Chrg 117Hhrg48010

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U.S. GOVERNMENT PUBLISHING OFFICE
WASHINGTON :
48–010
2022
FINTECH AND TRANSPARENCY IN SMALL BUSINESS
LENDING
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
HEARING HELD
JULY 13, 2022
Small Business Committee Document Number 117–060
Available via the GPO Website: www.govinfo.gov

(II)
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELA´ ZQUEZ, New York, Chairwoman
JARED GOLDEN, Maine
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
MARIE NEWMAN, Illinois
CAROLYN BOURDEAUX, Georgia
TROY CARTER, Louisiana
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
CHRISSY HOULAHAN, Pennsylvania
ANDY KIM, New Jersey
ANGIE CRAIG, Minnesota
SCOTT PETERS, California
BLAINE LUETKEMEYER, Missouri, Ranking Member
ROGER WILLIAMS, Texas
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
CLAUDIA TENNEY, New York
ANDREW GARBARINO, New York
YOUNG KIM, California
BETH VAN DUYNE, Texas
BYRON DONALDS, Florida
MARIA SALAZAR, Florida
SCOTT FITZGERALD, Wisconsin
MIKE FLOOD, Nebraska
MELISSA JUNG, Majority Staff Director
ELLEN HARRINGTON, Majority Deputy Staff Director
DAVID PLANNING, Staff Director

(III)
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Dean Phillips ..................................................................................................
1
Hon. Beth Van Duyne .............................................................................................
2
WITNESSES
Mr. Sean Salas, Chief Executive Officer and Co-Founder, Camino Financial,
Los Angeles, CA ...................................................................................................
5
Ms. Joyce Klein, Senior Director, Business Ownership Initiative, Aspen Insti-
tute, Washington, DC ..........................................................................................
6
Ms. Diane Paterson, Regional Director, Twin Cities Small Business Develop-
ment Center, Minneapolis, MN ...........................................................................
8
Dr. John Griffin, James A. Elkins Centennial Chair in Finance, McCombs
School of Business, The University of Texas, Austin, TX .................................
10
APPENDIX
Prepared Statements:
Mr. Sean Salas, Chief Executive Officer and Co-Founder, Camino Finan-
cial, Los Angeles, CA ....................................................................................
23
Ms. Joyce Klein, Senior Director, Business Ownership Initiative, Aspen
Institute, Washington, DC ...........................................................................
26
Ms. Diane Paterson, Regional Director, Twin Cities Small Business De-
velopment Center, Minneapolis, MN ...........................................................
33
Dr. John Griffin, James A. Elkins Centennial Chair in Finance, McCombs
School of Business, The University of Texas, Austin, TX ..........................
35
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Electronic Transactions Association (ETA) ....................................................
39
Innovative Lending Platform Association ......................................................
42
Letter from Members of Congress to Dave Uejio, Acting Director, Con-
sumer Financial Protection Bureau ............................................................
49
National Association of Federally-Insured Credit Unions (NAFCU) ...........
53
African American Alliance of CDFI CEOs letter ...........................................
55
African American Chamber of Commerce letter ............................................
58
Responsible Business Lending Coalition letter ..............................................
61

(1)
FINTECH AND TRANSPARENCY IN SMALL
BUSINESS LENDING
WEDNESDAY, JULY 13, 2022
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND REGULATIONS,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in Room
2360, Rayburn House Office Building, Hon. Dean Phillips [chair-
man of the Subcommittee] presiding.
Present:
Representatives
Vela´zquez,
Phillips,
Newman,
Bourdeaux, Chu, Craig, Meuser, Van Duyne, Donalds, and Fitz-
gerald.
Chairman PHILLIPS. All right. Good morning, everybody. I am
going to call the meeting to order. And without objection, the Chair
is authorized to declare a recess at any time.
I want to begin by noting some important requirements. Stand-
ing House and Committee rules will continue to apply during hy-
brid proceedings. All Members are reminded that they are expected
to adhere to these rules, including decorum. House regulations re-
quire Members to be visible through a video connection throughout
the proceeding. So please keep your cameras on. Also, please re-
member to remain muted until you are recognized to minimize
background noise.
In the event a Member encounters technical issues that prevent
him or her from being recognized for their questioning, I will move
to the next available Member of the same party, and I will recog-
nize that Member at the next appropriate time slot provided that
they have returned to the proceeding. And with that, I will begin
with my opening statement.
Increasing the flow of capital to American small businesses is
one of this Committee’s foundational goals. When entrepreneurs
can secure financing on reasonable terms, they create jobs, expand
their businesses, and move the economy forward. Unfortunately,
most American business owners feel that they cannot adequately
access capital. According to a 2022 Federal Reserve Survey, 59 per-
cent of small employer firms said they have unmet financing needs.
So we must find ways to fill that gap and deliver more funding to
small firms on safe and responsible terms.
Massive developments in financial technology, commonly known
as fintech, have shown real promise for expanding access to credit
for small firms. Over the years, entrepreneurs have flocked to
fintechs for their capital needs. One study found that by 2016, non-

2
bank lenders had a market share of close to 60 percent in the small
business lending sector. During the PPP, Paycheck Protection Pro-
gram, we witnessed the ability of fintechs to make small-dollar
PPP loans to small businesses, particularly those in underserved
communities, more effectively than traditional banks could.
Small businesses often turn to fintechs for their speedy approval
process, more diverse financing options, and alternative metrics for
credit worthiness. However, while fintech lending has helped many
entrepreneurs, concerns are growing that industry practices may
harm and even target small businesses.
For instance, the speed at which fintech lenders deploy capital
can come at a very substantial cost. A conventional bank loan typi-
cally carries an APR of 4 to 13 percent. For fintechs, APRs for on-
line loans and other financing products can start at 7 percent, and
can climb higher than 100 percent. These terms are not always
clear to small businesses. As many online lenders provide little or
no information upfront to perspective borrowers about the loan or
the product and often use metrics other than APR to disclose the
cost of capital.
Some online lenders also engage in predatory practices that put
small businesses particularly at risk. For example, merchant cash
advances, MCAs, allow a lender to receive a fixed percentage of fu-
ture sales until the financing is repaid. The extremely high interest
rates and daily repayments associated with MCAs can cause busi-
nesses to enter into an out-of-control debt spiral.
Furthermore, many MCA lenders require that borrowers sign an
obscure legal instrument known as a confession of judgment to get
the money. By signing that, borrowers waive their legal rights re-
garding any legal dispute that might arise. And when a court en-
forces the confession of judgment, it locks a small firm into that
unsustainable debt cycle and ultimately forces the business to
close.
Small Business advocates also worry about the lack of trans-
parency around fintech underwriting. The data and algorithms that
control automatic underwriting can pull unrelated information, like
who an applicant follows on social media, or the number of crimi-
nal records in an applicant’s ZIP Code. These underwriting prac-
tices lack transparency and have the potential to unfairly deny
credit to protected groups or make those products more expensive
for all.
As the fintech sector evolves, Congress must keep and ensure in-
dustry practices are not unfairly taking advantage of the entre-
preneurs, especially those who may be vulnerable to abusive prac-
tices.
So today, I look forward to discussing the benefits and risks of
fintech lending for small businesses, and what this committee can
do to both protect and expand opportunities for entrepreneurs.
With that, I would like to yield to the Ranking Member, Ms. Van
Duyne, for her opening statement.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman. A little
over an hour ago, the latest CPI numbers peaked at a whopping
year over year increase of 9.1 percent. Maybe more shocking is that
inflation rose 1.3 percent from just a month ago. This month’s surg-
ing inflation is just the latest in a long line of pain inflicting eco-

