New Consumer Financial Products and the Impacts to Workers (U.S. Senate Committee on Banking, Housing, and Urban Affairs)

Hearing	New Consumer Financial Products and the Impacts to Workers
Committee	U.S. Senate Committee on Banking, Housing, and Urban Affairs
Date	September 13, 2022

 

Hearing Takeaways:

• New Consumer Financial Products: The hearing focused mainly on the growth of new consumer financial products, including buy now, pay later (BNPL) products and earned wage access (EWA) products. Committee Members and the hearing’s witnesses expressed interest in ensuring that these products were safe for consumers and exploring how these products could expand access to credit (especially for traditionally underserved communities).
  • General Views of Committee Democrats, Ms. Gittleman, and Mr. Seligman: Committee Democrats, Ms. Gittleman, and Mr. Seligman expressed concerns that many of the new consumer financial products under consideration at the hearing were often poorly designed, opaque, and poorly regulated. They warned that these products could harm consumers and called on the U.S. to monitor and regulate these products more closely.
  • General Views of Full Committee Ranking Member Patrick Toomey (R-PA), Ms. Lee, and Prof. Zywicki: Full Committee Ranking Member Toomey, Ms. Lee, and Prof. Zywicki remarked that new consumer financial products were useful, low cost, and expanded access to credit for consumers. They expressed concerns that excessive regulation of these products could reduce access to credit for many consumers and stifle innovation. Full Committee Ranking Member Toomey specifically criticized the efforts of the U.S. Consumer Financial Protection Bureau (CFPB) to increase scrutiny and regulation for these products. He also argued that consumers were best positioned to decide which financial products to use so long as they had truthful and accurate information about the products. 
• BNPL Products: One key area of interest during the hearing was the growth of BNPL products. These products create consumers to make immediate purchases and repay these purchases in installments with no fees (so long as the borrowers made their repayments on schedule). Sen. Jack Reed (D-RI) highlighted how Mercator Advisory Group had found that $55 billion in BNPL credit had been extended in the last year in the U.S.
  • Potential for BNPL Product Users to Accumulate Large Amounts of Debt: Full Committee Chairman Sherrod Brown (D-OH) and Ms. Gittleman raised concerns that BNPL companies engaged in little-to-no underwriting of their users, which meant that they lacked a full understanding of the debt levels of their users. They warned that this accumulation of debt could force consumers to face cascading fees, negative credit reporting, debt collection, and difficulties with disputes and refunds. Full Committee Chairman Brown stated that one-third of BNPL consumers had missed one or more payments and indicated that 72 percent of these consumers had reported a decline in their credit scores. Ms.  Lee disputed this statement and noted how a recent Financial Health Network survey had found that 96 percent of BNPL users did not have difficulties making their payments and that only 4 percent of BNPL users either were late in making payments or missed one or more payments. Full Committee Ranking Member Patrick Toomey (R-PA) also emphasized that BNPL companies will suspend the ability of consumers to make further purchases if the consumers are late on their repayments.
  • BNPL Company Business Models: Full Committee Ranking Member Toomey and Ms. Lee stated that BNPL companies did not primarily make money from consumers and indicated that these companies instead made most of their money from retailers. They explained that the retailers paid the BNPL companies a small percentage of transactions to offer the service to their customers. They commented that retailers were willing to offer BNPL options because these options enabled retailers to avoid credit card interchange fees, increased sales, and increased customer loyalty.
  • Consumer Protections for BNPL Products: Ms. Gittleman called for the application of various consumer protection laws to BNPL products. These laws included the Truth in Lending Act (TILA), the Military Lending Act (MLA), the Equal Credit Opportunity Act (ECOA), the Electronic Fund Transfer Act (EFTA), and the Fair Debt Collection Practices Act. Ms. Lee stated however that BNPL products were already subject to consumer protection regulations, including anti-money laundering (AML) rules, fair lending rules, debt collection rules, privacy rules, fair treatment of consumer rules, and electronic fund transfer rules. She added that BNPL products were also subject to state consumer protection laws.
  • Reporting of BNPL Data to Credit Bureaus: Sen. Reed and Ms. Gittleman noted that there were no standard practices for the reporting of consumer information by BNPL companies to credit bureaus. They expressed concerns that this absence of standard reporting practices made it more difficult to evaluate the creditworthiness of consumers.
• EWA Products: Another key area of interest during the hearing was the growth of EWA products. These products provide consumers with pay advances for income that they had already earned during a pay period. Ms. Lee and Prof. Zywick stated that these products reduced the likelihood that consumers would incur overdraft fees, take out payday loans, or pay their bills late. Ms. Gittleman cautioned however that fee-based EWA products often forced workers to pay money to receive their wages and could lead to a cycle of reborrowing.
  • EWA Product Fees: Full Committee Ranking Member Patrick Toomey (R-PA) noted that employers will often pay the fees associated with EWA products as an employee benefit. He indicated that consumers might also be responsible for EWA product fees and commented that these fees were modest.
  • Use of Tipping Models: Full Committee Chairman Sherrod Brown (D-OH) and Ms. Gittleman expressed concerns over how some EWA products use a tipping model, which rely upon consumers paying tips to lenders in lieu of fees or interest rates. They asserted that these products used this model to avoid disclosure requirements under TILA and the MLA and disputed the contention that the tips in these products were truly voluntary in nature. 
