misleading measurement of any loan under a year in length,
and only serves to hide the true cost of a small-dollar loan from
consumers. Where is the transparency in that?
On one hand, my colleagues are attempting to eliminate bank in-
volvement in small-dollar lending, pushing consumers into less-reg-
ulated spaces, and on the other hand, they want to eliminate the
ability for non-bank entities to offer small-dollar loans. If they suc-
ceed, you have to ask the question, where will the unbanked and
underbanked go to access credit? I don’t think any of us will appre-
ciate and like the answer to that question.
With that, Madam Chairwoman, I yield back.
Mr. MEEKS. [presiding]. I would now like to introduce our wit-
nesses and welcome you to this committee: Ms. Graciela Aponte-
Diaz, who is the director of Federal campaigns for the Center for
Responsible Lending; Ms. Lauren Saunders, who is the associate
director at the National Consumer Law Center; Professor Creola
Johnson, who is the President’s Club Professor of Law at the
Moritz College of Law at the Ohio State University;
Assemblymember Monique Limon, from the California State As-
sembly, who is serving as Chair of the Banking and Finance Com-
mittee; and Brian Knight, director and senior research fellow for
the Program on Innovation and Governance at the Mercatus Cen-
ter at George Mason University.
Each of you will have 5 minutes to summarize your testimony,
and when you have one minute remaining, a yellow light will ap-
pear. At that time, I would ask you to wrap up your testimony so
that we can be respectful of both the witnesses’ and the committee
members’ time. And without objection, all of the witnesses’ written
statements will be made a part of the record.
Ms. Diaz, you are now recognized for 5 minutes to present your
oral testimony.
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STATEMENT OF GRACIELA APONTE-DIAZ, DIRECTOR OF
FEDERAL CAMPAIGNS, CENTER FOR RESPONSIBLE LENDING
Ms. APONTE-DIAZ. Good morning, Chairwoman Waters, Ranking
Member McHenry, and members of the committee. My name is
Graciela Aponte-Diaz, and I am the Director of Federal Campaigns
for the Center for Responsible Lending (CRL). CRL is a nonprofit
research and advocacy organization dedicated to protecting home
ownership and family wealth by fighting predatory lending prac-
tices. For nearly 20 years, I have dedicated my career to fighting
for low-income families and communities of color. I, myself, grew
up low-income, with a single mom who was trying to make ends
meet. Luckily, she was never a target of abusive payday or high-
cost installment loans because she lives in Maryland, a State that
bans these products.
In fact, 16 States, plus the District of Columbia, do not allow
payday loans, and the vast majority of States have interest rate
caps on installment loans. Active-duty servicemembers are also
protected from predatory loans through the bipartisan Military
Lending Act (MLA). Unfortunately, some lenders have found a way
to continue to target vulnerable consumers, despite State laws,
through rent-a-bank schemes.
Here is how a rent-a-bank scheme works. A predatory, nonbank
lender decides that they want to lend at higher rates than what is
allowed by State law, frequently, loans of 100 percent APR or more,
even in States that have a 36 percent interest rate cap or less.
They find a bank that is willing to originate the loans, because fed-
erally-insured banks are exempted from State interest rate laws.
After the loan is processed, the bank sells the loan or receivables
back to the nonbank. The nonbank handles marketing, consumer
interactions, and servicing. The nonbank lender is the public face
of the loan, and neither the customers nor the general public are
aware of the motions behind the scenes to legitimize a loan that
would otherwise be illegal.
Nonbank lenders, such as Elevate, OppLoans, Enova, LoanMart,
and World Business Lenders currently lend at outrageous rates in
States where those rates are illegal under State law. Through the
use of rent-a-bank schemes with banks regulated by the FDIC and
the OCC, neither regulator appears to have done anything to shut
down these abuses.
I would like to share three examples of high-cost loan documents
that I have seen firsthand from borrowers with whom I have
worked.
A disabled Marine veteran was targeted with a $5,000 loan at an
APR of 115 percent, and a ridiculously long term of 84 months. As
stated in her loan documents, that resulted in a cost of $42,000 to
borrow just $5,000 over 7 years. Not surprisingly, she was unable
to keep up with these unaffordable payments and ended up in
bankruptcy.
In another example, a single mother was targeted for a $2,500
loan with an APR of more than 100 percent. After 5 years, she paid
back $14,000, but was unable to save for her daughter’s college tui-
tion.
And finally, a Spanish-speaking man was lured into a store that
said, ‘‘Se habla espanol,’’ which means, ‘‘We speak Spanish.’’ How-
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ever, no one spoke Spanish, and all of the loan documents were in
English. He walked out with a $2,700 loan at 123 percent APR.
Worse, it was secured by the title of his truck. He had to pay back
$10,000 over a 5-year term or risk his only mode of transportation
to work.
These are just some examples of a now-too-common loan that is
being offered online or through storefronts that are disproportion-
ately located in communities of color. This is not access to credit.
This is not access to innovation. This is access to debt.
Fortunately, there are ways to stop these abusive lending prac-
tices. First, we need the FDIC and the OCC to take enforcement
actions against these predatory lenders that are using rent-a-bank
schemes and offering illegal loans in States with rate caps. Second,
the FDIC and the OCC should rescind their proposal that does
nothing to address this abuse, and, in fact, emboldens predatory
lenders to engage in rent-a-bank schemes. Third, Congress should
swiftly pass H.R. 5050, a 36 percent interest rate cap bill for vet-
erans and all consumers.
And finally, the FDIC should preserve its 2005 payday loan
guidelines, its 2007 guidelines advising of a rate cap of 36 percent,
and its 2013 guidelines, advising of ability to repay for all bank
payday loans.
Let me thank the committee again for the opportunity to address
these scams and real-life situations. I look forward to your ques-
tions.
[The prepared statement of Ms. Aponte-Diaz can be found on
page 50 of the appendix.]
Mr. MEEKS. I now recognize Assemblymember Limon for 5 min-
utes.
STATEMENT OF THE HONORABLE MONIQUE LIMON, CHAIR,
BANKING & FINANCE COMMITTEE, CALIFORNIA STATE AS-
SEMBLY
Ms. LIMON. Thank you. Thank you for holding this hearing and
inviting me to testify on how rent-a-bank schemes undermine State
consumer protection efforts. My name is Monique Limon. I serve in
the California State Legislature as an Assemblymember and as
Chair of the Committee on Banking and Finance.
High-cost consumer loans have created havoc for California fami-
lies over the last decade. Driven by the desire to avoid the forth-
coming CFPB rule, the payday lending industry began to aggres-
sively market larger, longer-term loans to vulnerable consumers
who were trying to pick up the pieces caused by the Great Reces-
sion.
The average size of these loans is about $3,000, with an annual
interest rate of 100 to more than 200 percent. While these high-
interest rates are unconscionable, I am more concerned by how
often consumers default on these loans. As we dug through the
data, we found that more than one-third of borrowers could not
repay their loans, representing more than 100,000 Californians
each year. Failing to repay a loan exposes consumers to serious
negative consequences like aggressive debt collection, ruined credit
scores, vehicle repossessions, and even bankruptcy.
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While consumers try to find a way out of this turmoil, high-cost
lenders are able to stay profitable because of the extremely high
rates and fees that they charge. Over the past several years, the
California Legislature attempted to address this problem by estab-
lishing a ceiling on interest rates, similar to policies adopted by
dozens of red and blue States across this country. It took us 3 years
and 5 different bills before we found the right balance to keep re-
sponsible lenders in the market while also protecting consumers
from high fees and defaults.
Last year, I introduced a bill that caps rates on loans in the
$2,500 to $10,000 range at 36 percent plus the Federal funds rate.
This bill received strong bipartisan support from a broad coalition
of lenders, consumer groups, faith leaders, veterans organizations,
and community groups across the State. On the strength of this co-
alition, the bill passed with broad support and was signed into law
by our governor.
In summary, the effort was thoughtful, and was deliberate. The
Legislature considered multiple options until we found the right
balance. But now that the new law is in place, high-cost lenders
are looking to exploit gaps and ambiguities in the administration
of Federal banking laws that would allow these lenders to evade
State laws and continue with business as usual. When left un-
checked, these rent-a-bank schemes perpetuate the system of mis-
aligned incentives that allows lenders to profit, even when many of
their customers fall into default.
Both the FDIC and the OCC have stated that they do not sup-
port bank partnerships designed to evade State laws. But those
agencies need to back up their words with actions. Until they act,
there will continue to be a small number of banks and lenders who
try to dodge State laws.
Before I conclude, I want to be clear that I do not believe that
all bank partnerships are bad. Bank partnerships that create prod-
ucts where the interested borrowers and lenders are aligned can be
a healthy part of the financial system. However, at the very least,
bank partnerships must be limited to banks that follow the FDIC’s
2007 guidance on offering affordable, small-dollar loans which en-
courage banks to offer small-dollar credit with APRs that do not ex-
ceed 36 percent.
The Federal Government has the ability to fix the problem of the
rent-a-bank schemes with solutions that protect State sovereignty,
protect consumers, and create a fair and competitive credit market
with all lenders playing by the same rules.
Thank you for bringing attention to this issue. I am hopeful that
Congress can work with the FDIC to ensure that a handful of su-
pervised banks are not being used to undermine State consumer
protection laws across this country.
[The prepared statement of Ms. Limon can be found on page 80
of the appendix.]
Mr. MEEKS. Thank you for your testimony. I now recognize Pro-
fessor Johnson for 5 minutes.
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STATEMENT OF CREOLA JOHNSON, PROFESSOR, THE OHIO
STATE UNIVERSITY MORITZ COLLEGE OF LAW
Ms. JOHNSON. Good morning. I am Professor Creola Johnson at
the Ohio State University College of Law. I was the first academic
to write a law review article about payday lending. It was based
on my research, which was funded by the university, where we ac-
tually took out payday loans. And what I discovered through this
research of payday lenders surveyed in Franklin County, Ohio, is
that they had two primary goals: first, to get the consumer to sign
up for a loan without understanding the consequences of what they
were signing up for; and second, to get the consumer on the hook
to pay as long as possible at triple-digit interest rates.
As has been mentioned, the rent-a-bank schemes are part of
keeping consumers in the dark. The consumer goes to a physical
store, interacts with a lender that is a nonbank entity, and has no
interactions at all with the bank that is in the background. As I
put in my remarks, this is part of the overall mission of keeping
people in the dark, keeping the consumer in the dark.
As a result of my research, I concluded that rent-a-bank schemes
allow nonbank lenders to get away with charging triple-digit or
quadruple-digit interest rates, and not only so but to keep con-
sumers on the hook, and I describe these practices in three main
areas. I call them ‘‘debt entrapment practices,’’ and by that, I mean
practices that seek to get a consumer on the hook, and by that, I
mean they are approved for credit in a minimal amount of time.
Someone mentioned a few minutes ago that we are able to do
this quickly. You are able to do it quickly because you are not actu-
ally focusing on the ability of the consumer to pay back the loan.
Debt entrapment practices also include issuing large amounts, at
triple-digit interest rates, and short maturity dates. In other words,
paying back the loan in a short period of time where the majority
of customers cannot pay back that debt and keep up with their on-
going expenses.
The second category of illegal practices are what I call, ‘‘treadmill
practices.’’ These practices are designed to keep a continuing
stream of payments coming in from the borrower. They include
multiple rollovers—extending the loan date multiple times—back-
to-back loan transactions, rapacious electronic debits to the con-
sumer’s bank accounts, and illegal garnishment of consumer wages.
Third, criminalization practices. These practices include making
the consumer feel that they need to fear imminent arrest unless
they comply with the nonbank lender’s demands. These include
threatening to prosecute consumers for crimes, filing police reports
against them for criminal charges, and misusing civil contempt pro-
ceedings to obtain arrest warrants against consumers.
These three practices—debt entrapment, debt treadmill, and debt
criminalization practices—are what nonbank lenders want to do,
and they want to be able to hide behind the banks to perpetrate
these practices. Let us keep in mind that these nonbanks are not
subject to regulatory oversight by the FDIC or the OCC, so they
should not be able to get away with these practices by hiding be-
hind a preemption doctrine.
This is important for us to focus on, not just new technology but
focus on protecting the State sovereignty, to protect consumers
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from usurious interest rates in these practices that I just spoke
about, and to protect consumers based on all of these consumer
protection laws in all 50 States, and U.S. Territories. And yes, we
want to balance that with allowing for reasonably priced credit
products for consumers. But they have to be balanced against the
State sovereignty and State consumer protection laws.
Thank you for allowing me to speak, and I look forward to your
questions.
[The prepared statement of Ms. Johnson can be found on page
68 of the appendix.]
Mr. MEEKS. Thank you for your testimony. Ms. Saunders, you
are now recognized for 5 minutes.
STATEMENT OF LAUREN SAUNDERS, ASSOCIATE DIRECTOR,
NATIONAL CONSUMER LAW CENTER
Ms. SAUNDERS. Thank you. Chairwoman Waters, Chairman
Meeks, Ranking Member McHenry, and members of the committee,
thank you for inviting me to testify today on behalf of the low-in-
come clients of the National Consumer Law Center (NCLC).
Today, we are facing the biggest threat in decades to States’ his-
toric power to protect Americans from predatory lending, rent-a-
bank lending. Interest rate limits are the simplest and most effec-
tive protection against predatory lending, and are strongly sup-
ported by American voters of all stripes.
At the time of the American Revolution, every State had interest
rate caps, and the vast majority still do today. For example, on a
$500, 6-month loan, 45 States and the District of Columbia limit
the rate at a median of 37.5 percent. At the end of the 20th Cen-
tury, however, most banks were exempted from State rate caps,
and rent-a-bank lending began as the latest in a long line of at-
tempts to evade State usury laws.
Short-term payday lenders first tried using rent-a-bank schemes
20 years ago, but the bank regulators shut them down. Yet in to-
day’s environment, high-cost lenders across the country are again
using a small number of rogue banks to offer loans at astonishing
rates that they cannot offer directly, and that banks would not
offer in their own branches.
My fellow witnesses have described some of the loans being of-
fered to consumers. I would like to focus on the rent-a-bank lender
that the OCC and the FDIC are actively supporting: World Busi-
ness Lenders. The FDIC and the OCC filed an amicus brief sup-
porting World Business Lenders and its right to charge a Colorado
business 120 percent on a $550,000 loan, because the loan was
originated by the Bank of Lake Mills and assigned back to World
Business Lenders, the same bank, by the way, that the FDIC had
sanctioned for targeting our servicemembers.
We have discovered several cases involving similar facts. A
World Business Lenders agent approaches a small business and of-
fers a loan. The paperwork shows that the loan comes from an
FDIC-supervised bank, Bank of Lake Mills or Liberty Bank, or
OCC-supervised Axos Bank. The bank quickly assigns the loan
back to World Business Lenders. These loans, ranging from
$20,000 to $400,000, are secured by a mortgage on the home of the
small-business owner at astonishing rates: 72 percent for a general
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10
contractor in Florida; 73 percent for a New York owner of a med-
ical supply company; 92 percent for a couple in Massachusetts.