3
nomic numbers that have come under President Biden’s leadership.
At this point, one thing is clear: Small businesses in our commu-
nities cannot prosper, let alone survive if this administration’s cur-
rent policies and frivolous spending continue.
Over a year ago, Congress forced through their $1.9 trillion rec-
onciliation package. Americans now feel the full inflationary effects
that Republicans were warning of. Filling up at the gas station is
now a shocking experience. Grocery store visits cost over 12 percent
more, and housing prices are almost untenable. There is no doubt
we are now paying for this administration’s free-money policies.
And, unfortunately, it seems that we have reached the point of
deja vu. As labor shortages and supply-chain troubles persist, we
are back to the talks of another $1 trillion reconciliation package.
If that wasn’t bad enough, Democrats plan to include tax increases
on small businesses in this proposed bill.
While details are still developing, I want to say loud and clear,
that any changes or expansions of the net investment income tax
will be a tax on small businesses’ pass-through entities.
When I visit the small businesses that make North Texas one of
the quickest growing areas in the United States, they tell me the
same thing: The government needs to stay out of the way. As we
are all well aware, small business owners are some of the best
America has on offer. And yet, they struggle to be optimistic when
it seems they are working against a tough economy and a govern-
ment that just won’t listen.
According to a survey by NFIB, the number of small business
owners expecting business conditions to improve has continued to
go down, decreasing every month this year. Every American knows
this is a difficult moment, but luckily, we can turn the tide back
in favor of economic growth. We can put small businesses back in
the driver’s seat by ending the trillions of dollars in reckless spend-
ing and aggressively reforming regulations.
In addition to these challenges, access to capital remains an im-
portant issue for American small businesses, and as it could be the
difference between business expansion or business stagnation.
As today’s hearing title suggests, Small Business Lending, must
include an examination of just how small business fairness over the
last 2 years during the COVID-19 pandemic, and how fintech lend-
ers performed during the Paycheck Protection Program. And any-
thing less would shortchange this topic.
Given at this Oversight Committee hearing, I would be remiss
not to mention my disappointment that we have yet to hear from
Secretary Yellen regarding her legal and statutory requirement to
testify.
Across the board, these are important issues and topics that de-
serve the attention of this Subcommittee and Members of Congress.
And I look forward to today’s conversation. I would like to thank
all of the witnesses that are here today. And thank you, Mr. Chair-
man, I yield back.
Chairman PHILLIPS. Thank you, Ms. Van Duyne. The
gentlelady yields back. And with that, I would like to introduce our
witnesses today. Our first witness is Mr. Sean Salas, Chief Execu-
tive Officer and Co-Founder of Camino Financial, a digitally native
Community Development Financial Institution, known as CDFIs,

4
with a variety of small business loan offerings for firms of all sizes,
including solopreneurs, a signatory of the Small Business Bor-
rowers Bill of Rights, Camino is an example of how to lend to small
businesses online in a fair and transparent manner. We welcome
you, Mr. Salas.
Our second witness is Ms. Joyce Klein, Senior Director of the
Business Ownership Initiative at the Aspen Institute. A central
focus of her work over 20 years includes examining the role of busi-
ness ownership and micro finance in addressing the challenges of
racial inequity and the racial wealth gap. She was also instru-
mental in helping start the Responsible Business Lending Coalition
which advocates for responsible practices and transparency in the
small business lending sector. We welcome, you, Ms. Klein, and
look forward to your testimony.
Our third witness is Ms. Diane Paterson, the Regional Director
Of the Twin Cities Small Business Development Center, SBDC, at
the University of St. Thomas in Minneapolis, Minnesota. In her ca-
pacity, she counsels small business owners on locating funding
sources for working capital and expansion and is certified as an
economic development finance professional and revolving loan fund
expert by the National Development Council. She is also a former
business owner herself, and brings a valuable multifaceted perspec-
tive to our discussion of these important issues. We welcome, you,
Ms. Paterson, and thank you for joining us today.
I would now like to yield to the Ranking Member, Ms. Van
Duyne, to introduce our final witness.
Ms. VAN DUYNE. Thank you, Mr. Chairman. Our next witness
is John Griffin. Dr. Griffin is the James A. Elkins Centennial Chair
in Finance at the McCombs School of Business at the University
of Texas in Austin, with a focus on banking, international finance,
and structured finance. Dr. Griffin has been a professor at Arizona
State University, Yale University, Hong Kong University of Science
and Technology, and Harvard Business School. In addition to
teaching, Dr. Griffin has conducted extensive research in published
findings on numerous banking topics, including the 2008, 2009 fi-
nancial crisis. His and his team’s most recent research examines
the intersection of fintech lending within the Paycheck Protection
Program also known as PPP.
Dr. Griffin, thank you for joining us today. I look forward to your
testimony. I would also like to thank all the witnesses for joining
us. And, Mr. Chairman, I yield back.

5
STATEMENTS OF SEAN SALAS, CHIEF EXECUTIVE OFFICER
AND CO-FOUNDER, CAMINO FINANCIAL; JOYCE KLEIN, SEN-
IOR DIRECTOR, BUSINESS OWNERSHIP INITIATIVE, ASPEN
INSTITUTE; DIANE PATERSON, REGIONAL DIRECTOR, TWIN
CITIES SMALL BUSINESS DEVELOPMENT CENTER; AND
JOHN GRIFFIN, JAMES A. ELKINS CENTENNIAL CHAIR IN FI-
NANCE, MCCOMBS SCHOOL OF BUSINESS, THE UNIVERSITY
OF TEXAS.
STATEMENT OF SEAN SALAS
Chairman PHILLIPS. Thank you, Ms. Van Duyne. And now to
you, Mr. Salas, you are recognized for a 5-minute opening state-
ment.
Mr. SALAS. Thank you, Chairman Phillips and Ranking Member
Van Duyne, and other Members of the Subcommittee. I really ap-
preciate it, and I am honored to be here today. My name is Sean
Salas, and I am the co-founder and CEO of Camino Financial.
Camino Financial is a fintech lending platform that empowers
entrepreneurs to grow their business and boost access to capital for
underserved communities. Our microloans provide small business
owners with the flexible financing they need to thrive in a competi-
tive market.
We are a national Community Development Financial Institu-
tion, or CDFI, that is pioneering affordable credit through tech-
nology and AI. Our mission is simple: To build generational wealth
in underserved communities. We take a digital first approach, and
applications are 100 percent online. We predominantly serve entre-
preneurs in California, but our digital first approach allows us to
serve businesses in other states.
Today, I am proud to say that we are one of the largest Latino-
focused small business lenders in the U.S. Over the last 6 years,
we have helped over 9,500 small businesses, deploying over 200, al-
most $200 million in capital. We have also created one of the larg-
est bilingual content hubs that offers entrepreneurs over 1,200 bi-
lingual articles related to business and entrepreneurship that
reaches hundreds of thousands of website visitors per month. We
provide a camino, or a pathway to capital by educating our bor-
rowers. This pathway involves providing resources that teach them
how to formalize their business and access the tools they need to
get on a path to qualify for larger, lower interest rate loans.
I founded Camino Financial with my brother, Kenny, while com-
pleting our MBAs at Harvard Business School. We are the proud
sons of a Mexican entrepreneur who truly sought the American
Dream. Our mother opened over 30 restaurants in Southern Cali-
fornia while raising six children. Imagine that. Unfortunately,
when I was 12 years old, her entire business collapsed. She moved
us to Mexico to restart our lives despite us being U.S. citizens.
The moment Kenny and I graduated from high school in Mexico,
we decided to immigrate back to the U.S. to pursue what my mom
had lost, the American Dream. We were lucky enough to be admit-
ted to UC Berkeley, and after, build our careers in finance. While
working in finance, we realized the capital gap of investing in
micro businesses in minority communities. So we decided to lever-
age our MBA experience to incubate Camino Financial to help busi-

