1 00:00:00.000 --> 00:00:03.870 Chairman: I'd like to call this hearing to order. And I think 2 00:00:03.870 --> 00:00:06.120 we'll get underway. I don't know if you're all familiar with this 3 00:00:06.120 --> 00:00:10.140 place, but we got votes this morning at about 1030. So we'll 4 00:00:10.140 --> 00:00:14.340 just go and we may have to let out for a few minutes and 5 00:00:14.340 --> 00:00:17.280 reconvene after votes. We're not expecting a huge vote series, 6 00:00:17.310 --> 00:00:19.770 but it probably be 20 or 30 minutes, just so you all know 7 00:00:19.770 --> 00:00:24.090 it's heading our way. Let's just start off and begin I'll try to 8 00:00:24.120 --> 00:00:26.760 get through some of this rapidly. Small business access 9 00:00:26.760 --> 00:00:30.450 to capital has always been a top priority for this committee. 10 00:00:30.600 --> 00:00:33.510 Access to Capital give small businesses the resources they 11 00:00:33.510 --> 00:00:36.030 need to keep the lights on purchase inventory, pay their 12 00:00:36.030 --> 00:00:39.300 employees, expand their businesses. For decades, small 13 00:00:39.300 --> 00:00:41.880 business owners typically went to their local community bank to 14 00:00:41.880 --> 00:00:44.940 receive this capital. These banks were the backbone of how 15 00:00:44.940 --> 00:00:48.300 main streets across this nation were created. However, the 16 00:00:48.300 --> 00:00:50.250 amount of community banks in the United States has fallen 17 00:00:50.250 --> 00:00:53.250 dramatically in recent years and regulations such as Dodd Frank 18 00:00:53.250 --> 00:00:55.740 have made it more difficult for small businesses to acquire 19 00:00:55.740 --> 00:00:59.670 loans through traditional means. Therefore, many small businesses 20 00:00:59.670 --> 00:01:02.970 have had to resort to other means to acquire capital. One 21 00:01:02.970 --> 00:01:05.520 private sector solution that has grown considerably in recent 22 00:01:05.520 --> 00:01:10.410 years to address this credit gap is online lending. While it's 23 00:01:10.410 --> 00:01:13.080 difficult to estimate the size of this industry, online lenders 24 00:01:13.080 --> 00:01:16.920 originated an estimated five to 7 billion in loans to small 25 00:01:16.920 --> 00:01:21.540 businesses in 2015. And it is expected to become a $50 billion 26 00:01:21.750 --> 00:01:25.290 industry by 2020. While this is an emerging industry with 27 00:01:25.290 --> 00:01:28.410 several types of business models to assess risk, mitigate lender 28 00:01:28.410 --> 00:01:31.320 exposure and obtain the capital to lend to small businesses. 29 00:01:31.710 --> 00:01:34.440 online lenders typically offer smaller loans with rapid 30 00:01:34.440 --> 00:01:37.560 approval and funding times. This morning, we will hear from a 31 00:01:37.560 --> 00:01:40.560 distinguished panel of witnesses who will give their perspective 32 00:01:40.560 --> 00:01:42.930 on recent trends in the small business online lending 33 00:01:42.930 --> 00:01:46.080 industry, and how it fits into the overall small business 34 00:01:46.080 --> 00:01:49.740 credit market. I appreciate the witnesses being here today. 35 00:01:49.740 --> 00:01:52.110 Thank you all very much for coming. I look forward to your 36 00:01:52.110 --> 00:01:54.930 testimony. I now yield to the ranking member for his opening 37 00:01:54.930 --> 00:01:55.470 remarks. 38 00:01:55.529 --> 00:01:57.749 Dwight Evans: Thank you, Mr. Chairman. Right. Access to 39 00:01:57.749 --> 00:02:00.299 capital is critical to the success of small minutes 40 00:02:00.329 --> 00:02:03.179 however, obtaining conventional credit can be particularly 41 00:02:03.179 --> 00:02:07.139 difficult. For many small firms. lending requirements are much 42 00:02:07.139 --> 00:02:10.529 tighter now that they are than they were before before the 43 00:02:10.529 --> 00:02:13.679 financial crisis and small businesses, especially startups 44 00:02:13.829 --> 00:02:18.629 are still considered a risky bet by many lenders. Although 45 00:02:18.629 --> 00:02:21.269 FinTech provides significant advantages, there are some 46 00:02:21.269 --> 00:02:24.719 drawbacks FinTech lending platform reserves the right to 47 00:02:24.719 --> 00:02:27.059 reject small business application, just like 48 00:02:27.059 --> 00:02:31.409 traditional banks. In 2014, the Federal Reserve found only 8% of 49 00:02:31.409 --> 00:02:34.499 business loan applications are acceptable by the larger 50 00:02:34.499 --> 00:02:38.669 platform. Today's hearing will provide members with an 51 00:02:38.669 --> 00:02:42.389 opportunity to learn about the online lending market and how it 52 00:02:42.389 --> 00:02:46.079 has helped increase access to capital small businesses. Today, 53 00:02:46.079 --> 00:02:49.289 many firms are turned to alternative lending that 54 00:02:49.289 --> 00:02:53.009 operates on online lending platform. These services have 55 00:02:53.219 --> 00:02:55.889 made hundreds of millions of dollars available to small firms 56 00:02:55.889 --> 00:02:59.699 by offering a number of benefits over traditional sources, but do 57 00:02:59.699 --> 00:03:02.249 have some drawbacks. I look forward to hearing from our 58 00:03:02.249 --> 00:03:05.969 witnesses on ways to improve the marketplace and increase access 59 00:03:05.969 --> 00:03:09.869 to capital for the nation's job creation and innovation. Thank 60 00:03:09.869 --> 00:03:11.129 you, Mr. Chairman, I yield back. 61 00:03:18.270 --> 00:03:20.340 Chairman: If committee members have an opening statement 62 00:03:20.340 --> 00:03:23.670 prepared, I asked them to be submitted for the record, I'd 63 00:03:23.670 --> 00:03:26.580 like to take a moment to explain the timing lights for our panel 64 00:03:26.580 --> 00:03:28.680 today, you will each have five minutes to deliver your 65 00:03:28.680 --> 00:03:32.340 testimony. The light will start out green. When you have one 66 00:03:32.340 --> 00:03:35.370 minute remaining, the light will turn to yellow. And finally at 67 00:03:35.370 --> 00:03:38.580 the end of your five minutes it will turn red. I ask that you 68 00:03:38.580 --> 00:03:43.470 try to adhere to that time limit as best you can. And will that 69 00:03:43.470 --> 00:03:46.830 we'll get off to our testimony. Our first witness today is Mr. 70 00:03:46.830 --> 00:03:49.560 William Phelan, the President and co founder of Paynet 71 00:03:50.010 --> 00:03:52.890 incorporated in Skokie, Illinois. Paynet provides small 72 00:03:52.890 --> 00:03:56.760 business credit data analysis to a variety of clients. He also 73 00:03:56.760 --> 00:03:59.670 serves on the Advisory Council on agricultural small business 74 00:03:59.670 --> 00:04:03.510 and labor to the Federal Reserve Board of Chicago. Thank you for 75 00:04:03.510 --> 00:04:05.700 being here this morning. You are recognized for five minutes. 