Fintech and Transparency in Small Business Lending (U.S. House Committee on Small Business, Subcommittee on Oversight, Investigations, and Regulations)

Hearing	Fintech and Transparency in Small Business Lending
Committee	U.S. House Committee on Small Business, Subcommittee on Oversight, Investigations, and Regulations
Date	July 13, 2022

 

Hearing Takeaways:

• Small Business Lending by Financial Technology (FinTech) Companies: The hearing mainly focused on how small businesses were turning to FinTech companies to access capital. Subcommittee Members and the hearing’s witnesses noted how small businesses often chose to use FinTech lenders because these lenders had fast approval processes, provided more diverse financing options, and employed alternative metrics for credit worthiness. However, Subcommittee Democrats, Mr. Salas, Ms. Klein, and Ms. Paterson expressed concerns that FinTech lender industry practices might act in a predatory fashion toward small businesses. They highlighted how many small businesses were sole proprietor businesses, which meant that the borrowers tended to not be very financially sophisticated. They called for increased disclosure requirements and regulations for FinTech lenders to address these practices and to empower borrowers to make better financing decisions.
  • FinTech Lending Disclosures to Borrowers: Subcommittee Democrats and the hearing’s witnesses expressed particular interest in reforming the disclosures made to borrowers of loans made by FinTech companies. They noted how FinTech lending products were not advertised using standard metrics, which made it difficult for prospective borrowers to comparison shop the products. They contended that this inability to comparison shop undermined competition within the lending market. They specifically recommended that FinTech lenders be required to disclose the annual percentage rate (APR) of their loans as this metric would enable direct comparison shopping. Rep. Byron Donalds (R-FL) argued however that the APR metric was often inappropriate for short-duration lending products. He elaborated that applying an annual metric to a short-duration lending product could leave prospective borrowers with a false impression regarding the cost of the product. Dr. Griffin argued however that APR disclosures would be appropriate for short-duration lending products given the frequency in which these products are extended beyond their original terms.
  • U.S. Consumer Financial Protection Bureau (CFPB) Oversight of FinTech Lenders: Subcommittee Democrats, Ms. Klein, and Dr. Griffin also expressed interest in providing the CFPB with the regulatory authority over small business loans and financing products. Dr. Griffin commented that the CFPB could provide an additional layer of oversight regarding the FinTech lending market, which could reduce the potential for bad actors to go undetected.
  • Minimum Federal Standards for FinTech Lending: Full Committee Chairman Nydia Velázquez (D-NY) noted how she had proposed legislation that would establish federal minimum regulatory standards for FinTech small business lending. She commented that this approach would still allow for states to enact stricter regulatory standards for FinTech small business lending. Ms. Klein stated that a federal standard for small business lending regulations would be helpful. She noted how many lenders worked in multiple states and stated that having a single set of disclosure requirements would be more efficient. She also commented that having a single set of disclosure requirements would help to bring down financing costs over time.
  • Use of Merchant Cash Advances (MCAs): Subcommittee Chairman Dean Phillips (D-MN) expressed interest in how many FinTech lenders used MCAs, which enabled lenders to receive a fixed percentage of a borrower’s future sales until the financing is repaid. He commented that MCAs often entailed high interest rates and daily repayments, which could thus drive small businesses into massive debt. He also noted how many MCA lenders required that borrowers sign a confession of judgment to obtain the money, which would waive the legal rights of the borrower in the event of a legal dispute.
  • Use of Algorithms for Underwriting Decisions: Subcommittee Chairman Phillips also raised concerns regarding the lack of transparency in FinTech underwriting practices and noted how algorithms that control automatic underwriting could make use of unrelated information. He commented that these underwriting practices had the potential to unfairly deny credit to protected groups or make lending products more expensive.
  • Use of Short-Term Repayment Periods: Ms. Paterson further noted that the repayment terms for FinTech loans tended to be between 6 and 12 months (which she described as very short). She commented that these short repayment terms greatly impacted a consumer’s monthly debt service.
• Role of FinTech Lenders in Administering the Paycheck Protection Program (PPP): One particular area of interest during the hearing involved the role that FinTech lenders played in disturbing PPP funds during the COVID-19 Pandemic. The PPP was a U.S. Small Business Administration (SBA) program that provided short-term cash assistance to small businesses for weathering the pandemic. Dr. Griffin testified that his analysis had found that FinTech lenders were 6.5 times more likely to process misreported PPP loans. He highlighted how his analysis had found that the top 12 PPP lenders with the most misreporting were all FinTech firms. He further expressed concerns over how PPP misreporting had increased during the program’s final month when there was less of a need to quickly distribute funds.
  • Lessons from the PPP for Future SBA Lending Programs: Dr. Griffin remarked that his research had demonstrated the problems associated with prioritizing the quick disbursement of funds in government lending programs. He noted how the U.S. had maintained traditional lending guidelines during the early days of the pandemic and asserted that these lending guidelines could have been followed. He stated that traditional banks had outperformed FinTech lenders in making PPP loans. He suggested that the processes and procedures of traditional banks had helped these banks to make more responsible lending decisions. He concluded that the U.S. government should not develop lending programs in which lenders could distribute funds without repercussions in the event of loan defaults.
  • Fraud in the Economic Injury Disaster Loan (EIDL) Program: Dr. Griffin also indicated that he had looked into the EIDL program and that he had not published his findings on this Program. He stated however that there was fraudulent activity occurring within the EIDL program. He noted that while he did not have the estimated dollar value of this fraud on hand, he commented that this fraud was “quite large” as a fraction of the program. He highlighted how many business borrowers had discrepancies between their PPP loan applications and EIDL applications in terms of their reported number of employees. He indicated that these applications were made at almost the same time, which suggested suspicious activity. 
• Other Policy Issues: Subcommittee Members and the hearing’s witnesses expressed additional interest in addressing broader issues related to FinTech small business lending beyond the lending activity itself and the PPP.
  • Proposals to Require the Collection of Small Business Lending Data: One notable area of interest during the hearing was Sec. 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which directs the CFPB to collect small business lending data from financial institutions. Dr. Griffin and Ms. Paterson expressed support for this data collection and commented that this data could support the development of better policies. Dr. Griffin stated that this information sharing requirement would not impose additional burdens on FinTech lenders and traditional banks because the information was already being collected. Rep. Scott Fitzgerald (R-WI) contended however that this policy would be impractical within the FinTech context given the large number of transactions that FinTech lenders engaged in on a daily basis. He stated that this policy would result in fewer loans and decreased access to credit for small businesses.
  • The Community Advantage (CA) Loan Program: Rep. Judy Chu (D-CA) and Mr. Salas expressed support for the SBA’s CA Loan Program, which seeks to support qualified lenders in making loans to underserved markets. These CA loans have a maximum interest rate of prime plus 6.5 percent. Rep. Chu and Mr. Salas also expressed interest in making the CA loan program permanent in order to provide the necessary certainty for lenders to participate in the program.