6
nesses like my mother’s grow to a point where they can access a
broader suite of wealth-building solutions.
Now for context, the average Latino business earns around
$250,000 in revenue per year. That is about half of the national av-
erage. Most Latino-owned businesses are micro businesses, not
even small businesses, with four or less employees. Banks and larg-
er institutions—and larger institutional investors do not actively
service this lower end of the market, comprising over 97 percent of
Latino businesses with the unmet credit demand north of $20 bil-
lion.
I would like to share a few examples of entrepreneurs we help.
Letesha, a business owner and restaurant owner, needed a busi-
ness loan during a busy season to hire and train more staff. She
never received a business loan and needed guidance. After submit-
ting her application, a Camino Financial business loan specialist
called her within minutes to walk her through the process so that
she can train and hire more staff.
Prior to working with us, Baldemar, who owns a car repair and
maintenance shop, used personal loans for his business. After real-
izing that personal loans were not sufficient for his business, he
worked for Camino Financial to buy him into and increase his com-
pany’s efficiencies and profits.
People like Letesha and Baldemar reach out to Camino Financial
because of our easy digital application, because we are a digital-
first company, and a lot of our business is done online. How that
is said, transparency is critical to our success. That is why we
joined the responsible business lending coalition. That is also why
we support the efforts of Chairwoman Nydia Vela´zquez to create
protections for small business owners. We believe that borrowers
should have access to responsible loans and information that allows
them to uniformly compare and select the financing that makes
sense for them.
I should also note that in California, we are already required to
disclose much of our information to help protect borrowers. And
while I am not here to discuss our competitors, I will say that Cali-
fornia interest and fee disclosures are not hindering our business,
they are leveling the playing field. In the end, our business is about
helping entrepreneurs achieve the American Dream. It is my hope
that we can continue to grow while helping many more budding en-
trepreneurs live that American Dream. Thank you for your time
and the privilege to speak today.
Chairman PHILLIPS. Thank you, Mr. Salas. And with that, I
welcome you, Ms. Klein. You are recognized for 5 minutes for your
opening statement.
STATEMENT OF JOYCE KLEIN
Ms. KLEIN. Thank you. Chairman Phillips, Ranking Member
Van Duyne, and Members of the Committee, thank you for inviting
me to appear before the Oversight Investigation and Regulation
Subcommittee today to speak with you about the importance of
transparency and the role of financial technology in small business
lending. My name is Joyce Klein, and I am the senior director of
the Aspen Institute’s Business Ownership Initiative.

7
At the Business Ownership Initiative, we work to understand the
needs of and the barriers facing the most underserved small busi-
nesses, and to develop solutions for reaching them. We have been
doing this work at the Aspen Institute for 30 years, and over that
time, we see many changes in the financial services landscape. But
one constant is that entrepreneurs still face challenges in accessing
capital, and this is particularly true for certain types of entre-
preneurs. It is true for women, for people of color, for immigrants,
for those in rural communities.
I also serve as the Chair of the Responsible Business Lending
Coalition which is a network of nonprofit and for-profit lenders,
like Sean in Camino, investors and small business advocates. And
we share a commitment to innovation of small business lending,
but also concerns about the rise of irresponsible small business
lending practices. And so my remarks today draw from both our
work at the Aspen Institute, and from the work of the Responsible
Business Lending Coalition.
So when considering the implications of fintech for small busi-
ness lending, it is important to focus on financial technology in its
broadest sense, which involves the application of digital tech-
nologies to financial transactions. And, today, virtually every small
business lender, whether they are a bank or a credit union or a
CDFI or a fintech firm or some other type of commercial finance
company is using financial technology. And there are many ways
in which financial technology can help expand access to capital to
those who have been excluded from or marginalized in our capital
markets.
But through our work, we have learned that if the goal is to ex-
pand access to responsible capital, it is not the type of institution
that is providing the financing or whether and how they use tech-
nology that is most important. What is most important is getting
the financing products right and the financial practices right.
So with regard to products, we have seen progress in increasing
lending to underserved businesses is when lenders offer smaller
loans, and they underwrite by focusing on cash flow and a flexible
approach to credit histories, rather than by focusing on collateral,
equity, and credit scores. And the right practices are also essential
in reaching segments of the small business market that haven’t
been reached by banks. And this is where CDFIs are particularly
adept, and it is where fintech can bring technology that is acces-
sible and user-friendly. But we have to balance greater access with
borrower protections.
The economics of smaller-dollar small business lending are really
challenging, and that creates pressure to sometimes use practices
that can be abstractive or even predatory.
And so this brings me back to our work at the RBLC where we
have created the Small Business Borrowers Bill of Rights. BBOR
puts the small business at the center of the financing transaction,
identifying six rights we believe should be upheld. And the first
among these is the right to transparent pricing and terms.
The RBLC has been a part of diverse coalitions that have been
successful in passing small business truth-in-lending legislation in
California and in New York. And the RBLC is grateful for the work
that Chairwoman Nydia Vela´zquez has done to promote trans-

8
parency and responsible practices in small business financing, in-
cluding her leadership in introducing H.R. 6054, the Small Busi-
ness Lending Disclosure Act of 2021, which would require lenders
to disclose information that enables small businesses to make in-
formed choices.
The original Truth-in-Lending Act was not applied to commercial
financing because it was assumed that businesses had financial ex-
pertise that consumers did not. And while that is true for some
businesses, it is not true for most. So most small businesses in the
U.S. are sole proprietors; they are not corporations; and they are
home daycare centers and cleaning and landscape businesses and
food trucks and small retail shops, hair and nail salons. They do
their own books and finances. They may, but they may not even
have access to a part-time bookkeeper or accountant to help them.
And with the emergence of new small business lending, financing
products has come at greater variation in how those products are
structured in place. And so, we believe it is vital that when small
business owners seek financing, they have the information to fully
understand the cost and the terms of each offer to compare across
those products, and make the best choice for their business. And
essential to that is the disclosure of APR, Annual Percentage Rate,
which is the only metric that allows borrowers to make apples-to-
apples comparisons across products.
And I would note that lack of transparency actually inhibits com-
petition. Market competition relies on price disclosure. Without
transparent disclosure on pricing that allows borrowers to compare
costs, financing companies don’t have an incentive to innovate and
compete on price. So as a result, financing——
Chairman PHILLIPS. Ms. Klein, your 5 minutes has expired. So
if you could wrap it up.
Ms. KLEIN. Thank you so much for the ability to testify today,
and I look forward to answering your questions. Thank you.
Chairman PHILLIPS. Thank you. Thank you very much. And
now I recognize my fellow Minnesotan, Ms. Paterson, for 5 minutes
for your opening statement.
STATEMENT OF DIANE PATERSON
Ms. PATERSON. Good morning, and thank you, Chairman Phil-
lips, and Ranking Member Van Duyne. My name is Diane
Paterson, and I am the regional director of the Small Business De-
velopment Center in the Twin Cities in Minnesota. We have been
an SBDC for over 31 years. The SBDC program is a national pro-
gram that is a matching partnership program with the SBA and
organizations of higher ed.
We work with all kinds of businesses, small to medium generally,
startup to exit planning. So we have seen a lot of businesses. We
worked with a lot of businesses during the recession, and we cer-
tainly had a great deal of businesses coming to us during the pan-
demic.
With today’s online credit-lending environment where many
fintech services offer a 4-minute application and 24-hour turn-
around to access funds, the SBDC has seen small business owners
navigating confusing fine print, adverse interest rates, thwart loan
terms, and prepayment penalties. These lending practices are espe-