76 00:04:05.730 --> 00:04:06.120 Thank you. 77 00:04:07.050 --> 00:04:09.210 William Phelan: Thank you, Mr. Chairman. Thank you for that 78 00:04:09.210 --> 00:04:12.060 introduction, the financial crisis, as you all state 79 00:04:12.090 --> 00:04:15.270 disrupted the credit markets, traditional banks, as you 80 00:04:15.270 --> 00:04:21.270 mentioned, and even large banks were preoccupied and didn't find 81 00:04:21.270 --> 00:04:24.930 lending to be as profitable. fintechs jumped in, as you said, 82 00:04:24.930 --> 00:04:27.090 chairman to fill the credit gap and but they have their own 83 00:04:27.090 --> 00:04:29.670 challenges as well. Let me just briefly talk about the credit 84 00:04:29.670 --> 00:04:32.400 conditions for small businesses right now. There's less 85 00:04:32.400 --> 00:04:36.210 investment being taken by small businesses right now. From the 86 00:04:36.210 --> 00:04:39.630 period 15 to 17, the Small Business Investment is actually 87 00:04:39.630 --> 00:04:45.600 down 1% versus 2005 to seven where it was up 12%. Having said 88 00:04:45.600 --> 00:04:48.420 that the financial health of small businesses is extremely 89 00:04:48.780 --> 00:04:51.930 strong right now. There are days past two are actually better 90 00:04:51.930 --> 00:04:54.720 than they were before the recession. Very briefly, let me 91 00:04:54.720 --> 00:04:57.450 just mention the size of this market. It's important to 92 00:04:57.450 --> 00:05:00.360 understand the sheer scope of the Small Business his credit 93 00:05:00.360 --> 00:05:04.890 market we estimated over $1 trillion in total credit, banks 94 00:05:04.920 --> 00:05:07.560 make up the biggest portion of that about 700 billion, 95 00:05:07.890 --> 00:05:11.880 commercial finance about 250 billion. And alternative finance 96 00:05:11.880 --> 00:05:16.560 or Fintech is about five to 7 billion right now. Briefly, you 97 00:05:16.560 --> 00:05:18.960 mentioned the banks and the challenges they've had they go 98 00:05:18.960 --> 00:05:22.980 undergo a credit process, the credit process is one of 28 99 00:05:22.980 --> 00:05:27.210 different steps that can cost a bank five to $7,000 to complete 100 00:05:27.210 --> 00:05:30.060 one credit application. So it's a very expensive process for a 101 00:05:30.060 --> 00:05:32.970 bank. And then they have to spend a lot of time actually 102 00:05:32.970 --> 00:05:36.270 reviewing those loans. And that's another $1,000 of cost. 103 00:05:36.870 --> 00:05:41.700 You mentioned the credit gap as well. In your opening, I'd like 104 00:05:41.700 --> 00:05:44.700 to point out that Harvard Business School conducted a 105 00:05:44.700 --> 00:05:48.030 research study called the decline of big bank lending to 106 00:05:48.030 --> 00:05:52.080 small businesses, the dynamic impacts on local credit and 107 00:05:52.080 --> 00:05:55.230 labor markets. This was conducted by Jeremy Stein, an ex 108 00:05:55.230 --> 00:05:58.650 fed governor and two of his colleagues. And what they found 109 00:05:58.650 --> 00:06:02.010 was that fewer businesses expanded employment as small as 110 00:06:02.370 --> 00:06:05.460 the large big four banks pulled back and providing access to 111 00:06:05.460 --> 00:06:10.440 capital. These were unemployment rates rose, wages fell, the 112 00:06:10.440 --> 00:06:14.100 effects were concentrated in industries like manufacturing, 113 00:06:14.430 --> 00:06:18.990 and small banks, non bank, finance companies, and fintechs 114 00:06:19.020 --> 00:06:22.110 jumped in to fill that gap. And so there's evidence of this 115 00:06:22.110 --> 00:06:25.590 shown in this Harvard study, wages are still lower, that 116 00:06:25.590 --> 00:06:28.080 still persists, which means there's more work to be done. 117 00:06:28.860 --> 00:06:31.890 You mentioned in your memo, the size of FinTech at five to 7 118 00:06:31.890 --> 00:06:34.920 billion, so I won't dwell on that. They do make traditional 119 00:06:34.920 --> 00:06:38.160 loans, they make working capital loans. There are several 120 00:06:38.160 --> 00:06:41.100 coalition's that have banded together to make disclosure 121 00:06:41.100 --> 00:06:44.010 available, like the innovative lenders platform Association, 122 00:06:44.340 --> 00:06:49.200 the responsible business lending coalition, and the electronic 123 00:06:49.200 --> 00:06:51.960 transaction Association, and they've all instituted 124 00:06:51.960 --> 00:06:56.130 disclosures to help understand the cost of this capital. Very 125 00:06:56.130 --> 00:06:59.700 briefly, I want to point out the credit quality of the type of a 126 00:06:59.700 --> 00:07:03.600 business that uses FinTech, we've seen that credit quality 127 00:07:03.600 --> 00:07:09.450 improve from 2009 to the current to two through 2016. The credit 128 00:07:09.450 --> 00:07:13.410 scores were about 660. Back in oh nine, they're about six, 129 00:07:13.410 --> 00:07:18.930 almost 670. Now, in 2016, we've seen the fintechs actually 130 00:07:19.050 --> 00:07:21.780 increase the balance of the loans that they're providing 131 00:07:21.780 --> 00:07:25.590 small businesses, so they were around 20, and the 20,000 size 132 00:07:25.590 --> 00:07:29.730 and other at the $65,000 size. We've seen them expand the 133 00:07:29.730 --> 00:07:32.520 length of the loans that they're providing. These were very short 134 00:07:32.520 --> 00:07:36.420 term loans, six month type loans. Now they're average of 15 135 00:07:36.420 --> 00:07:43.560 months. We've seen the, the businesses that they lend to is 136 00:07:43.560 --> 00:07:46.020 actually longer established businesses. This was really 137 00:07:46.020 --> 00:07:48.630 interesting in some of the research that they're lending to 138 00:07:48.630 --> 00:07:51.660 businesses that have been in business for 10 or more years, 139 00:07:52.170 --> 00:07:55.620 to the tune of about 70% of their borrowings go to those 140 00:07:55.620 --> 00:08:00.570 kinds of businesses versus 77% for banks, and they're expanding 141 00:08:00.570 --> 00:08:03.810 into diverse industries. These are, we're seeing lending into 142 00:08:03.810 --> 00:08:07.020 retail healthcare, a combination of foods, construction, 143 00:08:07.020 --> 00:08:10.860 professional services, wholesale trade, transportation, 144 00:08:10.890 --> 00:08:14.370 administration and manufacturing. Very briefly, we 145 00:08:14.370 --> 00:08:17.820 have pain that conducted a study, we looked at what happens 146 00:08:17.820 --> 00:08:21.660 to businesses that borrow from online or FinTech lenders. And 147 00:08:21.660 --> 00:08:24.690 we see that about 80% of them have actually kind of climbed 148 00:08:24.690 --> 00:08:28.590 that credit ladder, and actually seen their their credit in their 149 00:08:28.590 --> 00:08:32.190 financial health actually improve over that timeframe. So 150 00:08:32.190 --> 00:08:36.000 that was important finding that we had. But we also note that 151 00:08:36.000 --> 00:08:38.820 there's a long way to go for fintechs to be successful. 