Transparency in Small Business Lending (House Small Business Committee hearing, September 9, 2020)
Summary
Printed record of the House Committee on Small Business hearing held September 9, 2020, Transparency in Small Business Lending, Small Business Committee Document Number 116–090. Opening statements came from Chairwoman Nydia Velázquez and Ranking Member Steve Chabot. Witnesses were Luz Urrutia, CEO of Opportunity Fund, testifying on behalf of the Responsible Business Lending Coalition; Yanki Tshering, executive director of the Business Center for New Americans; Adam Levitin, professor of law at Georgetown University Law Center; and Michael Hiles, founder and chief executive officer of 10XTS. The appendix prints their prepared statements and additional material from the Center for Monetary and Financial Alternatives, a statement by Johnathon Bush of Not Just Cookies, and a statement by the Responsible Business Lending Coalition.
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“Transparency in Small Business Lending (House Small Business Committee hearing, September 9, 2020).”
Original at www.govinfo.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/transparency-in-small-business-lending-house-small-business-committee-16aff27c6c/
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TRANSPARENCY IN SMALL BUSINESS LENDING
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
HEARING HELD
SEPTEMBER 9, 2020
Small Business Committee Document Number 116–090
Available via the GPO Website: www.govinfo.gov
U.S. GOVERNMENT PUBLISHING OFFICE
41–344 WASHINGTON : 2021
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELÁZQUEZ, New York, Chairwoman
ABBY FINKENAUER, Iowa
JARED GOLDEN, Maine
ANDY KIM, New Jersey
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
KWEISI MFUME, Maryland
JUDY CHU, California
DWIGHT EVANS, Pennsylvania
BRAD SCHNEIDER, Illinois
ADRIANO ESPAILLAT, New York
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANGIE CRAIG, Minnesota
STEVE CHABOT, Ohio, Ranking Member
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
TROY BALDERSON, Ohio
KEVIN HERN, Oklahoma
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
TIM BURCHETT, Tennessee
ROSS SPANO, Florida
JOHN JOYCE, Pennsylvania
DAN BISHOP, North Carolina
MELISSA JUNG, Majority Staff Director
JUSTIN PELLETIER, Majority Deputy Staff Director and Chief Counsel
KEVIN FITZPATRICK, Staff Director
(II)
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CONTENTS
OPENING STATEMENTS
Page
Hon. Nydia Velázquez ............................................................................................. 1
Hon. Steve Chabot ................................................................................................... 3
WITNESSES
Ms. Luz Urrutia, CEO, Opportunity Fund, San Jose, CA, testifying on behalf
of the Responsible Business Lending Coalition ................................................. 5
Ms. Yanki Tshering, Executive Director, Business Center for New Americans,
New York, NY ...................................................................................................... 7
Mr. Adam Levitin, Professor of Law, Georgetown University Law Center,
Washington, DC ................................................................................................... 8
Mr. Michael Hiles, Founder and Chief Executive Officer, 10XTS, Cincinnati,
OH ......................................................................................................................... 10
APPENDIX
Prepared Statements:
Ms. Luz Urrutia, CEO, Opportunity Fund, San Jose, CA, testifying on
behalf of the Responsible Business Lending Coalition .............................. 34
Ms. Yanki Tshering, Executive Director, Business Center for New Ameri-
cans, New York, NY ...................................................................................... 43
Mr. Adam Levitin, Professor of Law, Georgetown University Law Center,
Washington, DC ............................................................................................ 49
Mr. Michael Hiles, Founder and Chief Executive Officer, 10XTS, Cin-
cinnati, OH .................................................................................................... 60
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Center for Monetary and Financial Alternatives ........................................... 64
Statement by Johnathon Bush, Not Just Cookies, Chicago, Illinois ............ 69
Statement by the Responsible Business Lending Coalition .......................... 71
(III)
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TRANSPARENCY IN SMALL BUSINESS
LENDING
WEDNESDAY, SEPTEMBER 9, 2020
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., via Webex,
Hon. Nydia M. Velázquez [chairwoman of the Committee] pre-
siding.
Present: Representatives Velázquez, Finkenauer, Kim, Davids,
Mfume, Chu, Evans, Schneider, Delgado, Houlahan, Craig, Chabot,
Radewagen, Balderson, Hern, Stauber, Burchett, Spano, and
Bishop.
Chairwoman VELÁZQUEZ. Good afternoon.
I call this hearing to order.
Without objection, the Chair is authorized to declare a recess at
any time.
I want to thank you for joining us this afternoon for this official
remote hearing. I want to make sure to note some important re-
quirements. Let me begin by saying that standing House and Com-
mittee rules and practice will continue to apply during remote pro-
ceedings. All members are reminded that they are expected to ad-
here to these standing rules, including decorum.
With that said, during the covered period as designated by the
Speaker, the Committee will operate in accordance with House
Resolution 965, and the subsequent guidance from the Rules Com-
mittee in a manner that respects the rights of all members to par-
ticipate. House regulations require members to be visible through
a video connection throughout the proceeding, so please keep your
cameras on.
Also, if you have to participate in another proceeding, please exit
this one and log back in later. In the event a member encounters
technical issues that prevent them from being recognized for their
questioning, I will move to the next available member of the same
party, and will recognize that member at the next appropriate time
slot, provided they have returned to the proceeding.
If a witness loses connectivity during testimony or questioning,
I will preserve their time as staff address the technical issue. I may
need to recess the proceedings to provide time for the witness to
reconnect. Finally, remember to remain muted until you are recog-
nized to minimize background noise.
With that, let’s jump in.
Affordable capital fuels new start-ups and helps existing busi-
nesses expand into new markets and grow their customer base.
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And we know that when capital is accessible on fair terms, small
businesses can do what they do best, strengthen our communities
and fuel our economy. However, predatory lending practices and
lack of oversight can put many small businesses out of business.
Last summer, our Committee examined the use of confessions of
judgement by predatory online lenders. That hearing highlighted
how merchant cash advance companies and online lenders have
been able to skirt state and federal laws, and include predatory
loan terms on small business owners.
That hearing crystallized my belief that there needs to be more
transparency, accountability, and oversight, in the small business
lending arena. We all know that the internet and technology has
changed our lives for the better, allowing consumers and busi-
nesses to buy virtually any product online, access healthcare, and
even educate our children.
That also is true for how we manage our finances. I am sure that
everyone participating today has recently gone online to pay a bill,
get a home mortgage quote, or sent money to a friend or family
member. Small businesses, many of whom the large traditional
money center banks do not serve, has turned to the internet for
capital to start a business or operate an existing one.
Today’s discussion is also extremely timely as economic uncer-
tainty due to COVID-19 remains high. Access to credit for small
firms may be even more challenging than usual. In this unique en-
vironment, online, or FinTech lending, has continued to grow, and
remains an attractive option for small businesses seeking capital.
For small business borrowers, the biggest advantage of FinTech is
the ability to access capital after being denied a loan by a tradi-
tional lender.
In many cases, FinTech lenders are able to meet the needed pay-
roll, inventory, or overhead needs of a small business, and, in some
cases, disburse funds in as little as 48 hours. FinTech lenders are
also likelier to make small-dollar loans generally considered too
small to be profitable by most banks, but which, predominantly, go
to women and minority-owned small businesses. With minority
owners being almost twice as likely to apply for a loan online
versus a traditional lender, it is critical for them to be able to seek
capital online, and be assured the terms are fair, transparent, and
affordable.
However, as this Committee has explored, there are also poten-
tial risks for small firms seeking capital online. Aside from confes-
sions of judgment abuses, observers have noted a considerable lack
of transparency in the underwriting process for many FinTech
small business loans. It remains unclear whether lenders, or other
actors, in the space are using certain information about applicants
to discriminate.
Furthermore, not all FinTech lenders disclose the cost of capital
in a way that is clearly presented and easy to understand for all
small business borrowers. An economy where small businesses are
sometimes paying 200 or 300 percent interest rates to keep their
business running is not an economy that is working for all. It is
a result of a patchwork of state laws, a lack of a federal regulator,
and no federal law preventing exorbitant interest rates. It has be-
come clear to us, and this Committee, through examples we have
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seen in prior hearings and in our interactions with business owners
in our own districts, that small business owners applying for loans
online are just as vulnerable as anyone to deceptive practices and
unfair terms and have a right to a full and fair disclosure of all
terms just like consumers.
Just because they do not have an army of financial and legal pro-
fessionals, like big businesses, does not mean they should be left
to fend for themselves when seeking credit. We all know that in
order to maximize competition in a marketplace, all actors need to
have as much and as accurate information as possible.
The same applies in the market for small business loans if you
are the borrower, you need as much and as accurate information
about your loan options as possible in order to make the best deci-
sion for your business. That is why, earlier this summer, I intro-
duced the Small Business Lending Disclosure and Broker Regula-
tion Act, which will expand the Truth in Lending Act protections
and disclosures, or TILA, that currently apply for consumers who
also apply for small business loans.
My bill will bring needed transparency to small business credit
markets, ensuring entrepreneurs understand their obligations and
rights when they sign up for a loan. I should point out that these
efforts are already underway at the state level, with California en-
acting a similar bill into law 2 years ago, and another version re-
cently passed the New York State legislature, and is awaiting ap-
proval by Governor Cuomo.
It is long overdue that we take this fight for fairness on behalf
of small businesses to the federal level. In this pandemic, entre-
preneurs have faced, and will continue facing, some of the most dif-
ficult and uncertain economic conditions ever, and it is vital we en-
sure predatory lenders do not exploit this situation by enticing
small businesses into unfair and unsustainable loans.
Fortunately, some lenders already conduct the business of online
lending in a responsible way, and are able to do it sustainably
while making a positive impact on their communities. We will hear
from one of those lenders soon. We will also hear from legal experts
and advocates who will illustrate the impact of applying TILA to
small business loans on minority communities, since small busi-
nesses usually represent one of the few wealth-building opportuni-
ties for people of color, and, in many cases, can serve as an official
community center for the neighborhood.
I look forward to today’s discussion. Again, I want to thank the
witnesses for joining us today, and now yield to the Ranking Mem-
ber, Mr. Chabot, for his opening statement, and I will ask members
to please mute their mics. Thank you.
Mr. Chabot, you are now recognized.
Mr. CHABOT. Thank you, Madam Chairwoman, for holding this
important hearing on the impact of FinTech and online lending on
the Nation’s small businesses. As the current Ranking Member and
former Chair of this Committee, I have had the pleasure to speak
directly with small business owners for many years, both in my dis-
trict and across the country. Whether it is talking to small business
owners or their employees, their input is critical in determining
best way to support our small businesses, which are the backbone,
after all, of this Nation’s economy.
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To say that America’s small businesses have some of the hardest
working people in the entire country would be an understatement.