9
cially harmful to small, young, less profitable, and minority-owned
businesses, who already struggle to access financing because they
lack the business history or collateral that traditional banks re-
quire. Yes, the ease and speed with which small business bor-
rowers can access fintech credit is appealing. These businesses tend
to use this loan option in conjunction with other forms of credit,
making them financially vulnerable.
The application process for a traditional lender takes days. The
approval process itself can take weeks or longer depending on the
meeting schedule of the loan committee. Standing in stark contrast,
two fintech options, biz to credit, and blue line advertise 4- and 5-
minute completion times respectively. Both promise next-day avail-
ability of funds.
While fintech loans address pain points in the loan application
process, these loans subject the borrowers to much higher interest
rates and other terms that cause many to default. The biggest
issue in fintech lending practices is the lack of transparency in the
price of their products. As consumers, we are accustomed to seeing
rates of 5-1/2 to 6-1/2 APR. This commonly understood Annual Per-
centage Rate terminology is familiar. It makes sense. Fintech bor-
rowers read rates ranging from 3-1/2 to 4-1/2 percent and assume
their APR. What they do not realize is the fintech rates are regu-
larly calculated on a daily basis. That results in a lending relation-
ship that subjects the borrower to an interest rate in the range of
58 to 63 percent. Simply put, fintech lending practices are an issue
with this daily calculation, the first of several fine-print problems.
OnDeck interest rates are posted at 3-1/2 to 5 percent, but in re-
ality, they range from 24.6 to 58.6 percent. Kabbage, on the other
hand, advertises a loan fee instead of an interest rate. Lending
Club charges 9.77 percent to 35.71 percent interest, but then as-
signs an additional loan origination fee ranging from 1.99 percent
to 8.99 percent.
The cost of fintech credit is high. The terminology is confusing.
Adding more fuel to the fire is the repayment terms, which are tra-
ditionally very short. Fintech loan terms typically are 6 to 12
months. This greatly impacts the level of the borrower’s monthly
debt service. While many fintech lenders offer weekly installments,
that doesn’t change the reality that these payments are often too
large for a small business’ cash flow to digest.
To illustrate, a client of the Small Business Development Center
founded a craft brewery operation making a gluten-free beer. Due
to the nature of their product, we were unable to brew beer using
other craft brewer’s equipment during the start-up phase. As such,
they financed new machinery using a $375,000 loan from a bank.
The taproom was an instant revenue generator. But the revenue
from distribution lagged behind their projections. They approached
their bank for a second loan for $100,000 working capital to bridge
in the distribution side of the business caught up——
Chairman PHILLIPS. Ms. Paterson, your time is up. If you could
wrap it up, we would appreciate that.
Ms. PATERSON. Yes. So thank you very much. The debt service
for that business was $11,208 a month. That is still too high. But
thank you, and I look forward to your questions.

10
Chairman PHILLIPS. Thank you, Ms. Paterson. And you I recog-
nize Dr. Griffin for 5 minutes for your opening statement.
STATEMENT OF JOHN GRIFFIN
Mr. GRIFFIN. Chairman Phillips, Ranking Member Van Duyne,
and Members of the Committee, thank you for inviting me to ap-
pear before the Small Business Subcommittee to speak to you
about fintech lending. I am John Griffin, a forensic finance pro-
fessor at the University of Texas, and also a founder of Integra
FEC, a small consulting business which investigates financial
fraud.
This testimony is based on my academic paper with co-authors
Professor Sam Kruger and Prateek Mahajan, entitled, ‘‘Did fintech
Lenders Facilitate PPP Fraud?’’ It is found with links from my
website and SSRN.
I will briefly summarize some of the main findings of our paper,
and then discuss the potential policy implications. Our paper ana-
lyzes the SBA’s Paycheck Protection Program, called PPP, based on
four main metrics of potential misreporting, which are cross-
verified with and against each other, and with seven additional in-
dicators. The main findings of the paper are first: Misreporting in-
dicators consistently concentrate in fintech lenders. Overall,
fintechs are 6.5 times more likely to process misreported loans.
Second, misreporting is not a simple function of disbursing funds
quickly in early 2020. To the contrary, misreporting steadily in-
creased throughout the program. At the end of the PPP program,
in May of 2021, the level of suspicious lending through fintechs are
four times the level at the start of the program.
Third, the four main measures place the magnitude of likely
fraud at $64 billion, but our additional indicators and analysis
point to $117 billion. Since these analyses use only public data and
take a conservative approach, the total amounts are likely even
larger.
Finally, we find that suspicious loans are being overwhelmingly
forgiven by the SBA at similar rates to other loans. An extremely
few are prosecuted. A key result can be seen in Figure 2 from our
paper which is reproduced also in my report. The red and light yel-
low are fintech lenders, and the lenders in gray are traditional
banks. The top 12 lenders with the most misreporting are all
fintech and are all shown at the left of the graph.
Though there are also some problems at traditional banks, most
traditional banks are to the middle and to the right of the graph
with consistently lower levels of misreporting. Interestingly, how-
ever, not all fintech lenders have high rates of misreporting.
Our findings have important policy implications. First, the PPP
program did not include robust verification requirements. This led
to substantial cost to taxpayers, particularly in 2021, when there
was less concerns to distribute refunds quickly.
Second, fintech lending, no praise for getting funds out quickly,
needs substantial improvement in due diligence practices. Two
fintech lenders with an established track record persistently have
low rates of misreporting, indicating that online lending itself need
not be substandard.

11
Third, three leading academic papers cited in my report showed
that the PPP saved relatively few jobs at an extremely high cost
per job. Along with our evidence, this indicates that the PPP pro-
gram was an ineffective use of taxpayer dollars and should cause
the lender to reconsider the efficacy of future SBA lending pro-
grams.
Fourth, incentives of some of the PPP appear misaligned in the
fintech lenders with few employees relatively little track record and
lax due diligence procedures made billions of dollars disbursing
fraudulent loans. In my opinion, the fintech organizations and indi-
viduals who facilitated such activities should not be allowed to en-
gage in future government programs.
Fifth, with the increasing scale of fraud through time indicates
that the fraudsters targeted the program, and current penalty and
enforcement systems are not effective. If a system is not changed
for future SBA lending programs, the most likely outcome is even
more of the same. Government agencies can assist in transparency
by making more detailed data widely available.
Finally, though we should try to design better systems for the fu-
ture, fraudsters typically find new holes in the system. This is why
I believe that serving justice for financial crime is not simply old-
fashioned, backward-looking as some might think, but rather, for-
ward-looking as well. Our analysis shows that less than 1 in 10,000
loans with a misreporting indicator has been prosecuted. Without
prosecuting the organizations and networks of individuals who
stole billions of dollars from U.S. taxpayers, these same individuals
will most likely amount even more cost for society going forward.
Additionally, justice serves the warning to others and deters future
crime.
Much more can and must be done. Other important details can
be found in our academic paper online. Thank you for your atten-
tion to these important issues. I look forward to further questions.
Chairman PHILLIPS. Thank you, Dr. Griffin. And thanks to all
of our witnesses. We appreciate everything that you have shared
with us. I will now begin by recognizing myself for 5 minutes.
My first question is to you, Ms. Paterson. We all know the SBA
has not yet allowed fintechs to participate in programs other than
PPP, but they have clearly shown potential in expanding access to
capital for small businesses. However, their involvement in the
wider small business lending sector and in PPP specifically have
also raised serious fraud and transparency-related concerns as we
have heard in testimony. You detail in your testimony that guide-
lines to set uniformity in fintech lending practices specific to the
cost of capital would be worthy solutions to this issue.
So my question is, what should the SBA and this Committee spe-
cifically focus on as it deliberates on the potential involvement of
fintech, specifically, in SBA lending programs, particularly given
that in SBA lending programs, the agency often sets the under-
writing terms?
Ms. PATERSON. Primarily, and all the witnesses mentioned
this, is the transparency piece, as well as a recording piece. We
really don’t have good data regarding the default rate of fintech
loans. We surmise that it is much higher than traditional lending,
but we really don’t have that data. But from a borrower’s stand-