152 00:08:39.270 --> 00:08:42.240 They've done a good job with the technology, but they still have 153 00:08:42.240 --> 00:08:45.810 work to do on acquiring accounts, and finding access to 154 00:08:45.810 --> 00:08:49.620 capital. And they're on the road towards this disclosure, which I 155 00:08:49.620 --> 00:08:52.350 think is an important part of what they've got to do to 156 00:08:52.350 --> 00:08:54.930 further bolster their business models. With that I'll wrap up 157 00:08:54.930 --> 00:08:56.100 my comments. Thank you. 158 00:09:18.540 --> 00:09:20.640 Katherine Fisher: Chairman Brat Ranking Member Evans and 159 00:09:20.640 --> 00:09:23.340 committee members, thank you for the opportunity to present 160 00:09:23.340 --> 00:09:26.760 testimony today regarding financing through FinTech online 161 00:09:26.760 --> 00:09:30.360 lending its role in improving small business capital access. I 162 00:09:30.360 --> 00:09:33.420 am here today on behalf of the commercial finance Coalition, a 163 00:09:33.420 --> 00:09:35.940 group of responsible finance companies that provide needed 164 00:09:35.940 --> 00:09:38.580 capital to small business small and medium sized businesses 165 00:09:38.580 --> 00:09:42.060 through innovative methods. Small businesses face a gap in 166 00:09:42.060 --> 00:09:45.240 credit availability. commercial finance coalition member 167 00:09:45.240 --> 00:09:47.820 companies are trying to close this gap and help spur 168 00:09:47.820 --> 00:09:50.610 entrepreneurship so more Americans can own and operate 169 00:09:50.610 --> 00:09:54.270 their own businesses. And my testimony today I will provide 170 00:09:54.270 --> 00:09:56.670 an overview of the types of financing available to small 171 00:09:56.670 --> 00:09:59.640 businesses with an emphasis on some of the more innovative 172 00:09:59.640 --> 00:10:03.270 finance In options, I also will address existing regulation on 173 00:10:03.270 --> 00:10:05.910 small business which is sufficient to protect small 174 00:10:05.910 --> 00:10:11.040 businesses. First, small businesses need choices. Small 175 00:10:11.040 --> 00:10:13.590 businesses benefit from having different types of financing 176 00:10:13.590 --> 00:10:16.800 available. A business owner who is planning for longer term 177 00:10:16.800 --> 00:10:19.740 capital needs may choose to apply for a loan guaranteed by 178 00:10:19.740 --> 00:10:23.310 the Small Business Administration. These SBA loans 179 00:10:23.310 --> 00:10:27.810 are relatively low cost, they range typically from 25,000 to 180 00:10:27.810 --> 00:10:32.700 $5 million. To apply for an SBA loan, the loan applicant must 181 00:10:32.700 --> 00:10:36.060 submit a business plan and the business owner must often use 182 00:10:36.060 --> 00:10:40.560 her house as collateral for the loan. In contrast, a business 183 00:10:40.560 --> 00:10:43.920 owner who has short term capital needs may choose to apply for a 184 00:10:43.920 --> 00:10:47.040 loan from a non bank lender or to sell future receivables to a 185 00:10:47.040 --> 00:10:51.030 merchant cash advance company. These types of transactions are 186 00:10:51.030 --> 00:10:54.090 typically higher costs than traditional SBA loans, and are 187 00:10:54.090 --> 00:10:57.960 in smaller dollar amounts. To apply for one of these loans or 188 00:10:57.960 --> 00:11:01.410 MC A's, the applicant usually must submit bank statements 189 00:11:01.440 --> 00:11:04.560 showing several months worth of revenue, and the business can 190 00:11:04.560 --> 00:11:08.730 receive funds in a matter of days. MCA companies these are 191 00:11:08.730 --> 00:11:11.700 merchant cash advance companies are primarily balance sheet 192 00:11:11.700 --> 00:11:15.690 funders who have an interest in the success of the business. MCs 193 00:11:15.690 --> 00:11:18.360 are also unique because they allow the merchant to adjust the 194 00:11:18.360 --> 00:11:23.340 terms of the transaction to match the revenue. Whatever the 195 00:11:23.340 --> 00:11:26.130 type of financing a business owner chooses, banks alone are 196 00:11:26.130 --> 00:11:29.640 not addressing the needs of small business. Other financing 197 00:11:29.640 --> 00:11:32.430 sources are finding success because small businesses demand 198 00:11:32.430 --> 00:11:35.910 them. This demand shows that small businesses are being 199 00:11:35.910 --> 00:11:40.530 underserved by the traditional funding sources. The MCA and 200 00:11:40.530 --> 00:11:43.200 commercial lending spaces are sufficiently regulated by 201 00:11:43.200 --> 00:11:47.430 existing federal and state laws and regulations. Both MCA 202 00:11:47.430 --> 00:11:50.130 companies and commercial lenders must comply with laws and 203 00:11:50.130 --> 00:11:52.500 regulations affecting nearly every aspect of their 204 00:11:52.500 --> 00:11:56.130 transactions from marketing and underwriting through servicing 205 00:11:56.130 --> 00:12:00.360 and collections. Even when they comply with every applicable law 206 00:12:00.360 --> 00:12:03.450 and regulation. Small Business funders must also be wary of the 207 00:12:03.450 --> 00:12:06.720 Federal Trade Commission's powerful authority to prevent 208 00:12:06.720 --> 00:12:11.220 unfair or deceptive acts or practices. commercial lenders 209 00:12:11.220 --> 00:12:14.160 must comply with additional federal regulation, and many 210 00:12:14.160 --> 00:12:16.650 states subjected them to comprehensive licensing and 211 00:12:16.650 --> 00:12:21.060 regulatory schemes. For example, on the federal level, commercial 212 00:12:21.060 --> 00:12:24.120 lenders must comply with the Equal Credit Opportunity Act and 213 00:12:24.120 --> 00:12:27.090 its implementing regulation P which prohibit discrimination 214 00:12:27.120 --> 00:12:29.670 against protected classes of people in the extension of 215 00:12:29.670 --> 00:12:33.600 credit. The Equal Credit Opportunity Act and REG be 216 00:12:33.630 --> 00:12:36.690 applied to business credit and provide protections specifically 217 00:12:36.690 --> 00:12:40.680 for business borrowers. Another example is the Fair Credit 218 00:12:40.680 --> 00:12:43.410 Reporting Act, which requires a funder to have a permissible 219 00:12:43.410 --> 00:12:46.860 purpose to pull a consumer report for sole proprietor or 220 00:12:46.860 --> 00:12:51.030 for an individual guarantor of a business transaction. This is 221 00:12:51.030 --> 00:12:53.760 particularly relevant in the world of Small Business Finance, 222 00:12:53.940 --> 00:12:56.730 where the business is often organized as a sole proprietor, 223 00:12:57.150 --> 00:12:59.970 or the individual owner will serve as a guarantor in the 224 00:12:59.970 --> 00:13:04.350 event that the business defaults. Finally, many states 225 00:13:04.350 --> 00:13:07.710 require a license to make a loan to a business limit the interest 226 00:13:07.710 --> 00:13:11.760 rates lenders may charge to business borrowers or both. And 227 00:13:11.760 --> 00:13:15.600 with state licensing programs comes regulatory oversight 228 00:13:16.590 --> 00:13:19.920 states that regulate lending and also typically limit the terms 229 00:13:19.920 --> 00:13:22.740 of loans, required disclosures and loan documents and limit the 230 00:13:22.740 --> 00:13:26.580 fees that creditors may impose. Most state laws regulating 231 00:13:26.580 --> 00:13:29.640 lending apply to loans with smaller dollar values. And these 232 00:13:29.640 --> 00:13:32.010 are exactly the types of loans upon which small businesses 233 00:13:32.010 --> 00:13:36.540 rely. I'm very optimistic that FinTech and alternative finance 234 00:13:36.540 --> 00:13:39.270 will fill the void for those underserved by traditional banks 235 00:13:39.480 --> 00:13:42.420 and financial institutions, providing much needed access to 236 00:13:42.420 --> 00:13:44.490 capital for small businesses. Thank you. 237 00:13:47.460 --> 00:13:49.440 Chairman: Thank you, Miss Fisher. We appreciate your 238 00:13:49.470 --> 00:13:52.110 testimony as well. Thank you very much and I'll now yield to 239 00:13:52.110 --> 00:13:53.970 our ranking member for the introduction of the final 240 00:13:53.970 --> 00:13:54.450 witness. 