They rise early. They stay late to meet the challenges of their cus-
tomers daily. They are also responsible for creating two out of
every three new private-sector jobs in the country. To meet the
needs and expectations of their customers and to grow and thrive,
these small businesses require, as you mentioned, access to capital.
Unfortunately, Main Street businesses continue to report that
capital access is one of their greatest challenges. Moreover, the cur-
rent COVID-19 crisis has exacerbated this problem for our Nation’s
job creators. And, of course, access to capital continues to be one
of the top issues that this Committee tackles, and, fortunately,
under your leadership and previously under mine, in a bipartisan
manner, because we are, I think, the most bipartisan Committee
in Congress, and that is why we get the most done.
That is why today’s hearing on FinTech and online lending is so
important. As small businesses faced local and State shutdowns
due to COVID-19, this Congress and President Trump unveiled the
PPP, Paycheck Protection Program, to assist small businesses and
their workers, for my State, Ohio, to your State, New York, to Flor-
ida, to Texas, to California, and all across the entire country. By
utilizing private sector lenders, PPP was able to deliver financing
quickly, and, for the most part, effectively. While there were only
a limited number of FinTech companies participating in the pro-
gram, [inaudible] delivered literally billions of dollars for America’s
small businesses.
Given the FinTech’s growing popularity, it is critically important
for this Committee to examine their role moving forward. These
companies are driving innovation within our financial ecosystem.
They are utilizing data to make rapid lending decisions. Conversa-
tions on disclosure requirements are necessary to ensure trans-
parency is appropriate, and to protect America’s small businesses
as well. So that is obviously something that we need to consider as
we consider this important issue. I am looking forward to dis-
cussing all of these topics today, including how these types of lend-
ers should operate within the confines of the SBA existing pro-
grams.
Additionally, I am hopeful our conversations today help deter-
mine how FinTech and online lending is regulated, if that is going
to occur, at the Federal level. We know that all the witnesses have
busy schedules, so we appreciate them joining with us here today
virtually.
And with that, Chairwoman Velázquez, thank you for holding
this hearing.
And I yield back.
Chairwoman VELÁZQUEZ. Thank you, Mr. Chabot.
I would like to take a moment to explain how this hearing will
proceed. Each witness will have 5 minutes to provide a statement,
and each Committee member will have 5 minutes for questions.
Please ensure that your microphone is on when you begin speak-
ing, and that you return to mute when finished.
With that, I would like to thank our witnesses for taking time
out of their busy schedules to join us. Our first witness is Ms. Luz
Urrutia, CEO of Opportunity Fund, a CDFI and SBA lender based
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in San Jose, California. Opportunity Fund is one of the largest non-
profit lenders in the country and recently established a partnership
with two large FinTech companies. Welcome, Ms. Urrutia.
Our second witness is Ms. Yanki Tshering, Executive Director of
the Business Center for New Americans, a CDFI and SBA micro
lender serving New York City. Beyond helping underserved entre-
preneurs access affordable capital, Ms. Tshering was also recently
a key advocate in the efforts before the New York State legislature
to advance true lending protections for businesses across the state.
I particularly thank you, Ms. Tshering, for your advocacy on behalf
of all New York entrepreneurs, and welcome you before us today.
Our third witness is Professor Adam Levitin. Professor Levitin is
the professor of law at the Georgetown University Law Center,
with a focus on banking and finance law, bankruptcy law, and con-
sumer protection. As an expert in this field, he has testified before
Congress on numerous occasions, including last Congress before
the Financial Services Committee on this issue.
Welcome back to the Small Business Committee, Professor
Levitin, and I look forward to hearing your views on the interplay
between FinTech and small business lending.
Finally, I would like to turn it over to the Ranking Member, Mr.
Chabot, to introduce our last witness.
Mr. CHABOT. Thank you, Madam Chair.
Our final witness will be Michael Hiles. Mr. Hiles is the founder
and Chief Executive Officer of 10XTS here in Cincinnati, Ohio.
10XTS is a software start-up company that is focused on blockchain
technology and FinTech. Mr. Hiles has a long history of working
within Cincinnati’s technology sector. Prior to founding 10XTS, Mr.
Hiles worked in the software development at Sabre Systems. He
founded a web development company called Soft Links Interactive
and worked at Proware.
Mr. Hiles was also responsible for setting up the Cincinnati
chapter of Founder Institute, which assists business through the
incubator and accelerator models. Mr. Hiles, I want to thank you
for taking time out of your busy schedule to be with us today. It
was my honor to speak with you recently on another call, and we
look forward to your testimony here this afternoon.
And I yield back.
Chairwoman VELÁZQUEZ. Thank you, Mr. Chabot.
Now I would like to begin by recognizing Ms. Urrutia for 5 min-
utes. Thank you, Ms. Urrutia.
STATEMENTS OF LUZ URRUTIA, CEO, OPPORTUNITY FUND,
TESTIFYING ON BEHALF OF THE RESPONSIBLE BUSINESS
LENDING COALITION; YANKI TSHERING, EXECUTIVE DIREC-
TOR, BUSINESS CENTER FOR NEW AMERICANS; ADAM
LEVITIN, PROFESSOR OF LAW, GEORGETOWN UNIVERSITY
LAW CENTER; AND MICHAEL HILES, FOUNDER AND CHIEF
EXECUTIVE OFFICER, 10XTS
STATEMENT OF LUZ URRUTIA
Ms. URRUTIA. Good afternoon, Chairwoman Velázquez, Rank-
ing Member Chabot, and Committee members. My name is Luz
Urrutia, and I am the CEO of Accion Opportunity Fund and Oppor-
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tunity Fund. Opportunity Fund is a CDFI and the Nation’s leading
nonprofit small business lender. We believe small amounts of
money, and the right financial advice can have lasting changes in
peoples’ lives, drive economic mobility and build stronger commu-
nities.
Last year, we deployed $120 million in 3,200 loans mostly to mi-
nority immigrants and women-owned businesses. Accion Oppor-
tunity Fund is also a founding member of the Responsible Business
Lending Coalition, a group of nonprofit and for-profits in the indus-
try committed to transparency and innovation in small business
lending.
Before COVID-19, small businesses were already facing signifi-
cant challenges, accessing responsible capital. Main Street financial
institutions do not generally lend directly to underserved small
businesses for a variety of reasons—tight credit boxes, small dollar
amounts, lack of profitability, risky industries. But since the Great
Recession, many banks left communities, and FinTechs and online
lenders stepped in to fill the gap. There is no argument that these
lenders have transformed the marketplace by speeding access to
capital, and some of them, not all, being transparent and respon-
sible.
Unfortunately, it has also created many unprincipled lenders
that are wreaking havoc across Main Street, charging exorbitant
rates and providing products that lack proper disclosures and
transparency. After COVID, we believe the lending landscape will
be altered even further. Banks will tighten their credit boxes even
more. Many FinTechs and merchant cash advances providers will
retrench or fail due to their capital structures and portfolio losses.
The result will be that underserved small businesses will have an
even bigger challenge accessing capital.
To meet this capital need, Accion Opportunity Fund believes that
innovative partnerships with responsible FinTechs will be crucial.
An example is Opportunity Fund’s partnership with Lending Club,
a one-of-a-kind partnership between a nonprofit CDFI, and a re-
sponsible, for-profit, publicly traded FinTech lender. Lending Club
has the marketing reach and partnerships to provide an accessible
digital experience for small businesses in need.
Opportunity Fund combines its credit assessment tools and a
high touch customer service model to provide small businesses with
responsible credit and transparent rates. The partnerships provide
capital and technical assistance to businesses whose needs may not
be met, or might pay significantly more with other providers.
More than 50 years ago, Congress enacted the Federal Truth in
Lending Act to protect Americans from scrupulous lenders, making
deceptive offers of credit. Unfortunately, we do not have those same
protections for the Nation’s small businesses. Opportunity Fund
analyzed the data set of alternative loans held by small business
owners who came to us hoping to refinance. We found that unregu-
lated lenders were charging an average APR, annual percentage
rate, of 94 percent with an average monthly loan payment nearly
double the borrowers’ net incomes. One loan was priced at an as-
tounding 350 percent. These loans put many small business owners
in a crushing cycle of debt.
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Take Deanna Irish, owner of Wine Tour Drivers, in Sacramento,
California. Deanna took a $25,000 online loan that cost her $2,000
a month. She was able to refinance with Opportunity Fund cutting
her payment to $900. Since then, she has been able to pay off her
loan. These high rates are unfair and deceptive, often hidden under
layers of misinformation. Federal research also finds that small
businesses are often misled by disclosure quoting non-APR rates.
The inability to compare prices on an apples-to-apples basis, and
lack of transparency, stymies free market competition that could
lower prices and spur financial services innovation.
I want to thank the Chairwoman for introducing the Small Busi-
ness Lending Disclosure and Broker Regulation Act of 2020, which
will deliver much needed protections to small businesses. Research
also shows it will bring over $3.8 billion in savings to nearly
800,000 small business annually, including hundreds of millions in
savings for over 158,000 minority-owned small businesses. The leg-
islation could not come at a better time, when many business own-
ers are desperately seeking for ways to remain solvent. An unin-
formed business decision for a financing choice could be the dif-
ference between survival and failure. We applaud California and
New York for passing legislation mandating transparency in small
business lending, however, a State-by-State approach hampers in-
novation and increases costs for lenders. This national approach is
much needed to provide clear and concise national regulations that
protect all small businesses equally and allow responsible lenders
to innovate and create quality products.
I encourage all of our leaders in Congress to work together to
pass the Small Business Lending Disclosure and Broker Regulation
Act of 2020.
Thank you.
Chairwoman VELÁZQUEZ. Thank you, Ms. Urrutia.
Ms. Tshering, you are recognized for 5 minutes.
STATEMENT OF YANKI TSHERING
Ms. TSHERING. Thank you. Thank you, Chairwoman Velázquez,
Ranking Member Chabot, and distinguished members of the Com-
mittee. Thank you for inviting me to speak with you today about
the lack of transparency in small business lending, and the urgent
need to provide entrepreneurs with the information they need to
make informed decisions.
My name is Yanki Tshering, and I am the executive director of
the Business Center for New Americans, a treasury-certified Com-
munity Development Financial Institution and Small Business Ad-
ministration micro lender and community advantaged lender based
in New York City.
In addition to my role leading BCNA, I have also served on the
board of the New York State CDFI coalitions since 2015. BCNA
was founded to help hard-working immigrants and refugees pursue
the American dream. Over two decades, we have provided financial
counseling and loans to help clients to start or grow a business,
buy a home, or save for the future. BCNA serves exceptionally di-
verse clients. Our micro and small business clients range from the
street vendor who comes in once a year to borrow $500 to fund his
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inventory of roses for Valentine’s Day to the deli owner operating
six grocery stores with 80 employees.