  • Consumer Protections for EWA Products: Ms. Lee highlighted how EWA products were non-recourse and did not charge interest to users. She also emphasized that all EWA products were subject to consumer protections, including fair treatment of customer laws.
• Employer-Driven Debt Arrangements: Committee Democrats, Ms. Gittleman, and Mr. Seligman expressed concerns over the increasing prevalence of employer-driven debt arrangements, which led many employees to become indebted to their employers. Mr. Seligman expressed concerns that these arrangements particularly harmed vulnerable workers, including immigrants and communities of color. He further stated that workers could not often address the harms of employer-driven debt on their own and indicated that these workers could be deterred by pervasive misclassification, forced arbitration clauses, and threats of aggressive debt collection.
  • Training Repayment Agreement Provisions (TRAPs) in Employment Contracts: Committee Democrats, Ms. Gittleman, and Mr. Seligman expressed particular concerns over the use of TRAPs in employment contracts. These provisions allow employers to recoup the cost of training employees who leave the job. They asserted that these provisions threatened the credit and economic mobility of workers through making it prohibitively expensive to leave jobs. They indicated that workers subject to these provisions included nurses, truck drivers, hair stylists, social workers, and PetSmart employees.
  • Predatory Franchising Practices: Sen. Catherine Cortez Masto (D-NV) and Mr. Seligman also raised concerns over predatory franchising practices that trapped franchisees in debt using the promise of small business ownership. Mr. Seligman highlighted how these predatory franchises will maintain agreements with franchisees that limit the ability of the franchisees to set their own prices and communicate with clients. He further noted how these predatory franchises will not pay the workers’ wages and will instead demand that the workers pay high franchise fees. He indicated that the predatory franchises will often provide loans to the workers to cover the franchise fees, which creates a cycle of predatory debt. Sen. Cortez Masto mentioned how she had introduced legislation that would require franchises to disclose more information about their business models to prospective franchisees.
  • Legal Questions Regarding Employer Driven Debt: Mr. Seligman remarked that employer-driven debt that sought to recoup an employer’s costs could constitute an illegal kickback against the wages of workers. He indicated that these illegal kickbacks would violate minimum wage laws and stated that the U.S. Department of Labor (DoL) could ensure that employers did not ensnare workers in jobs through threats to collect such debts.
• Partnerships Between Traditional Financial Institutions and Financial Technology (FinTech) Companies: Another area of interest during the hearing involved partnerships between traditional financial institutions and FinTech companies to offer credit products, including small dollar personal, automotive, and small business loans, as well as credit cards, mortgages, and home equity credit lines. 
  • Oversight of FinTech Lenders: Committee Members and the hearing’s witnesses expressed interest in developing a clearer regulatory framework for the partnerships between traditional financial intuitions and FinTech companies to provide certainty to these companies and to better protect consumers. They also asserted that this clarity was key to addressing inconsistencies across states. Ms. Lee remarked that there were three different ways to provide a regulatory framework for FinTech companies. She indicated that the first way to apply a regulatory framework to new FinTech companies would be to have these companies obtain state money transmitter licenses. She indicated that the second way to apply a regulatory framework to FinTech companies would be to have the companies enter into bank-FinTech partnerships. She explained that these partnerships would subject the companies to oversight from state and federal banking regulators. She indicated that the third way to apply a regulatory framework to FinTech would be to have the companies pursue their own bank charters. She noted however that there had recently been a very slow acceptance of having special purpose or other types of national bank charters. 
  • “Rent-A-Bank” Schemes: Ms. Gittleman warned that that many FinTech lenders were engaged in “rent-a-bank” schemes to offer high interest loans, even in states where such loans were illegal. She explained how banks were largely exempt from state interest rate caps and remarked that high cost lenders have used this exemption to launder their loans through banks to evade state interest rate laws. She stated that the Veterans and Consumers Fair Credit Act would protect consumers from high interest loans that were evading state interest rate caps.
  • Customer Disclosures: Ms. Gittleman also recommended that the cost of credit ought to be portrayed to consumers as an annual percentage rate so that consumers could compare the costs of different products.
• Predatory Behavior from Student Lenders: Sen. Elizabeth Warren (D-MA) and Ms. Gittleman expressed concerns that student loan servicers (such as Navient) were attempting to steer their borrowers to privately refinance their student loans so that the borrowers would lose their eligibility for the Biden administration’s recently announced student debt cancellation. They explained that only federal student loans were eligible for this debt cancellation opportunity and asserted that these student loan servicers would make more money if their borrowers could not cancel portions of their student debts. Sen. Warren remarked that policymakers ought to closely monitor student loan servicers to ensure that borrowers were being protected as they await student debt cancellation.

