Transcripts For CSPAN3 Hearing 20240703

[inaudible conversations] [inaudible conversations] come to order. Without objection the chair is authorized to declare a re cess for the committee at anytime. Entitled bureaucratic overreach for Consumer Protection. Examining the cfpbs latest action to restrict composition in the payments. Without objection all members have five legislative days to submit extraneous materials for inclusion in the record. I want to recognize myself for five minutes to give an opening statement. Todays hearing, bureaucratic overreach or Consumer Protection, examining the cfpbs latest action to restrict competition in payments in my view is critical because its going to talk about this large participants in the general use of Digital Consumer payment applications market. This is the sixth lpr that the cfpb has initiated. And putting aside the egregiously short Comment Period which frustrates both members of this committee, the deeply flawed cost benefit analysis which are both have become hallmarks of this administration, i find the substance of the cfpbs proposal deeply concerning. The proposal asserts that companies that let you send moneys to friend, peertopeer, are companies that keep your credit cards information on your phone somehow are in the exact same market. Why . Well, just because the cfpb says so. This breadth of the market, the cfpbs trying to define, has perplexed many on this committee from potentially covered to both sides of aisle here. Many companies are utterly confused, whether the rule will be implemented and whether theyre covered by it. I would say this is no accident. Cfpb is trying to cast a wide a net as possible and become a technology regulator. In many more ways than one, this proposal marks is sharp departure from the cfpbs previous large participation rule. Director chopra decided on a whim, in my view without justification that Technology Companies pose a threat to consumers and this rule should be viewed as a thinly veiled work around to get cfpb Supervision Team into these Tech Companies. And thats because once an entity is designated as a large participant, the cfpb cannot only supervise the activities, which is what i think the intent of doddfrank was, that originally qualify, but they can actually supervise the entities, business itself. The proposal attempts to establish limits by only capturing those companies with five million transactions within a year. So wed love to hear from the panel on, is that a good number or a bad number . But dont be fooled this modest threshold is so low the agency will effectively have Carte Blanche to knock down the doors with their fleet of examiners. In the payment space and leave consumers encumbered with fewer firms from which to choose a payment method. That decreases competition. This lpr doesnt benefit consumers or provide market clarity, in fact, the only people this proposal potentially will benefit besides witnesses like you, are compliance lawyers. To further expand their authority to see if pb decided to capture Digital Assets as well. To see if the assertion of funds includes Digital Assets. This is a novel position and the cfpb justifies interpretation only in a small unassuming footnote. Concerns around that is not particularly partisan. There were questions about the scope and implementation. The cfpb needs to go back to the drawing board and work to protect consumers and not hinder innovation and not expand the cfpbs insatiable power and scope. We appreciate your willingness to work with us. I now yield to the Ranking Member, mr. Lynch of massachusetts, five minutes for his opening comment. Thank you, mr. Chairman. And good morning. Id also like to thank all of our Witnesses Today for your willingness to help the committee with its work. It is the fundamental mission of the Consumer Financial Protection Bureau to safeguard American Consumers against unfair, deceptive and abusive financial practices and discrimination. The cfpb ensures that our markets are for Consumer Products and service operate fairly and efficiently in the interest of consumer access and responsible innovation. In furtherance of the critical mandate cfpb recently proposed a rule as the chairman noted that will allow the agency to exercise Supervisory Authority over companies that offer digital wallets and payment services, peertopeer payment apps and electronic funds payment apps. Unfortunately, this will place, apple, google, meta, other companies that moved into the Financial Services space on par with Financial Institutions that are already there and already subject to cfpb supervision. Unlike large banks and credit unions, such of these companies do not currently undergo cfpb superry exams, periodic monitoring or compliance checks. They may not be required to ensure Company Funds or deposits. Cfpb action in this area is timely, considering the escalation of shadow banking. That is the migration of core banking activities, which traditionally fall outside of the banking regulations. And this is growing, given the employment of opaque technology. And theyve reached 300 billion dollars and estimated to grow over 150 by 2028. Moreover, an estimated twothirds of all americans, including the majority of low to moderate income users are now relying on peertopeer Digital Payments, such as paypal and venmo, many have options. And its not surprising that the consumer advocates strongly support the rules. According to the Consumer Federation of america, quote, we would be concerned whenever the line between congress and banking is committed to blur. By closing this loophole theyre moving forward to hold big Check Companies accountable to play by the rules as everyone else. I agree with that statement. The cfpb is not becoming a check regulator as much as Check Companies are becoming banks or are becoming involved in the conduct of banking. By subjecting large Check Companies to the same Consumer Privacy standards that apply to Financial Institutions under the federal graham act, protecting consumers against massive Data Collection and the monetization of the personal information. Cfpb estimates that the proposed rule would only apply to 17 entities. The agency has also made clear that its supervision of nonbank institution is based on risk, size, and financial transaction volume, as well as the extent of state oversight. That is why the rule includes a threshold of five million Payment Transactions annually. I look forward to hearing from our panel lists this morning and stake holders as this rule making process. Thank you, mr. Chairman, and i yield back the balance of my time. The gentleman yields back. We want to thank our witnesses for being here today and making the time. We