Hearing Witnesses:

1. Mr. Sean Salas, Chief Executive Officer and Co-Founder, Camino Financial
2. Ms. Joyce Klein, Senior Director, Business Ownership Initiative, Aspen Institute
3. Ms. Diane Paterson, Regional Director, Twin Cities Small Business Development Center
4. Dr. John Griffin, James A. Elkins Centennial Chair in Finance, McCombs School of Business, The University of Texas

Member Opening Statements:

Subcommittee Chairman Dean Phillips (D-MN):

• He referenced a 2022 U.S. Federal Reserve survey that found that 59 percent of small employer firms had indicated that they had unmet financing needs.
• He remarked that the Subcommittee must work to address these small business access to capital issues and to ensure that this capital would have safe and responsible terms.
• He stated that significant developments in FinTech have shown “real promise” in terms of expanding access to credit for small firms.
  • He referenced a study that found that nonbank lenders had a market share of close to 60 percent in the small business lending sector in 2016.
• He discussed how FinTech lenders had played a key role in making small dollar PPP loans to small businesses during the COVID-19 pandemic.
  • He stated that these FinTech lenders had proven more effective at making PPP loans to underserved communities than traditional banks.
• He stated that small businesses often chose to use FinTech lenders because these lenders had fast approval processes, provided more diverse financing options, and employed alternative metrics for creditworthiness.
• He remarked however that there were growing concerns that FinTech lender industry practices might harm and target small businesses.
• He stated that the speed at which FinTech lenders deployed capital could impose substantial costs on borrowers.
  • He noted how conventional bank loans tended to carry APRs between 4 and 13 percent while FinTech loan APRs could start at 7 percent and could climb to higher than 100 percent.
• He also discussed how the terms of FinTech loans were not always clear to small businesses and stated that many online lenders provided little or no upfront information to prospective borrowers about their loans and products.
  • He added that these online lenders often used metrics other than APR to disclose their costs of capital.
• He further mentioned how some online lenders engaged in predatory practices that put small businesses at risk.
• He highlighted the use of MCAs, which enabled lenders to receive a fixed percentage of a borrower’s future sales until the financing is repaid.
  • He commented that the “extremely” high interest rates and daily repayments associated with MCAs could cause small businesses to enter into an “out of control debt spiral.”
• He noted how many MCA lenders required that borrowers sign a confession of judgment to obtain the money.
  • He explained that borrowers waived their legal rights regarding any legal dispute that might arise through signing the confession of judgment.
• He stated that a court’s enforcement of a confession of judgment could lock a small business into an unsustainable debt cycle, which could ultimately force the small business to close.
• He also raised concerns regarding the lack of transparency surrounding FinTech underwriting and noted how algorithms that control automatic underwriting could make use of unrelated information.
  • He commented that these underwriting practices had the potential to unfairly deny credit to protected groups or make lending products more expensive.
• He contended that Congress must keep pace with FinTech lending developments and ensure that the FinTech industry was not unfairly taking advantage of entrepreneurs.