Many of these small business owners are facing foreclosure, like a
REALTOR in New York who was buried by a $90,000 mortgage at
138 percent APR.
Many States prohibit these rates on second mortgages by
nonbank lenders, but World Business Lenders argues that as the
bank’s assignee, it can charge outrageous rates.
This is the lender that the OCC and the FDIC are supporting,
with the same arguments that they are using to justify their pro-
posed new interest rate rules. These proposed rules are in no way
necessary to address legitimate secondary markets. We see no
problem in those markets. What we do see is an explosion of preda-
tory rent-a-bank lending undermining power that States have had
for nearly 250 years. The FDIC’s and the OCC’s support for World
Business Lenders tells us exactly who is eager to step into the
bank’s shoes: predatory lenders.
So, what can Congress do? First and foremost, pass H.R. 5050,
the Veterans and Consumers Fair Credit Act, to cover all lenders,
banks and nonbanks, with a 36 percent interest rate cap. That is
still a high rate, and the bill will not stop all evasions of State
usury laws. But an upper limit of 36 percent will cut off the most
egregious abuses of the bank charter that facilitate predatory lend-
ing.
Second, stop the FDIC and the OCC from facilitating rent-a-bank
lending, and support States’ historic power to limit interest rates.
Third, pass H.R. 1423, the Forced Arbitration Injustice Repeal
Act, which will restore consumers’ and small businesses’ access to
the courts when predatory lenders violate the law.
Thank you for inviting me to testify today. I look forward to your
questions.
[The prepared statement of Ms. Saunders can be found on page
91 of the appendix.]
Mr. MEEKS. Thank you for your testimony. Mr. Knight, you are
recognized for 5 minutes.
STATEMENT OF BRIAN KNIGHT, DIRECTOR AND SENIOR RE-
SEARCH FELLOW, PROGRAM ON INNOVATION AND GOVERN-
ANCE, MERCATUS CENTER AT GEORGE MASON UNIVERSITY
Mr. KNIGHT. Thank you. Good morning, Chairwoman Waters,
Subcommittee Chair Meeks, Ranking Member McHenry, and mem-
bers of the committee. Thank you for inviting me to testify today.
My name is Brian Knight, and I am the director of the Program
on Innovation and Governance, and a senior research fellow at the
Mercatus Center at George Mason University. Much of my research
focuses on the role of technological innovation in the provision of
financial services.
The key point I want to leave you with is that innovation and
competition in lending, of which the bank partnership model is a
key part, is helping to improve access to credit, especially for bor-
rowers poorly served by the traditional market. We are witnessing
an important evolution in the credit markets, powered by innova-
tive firms partnering with banks, frequently smaller banks.
Fintech firms, many partnering with banks, now account for 38
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11
percent of unsecured personal loan balances, up from only 5 per-
cent, 5 years ago. There is evidence that these partnerships allow
some borrowers to access credit on better terms than they would
receive from a traditional lender. There is also evidence that these
partnerships allow for greater access to credit for borrowers in
parts of the country that are underserved by traditional lenders,
and that innovative lending can be less racially discriminatory
than traditional lending.
These partnerships are mutually beneficial for both the fintech
firm and the bank. The bank receives access to technology beyond
what it could develop on its own; access to customers outside of its
immediate geographic area, helping it to diversity its business; bet-
ter management of its balance sheet; and enhanced servicing ca-
pacity. Fintech firms receive assistance with regulatory compliance
and the ability to do business nationwide, under a consistent regu-
latory regime in conjunction with their bank partner.
It is important to keep in mind that these relationships are high-
ly regulated. Fintech firms that partner with banks are frequently
regulated under the Bank Service Company Act and are subject to
examination by the bank’s Federal regulator for the services the
fintech firm provides to the bank.
Additionally, the fintech partner is frequently subject to exam-
ination by a State bank regulator if the partner bank is State-char-
tered, and is covered by consumer protection laws enforced by the
Consumer Financial Protection Bureau (CFPB) and the Federal
Trade Commission (FTC). Likewise, the bank is accountable for the
actions of its fintech partner, taken in furtherance of that partner-
ship. Bank regulators have shown themselves to be willing and
able to police bank partnerships and hold both banks and their
partners accountable for bad acts.
While these partnerships between banks and innovative tech-
nology companies have displayed significant promise, they have
been threatened by recent litigation that has disrupted long-settled
expectations. In the case of Madden v. Midland Funding, the
United States Court of Appeals for the Second Circuit held that
New York law governed a loan that was originally issued validly
by a bank under Delaware law, and therefore, the loan was usu-
rious, when it was sold to a debt collector after default. In effect,
the court held that the legality of a validly-made loan could change,
depending on who held it after it was made, even if the terms of
the loan itself did not change.
This holding has been criticized as an incorrect interpretation of
the law by the Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and the Obama
Administraton’s solicitor general.
While this case does not directly deal with the type of bank part-
nerships at the heart of innovative lending, it appears to have had
a significant and negative impact on credit markets because it calls
into question the ability of banks to sell their loans to fintech part-
ners. One study found that, in the wake of the Madden decision,
funding for marketplace loans aimed at borrowers with FICO
scores under 700 decreased significantly in New York and Con-
necticut compared to outside the Second Circuit, because of con-
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12
cerns that any loan made to those borrowers may become invalid
if sold to a nonbank marketplace lender.
A subsequent study found a reduction in marketplace lending
credit available to New York and Connecticut residents, especially
low-income residents, as well as an increase in personal bank-
ruptcies, a phenomenon that the authors of the study linked to the
inability of low-income borrowers to access credit in order to refi-
nance debt or address exigent circumstances like medical bills.
These unfortunate results highlight the potential harm of imped-
ing increased innovation and competition in credit markets. Con-
sumer protection is essential, but denying consumers access to
credit does not necessarily protect them, because it does not remove
the underlying issues motivating the need for credit. Rather, allow-
ing more innovation and competition in credit markets, especially
to those insufficiently served by traditional products, presents a
better path to what we all want: a credit market that allows con-
sumers to make informed choices that best serve their needs.
Thank you again for the opportunity to testify, and I look for-
ward to your questions.
[The prepared statement of Mr. Knight can be found on page 77
of the appendix.]
Mr. MEEKS. Thank you, and I thank all of the witnesses for their
testimony. I now recognize myself for 5 minutes for questions.
Your testimony today has been very good, and I am sitting here
listening and trying to dig through where and what will be the best
way to go. One of the things that I have been trying to do, espe-
cially on the subcommittee, is try to make sure that there is access
to credit in low- and moderate-income communities, and we have
found, to a large degree, that that came from minority depository
institutions (MDIs).
There are only 20 MDIs left today, and during that hearing that
we had, it was 20 that are left. And I agree with what most of you
said, when you look at payday lending and the title and pawn
shops, especially when it comes to small-dollar loans, that is where
folks in my community go when they try to borrow some money.
And generally, the MDIs have more accessibility in working with
them. When they testified here, they said it may be better for them
to have partnerships, especially when dealing with technology.
So my first question will go to Ms. Johnson. I don’t know wheth-
er your research had shown what effect this would have on minor-
ity depository institutions in regards to, if there was a rate cap at
36 percent, what effect would that have on their viability, remain-
ing in the community, and/or what other incentives can be utilized
so that they can feel it is okay to do business with a small-dollar
loan with a lower interest rate?
Ms. JOHNSON. If I understand your question correctly, you are
asking what impact would an interest rate cap have in minority
communities?
Mr. MEEKS. Minority depository institutions, minority banks.
Ms. JOHNSON. Right. My research does not deal specifically with
those types of organizations. I don’t know if any of my colleagues
could speak to that.
Mr. MEEKS. Ms. Aponte-Diaz, do you—
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Ms. APONTE-DIAZ. Yes. Hello. I can speak to our credit unions or
our partners’ Self-Help Federal Credit Union offers loans capped at
18 percent, and they are able to do that for—we did a special pro-
gram for DACA recipients at 18 percent at the top, depending on
their credit, and we are able to do that and provide lower interest
rate loans for—
Mr. MEEKS. And is that for small-dollar loans?
Ms. APONTE-DIAZ. Small-dollar loans. Yes, a DACA loan is about
$600.
Mr. MEEKS. Let me ask another question, because one of the
things that I had hoped, back when we had the financial crisis and
we created the CFPB, was that we would have someone that would
be fighting for consumers. Unfortunately, I think that we have
moved back from, say, some of the rules that were being put down
by Director Cordray. Under Director Cordray’s CFPB, particularly
for the payday rule, it was anchored by two pillars: ability to repay,
which is tremendously important, and that is what got us in trou-
ble before with these no-doc loans; and capping at three the num-
ber of loans that lenders could make in quick succession. He was
indicating that this would get at the heart of the payday industry’s
debt trap business model.
Assemblymember Limon, what would you say about what the
CFPB was saying under Director Cordray’s leadership?
Ms. LIMON. Thank you. I do want to comment on your previous
point. I can tell you that with the State law in California that was
passed at 36 percent plus Federal rate, we still have a $2 billion
industry for just California alone. I can’t tell you how many of
those are minority-owned banks but the space is still there for
lending. So, I want to be clear that there are still some options.
And as far as Director Cordray’s direction, the ability-to-repay
underwriting is absolutely important to this space and to this mar-
ket, and certainly capping the number of loans that people take out
at one time is another way to address this. These are elements that
we have explored in the State of California and elements of which
we are supportive. They are not written into the law that was
passed, but there are different elements that can further address
the security of ensuring payback.
Mr. MEEKS. So if he was still here, are the rules that he was put-
ting in place—do you believe it would been a failure or a success
in the rule as he had outlined it?
Ms. LIMON. Success.
Mr. MEEKS. Thank you. I am out of time, and so I now recognize
the gentleman from California, excuse me, the ranking member
from North Carolina—
Mr. MCHENRY. Very different. We are getting some California
jobs though.
Mr. MEEKS. —Mr. McHenry.
Mr. MCHENRY. We are getting some California jobs, and I am so
grateful for that.
Anyway, Mr. Knight, in your written testimony you speak of the
spread of the bank/fintech partnership model as having a number
of benefits, including better credit terms for consumers, improved
access, and some of the technological advantages that we see in
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14
other areas outside of consumer lending, right? So, there are a lot
of benefits afforded to this model.
But looking at this, in 2015, the Second Circuit had a ruling in
Madden v. Midland that a loan to a New York resident was valid
when it was made by a bank, but became invalid once it was sold
by the bank to a nonbank third party, right? This came as a sur-
prise to many. Why?
Mr. KNIGHT. Because it upset a well-settled expectation that,
one, banks can sell loans, that that is the power of a bank and that
they can sell the loan and the loan remains valid, and that is an
important criteria.
Mr. MCHENRY. Why can they sell a loan?
Mr. KNIGHT. Well, they need to sell loans for a host of reasons—
balance sheet management, risk management. In the case of Mad-
den, this loan had gone into default, so they wanted to move it off
of their balance sheet so they could shed the risk. There is a profit-
ability argument there, particular for smaller banks which don’t
necessarily have the deposit base to sit on a whole bunch of loans.
So, it has long been recognized that selling a loan is part and par-
cel of being a bank, that is the ability to sell the loan as a bank
prong.
The second prong, which the Second Circuit really didn’t deal
with, is the common law of valid-when-made doctrine, which gen-
erally says that a loan, if it is valid when it is made, does not be-
come usurious because of a downstream transaction.
Mr. MCHENRY. Okay. So is that a payday issue, a payday lending
issue of valid-when-made? Is that all this is about?
Mr. KNIGHT. No. This applies to—
Mr. MCHENRY. To every loan.
Mr. KNIGHT. —every loan.
Mr. MCHENRY. Okay. And a loan is an asset on a bank’s balance
sheet.
Mr. KNIGHT. Correct.
Mr. MCHENRY. Right. So the issue of valid-when-made is how
old? How longstanding is this practice?
Mr. KNIGHT. The early 19th Century court cases refer to it as
this longstanding maxim, but I don’t know how far back it goes.
Mr. MCHENRY. So how does this affect the banking system if it
becomes the national norm?
Mr. KNIGHT. It could severely limit the ability of a bank to sell
a loan, because under the logic of the Madden decision, the bank
could only sell the loan and have it remain valid if the recipient
could have made that loan themselves. So in that case, you basi-
cally have banks selling to other banks, and not just any bank. It
would have to be a bank that, under that bank’s home State law,
could have made that loan. Which means, one, you can’t move that
risk outside the banking system. You are just trading it among
banks. And two, that significantly diminishes the ability of a bank
to sell a loan at what should be its appropriate market value.
Mr. MCHENRY. Okay. But this issue gets conflated with a num-
ber of issues that are hotly litigated across States. Is that not the
case?
Mr. KNIGHT. Right. It has been validly made it has been
conflated with the ability of a bank to sell a loan statutorily, and
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it has been conflated with the True Lender doctrine, and they are
all related but they are also all distinct.
Mr. MCHENRY. What is True Lender?
Mr. KNIGHT. The True Lender—so, valid-when-made is about
what happens to the loan after it is sold, because if the loan isn’t
valid in the first place, valid-when-made doesn’t apply. True Lend-
er is an emerging doctrine that even if the bank technically makes
a loan, it is not considered the true lender under certain cir-
cumstances by some courts. And the emerging doctrine is a pre-
dominant economic interest test, so if the bank does not have the
predominant economic interest test in the loan when the loan is
made, or shortly thereafter, some courts will say, ‘‘Well then, bank,
you weren’t the true lender. The party that has the predominant
economic interest was, in fact, the true lender, and so we will look
to see if that party could have made the loan.’’
Mr. MCHENRY. Okay. So resolving this issue of valid-when-made
is distinct from True Lender?
Mr. KNIGHT. Yes, it is.
Mr. MCHENRY. And to this end, what we have seen in the Second
Circuit jurisdictions of New York, Connecticut, and Vermont is that
the availability of credit has gone down, that rates have gone up,
and it has had a negative effect on consumers. And that is accord-
ing to the Stanford-Columbia-Fordham study of this. Is that cor-
rect?
Mr. KNIGHT. Both that study and a subsequent study.
Mr. MCHENRY. Thank you. I yield back.
Mr. MEEKS. The gentleman’s time has expired. I now recognize
the gentleman from California, Mr. Sherman, who is also the Chair
of our Subcommittee on Investor Protection, Entrepreneurship, and
Capital Markets, for 5 minutes.
Mr. SHERMAN. Thank you. It is interesting to see the argument
made that if fewer payday loans are made, consumers are hurt.
That jumps to a conclusion. But the fact is that wages are too low,
and people often are knowledgeable but poor. What are you going
to do? Sell your truck? Rely on overdraft protection? Fall behind on
your rent? Or go to one of these payday loans or similar loans?