Hearing Witnesses:

1. Ms. Rachel Gittleman, Financial Services Outreach Manager, Consumer Federation of America
2. Ms. Penny Lee, CEO, Financial Technology Association
3. Prof. Todd J. Zywicki, George Mason University Foundation Professor of Law, George Mason University Antonin Scalia School of Law
4. Mr. David H. Seligman, Executive Director, Towards Justice

Member Opening Statements:

Full Committee Chairman Sherrod Brown (D-OH):

• He expressed concerns that the U.S. did not have sufficient economic mobility and highlighted how many middle-class Americans lacked economic security and stability.
  • He commented that the aforementioned conditions often drove Americans to assume debt.
• He stated that while well-designed, regulated, and transparent financial products could help Americans to respond to unexpected costs, he asserted that these financial products were often poorly designed, opaque, and poorly regulated.
  • He commented that these financial products often drove consumers into further debt and financial instability.
• He indicated that the hearing would focus on how some new consumer financial products were impacting workers.
  • He asserted that many lenders will often use the promise of innovation to hide their efforts to trap consumers in debt.
• He discussed how new consumer financial products, such as BNPL products, could help consumers to pay for products in installments with strong consumer protections.
• He warned however that many of these new consumer financial products carried hidden fees, lacked transparency, and were poorly underwritten.
  • He mentioned how advertisements for these consumer financial products often encouraged consumers to use the products for multiple purchases at multiple online stores, which could lead consumers to assume unsustainable amounts of debt.
• He highlighted how BNPL companies engaged in little-to-no underwriting of their users, which meant that they lacked a full understanding of the debt levels of their users.
  • He further criticized BNPL companies for not providing proper term disclosures to their users.
• He remarked that there needed to exist robust rules and disclosure requirements for BNPL companies for their products to work for consumers.
• He also discussed how some new consumer financial products use a tipping model, which rely upon consumers to pay tips to lenders in lieu of fees or interest rates.
  • He asserted that these products used this model to avoid disclosure requirements under TILA and the MLA and disputed the contention that the tips in these products were voluntary in nature.
• He noted that consumer financial products that use the tipping model include cash advances, overdraft coverage, and EWA products.
  • He also commented that while EWA products with strong consumer protections could help workers to cover unexpected expenses or emergencies, he stated that companies should instead increase their employee pay.
• He then remarked that certain debt products, including TRAPs, are too predatory and offensive and asserted that these products should have no place in the U.S. financial system.
  • He explained that TRAPs are provisions in employment contracts that allow employers to recoup the cost of training employees who leave the job.
  • He called the concept of TRAPs offensive and argued that employers should be responsible for covering the cost of on-the-job training.
• He stated that employers use TRAPs to prevent employees from pursuing higher paying jobs or better career opportunities and commented that these provisions threaten the credit and economic mobility of workers.

Full Committee Ranking Member Patrick Toomey (R-PA):

• He discussed how financial institutions have developed technology-oriented solutions to meet consumer needs over the previous decade and commented that these new choices foster a more competitive marketplace.
• He remarked that consumers were best positioned to decide which financial products they should use so long as they had truthful and accurate information about the products.
  • He asserted that any regulation of financial products should fit the product type, make room for innovation, and maximize consumer choice. 
• He accused Committee Democrats of expressing reflexive opposition to new types of financial products.
• He discussed how BNPL products were one type of new financial product and explained that these products enabled consumers to make immediate purchases and repay the purchases using four interest-free installments later.
  • He stated that BNPL services could be an attractive means for enabling consumers to manage their cash flows to obtain goods and services without paying any interest.
  • He commented that BNPL services were especially useful for consumers that did not possess a credit card or that did not want to use a credit card to pay for an item.
• He highlighted how BNPL products were most popular among younger consumers with shorter credit histories.
• He also noted how BNPL companies will suspend the ability of consumers to make further purchases if the consumers are late on their repayments.
  • He added that some BNPL companies will charge a fee for late repayments.
• He stated that BNPL companies did not primarily make money from consumers and indicated that these companies instead made most of their money from retailers.
  • He explained that the retailers paid the BNPL companies a small percentage of transactions to offer the service to their customers.
  • He commented that retailers were willing to offer BNPL options because these options enabled retailers to avoid credit card interchange fees, increased sales, and increased customer loyalty.
• He also discussed how EWA products provide consumers with short-term funding and stated that these products could serve as an appealing alternative to payday loans for workers that want an advance on their wages.
  • He commented that EWA products helped consumers that lacked savings to cover unexpected expenses that arose between pay periods.
  • He explained that EWA products advanced the consumers the amount of income that they had already earned during a pay period.
• He highlighted how there were various EWA products available and noted that employers will pay the fees associated with EWA products as an employee benefit in some cases.
  • He indicated that consumers might also be responsible for EWA product fees.
  • He mentioned how a recent study had found that the average EWA product fee a user paid per advance was between $2.59 and $6.27, which was less than 5 percent of the amount advanced.
• He remarked that marketplace competition had successfully generated more and cheaper online financial product options to meet consumer needs.
• He then discussed how there were new financial innovations that involved long-existing forms of credit being delivered in new ways.
• He highlighted how financial institutions (primarily community banks) have begun to partner with FinTech companies to offer improved products and to reach more customers.
  • He noted how these partnerships offered many credit products, including small dollar personal, automotive, and small business loans, as well as credit cards, mortgages, and home equity credit lines.
• He stated that financial institution-FinTech company partnerships could generate “significant” consumer benefits through lowering the price of financial products, expanding consumer choice, and increasing competition.
  • He highlighted how these partnerships often provided credit to higher risk borrowers (such as consumers with lower incomes or no credit history) though a “highly supervised” financial institution.
• He asserted that some lawmakers and policymakers were reflexively hostile to new financial products and commented that this hostility could restrict access to needed credit for lower income consumers.
  • He criticized Congressional Democrats for their overturning of an U.S. Office of the Comptroller of the Currency (OCC) rule that would have provided regulatory certainty for financial institution-FinTech partnerships.
• He also contended that the CFPB was acting in a hostile manner toward innovation in consumer finance markets.
• He criticized CFPB Director Rohit Chopra’s decision to replace its Office of Innovation with the new Office of Competition and Innovation to involve the CFPB in antitrust and competition law.
  • He asserted that antitrust and competition law were outside of the CFPB’s jurisdiction.
• He also alleged that CFPB Director Chopra had ended efforts to promote responsible innovation, including no action letters and regulatory sandboxes.
• He raised concerns that the CFPB would bring its “reactive anti-innovation perspective” to its scrutiny of new financial products, including BNPL products.
  • He asserted that this hostility toward new financial products constituted a form of condensation and paternalism.