12
point, the transparency is key. When you tell a client that their in-
terest rate is 58.6, and they thought it was 4.5, that is a—that is
really hard for that business to digest. The other thing that we are
seeing is once we—the borrower understands the terms that they
have signed on to are the prepayment penalties, which can be as
high as 20 percent. And so, when they recognize that they are pay-
ing 60 percent interest rate, and they want to refinance that loan,
they have difficulty doing so because you have principal plus the
prepayment penalty. And so we don’t see them refinanced. I have
only seen one, and that was actually that craft brewery, because
the bank was nervous that they would not get their original 375
back. So I just think from a regulatory standpoint, I love the acces-
sibility of fintech loans, but we need that transparency so that bor-
rowers truly understand the loan documents that they are signing,
the interest rate, and what that impacts if the term is only 6
months to a year.
Chairman PHILLIPS. All right. Thank you, Ms. Paterson. So
now, Mr. Salas, I will turn to you on the same subject. Like many
of us believe that online lenders should adopt the same disclosure
and transparency policies of traditional banks. And some of them,
some fintechs have already adopted those. But can you detail for
all of us some of the policies that you have adopted and the impor-
tance of those policies relative to this issue?
Mr. SALAS. Absolutely. So as I mentioned earlier, we are al-
ready regulated under truth-in-lending-like laws in California
where we disclose to our Members in a clear and simple manner
terms. And one of the most critical, what I would say metrics in
pushing transparency and creating a level playing field, is APR.
We believe that APR is comparable across different credit products.
That every lender needs to use their best commercial efforts to dis-
close that APR at their earliest convenience. And we have not been
hindered at all from the business perspective in that disclosure.
And we have found that by having that requirement under law, it
creates for more fair and competitive marketplace which ultimately
benefits the borrower.
Chairman PHILLIPS. I appreciate it. Thank you. And with my
1 minute left, Dr. Griffin, to you, your chart and report on fintechs
and fraud was quite stunning to me. And not all fintech lenders,
although, in that chart have high misreporting rates. Two of them,
in fact, were among the better in the entire graph. So what fea-
tures distinguish the fintechs with low misreporting rates from
those with high misreporting rates in your estimation?
Mr. GRIFFIN. Great question, actually. I think the difference is
two of the lenders that have very low misreporting rates will actu-
ally establish businesses that have been in the fintech business for
a while. And most of the lenders with low rates of misreporting
were kind of new lenders that developed—had little track record,
little reputation to protect, and probably little in a way of estab-
lished procedures. And so, with little reputation to protect, and
nothing but potential or probably low potential of being prosecuted,
some of these fintech lenders seem to have just opened the door to
rampant mortgage fraud.
Chairman PHILLIPS. Okay. Thank you, sir. And with that, my
time is expired. And now I recognize the gentlewoman from Texas

13
and the Ranking Member of this Committee, Rep. Van Duyne, for
5 minutes.
Ms. VAN DUYNE. Thank you, Mr. Chairman. Dr. Griffin, I
would like to start by looking at some of your findings. In your tes-
timony, you state that, quote, ‘‘Misreporting is not a simple func-
tion of getting money out the door quickly in 2020. In fact, the
fraud at the end of the month of the program in May 2021 is four
times the level at the start of the program,’’ end quote. This is an
astounding finding and one that is really not discussed very widely.
Can you talk to us more about why this is the case?
Mr. GRIFFIN. Yes. Thank you. Yes, it surprised us as well. Well,
it appears to be that fraudulent networks kind of ramped up their
activities in terms of getting more and more PPP funds, and prob-
ably knowing which fintech lenders would rubber-stamp these
loans. I say that because we find that in the very geographies in
round one—in round one and two where there is high levels of
misreporting, in those same ZIP Codes where there is some levels
of misreporting at rounds one and two. The rounds increased dra-
matically in rounds three and four.
So it seems—and we also find evidence that it spreads through
social networks online. So we think that kind of people initially
went in, got fintech loans, and then spread this through networks
in a massive scale, and it increased over time. That also indicates
that fraudsters are fairly sophisticated. And if we engage in such
type of SBA lending again, they are going to likely target this on
a massive scale.
Ms. VAN DUYNE. Well, that actually brings me to my next
point. I want to turn to your fourth finding which you state that
suspicious loans are being overwhelmingly forgiven at similar rates
to other loans and very few are being prosecuted, indicating that
substantial reforms in SBA lending are needed. This is concerning.
And the SBA has, indeed, fully or partially forgiven 90 percent of
all PPP loans as of July 10, 2022. So I am going to use your words,
do you believe that we are giving a free pass to the fraudsters that
are abusing the programs and American taxpayer dollars and the
nation’s small businesses?
Mr. GRIFFIN. I have no idea why all these loans are being for-
given, quite frankly. I mean, SBA, themselves, recognizes it. There
is a real problem with fraudulent loans. And so we were kind of
shocked to find the rate that loans are being forgiven among the
likely fraudulent and non are essentially the same. And so, I don’t
understand that it would be a simple matter of any loan with a
questionable indicator simply being flagged and waived to forgive
that loan. And that procedure could take a while to thoroughly in-
vestigate.
I think there is much—as I mentioned in our paper, we are only
using public data. So there is also a lot of private data that the
SBA has access to and likely indicates the problem is even greater
than what we identified in our paper.
Ms. VAN DUYNE. Wow. Have you or your team researched or
examined fraud within the Economic Injury Disaster Loan Pro-
gram, EIDL?