I don’t think APR is the best way to evaluate the cost of short-
term loans. I think the minority made that point. For example, I
pay a $2 fee to use a particular ATM. If I spent 15 minutes extra
time, I could go to my own bank’s ATM. So I am borrowing the
money, $200, for 15 minutes, and paying $2 to do that. That is,
what, about 100,000 percent interest. It is not because—the bank
is getting a fair fee. The owner of the machine is getting a fair fee.
They have to have the machine there. They are entitled to what
I think is a fair fee to save me from having to wait for my money
for another 15 minutes.
The position of the OCC seems outrageous when they say that
they can adopt any regulation to facilitate banks’ ability to operate
across State lines. I will throw out one example. Are we going to
have a position where if a bank makes a loan on a piece of real
estate, that State and local law can’t change the zoning of that real
estate, because that would hurt the bank? And if a bank ever were
to make a loan, then forever, that property would be exempt from
down-zoning.
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The OCC is taking an outrageous position on this, but they want
us to listen to them on LIBOR and other issues. The OCC’s posi-
tion is, well, if you are a bank, you are not going to be subject to
State and local regulations to protect consumers, and we are going
to make sure that there is no Federal protection for consumers.
And if you engage in a business practice to roll over the loan 26
times a year, year after year, well, that is just fine as long as a
bank is involved that is making some money, and we are facili-
tating banks and making banks more profitable.
Let me ask my own California Assemblymember. We have taken
some real actions in California. What do people do when they need
money to pay to keep the lights on?
Ms. LIMON. People still have access to credit. As I mentioned,
there is still a $2 billion credit space in California under the rate
cap.
Mr. SHERMAN. Is that $2 billion of all consumer loans, or how do
you define it?
Ms. LIMON. For small-dollar lending.
Mr. SHERMAN. Small-dollar lending, not credit cards.
Ms. LIMON. Small-dollar lending.
Mr. SHERMAN. And when you say ‘‘small,’’ you mean under
$5,000? Under $2,000? Under what?
Ms. LIMON. Under $10,000.
Mr. SHERMAN. Under $10,000. Is there space there for people
who need to borrow $500, because I would hate to borrow $5,000
if I need $500.
Ms. LIMON. Under $10,000 includes the $500.
Mr. SHERMAN. Yes, but is there a vibrant industry in California
where I can get a $500 loan, if I don’t need a $10,000 loan?
Ms. LIMON. There is an industry, and regrettably the industry,
at this moment, for $300 and under, and above, if it is under the
36 percent, is a very healthy one. We haven’t done anything about
addressing payday proper. The bill that we have passed in Cali-
fornia is about the $2,500 to $10,000 space, which is the highest-
used product, the highest-growing product in the State of Cali-
fornia.
Mr. SHERMAN. I would point out to my colleagues that it looks
like OCC wants to push this regulation through, but a provision on
an appropriations bill preventing them from doing that would be
the best way to make sure that we don’t have a situation, as we
do today, where there is no Federal regulation, and an agency dedi-
cated to making a lot more money for banks is going to allow them
to evade California law and other law.
It would be one thing if the OCC was applying this after we, in
Congress, consider the Garcia bill and others, and have reasonable
Federal rules. Then, the OCC would be saying, ‘‘Well, you are a
bank. That means nationally.’’ But to have a zero consumer protec-
tion rule for everything shows that the OCC needs to be reined in,
hopefully by a provision in the appropriations bill.
I yield back.
Mr. MEEKS. The gentleman’s time has expired. I now recognize
the gentlewoman from Missouri, Mrs. Wagner, for 5 minutes.
Mrs. WAGNER. I thank the Chair. According to a 2017 survey by
the FDIC, 25 percent of U.S. households, or 32 million Americans—
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and I will say again, 32 million Americans—are either unbanked
or underbanked. These households might have a checking or a sav-
ings account but they also obtain financial products and services
outside of the formal banking system. A minority of these house-
holds do not even have a bank account with an insured institution.
Lack of access to banking continues to worsen as branches close
across our country. Access to safe and affordable financial services
is absolutely critical, especially among families with limited wealth,
whether they are looking to invest in education or simply manage
the ups and downs of life.
Mr. Knight, in your testimony you stated that the bank partner-
ship model allows for greater access to credit for borrowers in parts
of the country that are underserved by traditional lenders. Could
you please elaborate more on how these partnerships help those
without access to mainstream banking services?
Mr. KNIGHT. Absolutely. Thank you for that question, ma’am.
Based upon the research I have seen, where the partnerships bear
fruit is that a relatively modest-sized bank that could never make
the sort of financial commitment to build out their technology on
their own is able to partner with a technology firm that is able to
put forward an internet platform that can penetrate just about
anywhere, particularly with the increasing penetration of the inter-
net and smart devices, and that enables borrowers who are in
areas where maybe banks have retrenched or are otherwise under-
served to access relatively high-quality credit over the internet,
who couldn’t necessarily do that via a traditional bank branch
model.
And so, that allows your modest-sized bank, which is good at
banking but not so great at technology and scope, to partner with
a fintech company that is great at technology and scope and is not
a bank, and it is two great tastes that often taste great together.
Mrs. WAGNER. You have given us kind of the outline of how the
pieces are put together in terms of this bank partnership. How
does the actual constituent benefit? How does this model work for
them, those who are, in fact, underserved in so many of these com-
munities?
Mr. KNIGHT. First, it gives them more options and more potential
lenders competing for their business. Competition has been shown
to frequently drive down prices and credit, just—
Mrs. WAGNER. Drive down prices and credit.
Mr. KNIGHT. Yes. You will also see, and there is evidence, that
many of these firms are using innovative underwriting to better
serve groups that are not necessarily well-served by your tradi-
tional FICO-based underwriting model. So for those groups, they
will see better underwriting that is both more accurate and also
frequently cheaper.
Then, they have ease of access and convenience, and it can often
be relatively quick to access these loans.
Mrs. WAGNER. So they can get that money when they need it, ex-
peditiously, for the, as I call it, ups and downs of life.
Mr. KNIGHT. That is correct, and an example from the small-
business space is that one of the things that these small-business
loans, and to be completely clear, on the small-business side, these
loans are often more expensive than a small-business bank loan.
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But a lot of these businesses could not get a small-business loan
because they need less money, and the bank would take much,
much longer to approve the loan, so they are paying for conven-
ience and a right-sized loan.
Mrs. WAGNER. In my limited time, is it possible for banks to
evade State law if they have bank preemption?
Mr. KNIGHT. No. They are operating on the basis of Federal law,
and Congress has made a choice to grant both State and Federal
banks certain authorities.
Mrs. WAGNER. And you have already talked about what will hap-
pen to access to affordable credit if bank partnerships are prohib-
ited by Congress. It will go away. Is that correct?
Mr. KNIGHT. It would certainly be crimped.
Mrs. WAGNER. And who would step in to fill that void?
Mr. KNIGHT. Probably an alternative provider or an illegal pro-
vider, or—
Mrs. WAGNER. An illegal provider. Thank you. My time has ex-
pired.
Mr. MEEKS. The gentlelady’s time has expired. The gentleman
from Georgia, Mr. Scott, is now recognized for 5 minutes.
Mr. SCOTT. Thank you, Mr. Chairman. I want to follow up on a
point of questioning that I agree on with Chairman Meeks, and
also my colleagues, Mr. Sherman and Mrs. Wagner. We have been
working in this committee for many years against predatory lend-
ing, but what we have found out is that we need to do a rifle ap-
proach to solving this problem and not a scatter gun that could
bring innocent bystanders in who are actually out here doing a re-
markable job, providing credit access and lending to the very peo-
ple that we are concerned about protecting from the predatory
lenders.
Let me start with you, Ms. Limon. When it comes to the creation
of new financial products, are there not other pro-consumer fea-
tures to products that policymakers should focus on beyond the
APR, things like fee transparency, limitation on debt rollovers? Are
those not also important aspects for us to explore as we look to
incent innovation and expand services to the unbanked and under-
served?
Ms. LIMON. Yes. Those are also important elements to consider.
Mr. SCOTT. And now, let me get to the heart of the matter here.
In your written testimony, you describe feedback from some lenders
in your State, stating that they preferred an interest rate cap to
underwriting guardrails.
Our concern on this committee is around access to credit. And I
have heard from lenders, I have heard from online lenders, and I
have heard from banks, and as my chairman, Mr. Meeks, men-
tioned, we have had our African-American bankers here—and we
have not had a new African-American bank in a quarter of a cen-
tury—who are very concerned about this rate cap and their ability
to provide access to credit for the very people that we want to pro-
vide with credit. They feel that they may be unable to fulfill de-
mand for credit under such circumstances, particularly for the low-
income consumers who are already having many challenges.
I call your attention to a 2018 study by the World Bank that
found that binding interest rate caps below market values can re-
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19
duce overall credit supply. I am sure you may be familiar with
that. A separate study, looking at the experience in Chile, found
that the impact was felt most profoundly by the youngest, least
educated, and poorest families, the very families that you and I
both are concerned about.
And also let me add this. Because the underwriting costs are
strained by the rate cap, the lender must make larger loans in
order to make the loan profitable. This means that consumers may
take out a larger loan than they need, which can place our con-
sumers in a financially precarious position. And the rate cap ex-
tends broadly to most types of credit and is not narrowly tar-
geted—that is our concern—to the payday lenders, and rate caps
cause a loss of credit availability, particularly for non-prime, sub-
prime consumers who pose a greater risk of default. And this is be-
cause the lender cannot afford to offset the underwriting costs due
to the rate cap.
All I am saying is that we can’t dismiss these concerns; we have
to deal with them. So what I want to kind of hear from you, Ms.
Limon, is what information did you have prior to passing your law
that led you to believe the rate cap would not restrict access to
credit?
Ms. LIMON. The very principle of our law is that high interest
rates cause higher defaults for the very same families that we are
trying to serve. And so, that is a concern. We saw over 20,000 Cali-
fornians have a car repossessed and over 100,000 Californians go
into default because of these loans.
Mr. SCOTT. And do you—
Mr. MEEKS. The gentleman’s time has expired.
Mr. SCOTT. Thank you, sir.
Mr. MEEKS. The gentleman from Florida, Mr. Posey, is recog-
nized for 5 minutes.
Mr. POSEY. Thank you, Mr. Chairman. Our topic today illus-
trates one of the great paradoxes of regulations. On the one hand,
our government has sought to regulate prices to protect consumers,
only to find out that doing that restricts the supply of the good or
service and actually hurts those whom they seek to protect. And,
in an everyday perspective, a lot of consumers would jump for joy
if Congress passed a law that said you couldn’t charge over $1 a
gallon for gasoline. A lot of people would be really excited and say,
‘‘You really did the right thing.’’
But we know what would happen, don’t we? You would have zero
gasoline. And so, is it better to pay more than $1 for a gallon of
gasoline or not have any gasoline?
In that regard, I ask unanimous consent to enter into the record
a 1970 Newsweek article by the late Milton Friedman, entitled
‘‘Defense of Usury.’’
Mr. MEEKS. Without objection, it is so ordered.
Mr. POSEY. Thank you, Mr. Chairman. There are two more items
I would like to put in the record. The first is Rolf Nugent’s classic
paper that appeared in the Harvard Business Review in 1930, that
showed how half-percentage reductions in maximum interest rates
across three States was correlated with funding for small loan
needs of low-income people and the unfortunate growth in bootleg
lenders.
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And finally, a 1975 paper from the Florida State University Law
Review that details the history of small-loan regulation in Florida.
This paper details the ways that market innovators got around rate
ceilings. The articles will help remind us that regulating small-dol-
lar loans has a wide range of unintended consequences, including
denying many low-income people the loans that they need.
Mr. MEEKS. Without objection, it is so ordered.
Mr. POSEY. Thank you, Mr. Chairman. These papers also under-
score another important aspect of our hearing, and that is regu-
latory arbitrage. Interest rate caps in one or more States make in-
centives for market lenders to innovate to make loans to residents
of those States who need them. They have done this in partnership
with banks in other States.
Mr. Knight, what role do small-dollar lenders or loans play in
our economy? Do they provide essential financial services?
Mr. KNIGHT. Small-dollar credit can provide essential financial
services for borrowers. There is definitely evidence. I should say
that for small-dollar credit, particularly, say, storefront payday, the
economic evidence is mixed as to whether access is a good thing or
a bad thing, but it is pretty clear that for at least some borrowers,
it can be absolutely essential.
Mr. POSEY. Okay. I believe that the regulation of interest rates,
as I mentioned, is a real paradox, and some States seek to protect
consumers and they make money unavailable to them, unfortu-
nately. This two-edged sword is difficult to balance sometimes.
Which aspect do you believe is more important, protecting from
high interest rates or protecting from credit scarcity?
Mr. KNIGHT. I believe that protecting from credit scarcity is fre-
quently more important. I believe that in a functioning, competi-
tive, and well-regulated market, there is definitely a role for regu-
lation to play, consumers should be able to access credit and that
they will be able to address their credit needs, because frequently
they are accessing credit to avoid a greater harm. There is always
the option to not take a loan, but if you are taking a loan to avoid
a greater harm, that loan should be available to you.
Mr. POSEY. The CFPB has delayed the ability-to-repay manda-
tory underwriting provisions until November. CFPB originally pro-
posed to rescind the entire rule. Can you evaluate the underwriting
provisions in terms of benefits, costs, and impact on consumer cred-
it availability?
Mr. KNIGHT. Sir, I am afraid I cannot do that. I have not done
a sufficient study of that to have an informed opinion.
Mr. POSEY. Okay. In fairness, Ms. Limon, would you care to re-
spond?
Ms. LIMON. I’m sorry. Can you repeat the question that you
would like me to respond to?
Mr. POSEY. Yes. It was talking about the delay of the CFPB rule,
that they had the ability to pay rule.
Ms. LIMON. We would like to see that in California, and that has
actually been a challenge to us, and part—not full, but part of the
reason we also stepped up to pass our own rate cap law.
Mr. POSEY. Okay. Thank you very much. Mr. Chairman, I see my
time has expired.
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Mr. MEEKS. The gentleman yields back. The gentlewoman from
North Carolina, Ms. Adams, is recognized for 5 minutes.
Ms. ADAMS. Thank you, Mr. Chairman, and I want to thank all
of the participants today for sharing with us your ideas.
Let me, first of all, ask Ms. Limon, in addition to your work on
predatory lending, you have also been leading a conversation in
California about strengthening the oversight authority of the State
financial regulator, particularly in light of the Trump Administra-
tion’s efforts to weaken consumer financial protection and the
CFPB’s role in enforcement. Can you talk briefly about why Cali-
fornia feels the need to act, and what you hope to accomplish by
strengthening the State’s role in protecting consumers in the finan-
cial marketplace?
Ms. LIMON. Thank you. Last year, I introduced a bill that would
have developed a California version of the CFPB. In light of the
Administration taking action on some of the work that we expected
to be coming down, California has really seen a need to step up.