Since we were founded, BCNA has made over $33 million in
micro and small business loans, and provided training and advice
to over 10,000 businesses. One of those businesses is Haute Knit
whose owner, Vladimir Teriokhin, produces knitted garments for
New York design houses. Vlad was initially thrilled when he was
approved for a $35,000 loan from an alternative FinTech lender
that he found online, but gradually realized to his horror that he
was paying over 61 percent in annualized interest.
When Vlad came to BCNA 3 years ago to ask us about a loan,
part of which he would use to pay off that high interest loan, we
were shocked to learn that he was also required to pay the full
amount of interest and fees, even if he was able to prepay the loan,
something he didn’t understand when he signed off for the loan.
We are happy to have been able to help him with financing that
loan and many more for affordable terms that are transparent and
fair. Unfortunately, now, more than ever, small businesses are suf-
fering from a lack of access through responsible transparent credit.
The Truth in Lending Act, originally passed in 1968, requires lend-
ers to clarify, disclose their pricing, and terms for consumer loans,
but does not apply to financing for commercial loans.
This means that small business owners like Vladimir are left to
face a Wild West of unregulated and increasingly complex financial
products without any consistency in how the lenders explain, or
present their products to borrowers.
We regularly assist clients who have encountered alternative
loan products, such as merchant cash advances that they did not
understand at times with dire consequences. Larger, more estab-
lished businesses are able to hire attorneys and accountants to
translate confusing term sheets, but as members of the Committee
know very well, the overwhelming majority of small and micro
businesses don’t have the funds for that level of legal assistance.
This is why we are very happy to be here today in support of
Chairwoman Velázquez’s recently introduced Small Business Lend-
ing Disclosure and Broker Regulation Act, which will ensure that
no small business is left behind and extend sensible disclosure pro-
tection to entrepreneurs nationwide.
Thank you.
Chairwoman VELÁZQUEZ. Thank you, Ms. Tshering.
Now we recognize Professor Levitin for 5 minutes.
STATEMENT OF ADAM LEVITIN
Mr. LEVITIN. Chairwoman Velázquez, Ranking Member Chabot,
and members of the Committee, good afternoon. Thank you for in-
viting me to testify before you today.
My name is Adam Levitin. I am a law professor at Georgetown
University, where I teach courses in commercial law and financial
regulation. For over 50 years, consumer credit has been governed
by an extensive Federal regulatory regime of disclosure, sub-
stantive term regulation, and supervision of lenders. There is no
equivalent regulatory regime for business loans. The lack of regula-
tion of business lending is, in large part, because businesses are
presumed to be more sophisticated entities than consumers, and,
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therefore, less needing of governmental protections. Yet, there is a
considerable range of financial and legal sophistication among busi-
nesses and the reason that a borrower takes out a loan does not
determine the borrower’s ability to otherwise protect his or her in-
terests.
Small businesses, in fact, often resemble consumers in terms of
limited information, sophistication, and market power in credit
markets. Moreover, small business borrowing is often personally
guaranteed by the small business’s owner. The lack of regulation
leaves small business vulnerable to abusive practices of the sort
that were prohibited in consumer credit markets in the 1960s and
1970s. It makes sense to recognize that small businesses need
many of the same sorts of protections as consumer borrowers to en-
sure that they can enjoy fair, efficient credit markets. And that is
precisely what the Chairwoman’s bill, a Small Business Lending
Disclosure and Broker Regulation Act would do.
Most importantly, the Chairwoman’s bill would extend the cen-
terpiece of Federal consumer credit regulation, the Truth in Lend-
ing Act, to small business loans. The Truth in Lending Act re-
quires, among other things, the standardized disclosure of the cost
of credit in the form of the finance charge and the annual percent-
age rate, or APR. That is an annualized measure of the finance
charges as a percentage of the principal obligation.
Standardization of credit cost disclosure is important, because it
enables borrowers to more readily understand and compare various
credit offers available on an apples-to-apples basis, so that the bor-
rowers can make an informed decision about using credit. Informed
use of credit is essential for ensuring robust price competition,
which is the first line of consumer protection.
Let me give you an example of what the world could look like
without standardized credit cost disclosure. If I were to tell you
that a loan cost 10 percent without telling you more, you could not
tell if that meant 10 percent annually, 10 percent monthly, or 10
percent weekly; much less, if that 10 percent were compounded and
with what frequency. That actually leads to very different effective
interest rates. Without compounding, the 10 percent monthly figure
would translate to 120 percent annually, and the weekly figure, to
520 percent annually.
So the imprecision of stating 10 percent interest allows for
abuses of consumers. Let me illustrate this with a story of small
business from Sarasota, Florida called Homes by DeRamo. And this
is the story experience with a predatory small business lender,
called World Business Lenders, that operates in partnerships with
various banks that rent out their banking charters to enable the
nonbank lender to evade State laws.
So the DeRamos got a loan from World Business Lenders
through a small Wisconsin bank with two branches, called Bank of
Lake Mills. It had no connection whatsoever with Florida. And the
pricing of the DeRamos’ loan was never disclosed as an annual per-
centage rate. Instead, it was disclosed in terms of a daily percent-
age rate, and that appeared as a 12-digit decimal figure of just over
0.33 percent. Annualized, however, that translates into 121 percent
APR.
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That 121 percent APR figure never appeared anywhere in the
DeRamos’ loan documents, however. Moreover, even the daily per-
centage rate, was never prominently disclosed. It was buried in the
midst of legalese. No interest rate whatsoever appeared on the
summary term sheets for the loan. Instead, the only percentage fig-
ure that appeared was for 15 percent prepayment penalty and that
is the figure that the DeRamos believed was the interest rate on
the loan.
So the Chairwoman’s bill would address this sort of abuses that
occurred with the DeRamos’ loan, by requiring disclosure of credit
cost in standardized terms. It would also prohibit the sort of
gotcha-type of enormous prepayment penalties for same lender refi-
nancing as the DeRamos experienced. And most importantly, I
think, it would extend the scope of the Consumer Financial Protec-
tion Bureau’s regulatory authority so that the CFPB can supervise
the larger participants in the small business lending and use its
power to prohibit unfair and deceptive acts of practices as a gap
filler.
I would urge the Committee to take up the Chairwoman’s bill,
which is an excellent point for bringing much needed protection to
small business borrowers.
Thank you.
Chairwoman VELÁZQUEZ. Thank you, Professor Levitin. Now
we recognize the gentleman, Mr. Hiles, for 5 minutes.
STATEMENT OF MICHAEL HILES
Mr. HILES. Chairwoman Velázquez, Ranking Member Chabot,
and members of the Committee, thank you for the invitation to tes-
tify at this hearing.
My name is Michael Hiles, and I am the CEO of 10XTS, a Cin-
cinnati-based FinTech/RegTech company building blockchain solu-
tions for financial records. The SBA’s admirable effort to rapidly
mobilize financial stimulus through EIDL and PPP loans dem-
onstrates how small business funding is clearly an essential lifeline
to a thriving economy. When American small business is unable to
access capital, single moms, immigrants, and regular ordinary peo-
ple suffer. The SBA is historically partnered with banks as the
origination and servicing agents for lending programs. While this
approach has generally allowed the SBA to serve a wider market,
the administration can only be as effective in delivering services
and support as their partners. Therein lurks the problem faced by
the SBA.
The PPP program experienced significant delays in delivering fi-
nancial relief to small businesses due to many banks’ inability to
adjust business operations in an agile fashion and fairly deliver
funds in a diverse and inclusive ways. We directly experience these
frustrations.
Legacy banks are already in the throes of compressive disrup-
tion. They are not in a position to quickly respond to rapid, disrup-
tive changes in the market. The resulting permanent branch clo-
sures and downsizing has been an alarm bell for many. In 2018,
Gartner published a report indicating that by 2030, 80 percent of
the traditional financial services firms will close, become
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commoditized, or exist formally, but will not compete effectively in
the market.
With so many consolidations, banks have struggled to merge re-
dundant, legacy IT systems. The largest banks are a hodgepodge
of too-big-to-fail technology strung together with little to no stand-
ardization. As a result, institutions are weighed down with ineffi-
cient fragmented processes. Our hypothesis at 10XTS is that a bevy
of problems are mostly based on how information, records, docu-
ments, and data are stored, managed, shared within, and between
other organizations and customers. Trusted information is still
mostly another human vouching for the authenticity of documents
and data.
Facing increasing regulatory scrutiny, banks have been reluctant
to drive innovation due to the inherent compliance risks. Financial
services industry already spends more than $270 billion per year
in compliance and regulatory obligations. Legacy systems limit the
simple automation and straight-through processing from front end
to the back office. Proprietary systems complicate the adoption and
integration of emerging tech like blockchain, AI, robotic processing,
and API-based micro services. In short, legacy information systems
reduce a bank’s ability to innovate and improve value for their cus-
tomers and partners.
Meanwhile, there are now approximately 60 million Generation
Z banking customers who control $45 billion in annual spending.
With the oldest of them nearing age 24, these young adults literally
have no recollection of life prior to the internet, social media, and
mobile tech. Gen Z expects highly transactional services, placing
more value upon convenience over traditional branch-based rela-
tionship-driven banking.
In consideration of these things and other things, I offer the fol-
lowing recommendations: One, coordinate efforts with the U.S.
Treasury and Federal Reserve Bank in establishing a sandbox en-
vironment, and a decentralized national network of financial
records. Without a definitive path of its own, relying on the finan-
cial services industry to provide tech solutions means the SBA is
at risk for future disenfranchisement of the growing market of dig-
ital-first business’ owners who rely upon tech solutions for fast, ef-
ficient business operation.
Similar to the early communications standards that became the
internet and web, a collaborative approach to building a commer-
cial lending and financial records network by the SBA, Treasury,
tech companies, and banks could accelerate a more verdant, effi-
cient, and trustworthy financial system. Through collaboration, the
SBA is in a position to establish new standards for financial docu-
ment and information networks, data interoperability, robotic proc-
ess automation, and exchange.
Firms that optimize customer data, robotic processes, and pro-
vide new solutions can offer timely and relevant support for the
SBA’s programs. With data-driven and digital-only models, chal-
lenger firms are in a better position to adapt to rapid change and
unforeseen circumstances.
Number two, leverage and improve upon small business innova-
tion research, SBIR programs, to foster FinTech and RegTech inno-
vation. The SBA has an opportunity to collaborate with technology
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companies to provide proof of concepts for the direct delivery of
automated services. However, Federal contracting, grant, or regu-
latory policies can be quite prescriptive when it comes to defining
technology and solution requirements.
Instead, Congress should establish goals for the outcomes of in-
novation programs and then strive to support businesses that offer
effective, affordable technology solutions. While contracting vehi-
cles already exist, they can be prohibitive for small companies to
pursue due to the amount of resources required. As we have seen
with recent SBIR innovations and instant procurements and
streamlined processes within the Air Force, tapping into a wider
national brain trust for innovation can be achieved through
thoughtful improvements through the existing processes.