241 00:14:14.040 --> 00:14:19.350 Dwight Evans: Thank you, Mr. Chairman. Our last witness is 242 00:14:19.350 --> 00:14:25.290 Mr. Dryer, CEO of the company is Mirador, did I get that right? 243 00:14:25.740 --> 00:14:29.130 Mirador. Mirador Finance in Portland, Oregon. Mr. Dryer 244 00:14:29.130 --> 00:14:37.020 received his a BA in history. literature from Harvard 245 00:14:37.020 --> 00:14:40.290 University before receiving his JD from Stanford University Law 246 00:14:40.290 --> 00:14:43.290 School. Thank you for being here this morning. And you may begin. 247 00:14:43.320 --> 00:14:44.100 Thank you, Mr. 248 00:14:44.840 --> 00:14:47.450 Dryer: Chairman, brat and Ranking Member Evans, thank you 249 00:14:47.450 --> 00:14:50.240 for the opportunity to testify today. It's really an honor to 250 00:14:50.240 --> 00:14:54.560 be here. As mentioned, my name is Trevor Dreyer. I'm the CEO of 251 00:14:54.590 --> 00:14:57.530 Mirador, which is a small business headquartered in 252 00:14:57.530 --> 00:15:01.670 Portland, Oregon. Mirador is a White Label third party service 253 00:15:01.670 --> 00:15:05.090 provider working with regional mid sized and community banks, 254 00:15:05.120 --> 00:15:10.040 credit unions and nonprofit CDI CDFIs. Mirador is dedicated to 255 00:15:10.040 --> 00:15:13.130 the proposition that regulated financial services companies 256 00:15:13.130 --> 00:15:16.970 want to serve small businesses in their communities. Mirador is 257 00:15:16.970 --> 00:15:19.940 not a lender. Our platform focuses on improving the 258 00:15:19.940 --> 00:15:22.490 engagement and experience between borrower and lender 259 00:15:22.700 --> 00:15:26.330 supporting commercial term loans, SBA back loans, working 260 00:15:26.330 --> 00:15:29.720 capital lines of credit, commercial real estate loans and 261 00:15:29.720 --> 00:15:33.050 small dollar loans. When a borrower goes to one of our 262 00:15:33.050 --> 00:15:36.320 customers branches or to their website to apply for a business 263 00:15:36.320 --> 00:15:39.680 loan, they're routed onto the Mirador platform. However, they 264 00:15:39.680 --> 00:15:42.560 likely won't even know they have left the bank site and we want 265 00:15:42.560 --> 00:15:45.740 it that way. Borrowers can follow simple steps to fill out 266 00:15:45.740 --> 00:15:48.770 the application and Mirador technology completes a credit 267 00:15:48.770 --> 00:15:51.830 memo by pulling additional data from public records, credit 268 00:15:51.830 --> 00:15:55.610 bureaus, accounting software, bank accounts and the IRS, which 269 00:15:55.610 --> 00:15:58.400 is returned to a banks loan officer with a simple indication 270 00:15:58.400 --> 00:16:02.330 of credit worthiness. Based on the lenders credit criteria. We 271 00:16:02.330 --> 00:16:05.120 are paid for every credit memo we complete without regard to 272 00:16:05.120 --> 00:16:08.570 the final outcome of the application. The benefit to our 273 00:16:08.570 --> 00:16:11.600 bank customers is a vast reduction in the time and cost 274 00:16:11.600 --> 00:16:14.630 to process the loan. For the borrowers they benefit from an 275 00:16:14.630 --> 00:16:17.510 equally steep reduction in the time it takes to go from the 276 00:16:17.510 --> 00:16:21.320 application to the funding of the loan. As we grow our client 277 00:16:21.320 --> 00:16:24.110 base, we're creating a network of partners borrowers and 278 00:16:24.110 --> 00:16:27.290 lenders passing along customers to ensure that any small 279 00:16:27.290 --> 00:16:29.570 business can gain access to credit from a regulated 280 00:16:29.570 --> 00:16:32.810 institution without having to go through the time and trouble of 281 00:16:32.810 --> 00:16:36.560 starting the application process over each time. This is also a 282 00:16:36.560 --> 00:16:39.410 unique way to increase awareness of low cost lenders such as 283 00:16:39.410 --> 00:16:43.040 CDFIs that traditionally do not engage in marketing activities. 284 00:16:44.000 --> 00:16:46.610 Innovation in the area of small business lending is improving 285 00:16:46.610 --> 00:16:49.250 access to capital. However, a number of issues still 286 00:16:49.250 --> 00:16:51.740 negatively impact this market and place the borrower at a 287 00:16:51.740 --> 00:16:55.490 disadvantage. To that end, I proffer a few recommendations to 288 00:16:55.490 --> 00:16:58.250 further remove pain points for small business borrowers and 289 00:16:58.250 --> 00:17:02.390 lenders. First, I strongly encourage the IRS to automate 290 00:17:02.390 --> 00:17:05.930 the 45 O 60 process for a third party to obtain a tax 291 00:17:05.930 --> 00:17:09.470 transcript. Congressman McHenry and Blumenauer as well as the 292 00:17:09.470 --> 00:17:11.180 ranking member of this committee, Congresswoman 293 00:17:11.180 --> 00:17:16.100 Velazquez introduced hr 3860. The IRS data verification 294 00:17:16.100 --> 00:17:20.000 Modernization Act of 2017, requiring the IRS to automate 295 00:17:20.000 --> 00:17:23.900 the income verification express service process by creating an 296 00:17:23.900 --> 00:17:27.560 API or application programming interface, which will reduce the 297 00:17:27.560 --> 00:17:30.320 paperwork and the waiting period that currently burdens lenders 298 00:17:30.320 --> 00:17:33.980 and borrowers alike. Second, working with New York Business 299 00:17:33.980 --> 00:17:37.160 Development Corporation, we've identified an opportunity to 300 00:17:37.160 --> 00:17:40.040 increase referrals of those borrowers unable to gain access 301 00:17:40.040 --> 00:17:42.740 of credit through traditional methods to a mission based 302 00:17:42.740 --> 00:17:46.250 nonprofit lender, by providing Community Reinvestment Act or 303 00:17:46.250 --> 00:17:50.390 CRA consideration for referrals. Currently, banks do not receive 304 00:17:50.390 --> 00:17:53.390 CRA credit from referring borrowers to CDFIs or other 305 00:17:53.390 --> 00:17:56.270 qualified institutions. When these loans are too risky for 306 00:17:56.270 --> 00:17:59.120 the bank to underwrite. Given the economic development 307 00:17:59.120 --> 00:18:02.540 missions of CDFIs. To support small businesses, a successful 308 00:18:02.540 --> 00:18:04.670 referral from a bank is something that regulators should 309 00:18:04.670 --> 00:18:08.930 incentivize. Third, the law should allow credit reports to 310 00:18:08.930 --> 00:18:12.050 travel with referred loan applications. When applying for 311 00:18:12.050 --> 00:18:14.510 a loan. Numerous credit inquiries occur from the various 312 00:18:14.510 --> 00:18:17.510 lenders considering the borrower's request, even though 313 00:18:17.510 --> 00:18:20.990 the borrower is seeking a single loan. Currently, each lender has 314 00:18:20.990 --> 00:18:24.290 to pull a credit report even if the loan is a referral. The more 315 00:18:24.290 --> 00:18:27.440 inquiries the greater the impact on a credit score. As a credit 316 00:18:27.440 --> 00:18:30.800 score gets lowered, the cost of capital increases and becomes 317 00:18:30.800 --> 00:18:35.210 more difficult to obtain. Finally, I'd encourage further 318 00:18:35.210 --> 00:18:38.720 AI to further incentivize the SBA to improve their technology 319 00:18:38.720 --> 00:18:41.210 and making the agency's lending process more efficient and 320 00:18:41.210 --> 00:18:44.750 borrower friendly. SBA back products remain a vital source 321 00:18:44.750 --> 00:18:47.900 of capital for small businesses, particularly newer businesses 322 00:18:47.900 --> 00:18:51.020 and startups. However, the process and technology used are 323 00:18:51.020 --> 00:18:53.480 cumbersome and can deter many lenders and borrowers from 324 00:18:53.480 --> 00:18:56.540 participating. The private sector including Mirador has 325 00:18:56.540 --> 00:18:59.390 developed world class matching technology, ensuring that 326 00:18:59.390 --> 00:19:01.610 borrowers end up approved by a lender under the most 327 00:19:01.610 --> 00:19:04.460 appropriate terms and conditions. The SBA should be 328 00:19:04.460 --> 00:19:06.650 encouraged to look to the private sector for technology 329 00:19:06.650 --> 00:19:09.260 solutions to improve the borrower experience in their 330 00:19:09.260 --> 00:19:13.550 flagship programs, SBA won an SBA lender match. Once again, 331 00:19:13.550 --> 00:19:16.040 thank you so much for this incredible opportunity and happy 332 00:19:16.040 --> 00:19:16.940 to answer your questions. 