14
Mr. GRIFFIN. We did briefly look at it, and we do think that
there is—it is not in the paper, but we did find quite a bit of fraud
in EIDL as well.
Ms. VAN DUYNE. Do you have any idea? Do you have more in-
formation than just—I think we all——
Mr. GRIFFIN. I don’t have the exact dollar amounts on my table,
but it was a fraction of the program. It was quite a large. I mean,
one of our indicators is the difference in jobs reported to the EIDL
program as well as the PPP program. So you will see that some—
there are many borrowers who said they had 10 jobs in their busi-
ness when they reported to EIDL, and yet when they applied to
PPP, they are only one person. And those loans—we also depend
on timing. So these two representations were made almost at the
same time. So it is very—there was a huge mismatch between the
programs.
Ms. VAN DUYNE. In my last 40 seconds, I don’t believe Mem-
bers can have a full and thorough conversation on fintech lending
without further exploring how they performed their last 2 years.
Especially you had mentioned earlier, their performance from near-
ly $800 billion PPP. So what is some of the top lessons that Mem-
bers should take away from PPP fintech research?
Mr. GRIFFIN. Thanks. Well, I think some of the top lessons are
that, to focus on getting money out the door quickly. It is not nec-
essarily a great goal. We had traditional lending guidelines in
place, and those lending guidelines could have been followed. We
don’t know why the traditional banks did better. But if you talk to
people at traditional banks, they will say they followed the same
process and procedures they used before. And those process and
procedures, those due diligence procedures where banks actually
had a stake and could lose money if the loans defaulted, those pro-
cedures seem to have worked a lot better.
So, in general, I think—I don’t think it is a good idea for the gov-
ernment to give out money without—and allow lenders to give out
this money without repercussions where they also have a skin in
the game and lose money if the loans default.
Ms. VAN DUYNE. All right. Thank you very much. I yield back.
Chairman PHILLIPS. And the gentleman’s time has expired—
the gentlelady’s time has expired. I am sorry. And now I recognize
the gentlelady from New York and the Chairman of the Small
Business Committee, Ms. Vela´zquez, for 5 minutes.
Ms. VELA´ ZQUEZ. Thank you, Mr. Chairman, and Ranking
Member. Ms. Klein, can you explain how underserved small busi-
nesses are susceptible to predatory lending practices, and why leg-
islation is needed to ensure all small business loans contain fair
and accurate disclosures about costs and terms?
Ms. KLEIN. Yes, thank you so much for that question Congress-
woman and Chair Vela´zquez. As I noted in my testimony, though,
the Truth in Lending Act was originally not applied to consumer—
commercial transactions because it was assumed that businesses
had access to financial, and, in some cases, access to legal exper-
tise. And that is true for large firms, but it is certainly not for the
smallest firms. And I think both Ms. Paterson and Sean gave some
really good examples of the kinds of small firms that they work
with.

15
And I think one of the things that is also really important, not
only to understand is, you know, that these firms don’t necessarily
have this level of financial expertise. The other thing that is impor-
tant to note is that in many cases, a small business owner’s per-
sonal and their business finances are closely connected. So a small
business owner often uses her personal credit score when she is ap-
plying for credit. She may pledge personal assets or make a per-
sonal guarantee against the financing that she is receiving.
And, often, when there is a mismatch between, sort of, income
or revenues and expenses, she is drawing on her personal savings,
where she is choosing not to pay herself so that she can meet her
other financial obligations. And so, I think this assumption of who
small business owners are that is, you know, the reason behind—
not—and sort of applying the original Truth in Lending Act to com-
mercial transactions just doesn’t quite hold up.
So what we want is, we want business owners to be able to make
the best choices that reflect their financial circumstances, their per-
sonal circumstances, their business circumstances. And that is why
truth-in-lending-like disclosures are really needed for small busi-
ness loans. So they have the information they need.
Ms. VELA´ ZQUEZ. Thank you. And, Ms. Klein, my legislation,
Truth in Lending bill, gives the CFPB regulatory authority to in-
clude small business loans and financing products. Given that
CFPB already has jurisdiction over the Truth in Lending Act and
Section 1071 of the Dodd Frank Act which vastly improves small
business lending data collection, do you agree that CFPB is the ap-
propriate federal agency for overseeing this space.
Ms. KLEIN. Yes, and I would speak here both wearing my Aspen
Institute hat and the Responsible Business Funding Coalition hat.
We agree that there is an extending framework at CFPB that is
based on its oversight of existing protections to consumers, and
that provides us a good foundation for extending these protections
to small businesses seeking financing.
Ms. VELA´ ZQUEZ. My legislation will create a federal regulatory
floor, meaning that States can enact stronger protections than in
federal law. However, I heard that to prevent jurisdiction shopping
by online lenders, federal law should establish a ceiling instead and
preempt State law in this space. What are your thoughts on wheth-
er federal law should preempt States in regulating this lenders and
products?
Ms. KLEIN. So I say—our framework again as we start is to
start with the interest of a small business owner. And from that
perspective, your legislation H.R. 64, already does the most impor-
tant thing, which is to require the rights of the disclosures that in-
cludes APR. And we think small business owners across the coun-
try deserve that information.
So with regard to preemption, I am going to speak based on my
work at the Aspen Institute, and then if like, if needed, I will clar-
ify later the formal position of the Responsible Business Lending
Coalition. But from the perspective of my own work, I think a fed-
eral standard is really helpful. Many lenders, CDFIs, fintech lend-
ers, other lenders work in multiple space, in some cases, nation-
wide, and having one set of required disclosures would be more effi-
cient for them. It would enable—if we want financing costs to go

16
down over time, I think a strong national standard is the way to
go.
Ms. VELA´ ZQUEZ. Thank you. And New York and California
with both passed truth in lending laws for small business loans.
And in implementing them, they carve out fraud plan financing
and real estate investment property from the lost coverage. Are
those exemptions something we should consider at a federal level?
Ms. KLEIN. Thank you. I think our preference as a Responsible
Business Lending Coalition would be to have all small business
lenders subject to the same requirements for all products. I think
that creates a, you know, a level, regulatory playing field that
doesn’t preference some types of products or lenders over others,
which I think is important. However, I will also note we did, you
know, support the financial legislation that passed in California
and New York.
Ms. VELA´ ZQUEZ. Thank you. I yield back, Mr. Chairman.
Chairman PHILLIPS. The gentlewoman yields back. And now I
recognize the Ranking Member of the Subcommittee on Economic
Growth, Tax, and Capital Access, the gentleman from Pennsyl-
vania, Mr. Meuser for 5 minutes.
Mr. MEUSER. Thank you very much, Mr. Chairman. I thank the
Ranking Member Van Duyne as well for holding this hearing. And
thanks to all of our witnesses.
Certainly, I think we all know, small businesses today are facing
tremendous challenges. It is somewhat of an endless list from infla-
tion, to labor shortages, to all kinds of supply chain disruptions,
unpredictable new regulations, and, of course, challenges to access
to capital.
So, you know, Dr. Griffin, I am very interested in your testimony
as well as the graphs and all that you provided us. So when you
speak of the issues from the lending on PPP, you meant—related
to fintech as well, of course, do you think that there is—is there
an 80/20 rule, 20 percent or 80 percent of the fraud was coming
from 20 percent of the participants? Would you say that is, per-
haps, fair, or maybe you can elaborate on that some?
Mr. GRIFFIN. That is an interesting point. Yes. I think that the
fraud is likely perpetuated by a smaller number of actors than you
might think. Because our analysis shows that the fraud is con-
centrated in certain CBSAs. And even within those CBSAs, con-
centrated in certain ZIP Codes. That indicates that it is not just
a few people getting this idea of randomly and applying for the
loans, but rather organized networks, recruiting people, getting
fees, maybe coordinating with other organizations to facilitate the
fraud. So I think it is an organized—our evidence indicates it has
an organized fashion to it, and that the likely number of players
that were orchestrating, at least the rampant fraud, is probably
more aligned with more like 5 percent of the people doing 90 per-
cent of the 90 percent of the fraud.
Mr. MEUSER. Great. Thank you. Mr. Salas, I want to ask you
a question, if I can, please. So what do you consider to be your big-
gest concerns, or your customers’ largest concerns and their needs
for access to capital? In a way, why does your company exist when,
you know, there is community banks and everything else out there?