As we deliberate national small business, funding, banking, tech-
nology, and even monetary policies, Congress should invest in these
opportunities, accelerate them where possible, and ensure the fi-
nancial and regulatory standards and technology of the future con-
tinue to be led by American ingenuity and resolve.
Thank you, again, for inviting me to testify, and I look forward
to addressing each of your individual questions.
Chairwoman VELÁZQUEZ. Thank you, Mr. Hiles. Thank you all
for everything you have shared with us. I will begin by recognizing
myself for 5 minutes.
Ms. Urrutia, the goal of my bill is to bring transparency and un-
derstanding of pricing terms and conditions to small business lend-
ing nationally. How would increased transparency have a unique
impact on borrowers of color, immigrant entrepreneurs, and other
vulnerable communities?
Ms. URRUTIA. First, I want to start by saying that underserved
small businesses, particularly the minorities, immigrant, and
women-owned do not generally maintain existing banking relation-
ships. I think this was recently brought to light after looking at the
results of who received PPP loans. Unfortunately, we saw that
many minority immigrants and women-owned business who tried
to apply with banks were left at the back of the line, or declined
altogether. There is also plenty of research from many sources
showing that these underserved communities are most negatively
impacted when it comes to accessing responsible and affordable
capital.
The Brookings Institute research shows that minority and
women-headed households generally have lower levels of household
wealth, making external borrowing more difficult. It also shows
that these two segments have increasingly difficult times accessing
responsible capital. Similarly, the U.S. Department of Commerce,
Minority Business Development Agency shows that minority and
women-owned businesses are less likely to receive loans, more like-
ly to receive lower amounts, and more likely to be denied when
compared to nonminority businesses.
Chairwoman VELÁZQUEZ. Thank you. Thank you. I just need
to go on with other questions. Thank you so very much.
Ms. Tshering, you noted that nonprofit lenders are left helping
small businesses pick up the pieces due to the lack of transparency
and abusive lending practices in online lending. Can you elaborate
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on some of the terms these FinTech products have that hurt small
business borrowers?
Ms. TSHERING. So what we found and it is the CDFI Business
Center For New Americans, which I represent, but also all—we
have a coalition of CDFIs in New York State, and we work very
closely together. What we found is the, you know, lack of trans-
parency of the actual interest rate. And I think we had someone
who just spoke, the professor, who explained in detail, you know,
very often the fact that the interest rate is a daily interest rate is
not conveyed clearly to the borrower.
So when you actually—you don’t have the ability to compare ap-
ples to apples. So a borrower may look at a CDFI’s loan product
offerings and see 8-1/4 percent, and 10 percent, and when they see
the interest rate that is conveyed to them by a FinTech, or an on-
line, or some other lender, they are very confused. So, you know,
we greatly feel what we are asking for is transparency and fair-
ness. We are not condemning the FinTech sector. We are con-
demning and bringing to light the bad behavior.
The other thing that we were shocked to find out, and I have to
point this out, was the fact that even if we stepped in, a CDFI
stepped in and was willing to make a loan to refinance, this loan
with this exorbitant interest rates because of what the client on the
borrower small business owner had signed on, it was still liable for
the entire fees and interest for the term of the loan.
Chairwoman VELÁZQUEZ. Thank you, Ms. Tshering.
Ms. Urrutia, in an effort to increase transparency in small busi-
ness lending, an unexpected degree of disagreement has a reason
with respect to annual percentage rate, or APR, disclosures. Some
have argued that a total cost of capital metric is appropriate, but
others have argued that an APR cannot be calculated for certain
products.
What is your response, and why is it so important that APR spe-
cifically be disclosed to borrowers? Do you believe it is more accu-
rate or useful metric for borrowers in comparing loan products?
Ms. URRUTIA. They are providing capital over time for a fee
just as lenders are. For a long time, the merchant cash advance in-
dustry has long claimed that their products are different to get
around regulations that are intended to protect their customers.
This is just another example of that avoidance. A lot of conversa-
tion focuses on the nuances of the product themselves. Are they an
MCA? Are they a daily debit? What are the product features? This
financing is mostly very high cost and doing more harm than good.
You know, customers need to be educated. The best businesses
educate their customers because that allows them to make in-
formed decisions. APR is definitely a metric that helps borrowers
understand how much they are paying, and be able to compare ap-
ples to apples, one product to another.
Chairwoman VELÁZQUEZ. Thank you. Thank you. My time has
now expired, and maybe if we go to a second round of questioning,
I will be able to ask question for the witnesses that I haven’t gotten
to yet.
Now, the Ranking Member, Mr. Chabot, is recognized for 5 min-
utes.
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Mr. CHABOT. Thank you, Madam Chairwoman, and I will begin
with Mr. Hiles.
Mr. Hiles, Cincinnati is a modest-sized city. How is Cincinnati
come to be such a significant driver of financial innovation? What
advantages have you found here in this area?
Mr. HILES. Madam Chairwoman, Ranking Member, thank you
for the question.
Cincinnati has a great legacy of financial technology. In 1976,
that was the start of the electronic trading with the Cincinnati
stock exchange. In fact, Cincinnati is recognized as being the first
independent software vendor company in history, Cincom Systems.
So it has a wonderful technology legacy that was followed through.
In 1977, Fifth Third Bank launched the very first ATM network,
the Genie Network, which has become fairly ubiquitous now
throughout the world for accessing cash through trusted networks.
Separately, I am honored to have been on the team that was the
first to ever connect a court judicial case management system to
the world wide web and allow a clerk of courts case management
search look-up, and we won a Smithsonian Computer World Lau-
reate award for that.
So we have got a tremendous history of firsts, and that is one
of the reasons that we are now also advocating the establishment
of a decentralized network of records as a way to really provide
proof and efficacy of financial identities, entity information, assets,
and, ultimately, transactions, so that they can be queried instantly
by regulators, but then also ensure the security and the efficacy of
documents and data as they are passed between institutions and
organizations and individuals.
So that hopefully answers the question, Ranking Member. Thank
you.
Mr. CHABOT. Thank you very much.
Ms. Urrutia, I will go to you next. Could you expound upon the
partnership that Opportunity Fund has with LendingClub and
Funding Circle and how that those partnerships have helped reach
small businesses across the country?
Ms. URRUTIA. Sure. We established a one-of-a-kind partnership
where we were able to take LendingClub customers that applied
for a loan and got denied, primarily for credit reasons, in the back-
ground we were able to check them to decide if we could provide
them a prequalification offer. In essence, we were a second look for
a FinTech lender. They brought the marketing and, their digital ca-
pabilities, and we brought our high-touch customer service and our
ability to underwrite credit for these underserved consumers, giv-
ing access to credit to borrowers that, otherwise, would have been
turned down.
And for certain borrowers that we cannot handle because their
loan sizes are greater and/or they are prime creditworthy cus-
tomers, we would send them to another lender, such as Funding
Circle for them to underwrite; again, better expanding access as
well as providing transparent rates and affordable loans.
Mr. CHABOT. Thank you very much.
Ms. Tshering, I will go to you next. As we have seen, COVID-
19 has acutely impacted small businesses across the Nation. This
is especially true for the country’s smallest firms. I have introduced
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legislation that considers the smallest of small businesses, those
that have 10 or fewer employees.
As Congress looks to assist these smallest of hard-hit businesses
during this emergency period, do you have any suggestions as to
what we could consider why these smallest businesses have a par-
ticularly hard way to go?
Ms. TSHERING. That is a great question. Thank you.
So one thing I want to, you know, thank everyone who is in-
volved in passing the CARES Act, one of the provisions that is not
talked as much about as the PPP—we hear so much about the PPP
loans, was under the CARES Act, anyone who was funded with the
loan from funds from the SBA were able to get 6 months of loan
repayments assistance under the CARES Act.
So, that was a lifeline for small businesses that had a loan fund-
ed by the SBA, many of the EIDL loans, others were really, really
helpful, but when we speak to our clients and other clients of other
CDFIs, the area where most of the businesses seem to really need
help is some form of rent relief. And what they have also said over
and over, again, is, Yes, we do not need more debt, you know. We
would love to have a program which would, you know, provide
some equity, help us pay off the 4 months of rent that we owe, and
some of the expenses so we can get back on track.
Mr. CHABOT. Thank you very much. My time is expired,
Madam Chair.
I yield back.
Chairwoman VELÁZQUEZ. Thank you. The gentleman’s time
has expired.
Now we recognize the gentlelady from Kansas, Ms. Davids, for
5 minutes.
Ms. DAVIDS. Thank you, Chairwoman Velázquez and Ranking
Member Chabot, for holding this hearing today. The COVID-19
pandemic has certainly illustrated and exacerbated many of the
challenges that our small businesses face in their ordinary day-to-
day operations, whether we are talking about access to capital,
starting a business, keeping the doors open in an emergency, and
we are seeing just how hard those challenges can be.
FinTech, I think, presents a unique and exciting opportunity for
lenders to better reach and serve small business owners who are
often in search of small loans, things, you know, loans that are
under $1 million, and FinTech lenders are often able to speed up
the typical loan turnaround time, which can be critical for small
businesses with tight margins.
But, as we know, the FinTech industry, as it grows and adapts,
we have a responsibility to ensure that those opportunities for
small business lending are equitable and that they are fair. And so,
Ms. Urrutia, I would really love to hear from you about how we en-
sure that FinTech and online lenders offer fair and clearly under-
stood terms, and making sure that they are remaining accessible
to small lenders and you were kind of touching on this earlier
when you were talking about the transparency that the Chair-
woman was asking about, but also, just in terms of making sure
that folks understand the terms that they are signing up for, how
we educate folks on that.
Can you talk a little bit about that?
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Ms. URRUTIA. Sure. Thank you.
First, there are many reputable national lenders. CDFIs and
FinTechs alike, who deliver solutions online to customers through-
out this country in both rural and urban communities. And these
organizations, ourselves included, we meet borrowers where they
are and when they need us. And we have been and will continue
to be committed to transparency in our lending activities. Exam-
ples of many of these lenders are members of the Responsible Busi-
ness Lending Coalition, which is a network of more than 110 non-
profit and for-profit lenders, investors, and small business advo-
cates that share a commitment to innovation in small business
lending, and we also are concerned about the rights of small busi-
nesses. The 50-plus lenders in the group currently provide bor-
rowers in need of loan capital with transparent disclosures.
The second point I will make is that we strongly believe that an
educated customer is our best customer. By being transparent, we
help them to understand how to pay loans back, which means more
people can get credit as a result. For us and for these lenders, cus-
tomer success drives business success.
Ms. DAVIDS. Oh, really quickly, I would like to hear a little bit
more about—I am really interested in making sure that small busi-
ness owners are able to trust that they are interacting with a lend-
er that is really going to either meet them where they are at or
educate them in a way that is necessary.