With almost 40 million people in the State of California, we know
that we are a big portion of the market share for a lot of this lend-
ing space, and so we feel that it is very important to protect con-
sumers, and as a State, we have had to step up in the absence of
Federal oversight and regulation.
Ms. ADAMS. Okay. So it is my understanding that California had
been trying for a number of years to get a rate cap in place. What
do you think were the key components of your efforts last year to
get the bill over the finish line, and was there bipartisan support
for the new California law?
Ms. LIMON. Thank you. There was strong bipartisan support for
this bill, and we built a coalition that I think was very strong. Over
2 decades of having this conversation, with multiple bills intro-
duced in the last 3 years, we put together a coalition that included,
among others, veterans’ groups, and the Urban League. We had
many groups at the table, including responsible lenders, who told
us time and time again that they could work within the interest
cap rate and provided options for consumers in California.
Ms. ADAMS. Okay. Well, great. I served in the North Carolina
House for about 20 years so I understand how important it is to
bring stakeholders to the table. Otherwise, they say you are on the
menu. But thank you for that.
Ms. Saunders, NCLC has previously highlighted some high-cost
mortgage loans, as high as 138 percent APR made to small busi-
ness owners through a rent-a-bank scheme. Would you please tell
us more about these loans, the terms, and the circumstances in
which they were made?
Ms. SAUNDERS. Sure. First mortgage loans are deregulated and
there is no rate cap, but many States do limit the rates for second
mortgages. And yet, there is a nonbank lender, World Business
Lenders, that is using a couple of banks, OCC-supervised Axos
Bank, and in the past, FDIC-supervised the Bank of Lake Mills in
Wisconsin, to entrap small business owners with really horrendous
loans.
For example, Jacob Adoni in New York, was looking for a per-
sonal loan, but he was forced to reference his business in the loan
documents. He ended up with a $90,000 loan at 138 percent, and
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22
he is facing foreclosure. And that is an illegal loan in New York,
but the claim is that because the loan was—the paperwork showed
it came from a bank and then it was assigned back to the lender,
that makes it legal.
Elissa Speer is facing foreclosure in Connecticut because of a
$20,000 loan at 121 percent, supposedly for her restaurant, which
she didn’t own a restaurant, but they trumped up these loan docu-
ments claiming that a leaf blower was equipment for a restaurant.
These are the kinds of things that we are seeing predatory lend-
ers do, using banks as a fig leaf.
Ms. ADAMS. Thanks very much. Ms. Saunders, where are we now
with the ability-to-repay standard in the 2017 rule? Is it important
for us to fight for this, and what other features are necessary?
Ms. SAUNDERS. It is absolutely necessary for us to fight for it. In
the absence of a rate cap, the CFPB’s ability-to-repay rule, a very
modest rule that simply caps the number of loans and has a com-
mon-sense rule, that the lender should consider a person’s ability
to repay, should go into effect. It has been saved by the court. The
CFPB has threatened to repeal it, and we need to put it into effect.
Ms. ADAMS. Thank you. Ms. Aponte-Diaz, CFPB Director
Kraninger will be appearing before our committee tomorrow. What
questions would you recommend we ask her about these issues?
You have 20 seconds.
Ms. APONTE-DIAZ. For Ms. Kraninger?
Ms. ADAMS. Yes.
Ms. APONTE-DIAZ. She was on the board that approved the FDIC
proposed rule, so we would ask her to rescind that rule and also
to move forward with the ability-to-repay payday rule.
Ms. ADAMS. Great. Thank you very much. Mr. Chairman, I yield
back.
Mr. MEEKS. The gentlelady’s time has expired. I now recognize
the gentleman from Missouri, Mr. Luetkemeyer, for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. Ms. Limon, you
made a statement a minute ago when you were talking about your
bill from California. My understanding is that the bill was signed
October 11, 2019. Is that correct?
Ms. LIMON. Yes.
Mr. LUETKEMEYER. And it only regulates loans between $2,500
and $10,000. Is that correct?
Ms. LIMON. That is correct.
Mr. LUETKEMEYER. Okay. Mr. Sherman from California asked
you about $300 loans a while ago, and I didn’t really hear you give
him a good answer to that. You don’t regulate the $300 loans,
though. Is that correct?
Ms. LIMON. We have not done anything around payday loans.
Mr. LUETKEMEYER. Okay. That was not the impression we got
from your testimony and your earlier comments. Also, you said that
you have a $2 billion industry. Have you studied—and I doubt that
you have, since the most you could have studied would be 4 months
here, since the law was signed—what kind of effect it has had on
small-dollar lending yet?
Ms. LIMON. The $2 billion that I referenced is the lenders that
are lending within the rate cap, so just to be clear, the industry is
bigger—
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Mr. LUETKEMEYER. Okay. But have you seen an effect on this?
I would imagine you haven’t, at this point.
Ms. LIMON. The data will not come out for another year.
Mr. LUETKEMEYER. Okay. So we really can’t say whether it has
or has not helped it, at this point.
Ms. LIMON. What I can say is what the existing market is under
the rate cap, and that is $2 billion.
Mr. LUETKEMEYER. Very good. My concern is—and I think you
have found the sweet spot there, because a George Washington
University study says that the break-even point for a 36 percent
APR is $2,600. So, you are where the break-even point is, so it is
interesting that you have that.
Also, there is a UK study that my good friend from Georgia, I
think, is referencing here. The UK put into effect, in 2015, a 100
percent rate cap, and then the Financial Conduct Authority did an
assessment on it and found that the value and number of short-
term dollar loans fell 50 percent in 6 months. I am guessing you
are going to see a significant decline in loans in this $2,500 to
$10,000 area as well.
And one of the things that concerns me is the misrepresentation
of the cost of the loan. APR, in my judgment, if you are talking
about a loan that is less than one year, is irrelevant, and I will give
you an example. If you have a leaky faucet in your house, you call
the plumber up. He comes out, turns a tap, and 10 minutes later,
he walks out the door and hands you a bill for $50. Now, was that
a surcharge, Ms. Saunders, or did he charge you $300 an hour for
that service?
Ms. SAUNDERS. I think that the rent-a-bank loans that we are
talking about—
Mr. LUETKEMEYER. I am asking you a question. Is it a service
charge for him coming to your home with his truck, his equipment,
his knowledge, and his tools, fixing your faucet, or did he charge
you $300 an hour?
Ms. SAUNDERS. Well, he hasn’t offered you a loan, so no, it is not
an interest rate.
Mr. LUETKEMEYER. That is not the question I asked. I asked
whether he is charging you by the hour or whether he is charging
you a service charge.
Ms. SAUNDERS. People charge in various ways. You can charge
by the hour or you can charge a surcharge, and—
Mr. LUETKEMEYER. Okay. You don’t want to answer the question.
The answer is, it is a service charge, which is exactly what any
kind of a loan less than a year should be. It should be disclosed
as a service charge. I would argue that you are hiding the true cost
of the loan, hiding behind an APR, because that customer doesn’t
know what the true cost of it is. If it is $5 per 100, $10 per 100,
$20 per 100, whatever it is, if you don’t disclose that in a way they
can understand, they will never know. Who knows what a 200 per-
cent—let me give you an example.
You have a $400 loan, which is the average that most people
can’t afford to cover anymore. And if you charge them $20, do you
know off the top of your head what kind of interest rate that would
be?
Ms. SAUNDERS. It depends on how long it has been—
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Mr. LUETKEMEYER. Over 14 days, 2 weeks. That is the normal
rate.
Ms. SAUNDERS. Twenty dollars for a $400 loan?
Mr. LUETKEMEYER. Yes, 14 days.
Ms. SAUNDERS. You know, under pressure, I can’t do the math.
I can tell you that 15 for 100 is—
Mr. LUETKEMEYER. Okay. It is 120 percent.
Ms. SAUNDERS. Okay.
Mr. LUETKEMEYER. A while ago, we just established that the av-
erage is going to cost you $35. So, here we have a loan that is
below the cost. Do you think they are going to make that loan if
it is below the cost?
Ms. SAUNDERS. What they would probably do is make a better
loan, that is a longer-term loan, that gives you time to pay it back.
Mr. LUETKEMEYER. No. The customer doesn’t want—you see, that
is the problem that you are getting into here. You are trying to
drag them into something different. The customer just walks in
and wants a 14-day loan until he gets to payday, and I will show
you here in just a minute that there is a reason for this. And if
you only use that amount of money, that is all you want, why
should you drag the customer into something they don’t want?
That is my concern.
Ms. SAUNDERS. APRs give people the ability to compare the same
amount of money—
Mr. LUETKEMEYER. APRs hide the true cost of the loan. I will
argue that until—
Ms. SAUNDERS. And I would argue the other way around because
it is usually—
Mr. LUETKEMEYER. Professor Johnson, I have a comment for you,
before I end my testimony here. You are talking about having gone
out and surveyed some different payday loan institutions. I would
recommend to you, for reading, ‘‘The Unbanking of America,’’ by
Lisa Servon. She went out and did 4 months in 2 separate locations
of check cashers and payday lenders. She had the same sort of
preconditioned, pre-thought process that you have displayed today
with regard to your testimony, and she came up with a completely
different view of what happened. I suggest that you read that.
Mr. MEEKS. The gentleman’s time has expired.
Mr. LUETKEMEYER. Thank you very much, Mr. Chairman.
Mr. MEEKS. The gentlewoman from Michigan, Ms. Tlaib, is recog-
nized for 5 minutes.
Ms. TLAIB. Thank you. Professor Johnson, who funded your re-
search?
Ms. JOHNSON. The Ohio State University.
Ms. TLAIB. The university academics. I really pay attention to
who is funding various research and books and things of that na-
ture.
I want to focus on the truth today. We are calling this the rent-
a-bank method, correct?
Ms. JOHNSON. Yes.
Ms. TLAIB. When someone is intentionally committing an act that
is clearly illegal and uses someone else to do it, isn’t that still a
crime?
Ms. JOHNSON. Yes.
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Ms. TLAIB. So, the truth is that the rent-a-bank is actually a
criminal scheme, correct? Do you not agree, Mr. Knight?
Mr. KNIGHT. It depends on the nature of the action.
Ms. TLAIB. Got it.
Mr. KNIGHT. I don’t want to give you a misleading answer.
Ms. TLAIB. That is okay. I will make sure to tell my son that hid-
ing behind someone else when he is part of the crime—that he is
still part of a criminal scheme if he does that. So you can all con-
tinue to say it depends, but the truth is you have State law that
is being circumvented by these banks that are really targeting the
most vulnerable communities, people that we represent. We are not
here representing the banks and big corporations. We are elected
by the people, not by them.
On December 5th and 6th, FDIC Chairwoman McWilliams had
testified before various committees and was asked several ques-
tions about FDIC-supervised banks that are helping high-cost lend-
ers evade State interest, abusing in these terminologies, really, to
commit crimes, to basically sit back and watch them do it, whether
or not their proposal that they submitted encourages those criminal
schemes.
I specifically asked Chair McWilliams about these criminal
schemes happening in my State, in Michigan, where we have really
strong interest caps, and it is really important. We have a huge
amount of working-class, middle-class families who are being tar-
geted. Chair McWilliams said the agency, ‘‘frowns upon arrange-
ments between banks and nonbank lenders for the sole purpose of
evading state law.’’ Great. Let’s see that in action, right?
Ms. Aponte-Diaz, does this satisfy your concerns about the so-
called rent-a-bank criminal scheme, is what I am going to be call-
ing it, because that is the truth?
Ms. APONTE-DIAZ. Absolutely not. It has been lip service to date.
There have been no enforcement actions on these rent-a-bank
schemes from the FDIC, and the proposed rule actually is going to
embolden predatory lenders to enter into more rent-a-bank
schemes.
And if you don’t mind, I just wanted to add to the many ques-
tions around access to credit. We recently did a study in South Da-
kota where voters, through a ballot initiative, voted 77 percent that
they wanted a 36 percent rate cap. We came back 3 years later to
ask folks how they felt about that, and 82 percent of the folks in
the poll said that they are very happy with the 36 percent and they
wouldn’t change it. We saw, still, an increase in lending—not just
stable but an increase in lending, in South Dakota. And so, I just
wanted to add that as well.
Ms. TLAIB. And I think, Ms. Aponte-Diaz, we can do a lot of poll-
ing and surveys. That seems not to matter here. And it is the
truth. It seems to me that there is a lack of a sense of urgency in
trying to help middle-class families not become targets of these
criminal schemes. And it may be corporations, it may be folks. But
I will tell you, my residents get labeled these kinds of really awful
names and so forth, and kind of get brushed off. But boy, if it is
a corporation, a CEO, a bank, a predatory lender, it seems like we
kind of give them a pass. And I feel very strongly about this.
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Do you think FDIC’s McWilliams is being straight with Congress
about the criminal rent-a-bank scheme when, I believe the quote
was, ‘It is up to states to decide what rate caps are appropriate,
if any, or whether or not the states want to opt out of that ability
of the interest rates to be preserved when an out-of-state entity
purchases the loan product.’’ There is a lot of stuff here. But it is
because of this that a Utah bank can simply claim that the loan
was made in Utah because that is where the charges are imposed,
and payments sent, but it is really in the fine print of the contract.
It literally is on paper that they are circumventing the law. It is
blatantly, in your face, a criminal scheme.
What more can we do, because it is very obvious that is exactly
what is happening?
Ms. APONTE-DIAZ. Chairwoman McWilliams mentioned this opt-
out, but States should not have to opt out. California spent 3 years
going through the democratic process, and Colorado and South Da-
kota, through the ballot initiative. We should not have to go
through these extra steps.
Ms. TLAIB. No. It undermines—
Mr. MEEKS. The gentlelady’s time has expired.
Ms. TLAIB. Thank you, Mr. Chairman.
Mr. MEEKS. The gentleman from Kentucky, Mr. Barr, is now rec-
ognized for 5 minutes.
Mr. BARR. Thank you. I am stunned. I have never heard interest
rate preemption that is specifically authorized under Federal law,
the National Banking Act and the Federal Deposit Insurance Act,
ever described as a criminal scheme. But nevertheless, I learn
something new every day here.
Mr. Knight, many of the other witnesses here today have offered
this narrative that banks in these partnerships are merely passive
participants who allow bad actors to use their charters to prey on
consumers. The title of this hearing, in fact, suggests that banks
play no significant role in these partnerships. But in reality, the re-
lationships we are discussing today are genuinely innovative part-
nerships that allow banks to provide access to credit to portions of
the population previously underserved by financial institutions, or
stuck with predatory payday lenders, check-cashing businesses, or
pawn shops. In many cases, banks provide significant value to both
their partners and the consumers, including by developing under-
writing standards, retaining a portion of the risk on their books,
and maintaining high standards of customer service.
Would you please discuss how banks play an important, active
role in these bank fintech partnerships that we are discussing
today, and discuss how banks have skin in the game?