Subcommittee Ranking Member Beth Van Duyne (R-TX):

• She discussed how the U.S. was currently experiencing very high inflation and asserted that the Biden administration’s economic policies were harming U.S. small businesses.
  • She largely attributed this high inflation to the American Rescue Plan Act of 2021’s significant amount of spending
  • She further highlighted how the U.S. was experiencing significant gas and house price increases.
• She expressed concerns that the U.S.’s current labor shortages and supply chain challenges would be exacerbated if the U.S. were to pass additional legislation through the budget reconciliation process.
• She further raised concerns that this budget reconciliation bill would include tax increases on small businesses.
  • She asserted that any changes or expansions of the Net Investment Income Tax (NIIT) would constitute a tax on small businesses and pass-through entities.
• She referenced a recent National Federation of Independent Business (NFIB) survey that had found a decline in the number of small business owners expecting business conditions to improve.
  • She contended that the U.S. could improve the conditions for small businesses through reducing government spending and reforming regulations.
• She then discussed how access to capital remained an important issue for U.S. small businesses.
• She also expressed frustration with U.S. Secretary of the Treasury Janet Yellen’s failure to testify before the Committee and stated that Secretary Yellen was legally and statutorily required to testify before Congress.

Witness Opening Statements:

Mr. Sean Salas (Camino Financial):

• He discussed how his financial institution, Camino Financial, provided a FinTech lending platform that boosted access to capital for underserved communities.
  • He stated that Camino Financial’s microloans provided small business owners with flexible financing.
• He indicated that Camino Financial was a community development financial institution (CDFI) that sought to leveraged technology and artificial intelligence to provide affordable credit and stated that Camino Financial’s mission was to build generational wealth in underserved communities.
• He remarked that Camino Financial took a “digital first” approach and noted how their financing applications were completely online.
  • He indicated that while Camino Financial primarily served businesses in California, he commented that the CDFI’s “digital first” approach enabled it to serve businesses in other states.
• He testified that Camino Financial had helped over 9,500 small businesses and had deployed almost $200 million in capital.
  • He also mentioned how Camino Financial had created one of the largest bilingual content hubs that provided access to over 1,200 business and entrepreneurship articles.
• He stated that Camino Financial worked to educate its borrowers on how to formalize their businesses and work to qualify for larger and lower interest rate loans.
• He discussed how the average Latino business earns around $250,000 in revenue every year (which was about half of the national average).
  • He noted how most Latino businesses were considered microbusinesses (which meant that they had four or less employees)
• He stated that banks and larger institutional investors did not actively service this market and commented that this lack of servicing resulted in an unmet credit demand from Latino businesses that exceeded $20 billion.
• He then remarked that transparency was “critical” to Camino Financial’s success and commented that this commitment to transparency had led his CDFI to join the Responsible Business Lending Coalition (RBLC).
• He also expressed support for Full Committee Chairman Nydia Velázquez’s (D-NY) efforts to create lending protections for small business owners.
  • He asserted that borrowers should have access to responsible loans and information that would allow them to uniformly compare and select the financing that makes sense for them.
• He mentioned how California already required Camino Financial to make interest and fee disclosures to borrowers and stated that these disclosure requirements were not hindering Camino Financial’s business.

Ms. Joyce Klein (Aspen Institute):