Can you talk a little bit more about that? The Responsible Lend-
ing Coalition sounds really interesting. Are there other groups out
there that are doing similar work?
Ms. URRUTIA. Yes, and I would say that under the Responsible
Business Lending Coalition, we created—the Business Borrower
Bill of Rights, which outlines six principles of what responsible
lending would look like. It does not mean that other lenders that
have not signed on to this bill are not doing responsible lending,
but I think that the BBoR will serve as a guideline for small busi-
nesses when taking out a loan to understandf if, the loan meets
this criteria?
Ms. DAVIDS. And then, Ms. Tshering, I saw you nodding your
head a bit. I would love to hear from you on this.
Ms. TSHERING. Yes.
So, you know, I want to point out, as Luz referred, that many
who have not signed on to this, you know, small business lender
Bill of Rights, but they believe in what we are asking for. And we
are not, you know, condemning the FinTech sector, as I said before.
What we are saying is, we want some rules in place to affect and
make sure there is no bad behavior, which impacts very negatively
on small business owners.
Ms. DAVIDS. Yeah. I appreciate that, and it sounds like there
are a lot of—when I was hearing about the partnerships with folks
like Lending Tree and other online folks, I think that it sounds as
though, there is—again, I said this earlier, a lot of opportunities for
access and growth just making sure we are making that a fair and
equitable process.
Thank you so much for your responses.
And I yield back.
Chairwoman VELÁZQUEZ. The gentlelady yields back.
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Now we recognize the gentlelady from American Samoa, Mrs.
Radewagen, for 5 minutes.
Mrs. RADEWAGEN. Thank you, Chairwoman Velázquez and
Ranking Member Chabot, for holding this hearing, and I, too, want
to welcome the panelists.
For Ms. Urrutia, in your testimony, you state that small business
owners are sometimes shut out of a traditional financial system.
Why do you believe some lenders do not consider them good can-
didates for traditional lending products? And small businesses
are—well, as Congress continues to discuss PPP and the next
round of COVID relief, what should we concentrate on that would
provide the most assistance to small businesses?
Ms. URRUTIA. Sure. Yes. Banks generally have a very specific
criteria under which they make loans. They look at FICO scores,
and there are a lot of small business owners and individuals that
don’t have one—primarily those that either new to credit or, immi-
grant communities. Second, they are looking at size of loans. The
loans we are talking about are very small microloans. It is really
hard to make those loans profitable. Also, many of these minority-
owned businesses are in industries that pose a greater risk for
banks, even though, we would disagree with that statement based
on our own experience.
So, the overall profitability and the overall segment that we are
talking about has needs that the banks are just not set up to serve.
As a result, these small businesses are going to alternative lenders
to seek the credit that they need; online, MCAs, FinTechs. In terms
of PPP, we believe that there are several things to improve. We do
believe that there needs to be the ability for businesses to access
a second PPP loan. We also believe that to incentivize lenders to
make smaller loans, lenders should get paid a minimum fee of
$2,500. As an example, at Opportunity Fund, our average loan for
PPP was $15,000, okay.
The average loan on the second round was 73,000 for the indus-
try as a whole, and even larger in the first round. So, to incentivize
lenders to make smaller PPP loans, there should be a process to
forgive any loans under $150,000. That will help lenders be willing
to make those smaller loans.
Mrs. RADEWAGEN. Thank you, Chairwoman Velázquez. I yield
back the balance of my time.
Chairwoman VELÁZQUEZ. The gentlelady yields back. Now we
recognize the gentleman from Maryland, Mr. Mfume, for 5 minutes.
Mr. MFUME. Well, Madam Chair, thank you very much. You are
very gracious with your time. I hopped on a little late because I
have had conflicting meetings this day, and so in deference to the
members on our side that may have been here earlier before me,
I would yield until the next round.
Chairwoman VELÁZQUEZ. I recognize the gentlelady from Cali-
fornia, Ms. Chu, for 5 minutes.
Ms. CHU. Thank you, Madam Chair.
Well, Ms. Tshering, I am so glad you are on this panel today be-
cause your organization is a Community Advantage lender serving
immigrant and minority business owners. What this hearing today
shows is that it is so important for us to support the Chairwoman’s
Small Business Lending Disclosure Act ASAP.
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And I have also introduced legislation, along with my colleague,
Representative Spano, that would authorize the Community Ad-
vantage program for 5 years, which has been operating as a pilot
program successfully since 2011.
Now, we are facing a long recovery from COVID-19, and we need
to be bold about giving small businesses, especially underserved
small businesses, more opportunities to access SBA capital.
So, you know, we have an interest in making sure the Commu-
nity Advantage program remains live. And as a Community Advan-
tage lender, can you speak to the potential of this program to play
a part in the economic recovery for small businesses, especially
those owned by immigrants and people of color, and especially
when they may be potentially taken advantage of by unscrupulous
FinTech lenders?
Ms. TSHERING. So, thank you. So, the Community Advantage
product is a great product. We are relatively new to the product.
We have been making these loans for 2 years. But what I have to
say, we were pleasantly surprised once we started processing them,
how efficiently we got a response as to whether something was ap-
proved or not, if a loan was approved, or if documents were miss-
ing. And I think it has a great role to play in the recovery efforts.
New York, here, businesses are reopening. We are making, you
know, emergency microloans funded by the SBA. We are also a
very active lender with funds, awards from the Treasury, the CDFI
fund at the U.S. Department of Treasury. But the CA, Community
Advantage program, has a great role to play.
And I think, you know, if more of the business owners were
aware of the product, certainly there is some time involved in un-
derwriting the loan, but that makes sense because, you know, you
really have a responsibility to make sure that the borrower has the
ability and, you know, is able to repay before you make the loan
to the business.
Ms. CHU. Thank you for that.
And, Ms. Urrutia, as the only member from California on this
committee, I would like to ask you about SB-1235, which was
signed into law in my home State in 2018, and was the country’s
first truth-in-lending law specifically for small business. And I
know your organization was very instrumental in the passage of
this bill in my State.
Of course, this legislation did address the misleading advertising
practices by requiring lenders to disclose the true estimated cost of
their products on an annualized basis, and it laid the groundwork
for a similar effort in New York State. And, of course, I commend
Chairwoman Velázquez for spearheading these disclosure require-
ments here in Congress because we certainly need it on a national
basis.
So, can you tell us how the bill is doing and expound on the les-
sons learned from SB-1235 in California, and how we can apply
those lessons to the Federal level?
Ms. URRUTIA. SB-1235 has not been fully implemented yet in
California, but, transparency is what we all were looking for. That
is why when this bill was passed, there was no opposition to enact-
ing some of the disclosures.
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Æ–What we saw is that high-cost lenders continue to op-
pose it because their APRs will be much higher than the
rates that they disclose now. As I said earlier, the Federal
Reserve found instances of providers claiming that a 4 per-
cent ‘‘fee rate’’ of 4 percent, when the estimated APR was
45 percent, or a ‘‘factor rate’’ of 1.15 when the estimated
APR was 70 percent. The Fed found these rates are con-
fusing.
So, when we introduced this bill, I think that the reason we
found support is because consumers and small businesses deserve
the right to know their options and what they are buying so they
can make informed decisions. And we are looking forward to suc-
cessful and full implementation of the bill in California.
Ms. CHU. Thank you. I yield back.
Chairwoman VELÁZQUEZ. The gentlelady yields back.
I now will recognize the gentleman from Ohio, Mr. Balderson, for
5 minutes.
Mr. BALDERSON. Thank you, Chairwoman. Chairwoman, I ap-
preciate you doing this committee today, and I look forward to lis-
tening. It has been good today.
My first question will go to Mr. Levitin. In your testimony, you
briefly discuss personal guarantees. At the SBA, personal guar-
antee is utilized with many of the government guaranteed lending
products. Can you provide more detail about its role in traditional
lending products?
Mr. LEVITIN. Sure. Personal guarantees are—commonly are
very frequently used as business lending because the small busi-
nesses—in many situations, the dividing line between what is a
small business asset and what is a personal asset gets—it can be
fussy. That is one reason.
For example, a contractor who buys a Ford F-150 or something
might use it for work, but he is also going to use it to take his kids
to school, and to get groceries and the like. It is both—it may be
registered in the business’s name, but the business is really hard
to separate from the person, and that is why you often see personal
guarantees for all businesses where the credit of the business is
just tied up with the credit of the person.
I don’t think a personal guarantee is, in any way, a problem. I
want to be clear about that. But when you start having personal
guarantees it can make it look a lot more like [inaudible] than if,
you know, a large—Coca-Cola were to go and take out a multi-
million dollar loan.
Mr. BALDERSON. Thank you. I will follow up for you. What
small business provision should Congress concentrate on while dis-
cussing the next COVID relief package?
Mr. LEVITIN. I think the key—maybe the most important prob-
lem small businesses are facing is rent, and that is not an easy
problem, because you have small businesses that, through no fault
of their own, are facing real problems with their rent, and you have
landlords who, through no fault of their own, are finding their own
liquidity stressed because of the COVID problems. I don’t, unfortu-
nately, have a good solution for you on this, but that is, I think,
where a lot of attention needs to be paid.
Mr. BALDERSON. Okay. Well, thank you.
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My next question is for Mr. Hiles. Mr. Hiles, thank you for being
here today. What do you believe are the factors that are driving
change within the country’s banking and lending system?
Mr. HILES. Madam Chairwoman, Representative Balderson,
thank you for the question.
There is a confluence of different factors affecting the banking
system right now. As I stated in my initial testimony, one of the
problems through consolidation for Main Street to Wall Street has
been the development of these gigantic too-big-to-fail patchwork
quilts of disparate financial IT systems in the way that the docu-
ments and the data are managed become very expensive to main-
tain.
And we have seen instances where very large banks have spent
upwards to $1 billion in an attempt to launch a fully automated
digital bank from the inside out. And we know that from the tech-
nology standpoint, the technology innovation generally takes place
outside of large institutions and then becomes acquired or absorbed
within as we are able to innovate and pivot.
There are other compressive factors, you know, the risks from a
regulatory cost standpoint and, you know, not clear guidance. We
have struggled with standards in technology. We have had a little
bit of a national dialogue, in particular, around blockchain. There
has been an attempt to bring to the floor a previous legislation that
defines even the taxonomy of blockchain and cryptocurrency and
trying to inject some definitions into the mix.
I would like to also remind the committee that FinTech, in and
of itself, is not necessary alternative lending. FinTech is just finan-
cial technology that powers an efficient way for even traditional fi-
nancial firms to continue to operate.
Mr. BALDERSON. Thank you very much for your answer.
Madam Chair, I will yield back my remaining time. It is pretty
short. So thank you very much for all of you being here today.