Witness Opening Statements:

Ms. Rachel Gittleman (Consumer Federation of America):

• She discussed how new consumer credit products were “exploding” across market areas and stated that some of these products were inherently deceitful and predatory.
  • She commented that while other consumer credit products might help consumers to manage their finances, she asserted that these products were not risk free.
• She remarked that all of the products under consideration at the hearing were credit and contended that basic consumer protections at the state and federal level ought to apply to these products.
  • She commented that these consumer protections were especially important given the fact that these products were disproportionately marketed to and used by lower income consumers and consumers of color.
• She explained how BNPL products enabled consumers to pay a portion of a purchased item upfront and make the rest of the purchased item’s payments in multiple installments over a set period.
  • She indicated that these installment payments were often interest free.
• She noted however that BNPL products often did not assess a consumer’s ability to repay their debts, which could lead consumers to accumulate unmanageable amounts of debt.
  • She commented that this accumulation of debt could force consumers to face cascading fees, negative credit reporting, debt collection, and difficulties with disputes and refunds.
• She then explained how EWA products were funds advanced by a third-party to a consumer before their regular payday.
• She contended that fee-based EWA products were “ostensibly” a lower cost version of a payday loan.
  • She elaborated that EWA products often forced workers to pay money to receive their wages and could lead to a cycle of reborrowing.
• She remarked that fake EWA products, overdraft protection products, and other cash advance products that collect tips were simply disguising finance charges under a new name.
  • She asserted that the tips associated with these products were not voluntary and were structured in a fashion where consumers could not easily avoid the need to tip.
• She stated that the true costs of these tips were not clear to consumers and that these tips could add up very quickly.
  • She commented that these tips could ultimately amount to the same amount of money as interest charges in traditional payday loans.
• She then discussed how TRAPs in employment agreements could ensnare consumers in low paying jobs by requiring repayment of large fees for on-the-job training and orientations.
  • She noted how the TRAP debt was enforced whether a consumer leaves their job voluntarily or not before an arbitrarily determined date.
  • She stated that TRAPs indebted consumers to their employers using threats of high interest rates, attorney and collection fees, or the withholding of other benefits.
• She asserted that BNPL products, EWA products, and TRAPs constituted forms of credit and should be viewed and regulated as such.
• She recommended that state and federal regulators should supervise FinTech providers to ensure their compliance with credit, fair lending, and consumer protection laws.
  • She also stated that regulators should ensure that FinTech providers were not engaging in unlawful discrimination or unfair, deceptive, or abusive acts or practices.
• She called on state and federal regulators to examine evasive pricing models and stated that FinTech providers should only offer products after determining a consumer’s ability to repay.
  • She further stated that loans ought to be structured in an affordable manner with proportional penalty fees.
• She also recommended that the cost of credit ought to be portrayed to consumers as an annual percentage rate so that consumers could compare the costs of different products.
• She then remarked that consumer data should only be used in a responsible and transparent manner and called for state and federal regulators to collect, analyze, and publish data to better understand and illuminate the risks associated with financial products.
  • She further asserted these regulators ought to work together across agencies and levels of government to ensure that consumers were being protected.
• She stated that the absence of meaningful and holistic underwriting standards, affordable repayment options, and price transparency could cause new consumer financial products to undermine financial inclusion.

Ms. Penny Lee (Financial Technology Association):

• She discussed how FinTech product adoption had “surged” in recent years and mentioned how 90 percent of consumers used FinTech products and services to manage their finances.
  • She commented that consumers had indicated that they use FinTech products and services because the products saved them both time and money.
  • She noted how 73 percent of consumers had stated that FinTech products and services supported better financial decisions and how 71 percent of consumers had stated that FinTech products and services helped to reduce financial stress.
• She lamented how Americans were reporting that they were worse off financially relative to one year ago and stated that FinTech companies were creating new tools for Americans to improve their financial security.
• She discussed how BNPL products enabled consumers to manage their cash flows and to avoid paying high interest rates and fees.
  • She explained that the typical BNPL model provided small, low cost, and short-term payment options that traditionally entailed four installments over six to eight weeks with no extra fees so long as the consumer made their payments on schedule.
• She stated that BNPL products derived the “vast majority” of their revenues from partnerships with merchants (rather than from consumer fees).
• She highlighted how more than three-quarters of BNPL users have a favorable opinion of BNPL services and trusted these services to act in the best interests of consumers according to a Morning Consult poll.
  • She added that 77 percent of adults using multiple BNPL companies had indicated that these services made it easier to pay for purchases.
• She also mentioned how a recent Financial Health Network survey had found that 99 percent of BNPL users understood the terms and conditions of the BNPL service.
  • She added that this survey had found that 96 percent of BNPL users did not have difficulties making their payments and that only 4 percent of BNPL users either were late in making payments or missed one or more payments.
• She remarked that BNPL products and services supported small businesses through enhancing the customer experience, facilitating economic activity, and driving consumer satisfaction.
• She also noted how BNPL products were subject to consumer protection regulations, including AML, fair lending rules, debt collection rules, privacy rules, fair treatment of consumer rules, and electronic fund transfer rules.
  • She added that BNPL products were also subject to state consumer protection laws.
• She then discussed how EWA products offered workers flexibility through on demand and early access to their already earned wages.
  • She commented that these products helped workers to make timely payments, avoid overdraft fees, and manage any short-term financial shocks.
• She stated that the absence of EWA services would cause 44 percent of consumers to be unlikely to pay their bills on schedule and 38 percent of consumers to consider going into overdraft.
• She highlighted how EWA products were non-recourse and did not charge interest to their users.
  • She also emphasized that all EWA products were subject to consumer protections, including fair treatment of customer laws.