• She discussed how entrepreneurs had long faced challenges in terms of accessing capital and stated that these access to capital challenges were particularly pronounced among women, people of color, immigrants, and rural Americans.
• She also mentioned how she served as the Chair of the RBLC, which she explained was a network of nonprofit lenders, for-profit lenders, investors, and small business advocates that was concerned about the rise of irresponsible small business lending practices.
  • She indicated that Camino Financial was a member of the RBLC.
• She remarked that all small business lenders (including banks, credit unions, CDFIs, and FinTech firms) were currently making use of FinTech and asserted that FinTech could help traditionally marginalized communities to access capital.
• She contended that the most important way to expand access to responsible capital was to focus on financial products and financing practices.
  • She commented that financial institution type and the use of technology applications were less important in efforts to expand access to responsible capital.
• She stated that lenders had been most successful in increasing lending to underserved businesses when they offered smaller loans and underwrote the loans with a focus on cash flow and a flexible approach for considering credit histories (rather than focusing on collateral, equity, and credit scores).
  • She also highlighted how CDFIs and FinTech companies had proven particularly adept at reaching underserved segments of the small business market.
• She asserted however that the U.S. must balance the promotion of greater access to financial services with the need for borrower protection.
• She remarked that the economics associated with smaller dollar small business lending were challenging and commented that this dynamic created pressure for lenders to engage in extractive and predatory practices.
• She mentioned how the RBLC had proposed the Small Business Borrowers’ Bill of Rights to protect small businesses from predatory lending practices.
  • She indicated that one of RBLC’s proposed rights was a right to transparent pricing and terms for financing.
• She discussed how the RBLC had successfully advocated for truth in lending legislation in California and New York and expressed the RBLC’s appreciation for Full Committee Chairman Nydia Velázquez’s (D-NY) efforts to promote transparency and responsible practices in small business financing.
  • She specifically thanked Full Committee Chairman Velázquez for introducing the Small Business Lending Disclosure Act of 2021.
• She noted how the federal Truth in Lending Act of 1968 (TILA) did not originally apply to commercial financing because there had been an assumption that businesses had a greater level of financial expertise.
  • She asserted that this assumption did not hold true for most U.S. small businesses and highlighted how most U.S. small businesses were sole proprietors.
• She stated that the emergence of new small business lending products had led to greater variation in terms of financial product structures and prices.
• She called it vital for small business owners to be provided with information so that they could fully understand the costs and the terms of loan offers.
  • She stated that APR disclosures would be key and commented that APR constituted the only metric that enabled borrowers to directly compare across different financial products.
• She remarked that the lack of transparency within the small business lending space was inhibiting competition because it reduced incentives for lenders to compete on price.

Ms. Diane Paterson (Twin Cities Small Business Development Center):

• She discussed how the Small Business Development Center (SBDC) program was a matching partnership program with the SBA and organizations of higher education.
  • She explained how SBDCs advised all types of businesses through all stages (ranging from the startup stage to the exit planning stage).
• She noted how many FinTech companies currently offered four-minute loan applications and provided a 24-hour turnaround period to access funds.
• She stated that this situation was leading many small business owners to navigate confusing loan terms, adverse interest rates, short loan terms, and prepayment penalties.
  • She commented that these lending practices were especially harmful to small, young, less profitable, and minority-owned businesses.
• She acknowledged that while the ease and speed that small business borrowers could access FinTech credit was appealing, she noted that small businesses tended to use FinTech lending options in conjunction with other forms of credit.
  • She commented that this dynamic made these businesses financially vulnerable.
• She mentioned how the loan application process for traditional lenders generally took days to complete and how the approval process could take weeks or longer (depending on the meeting schedule of the financial institution’s loan committee).
  • She commented that while FinTech loans addressed “pain points” in the loan application process, she stated that FinTech loans subjected borrowers to higher interest rates and other terms that could lead to defaults.
• She asserted that the biggest issue in FinTech lending practices was the lack of transparency in the price of FinTech products.
• She noted how consumers were accustomed to seeing loan rates in an APR format and highlighted how many FinTech lenders calculated their rates on a daily basis, which led consumers to misread the rates.
  • She commented that this dynamic often resulted in FinTech borrowers being subjected to very high interest rates.
• She remarked that many prominent FinTech lenders, including OnDeck, Kabbage, and Lending Club, engaged in deceptive advertising practices to conceal their true rates.
  • She mentioned how some FinTech lenders attached fees to their loans in order to advertise lower interest rates.
• She further noted that the repayment terms for FinTech loans tended to be between 6 and 12 months (which she described as very short).
  • She commented that these short repayment terms greatly impacted a consumer’s monthly debt service.
  • She noted that while many FinTech lenders allowed for borrowers to pay off their debt in weekly installments, she asserted that these debt payments were often too large for a small business’s cash flow to cover.

Dr. John Griffin (McCombs School of Business, The University of Texas):