Chairwoman VELÁZQUEZ. Thank you. The gentleman yields
back.
Now we recognize the gentleman from Pennsylvania, Mr. Evans,
for 5 minutes.
Mr. EVANS. Thank you, Madam Chairperson. Thank you for
your leadership on this issue.
The question I want to start off is with the professor from
Georgetown. Mr. Levitin, can you describe the pros and cons of
using FinTech for lending? What can business owners do right to
now protect themselves from predatory lending? And I would like
to get others to respond to that too.
Mr. LEVITIN. So, as Mr. Hiles was saying a second ago, FinTech
simply—it is actually not a very useful term because it is so vague.
It just means bringing technology to the lend—to financial services,
and that can mean a whole range of things. In the lending context,
it usually is used to refer to online lenders. But a website is hardly,
you know, revolutionary technology at this point.
Often when we think of FinTech lenders we—people are referring
to lenders that are using alternative underwriting data, so that
they are able to maybe underwrite loans for borrowers that do not
have traditional credit scores or have thin credit files, and also,
lenders using particularly automated underwriting.
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And these two things, the automated underwriting and the use
of alternative underwriting data, enables both cheaper under-
writing and faster underwriting, and underwriting of populations
that might not otherwise be served by the traditional lending mar-
ket.
Potentially, that is all really good, right. There is a lot of poten-
tial upside to FinTech. The problem is that FinTech has—it can be
both good and bad, and you have—just as in the regular banking
market, you can have abusive practices. You can have those, too,
with FinTech.
And with FinTech lenders, often they are not operating with a
banking license, so their regulation will vary. It is going to be on
the State level primarily. And what that means they are actually
subject to can just—there is substantial variation depending on
how they do this.
Additionally, some FinTech lenders are not banks, but they part-
ner with a bank. These bank partnerships are sometimes called
rent-a-bank arrangements, where the bank acts as the front. It
makes the loan and then immediately sells the loan, and the loan
was made on spec for the FinTech. What that allows the FinTech
to do, it allows it to evade State regulations.
So the example I give in any opening statement of the DeRamos’
business loan, the 121 percent interest rate, well, Florida has an
18 percent usury cap. It actually applies—unlike many States,
Florida’s usury cap applies to business loans as well as to con-
sumer loans.
How is a 121 percent APR loan made there? Well, because banks
are exempt from State usury laws. And by having the little tiny
Wisconsin community bank with just two branches in Wisconsin be
the formal lender, and then a few days later, sell the loan to the
FinTech, the FinTech was able to at least make an argument that
it was not subject to the State’s usury laws.
And, unfortunately, over the summer, the Office of Comptroller
of the Currency and the Federal Deposit Insurance Corporation
both put finalized rulemakings that pretty much blessed this proc-
ess, and are giving a green light to bad actors in the financial serv-
ices space rather than trying to, you know, squeeze out the bad ac-
tors and have an open field for the good actors.
Mr. EVANS. So maybe somebody can go real quick. I have a
minute. So can I get you to respond the pros and cons on it?
Mr. LEVITIN. Can you repeat that, sir? I didn’t hear it.
Mr. EVANS. Is anybody else giving comments on the pros and
cons of FinTech along the panel?
Ms. URRUTIA. I would just say that FinTechs have done a great
job of leveraging technology and data analytics to scale lending to
underserved communities in markets where banks have left, and
they have become banking deserts. And they have the reach and
many are responsible.
The problem that we have as responsible lenders is with those
online and FinTech providers that are not transparent in their dis-
closures. And with those who say that why don’t we just talk about
the cost of credit and the dollar amount, recognizing that that is
not a good, fair comparison, because a 6-month loan is very dif-
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ferent than a 5-year term loan, and so you have to look at APR in
order to be able to compare apples to apples.
Mr. EVANS. I yield back the balance of my time.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Oklahoma, Mr. Hern, for
5 minutes.
Mr. HERN. Thank you, Madam Chairwoman. I really appreciate
you doing this meeting today, and Ranking Member Chabot, and
our witnesses for testifying today.
As a business owner for over 35 years before getting into Con-
gress 2 years ago, I am certainly very familiar with the complex-
ities associated with obtaining access to capital through the loan
programs that are out there and available.
I am also—as a cofounder of a small community bank, I also un-
derstand the compliance standards and the financial risk our lend-
ers face on the other side. So I have a unique perspective of being
on both sides of this for over 20 years now.
These financial risks have grown significantly, due to small busi-
nesses utilizing online lending more frequently, which often creates
quicker means to obtaining loans, as each of you have described,
is more appealing to younger demographics of business owners. If
it is usually that easy and that automated, there is usually some-
thing of suspicion behind it, and I think that is what has been so
appetizing about these type of loans.
Unfortunately, online lending comes with a lack of transparency
and increased ambiguity regarding long-term agreements, again, as
we have been speaking to today. Going forward, as our society’s re-
liance on the digital marketplace continues, it is essential that we
increase transparency so that small businesses better understand
the terms of online lending agreements.
Compliance standards are also a growing problem, as our Na-
tion’s banks have been overregulated since the passage of Dodd-
Frank, and they have become worse during the coronavirus crisis.
While the PPP and auto programs have helped businesses remain
open and for employees who are unemployed, a quick turnaround
in processing these loans has placed even more standards on many
banks, causing them to work extra hours and adding to the overall
compliance cost.
So, to ensure more efficiency and transparency with SBA lend-
ing, we need to reduce the burdensome regulation for banks and
strive to innovate. And this brings me to the first question.
Mr. Hiles, in your testimony, you note that the need for the SBA
to be more innovative and work with technology companies to fos-
ter FinTech and RegTech solutions, if the SBA is to innovate
through online platforms, how do we ensure that we are not over-
regulating causing more burdens for banks, yet also to ensure there
is transparency for small businesses within loan agreements?
Mr. HILES. Madam Chairwoman, Representative Hern, thank
you for the question. We are advocates of leveraging technology
that exists today that allows for the immutable mathematical proof
of documents and data. I think of it as the underlying technology
beneath cryptocurrencies, but applied in an enterprise fashion for
compliance purposes.
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This allows a mathematical way to encrypt the information, and
then decentralize it to, you know, essentially hack-proof it. I don’t
like to say that word because it is not true, but at least elevate a
much higher level of security around that information.
This also provides for a proof of information and data from a reg-
ulatory standpoint as an examiner would be provided with a token
key to the network to access specific records on a real-time basis.
It would seem that from a transparency standpoint these kinds of
innovations would be a dream come true for both small financial
institutions who already struggle with technology innovation. As a
community bank, they don’t have the R&D budgets. And then from
an administrative standpoint, to help leverage some of these new
technologies, to also work in a far more efficient fashion as an ad-
ministration. These are the kinds of things that we look forward
to in the future with the ability to, you know, proof documents and
data.
Mr. HERN. Thank you.
Mr. Levitin, my second question, I will start with you on this and
we will see where time goes, but this is regarding increased lending
flexibility for banks. What are some of the actions the government
can take to reduce current regulatory burdens on banks to increase
the flexibility within lending leading to quicker turnaround for loan
processing, as that seems to be one of the appetizing things to the
FinTech industry right now?
Mr. LEVITIN. So I am not actually aware of any particular regu-
lation that slows down the speed of underwriting. There may be
just internal technological and operating procedures that do so, but
I am unaware of anything in terms of Federal regulation that re-
quires a delay between when the bank decides to make a loan and
when there can be a disbursement, or about how fast a bank can
undertake an underwriting process.
There are certain things that, you know, pretty much any lender
is going to be required to abide by, such as anti-money laundering
regulations, but those should not be creating a particular delay
once the necessary documents are submitted to a lender.
Mr. HERN. Madam Chairwoman, I yield back the balance of my
time. Actually, I have none left.
Chairwoman VELÁZQUEZ. The gentleman yields back.
Now we recognize the gentleman from Illinois, Mr. Schneider, for
5 minutes.
Mr. SCHNEIDER. Thank you, Madam Chair. And thank you and
the Ranking Member for hosting this important hearing.
I want to thank our witnesses for joining us today.
This summer, I had the privilege to host a number of virtual
roundtables with, in particular, minority business owners in my
district. And in these, time and again, we heard a common theme
that these small businesses, especially minority-owned businesses,
had nowhere to turn for financial assistance.
Now, the big businesses were getting ahead of them in line at
the banks and accessing PPP, at least in the first round. Many sub-
mitted their paperwork, only to get skipped over, and they really
struggled. In the second round, they did a little bit better.
But the data supports the conclusions. Only 12 percent of black
and Latino business owners pulled between April 30 and May 12
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said that they had received the funding they had requested, while
about 1 quarter received some funding. In contrast, half of all small
businesses reportedly receiving Federal reports through the PPP
program.
So we passed PPP. We had additional help that we hoped to offer
through the Heroes Act, but nothing has yet to come. And one of
the biggest themes, or concerns I heard in these conversations, was
the fear that nothing would come and they would be left hanging.
So my first question, and maybe I will start with Ms. Urrutia,
is how successful do you think the second round of PPP funding
was in targeting these underserved communities?
Ms. URRUTIA. [Inaudible] a lot of different places. Minority-
owned businesses and the most vulnerable ones that we are talking
about do not generally have banking relationships. As a result, the
banks were only supporting their customers first. So that is why
your comment that they stood at the back of the line, they stayed
in the back of the line, for the most part.
Also, if you look at the average size of loans that were made, in
the second round, it was $73,000. Our average loan size was
$15,000, and we deployed about 1,000 loans in a 6-week period.
And so we must ensure that PPP funds go to the smallest, most
vulnerable small businesses, because they are the ones that are mi-
nority-owned, and they are the ones that really need it, and that
is why we are supporting that a second PPP loan be authorized.
We are also asking that PPP loans under $150,000, be automati-
cally forgiven. Those businesses are the ones that need the most re-
lief in order to get back on their feet.
And then, the other piece is an administrative fee. As you know,
5 percent was paid by SBA to loans under $350,000. In our case,
we made a $15,000 loan. Five percent is $750. That does not cover
the cost of processing the loans and working with these borrowers
that need so much help to ensure that they can get approved.
Mr. SCHNEIDER. Thank you.
And maybe, because I think my next one is somewhat of an aca-
demic question, I will turn to Professor Levitin. But, you know, as
we are looking forward, we are looking to the next package. In the
minute and a half left, can you touch on, you know, the needs that
businesses might have in the next round, how we could better
structure this program to serve these underserved businesses, and
what we might do also to create a more efficient, effective process
to make sure these businesses have access to the loans?
Mr. LEVITIN. So, there is a bit of a MacGyver problem here
where you have got to work with the tools you have at hand. We
can’t start setting up an entire new financial system from scratch.