17
And also, what is your feeling about, you know, there is some
fintechs, and some of the commentary that has been made here on
these outrageous levels of nontransparent interest rates? I would
like to hear your thoughts on that.
Mr. SALAS. Absolutely. And thank you for the question. In our
experience, entrepreneurs have some clear market demands, and I
just want to outline what those demands are. One is transparency;
two is simplicity; three is affordability; and fourth is expediency.
At Camino Financial, we try to meet these demands for our bor-
rowers in the most responsible and cost-effective way. And I do
want to underscore to the second part of your question, the impor-
tance of transparency.
I recognize that there are bad actors in this industry that have
over-anchored on one of those particular principles, which has been
underscored by this Committee, expediency over transparency. And
so we are proud Members of the Responsible Business Lending Co-
alition to show united front among those good actors in the indus-
try that we care about these issues, that our underlying intention
is to leverage technology, to effectively bring down the cost of dis-
tributing and transacting, which ultimately benefits our borrowers.
Mr. MEUSER. Okay. Good. Good. Mr. Griffin, I am going to come
back to you for a moment. The idea of CFPB having authority over
small business lending over fintechs, your thoughts? Good idea?
Not a good idea? Your thoughts on that?
Mr. GRIFFIN. Well, I realize this is a very partisan issue, but
I do think the CFPB does play a role to provide a different perspec-
tive on overseeing some of the predatory practices. So I have noted,
I investigate fraud, and I look at which organization—I look at—
I also talk to various government organizations. And one pattern
that I notice is sometimes one organization will pick up on some-
thing and someone else may not. And it may be because of kind
of exogenous reasons. So I am a fan for more data being available
not just to government organizations but to the public to analyze
these matters. So—and I completely share——
Mr. MEUSER. I am absolutely sorry. We are over our time. And
I just want to say we want to get it right and not be partisan. And,
Mr. Salas, I would like to get your response to that in writing or
after this. And, Mr. Chairman, I yield back. Thank you.
Chairman PHILLIPS. The gentleman yields back. Now I recog-
nize the gentlelady from California, Ms. Chu, for 5 minutes.
Ms. CHU. Mr. Salas, congratulations to Camino Financial for re-
cently being approved as a U.S. Treasury-certified Community De-
velopment Financial Institution, or CDFI. As a mission-based lend-
er, you are one of a small group of fintech lenders with a CDFI cer-
tification demonstrating your commitment to promoting community
development and providing responsible, affordable capital and tech-
nical assistance to underserved, minority-owned small businesses.
You are also one of the few fintech lenders that have voluntarily
signed onto a Small Business Borrower Bill of Rights which com-
mits you to fair business practices, including disclosing the true,
complete cost of your product.
Mr. Salas, can you discuss why Camino Financial chose to sign
onto the Small Business Borrower Bill of Rights, and how being a

18
signatory benefit to business? And what would you say to encour-
age other fintech small business lenders to join you.
Mr. SALAS. Thank you for your kind words and your question.
I will say that becoming a CDFI has been a long-term bet that we
know is a winning bet. It took us 3 years to get certified in mul-
tiple applications, as one of the first, if not the first digitally native
CDFI with a national designation focused on small business lend-
ing. So we are proud to be a CDFI and appreciate the question.
Why did we sign the Borrower Bill of the Rights? Simply put, it
was the right thing to do, because it is in the best interest of our
borrowers, and it underscores guiding principles or guardrails of re-
sponsible lending in our industry.
And I encourage other fintechs to do the same. And if you don’t,
we are going to put you out of business.
Ms. CHU. Well, I also appreciate the fact that Camino Financial
is pursuing a Community Advantage lending license with the SBA.
Community Advantage is something that could benefit small busi-
nesses so tremendously if they had greater access to it. And be-
cause fintech lenders are much more likely to serve the smallest
businesses unable to access products from traditional lenders, they
are kind of going after the same market. And compared to the mis-
leading advertising, some fintech companies use to track busi-
nesses in unaffordable loans with high interest rates, Community
Advantage loans have a maximum interest rate of prime plus 6.5
percent, which is far below the nearly 50 percent we have seen in
some parts of the fintech market.
Community Advantage lenders also provide their clients with
technical assistance that some fintechs may not. I have long been
a proponent for making Community Advantage programs perma-
nent. And I was pleased to see that the SBA recently raise the
moratorium on new lenders in the program of which you are one
that is applying.
Can you tell us why you are pursuing this license and about how
bringing more lenders into Community Advantage loan programs—
into this program could potentially help more small businesses out
of predatory unaffordable loan products?
Mr. SALAS. Absolutely. Excuse my excitement because I think
this is one of the biggest opportunities to systematically lower the
cost of capital to underserved small businesses. We believe that the
extension in permanent implementation of the SBA Community
Advantage Program presents a great opportunity to increase the
accessibility.
Let me illustrate with how I believe Camino Financial would
apply this program. We know and acknowledge that many under-
served small businesses, on the day of their application, may actu-
ally not qualify for the Community Advantage program. And so,
why do I think and believe that it is going to drastically bring
down the cost? It is because we call ourselves Camino for a reason.
We are not just your starting point, we are your end point. It is
important that we not only offer you an affordable and accessible
loan at the onset that may not be an SBA loan, but gives you the
path to graduate into an SBA loan. And, unfortunately, today, as
you know, SBA licenses are very hard to come by unless you buy
a bank. But there is an opportunity as a CDFI to participate in

19
SBA loan programs, to be able to offer what I qualify, if not the
lowest, some of the lowest prices available to these underserved
communities.
Ms. CHU. And to follow up, the Community Advantage program
was extended for 2 years. But would making the program perma-
nent provide the certificate needed for lenders to participate?
Mr. SALAS. Yes.
Ms. CHU. Thank you.
Chairman PHILLIPS. We never heard a witness just say ‘‘yes’’
or ‘‘no.’’
The gentlelady yields back.
And with that, I recognize the gentleman from Wisconsin, Mr.
Fitzgerald, for 5 minutes.
Mr. FITZGERALD. Thank you, Mr. Chair.
Dr. Griffin, I think it would be wrong for us to have the hearing
on fintech lending and not discuss Section 1071 of Dodd-Frank.
Since CFPB issued its proposed rule, I have heard from several
financial institutions about the negative impact that this will have
on both small banks and small businesses. Even CFPB Director
Chopra expressed concern regarding the regulatory burden the pro-
posed rule would have on small banks. But it is not just traditional
institutions that would feel the effect of 1071. Nonbank lenders and
fintechs would meet the 25 covered credit transaction requirement
that will be subject to the same data collection burdens as other
financial institutions. The results of this proposed rule will be
fewer loans and decreased access to credit for small businesses.
I want to thank the Ranking Member, Ranking Member Luetke-
meyer, for his leadership on this issue, including sending a letter
to the director outlining the concerns of Small Business Committee
Members with the proposed rule.
I would also like to submit that for the record if I could, Mr.
Chair.
I would also be introducing a bill this month to repeal Section
1071 and require small business advocacy review panels to pre-
sume tailoring is necessary for rulemaking.
Dr. Griffin, can you elaborate on how Section 1071 reporting re-
quirements are burdensome to small businesses?
Mr. GRIFFIN. Yeah, thanks.
Well, I am not an expert on 1071, but I will just say, I am not
in favor of having additional reporting requirements for small busi-
nesses. I would—I favor, like, the SBA having authority to inves-
tigate if they see consumer or predatory loans, but in terms of addi-
tional reporting requirements on small businesses, that could be—
I would see where that could be burdensome.
It would seem that the kind of data that I am requiring, or I
would like to see more public transparency of, is data that is al-
ready collected. In terms of when loans are made, there is a lot of
features to those loans, and that data could be made available by
the SBA or the CFPB or other government organizations so that
private individuals and academics like myself can investigate the
data and look for misreporting.
Mr. FITZGERALD. Yeah. I mean, one of the corporations actu-
ally located in my congressional is Fiserv. And with the literally
millions of transactions that happen on a daily basis, I think put-