Mr. KNIGHT. Yes. Thank you very much. Yes, I think that there
is a concern that these partnerships are basically a bank handing
a nonbank lender a stack of stationery and saying, ‘‘Go for it.’’ And
if that is the case, that is against the law, and the regulators al-
ready have tools to police it.
In reality, many of these partnerships are a collaborative effort
between a bank and what amounts to sort of a vendor who can
help them, from a technology perspective, from an underwriting
perspective, with the utilization of technology, from a marketing
perspective, and then from a balance sheet management perspec-
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27
tive, which are things that banks contract to third parties all the
time.
Mr. BARR. And then, banks have additional capital and they
have underwriting expertise.
Mr. KNIGHT. They have capital. They have underwriting exper-
tise. They have regulatory expertise.
Mr. BARR. Yes.
Mr. KNIGHT. The have the ability to help the fintech firm man-
age the efforts.
Mr. BARR. Well, let’s just follow the logic of the critics that this
is truly only passive conduct on the part of the bank. And I think
by passivity they mean the loans are not kept in portfolio. But
banks are passive in a number of other asset classes, and I don’t
hear our witnesses leveling charges of rent-a-bank for these activi-
ties. Consider a mortgage. Fannie Mae and Freddie Mac have very
specific rules for what kinds of paper they will buy. Are they in-
volved in a rent-a-bank when they insist on specific loan terms for
mortgages, and then purchase them a few days after the loans are
extended? Should we shut down that system and insist that Fannie
and Freddie enter the direct lending market?
Mr. KNIGHT. No.
Mr. BARR. Okay. Let me ask you, Mr. Knight, in your testimony
you note that the Madden decision resulted in the reduction of
credit availability to residents in States within the Second Circuit,
and that the rate of personal bankruptcy filings increased due to
a lack of available funding options for borrowers. Would the FDIC
and the OCC’s proposed rules to clarify valid-when-made help re-
verse these credit availability issues?
Mr. KNIGHT. They would help.
Mr. BARR. And tell me, what would happen to the credit mar-
kets, particularly in terms of liquidity, when originators and pur-
chasers of loans are not certain about the permissible interest rate
for those loans?
Mr. KNIGHT. I think what we are seeing is that it dries up, and
particularly for the riskier loans, the loans that would have to be
priced at a somewhat higher interest rate, because there are con-
cerns about their validity. People are not going to invest money in
a loan that they are not certain will remain valid.
Mr. BARR. So the vibrancy of a secondary market is directly con-
tingent upon the valid-when-made doctrine?
Mr. KNIGHT. Well, some combination of the valid-when-made doc-
trine and the ability of a bank to sell a loan and have it remain
valid, which is a statutory power.
And, sir, if I may note, one more important thing in that partner-
ship.
Mr. BARR. Sure.
Mr. KNIGHT. The bank has to own the credit model. The bank
has to be the ultimate decision-making party. They own that
regulatorily. They are responsible for the loans that are made. And
if it isn’t that way, that is against the law, and they are in trouble,
and there are tools available to police that already, and the FDIC
and the OCC have shown a willingness to do so.
Mr. BARR. Mr. Knight, final question. I represent a relatively
rural district. I have some urban and suburban parts in my district
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as well, but I do think about my rural constituents a lot, in the
context of access to financial services. A recent Federal Reserve
study shows that 51 percent of the counties in the U.S. saw net de-
clines in the number of bank branches between 2012 and 2017, and
these declines in bank branches disproportionately hit rural com-
munities. Another report by researchers from the Fed found that
online fintech lending has penetrated areas that could benefit from
additional credit supply, including those areas that have lost bank
branches.
As banks are closing and consolidating, how are fintech/bank
partnerships able to fill the void and service rural customers?
Mr. MEEKS. The gentleman’s time has expired. The gentlewoman
from Massachusetts, Ms. Pressley, is now recognized for 5 minutes.
Ms. PRESSLEY. Thank you, Mr. Chairman, and thank you to our
witnesses for being here today.
It seems there is no lack of creativity when it comes to the finan-
cial industry’s desire to exploit those facing hardship. To be clear,
unless you believe that poverty is a character flaw, there is abso-
lutely no justification for triple-digit interest rate installment loans.
The unfortunate reality is that if 40 percent of Americans cannot
afford a $400 emergency, then there are larger structural issues at
play. People are not being paid enough for their work to be able
to live, let alone save. In times of struggle, the options shouldn’t
be a debt trap interest rate or nothing at all.
This is particularly frustrating when States like my own, the
Commonwealth of Massachusetts, go to great lengths to protect
consumers from predatory lenders. Massachusetts maintains crimi-
nal usury laws, capping small loans at 23 percent interest while
making it a crime to assist in providing a predatory loan, impli-
cating the lender and the bank.
Ms. Johnson, how does this compare to protections in other
States you have looked at?
Ms. JOHNSON. In response, I wanted to say that, yes, this isn’t
something new. The Pennsylvania attorney general sued Think Fi-
nance, who had rent-a-bank partnership with First Bank of Dela-
ware, and rent-a-tribe partnerships, in other words, partnering
with Native American tribes in order to charge triple-digit interest
rates. The lawsuit is going forward against Think Finance as a
criminal enterprise with this partnership with the Native Amer-
ican tribes. So, that is not something foreign. We have criminal
usury statutes.
And in response to your question, we have some States suing civ-
illy. We have some States suing criminally. But either way it goes,
consumers need to be protected through these statutes to protect
consumers from triple-digit interest rates.
Ms. PRESSLEY. Absolutely, and I still hear from folks in my dis-
trict, Massachusetts 7th, and across the State, about the continued
availability and marketing of these predatory loans.
There is also a question of what happens when the debt from
these loans is sold. So Ms. Saunders, how might a debt collector’s
pursuit of the purchased loan differ from that of a lender illegally
operating in the State?
Ms. SAUNDERS. Debt buyers who buy charged-off debt are obvi-
ously going after people who are struggling the most and who often
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have been the target of predatory lending. And we have heard a
lot of talk about the Madden case. Well, debt buyers are buying
charged-off credit card debt for pennies on the dollar. They do not
need to charge outrageous interest rates on top of that, and cer-
tainly the Madden court was correct that it doesn’t hurt banks not
to let debt buyers continue to pile on to people who have been the
target of predatory lending.
Ms. PRESSLEY. I think we eliminated debtors’ prisons in some-
thing like 1833. But last December, ProPublica published their re-
port entitled, ‘‘The New Debtors’ Prisons,’’ highlighting University
of Utah law professor Christopher Peterson’s work on the sky-
rocketing abuse of the States’ small claims courts.
And I ask for unanimous consent to submit this article for the
record, Mr. Chairman.
Mr. MEEKS. Without objection, it is so ordered.
Ms. PRESSLEY. Mr. Peterson’s research is just one more case
study into our continued criminalization of poverty and the
weaponization of the legal system against those who are already
living on the margins.
Ms. Saunders, do you believe that what we are seeing in Utah
can spill over into States with stronger consumer protection?
Ms. SAUNDERS. Yes. Unfortunately, we are seeing that Utah is
the center of a lot of this predatory rent-a-bank lending. We have
FinWise Bank there and others that are enabling debts of thou-
sands of dollars, tens of thousands of dollars, over years, at 160
percent APR or higher. There is a $4,500 loan that will cost
$13,000 to repay. APRs matter.
And if the lack of oversight and rate caps in Utah can spread
across the country, then every State, including your own, will be
the subject of predatory lending.
Ms. PRESSLEY. Back in 2017, Massachusetts Attorney General
Maura Healey settled with the State’s then-largest debt collector
for $1 million for egregious abuse of the State’s small claims courts
to collect from folks whose incomes were exempt.
Ms. Saunders, what does it mean to have exempt income, and
what are the unique risks of these aggressive collection practices
to vulnerable communities?
Ms. SAUNDERS. Exempt income is income that you need for basic
necessities—food, medicine, rent—and income that, like Social Se-
curity, other forms of pension, public benefits, and certain amounts
of wages, are exempt from collectors, because we don’t believe that
people should have to starve because they are in debt.
Ms. PRESSLEY. That is right. It seems that this is less access to
credit or really just access to debt.
Mr. MEEKS. The gentlelady’s time has expired.
Ms. PRESSLEY. Thank you.
Mr. MEEKS. The gentleman from Texas, Mr. Williams, is now rec-
ognized for 5 minutes.
Mr. WILLIAMS. Thank you, Mr. Chairman. Interest rates are the
price of obtaining credit. I am a small-business owner in Main
Street America. I have been in business for 50 years and have
never had one day in my business life that I have been out of debt.
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In any line of business, price is determined by calculating many
different factors. A business must cover the cost of hiring employ-
ees, keeping inventory, and paying taxes, just to name a few.
Tom Miller, of Mississippi State University, stated, ‘‘Although a
36 percent interest rate might sound high and profitable, personal
installment loans are profitable at that rate only if the loan exceeds
a certain size threshold. If we set a national rate cap at 36 percent,
many of those innovative products that are filling a need for many
people in our economy, would no longer be profitable and would
cease to exist.
‘‘Rather than increase government intervention with a national
rate cap, we should allow capitalism and the free market to deter-
mine the price of obtaining credit. This is called competition.’’
Before I continue with my questions, Mr. Knight, are you a pro-
ponent of capitalism or are you a socialist?
Mr. KNIGHT. I am a proponent of capitalism.
Mr. WILLIAMS. Thank you very much. That is a great answer. We
are doing good this year.
This issue is about personal and financial freedom. If we, in Con-
gress, set an arbitrary rate cap on what we think is too high an
APR, we are limiting customer choice and saying that the govern-
ment knows your financial situation better than you do. Unfortu-
nately, some of my colleagues seem to believe that if we legislate
high APR loans out of the marketplace, the demand for these prod-
ucts will simply go away.
However, statistics show that millions of Americans lack the
ability to pay for a $400 emergency expense. We should be spend-
ing our time on legislation that allows people to save more of their
hard-earned money and build personal wealth, rather than limiting
the options available to them when they are most in need of assist-
ance.
Mr. Knight, can you elaborate on what population would be most
hurt by enacting a national interest cap, and what would happen
to their availability of credit?
Mr. KNIGHT. Yes. In terms of access to credit, the population that
would be most likely to suffer would be the more marginal bor-
rowers, your relatively less affluent, your relatively young. Under-
represented groups would likely see a reduction in access to credit.
Mr. WILLIAMS. A Bloomberg analysis showed that 5 years ago, 22
percent of Wells Fargo’s consumer loans were made to customers
with credit scores below 680. Today, this number has shrunk to 11
percent. Traditional financial institutions are having to avoid
riskier lending after greater pressure from regulators following the
financial crisis, and more government involvement. Unfortunately,
these changes have made obtaining credit much harder for a per-
son of that population.
So Mr. Knight, can you explain how greater bank partnerships
can help solve this issue, and the benefit to consumers that it
would create?
Mr. KNIGHT. Yes. There is a benefit in two ways, potentially: one,
better access to assessment underwriting on the front end; and two,
better balance sheet management and servicing on the back end.
So a bank is able to leverage a partnership to access customers, un-
derwrite them, service them, and move the credit off of their bal-
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31
ance sheet into either a loan sale or a securitization, which is very
similar to what we do with any number of other things like credit
cards, car loans, et cetera, and then have that loan serviced. And
this allows, particularly smaller banks, to access these markets,
which allows for greater competition in the credit markets.
Mr. WILLIAMS. And most people deal with smaller banks. Mr.
Knight, in your testimony you talk about innovation and the bene-
fits of bank partnerships with fintech companies. There is a mis-
conception that these partnerships operate outside the bounds of
any laws. So, could you talk briefly about some of the third-party
guidance that currently exists, and how it helps protect consumers?
Mr. KNIGHT. Sure. Both the OCC and the FDIC have strong
third-party guidance that both places a strong burden on the bank
to manage its partner and the conduct with its partner, and holds
the bank accountable for the auctions of its partner as if the bank
did it themselves.
Also, under the Bank Service Company Act, to the extent that
the partner is providing services for a bank, be it marketing, un-
derwriting, or servicing, or something like that, that partner is also
subject to examination by the bank regulator. And if you talk to
some of these firms, you will see that they have bank regulators
coming in to visit them.
Mr. WILLIAMS. I yield back. Thank you for being a capitalist.
Mr. MEEKS. The gentleman yields back. The gentleman from Illi-
nois, Mr. Garcia, is now recognized for 5 minutes.
Mr. GARCIA OF ILLINOIS. Thank you, Mr. Chairman. I live a half-
block from Main Street in a Chicago neighborhood, and I have seen
how predatory payday loans and sky-high interest rates are trap-
ping too many consumers into debt traps. Consumers might take
out a small-dollar loan to meet a short-term need, only to find that
they can’t keep up with the triple-digit interest rate on that loan.
Soon, they are forced to take out another loan to meet the need,
stacking debt on top of debt, and trapping them in a vicious cycle.
Ms. Saunders, can you tell us very briefly two instances of what
happens when people get caught up in a debt trap, and what are
the hardships and health consequences that consumers face?
Ms. SAUNDERS. Sure. When they get into a debt trap, they have
trouble meeting other expenses. Especially when they have very
aggressive payday lenders or debt collectors after them, they may
have trouble buying medicine or buying food or paying for their
rent. In addition, these predatory lenders often require access to
their bank account, and they take out money before they have paid
for expenses, and they are going to incur overdraft fees and NSF
fees.
Mr. GARCIA OF ILLINOIS. Thank you. One major reason why I
think it is so important for this committee to pass my bill, the Vet-
erans and Consumers Fair Credit Act, is that the protections in the
Military Lending Act have been shown to work. Veterans and mili-
tary groups support my bill because they are familiar with the re-
search showing that the Military Lending Act protects active duty
servicemembers from predatory loans and so pushes them towards
healthier forms of credit.
Assemblywoman Limon and Ms. Aponte-Diaz, what alternatives
to payday loans exist out there that comply with the 36 percent
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rate cap but make sure that people get the credit that they need
without falling into a debt trap, and how have consumers fared in
States with strong interest rate caps in place?
Ms. LIMON. Thank you, and I want to point out that California
has the California Pilot Program for Affordable Small Dollar Cred-
it, and we have had that in place for a number of years, and that
caps loans under $2,500 to 36 percent. So, that exists. It is a mar-
ket that has been increasing over the last few years, and what we
have also seen is that businesses are looking for regulatory sta-
bility to keep investing in this space.
Mr. GARCIA OF ILLINOIS. Thank you.
Ms. APONTE-DIAZ. And I will just add, I am from a State, Mary-
land, which has never had payday loans or high-cost installment
loans, and there are multiple other ways to access credit. There are
credit cards. There are also credit unions, and to your point, minor-
ity depository institutions, and credit unions are not charging more
than 36 percent.
There is also just the targeting—the marketing done by these
high-cost lenders is why it is concentrated in communities of color.
It is on your phone. It is on our radio stations. It is everywhere.