are youll be recognized for five minutes to give an oral testimony and without objection your written statements will be made part of the record. We recognize the testimony of mr. Holtshowser, and james kim, Industry Group at troutman. And a Financial Technology policy analyst at the Cato Institute. And christopher, Joe Josephine witt professor s. Thank you, mr. Chairman. Chairman hill, Ranking Member lynch and members of the subcommittee and Digital Assets. Financial technology and innovation, thank you for the opportunity to discuss the Consumer Financial Protection Bureau as rule on defining larger participants in the market. Im executive of net tech, the Technology Ceos and promotes the growth of the economy at the 50state level. Our diverse membership, businesses ranging from startup to some of the most Iconic Companies on the planet. And we have employees in the field of technology, Artificial Intelligence, ecommerce, sharing the gig economies, advanced energy, transportation, cyber, Venture Capital and finance. As you know, technology plays an important roles in removing barriers to access and empowering americans of all backgrounds to better manage their Financial Life through safe, secure, inclusive and reliable financial tools, including digital wallets and payment application. Members support efforts by policy makers to adapt and update outdated laws and regulation to meet the growing demand from consumers and businesses for these innovative fintec products. Its highly diversified. Companies across the eco system play a wide array of unique roles serving different markets and offering different functionality. And regulations focused on fintecs must make sure allowing this economy to flourish. Fails to accomplish those doles. Under doddfrank and the procedures act the bureau must conduct thorough Due Diligence before issuing a proposed rule. The cfpb falls well short of this requirement. Frankly the lack of empirical analysis, underlying the proposed rule is stark and troubling. Because they failed to follow rule making by congress the proposed rule creates an arbitrary market thats not based on data driven analysis or the reality of the eco Payment System. And fails to identify consumer harms that would necessitate supervision and fails to adequately address the cost. The diversity of companies that can be for the supervision. We strongly feel that these deficiencies render the proposed rule defective. Before moving forward, its critical that the cfpb more precisely and narrowly define the Consumer Payments market in which it seeks to supervise and conduct empirical analysis required in the rule making process. At a very basic level the bureau should complete a cost benefit analysis that adequately considers companies that may fall within the purview of the proposed rule. Analyze the cost to the Companies Rather than using conservative estimates, and determine the cost may be the the cost that may be passed on to consumers. Until the cfpb conducts the analysis required of it by law, tech net looks at the policy altogether and the rule in its entirety. Otherwise this rule will introduce tremendous complexity and uncertainty into the Digital Payment markets to the detriment of consumers and businesses across our country. We appreciate the subcommittees look at this important rule. Thank you, youre recognized for five minutes. Thank you for holding this important hearing on the cfpbs proposed larger participant rule making. Im brian johnson, managing director of potomac level partners, previously served as dew point director of the cfpb, prior to that i served on the Financial Services committees previously staff. I will address my comments today first to the proposed rule and second to the broader context of recent cfpb action. As members are aware, Congress Gave the cfpb authority to subject socalled larger participants of defined markets for Consumer Financial products and services the supervisory examination. The proposed rule would, if finalized, define a market for general use Digital Consumer payment applications. Larger participants of this market defined as providers of at least the annual Payment Transactions Small Business concerns, would be subject to cfpb exam. There are several reasons for members on a bipartisan basis to encourage the cfpb to withdraw and repropose its rule so it may so that it may engage in a more thoughtful deliberatie process. The remarks are the impetus for the proposed rule concerns for Big Tech Companies to engage in various anticompetitive practices. However, the cfpb is not the proper agency to address such concerns. Cfpb supervisory duty is for financial law not antitrust law. Proposed rule lacks adequate justification, because its not grounded in Consumer Financial risks arising from the offering or use of covered products and Services Within the defined market. Second, the doddfrank act provides the cfpb with no intelligible principle to guide its definition of markets or selection of larger participants. Rather, it gives the cfpb Carte Blanche to expand its own supervisory reach. This violates nondelegation principles. Congress should define the cfpbs authority and not the cfpb itself. Third, the proposed market definition is really broad because it aggregates terms rather than describe a coherent market for reasonably interchangeable Financial Products and services. Fourth, the cfpb intemperatures the term funds to cover Digital Assets. The effect of which would be to expand its Regulatory Authority over a large number of new products and participants. This would up end careful efforts by members of congress to craft a balanced legislative framework for Digital Asset regulation. This presents a major question of economic and political significance that must be left to congress to decide. Fifth, the cfpbs cost benefit analysis uses a decade old frame work to calculate the expected cost to the examination. In my view, the bureaus exam understates the true cost of an example by at least an order of magnitude. The cfpbs failure to update its assumptions and obtain Accurate Information is a significant weakness in the proposals 1022 analysis. Finally, without good cause shown, the cfpb departed from its Standard Practice in order to limit the amount of time for the public to submit comments on the rule which is contrary to the spirit. Now the cfpb action. Regarding the consequences, i note that cfpb sometimes require institutions to waive attorneyclient privilege and turn over communication. The Supreme Court long held that they cannot compel this information without authorization of congress, which the cfpb does not have. Which is detrimental to consumers. Also cfpb, unlike occ or sec, does not publish