Prof. Todd J. Zywicki (George Mason University Antonin Scalia School of Law):

• He remarked that BNPL and EWA products demonstrated the potential for FinTech to improve consumer welfare.
  • He commented that these products could especially help consumers that have traditionally been excluded from credit opportunities or have limited or no credit history.
• He also stated that BNPL and EWA products served as important vehicles for promoting innovation and competition against incumbent credit providers.
• He remarked that middle class Americans generally had sufficient access to transparent, competitive, and innovative credit markets.
• He noted however that the U.S. had faced perennial challenges with access to credit for people that did not qualify for prime sources of credit.
  • He commented that these credit access issues were prevalent among wage workers that faced unexpected expenses in between pay periods.
  • He also remarked that many consumers faced challenges affording more expensive products that will ultimately save them money and time over a longer duration.
• He stated that many new consumer financial products were providing consumers with useful, low cost, and convenient solutions to the aforementioned challenges.
  • He commented that BNPL products innovated upon personal finance companies and retail installment loans and that EWA products innovated upon wage and payday loans.
• He remarked that history had demonstrated the importance of innovation as a means of improving consumer welfare (particular for lower income consumers).
  • He recounted how the development of the credit scoring and reporting system during the 1970s had bolstered competition amongst financial institutions, broadened access to credit, and combatted discrimination.
• He stated that new consumer financial products demonstrated great potential and commented that consumers had thus far used these products in valuable ways.
  • He noted how EWA product users have reported that they are less likely to incur overdraft fees, take out payday loans, and pay bills late.
• He then called BNPL products a “godsend” for many consumers and highlighted how these products had supported consumer purchases during the COVID-19 pandemic.
• He highlighted how younger consumers were more likely to make use of BNPL offerings because these consumers tended to have less access to credit cards and financial services.
  • He attributed this reduced credit access to various policies, including the Durbin amendment and the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009.
• He remarked that new consumer financial products tended to be “frothy” at first and asserted that competition and innovation tended to drive standardization of these products over time.
  • He expressed concerns that premature regulations could drive up costs for consumers and be ill-suited for innovative products.
• He commended the CFPB for its issuing of a request for information (RFI) to learn more about new consumer financial products and their customers before it sought to issue rules that would regulate the products.

Mr. David H. Seligman (Towards Justice):

• He mentioned how there were arguments that employer-driven debt was an innovation of corporate employers and the financial services sector that ought to be celebrated and insulated from regulatory oversight.
  • He stated that the arguments in favor of employer-driven debt were that it was often necessary for providing workers with access to credit, training workers to advance in their careers, and covering the costs associated with starting up a job.
• He remarked that challenges associated with satisfying the financial demands and the professional advancement of workers were not the result of a lack of access to capital.
  • He asserted that these challenges were instead attributable to the fact that many workers did not receive a living wage or have a predictable work schedule.
  • He further stated too many corporate employers were seeking to shift their own costs onto their workers.
• He discussed the prevalence of TRAPs in employment contracts and noted how the workers subject to these provisions included nurses, truck drivers, hair stylists, social workers, and PetSmart employees.
  • He asserted that TRAPs were incongruent with principles of fair competition because they ensnared workers in their jobs.
  • He further mentioned how employer-driven debt impacted immigrant cleaning workers, retail workers, and service workers.
• He remarked that workers could often not address the harms of employer-driven debt on their own and indicated that these workers could be deterred by pervasive misclassification, forced arbitration clauses, and threats of aggressive debt collection.
  • He commented that it was often unclear whether the contractual provisions that permitted such debt collections would actually be enforced in court.
• He called it imperative for federal agencies to provide regulatory oversight and vigorous enforcement in the consumer financial product space.
  • He stated that the CFPB could guard against unfair, abusive, and deceptive practices related to these products, protect against predatory employer-driven debt arrangements that unlawfully target immigrants and people of color, and ensure that the Fair Debt Collection Practices Act would apply to the predatory debt collection practices of employers.
  • He further stated that the U.S. Federal Trade Commission (FTC) and the U.S. Department of Justice (DoJ) can police and regulate the market for employer-driven debt that unfairly and illegally impedes worker mobility and traps workers in their current jobs.
• He lastly remarked that employer-driven debt that sought to recoup an employer’s costs could constitute an illegal kickback against the wages of workers.
  • He indicated that these illegal kickbacks would violate minimum wage laws and commented that the DoL could ensure that employers did not ensnare workers in jobs through threats to collect such debts.

Congressional Question Period:

Full Committee Chairman Sherrod Brown (D-OH):