Given the tools that are at hand, I think that PPP made the best
of what it could from a bad situation. And while I am not generally
enthusiastic about using—relying on private financial institutions
to carry out Federal aid programs—I think we have seen problems
with that in the past, for example, with mortgage servicers and
Federal foreclosure relief—I think that, you know, the goal for the
next round has to be figuring out a way that the banks that par-
ticipate in PPP or any expansion of that will reach out not just to
their existing clients, but try and serve new clients, and see this
as an opportunity for developing new banking relationships.
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Mr. SCHNEIDER. Great. Thank you.
And my time is expired, so I will yield back. But first, let me
just, again, thank our witnesses today and thank the Chairwoman
and the Ranking Member for this hearing.
Chairwoman VELÁZQUEZ. Time has expired. Now we recognize
the gentleman from Minnesota, Mr. Stauber, for 5 minutes.
Mr. STAUBER. Thank you, Chairwoman Velázquez and Ranking
Member Chabot. I really appreciate your leadership during this
really difficult time for COVID-19, and the small business owners
throughout the Nation, the 30 million of them.
Mr. Levitin, you just talked about the banking industry. You
know, during this COVID-19, we have relied on our small commu-
nity lending banks to, you know, help with these PPP loans with
not a lot of help or guidance from the SBA at times, and I think
they did a really good job under the circumstances. From your com-
ments, I hope you agree with that. I think you stated that. Is that
correct? Did I hear you correctly?
Mr. LEVITIN. [Inaudible] on the implementation of the PPP pro-
gram to take a position there. So I just want to—I am going to say,
my answer would be no comment.
Mr. STAUBER. Okay. And that is fine, because I want to put
forth my congratulations and support for community banks and
lending institutions that helped 51 million people keep their jobs
and helped almost 10 million, 9-plus million businesses to stay
open during this time.
And I would just say this, here is a question. The small business-
men and women across this Nation, they are the engine of our
economy. The members of this committee understand that. I would
ask anybody this question: Do you think, because small business-
men and women are the engine of our economy on Main Street
America, is there anybody on the panel of experts here that feel
there is a need for small businesses to be protected from COVID-
19-related lawsuits? Anybody—this is directed to any one of the
witnesses.
Ms. URRUTIA. Can you say more about—when you say pro-
tected from COVID-19 losses, what do you mean?
Mr. STAUBER. Lawsuits.
Ms. URRUTIA. Lawsuits.
Mr. STAUBER. Lawsuits.
Ms. URRUTIA. Okay.
Mr. STAUBER. Anybody? Any of the three witnesses?
Ms. TSHERING. Are you talking about lawsuits from employees
or from, you know, customers or—yeah.
Mr. STAUBER. From the general public. Somebody comes in,
you own a small business, you are following the CDC recommended
guidelines. You have payments to make to the lending institutions
that helped you get through, and there is a lawsuit—COVID-re-
lated lawsuit stating your business—I went into your business and
got COVID. Tell me about your thoughts on that.
Ms. TSHERING. Yeah. So what we found is when we have asked
our clients, you know, what sort of concerns do you have when you
are operating your business, this is the last thing on their mind,
you know, because they all have reopening plans; they, you know,
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have signs about masks, they have, you know, plastic barriers.
That is the last concern on their mind.
Their concern is the rent they owe. And I think we had the pro-
fessor also mention, we found that rent, you know, rent for the last
few months, the debt that they have is the biggest concern among
our small business owners.
And the other concern we have is, you know, hopefully there will
be more relief for them. But we—you know, I manage a CDFI, and
there are hundreds of CDFIs throughout the U.S.
Mr. STAUBER. So——
Ms. TSHERING. They should—you know, they could be funded—
yeah.
Mr. STAUBER. Ma’am.
Ms. TSHERING. Yeah. Go ahead.
Mr. STAUBER. Let me ask maybe the question more directly. Is
that something as a small business supporter, like you are, is that
something you would support protecting the small businesses from
these types of lawsuits? Because your experience where you are at,
and my experience from talking to our Chamber of Commerces are
much different. And so, I would say that it is a priority that when
they open, when they follow the CDC guidelines that they aren’t
in lawsuits.
So I will be more direct: Do you support the protection, the liabil-
ity for small businesses from lawsuits for COVID-19 only when
they follow CDC guidelines? Anybody?
Yeah. So that is—your—the silence is deafening here, and that
is the concern. That is the real concern we have across America.
We talk about support for small businesses. Well, here is an oppor-
tunity to protect them. We have given our small businesses relief
that they needed, in fact, the three-page PPP for those small mi-
nority-owned businesses that don’t have a human resource depart-
ment to be able to access there.
And so my question was, we are doing all this upfront. Do you
know that of 30 million small businesses across this Nation prob-
ably 25 million, 28 million of the small businesses could not even
handle one lawsuit?
So we know they are the engine of our economy, and it strikes
me that all three of you are silent on my question.
Ms. TSHERING. So can we—yeah. We would like to give this
more thought and get back to you, so we are very clear about what
exactly you mean. And, you know, we appreciate your concern for
small businesses, so we would like to get back to you on this.
Mr. STAUBER. I appreciate that. I am a small business owner
for 31 years. And as Professor Levitin said, it is not easy, but we
need that stability and the certainty to be able to even keep our
doors open. And I think you would all agree with that.
I think that is—the last question I have, and I know I have a
little bit of time here, are there any archaic laws that you see on
the books that we should remove, that you as—from your expertise,
that we should remove to help small businesses not only succeed,
but also access to capital in an easier fashion like the PPP loans,
the three-page loan to get that access to—that capital to the small
businesses that need it? Anybody?
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Mr. HILES. I will take that one very quickly. I think that Con-
gress and the Securities Exchange Commission and, you know, the
dialogue that is happening around equity funding is a positive step
in the right direction with the realignment of what constitutes an
accredited investor. I think that there needs to be more of a
crowdfunding focused approach to some of the smaller businesses
in particular.
That being said, even working with some of the Title 3 JOBS Act
crowdfunding portals represents a pretty significant upfront, front-
loaded expense to mount a marketing campaign and get through
the statutory requirements in order to launch a crowdfunding cam-
paign for even a very small amount of funding. Cost of capital
tends to run fairly high.
Mr. STAUBER. Okay. Does anybody else want to tackle that
one? Okay. I just——
Chairwoman VELÁZQUEZ. Time has expired.
Mr. STAUBER. Thank you, Madam Chair.
Chairwoman VELÁZQUEZ. Thank you.
Now we recognize the gentleman from Tennessee, Mr. Burchett,
for 5 minutes. You need to unmute yourself, sir.
Mr. BURCHETT. I think we skipped the order there. I think a
Democrat should be next. I hate to cut in front of one of my col-
leagues across the aisle.
Chairwoman VELÁZQUEZ. No. I have recognized everyone.
Mr. BURCHETT. Oh, okay. So I am last. Oh, well, I should be
more offended then. I apologize. I will remember that offensiveness
to the next meeting. No, you are wonderful, Chairlady. I always
enjoy being on with you, ma’am. I am sorry we are not in person.
I guess I am wondering about how do we increase our access—
I am just going to ask all of the panelists there, if we can just start
at one end and go to the other. How do we increase access to cap-
ital for business and limit our risk for lenders?
And I guess I would be interested really in our minority commu-
nity. It seems like the percentage and the volume of loans go—it
seems they are at a disproportionate amount, some of those folks,
and I would be—I anxiously await your answers.
Ms. URRUTIA. I can start. I think a number of ways. First of
all, make sure that CDFIs have the proper funding that they need.
CDFIs are ensuring access to credit for impacted businesses in
rural communities, underserved small businesses. We are offering
affordable loans, technical assistance, and a lot of other services
that are needed, and we need to be properly funded and have lever-
age and balance sheet capacity to support the lending.
So in support of CDFIs, a supplemental appropriation of $1 bil-
lion to the CDFI Fund will allow CDFIs across the country to lever-
age $12 billion in capital that will be deployed to communities in
need. That is the first thing.
The second thing is make sure that section 1071 of Dodd-Frank
is passed so that lenders report on the amount of lending that they
are doing to minority and women-owned businesses. We need to
have visibility so that we can understand what the problems are
and correct them.
We also should be looking at reauthorizing the State Small Busi-
ness Credit Initiative, SSBCI. After the Great Recession, this was
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a great program. It provided over $1.5 billion to State-led small
business financing programs, and it gave a lot of flexibility to lend-
ers to leverage that capital as loan loss reserves to support over $8
billion in small business loans.
So, I think that this is a great opportunity for public and private
sector partnerships to come together through access to funding for
CDFIs and loan loss reserves so that we can feel comfortable and
continue to increase lending in these communities.
Mr. BURCHETT. Okay. Thank you. Anyone else?
Ms. TSHERING. So, you know, as a CDFI that works with mi-
nority and women-owned businesses, I would like to second what
Luz just recommended about supporting CDFIs. And they are all,
several hundred of them, or maybe even more than several hun-
dred, spread all over the United States, rural, urban, you know,
and they really understand the clients they work with, the busi-
nesses that need some hand-holding. And eventually, many of them
are bankable and able to get larger loans from banks, so I really
support that suggestion.
Mr. LEVITIN. I would also like to echo the point about section
1071 of Dodd-Frank. It is way past time for the Consumer Finan-
cial Protection Bureau to have implemented the data collection on
small business lending, which is just the—it is the necessary pre-
condition for trying to police the small business lending market for
discriminatory lending. And without that data, it is just not easy
to do any kind of meaningful fair lending enforcement.
Mr. BURCHETT. All right. I guess, Mr. Hiles, I will ask you the
last question. I don’t think I have got 30 seconds. But have the on-
line lenders in the FinTech industry experienced a higher demand
for capital from new businesses, and how is the industry managing
the existing investments in companies that have made significant
operational changes?
Mr. HILES. There has, indeed, been a significant growth. Thank
you for the question, Representative, Madam Chair. There has
been a significant growth in usability, and as I indicated in my ini-
tial testimony, we expect those numbers to continue to climb as the
younger generation, who is far more transactional, less relation-
ship-focused, wish to leverage the technology that has been in their
hands since they were literally born as children to access all man-
ner of capital.
And so, from that standpoint, we see there being nothing but a
growth path forward for everything from online alternative lending
to fully automated, full digital banking, and even non-lending
banking as seen with some of the recent legislation in the State of
Wyoming with special purpose depository institutions, you know,
really remix the notion of what banking is from a services versus
a lending-risk standpoint. Thank you for the question.
Mr. HERN. I yield back my time, Chairlady. Thank you, ma’am.
Chairwoman VELÁZQUEZ. The gentleman’s time has expired.
Now we are going to go to a second round of questioning, and I
welcome the members to stay on. I will recognize myself for 5 min-
utes.
Professor Levitin, last Congress, you testified before us on the Fi-
nancial Services Committee on the use of the rent-a-bank scheme
that allows FinTech lenders to get around state usury law. Can you
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explain the mechanics of those transactions to us, and how this
scheme enables predatory lenders to continue operating unchecked?