333 00:19:18.730 --> 00:19:20.950 Chairman: Super. Thank you, Mr. Dryer, we appreciate your 334 00:19:20.950 --> 00:19:24.880 testimony as well. And I think for the questions, I'm first 335 00:19:24.880 --> 00:19:28.180 going to yield to my colleague, Mr. Luke De Meyer. He's got a 336 00:19:28.180 --> 00:19:31.750 special interest and expertise in this area, and he'll lead off 337 00:19:31.750 --> 00:19:32.470 with some questions. 338 00:19:33.250 --> 00:19:34.660 Luke De Meyer: Thank you, Mr. Chairman. I appreciate the 339 00:19:34.660 --> 00:19:39.760 opportunity to be here today in your in your committee. Miss 340 00:19:39.940 --> 00:19:43.570 Miss Fisher, I'm kind of curious. You are advocating I 341 00:19:43.570 --> 00:19:46.570 represent anyway the merchant cash advance folks that correct? 342 00:19:48.790 --> 00:19:52.960 Would you describe a cash advance as a loan or investment 343 00:19:52.960 --> 00:19:54.310 or how would you classify that? 344 00:19:54.370 --> 00:19:57.520 Katherine Fisher: Sure, thanks for asking that. A merchant cash 345 00:19:57.520 --> 00:20:01.180 advance is not a loan. It is a purchase of of the right to 346 00:20:01.180 --> 00:20:05.320 receive future income from a business. So a small business 347 00:20:05.320 --> 00:20:09.070 owner can enter into a transaction with a merchant cash 348 00:20:09.070 --> 00:20:12.400 advance funder under which the small business owner sells a 349 00:20:12.400 --> 00:20:16.570 percentage of its future income. And the merchant cash advance 350 00:20:16.570 --> 00:20:21.640 company then will receive that portion of the of the small 351 00:20:21.640 --> 00:20:25.900 business's revenue, as the small business makes the revenue. It's 352 00:20:25.900 --> 00:20:30.460 a very helpful product for small businesses and that payments are 353 00:20:30.460 --> 00:20:33.400 not unconditionally required, the payments to the merchant 354 00:20:33.400 --> 00:20:36.220 cash advance company are required only to the extent that 355 00:20:36.220 --> 00:20:38.320 the small business actually creates revenue. 356 00:20:38.800 --> 00:20:43.150 Luke De Meyer: Okay, fantastic. So I know that in Mr. Failings 357 00:20:43.150 --> 00:20:46.510 testimony, he talks about a Smart Box. And I'm all for 358 00:20:46.510 --> 00:20:49.810 disclosures. I think the individual the business needs to 359 00:20:49.810 --> 00:20:52.480 know what they're getting into. That gets important. But I know 360 00:20:52.510 --> 00:20:56.020 in the smart box there is an APR, disclosure, how do you 361 00:20:56.020 --> 00:20:59.710 disclose an APR with a Merchant Advance product? 362 00:21:02.170 --> 00:21:04.180 Katherine Fisher: That's a good question. A merchant cash 363 00:21:04.180 --> 00:21:05.620 advance product is not. 364 00:21:05.710 --> 00:21:08.020 Luke De Meyer: It's not a loan. So therefore you don't really 365 00:21:08.020 --> 00:21:08.860 have an APR. 366 00:21:09.070 --> 00:21:12.820 Katherine Fisher: If there's and and also, there is no definite 367 00:21:12.820 --> 00:21:16.480 term. So because a small business is required to deliver 368 00:21:16.480 --> 00:21:19.300 their a portion of their receipts, as as receipts are 369 00:21:19.300 --> 00:21:24.610 created. We can't know when those crates those receipts will 370 00:21:24.610 --> 00:21:28.180 be created. And, and things can happen. Like there can be a 371 00:21:28.180 --> 00:21:31.900 tough winter in Minnesota and business slows down for 372 00:21:31.900 --> 00:21:34.840 businesses there. And so receipts trickle in more slowly 373 00:21:34.840 --> 00:21:39.910 than expected. So putting a an APR as a measurement on a 374 00:21:39.910 --> 00:21:43.360 transaction with no definite term is is not the most healthy. 375 00:21:43.360 --> 00:21:45.130 Luke De Meyer: We're trying to turn a square peg into a round 376 00:21:45.130 --> 00:21:50.860 hole. I have I deal with a lot of small dollar lending. And I 377 00:21:50.860 --> 00:21:54.040 chair the financial institutions subcommittee and financial 378 00:21:54.040 --> 00:21:56.740 services. And so I deal with this stuff all the time. And 379 00:21:56.740 --> 00:22:00.400 it's, you know, for a long time, I actually chaired the Financial 380 00:22:00.400 --> 00:22:02.350 Services Committee back in Missouri when I was back in the 381 00:22:02.350 --> 00:22:06.580 state house. And I've always dealt with the the problem with 382 00:22:06.580 --> 00:22:10.330 APR, just disclosures for small barrel lending anything less 383 00:22:10.330 --> 00:22:14.350 than a year. You know, APR, the letter stands for annual 384 00:22:14.380 --> 00:22:17.770 percentage rate, how do you have an annual percentage rate on 385 00:22:17.770 --> 00:22:21.100 something that's not an annual payment and is not done on an 386 00:22:21.100 --> 00:22:23.860 annual basis, it's done for two, three weeks or six months at a 387 00:22:23.860 --> 00:22:26.890 time, I've really struggled with this. And I think, you know, 388 00:22:26.890 --> 00:22:30.610 quite often time the APR is the misrepresented because at the 389 00:22:30.610 --> 00:22:34.720 end of the day, if I'm if I've got a leaky faucet at home, and 390 00:22:34.720 --> 00:22:39.130 I call my plumber up, and he charges 50 bucks to open, you 391 00:22:39.130 --> 00:22:42.310 know to stop by my my doorstep goes in and so you gotta you 392 00:22:42.310 --> 00:22:44.710 gotta tap, I just got to fix it within five minutes, you know, 393 00:22:44.740 --> 00:22:51.190 10 minutes there, he he fixed my my faucet. Now He charged me 50 394 00:22:51.190 --> 00:22:54.760 bucks to stop by and pay for his trip out and his experience and 395 00:22:54.760 --> 00:23:00.340 all his tools and all that or He charged me $300 an hour. That's 396 00:23:00.340 --> 00:23:03.430 the that's the disproportionality of an APR, 397 00:23:03.730 --> 00:23:07.270 and the misrepresentation of what's going on with a service 398 00:23:07.270 --> 00:23:10.300 charge for small dollar lending, which, you know, in your 399 00:23:10.300 --> 00:23:15.010 situation here, quite frankly, didn't even apply because of the 400 00:23:15.040 --> 00:23:19.450 business model that you have. So that's my concern with with APR, 401 00:23:19.480 --> 00:23:22.150 I think, for small dollar lending or anything is less than 402 00:23:22.150 --> 00:23:24.640 a year. I think it's an irrelevant thing. And I hope 403 00:23:24.640 --> 00:23:27.640 that that can be something that a smart box can be able to be 404 00:23:27.640 --> 00:23:30.850 fixed. So that doesn't do more harm than good, because I think 405 00:23:30.850 --> 00:23:35.230 it misrepresents what's actually going on there. Mr. Dryer, you 406 00:23:35.230 --> 00:23:37.420 made a comment a minute ago with regards to credit bureau 407 00:23:37.420 --> 00:23:40.360 inquiries. I think this is a very, very important point from 408 00:23:40.360 --> 00:23:43.120 the standpoint that the more inquiries that an individual 409 00:23:43.120 --> 00:23:46.330 has, or businesses has, at some time can have a negative impact 410 00:23:46.660 --> 00:23:49.180 on that person or that business's ability to get 411 00:23:49.180 --> 00:23:51.130 credit. Would you like to elaborate on that just a little 412 00:23:51.130 --> 00:23:55.180 bit? It seems counterintuitive, because you're trying to find a 413 00:23:55.180 --> 00:23:57.760 way to help people actually hurt them by going to the credit 414 00:23:57.760 --> 00:23:58.030 bureau. 