• Chairman Brown asked Ms. Gittleman to indicate whether BNPL products, EWA products, and other types of new consumer financial products that employ a tip model constitute a form of credit and should therefore fall under the purview of existing consumer protections.
  • Ms. Gittleman remarked that all of the new consumer financial products under consideration at the hearing were credit and should be treated as such by both consumers and regulators.
• Chairman Brown asked Mr. Seligman to indicate whether TRAPs should be considered a form of credit.
  • Mr. Seligman answered affirmatively and stated that consumer protections ought to cover such provisions. He noted that some employers might argue that the underlying training being provided in a TRAP was not for the personal benefit of the employee and therefore should not constitute a form of credit. He contended however that this argument would put the TRAP in violation of minimum wage laws. He called it very important for the CFPB and the DoL to coordinate on their oversight of TRAPs.
• Chairman Brown remarked that the aforementioned consumer financial products constitute credit and asserted that relevant consumer protections ought to therefore apply to these products. He indicated that these relevant consumer protections included TILA, the MLA, and state usury caps. He applauded the CFPB for launching an inquiry into these new types of consumer financial products. He then expressed concerns that TRAPs created an economy in which employers preyed upon workers through using debt as a tool for coercion. He stated that TRAPs could limit the economic mobility of workers through inhibiting their ability to change jobs. He asked Mr. Seligman to address whether TRAPs limited worker mobility.
  • Mr. Seligman remarked that TRAPs limited worker mobility and asserted that employers often intentionally include TRAPs in their employment contracts for the express purpose of limiting worker mobility. He also stated that the debt associated with TRAPs will often far exceed the value of the training.
• Chairman Brown asked Mr. Seligman to discuss how limited worker mobility impacts individual households and the broader economy.
  • Mr. Seligman remarked that the costs of TRAPs could be “devastating” for workers. He also asserted that TRAPs suppressed employee wages and interfered with the ability of competitors to hire workers. He stated that the strongest negotiating leverage that an employee has is the ability to threaten to leave their position. He commented that TRAPs effectively eliminated this negotiating leverage for employees, which could effectively force employees to remain in a certain position.
• Chairman Brown then noted how a consumer had recently testified before the Committee that BNPL credit she had taken out was initially manageable. He indicated however that this consumer was extended credit through multiple BNPL service providers, which caused the consumer to amass an unsustainable amount of debt. He asked Ms. Gittleman to indicate whether BNPL underwriting practices were meaningfully assessing the ability of borrowers to repay their debts. He also asked Ms. Gittleman to indicate whether BNPL companies assessed whether a consumer had multiple outstanding BNPL loans with different providers.
  • Ms. Gittleman remarked that most BNPL companies did not meaningfully assess a consumer’s ability to repay their debts. She also stated that there was no way currently for BNPL companies to verify how many outstanding loans consumers have across different providers. She noted that many BNPL companies only required consumers to only provide a payment form, verify their identity, and undergo a soft credit check.
• Chairman Brown highlighted how one-third of BNPL consumers had missed one or more payments and indicated that 72 percent of these consumers had reported a decline in their credit scores. He called for the strengthening of BNPL underwriting standards.

Full Committee Ranking Member Patrick Toomey (R-PA):

• Ranking Member Toomey remarked that many FinTech innovations were designed to expand access to financial services for people that could not access traditional financial products. He acknowledged that while these FinTech innovations were disruptive to incumbent financial institutions, he asserted that these FinTech innovations create new opportunities for consumers. He asked Prof. Zywicki to provide recommendations for regulating FinTech innovations, including BNPL and EWA products.
  • Prof. Zywicki remarked that FinTech innovations had the most promise for traditionally underserved consumers. He discussed how there were often high fixed costs associated with small dollar loans and stated that FinTech could provide lending options with low overhead costs. He expressed concerns over proposals to apply the U.S.’s traditional regulatory structures (which he called archaic) to new FinTech companies. He asserted that these traditional regulatory structures were not designed for FinTech companies and stated that the costs associated with these regulations outweighed their potential benefits. He contended that the U.S. should instead focus on protecting consumers, promoting competition, and promoting innovation within the FinTech space.
• Ranking Member Toomey asked Prof. Zywicki to indicate whether there existed data suggesting that consumers that use BNPL products tend to be younger, have lower incomes, and have challenges accessing credit through traditional avenues.
  • Prof. Zywicki answered affirmatively. He stated that the chief value proposition of BNPL products was for younger, lower income, and traditionally underserved consumers.
• Ranking Member Toomey asked Ms. Lee to indicate whether there existed evidence that indicates whether consumers understood the terms of BNPL products.
  • Ms. Lee mentioned how a recent Financial Health Network study had found that 99 percent of the consumers that use BNPL products understood the terms and conditions of said products. She also mentioned how a recent Morning Consult survey had found that 94 percent of the consumers that use BNPL products understood the terms and conditions of said products. She commented that these studies indicated that a very high percentage of BNPL product users understood the products and their associated obligations.
• Ranking Member Toomey highlighted how BNPL products were typically zero cost, did not charge interest rates, and imposed their fees on merchants (rather than on consumers). He noted however that consumers of BNPL products that did not make on schedule payments could be subject to a late fee. He asked Ms. Lee to address the prevalence of late fees in BNPL products for consumers. He also asked Ms. Lee to indicate what percentage of a typical BNPL company’s revenue was derived from late fees.
  • Ms. Lee indicated that less than 4 percent of BNPL product consumers incur late fees. She attributed the growing popularity of BNPL products to the fact that the products enabled consumers to improve their budgeting capabilities. She then noted how BNPL companies derived between 85 percent and 87 percent of their revenues from merchant fees.

Sen. Elizabeth Warren (D-MA):