an annual list of exam priorities. As a result institutions have comparatively less insight into the cfpbs prioritization of Compliance Risks and therefore, less opportunity to proactively address them. Regarding rule making, recently proposed or finalizes several rules on socalled junk fees as part of a campaign to scapegoat companies for rising prices caused by inflation. The price controls depart from the traditional federal approach to Consumer Finance regulation the politicized credit and capital unwarranted market, a danger to free markets and consumer autonomy. This is not Consumer Protection. I urge congress to use all available means to prevent bureaucratic Central Planning and overreach. Thank you, and i welcome the opportunity to answer your question. Thank you very much. Mr. Kim, youre recognized for five minutes. Chairman hill, Ranking Member lynch and members of the subcommittee. Thank you for inviting me to testify today. My name is james kim. Im a partner at the law firm Pepper Hamilton sanders. Im presenting my views and not those of the firm or any client. Firm. My testimony and the views i express today are informeded by my tenure at the cfpb and subsequent practice focusing on payments and technology. My clients at trout and pepper range from banks and other established institution to medium size and Early Stage Companies seeking to introduce Innovative Products and expand choices for consumers in the marketplace. From 2012 through 2014, i had the privilege of serving at the cfpb where i was the lead attorney in the bureaus first enforcement action by mobile devices and payments. I also work with colleagues in the office of supervision and supported examination. And i was a member of an Interdepartmental Working Group focusing on emerging payment products, and since leaving the bureau, my practice very much focuses on helping Companies Navigate examinations, investigations, and rule makings involving an agency. So why is the proposed rule for defining larger participants in the payment space important . Before i answer, its worth highlighting that there is no question that Consumer Payments are currently regulated by a host of federal and state laws and rules that are enforced by a combination of the cfpb, federal prudential regulators, the federal trade commission, sinfen and agencies. It does not change the mayor yad of the regulations, instead the proposed rule is important because it seeks the larger participants on the Supervisory Authority. The bureaus power to examine institutions is the agencys most powerful and least transparent tool. Companies supervised by the cfpb must devote personnel and significant resources to host examiners at their offices, respond to information requests and followup questions and address findings. Examinations are nonpublic and often last months and sometimes longer than a year. The cfpb typically extends the scope of their exams to the companys parent, affiliated entities and other business areas beyond the covered activity, in this case, general use payment application. Examinations lack a third party, such an a court or an Administrative Law judge to oversee the process and adjudicate disputes. Companies also forfeit their attorneyclient privilege during the exams. With these considerations in mind, congress carefully defined the cfpb Supervisory Authority by generally limiting supervision to larger banks and larger nonbanks who can bear the significant cost of complying with exams. And Congress Also mandated requirements before the bureau can expand the scope of its own authority to the larger participant rule making. Im going to just highlight two issues. First is require making in doddfrank and existing supervision by federal prudential regulators and state agencies. Doddfrank lays out the requirement for larger participant rule and before issuing such a rule, the bureau must consult with the federal trade commission. That requirement is critical because defining a market is the fundamental prerequisite to determining who the larger participant within the market. The ftc analyzes market concentration and enforces antitrust laws and therefore doddfrank requires the cfpb to consult with the ftc. Now, the proposed rule states that the cfpb consulted or provided an opportunity for consultation and input with not only the ftc, but other federal agencies, but it doesnt discuss any input from the ftc or any factors determining which products or services should be included within the same market. Its therefore, unclear whether the bureau met the statutory obligation to meet with the ftc that the bureau shall consult with its sister agency. Now, turning to duplicative supervision by state and other federal agencies. The proposed rule would create duplicative and overlapping supervision for Many Companies in the space. The proposed rule mentions that states have supervisory programs, but ignores Many Companies subject to the rule and partnered with a Financial Institution who are already supervised and subject to examination by the cfpb or the banks prudential regulators under the Banks Service company act. Mr. Kim, youve gone over your time. Your full statement will be in the record. Thank you, sir. Thank you, of course. Youre recognized for five minutes. Good morning. Chairman hill, Ranking Member lynch and distinguished members of the Consumer Financial Protection Bureau and inclusion. Thank you for being able to take part in this hour. Im a policy analyst at Cato Institute center for monetary and financial alternatives. The views that i express today in my testimony are my own. Consumer Financial Protection Bureau for providing supervised payment app, for reasons laid out in my testimony, it should be withdrawn. Since the launch of the first payment app these tools have been highly successful satisfying demand. The cfpb explains this well. More than 9 in 10 u. S. Consumers report a Digital Payment method and reports of Digital Payment app. In recent years, cryptocurrency or defi keep the United States at the technology frontier. The first payment tool to benefit entrepreneurs and consumers. Unfortunately the cfpbs larger participant rule takes the utility and popularity of Digital Payment tools as the reason to subject them to greater scrutiny. It would target market success, not market failure. The cfpb does not identify specific risk to consumers from Digital Payment apps, rather, vague references to generic risk leave without a justification and also create uncertainty, as when the bureau indicates its supervision priorities will be tied to unpredictable factors. Unclear rationals and authorities provide little practice cal guidance. Given the shortcomings, the bureau should withdraw the