415 00:23:58.420 --> 00:24:02.230 Dryer: That's right, we see typically, because of the rules 416 00:24:02.230 --> 00:24:04.810 that don't allow one lender to share a credit report with 417 00:24:04.810 --> 00:24:08.200 another that small businesses often have to apply to several 418 00:24:08.200 --> 00:24:11.080 lenders in order to find one that could they fit their credit 419 00:24:11.080 --> 00:24:13.810 parameters, their lending parameters. And so you'll see 420 00:24:13.810 --> 00:24:16.630 sometimes when they're looking for the same $50,000 loan, 421 00:24:16.990 --> 00:24:19.210 that'll apply to five or six lenders, and as they go through 422 00:24:19.210 --> 00:24:22.360 the process, more credit inquiries lowering their FICO 423 00:24:22.360 --> 00:24:22.810 score. 424 00:24:23.290 --> 00:24:24.940 Luke De Meyer: So how would, how would you fix that for your 425 00:24:24.940 --> 00:24:27.130 small for your small businesses, because this is really 426 00:24:27.130 --> 00:24:28.780 important, because they're trying to get started, they're 427 00:24:28.780 --> 00:24:32.230 struggling. And yet if they actually try and go someplace 428 00:24:32.230 --> 00:24:35.740 and get some funds, and they that individual or company or 429 00:24:35.740 --> 00:24:38.170 entity goes to the credit bureau, it's actually a mark 430 00:24:38.170 --> 00:24:39.580 against them. How do you how do you solve that problem? 431 00:24:40.020 --> 00:24:42.870 Dryer: I would solve it by allowing the credit report to be 432 00:24:42.900 --> 00:24:45.630 transferred from lender to lender. If you're applying for a 433 00:24:45.630 --> 00:24:48.300 single loan, even if it's a multiple lenders, that should be 434 00:24:48.330 --> 00:24:52.080 one credit inquiry, in my view, and if you can allow the 435 00:24:52.080 --> 00:24:55.200 borrower to kind of take that data with them, that would I 436 00:24:55.200 --> 00:24:56.760 think, solve largely the problem. 437 00:24:57.060 --> 00:24:59.130 Luke De Meyer: Appreciate that. Thank you, Mr. Chairman. My time 438 00:24:59.130 --> 00:24:59.640 is expired. 439 00:25:01.550 --> 00:25:04.010 Chairman: Thank you. I'll now yield to the ranking member 440 00:25:04.040 --> 00:25:06.200 member, Mr. Evans for five minutes. 441 00:25:06.230 --> 00:25:10.700 Dwight Evans: Thank you, Mr. Chairman. Miss Fisher. Want to 442 00:25:11.150 --> 00:25:13.520 probe a little bit more what my colleagues just talked about 443 00:25:13.550 --> 00:25:16.730 when applying for finance? Does your industry get personal 444 00:25:16.730 --> 00:25:19.640 guarantees that lenders and other industries receive? 445 00:25:22.670 --> 00:25:25.220 Katherine Fisher: Thank you for that question. When the merchant 446 00:25:25.220 --> 00:25:28.670 cash advance industry, they're typically our personal 447 00:25:28.670 --> 00:25:31.160 guarantees, but they're of a different sort than what the 448 00:25:31.160 --> 00:25:35.540 loan as I explained before, with a merchant cash advance 449 00:25:35.540 --> 00:25:38.930 transaction, the business is only obligated to deliver 450 00:25:38.930 --> 00:25:41.900 revenue to the extent the business creates that revenue. 451 00:25:42.170 --> 00:25:45.500 So the personal guarantee is not a personal guarantee of payment. 452 00:25:45.950 --> 00:25:48.920 The business owner also make certain promises such as they 453 00:25:48.920 --> 00:25:53.720 won't divert revenue, they they won't open multiple bank 454 00:25:53.720 --> 00:25:58.520 accounts and do funny things with their money. So the 455 00:25:58.520 --> 00:26:02.630 guarantee is a guarantee of those types of promises, not the 456 00:26:02.630 --> 00:26:03.980 guarantee of repayment. 457 00:26:05.270 --> 00:26:08.360 Dwight Evans: So does that lack of collaboration affect your 458 00:26:08.360 --> 00:26:09.050 business model? 459 00:26:14.480 --> 00:26:17.930 Katherine Fisher: No, I, I think it affects it in a positive way, 460 00:26:17.930 --> 00:26:22.400 in that it helps only ensure that the business owner who 461 00:26:22.400 --> 00:26:25.130 typically is the person who can control in a small business, 462 00:26:25.400 --> 00:26:28.490 whether they're opening multiple bank accounts is standing behind 463 00:26:28.490 --> 00:26:32.390 those promises. But it doesn't change the nature of the product 464 00:26:32.390 --> 00:26:34.040 being not absolutely repayable. 465 00:26:35.690 --> 00:26:38.390 Dwight Evans: This is to the entire panel, I'll start with 466 00:26:38.390 --> 00:26:41.690 you. Are you aware of the Small Business borrowing Bill of 467 00:26:41.690 --> 00:26:44.960 Rights? And do you think its tenants include common sense 468 00:26:44.960 --> 00:26:47.540 tools to protect small businesses and provide 469 00:26:47.540 --> 00:26:48.560 transparency? 470 00:26:49.610 --> 00:26:52.640 Katherine Fisher: Oh, thank you. I am aware of the small 471 00:26:52.700 --> 00:26:55.070 borrowers Bill of Rights. I haven't I haven't read it in a 472 00:26:55.070 --> 00:27:00.320 while. So I'm not familiar with exactly what it says. I think 473 00:27:00.320 --> 00:27:02.750 that, as I recall, there are certain things about it that are 474 00:27:02.750 --> 00:27:05.600 very good. There are certain things about it. I think it 475 00:27:05.930 --> 00:27:08.690 mentions APR. So that would be something that I would disagree 476 00:27:08.690 --> 00:27:13.550 with. The good news is there are many different industry groups 477 00:27:13.580 --> 00:27:16.520 who are working on best practices. And although they 478 00:27:16.520 --> 00:27:20.030 don't agree with every practice, they are working hard on coming 479 00:27:20.030 --> 00:27:23.150 together for best practices as a whole. So that that's a positive 480 00:27:23.150 --> 00:27:23.480 thing. 