• He discussed his analysis of the PPP based on four main metrics of potential misreporting and noted how these metrics were cross verified against each other and with seven additional indicators.
• He testified that the PPP misreporting indicators in his analysis were consistently concentrated among FinTech lenders.
  • He noted how FinTech lenders were 6.5 times more likely to process misreported loans.
• He stated that PPP misreporting was not a simple function of quickly disbursing PPP funds in early 2020 and noted how PPP misreporting had steadily increased throughout the Program’s existence.
  • He highlighted how the level of suspicious PPP lending through FinTech lenders was four times greater in May 2021 as compared to at the start of the Program.
• He mentioned that his analysis’s four main measures had projected the magnitude of likely PPP fraud at $64 billion and that his analysis’s additional indicators suggested that this fraud could be as high as $117 billion.
  • He noted that his analysis had only used public data and had taken a conservative approach, which meant that the total amount of PPP fraud could therefore be even larger.
• He stated that the SBA was overwhelmingly forgiving suspicious PPP loans at similar rates to other loans and indicated that “extremely few” of these suspicious loans were being prosecuted.
• He highlighted how his analysis had found that the top 12 PPP lenders with the most misreporting were all FinTech firms.
  • He commented that traditional banks that had engaged in PPP lending had exhibited lower levels of loan misreporting.
• He noted however that not all FinTech lenders had high rates of PPP loan misreporting.
• He remarked that his analysis’s findings had demonstrated that the PPP did not include robust verification requirements, which had led to substantial costs for taxpayers.
  • He commented that these costs were particularly concerning in 2021 when there was less of a need to distribute PPP funds out quickly.
• He also contended that FinTech lenders needed to make “substantial” improvements to their due diligence practices.
  • He mentioned how there existed FinTech lenders with low misreporting rates, which suggested that the practice of online lending could be done responsibly.
• He noted how studies of the PPP had found that the Program had saved relatively few jobs at an “exceedingly” high cost per job.
  • He contended that the PPP was an ineffective use of federal taxpayer dollars and that policymakers ought to reconsider the efficacy of future SBA lending programs.
• He stated that the PPP’s incentives were misaligned and had enabled FinTech lenders with few employees, limited histories, and lax due diligence procedures to make billions of dollars through disbursing fraudulent loans.
  • He asserted that the organizations and individuals that facilitated such lending activities should be barred from engaging in future government programs.
• He remarked that the increasing scale of PPP fraud over time indicated that bad actors targeted the PPP and that current penalty and enforcement systems were not effective.
• He also stated that government agencies could assist in promoting transparency among FinTech firms through making more detailed data widely available.
• He lastly discussed how less than one out of every 10,000 loans with a misreporting indicator had been prosecuted and contended that this failure to prosecute these lenders would lead the lenders to impose additional costs on society moving forward.
  • He commented that such prosecution would also serve as a deterrent to other parties that might be tempted to pursue fraudulent or substandard lending activities.

Congressional Question Period:

Subcommittee Chairman Dean Phillips (D-MN):

• Chairman Phillips noted how the SBA has not permitted FinTech lenders to participate in SBA programs beyond the PPP thus far. He remarked that FinTech lenders had shown the potential to expand access to capital for small businesses. He stated however that the involvement of FinTech lenders in the wider small business lending sector and PPP had raised “serious” fraud and transparency-related concerns. He mentioned how Ms. Paterson had suggested that the U.S. could set uniformity guidelines for FinTech lending practices related to the cost of capital to address the aforementioned concerns. He asked Ms. Paterson to identify policy areas that both the SBA and the Subcommittee ought to focus on regarding the participation of FinTech firms in SBA lending programs.
  • Ms. Paterson remarked that there currently did not exist good data regarding FinTech loan default rates. She also stated that providing transparency for FinTech loans would be key for borrowers. She noted how many borrowers were being subjected to much higher interest rates than they believed. She also mentioned how many FinTech loans included prepayment penalties for borrowers, which discouraged borrowers from refinancing their loans.
• Chairman Phillips then asked Mr. Salas to detail Camino Financial’s disclosure and transparency policies and to discuss the importance of these policies.
  • Mr. Salas noted how Camino Financial was subject to California’s truth in lending law, which required the CDFI to disclose the terms of their loans in a “clear and simple” manner. He remarked that APR was a metric that could support loan transparency and be used to foster a competitive lending landscape. He elaborated that APR disclosures would enable comparisons across different types of credit products. He remarked that every lender ought to use their best commercial efforts to disclose the APR of their products at their earliest convenience. He stated that California’s disclosure requirements had not hindered Camino Financial from a business perspective. He asserted that California’s disclosure requirements created a fairer and more competitive lending marketplace, which ultimately benefited borrowers.
• Chairman Phillips then asked Dr. Griffin to identify the features that distinguished the FinTech lenders with low PPP loan misreporting rates from the FinTech lenders with high PPP loan misreporting rates.
  • Dr. Griffin noted how the two FnTech lenders with low PPP loan misreporting rates in his analysis had been operating in the FinTech space for a while prior to the offset of the COVID-19 pandemic. He stated that most of the FinTech lenders with high PPP loan misreporting rates were relatively young. He commented that these FinTech lenders did not have reputations to protect and likely lacked sufficient lending procedures.