So this is sort of what our community thinks, this is what is avail-
able. But there is a lot more. There are emergency programs for
utility companies. There are nonprofits, churches, and a lot of other
things. But we are bombarded with the marketing from these high-
cost lenders.
Mr. GARCIA OF ILLINOIS. Thank you. A little bit of history on this
issue for a moment. In 1978, Robert Bork, a well-known jurist in
our country, argued and won a Supreme Court case that allowed
banks to exploit high-interest rates.
Here is how Binyamin Applebaum described what happened next
in his book, ‘‘The Economists’ Hour’’: ‘‘Citicorp’s vice chairman com-
piled a list of five states that had lenient laws or might be willing
to write new laws. One of the five names on the list was South Da-
kota, which was already moving to get rid of its interest rate caps.
The bill sailed through the legislature and was signed into law.
‘‘But that wasn’t enough. Under Federal law, banks needed an
invitation to enter a new state. Citicorp executives flew to South
Dakota and promised to bring 400 jobs.—you may have heard that
earlier—The company gave the text of the desired invitation to
South Dakota’s Governor, Bill Janklow. The necessary legislation
was introduced on the last day of the legislative session in 1980,
passed by both houses, and the same day signed into law by
Janklow before the sun went down. He also declared that the need
for jobs was an emergency, so the law took effect immediately.’’
Four hundred jobs saved the State of South Dakota. Ever since
then, South Dakota has exported high interest rates to consumers
all over the country. So, that is why we are advancing this bill. We
need to learn from history and not repeat those mistakes.
Mr. MEEKS. The gentleman’s time has expired. The gentleman
from Tennessee, Mr. Kustoff, is recognized for 5 minutes.
Mr. KUSTOFF. Thank you, Mr. Chairman, and I do want to thank
the witnesses for appearing this morning.
Mr. Knight, if I could, I would like to plow over some ground that
I know that we have talked about this morning, and make a couple
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of observations. One, and again, we have talked about this, I think
every Member of Congress has constituents who lack the ability to
pay a $400 emergency expense. They are my constituents, and ev-
erybody else represents these hard-working people as well, who lit-
erally do work paycheck to paycheck.
The second observation is, as we have talked about, we have a
number of people in our communities, for all the reasons we have
discussed, who are becoming unbanked or underbanked. So again,
if we look at capping interest rates at, say, 36 percent, a couple of
questions. One is, what happens to access to credit for those who
are unbanked or underbanked, in my district or any other district,
maybe whose credit score is around 600, give or take? If you could
address that question first.
Mr. KNIGHT. We would expect to see a rationing effect of credit,
so some loans would not get made because they could not be made
profitably. We would also expect to see a distortion in the model
of credit, because APR is just one factor in a loan. And so if you
have to squeeze the balloon, you would see either larger loans
being made or longer timelines being made, or some combination
thereof.
There is also evidence that you would see a shift from inde-
pendent loans to loans secured by something, or loans made by,
say, a seller. There is a CFPB working paper that shows that in
the presence of a binding usury cap, you don’t see subprime inde-
pendent auto loans. You see the dealer, the subprime car dealer,
be the only lender, because they can raise the cost of the car. So
it is a smaller interest rate but applied to a bigger principal, which
becomes a problem if you want to prepay the loan or default on the
loan, and you end up buying less car for more money.
Ms. APONTE-DIAZ. Can I just add that payday lending actually
leads to being unbanked.
Mr. KUSTOFF. Thank you. Mr. Knight, if we could look from the
historical perspective and maybe look 5, 6, 7 years ago at Chile,
they instituted a cap rate of 36 percent on small loans, unsecured
loans. Are you familiar with what happened in that country?
Mr. KNIGHT. There was, as expected, a rationing of credit. There
was a reduction in access, and the reduction in access fell dis-
proportionately on the relatively poor and the relatively young.
Mr. KUSTOFF. And what further result occurred when they
capped the rate at 36 percent?
Mr. KNIGHT. My recollection is that, yes, there was that ration-
ing of credit. You saw fewer loans being made, and people had to
then compensate in some other way. And there is other evidence
and other scholarship that indicates that in the presence of credit
rationing, particularly something like subprime credit rationing,
people move to other alternative forms of credit. They don’t go with
a credit card. They go to another alternative form or something like
overdraft.
Mr. KUSTOFF. Thank you. So as far as usury laws are concerned,
they essentially set a cap on the price that a lender can recoup
from making a loan, unless, of course, the lender gets into fees and
other charges. Can you talk about how those laws affect the incen-
tives to lend in a given market?
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Mr. KNIGHT. Yes. As I mentioned, a usury cap is going to
disincentivize loans made to relatively risky borrowers, because
they cannot be made profitably over the portfolio of loans. They are
also going to incentivize either shifting to more fee income rather
than interest rate income if the law allows for that, or shifting the
structure of the loan to be generally high principal and longer
term, so that while the APR is lower, it is actually acting on a
higher principal for a longer period of time.
A useful exercise is if you compare a 30-year mortgage at 4 per-
cent APR to a payday loan of 2 weeks at 500 percent APR, taken
to their natural term, as interest is a percentage of principal, it is
actually higher with the mortgage, because even though it is a
lower APR, it is a longer loan.
Mr. KUSTOFF. Thank you. My time has expired, and I yield back.
Mr. MEEKS. The gentleman yields back. I now recognize the gen-
tleman from Texas, Mr. Green, who is also the Chair of our Sub-
committee on Oversight and Investigations, for 5 minutes.
Mr. GREEN. Thank you, Mr. Chairman. I thank the witnesses for
appearing as well.
Mr. Knight, persons who are caught in this debt trap, who re-
ceived loans that they could not afford—what do you propose we
do for the countless number of people who are caught in these debt
traps? Do we just write them off as persons who should not have
engaged in this process? They should have been better educated?
Maybe they should have made more money. Perhaps, they
shouldn’t have been poor. But what do we do? We have people who
are being harmed when we know that things shouldn’t be occurring
as they are. The Supreme Court has ruled, since the 19th Century,
that you cannot engage in a scheme to create loans that are usu-
rious. So, what do we do?
Mr. KNIGHT. Thank you very much for your question, sir, and it
is a very valid concern about the plight of people who are trapped
in suboptimal situations. I don’t mean to make light of it. It is a
very real concern. And I would say that I think we are looking at
sort of a two-pronged issue. One is the underlying macroeconomic
situation.
Mr. GREEN. I understand that, but let’s not use my time explain-
ing the micro or the macro either, of economics. Tell me, what do
we do with the people, for the people?
Mr. KNIGHT. I would say that our best bet is to provide people
with better options, because the risk we run is that you can legis-
late away the supply of credit, but you cannot legislate away the
demand for credit. So, the solution is to provide better options for
credit for people who are poorly served. I don’t think anyone thinks
that a payday loan is the pinnacle of credit, and I hope we move
to something that is better and more broadly available.
Mr. GREEN. We are talking about people now who are entrapped
into this cycle of borrowing. We know that it is unlawful to develop
a scheme such that a bank and a nonbank entity can enter into it
for the purpose of having an interest rate that they could not ordi-
narily have in a given State. That is unlawful. So, what do we do?
What do we do for the people who are caught in this trap?
Ms. APONTE-DIAZ. Can I add that this is a bigger problem than
just access to loans. This is low wages, historically, in our country.
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When the gentleman speaks about Chile, if we are following what
is recently going on in Chile, there is a huge inequality issue in
Chile, and they are still struggling because of wage issues.
So we need to not try to solve this problem by giving people loans
of 150 percent APR. Even at 36 percent, a $10,000 loan costs
$10,000. So APRs do matter, and this is not the solution that we
should be talking about, ‘‘Oh, we should let the free market charge
whatever, 100 percent.’’ Thirty-six percent is generous. It is a very
generous number to say that you can charge someone that amount.
Mr. GREEN. Thank you. Mr. Knight, back to you. What do we do
when we have persons who are in this position? We have at least
one recommendation, but the other side doesn’t offer any alter-
native. They don’t come with a plan to help extricate people from
the enigmatic circumstance. Their plan is leave things as they are.
This is the way things are and they should continue to be. I am
asking you for a plan. What do we do? There is a plan on the table.
What do we do?
Ms. Johnson, are you attempting to weigh in?
Ms. JOHNSON. I was not, but I was just thinking in my head that
we need to pass—if we don’t want an interest rate cap, then we
need to say that banks in partnership with nonbanks should not
be able to do multiple rollovers, should not be able to extend the
maturity date multiple times, should not be able to electronically
debit people’s credit cards or bank accounts over and over again,
and should not engage in illegal garnishments in order to collect
on the debts. In other words, we need to—if we are not going to
have an interest rate—
Mr. GREEN. With my time that I have left, pardon me for inter-
rupting, I am going to challenge my colleagues on the other side
to give us a solution as opposed to an objection. I yield back.
Mr. MEEKS. The gentleman’s time has expired. I now recognize
the gentleman from Tennessee, Mr. Rose, for 5 minutes.
Mr. ROSE. Thank you, Mr. Chairman, and I thank Chairwoman
Waters and Ranking Member McHenry for organizing this hearing
today.
Mr. Knight, I think as has already been discussed here today,
the valid-when-made issue is often confused or used interchange-
ably with the True Lender issue. When Chair McWilliams testified
in a Financial Services Committee hearing here in December, she
tried to clarify that the FDIC’s proposed rule did not touch the
True Lender doctrine. Do you agree with Chair McWilliams’ asser-
tion that the True Lender question is outside the scope of this rule-
making?
Mr. KNIGHT. I do.
Mr. ROSE. Thank you. When done properly, bank partnerships
with nonbank lenders are good for consumers, good for competition,
and good for innovation. These partnerships and a healthy sec-
ondary market for loans also help extend credit to consumers who
might not otherwise be able to access it. This includes many of my
own constituents in the Sixth District of Tennessee.
Mr. Knight, in your comment letter supporting the OCC’s rule-
making, you noted that these bank partnerships are a critical as-
pect of the business of banking. You go on to also say that having
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these loans remain valid is critical the modern economy. Why is
the ability to sell a loan important for banks?
Mr. KNIGHT. It is important for banks because it is an important
function of safety and soundness concerns, the ability to shift risk
off their platform in a meaningful way, and a potential source of
revenue, particularly for smaller banks who don’t necessarily have
the deposit base to hold a whole bunch of loans on their balance
sheet, given the regulatory requirements that they face.
And so, if we want, particularly smaller community and other
banks to be more competitive going forward, they need options to
manage that, and these bank partnerships provide such an option
when done well.
Mr. ROSE. Earlier, Ms. Tlaib cut you off when asking about the
illegality of these arrangements. Would you like to take a moment
and complete your response there?
Mr. KNIGHT. Sure. The point I was going to make is it is not
that—I think we need to distinguish between a rent-a-bank scheme
and a bank partnership, because they are two separate things. A
rent-a-bank scheme is where the bank is a passive party that basi-
cally just allows whomever, the nonbank lender, to impersonate it
and just sign off on everything that is done.
In these bank partnerships, the bank actually exercises owner-
ship, discretion, and control. They are ultimately responsible and
they ultimately have the final say, and they have a relationship
with these partners akin to that of a vendor.
Mr. ROSE. I think you made an important point in your comment
letter that I would like to highlight here today, and you just reiter-
ated a few moments ago, which is that diminishing access to credit
does not diminish the need for credit. I see this in my district, and
I want to make reference to Mr. Luetkemeyer’s comments earlier
about what happens when we restrict the ability of individuals to
get those small-dollar loans that they may need, on terms that they
want, which is to borrow for a very short period of time. I see this
in my community all the time and I just want to stress the impor-
tance that we may think, when we impose statutes that limit those
types of transactions, that they somehow go away.
But I can assure the listeners, and our experts testifying, and my
colleagues, that they don’t go away, that people find ways to get
the credit they need, whether that be by extending terms in some
way or whether it be by seeking that credit through nontraditional
sources, and that is what I often see in my community, where I
guess so-called bootleg lenders are available, loan sharks, if you
will, that unfortunately, we force borrowers to seek out when we
restrict their ability to access the credit that they want and that
they need through traditional terms.
I want to conclude by just stressing that it is important to note
that in the 115th Congress, this committee passed legislation, on
a bipartisan basis, that would have codified the valid-when-made
doctrine. And when that legislation, H.R. 3299, came to the House
Floor, it again passed with bipartisan support. And so I think we
would be well-advised to keep that bipartisan mindset in mind. I
yield back.
Mr. MEEKS. The gentleman yields back. I now recognize the gen-
tleman from Florida, Mr. Lawson, for 5 minutes.
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Mr. LAWSON. Thank you, Mr. Chairman. I would like to welcome
you all to the committee. And I will start out with you, Ms. Saun-
ders. Can you please explain the True Lender doctrine?
Ms. SAUNDERS. The True Lender doctrine is just a variant of cen-
turies-old rules that usury law should not be evaded. The Supreme
Court, as early as, I think, 1838, and probably earlier than that,
has said that we are going to look beyond the form of a transaction,
because predatory lenders are very creative, and we are going to
prevent evasions. True Lenders is one form of evasion where a
State-regulated lender hid behind a bank, but the payday lender or
the regulated lender is the true lender.
Mr. LAWSON. Okay. Mr. Knight, did you want to comment on
that?
Mr. KNIGHT. Yes. I just to elaborate that the doctrine is not uni-
versally applied. Some courts apply it, and some courts adopt a
more contractual analysis of whomever the lender is on the con-
tract is deemed to be the lender. As I mentioned earlier, it seems
that the emerging trend is to look at who has the predominant eco-
nomic interest in the loan. So if a bank already has a purchaser
lined up for the loan, that weighs against the bank being the true
lender in the court’s mind, versus a loan that the bank intends to
hold for a while.
For example, the Madden decision doesn’t deal with True Lender
because the bank held the loan until it defaulted.
Mr. LAWSON. Professor Johnson, how do you feel about that?
Ms. JOHNSON. The True Lender doctrine—first of all, I agree
with my fellow witness that it is a longstanding doctrine. And what
we are talking about with these new transactions, at the end of the
day the payday lender or the nonbank lender performs all of the
servicing functions, all of the debt collection functions. The bank
itself might have an interest that effectively amounts to 10 percent,
maybe 20 percent of the receivables. To me, that is not a situation
where the bank is in control. He is describing a scenario where the
loans are on the books of the bank.
In the cases that we are talking about, including pending cases—
and I would direct you to read my statement where I talk about
Kabbage, a fintech lender which has partnered with Celtic Bank in
Utah—at the end of the day, the nonbank, Kabbage, is basically
doing all of the lending functions, all of the servicing-related func-
tions, and so Kabbage should be the true lender.
Simply saying the bank is involved somehow in a way with the
partnership does not do away with the fact that the predominant
economic interest is still with these nonbanks. Therefore, if we are
not going to cap the interest rates, we should do something else
about what the nonbanks can do in terms of servicing these debts
and collecting on these debts.