481 00:27:25.550 --> 00:27:27.410 Dwight Evans: Any people want to respond to that? 482 00:27:31.220 --> 00:27:35.690 William Phelan: Thank you, Congressman. We we also are 483 00:27:35.690 --> 00:27:38.870 aware of all the different disclosures that are underway 484 00:27:38.870 --> 00:27:41.510 now in the industry. And I mentioned some of them in my 485 00:27:41.510 --> 00:27:50.030 opening remarks. And there, there are different tools for 486 00:27:50.060 --> 00:27:55.670 assessing the cost of these types of loans. We think that 487 00:27:55.670 --> 00:27:59.810 more of those tools that are made available are better for 488 00:28:00.050 --> 00:28:04.550 the business to assess. I think somebody here mentioned that 489 00:28:05.090 --> 00:28:07.940 businesses have all kinds of credit needs and financial 490 00:28:07.940 --> 00:28:12.050 needs. And it's it's hard to distill this down into any one 491 00:28:12.080 --> 00:28:15.950 kind of point of view that can encompass all these different 492 00:28:15.980 --> 00:28:20.000 capital needs or credit needs for businesses. And so providing 493 00:28:20.030 --> 00:28:23.450 the disclosure and having the tools available, make a lot of 494 00:28:23.450 --> 00:28:27.950 sense is a way to help clarify the cost for the business. 495 00:28:30.770 --> 00:28:35.060 Dryer: Yes, we applaud the efforts of the industry to 496 00:28:35.090 --> 00:28:38.390 create more transparency and disclosure at the end of the 497 00:28:38.390 --> 00:28:41.060 day. That to me is what's important is the Small Business 498 00:28:41.060 --> 00:28:43.460 understanding what they're getting into. I think the 499 00:28:43.460 --> 00:28:46.970 challenge is when you have regulated entities that are 500 00:28:46.970 --> 00:28:50.450 subject to regulations requiring a certain disclosure, and then 501 00:28:50.450 --> 00:28:52.910 you have industry groups that have taken a different approach 502 00:28:53.120 --> 00:28:55.490 can become very confusing for a small business, if they're 503 00:28:55.490 --> 00:28:59.060 looking at multiple lenders to really understand the true costs 504 00:28:59.060 --> 00:29:02.900 and the terms of the loans. And we see that can be quite 505 00:29:02.900 --> 00:29:06.530 confusing. I don't have a great solution for that. But I think 506 00:29:06.530 --> 00:29:10.730 the more that a small business can be allowed to compare 507 00:29:10.760 --> 00:29:14.270 proverbial apples to apples, the better it is for the borrower. 508 00:29:16.620 --> 00:29:19.080 Dwight Evans: Thank you. Mr. Chairman. I yield back the 509 00:29:19.080 --> 00:29:19.770 balance of my time. 510 00:29:20.760 --> 00:29:24.840 Chairman: Thank you, Mr. Evans. I think we're actually doing all 511 00:29:24.840 --> 00:29:26.880 right on the voting clock. They're still talking on the 512 00:29:26.880 --> 00:29:30.420 floor. So we've done well today I'll ask a bit of a technical 513 00:29:30.420 --> 00:29:33.300 question. And then in the back your minds. You're up here in 514 00:29:33.300 --> 00:29:37.710 DC, federal government, federal law, etc regulations. At the 515 00:29:37.710 --> 00:29:41.220 end, maybe just suggest how we can be helpful to you moving 516 00:29:41.220 --> 00:29:44.640 forward, what can we do better and that but I'll just start off 517 00:29:44.640 --> 00:29:46.980 with a more of a narrow question. We'll just start with 518 00:29:46.980 --> 00:29:51.390 Mr. Phelan work down currently the Consumer Financial 519 00:29:51.390 --> 00:29:54.390 Protection Bureau. CFPB is in the process of implementing 520 00:29:54.390 --> 00:29:58.260 section 1071 of Dodd Frank which would require financial 521 00:29:58.260 --> 00:30:01.530 institutions including online land endeavours to gather and 522 00:30:01.530 --> 00:30:04.680 submit demographic data of borrowers to the government? 523 00:30:05.850 --> 00:30:09.360 What concerns if any, do you have with this provision? And 524 00:30:09.390 --> 00:30:12.660 how would it affect both small financial institutions and small 525 00:30:12.660 --> 00:30:13.380 businesses? 526 00:30:14.460 --> 00:30:17.220 William Phelan: Thank you for that question. Yes, we're we've 527 00:30:17.220 --> 00:30:20.370 worked a little bit with the CFPB to help them understand 528 00:30:20.370 --> 00:30:25.170 this data collection requirement. The, it's complex, 529 00:30:25.170 --> 00:30:28.590 and what we find is that the data doesn't exist today. So 530 00:30:28.590 --> 00:30:32.880 it's, it's hard to say where exactly to go for it right now. 531 00:30:33.750 --> 00:30:39.090 We think that the challenges in creating this sort of this 532 00:30:39.090 --> 00:30:43.920 massive set of information, and that, you know, it's going to 533 00:30:44.400 --> 00:30:48.180 put a burden on the businesses ultimately to report this in the 534 00:30:48.180 --> 00:30:51.480 in the transaction. And so there will be some requirements to 535 00:30:51.480 --> 00:30:54.000 collect it from the business, it's really the only source to 536 00:30:54.000 --> 00:30:56.760 get it is directly from the business because no other 537 00:30:56.760 --> 00:31:00.900 sources exist right now. Then you've got the challenge of 538 00:31:00.900 --> 00:31:04.320 being able to create this massive data warehouse, and 539 00:31:04.320 --> 00:31:07.890 there's different ways to do it. What we've spoken with with the 540 00:31:07.890 --> 00:31:13.350 CFPB, is to utilize current technology right now that exists 541 00:31:13.530 --> 00:31:18.180 right now, to collect this information. Once that's 542 00:31:18.180 --> 00:31:22.050 collected, it has to then be crafted into finished product 543 00:31:22.050 --> 00:31:24.900 that can understand what's going on in the lending markets and to 544 00:31:24.960 --> 00:31:30.000 understand fair credit, you know, lending activity. So the 545 00:31:30.000 --> 00:31:33.120 concerns are, it's it's going to be a massive project, it's going 546 00:31:33.120 --> 00:31:38.580 to be a very substantial initial change for both the business all 547 00:31:38.580 --> 00:31:42.000 the way through, I think, even to the CFPB to finally finally 548 00:31:42.000 --> 00:31:44.820 get understanding out of out of this dataset. 549 00:31:46.490 --> 00:31:48.950 Chairman: Great, thank you much. I apologize for the fire alarm. 550 00:31:48.950 --> 00:31:51.980 I've never heard it go off like that before. But I think I'm 551 00:31:51.980 --> 00:31:55.580 going to yield my time to a member. He bet Clark from New 552 00:31:55.580 --> 00:31:58.400 York right now. She's with us. And I want to make sure we get 553 00:31:58.400 --> 00:32:01.130 her questions in if she has any for you today. Thank you. 554 00:32:01.160 --> 00:32:03.350 Speaker 1: Certainly, I thank you very much, Mr. Chairman. I 555 00:32:03.350 --> 00:32:07.370 thank Ranking Member Evans, I think our expert witness for 556 00:32:07.490 --> 00:32:10.580 appearing here today, we know that the world has changed 557 00:32:10.580 --> 00:32:14.090 dramatically over the past decade alone, we've seen rapid 558 00:32:14.390 --> 00:32:17.900 technological advances that have allowed us to access the world 559 00:32:17.900 --> 00:32:21.530 in the palm of our hands. However, we have also seen 560 00:32:21.530 --> 00:32:24.860 generations of family wealth wiped out through the mortgage 561 00:32:24.860 --> 00:32:28.250 foreclosure crisis. At the center of all of this lies the 562 00:32:28.250 --> 00:32:33.440 financial technological industry. This crucial industry 563 00:32:33.470 --> 00:32:36.800 offers the promise of easier access to capital for people to 564 00:32:36.800 --> 00:32:40.940 open businesses afford college and launch new products. 