proposed rule. Even if it were justified, it would present multiple problems over cryptocurrency. The problem begins when they interpret the term funds to cover crypto. As the bureau acknowledges, funds is not specifically defined in the Consumer Financial protection act. And its not clear that the original public meaning of funds under that act included cryptocurrency. The act was part of legislation designed to address the 2007 to 2008 Global Financial crisis, an event predating the crypto coin transfer. That it can place in 2009, just prior to the act passage. And another major cryptocurrency would not launch until 2015. As the cfpb acknowledges, the case law the bureau cites to support its interpretation does not address the Consumer Protection act, but other laws. Asserting jurisdiction over crypto asserts different issues. The lack of clarity of key terms in the rule, misstating current crypto tools like other fintec tools. Specifically, treating what are selfhosted or nonCrypto Wallets as if they were the same as Digital Payment apps would be inappropriate. Unlike payment apps where users rely on service providers, selfhosted Crypto Wallets are simply tools that let users protect the unique cryptographic keys for their own crypto holdings. Importantly, these are not held or documented by selfhosted Crypto Wallet creators, rather, they are recorded on public block chain ledgers that operate independently. The proposed rule when it comes to these technologies. The bureau does not analyze the specific costs and impact over cryptocurrency or selfhosted Crypto Wallets. Applying the proposed rule to them would raise serious concerns under the administrative procedure act and the Consumer Financial protection act itself. While there are good reasons that the proposed rule should not be read to cover selfhosted Crypto Wallets, if the proposal were to proceed, the bureau must expressly clarify that the bureau does not apply to these tools. Notedly, the bureau attempt over crypto conflicts with the work of congress and this subcommittee in particular to define that jurisdiction. For the longterm health of both the fintec eco system and the constitutional order, congress, not administrative agencies should define the limits of Regulatory Authority. Thank you for the opportunity to provide this information and i welcome any questions you may have. Thank you. Professor, youre recognized for five minutes for your oral remarks. Thank you, good morning. Chairman hill, Ranking Member lynch and members of the subcommittee. Thank you for having me to testify today. Im a law professor at the university of iowa whereof teach and write in consumer law, Consumer Finance, Digital Finance and regulation. Id like to make three points regarding the nonbank Payments Market as well as the cfpbs larger participant rule. First, as an initial matter. The cfpb supervision of nonbank payment platforms would help regulate the Playing Field between those platforms and banks. And the need for levelling that regulatory Playing Field has to do with the fact that both banks and nonbanks are playing similar roles in the payments eco system. To be sure, we know that banks have long held a central role in the Payment System and as such are highly regulated institutions and a critical aspect of their regulation is supervision. Nonbank payment platforms are acting as powerful intermediate arearies, helping consumers transfer funds as well as transactions between consumers and merchants. When they do, they add additional parties and legs in the payment process and that has the effect of increasing the chances for losses related to fraud, data breaches, and the insolvency of these powerful intermediintermediarie to be sure, in order to engage in the transition of money, one must obtain a license from various state regulators. The requirements relative to obtaining the licenses and the degree of oversight and supervision can vary amongst the states. Among the back drop, the proposal to establish a more coherent supervisory framework over banks and nonbanks, can prevent the invasion of Consumer Finance laws and assure compliance across entities that are offering similar services, in this case, payment services. Secondly, another compelling reason favoring the supervision over nonbank payment platforms has to do with their collection, use and maintenance of important and sensitive Consumer Financial data. As Big Tech Companies increasingly penetrate the Payments Market. A major incentive appears to be gaining access of an important and valuable information about how consumers spend money. This notion, alliance, i think, very well with the tech industrys data driven advertising centered Business Models that really thrive on harvesting consumer data. But by these firms also operating payment transmission lines, that allows them to amass personalized financial data, which they can then integrate with their existing stock piles of data to create granular, multidimensional consumer profiles and those very multidimensional profiles can be exploited by these platforms, as well as sold to third persons and i think to that end, perhaps more alarming, these in depth consumer profiles can be used for discrimty purposes, such as unlawful, differential pricing and targeted marketing. Of course, theres already a long history of discrimination against black and latino households and women in u. S. Credit markets. To put it bluntly, i think a lack of the cfpbs Supervisory Authority over nonbanks in the Payment System, is and has been a glaring blind spot for that agency and establishing extending in this area helps remediate that blind spot and establish more Consumer Trust in the system. Thirdly, and lastly, the inclusion of some form or some type of Crypto Companies is much needed when it comes to cfpb supervision. These are often entwined with finance, but little is known by their intricate and opaque operations. And right now that were finding anything how they actually operate and in fact, take for instance, the high profile collapse of the Crypto Exchange giant ftx. Its exposed, i think, how little was professional known about the true nature of the transactions and handling of consumer assets. Lastly, ill note that extending cfpb supervision over at least some crypto firms is not just good for consumers, its also good for other crypto firms. So, while robust supervision can help detect and deter Consumer Fraud before it happens, it will also drive bad players from the market. So, in conclusion, we jumped generations in the Payment System just over the few years of the pandemic. And the cfpbs rule making in that regard is sorely needed. I think it is wellaligned with safeguarding american households, as