Mr. LAWSON. Professor Johnson, in capping the interest rates,
will that provide more opportunities for individuals, especially in
minority communities, where they have to go, oftentimes, to pay-
day lenders in order to make it to their next paycheck?
Ms. JOHNSON. Capping interest rates may drive down payday
lenders in the community, but it doesn’t mean that there are not
other lending alternatives. As my fellow witnesses identified, you
have millions of dollars being spent in advertising by the for-profit,
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nonbank lenders, whereas credit unions and some of these other
entities don’t have all of that advertising. So the person in your
community may not realize they can just simply go to a credit
union and get the same type of loan, except at a better interest
rate, on better terms, and not only being paid back over a longer
period of time, also benefitting from budgeting and other services
provided by the local bank or community bank or credit union.
Mr. LAWSON. Ms. Limon, would you like to comment on that?
Ms. LIMON. Thank you. I would say that States are doing dif-
ferent things. There are multiple options. California has a pilot
program. But I think that another piece that is really important to
highlight is that as we have this conversation about rent-a-banks,
they are really going around State laws. In July of 2019, before the
bill had passed in California, before it had been signed by the gov-
ernor, there was a conversation with these companies about how
they were going to evade the law, and that, I think, is what we are
trying to get at, how we ensure that these companies don’t evade
the law by finding a partner outside of the State to do business as
usual and offer products that are not good for consumers.
Mr. MEEKS. The gentleman’s time has expired.
Mr. LAWSON. Thank you.
Mr. MEEKS. I now recognize the gentleman from Georgia, Mr.
Loudermilk, for 5 minutes.
Mr. LOUDERMILK. Thank you, Mr. Chairman, and I thank the
panel for being here. This is a very important discussion we are
having here, because what we need to be focused on is how do we
make finance available, especially to most vulnerable communities.
And I think what my friends on the other side of the aisle are
doing is going to be harmful to those very communities. I am talk-
ing about rural and minority communities, because those are the
ones that have a problem getting access to capital.
And I appreciate the comment that was just made about a con-
versation of evading the law. I know of the conversation, but I don’t
know that anything has transpired with that. So, Mr. Knight, I
would like to ask you a series of quick questions, because I think
what has happened is we have demonized something that has been
standard operating practice in the financial services market for a
couple of centuries.
Now, since we have been here today, some have tried to portray
the OCC and FDIC rulemaking on valid-when-made as a new regu-
latory giveaway to banks. My understanding is the Madden deci-
sion deviated from nearly 2 centuries of precedent in banking law.
Is that true?
Mr. KNIGHT. I believe so.
Mr. LOUDERMILK. Do these proposed rules change the agencies’
underlying policy, or do they simply codify the agencies’ long-
standing position?
Mr. KNIGHT. They codify the longstanding position.
Mr. LOUDERMILK. Two centuries’ worth of longstanding positions.
Mr. KNIGHT. Yes.
Mr. LOUDERMILK. That has worked very well.
Mr. KNIGHT. Yes.
Mr. LOUDERMILK. When I make a loan, I really don’t care what
happens on the back side of it, as long as my interest rate is the
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39
same all the way through. I am okay if it goes down, but I need
to know that that interest rate is going to stay the same. And the
person loaning the money to me needs to be profitable so they can
make more money. I think that is an important position to have.
Another question: Nonbank lenders are not permitted to export
interest rates unless they are partnering with a bank or credit
union that originates the loan, is that true?
Mr. KNIGHT. I would clarify that the bank or credit union is the
one exporting the interest rates, because they are the lender.
Mr. LOUDERMILK. So there is a bank, a regulated bank, on the
back side of this. Correct?
Mr. KNIGHT. Correct.
Mr. LOUDERMILK. In order to benefit from the bank’s interest
rate exportation authority, nonbank fintech lenders must submit to
regulation as third-party service providers by the banking regu-
lators, and the bank is accountable for the actions of its fintech
partners. Is that correct?
Mr. KNIGHT. In the bank partnerships we are talking about, that
is what the law says.
Mr. LOUDERMILK. And that is what we are worried about, is
these fintech partnerships.
Do Federal banking regulators check to make sure these loans
are made lawfully during the exam process?
Mr. KNIGHT. Yes.
Mr. LOUDERMILK. They do. Is there widespread abuse of these
bank partnerships by payday lenders?
Mr. KNIGHT. Not to my knowledge.
Mr. LOUDERMILK. Do you know of any that are exporting it?
Mr. KNIGHT. I do not know of any.
Mr. LOUDERMILK. Okay. I haven’t heard of any either. Kabbage
was brought up. I had a small business. We had lines of credit. We
were going through a traditional bank and credit unions for small-
business lending. After the Dodd-Frank Act, my business no longer
qualified for those loans. Had there been a Kabbage available, I
would have been able to save a lot of employees that I had to lay
off because I couldn’t have access to capital. So I think we need to
be very careful in demonizing businesses that are actually pro-
viding funding to markets that traditional banks and credit unions
can’t.
Ms. APONTE-DIAZ. Can I add something?
Mr. LOUDERMILK. I am not quite done yet. Why has the avail-
ability of credit decreased and personal bankruptcies increased in
the three States since the Second Circuit made the Madden deci-
sion?
Mr. KNIGHT. Based on a recent study, the authors link it to the
lack of access to marketplace lending and the inability of borrowers
who would otherwise be able to either refinance an existing loan
or deal with exigent circumstances like a medical bill, the inability
to access credit.
Mr. LOUDERMILK. And low-dollar loans are an issue. I apologize,
but I have a short amount of time, and I always run out of time.
Regarding another issue which we are talking about, a national
interest rate cap, here is a concern I have. The small-dollar loans
are a big problem. Forty percent of Americans can’t afford a $2,500
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emergency that they have. They need access to credit. The problem
we have, as a George Washington University study indicated, is
that the break-even APR of a $2,600 loan is 36 percent. That is the
break-even APR, which means if you are going to borrow below
that, you need to have some higher interest rates. Right?
So a 36 percent national interest rate cap would effectively elimi-
nate loans under this amount. A study by the Federal Reserve
Bank of New York indicates that up to 60 million Americans do not
qualify for traditional bank—
Mr. MEEKS. The gentleman’s time has expired.
Mr. LOUDERMILK. Mr. Chairman, may I submit the study for the
record?
Mr. MEEKS. Without objection, it is so ordered.
Mr. LOUDERMILK. Thank you. I yield back.
Mr. MEEKS. The gentleman from Washington, Mr. Heck, is now
recognized for 5 minutes.
Mr. HECK. Thank you, Mr. Chairman, and I want to thank all
the members of the panel as well for their presence today, and
more importantly, for their advocacy on behalf of people who need
a voice. Frankly, the older I get, the more I have come to the con-
clusion that if we are not here to give a voice to people who don’t
have one, I am not quite sure why we are here.
I appreciate much of the conversation thus far. I appreciate what
I think is an important element of this, which is the access to cred-
it issue and the implications of this proposed policy, and the oft-
cited data point, which Congresswoman Pressley cited, that 40 per-
cent of American households don’t have $400 to meet an emergency
need. And that is a balancing consideration of this debate going for-
ward.
I do think there should be a balancing consideration of what is
it that States have actually done, albeit too few of them, and the
graph happens to be up right now as I speak. I am from Wash-
ington State, and we are pretty proud of our efforts at consumer
protection. Years ago, we enacted a payday lending limitation stat-
ute, which was very hard-won. We are talking tooth-and-nail,
knock-down, drag-out. And by just about every measurable account,
it is working.
Now I don’t pretend to be a total expert, but here is what I do
know. I know the reports are good from consumer organizations
and the regulator. I know that the number of payday lending loca-
tions has declined by 90 percent, payday lending dollar volume is
down 83 percent, and perhaps best of all, the number of complaints
filed with our regulator has decreased from hundreds per year to
40. It seems to be working.
That begs a question for me in the broader context of this. I
think, Ms. Saunders, I would like to ask you, is there a compelling
argument for State preemption, or Federal preemption of State
statute, State policy, when there is arguably a comparable con-
sumer protection regime?
Ms. SAUNDERS. No, there is not. As I said in my opening state-
ment, it is as American as apple pie for States to have interest rate
caps to protect their residents. All of the States have them. Of
course, it goes back to the Bible, and most States have them today.
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Unfortunately, although, Washington State has good laws, and it
is a modest law, no more than eight rollovers, and yet the payday
lenders couldn’t live on that abusive model. But in Washington
State, although you only allow 29 percent on a $2,000 loan, there
is a rent-a-bank lender, OppLoans, that is using FinWise bank in
Utah, which is making 160 percent APR loans up to $4,000 in
Washington State. And there is nothing under the National Bank
Act that allows nonbank lenders to obliterate the centuries-old
usury caps that States like Washington have, to protect your citi-
zens.
Mr. HECK. So your point of view, and I am asking in all sincerity,
is that Washington State law does not protect its consumers to a
sufficient degree, notwithstanding the data I shared and the re-
ports I get?
Ms. SAUNDERS. The Washington State laws are quite good, but
there are a couple of lenders that are starting to evade them using
this rent-a-bank model. And if we don’t put a lid on it right now,
you are going to see a lot more problems.
Mr. HECK. Isn’t there a way to solve that without an overall rate
cap?
Ms. SAUNDERS. Well, I think an overall rate cap would cut off the
worst of the high-cost rent-a-bank lenders, but we also can simply
stop banks from exporting high-rate loans into States like Wash-
ington that don’t allow it.
Mr. HECK. So remember my premise here, which is that we are
here to provide and extend protection to people who are vulnerable.
I think it is worth keeping in mind that Federal preemption is a
two-edged sword, and that what one hand giveth, the other hand
can taketh away.
And I always feel compelled to remind people that if we want to
go down the road of Federal preemption, understand there is an-
other side of that coin, that if Federal preemption seeks to, if the
policymakers seek to, they can remove those consumer protections.
I have had this argument or debate or good-hearted back-and-
forth with my colleagues on this committee for quite some time as
it relates to insurance regulation. I live in a State where the insur-
ance commissioner is doing a great job, and I don’t want somebody
to come in and set a lower standard than he has set. And the same
danger presents itself when it comes to this area.
But I will take into account and further plumb your feedback on
our law—
Mr. MEEKS. The gentleman’s time has expired.
Mr. HECK. —and I guess I am going to stop talking.
Mr. MEEKS. The gentleman from Ohio, Mr. Davidson, is now rec-
ognized for 5 minutes.
Mr. DAVIDSON. Thank you, Mr. Chairman. And thank you to our
witnesses. I appreciate your efforts to make sure we get this right.
Mr. Knight, I think you said it perhaps best, that Congress could
enact legislation that would restrict the supply of lending, but we
wouldn’t be able to dramatically affect the demand. And so, what
happens when we have big disconnects between supply and de-
mand? Normally black markets form, right? So, we have large
black markets all around the United States, it is a significant part
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of U.S. GDP, and a lot of that is attributable to broken market sys-
tems. And some of those are the result of legislation.
So could you highlight how a rate cap would do just that, limit
supply without checking demand?
Mr. KNIGHT. Yes, absolutely. Ironically, one of the great progres-
sive reforms in this very area was the Uniform Small Loan Law
of 1916 by the Russell Sage Foundation, and their recognition was
that usury rates were too low to attract legitimate lenders and that
they needed to actually allow people to make profitable loans. And
when they made those reforms, they were opposed by the religious
leaders and all who wanted the much lower rates, but also loan
sharks, who wanted to continue to operate illegally and not face le-
gitimate competition. And so the risk we run if we set an interest
rate that is binding and limits and constricts credit is that either
we cut people out of the legal system and they have to go seek
some inferior alternative, including loan sharks, or we have to dis-
tort credit products so that they are inferior to what they would
have gotten otherwise, and, therefore, are a worse fit than they
could have had, had we left the market.
Mr. DAVIDSON. Thanks for that basic explanation. And my col-
league, Mr. Green, was highlighting what is the alternative. Well,
the alternative is to make the economy grow, to create more jobs
than there are people to fill them, to see wages rising instead of
stagnant, to have wages at the bottom portion of the economy
growing faster than wages at the top of the economy, to get past
the broken status quo of stagnant growth and on to the economy
that we are enjoying today. And we did that largely through de-
regulation, tax reform, and incentivizing investment in the United
States and growth. We still have a long way to go, but we are mak-
ing progress.
Ms. Saunders, as you are aware, this past year Ohio passed a
law that regulated payday lenders, or lenders in question related
to this year. Pew, a consumer advocacy group, very similar to your
organization, NCLC, has said that the Ohio legislature got payday
loan reform right. The structure of the loan has an interest rate
component plus fees.
Here is an example of what Ohio’s law allows. If you lend $300
for 4 months under current Ohio law, the APR could be as high as
161 percent, depending on what day of the month the loan is origi-
nated. It doesn’t appear that Pew thinks a 36 percent rate cap is
the right reform. They also support bank lenders that charge rates
at least double the 36 percent rate. Why is there a disconnect be-
tween Pew and NCLC?
Ms. SAUNDERS. I think Ohio is following the path of Colorado.
Ohio voters voted to cap rates at 28 percent, overwhelmingly, back
in 2008, but the payday lenders decided to call themselves mort-
gage lenders in order to be able to charge a fee allowed for mort-
gages, and they got around it. And the legislature, where there is
a lot of big payday loan money, unfortunately, blessed that.
Eventually, after a lot of hard work, going up against big money
from predatory lenders, the Ohio Legislature came up with some-
thing that allows high-rate loans, like Colorado did. But eventually,
Colorado voters voted for a 36 percent rate cap.
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Mr. DAVIDSON. And fees. And then what will happen is the same
challenge of black markets.
Professor Johnson, I like your framework, and as another Ohio
person, thanks for coming to share your expertise in the field. I like
kind of the rubric that you laid out, but I don’t necessarily under-
stand the mechanisms of how it works, for example, debt entrap-
ment. Could you explain how someone is forced to take this loan?
Ms. JOHNSON. Okay. So by debt entrapment, I don’t mean that
somebody is being forced to take the loan. By that, I mean that you
have set up a scenario where a person is signing up for a loan, not
really understanding the consequences of that loan. For example,
if we talked about the payday loan rule that was to take effect this
past year, it would have required you to do the ability to repay,
right? So underwriting, ability to repay, that should be something
that should happen now.
Mr. DAVIDSON. So, sound underwriting practices would help
make a difference. And frankly, I would like to go into a lot of
areas where we totally disregard sound underwriting practices and
we socialize the risk. We distribute the risk over everyone, includ-
ing people who can qualify for lower rates.
So, thanks for the hearing, and—
Mr. MEEKS. The gentleman’s time has expired. The gentleman
from California, Mr. Vargas, is now recognized for 5 minutes.