Subcommittee Ranking Member Beth Van Duyne (R-TX):

• Ranking Member Van Duyne noted how Dr. Griffin had asserted that the misreporting problems associated with the PPP were not fully attributable to the quick disbursement of PPP funds during the COVID-19 pandemic. She highlighted how Dr. Griffin’s analysis had found that the fraud during the end of the PPP was four times greater than the fraud during the early months of the PPP. She called this finding “astounding” and asked Dr. Griffin to explain the finding.
  • Dr. Griffin discussed how fraudulent networks had worked to identify FinTech lenders that were more likely to approve their PPP loan applications. He noted how the geographies with high levels of PPP misreporting during the first two rounds of the Program went on to experience dramatic increases in PPP misreporting during the last two rounds of the Program. He also mentioned how there was evidence that fraudulent borrowers had publicized which PPP lenders were more susceptible to fraud through online social networks. He stated that this experience suggested that fraudulent borrowers were fairly sophisticated and would likely target future SBA lending programs.
• Ranking Member Van Duyne also mentioned how Dr. Griffin’s analysis had found that suspicious PPP loans were being “overwhelmingly” forgiven at similar rates to other loans and that very few of these suspicious PPP loans were being prosecuted. She noted how the SBA had fully or partially forgiven 90 percent of all PPP loans as of July 10, 2022. She asked Dr. Griffin to indicate whether the U.S. was providing a “free pass” to fraudsters that abused the PPP (and by extension U.S. taxpayer dollars).
  • Dr. Griffin expressed confusion as to why these fraudulent PPP loans were being forgiven. He noted how the SBA had recognized that there were significant problems surrounding fraudulent PPP loans. He stated that the SBA was forgiving these fraudulent PPP loans at the same rate that they were forgiving legitimate PPP loans. He also noted how his analysis was entirely based on public data and commented that the analysis had likely undercounted the amount of fraudulent activity within the PPP.
• Ranking Member Van Duyne asked Dr. Griffin to indicate whether he had conducted any analyses on the SBA’s EIDL program.
  • Dr. Griffin indicated that he had looked into the EIDL program and that he had not published his findings on that Program. He stated that there was fraudulent activity occurring within the EIDL program. He noted that while he did not have the estimated dollar value of this fraud on hand, he commented that this fraud was “quite large” as a fraction of the program. He highlighted how many business borrowers had discrepancies between their PPP loan and EIDL applications in terms of their reported numbers of employees. He noted that these applications were made at almost the same time, which suggested suspicious activity.
• Ranking Member Van Duyne asked Dr. Griffin to identify the top lessons from his research on the performance of FinTech lenders regarding their disbursement of PPP loans.
  • Dr. Griffin remarked that his research had demonstrated the problems associated with prioritizing the quick disbursement of funds in government lending programs. He noted how the U.S. had maintained traditional lending guidelines during the early days of the COVID-19 pandemic and asserted that these lending guidelines could have been followed. He stated that traditional banks had outperformed FinTech lenders in making PPP loans. He suggested that the processes and procedures of traditional banks had helped these banks to make more responsible lending decisions. He concluded that the U.S. government should not develop lending programs in which lenders could distribute funds without facing repercussions in the event of loan defaults.

Full Committee Chairman Nydia Velázquez (D-NY):

• Chairman Velázquez asked Ms. Klein to discuss how underserved small businesses were susceptible to predatory lending practices. She also asked Ms. Klein to address why legislation was needed to ensure that all small business loans would contain fair and accurate disclosures about costs and terms.
  • Ms. Klein noted how TILA was originally not applied to commercial transactions because there was an assumption that businesses had access to financial and legal expertise. She commented that while this assumption might be true for large firms, she stated that smaller firms did not have the same access to financial and legal expertise. She also highlighted how a small business owner’s personal and business finances were often closely connected. She elaborated that small business owners often applied for credit for their businesses using their personal credit scores and pledged personal assets as collateral in order to secure the credit for their businesses. She further noted how small business owners will often draw on personal savings or forgo compensation in order to cover business expenses. She asserted that TILA ought to therefore apply to commercial transactions involving small businesses. She stated that truth in lending disclosures for small businesses would enable small businesses to make informed borrowing decisions.
• Chairman Velázquez mentioned how she had proposed legislation that would provide the CFPB with regulatory authority over small business loans and financing products. She asked Ms. Klein to indicate whether the CFPB was the appropriate federal agency for overseeing these loans and financing products.
  • Ms. Klein remarked that CFPB’s experience in enforcing TILA made it well-suited to oversee small business loans and financing products.
• Chairman Velázquez also noted how her proposed legislation would establish federal minimum regulatory standards for FinTech small business lending. She commented that this approach would still allow for states to enact stricter regulatory standards for FinTech small business lending. She noted how there were arguments that there should instead exist a federal ceiling for FinTech small business lending regulations and that this ceiling ought to preempt state laws. She noted that supporters of this approach believed that it would prevent FinTech lenders from engaging in jurisdiction shopping. She asked Ms. Klein to address whether federal law ought to preempt states in regulating FinTech small business lending activities and products.
  • Ms. Klein remarked that Chairman Velázquez’s proposed legislation would help small businesses through requiring disclosures for FinTech small business lending activities and products. She specifically commended the legislation for requiring the disclosure of APR information. She then stated that a federal standard for small business lending regulations would be helpful. She noted how many lenders worked in multiple states and stated that having a single set of disclosure requirements would be more efficient. She also commented that having a single set of disclosure requirements would help to bring down financing costs over time.
• Chairman Velázquez mentioned how New York and California had both passed truth in lending laws for small business loans. She noted how these state laws did not apply to floor plan financing and real estate investment property. She asked Ms. Klein to address whether Congress should consider similar exceptions in potential federal legislation on the topic.
  • Ms. Klein remarked that all small business lenders ought to be subject to the same requirements for all products. She commented that this approach would create a “level regulatory playing field” that treated all products and lenders equally. She acknowledged however that the RBLC had supported the California and New York small business lending laws.