well as maintaining a secure and competitive payment landscape. Indeed, given these platforms amidst growth, this role is long overdue. Thank you. The gentleman yields back, thank you our panel for your excellent testimony. And we have the privilege of the Ranking Member for the full committee, maxine waters, and i yield for one minute. Thank you, mr. Chairman. Ive long raised concerns about big techs expansion into Financial Services. And im pleased that theyve finally taken action to oversee these companies. Big tech already dominates markets, possesses massive amounts of consumer data. But its not been subject to the cfpb supervision, and the banks and other Financial Institutions already follow. When i was chair, this Committee Held big tech to an account, included by convening a hearing by Facebook Ceo Mark Zuckerberg over his plans to develop a cryptocurrency called when democrats led the doddfrank act, we empowered the cfpb to supervise any large nonbank including big tech. When they facilitate payments or offer Financial Products to consumers to ensure that consumers are an always protected no matter who theyre dealing with, im pleased theyre using these tools as intended and i look forward to todays discussion. And i yield back. The gentle woman yields back. Recognize myself for initial questions. In my understanding, the cfpb since it was created 13 years ago talked about as the Ranking Member said for the past 13 committees about its legal authorities under doddfrank and constitutional funding structure. Because the cfpb often asserts its authorities broadly, its important for congress to be a check. For the larger participant rule makings like this one, defining a market is a prerequisite to determine what companies are, in fact, larger participants. Its really important for an lpr to set a narrow and clearly defined market because it allows the cfpb to subject nonranked Consumer Companies to its full supervision as i said in my opening statement. Not just about the product regulation, it opens those companies designated for full supervision and examination. Even if theyre not statutorily enumerated. However, ive got concerns about the bureau as chosen to set an overly broad and unclearly defined market in this rule over companies in the, quote, general use Digital Consumer payment application phase, closed quote. Legal precedent in the antitrust laws look at the same market if theyre reasonably interchangeable by consumers for the same purposes, this matters because the cfpb is supposed to consult with the ftc when defining the market. And its unclear from testimony today. If in fact the cfpb met its obligation to do so. In contrast, this attempts to sweep in practically the entire payments eco system by relying on the definition of general use and thus its overly broad and ambiguous. Mr. Holhowser does tech net view this as the same market, peertopeer, access to Digital Payments, are they part of the same market . No, general use is not a part of the market, thats conflation of a lot of products and services. Does the cfpbs overly abroad approach and unclear definition of a market threaten innovation and competition in this space . Absolutely. We have to protect consumers and safeguard them, but onerous regulations like this will have a Chilling Effect on innovation, particularly for Small Businesses and startups. People in a garage are just trying to make a dream work. Its really unclear whether or not, particularly with the five million transactions being so low, who would be covered in this. Its definitely more than but if were going to impose this type of compliance on a small startup, were impacting our job growth and our ability to compete. Interesting. Mr. Johnson on that point, i think master card might do 160 billion transactions a year, so in the payment space, the numbers are in the billions when it comes to Consumer Payment transactions, would be my judgment, but you were at the cfpb. Do you have any perspective on the five million number as being way too small or, you know, is it a goldilocks number or not a right number . Well, chairman, i would say the onus is on the bureau why thats the correct figure. Do they do that . I think theyve failed what is on this topic . Putting the finger in the wind and seeing which direction it blows. I believe the justification provided by the bureau is inadequate and you know, one pressure to look at to your question about market definitions, in each of the larger rules that the cfpb proposed, its very easy, was very easy for the bureau to actually define the markets, it took two to three pages in the definitions. Here just as a metric, theyve struggled for seven pages in the federal register to try to define this market and i think that speaks volumes about the struggle the agencies have undertaken. Thats helpful and then let me ask you this, again, based on your experience, should the lpr process be statutorily reformed . Should we direct the cfpb exactly how to propose an lpr . And provide more definition instead of this fishing expedition in addition to the collection rule in 2012, the auto financing rule 2015 to your point they were very specific. This seems overly broad. At a minimum, congress ought to provide an intelligible principle for them to follow, including the rules, that could include a list of statutory factors for setting a market definition and for setting the manner in which it establishes thank you, my time expired. Thank you. If you have further on that or anyone else, please submit it for the record. Without objection id like to propose that some letters be inserted into the record. Letters to director chopra. January 30th to director chopra from chairman mchenry, myself and mr. Flood and a letter dated january 15th from democratic members mr. Andic, et al. Stated january 5th. Without objection they will be included in our record. And now we turn to the Ranking Member mr. Lynch from massachusetts for five minutes. That you, mr. Chair, and again thank the witnesses. Professor, i was here when we created the cfpb. I was here during that debate and the goal here and the statutory direction of the cfpb, we were trying to provide a single point of accountability for enforcing financial Consumer Financial laws and protecting consumers in the financial marketplace. Why would why would this proposed rule be outside of the Regulatory Framework that we set up for the cfpb . This is exactly in my mind, this is exactly what we created the cfpb for. We understood even back then, not that long ago, that technology was changing. We understood that. So we didnt, we didnt put limitations on technology for the cfpb. We said protect consumers in the financial marketplace. Full stop. Full