• Sen. Warren discussed how the Biden administration had recently announced that it would cancel up to $20,000 in student loan debt for federal student debt holders. She commented that this policy would deliver “life changing relief” for as many as 43 million middle class and working class Americans. She remarked however that the corporations that profited from a “broken” student lending system were now seeking to find new sources of revenue. She highlighted how student loan servicer Navient was reportedly working to get borrowers to refinance their federal student loans using their private lender with the promise of lower interest rates. She posited a scenario where a student loan borrower accepted Navient’s offer to refinance their federal student loans using Navient’s private lender. She asked Ms. Gittleman to indicate how this refinancing would impact the borrower’s ability to take advantage of the Biden administration’s student debt cancellation proposal.
  • Ms. Gittleman noted how a student loan borrower that refinanced their federal student loan with Navient’s private lender would be replacing their federal student loan with a private student loan. She highlighted how only federal student loans were eligible for cancellation under the Biden administration’s student debt cancellation proposal. She stated that this student borrower would therefore no longer be eligible for student debt cancellation under the Biden administration’s proposal. She asserted that this loss of eligibility would be significant for this student loan borrower that previously held a federal student loan. She indicated that Navient had only mentioned that the replacement of a federal student loan with a private student loan would jeopardize a borrower’s eligibility for student debt cancellation in the fine print in the bottom of their emails to their borrowers.
• Sen. Warren mentioned how she had sent a letter to Navient requesting more information about the company’s offers to student loan borrowers to refinance their student loans using the company’s private lender. She stated that Navient appeared to be making it more difficult for their borrowers to qualify for student debt cancellation. She asked Ms. Gittleman to indicate whether Navient would make more or less money if their student loan borrowers were able to qualify for student debt cancellation.
  • Ms. Gittleman remarked that the future of Navient’s lending business depended on its ability to take the most creditworthy people with federal student loans and to refinance them into private loans. She stated that every borrower that was debt-free because of the Biden administration’s student debt cancellation policy was one fewer potential customer for Navient. She further stated that better deals for federal student loan holders would lead Navient to have less opportunities to sell their private loans.
• Sen. Warren described Navient’s efforts to steer federal student loan borrowers away from opportunities for student debt cancellation as “outrageous behavior.” She expressed interest in ensuring that student lenders provide consumers with timely and accurate information about their loans and their eligibility for student debt cancellation. She also stated that Navient had previously harmed student loan borrowers through steering them to suboptimal repayment options, failing to report borrower complaints, and harming the credit reports of disabled veterans. She remarked that policymakers ought to closely monitor student loan services to ensure that borrowers were being protected as they await student debt cancellation.

Sen. Mark Warner (D-VA):

• Sen. Warner remarked that the popularity of non-regulated consumer financial products had grown since the 2008 Financial Crisis. He also highlighted how banks were now responsible for fewer mortgage originations and small business loans. He raised concerns that the Committee was often too focused on the benefits of financial innovations and not focused enough on the associated drawbacks. He asked Ms. Gittleman to provide recommendations for the Committee for monitoring new consumer financial products. He expressed interest in ensuring that these products included consumer protections.
  • Ms. Gittleman remarked that the regulation and oversight of financial markets would benefit everyone. She stated that such regulation and oversight would promote competition, establish clear expectations for marketplace participants, and provide consumer protections. She expressed her appreciation for the CFPB’s inquiry into BNPL providers and expressed interest in eventually learning about the CFPB’s findings on the topic. She stated that the CFPB ought to use its various authorities to supervise existing FinTech lenders. She commented that such supervision would protect consumers and establish clear expectations for the FinTech lenders.
• Sen. Warner mentioned how he had previously advocated for more experimentation within the FinTech sector. He noted how some Committee Democrats had raised concerns over the OCC’s proposals for voluntary charters because these charters could result in insufficient levels of regulation. He stated however that the Committee should revisit the OCC’s proposals for voluntary charters and commented that these charters could lead some FinTech companies to have some form of regulatory structure. He asked the witnesses to provide recommendations for ensuring that new FinTech products would be subject to some type of regulatory framework.
  • Ms. Lee remarked that there were three different ways to provide a regulatory framework for FinTech companies. She indicated that the first way to apply a regulatory framework to new FinTech companies would be to have these companies obtain state money transmitter licenses. She indicated that the second way to apply a regulatory framework to FinTech companies would be to have the companies enter into bank-FinTech partnerships. She explained that these partnerships would subject the companies to oversight from state and federal banking regulators. She indicated that the third way to apply a regulatory framework to FinTech would be to have the companies pursue their own bank charters. She noted however that there had recently been a very slow acceptance of having special purpose or other types of national bank charters. She called on banking regulators to approve more charters for FinTech companies.
  • Prof. Zywicki remarked that the current “hodgepodge” of state regulations for FinTech companies was problematic and asserted that FinTech companies could only be financially viable on a national basis. He mentioned how he had served as the Chairman of the CFPB’s Taskforce on Federal Consumer Financial Law and noted how this Taskforce had recommended that the CFPB be given chartering authority for non-bank financial services institutions. He commented that while the OCC’s FinTech charter might be beneficial, he raised concerns that large banks might attempt to co-opt this charter process to impose unnecessary burdens on FinTech firms.
  • Mr. Seligman stated that new consumer financial products were credit and should be regulated as such. He suggested that the fact that these products often used FinTech terms or were related to employment arrangements could distort how policymakers approach the products.

Sen. Jack Reed (D-RI):