Rep. Dan Meuser (R-PA):

• Rep. Meuser asked Dr. Griffin to indicate whether the vast majority of FinTech lending fraud related to the PPP was coming from a small percentage of FinTech PPP lenders.
  • Dr. Griffin remarked that a small number of FinTech lenders were responsible for a disproportionate amount of the PPP lending fraud. He noted how his analysis had found that PPP lending fraud was concentrated in certain core-based statistical areas (CBSAs) in certain zip codes. He commented that this finding suggested that this fraud was not spontaneous in nature and was instead the result of organized networks working to engage in fraud.
• Rep. Meuser then asked Mr. Salas to discuss what Camino Financial’s customers viewed as their greatest challenges to accessing capital. He asked Mr. Salas to explain what Camino Financial offered to customers that other financial institutions (such as community banks) did not provide. He further asked Mr. Salas to comment on the lack of transparency in interest rates within the FinTech lending space.
  • Mr. Salas remarked that entrepreneurs tended to have certain market demands, including transparency, simplicity, affordability, and expediency. He stated that Camino Financial worked to meet these market demands in the most responsible and cost-effective way. He asserted that certain bad actors had focused too heavily on offering customers expediency at the expense of transparency. He stated that Camino Financial leveraged technology to reduce the costs associated with distributions and transactions, which he commented would ultimately benefit borrowers.
• Rep. Meuser then asked Dr. Griffin to opine on proposals to provide the CFPB with the authority to regulate FinTech small business lending.
  • Dr. Griffin remarked that different federal agencies and bodies could provide different perspectives in terms of overseeing predatory lending practices. He expressed support for increasing the amount of lending fraud data that would be made available to both government agencies and the public.
• Rep. Meuser interjected to note that his question period time had expired. He requested that Mr. Salas follow up with the Subcommittee on whether the CFPB ought to oversee the FinTech small business lending space.

Rep. Judy Chu (D-CA):

• Rep. Chu first congratulated Camino Financial for its recent certification as a CDFI by the U.S. Department of the Treasury. She highlighted how Camino Financial was one of a small group of FinTech lenders with a CDFI certification. She also noted how Camino Financial was one of the few FinTech lenders that had voluntarily signed onto the RBLC’s proposed Small Business Borrowers’ Bill of Rights. She explained that this Bill of Rights required signatories to adhere to certain business practices, including disclosures of the true and complete costs of their financial products. She asked Mr. Salas to explain Camino Financial’s decision to sign onto the Small Business Borrowers’ Bill of Rights and to address how being a signatory benefited Camino Financial’s business. She further asked Mr. Salas to discuss why other FinTech small business lenders ought to sign onto the Small Business Borrowers’ Bill of Rights.
  • Mr. Salas remarked that Camino Financial’s decision to become a CDFI was made for strategic reasons and noted how it had taken Camino Financial three years to obtain CDFI certification. He stated that Camino Financial had signed onto the RBLC’s Small Business Borrowers’ Bill of Rights for moral reasons and commented that this Bill of Rights was in the best interest of their borrowers. He called on other FinTech lenders to become signatories of the Small Business Borrowers’ Bill of Rights.
• Rep. Chu also applauded Camino Financial for its pursuit of a CA lending license with the SBA. She stated that the CA loan program could heavily benefit small businesses and commented that FinTech lenders were well-suited to make use of this loan program. She highlighted how CA loans have a maximum interest rate of prime plus 6.5 percent, which was “far below” the rates being charged by certain FinTech lenders. She also noted how CA lenders provide their borrowers with technical assistance. She expressed her support for making the CA loan program permanent and applauded the SBA for its recent lifting of the moratorium on new lenders in the CA loan program. She asked Mr. Salas to explain why Camino Financial was applying for a CA lending license. She also asked Mr. Salas to discuss how bringing more lenders into the CA loan program could help to protect small businesses from predatory and unaffordable loan products.
  • Mr. Salas remarked that the CA loan program constituted one of the greatest opportunities for systematically lowering the cost of capital for underserved small businesses. He then discussed how many small businesses would likely not qualify for the CA loan program on the day that they submitted their loan application. He stated that Camino Financial was focused on providing these types of small businesses with a path to eventually qualify for a CA loan. He commented that SBA licenses were currently very difficult for lenders to obtain and noted that FinTech lenders could participate in SBA loan programs as CDFIs. He stated that participation in SBA loan programs would enable FinTech lenders to offer low-priced lending options to underserved communities.
• Rep. Chu asked Mr. Salas to indicate whether making the CA loan program permanent would provide the necessary certainty for lenders to participate in the program.
  • Mr. Salas answered affirmatively.