stop. So now Technology Companies are getting into the financial marketplace in a big, big way, 300 billion dollars so far in you know, peertopeer apps and other platforms. So, why explain to me why the cfpb would not be that would not be in the legitimate purview of their Regulatory Mission . Thank you for the question. I think that regulating the space is absolutely within the cfpbs jurisdiction and i view it not so much as the cfpb trying to regulate tech firms, but as the cfpb exercising its authority as directed by congress to regulate and in this case to supervise nondepository institutions and nonbanks. It just so happens that these nonbanks often bill themselves as tech firms or term financial tech Technology Companies or fintec companies. And the point about Digital Payment firms having to abide by the same laws electronic funds transfer act and not in the same way that banks do with respect to supervision, i think, really accentuates a divide between banks and nonbanks or shadow banks and banks, which remains an issue, even after the 2008 crisis. I think we saw this most significantly in the runup to that crisis where banks chartered institutions were subject to one set of rules and nonbanks, which was largely the engine of subprime lending were not and i think its worth saying what i mean by not subject to the same set of rules and its really along two dimensions, first, they dont have the same sort of safety and soundness requirements that banks have. The result is that their Business Models can be used can come in a form that requires very view reserves, also, very thin margins, which makes them vulnerable to shock, which in turn can trickle down to consumer harm. And then supervision being the other side of that, these firms generally, well, they have to abide by the same rules, theyre not subject to the same monitoring ive got to jump in here, no, i appreciate that. So, ive heard from other witnesses that theres no riskbased foundation for the cfpb to act, but of the 24,000 cryptocurrencies that have been launched, over half, 14,000 have died. So, people have lost their investment completely, those cryptocurrencies have gone dead, gone to sorry. So, we know theres an abundance never mind ftx, mixon, terra, pay connect, bitcoin, all gone to zero. Theres a huge amount of risk and volatility in that and some would say theres no riskbased reason for cfpb to venture into this. Let me just ask you the last question. If i set up a Banking System that has all of the bells and whistles, all of the banking regulations for one group and then i create another one that has no regulations, completely unregulated, what where is the money going to migrate in your estimation . Where will the money migrate and the financial activity migrate to . The heavily regulated one that protects consumers or the fintec area with no regulation . I think quite simply, it will migrate over to the nonbank area because there are lower regulatory burdens in that space. But, the tradeoff there is that there can be more consumer harm in that space because there is less watching of the players in that market. Thank you. I yield back. The gentleman yields back. Mr. Lucas of oklahoma is recognized for five minutes. Thank you, mr. Chairman. The u. S. Banking sector is among the most highly regulated sectors in the country and in 2010, the passage of doddfrank with 2000 sweeping pages across the industry. And doddfrank established the cfpb, giving the new regulators authority over banks and nonbanks. Part of this was supervision over the larger participants in consumer markets. Cfpbs proposed larger participant rule from this past november is the sixth rule in this category. This time aimed at Digital Consumer payments applications. This rule would allow the cfpb to supervise certain nonbanks that provide Money Transfer to consumers. You discussed in your testimony how cfpb does not follow the administrative procedure act. Can you expand on that . Thats one of the fundamental issues. Playing by the rules. Well, theres the statutory rule making process that has to be followed, including plenty of time for respondents. I think that 60 responses were heard in this case and really was 41 days if you include the holidays was supposed to be 60. They have to provide justification of consumer harm and a reason why they need to do this and they need to explain who is going to be regulated and how its going to happen for a response, just to quickly answer so you can have it back. Thats in and of itself not sufficient. Mr. Kim, this isnt new for cfpb. Could you highlight the importance of robust administrative procedures act process . Why does it matter . It matters because the agency does have a lot of power and in order to exercise its power, it should follow its statutory mandate in doddfrank and other acts, primarily in doddfrank, so, i think, you know, in order to have the right balance of executing its mission to protect consumers, exercising its broad regulatory powers, it has to follow the mandate from congress. Theres been a significant amount of questions regarding the details of the rule. For example, the cfpb does not clearly define the term funds. Theres concerns that this could rope in entities that transfer assets such as securities or even commodities that are outside the purpose of this rule making. Mr. Kim, could you explain how elements in the proposal such as this are overly broad . So doddfrank has a specific requirement, where really, i think, boundaries is a better word, saying very clearly that the cfpbs jurisdiction end where the sec and the cfpb begins. So i think its pretty clear that those two sister agencies have been very active in the Digital Assets and crypto space, so the bureau should, i think, respect and recognize the jurisdiction and the effort and the investment by those agencies and congress in the Digital Asset space. Mr. Johnson, could you offer your perspective on the far reaching nature of the proposal . This has longterm impacts. Yes, congressman, it does have longterm impacts and i think the impacts will manifest over time due to the confidential nature of the supervisory process. So, an overbroad market definition, an imprecise establishment of the asset threshold for determining larger participants mean that an unknown number of institutions will be subject to supervision as a confidential process, the public wont understand what the bureau does behind the scenes afterwards and i think thats the primary risk. Focusing on the refire departments under the proposal, does the cfpb outline any specific examination procedures larger participants cover in Overpayment Services . Please give us a sense what details the cfpb lays out in my remaining