• Sen. Reed mentioned how he had introduced the Veterans and Consumers Fair Credit Act, which would establish a nationwide interest rate cap of 36 percent. He commented that this legislation sought to eliminate predatory loans in consumer credit markets. He asked Ms. Gittleman to identify emerging consumer financial products that were predatory towards consumers, despite the appearance of being consumer friendly.
  • Ms. Gittleman first thanked Sen. Reed and Full Committee Chairman Sherrod Brown (D-OH) for their advocacy for the Veterans and Consumers Fair Credit Act. She then remarked that consumer financial products that employed tipping models could be deceptively predatory. She noted that while the prices of these consumer financial products might appear affordable, she indicated that the costs associated with these products could be comparable to traditional payday loans. She also stated that many loans being offered online were predatory toward consumers. She further asserted that many FinTech lenders were engaged in “rent-a-bank” schemes to offer high interest loans, even in states where such loans were illegal.
• Sen. Reed asked Ms. Gittleman to discuss how many lenders engaged in “rent-bank” arrangements to avoid state usury caps.
  • Ms. Gittleman noted how banks were largely exempt from state interest rate caps and remarked that high cost lenders have used this exemption to launder their loans through banks to evade state interest rate laws. She stated that the high cost lenders in these arrangements had the predominant economic interest in the loan, conducted the majority of the loan’s underwriting, reaped the majority of the loan’s benefits, and assumed the majority of the loan’s risks. She commented that the high cost lender will either name the bank at the very end of their agreements with borrowers or pass the loan through the bank so that they can evade state interest rate caps. She highlighted how Congress had recently rebuked these “rent-a-bank” schemes on a bipartisan basis. She stated that the Veterans and Consumers Fair Credit Act would protect consumers from high interest loans that were evading state interest rate caps.
• Sen. Reed then discussed the growing popularity of BNPL products and explained that these products allowed for consumers to split payments into four equal installments. He commented that these products had been very popular during the COVID-19 pandemic and highlighted how Mercator Advisory Group had found that $55 billion in BNPL credit had been extended in the last year in the U.S. He added that Mercator Advisory Group had projected that BNPL credit would grow to $100 billion by 2024. He asked Ms. Gittleman to identify the consumer protection laws that apply to BNPL products, as well as the consumer protection laws that do not apply to these products.
  • Ms. Gittleman contended that most consumer protection laws should apply to BNPL products. She stated that BNPL products were increasingly structured as open-ended credit arrangements and asserted that TILA should therefore apply to these products. She also stated that the MLA should apply to the finance charges and mandatory arbitration agreements associated with BNPL products. She then remarked that ECOA ought to apply to BNPL products given the prevalent use of these products among people of color. She also noted how many BNPL products required or included authorizations for payments to be automatically deducted, which means that EFTA should apply to these products. She then contended that the Fair Debt Collection Practices Act should apply to BNPL products that allow consumers to consent to debt collection in the initial terms and agreements. She lastly remarked that federal regulators should supervise BNPL companies and ensure that these companies were not engaging in unfair, deceptive, or abusive acts and practices, as well as unlawful discrimination.
• Sen. Reed then noted that there were no standard practices for the reporting of consumer information by BNPL companies to credit bureaus. He commented that this absence of standard reporting practices made it more difficult to evaluate the creditworthiness of consumers. He asked Ms. Gittleman to confirm his understanding of the consumer information reporting practices by BNPL companies.
  • Ms. Gittleman remarked that BNPL product repayment data was beginning to be incorporated into consumer credit reports. She noted that this reporting of BNPL product repayment data was not conducted in a standardized manner and highlighted how each of the credit bureaus had their own format for making use of BNPL product repayment data. She stated that this inconsistency in BNPL product repayment data collection practices might have underwriting, credit reporting, and credit scoring consequences. She asserted that the U.S.’s current credit reporting system was an “awkward fit” for BNPL products. She remarked that BNPL product repayment data ought to incorporated into the credit reporting system in a thoughtful manner to ensure that consumers would be protected.

Sen. Catherine Cortez Masto (D-NV):

• Sen. Cortez Masto highlighted how novel financial products had been responsible for the 2008 Financial Crisis and contended that the Committee must therefore be vigilant regarding new consumer financial products. She then mentioned how she had released a 2021 report on the franchise industry’s business models and stated that there did exist predatory franchise business models. She asked Mr. Seligman to discuss how the promise of an independent franchise could be used to trap consumers in jobs with low wages and “crushing” amounts of debt.
  • Mr. Seligman first expressed his appreciation for Sen. Cortez Masto’s investigation into the franchise industry’s business models. He then remarked how predatory franchises often targeted vulnerable workers that could not obtain labor protections. He indicated that these vulnerable workers were disproportionately immigrants and people of color. He noted that these predatory franchises will promise workers the prospect of owning a small business through becoming a franchisee. He stated however that these predatory franchises will instead trap their workers in arrangements where the companies exert “extraordinary” control over the workers. He noted that these workers often lacked the ability to set their own prices or communicate directly with their clients. He further noted how these predatory franchises will not pay the workers wages and will instead demand that the workers pay high franchise fees. He indicated that the predatory franchises will often provide loans to the workers to cover the franchise fees, which creates a cycle of predatory debt. He stated that the workers in this situation were effectively trapped in involuntary servitude.
• Sen. Cortez Masto mentioned how she had introduced legislation that would require franchises to disclose more information about their business models to prospective franchisees. She then raised concerns over how TRAPs were impacting the nursing workforce. She highlighted how the U.S. Bureau of Labor Statistics (BLS) had reported that the U.S. required more than 179,000 nurses to meet its national shortage. She raised concerns over the prevalence of TRAPs in nursing contracts and noted that the repayments associated with these provisions could be as high as $20,000. She asked Ms. Gittleman to discuss how TRAPs were being used in the health care profession.
  • Ms. Gittleman remarked that TRAPs were becoming increasingly prevalent across different industries and employers, including trucking, nursing, PetSmart, social work, and medical providers. She stated that TRAPs were a form of employer-driven debt that burdened consumers, hindered workplace mobility, and exacerbated economic disparities.
• Sen. Cortez Masto provided Mr. Seligman with an opportunity to provide recommendations for addressing TRAPs.
  • Mr. Seligman noted how employers often justified TRAPs for immigrant workers on the grounds that immigrant workers entered into the agreements voluntarily to obtain visas. He contended that this use of TRAPs constituted a form of indentured servitude. He called on the U.S. to go after TRAPs and asserted that TRAPs were unfair and illegal. He also stated that forced arbitration clauses in employment contracts prevented many workers from challenging the TRAPs in their employment arrangements or the debt collections associated with these agreements.
• Sen. Cortez Masto expressed agreement with Mr. Seligman’s criticism of the forced arbitration clauses being included in employment contracts. She contended that forced arbitration clauses constituted adhesion contracts.