Mr. VARGAS. Thank you very much, Mr. Chairman, and thank
you to the witnesses for being here. I apologize that I wasn’t here
earlier. I also sit on the Foreign Affairs Committee, and we were
dealing with the unique challenges that women face in global
health, and I wanted to be there for that presentation.
But now that I am here, I do want to ask this. APR does matter,
and if you don’t think it matters, we don’t take those 300 percent
loans. I always tell my two daughters, ‘‘Don’t listen to what people
say. Watch what they do.’’ You go to the beach and they say, ‘‘Oh,
the water is warm.’’ I say, ‘‘Why aren’t you in it?’’ ‘‘Hell, no. I am
not getting in that cold water.’’ We don’t take those loans, because
we think they are predatory. That is why we don’t take them.
But I did want to talk about State rights versus Federal preemp-
tion. It is interesting. I have been around long enough to listen to
Republicans always talk about strong State rights, except when
they don’t like them, and then they are against the State rights
and the Federal Government should be involved.
California Assemblymember Limon, you passed a law, and it
seems to be working. Obviously, it is early on. Can you comment
on the process you went through, and the State went through, to
do that?
Ms. LIMON. This was a very extensive process. It has been tried
for well over 2 decades. But we really put an incredible coalition
together, faith groups, the Urban League, veterans’ groups, respon-
sible lenders, all to try to come up with a solution to one product,
which was the fastest-growing product in the market, that caused
the most harm to the consumer.
And we passed this law and it was signed, and now what you see
is that there are companies evading it. And I actually want to use
Mr. Knight’s description, if I may. He talked about the rent-a-bank
scheme being an impersonation of the true lender. And based on
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that description, I argue that the rent-a-bank schemes ongoing in
California will clearly show that the nonbank lender is the lender.
I want to give an example of what is happening. When you see
a title lender like LoanMart advertising their loans on a website,
between 60 to 220 percent, and in the fine print at the bottom of
this website you see that it says that the loan is made by a bank
in Utah. That is what we are talking about. They are evading State
law. The State law is very clear that it is 36 percent plus the Fed-
eral rate, and now they are using a bank outside of the State to
evade an existing law.
Mr. VARGAS. Ms. Aponte-Diaz, you stated at one point that the
underbanked actually get hurt taking these predatory loans be-
cause, in fact, oftentimes, they get unbanked. Could you explain
that a little bit?
Ms. APONTE-DIAZ. Yes. I have spent the last 7 years in California
talking to payday borrowers, to folks who have gotten the install-
ment loans, and there is not one of those former payday borrowers
who said, ‘‘I would go back and do this again,’’ or ‘‘I would go to
the black market.’’ Once they get out of that debt trap, they are
done with it, and look for better access to credit.
I’m sorry. Can you repeat your question one more time?
Mr. VARGAS. Yes. You said that what happens, you snuck it in
there quickly—
Ms. APONTE-DIAZ. Oh, the unbanked. Yes. I am so sorry. For
payday lending, and increasingly installment lending, you have to
give your bank account information so that it can be deducted di-
rectly from your bank account. So what we see often is, maybe the
borrower doesn’t have enough money to pay their rent or groceries
or utilities, and the payday lenders come and still take that money
out. And so, if there is no money in there, then you have your over-
draft fees over and over, and then those lead to bank closures. So
I was arguing that we are not trying to help the unbanked.
Mr. VARGAS. You had to sneak it in there. I just wanted to hear
your explanation. I appreciate it. Thank you very much.
Ms. APONTE-DIAZ. Thank you.
Mr. VARGAS. I do want to ask one last question—I have about a
minute left—the issue that you can’t loan to anyone $2,600 or less
at 36 percent because it is just not doable. Professor, could you
comment on that, or whomever would like to?
Ms. SAUNDERS. I would just say that I don’t think that is true.
Self-Help Credit Union, an affiliate of the Center for Responsible
Lending, certainly does it. In South Dakota and Montana, when
the voters capped rates at 36 percent, we actually saw an increase
in credit union small-dollar loans.
Mr. VARGAS. That is what I believed, but I have heard it almost
as if it was coming from Moses here that this was in case the law.
But I also have to thank you. See, most of it does go back to the
Bible. As a former Jesuit, I appreciate that, and you do have usu-
rious laws in the Bible too, that we don’t violate.
Mr. Knight, I have 20 seconds left, would you like to comment
on any of that?
Mr. KNIGHT. I would just say that I think it is fantastic if credit
unions can fill some of this gap, but there is a capacity question
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as to how much of the gap they can actually fill. And it is an open
question.
Mr. VARGAS. I wanted to give the Republicans an opportunity,
because everybody seems to just talk to you and not to the others.
I wanted to make sure you had equal—
Mr. MEEKS. The gentleman’s time has expired. The gentleman
from North Carolina, Mr. Budd, is now recognized for 5 minutes.
Mr. BUDD. I thank the Chair. Mr. Knight, I appreciate you being
here. So much of the discussion surrounding the Madden case—I
think I have heard it mentioned earlier, from some of my col-
leagues—has to do with the valid-when-made doctrine, which says
that a loan does not become valid when transferred to a third
party. The idea behind valid-when-made is that a loan is valid from
the beginning; it can’t suddenly change when transferred to an-
other person or company. And to my understanding, this has been
part of the banking law in the U.S. for about 100 years. So far, so
good?
Mr. KNIGHT. I think it has been a part for longer than that. If
I may, I want to note one thing, just for completeness.
Mr. BUDD. Please.
Mr. KNIGHT. There is a counterargument that says that the early
cases largely dealt with note assignment, and so the fact that it
was two subsequent loans is relevant. I disagree with that.
Ms. JOHNSON. But those were the early cases.
Mr. KNIGHT. Those were the early cases, but those cases, as we
acknowledge, banking changes rapidly, and more recent cases have
held that a subsequent transaction does not invalidate the loan.
And I think if you look at sort of the notion behind it, there isn’t
a reason why a subsequent downstream transaction that does not
change the borrower’s obligations should relieve the borrower of
their obligations.
Ms. JOHNSON. The Madden decision did not involve—
Mr. BUDD. I reclaim my time. Thank you, Mr. Knight. However,
the Madden v. Midland Second Circuit decision in 2015 kind of
branched away from this longstanding principle, and it ruled that
loans could become invalid when sold from a bank to a nonbank.
So as a result of this decision, credit markets have become volatile,
many borrowers have seen their access to credit diminish, as we
have talked about today, and it is at a time when we should be
doing everything we can to provide small businesses and con-
sumers—I even heard my colleague from Georgia mention that lack
of capital access as a small business owner—better access to credit
and financing alternatives. So, it seems unwise to put caps on con-
sumer loans.
So Mr. Knight, in your opinion, was the Madden decision wrong-
ly decided?
Mr. KNIGHT. I believe it was.
Mr. BUDD. And in what ways has the Madden decision actually
hurt low-income borrowers, hurt low-income borrowers’ access to
credit?
Mr. KNIGHT. Based upon the academic evidence I have seen, we
have seen a constriction in credit and a resulting—there is evi-
dence of a link to an increase in bankruptcy as people who need
to access credit to address either an emergent situation or an exist-
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46
ing loan, where they need to be able to refinance an existing loan,
are not able to do so. And one of the weird wrinkles of this is that
you can be under a credit card debt at 30 percent and not be able
to access a marketplace loan at 25 percent to refinance it, because
in the latter case, the bank is planning to sell the loan. That
strikes me as nonsensical.
Mr. BUDD. So just striving for clarity here, we have this decision,
this Madden decision. We cap these rates, trying to help people, be-
cause I think on both sides, we really want to help people here, ab-
solutely. But it ends up hurting people? That is what I am hearing
from you.
Mr. KNIGHT. It appears to be rationing credit, and that appears
to be having a harmful result.
Mr. BUDD. More bankruptcies.
Mr. KNIGHT. That appears to be the evidence.
Ms. JOHNSON. Can I respond to that bankruptcy—
Mr. BUDD. Great. Thank you. I want to continue on. I would like
to make two observations and then tie them together into a ques-
tion. The first is that it is incredibly troubling that millions of
Americans lack the resources to pay for a $400 emergency expense.
I think we all can agree that that is very troubling. But today, as
we speak, hard-working Americans are living paycheck to pay-
check. When times get tough, they may need to borrow money from
somewhere.
The second observation is the basic principle that our financial
services economy is built on risk-based pricing. Many of the people
I have described have credit scores just right above 600, and today
they have access to credit, and lenders lend to them in accordance
with State and Federal laws designed to promote safe and respon-
sible lending.
So here is my question, Mr. Knight. If we cap the interest rates
at 36 percent, what is going to happen to access for credit for the
unbanked and the underbanked folks across our country? Will their
need for credit just magically disappear, or is it more likely they
will turn to unregulated credit if regulated creditors turn them
down?
Mr. KNIGHT. The need for credit will not disappear, and so to the
extent a borrower who previously could access credit and is now
capped out of the market, they will either search for illegal or oth-
erwise alternative credit or suffer the consequence that they were
seeking to avoid with a loan.
Mr. BUDD. Thank you. I believe I am out of time. Thank you for
your time.
Mr. MEEKS. The gentleman yields back. I now recognize the gen-
tleman from Texas, Mr. Taylor, for 5 minutes.
Mr. TAYLOR. Thank you, Mr. Chairman. I appreciate this hear-
ing.
I just wanted to quickly do a lightning round. So a bank, the
profit margin is about 10 percent, right? And other businesses have
higher profit margins. Some have lower profit margins. What is an
unacceptable profit margin, in your mind, for payday lenders? And
I will start with Mr. Knight. I am just looking for a number—8 per-
cent, 10 percent, 100 percent? What is an unacceptable profit mar-
gin for a payday lender in your mind, Mr. Knight?
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47
Mr. KNIGHT. I don’t have a numerical answer. I’m sorry.
Mr. TAYLOR. Ms. Saunders?
Ms. SAUNDERS. I focus on the impact on the consumer, not on the
profit.
Mr. TAYLOR. Got it. Okay. Professor?
Ms. JOHNSON. No magic number. I am more concerned about the
terms of the loan as well as the interest rate.
Mr. TAYLOR. Okay. Ms. Aponte-Diaz?
Ms. APONTE-DIAZ. We have asked the payday lenders for a de-
scription. Like they are telling us they need to pay for their store-
fronts, for their employees, and we have asked over and over for
details about why they have to charge 100 percent to make ends
meet, and we have not seen the documents on that. But what we
have seen is that there are 40 percent default rates on these high-
cost installment loans.
Mr. TAYLOR. Sorry to cut you off, but do you have a number?
Ms. APONTE-DIAZ. No.
Mr. TAYLOR. I will come back to you in a second. Ms. Limon?
Ms. LIMON. No numerical number. It is to do right by the con-
sumer.
Mr. TAYLOR. Okay. So, there are publicly-traded payday lenders.
Have you looked at their profit and loss statements?
Ms. APONTE-DIAZ. No.
Mr. TAYLOR. Why? You can go look at their FTC filings, right?
Ms. APONTE-DIAZ. Right.
Mr. TAYLOR. So, you have a K-1. You can go look at that. You
haven’t looked at that?
Ms. APONTE-DIAZ. I have not personally, but—
Mr. TAYLOR. Okay. Mr. Knight?
Mr. KNIGHT. Yes. There are a couple of studies that look at that,
and payday lenders are not particularly profitable relative to other
finance companies. In fact, they tend to be significantly less profit-
able than more traditional finance companies.
Mr. TAYLOR. Do you want to put a number on that?
Mr. KNIGHT. I don’t have the exact—don’t quote me on this, but
I believe they are about a third as profitable.
Mr. TAYLOR. I have seen numbers in the 8 to 12 percent range,
in terms of profitability.
Mr. KNIGHT. Yes.
Mr. TAYLOR. So sometimes higher than banks, sometimes lower
than banks, but I haven’t seen anything that indicates—what gen-
erally lowers prices is competition, right? So if you have lots of peo-
ple competing to provide something, it drives the margins down to
where it sort of comes to be a risk-adjusted rate of return. So, hey,
that is an acceptable rate of return.
And then in terms of pricing, thinking about processing a payday
loan, if you were going to process a payday loan, you would need
to buy a credit report, right? You would need to have a human
being standing at a teller to fill out the forms. Those are some of
the prices that go into not just the interest rate on the money but
the actual processing of the form. Do you want to speak to that,
Mr. Knight?
Mr. KNIGHT. My understanding, based upon the research I have
seen, is that a lot of the expense about payday loans is overhead.
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48
It is location, because this is largely a convenience-driven business,
and it is staff, because it is human-intensive and the hours are
long. And so, yes, a lot of the cost is what we would consider to
be overhead.
Mr. TAYLOR. Right. And if we put lots of regulatory burdens on
lenders and make it really difficult to lend, then we are actually
making fewer competitors, and that, in turn, should drive up prices
and make the margins higher. If it is harder to do, it gets more
expensive, as a general rule of thumb.
Ms. APONTE-DIAZ. Excuse me, sir. Just to add, what we have
seen is $8 billion stripped in payday lending and car title loans in
fees across the country, so $8 billion.
Mr. TAYLOR. I don’t know what that means.
Mr. Knight, just thinking about what banks do, they typically
hire consultants to do their IT work, right? So, banks hire consult-
ants to do their IT systems, their mobile banking applications for
small regional banks. They have to go hire someone to go do that
for them. They hire companies to do loan processing, to actually
create the document processing management system. They go to
outside credit bureaus to go get their credit reports, because they
don’t do that internally.
And so, they interact with the Federal Government, with the
SBA loan program. It is very normal for all businesses, but in par-
ticular, in this case, to use outside vendors to provide services for
them. What would be the benefit to a bank to use an outside ven-
dor to help them underwrite smaller loans?
Mr. KNIGHT. To the extent that this vendor has a good model and
good technology—and I should note that ultimately the bank has
to own the model. And my understanding is, from talking to some
of these companies, the bank does own the model. They don’t just
accept the model whole cloth. They push back, they work on it, and
it is a collaborative process. But to the extent that this new cus-
tomer, this partner, can bring new technology, new capabilities, it
can benefit the bank.
Mr. TAYLOR. Okay. Thank you. Mr. Chairman, I yield back.
Mr. MEEKS. The gentleman yields back. All time has expired.
Without objection, a statement from the California Attorney Gen-
eral, Xavier Becerra, and a statement from Hope Credit Union,
both supporting the preservation of State laws that better protect
consumers, are entered into the record.
Without objection, it is so ordered.
I would like to thank our distinguished witnesses for their testi-
mony today. Your testimony has been very important and very in-
sightful to all of the Members, I am sure.
The Chair notes that some Members may have additional ques-
tions for this panel, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 5 legis-
lative days for Members to submit written questions to these wit-
nesses and to place their responses in the record. Also, without ob-
jection, Members will have 5 legislative days to submit extraneous
materials to the Chair for inclusion in the record.
This hearing is now adjourned.
[Whereas, at 12:46 p.m., the hearing was adjourned.]
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APPENDIX
February 5, 2020
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