time . The only reference im aware of is the general statutory requirement that the supervisory process itself be risk based. Notably the rule is not risk based and the bureaus determination of the market and subject to the proposed rule is not risk based. With that, mr. Chairman, my time is about to expire, ill yield back. Ms. Waters is recognized for five minutes. Thank you very much. To professor, the misleading title of this hearing suggests that the cfpbs larger participant rule would restrict competition and payment, but if anything, this rule should increase competition by ensuring that the Largest Companies are not able to leverage their size and data to unfairly crowd out Smaller Companies. This is a concern because some of these Big Tech Companies do not have the best record when it comes to Consumer Protection. Meta, for example, has engaged in illegal data practices and has been a repeat offender of regulatory orders highlighting the importance of Supervisory Authority in this space. Can you talk about how this rule would help Smaller Companies by keeping the Biggest Companies in check . Thank you for the question. I agree with you that market dominance is a concern in the space. The dominance and the concentration of the consumers Payments Market by a handful of companies poses, i think, some significant dangers. When know when a small number of Companies Control the majority of the market, leads to higher prices and reduced innovation. And lower income households facing constraints maybe more impacted, more vulnerable to the price increases. Also, market dominance in the consumer space limiting access to services that are more tailored to the needs of specific demographic groups. I see this rule as being in service to addressing that market concentration, so, to give you an example, the cfpb with supervision in this space could monitor instances of unfair acts and practices by nonbank payment firms that make it more difficult for consumers to untangle themselves from their payment account relationship and move on to other providers that might be more optimal for uses. Thank you, professor. Can you speak to the broader concerns about the potential for monopolistic use of data and power by Big Tech Companies. How concentrated is the market for payments currently and what risk do you forsee in the absence of enhanced supervision by the cfpb under its new proposed rule . So some of the Empirical Data right now indicates that a vast majority of u. S. Households use just a few of the platforms. I think 60 of u. S. Adults use venmo and paypal. Thats a concentration. That level of concentration and the way it generates very sensitive Consumer Financial data raises really significant concerns, particularly relative to privacy. I think this rule is animated by that concern. We know that major Tech Companies build their Business Models around the large collection and analysis of user data, like browsing history, social interaction and search inquiries. Having this Payment Information helps build even larger stockpiles of data about consumers which held by just a few companies can be very powerful, as i mentioned in my earlier remarks. Unlawful price differentials as well as targeted marketing. Thank you so much. Mr. Chairman and members, i served on one of the conference committees of doddfrank. I was so happy that the consumers finally had a agency dedicate today taking their care of their concerns. Mr. Hill has said its been controversial. Controversial because the opposite side of the aisle did not like the idea that the consumers were now going to have influence and power. So, im very thankful for the hearing, although it is entitled in a misleading way, but this helps bring out what the cfpb is responsible for, what they should be doing, and it does not continue to have to take certain kind of criticism from the opposite side of the aisle, who never likes the consumer Protection Bureau. Thank you, and ill yield back. The gentlewoman yields back. Thank you, chairman hill and thank you for our witnesses being here today. Risky and subjected to supervision through its statutory authority. Mr. Johnson, are there any manyfold considerations the cfpb is required to make you for determining a company is risky . Or has a cfpb set this up as an arbitrary process where they have unlimited discretion . The standard of evidence the bureau has established through his procedure rule is quite low. And the real problem here is the bureau changed its procedural rules to make nonpublic confidential processes associated with the supervision of institutions public in one instance in one instance only and thats what the Company Challenges the proposed determination. So this creates leverage for the agency to say we want to supervise you and if you fight us on this then were going to publicly menu as having challenge that proposed designation subject among other things classaction and reputational harm. Thank you. One of the factors the Consumer Financial protection. Proposal uses to determine if a nonbake covered person would be included in the general use Digital Consumer payment application space is whether they provide at least 5 million covered transactions annually. Market participants have indicated this threshold is alarmingly low. Mr. Holshouser, would you describe the potential Market Impact if the cfpb categorizes into the entities with such a small market share as larger participants . So the minimum 5 million transactions alarmingly low. If you think about just some of the small to mediumsize businesses having tens if not hundreds of thousands a day, that threshold is so low its obvious its an attempt to increase purview of oversight of the cfpb, which will as i mentioned earlier have outsized effect on startups and small and mediumsize companies who are trying to innovate and grow. And disproportionally affect them. Thank you. Appreciate the inset. Mr. Kim, how has the cfpb historically determined, determine thresholds for identifying entities to be considered larger participants under the larger participant rulemaking . In the past they have conducted, you know, databased research thats specific to a very welldefined market and so there hasnt been i think the uncertainty there is today with this rule. So, for example, with credit reporting thats a very welldefined market. I dont think there was a lot of discussion or uncertainty about what is large in that market. Same for a lot of the other lpr is. Todays are nothing highlights the uncertainty with this particular lpr. In your view to the cfpb conduct significant analysis to arrive at the threshold and a proposal . I dont see it in the proposed rule. I cant tell you what the basis was for 5 million. I