565 00:32:41.180 --> 00:32:44.900 However, however, it also means that lenders could be exposed to 566 00:32:44.900 --> 00:32:49.490 new forms of fraud, and borrowers could face new forms 567 00:32:49.640 --> 00:32:53.840 of soft discrimination implicit bias by focusing on non 568 00:32:53.840 --> 00:32:57.680 traditional lending factors that structurally disadvantaged 569 00:32:57.680 --> 00:33:01.550 specific communities, our goal is elected representatives of 570 00:33:01.550 --> 00:33:04.490 the American people is to ensure that the government creates 571 00:33:04.490 --> 00:33:09.590 clear, fair and effective rules to maximize access to capital 572 00:33:09.680 --> 00:33:13.490 while minimizing risk and discrimination that results from 573 00:33:13.490 --> 00:33:17.330 bias. So my first question is to Mr. Phelan, can you please 574 00:33:17.330 --> 00:33:21.500 describe what non traditional factors FinTech lenders may look 575 00:33:21.500 --> 00:33:25.070 to look toward and making investment decisions? For 576 00:33:25.070 --> 00:33:29.540 instance, is there some means of explaining the story behind late 577 00:33:29.540 --> 00:33:32.990 payments within the confines of your application process? 578 00:33:34.040 --> 00:33:36.590 William Phelan: Thank you, thank you for that question. First of 579 00:33:36.590 --> 00:33:39.860 all, I'll start with the just the nature of a small business, 580 00:33:40.190 --> 00:33:44.540 a lot of times small businesses lack the the financial 581 00:33:44.540 --> 00:33:49.490 statements in an audited format. And so they don't they start 582 00:33:49.490 --> 00:33:53.840 with the really, they don't have the need to, to, you know, 583 00:33:53.840 --> 00:33:56.240 present audited financial statements and undertake all 584 00:33:56.240 --> 00:34:00.020 that expense that a public company does. And so, you know, 585 00:34:00.050 --> 00:34:04.280 that is the starting point. And with that starting point, you 586 00:34:04.280 --> 00:34:08.240 know, lenders are looking to do a credit assessment, they're 587 00:34:08.240 --> 00:34:11.720 looking to conduct an assessment about the ability to repay the 588 00:34:11.720 --> 00:34:15.290 loan. So if you, you put those two together, and you 589 00:34:15.290 --> 00:34:21.140 immediately you have to go to some sources of data to assess 590 00:34:21.140 --> 00:34:25.700 the credit of the borrower. And the sources are things that are 591 00:34:25.730 --> 00:34:29.300 mentioned in the memo. Things like credit bureau information 592 00:34:29.330 --> 00:34:33.410 is one source, both on the personal end and the commercial 593 00:34:33.410 --> 00:34:36.770 side. So there's commercial credit data that can be used 594 00:34:36.800 --> 00:34:42.050 very effectively. Secondly, there's very creative things 595 00:34:42.050 --> 00:34:45.380 done by the fintechs around collecting financial statement 596 00:34:45.380 --> 00:34:48.470 or financial cash flow information through the bank 597 00:34:48.470 --> 00:34:52.010 statements. And so they can actually look at the cash flows 598 00:34:52.010 --> 00:34:54.350 of the business through the bank statements. So there's these 599 00:34:54.350 --> 00:34:58.280 things. There's other sources that are, I think, been more 600 00:34:58.280 --> 00:35:03.320 hyped than than reality. things like social media that are 601 00:35:03.350 --> 00:35:07.280 interesting from from a credit assessment standpoint, but are 602 00:35:07.280 --> 00:35:11.660 unproven. And so I think those are challenges that have not 603 00:35:11.660 --> 00:35:15.260 really been fully vetted yet. And and then there's, you know, 604 00:35:15.260 --> 00:35:18.350 other forms of payment records like the short term trade 605 00:35:18.350 --> 00:35:21.950 payables information. So shipping bills, phone bills, 606 00:35:21.950 --> 00:35:26.000 light bills, things like that. And so you can you know, what I 607 00:35:26.000 --> 00:35:28.700 think what's interesting about this perspective is that, you 608 00:35:28.700 --> 00:35:32.180 know, the online lenders really never see their their applicant, 609 00:35:32.390 --> 00:35:35.720 they don't meet them face to face, which is far different 610 00:35:35.720 --> 00:35:38.690 than the Community Bank structure. You know, in the 611 00:35:38.690 --> 00:35:41.360 community bank, you walk into the branch, you meet the banker, 612 00:35:41.360 --> 00:35:44.330 face to face. And with the online lenders, this is all done 613 00:35:44.330 --> 00:35:47.420 online, it's all done really through the information in the 614 00:35:47.420 --> 00:35:54.740 data that doesn't provide that view into the business itself 615 00:35:54.740 --> 00:35:57.410 and some of the some of the characteristics other than you 616 00:35:57.410 --> 00:36:00.680 need to get name, address, phone number, name of the business, 617 00:36:01.070 --> 00:36:04.940 you get, then the payment records, and maybe some public 618 00:36:04.940 --> 00:36:08.540 filing information. And so that can be distilled down to create 619 00:36:08.540 --> 00:36:11.630 some very credible and reliable credit assessments. 620 00:36:11.660 --> 00:36:14.300 Speaker 1: Very well. Thank you, Miss Fisher. In your prepared 621 00:36:14.300 --> 00:36:17.690 testimony, you went into detail about the complexity of merchant 622 00:36:17.690 --> 00:36:21.590 cash advances, which allows for businesses to sell their future 623 00:36:21.590 --> 00:36:26.780 receipts for up for cash upfront. Yet you also claim that 624 00:36:26.780 --> 00:36:29.870 they're already sufficiently regulated at the federal and 625 00:36:29.870 --> 00:36:32.930 state level. Are there any changes that you would like to 626 00:36:32.930 --> 00:36:36.020 see made to the way in which the government regulates MCAs? 627 00:36:39.990 --> 00:36:44.880 Katherine Fisher: Thank you for that question. My view is that 628 00:36:44.910 --> 00:36:50.400 federal regulation of merchant cash advances is sufficient. 629 00:36:51.030 --> 00:36:54.210 There are federal laws that touch the merchant cash advance 630 00:36:54.210 --> 00:36:57.540 transaction, as I mentioned, throughout the transaction, from 631 00:36:57.540 --> 00:37:01.380 marketing, to underwriting to servicing and collection, so I 632 00:37:01.380 --> 00:37:03.420 don't have any suggested changes. Thank you. 633 00:37:03.690 --> 00:37:07.170 Speaker 1: Very well. Mr. Mr. Chairman, I yield back. Thank 634 00:37:07.170 --> 00:37:07.380 you. 635 00:37:09.660 --> 00:37:13.020 Chairman: Thank you very much. And sorry for the rush field 636 00:37:13.020 --> 00:37:16.320 today. Um, I apologize. We usually on fly out days, we 637 00:37:16.320 --> 00:37:19.320 usually leave about noon. But today, for some reason happened 638 00:37:19.320 --> 00:37:23.250 a little early. And so I just want to thank you all for your 639 00:37:23.250 --> 00:37:26.520 participation and good spirits today. And the excellent 640 00:37:26.520 --> 00:37:29.580 testimony you all provided. I ask unanimous consent that 641 00:37:29.580 --> 00:37:32.310 members have five legislative days to submit statements and 642 00:37:32.310 --> 00:37:36.840 supporting materials for the record. Without objection. So 643 00:37:36.840 --> 00:37:40.350 ordered this hearing is now adjourned. And don't worry when 644 00:37:40.350 --> 00:37:43.320 you see we have eight minutes, we really have 23 minutes, so 645 00:37:43.320 --> 00:37:45.570 that's alright. That's how it works up here in the swamp. 646 00:37:46.440 --> 00:37:47.790 Thank you. Thank you.