Rep. Scott Fitzgerald (R-WI):

• Rep. Fitzgerald expressed interest in Sec. 1071 of the Dodd-Frank. He expressed concerns that the CFPB’s proposed rule implementing this section would adversely impact small banks and small businesses. He further stated that this proposed rule’s 25 covered credit transaction requirement would impose significant data collection burdens on non-bank and FinTech lenders. He asserted that this CFPB proposed rule would result in fewer loans and decreased access to credit for small businesses. He thanked Full Committee Ranking Member Blaine Luetkemeyer (R-MO) for sending a letter to the CFPB Director that outlined concerns with the CFPB proposed rule. He mentioned how he would soon introduce a bill to repeal Sec. 1071 of Dodd-Frank and require Small Business Advocacy Review (SBAR) panels to presume tailoring to be necessary for rulemaking. He asked Dr. Griffin to elaborate on how Sec. 1071 of Dodd-Frank imposed burdensome reporting requirements on small businesses.
  • Dr. Griffin expressed his general opposition to policies that imposed additional reporting requirements on small businesses. He commented that he was more partial to policies that would empower the SBA to investigate potential predatory loans. He also contended that there should exist more transparency for already collected loan data. He stated that the SBA, the CFPB, or other government agencies could make this collected data available, which would enable private individuals and academics to investigate the data for instances of misreporting.
• Rep. Fitzgerald mentioned how Fiserv was headquartered within his Congressional District. He criticized proposals to apply the same reporting requirements for traditional financial institutions to FinTech lenders given the large number of transactions that FinTech lenders engage in on a daily basis. He called such proposals naive and impractical. He asserted that Sec. 1071 of Dodd-Frank should therefore not be applied to non-bank and FinTech lenders. He asked Dr. Griffin to indicate whether he agreed with this assertion.
  • Dr. Griffin noted how FinTech lenders and traditional banks already collected large amounts of information. He expressed support for making this collected information available to certain federal agencies. He stated that this information sharing requirement would not impose additional burdens on FinTech lenders and traditional banks because the information was already being collected.
• Rep. Fitzgerald lastly noted how small banks and credit unions had experienced less PPP fraud relative to FinTech lenders. He expressed uncertainty as to how proposed reporting requirements could be applied to FinTech lenders given their scale and size.

Rep. Byron Donalds (R-FL):

• Rep. Donalds contended that harmful U.S. banking regulations had driven borrowers to seek out FinTech lending options. He called for Dodd-Frank to be either repealed or heavily reformed and asserted that the law had hampered the ability of capital to reach small businesses. He also criticized the CFPB and stated that the Agency operated absent Congressional oversight. He asked Dr. Griffin to indicate whether expanding the CFPB’s authority would make it more difficult for FinTech lenders to operate and provide capital to small businesses.
  • Dr. Griffin noted how one approach to regulation involved creating many safeguards on the front end in order to prevent potential problems on the back end. He stated that the PPP was emblematic of this approach and commented that there were “substantial” problems with the Program. He expressed support for regulatory approaches that included consequences on the back end for improper conduct. He suggested that existing bodies, such as the U.S. Department of Justice (DoJ), the U.S. Securities and Exchange Commission (SEC), and the CFPB, could provide such consequences on the back end. He stated that focusing on front end safeguards often created barriers to competition and entrenched market incumbents.
• Rep. Donalds then remarked that short-term loans should not be subjected to APR calculations. He noted how these debts were only outstanding for very limited periods (generally weeks) and commented that the use of an annual metric would therefore be misleading for these loans. He asked Dr. Griffin to indicate whether APR disclosures were appropriate for short-term loans.
  • Dr. Griffin expressed support for APR disclosure requirements for all loans. He stated that lenders could highlight any caveats in their disclosures, such as duration periods of the loans. He noted how loans were often extended beyond their original terms, which would make the APR a more appropriate metric. He stated that the use of APRs in disclosures would empower borrowers to better compare different loans and make better loan decisions, which would in turn promote competition.