Mr. LEVITIN. Absolutely, Madam Chairwoman. So every State
in the country has some sort of usury law. They vary substan-
tially—but here is the basic thing you need to understand about
them: Banks are not subject to State usury laws. I put in a little
asterisk. It is a little more technically complicated, but that is the
basic takeaway. Banks are not subject to State usury laws.
Nonbanks are subject to State usury laws.
In a rent-a-bank arrangement, a nonbank will partner with a
bank, and here is the terms of the partnership: The bank will make
loans according to the specifications of the nonbank. It may even
use an underwriting platform that is licensed to it by the nonbank,
where basically the nonbank has done all the programming and
has set all the terms of the underwriting.
The nonbank will do the marketing, it will service the loans, and
it will also purchase the loans or purchase an economic interest,
such as a participation interest, in the loans from the bank, so that
all the bank is really doing is being an origination agent. Its name
is on the loan documents originally. And maybe it provides very—
you know, the original funding for a very short period of time.
Maybe it holds a 10 percent or 5 percent economic interest in the
loans going forward.
But for all real purposes, the nonbank is the lender, and it is
using the bank as a front to make the loans. And the reason it does
that is because then that gives it a legal argument, which is a con-
tested one, but it gives it a legal—it gives the nonbank a legal ar-
gument that the bank is the true lender, and that, therefore, the
loan is not subject to State usury laws, and that the nonbank is
not subject to State licensure requirements, and that the loan is
not subject to other State consumer protections, such as limitations
on rollovers, in the case of payday loans.
Chairwoman VELÁZQUEZ. How does the lack of federal regula-
tion allow this practice to continue unchecked?
Mr. LEVITIN. Well, historically, if you went back about 17 years,
in 2003, the Office of Comptroller of the Currency cracked down on
these kind of arrangements, which were being used by online pay-
day lenders. And the Office of Comptroller of the Currency stopped
every national bank that was involved in doing this kind of rent-
a-bank from doing this.
A few years later, the FDIC stopped all the State-chartered in-
sured banks from doing this. I was actually an expert witness for
the FDIC in some litigation about this.
We have since had a change in management at the OCC and
FDIC, and the change in view about the dangers of predatory lend-
ing. And the OCC and FDIC have intervened in usury litigation to
try and protect rent-a-bank schemes.
And this last summer, they both finalized regulations that—and
I emphasize these regulations have already been challenged by the
Coalition of State Attorneys General, but these regulations, if
upheld, will basically bless this kind of rent-a-bank arrangement.
And they say if the bank’s name is on the loan, it doesn’t matter
what the real facts are, it doesn’t matter that the bank did abso-
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lutely nothing with the loan, we are going to treat it as a bank
loan.
Chairwoman VELÁZQUEZ. Thank you.
Mr. LEVITIN. And that just allows the banks to rent out their
Federal regulatory privileges, which isn’t how the system should
work.
Chairwoman VELÁZQUEZ. Thank you. Thank you very much.
Ms. Tshering, as someone who played a key role in the push for
New York’s TILA for Small Business that awaits Governor Cuomo’s
signature, I just want to ask you, what are some of the hallmarks
of the New York legislation that you think must remain in any fed-
eral legislation?
Ms. TSHERING. Well, one thing for sure, something we have
been—you know, each witness has said over and over again, you
know, very important that we are able—you know, a borrower is
able to compare apples to apples. So key is the APR, so they are
able to see what the loan is going to cost. The second is, you know,
no prepayment penalties.
What we are asking for asking for is transparency. And as you,
and earlier, Ranking Member Chabot referred to, you know, we are
talking about business owners. This is an opportunity for them to
build assets and wealth. But what happens is when they take on
these loans, which are, you know, not very clear about what the
costs are involved, then they are really stripped of their assets.
Chairwoman VELÁZQUEZ. Thank you.
Ms. TSHERING. So what we are asking for is very simple: We
are asking for transparency and clarity.
Chairwoman VELÁZQUEZ. Thank you. Thank you. My time has
expired. Now I recognize the Ranking Member, Mr. Chabot, for 5
minutes.
Mr. CHABOT. Thank you, Madam Chairman. Thank you.
And I will go to Mr. Hiles. Mr. Hiles, as you know, a number of
FinTech companies did participate in the PPP program, the Pay-
check Protection Program. Moving forward with respect to the SBA
and their other existing programs, like the 7A loans program, the
504 loan program, the microloan program, those types of things,
how do you see FinTech now fitting into those programs in the fu-
ture? And how would you like to see, you know, that relationship
progress, FinTech and the SBA?
Mr. HILES. Chairwoman, Ranking Member Chabot, thank you
for the question, and that is a good question. A couple of things.
One is that, as I stated in my initial testimony, that SBA is going
to continue to be subjected to the—call it idiosyncrasies and the
disruption that is taking place in the financial institution, and the
financial services market right now for those myriads of market
forces and technology reasons.
The opportunity to define standards first as opposed to being
necessarily highly prescriptive about the technology but then work-
ing with the—not only the financial institutions, but the technology
providers and the folks that build technology, to innovate and come
up with new solutions that would optimize the management of the
documents and the data and all of the loan applications, the bor-
rowing applications, you know, all of the TRID compliance, every-
thing that goes along with these loans from a documentation stand-
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point, but then optimize and bring a high degree of efficiency and
optimization as an administration, and then be a leader that sets
the standard forth about those programs beneath which the
FinTech industry, and then ultimately, the traditional financial
services industry, can follow suit and operate.
If you are looking for the private sector to establish these kinds
of standards and then adopt them, I think that we have leaked
pretty far in terms of technology innovation and where we are at,
and we are scrambling to figure out how to incorporate that into
traditional organizations.
And now is a time for leadership. And much like the Federal
Government established the standards that ultimately became the
internet and the world wide web, we are in the throes of potentially
doing the same with finance and financial records. And so, I would
highly admonish the stakeholders across the board to consider this
type of opportunity right now with the industry.
Mr. CHABOT. Thank you.
And then, finally, as Congress continues to examine the role of
your industry, FinTech companies, do you have any recommenda-
tions for us? And, you know, especially relative to regulations, you
know, more regulations versus the trend that we have tried to es-
tablish in government in recent years is to reduce unnecessary reg-
ulations or duplicative things, you know, so we don’t kill the goose
that laid the golden egg here for the economy and otherwise. So do
you want to weigh into that with the additional time I have avail-
able to you here?
Mr. HILES. Certainly. Thank you. There would be a couple of
key areas. One of the things that we like to do is we like to start
with the regulation first, and then work our way backwards into
the technology itself. And I think that there is this resistance to
technology in general. It is frightening. It is hard to understand.
And the idea that people are using technology to necessarily skirt
the regulations isn’t necessarily true. Once again, it goes back to
those standards.
I have seen some interesting things coming out of OCC and in-
terim Director Brooks talking about how payment providers would
ultimately end up with some form of de facto charter. I know that
that has raised a lot of red flags with banking—you know, division
of bankings with the States already.
So it is going to be an interesting dynamic to see how we get
there in terms of getting past the logjam that exists with banking
and tech now. Do we leapfrog it forward with technology companies
that become financial institutions? Not real sure at this point.
But Congress does absolutely have an opportunity to lead the
discussion as opposed to being responsive and waiting for the—
hopefully, you know, at some point, there would be a solution, but
historically, that has tended to be not necessarily the case when it
comes to standard setting, and that is where I believe the Small
Business Administration has the opportunity to really drive this
conversation forward.
Mr. CHABOT. Thank you very much.
And, Madam Chair, I think my time is expired, and I do have
a 3:00 commitment, so I will be dropping off shortly.
Chairwoman VELÁZQUEZ. Yes.
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Mr. CHABOT. But I thought this was an excellent hearing. I
want to thank all the witnesses for their fine testimony. I yield
back.
Chairwoman VELÁZQUEZ. Thank you. The gentleman yields
back.
Now we recognize the gentleman from Pennsylvania, Mr. Evans,
for 5 minutes. You need to unmute.
Mr. EVANS. Okay. Can you hear me now?
Chairwoman VELÁZQUEZ. Yes, we can hear you.
Mr. EVANS. Yes. I just want to follow up to something that the
Chairwoman was talking to the professor regarding what you de-
scribed about State policy and Federal policy. How do financial
technology leaders ensure compliance with equal credit opportuni-
ties and unfair banking rules? Is what I heard in the discussion
you were having with the Chairwoman, is that the same situation?
Mr. LEVITIN. No, that is not. So there is no—the rent-a-bank
situation does not enable nonbanks to evade fair lending laws.
They are still subject to—whether it is the bank or the nonbank
partner, someone there is subject to fair lending laws. The problem
on the fair lending side is that the—that if you want to do fair
lending enforcement or looking for disparate impact, you need to
have data.
And section 1071 of the Dodd-Frank Act enacted a decade ago
calls for the collection by the Consumer Financial Protection Bu-
reau of data on small business lending. Unfortunately, the Con-
sumer Financial Protection Bureau has not yet implemented the
regulations necessary to effectuate that, so we don’t have any data
being collected.
I would suggest that, you know, at least a temporary stopgap
measure would be for any further Federal assistance that is given
out under, sort of, additional—I am not sure what we are going to
call it—CARES Act round 2 or what have you, HEROES Act, any
additional—that there be requirements that lenders start collecting
and submitting data on the race, the ethnicity, and the gender at
least of the parties that are assisted, so we have a better under-
standing of where money is flowing and making sure that it is
being made available equitably to everyone in society.
Mr. EVANS. Thank you.
And I yield back the balance of my time. Thank you, Madam
Chairperson. Thank you for your leadership.
Chairwoman VELÁZQUEZ. Thank you. The gentleman yields
back.
Let me thank all of our witnesses today for their testimony. We
have explored some of the risks FinTech lending presents for small
businesses, and also some of the benefits. It has become clear to
me that there is a way to leverage those benefits, greater speed,
affordability, and accessibility, and translate them into gains for
small business owners.
Also, we have heard from lenders who can sustainably make
these loans, create the partnerships necessary to bring the mission-
based lending model online, and help the small businesses grow
and create jobs without resorting to deceptive or abusive practices.
However, it also remains clear to me that much more needs to
be done in this space to eliminate unfair and abusive practices by
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predatory lenders who have no interest in helping small businesses
grow or helping a community flourish, only to enrich themselves at
the cost of the small businesses.
Congress must follow the lead of New York and California who
are actively working to ensure a safe, fair, and affordable small
business lending market.
I ask unanimous consent that members have 5 legislative days
to submit statements and supporting materials for the record.
Without objection, so ordered.
If there is no further business before the Committee, we are ad-
journed.
[Whereupon, at 2:55 p.m., the Committee was adjourned.]
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APPENDIX
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Æ
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