20
ting fintech into kind of the same category and then saying that
the same requirements that would apply to any type of traditional
financial institution could also be accommodated by these corpora-
tions is just, well, first of all, naive; and, secondly, once again, kind
of the heavy hand of government stepping in and saying, You
know, we are going to require something that quite honestly we are
not even sure whether or not they could provide.
So, I mean, do you think—like you said, you may not be an ex-
pert on the topic, but, you know, codifying Section 1071 for
nonbank and fintech, it just doesn’t seem like a good fit. Would you
agree with that?
Mr. GRIFFIN. You know, again, I am not comfortable making an
up-or-down decision on it without knowing more details. But I
would say that fintechs, along with traditional banks, already col-
lect a lot of information. So I would favor whatever information
they are existing, collecting in their loans, and so forth, to make
all of that data available to some reporting agencies, and that—if
they simply did that, that would not require additional burdens. If
they are requiring to give a survey to all of the customers, then,
yes, that would be an additional burden. But just taking blanket
downloads of the data they already collect and passing that on, I
think that would be sensible, but that is probably not what the rule
is about. But, anyway, I will——
Mr. FITZGERALD. Yeah. And I apologize if I am putting you go
on the spot, and I know we are into kind of an area that no one
has really had to dive into yet.
But the other thing I would just say in closing is when we looked
at the PPP program and kind of the requirements and the financial
institutions and the oversight that was obviously in place when you
are talking about some of the small banks and credit unions, there
was obviously much less fraud.
Again, I don’t know how we apply these things when you are
talking about fintech with the scale and the size of what these com-
panies are doing. So, again, more of a comment than a question,
I guess. I wish we would simply avoid that if we could.
And I yield back.
Chairman PHILLIPS. The gentleman yields back.
And now I recognize the gentleman from Florida, Mr. Donalds,
for 5 minutes.
Mr. DONALDS. Thank you, Mr.—I am on? There you go.
Thank you, Mr. Chairman.
This is always an interesting topic for me considering the fact
that a lot of the reasons why we are in this issue are respect to
the new innovations is because banking regulation in the United
States has actually been terrible. It has actually crippled commu-
nity banking in the United States. We all know it. That is why you
have had so many different aspects of innovation that have matric-
ulated because the desire for small borrowers, small businesses,
micro businesses, and people at the lower levels of our socio-
economic strata still need capital. They have still got to borrow
money. And the banking system as it exists today cannot meet the
demand because of the ridiculous regulations brought from pre-
vious iterations of Congress a decade ago, two decades ago, so on
and so forth.

21
I stand still in the position today that Dodd-Frank even needs to
go completely, or be completely reformed because what it actually
did was cripple the ability for capital to reach some of the smallest
enterprises in the United States.
That being said, Dr. Griffin, one of the reasons I have an issue
with an expansion of CFPB’s authority—which, by the way, the
CFPB, in my view, is not constitutional because they have—there
is no oversight authority from Congress for them to operate. They
basically operate in the ether. And I know nobody likes to talk
about that, but they do their own thing, and they literally leverage
money from corporations with no oversight whatsoever from Con-
gress.
So my purview, they are an unconstitutional body, they should
be removed. Just figured we might as well get that on the record
right now.
But that being said, my issue with actually expanding their au-
thority is that—Dr. Griffin, do you think that it would make it
harder for fintechs to actually be able to operate and provide cap-
ital to the people who still desire capital in the United States, spe-
cifically around small business borrowing, micro business bor-
rowing? Do you think the Chairwoman’s bill would actually make
it harder for fintechs to meet the demand that obviously exists in
the United States?
Mr. GRIFFIN. Yeah, thanks for that question. I mean, these are
complex topics.
I would start by saying that I think, oftentimes, with regulation,
there is two approaches. One is to try to create a lot of safeguards
on the front end to prohibit potential problems on the back end.
And there can be problems with that as our program—as we
showed with the PPP, there were substantial problems with the
program.
Now, we should always think about designing better programs,
and so forth, but I am a big advocate, as I was mentioning at the
end of my talk, of having stronger consequences at the back end.
And whether that comes from existing organizations, like the De-
partment of Justice, the Securities and Exchange Commission, or
other regulatory bodies, perhaps the CFPB, I would have that to
be more repercussions for organizations that violate the rules, rath-
er than creating a lot of regulatory tape at the front end that could
actually—because one of the problems with that regulatory tape at
the front end is that it does prohibit new competition and can actu-
ally entrench those people that are able to navigate the rules, en-
trench those people in the market and actually cause, you know—
prohibit new competition.
Mr. DONALDS. Well, I appreciate that.
And one other area I want to get on real quick—and I heard it
in one of the witness’s testimony earlier today was about APRs, at
the annual percentage rate. Listen, as a banker—a recovering
banker, because I am not in the industry anymore obviously—but
as a recovering banker, you cannot—it has never worked to apply
short-term loans and subject them to APR calculations. The debt
is only outstanding for a week, 2 weeks, maybe 3 weeks, and you
are going to apply an annual percentage calculation to it? The
APR, quote/unquote, might sound technically right, but the prob-

22
lem is that the credit is not extended for a full year. So it is—you
are comparing apples and oranges. It just never has really made
much sense to try to apply APR terms to some of these short-term
lending instruments that are designed to be short-term that are
short-term.
Dr. Griffin, last question to you in the time remaining. Do you
think that it is actually beneficial to these borrowers to have these
APR disclosures which, in my view, are misleading anyway?
Mr. GRIFFIN. Yeah, I actually disagree with you on that. I
would like to see the APR disclosed. And if there are caveats, like
the APR would only be for a certain period of time, they could dis-
close that, that if the loan is only for X months. But the one prob-
lem is, if the loan is, like, only like a month originally but then it
extends to a longer term, then it could end up being an APR.
So I do think that transparency and giving accurate information
to borrowers and putting all of the information on a level playing
field so that borrowers can make the appropriate choices—I am a
finance professor, and I can tell you that sometimes my colleagues
are confused by some of the terms in various documents. So I do
think there is some role to transparency and putting things on a
level playing field, for better competition that way, actually.
Chairman PHILLIPS. And the gentleman’s time has expired.
And seeing no other questions, I want to thank all of our wit-
nesses for being here today. New technology can expand access to
timely credit for underserved entrepreneurs, increase financing op-
tions, and improve day-to-day operations for small businesses. But
as we have seen today, these new technologies have also been used
to take advantage of entrepreneurs.
As a Congress, we must take steps to ensure that this rapidly
developing sector has adequate protections for small businesses.
Today, we have discussed several commonsense policies, from
transparency policies to disclosure policies, that can help root out
predatory practices and ensure fairness for small business bor-
rowers around the country.
So I look forward to working with my colleagues on both sides
of the aisle to advance solutions that expand access to affordable
capital while safeguarding small firms.
Without objection, Members have 5 legislative days to submit
statements and supporting materials for the record.
And without any further business to come before the committee,
without objection, we are now adjourned.
[Whereupon, at 11:15 a.m., the subcommittee was adjourned.]

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