can say that very anecdotally there are as mr. Holshouser said come smaller to mid sized Payment Companies that would easily meet that threshold within a matter of months. Shift gears a bit. Mr. Johnson, in addition to larger disparate rulemaking the consumer cfpb is attempting to create a nonbank registry. I signed a letter my colleague led in may of last year highlighting our concerns with these actions by the cfpb. The cfpb has justified the need for for a costly come for coffee registration where nonbank companies quote selfreport public orders like Enforcement Actions or consent orders so consumers can be on the lookout for repeat offenders. Mr. Johnson, ms. Josquin isnt this information already public . It is and other aspects of that proposed rulemaking are equally troubling. And i see my time has expired so i yield back, mr. Chairman. Gentleman yields back. Mr. Sherman from california is recognized for five minutes. I, too, would like to criticize the cfpb. It has taken them over a decade to come up with a rule defining who would be subject to some future role. While consumers need the protection now, we may get it in several more years. This initial prerule is long past due. In this town i been in this long time and its not in at least wants to lobby 101 secret classes here the rule is very simple but teaching a simple. If the facts are on your side, argue the facts. If youre on the side of good Public Policy, argues the Public Policy. And if the facts are against you and the Public Policy is against you, argue the procedure. Thats mostly what we have here. People telling us that the procedure is summa all. The most extreme of those arguments is to add the cryptic currency industry come in and say how godawful outrageous it is that somebody would treat crypto as a currency. If you aspire to be a currency, you should aspire to be regulated like a currency. And like our Ranking Member, like the chair, regimen of the subcommittee i was here for doddfrank and and i can asu that when we said signs would certainly include anything that qualified as a currency. Banks have long, ive not really enjoyed the Community Reinvestment act, and so the hightech company to decide if we can be a bank, but call ourselves fintech, and we dont have to live with the Community Reinvestment act or the host of others. Mr. Monet, paypal is holding onto i think its about 18 billion of testimony. I assume assume that they invested as they will come maybe safe investments, maybe speculation. If they go bankrupt, does the fdic reimburse the customers . Thank you for the question. The simple answer is no. Those customers are holding their phones with the relationship only to that nonbank intermediaries. The fdic its like loading mother to your brother not if your brotherinlaw is sam bankmanfrieds. Yes. Okay. Ill ask mr. Holshouser, representing technet. If one of your members goes bankrupt will the other members ship in and make the customers hold or will those customers, voters be here demanding Congress Bail them out . Depends on what side of the fintech and as you speaking of. Theres reliability, credit and debit and of the product but some exposure. Youve got, right now theyre holding onto 18 billion. They they are investigating either something safe or maybe pork bellies, i dont know where they put their money. Where are they put it today they can put it somewhere else more risky tomorrow. Your members are not going to build them up. It here demanding a bailout from congress. Ill point out the deal with venmo is that you pay 1. 75 to get your money three days earlier. I dont think apr is really the way you should evaluate this, but for those of you who are fans of annual percentage rate, thats charging the consumer 213 annual percentage rate. Yes, its only 1. 75 but that is just for three days instead for 365 days. So we have a situation i cant think of any other situation where ordinary americans put their money in a Financial Institution that is totally unregulated, allowed to invest their money in pork bellies, or whatever they want, and they have no insurance. Can you think of any other place where millions of americans have their money at that kind of risk . Where the deposit their money and they think it is there . No, nothing comes to mind. To your point i think the real danger of the way consumers interact with nonbank payment platforms can also this is also particularly true for crypto firms, is they do so under the misperception that when they do they enjoy the same sort of regulatory protection they have when you deal with a broker and invest in securities or deposit accounts when they deal with the banks, which is manifestly not the case. Thank you. The time of the gentleman has expired. Esther davidson is recognized for five minutes, the vice chairman. I think the chevy to i think its great were having this hearing and its important we address just growth of government. Seems like the government expands every year. We do have one party that campaigns on a smaller government. We are not doing so will get every year every congress can we get more government. One of the guaranteed to grow forms of government was the Consumer Financial Protection Bureau. The mission and cause are important. I think we have multiple ways to try to address that. One of the things that support we get the right kind of government wherever we have it is that participation. So mr. Kim, in the most recent proposal for more government by the cfpb, they state they dont have to demonstrate that any customer harm has even occurred. Could you explain what the bare minimum cfpb, cfpb has to show to bring an enemy the under its supervision . Enmity. A statute, talk about doddfrank, requires costbenefit and risk analysis. So an identifying number one a market that is right for supervision, charted in five risk to consumers in that market. Thats what i see is lacking in the rule. Thank you. I guess costbenefit might not overtly address harm but it seems like theres always a case can we just need more government. One of footnotes cfpb tucked into their proposal many believe would give the Bureau Supervisor authority and divisions within a company, their outside the scope of the proposal. What is the practical impact, mr. Johnson, of including that wide sweeping statement in their proposal . Congressman, i think youre referring to were the bureaus that if institution qualifies that a larger participant within the defined market cfpb that only achieves Supervisory Authority can examine for the product line that you in as a larger participant but can thereafter and forever more examine institution for any other product line that may be a current product or service. And i think that expansive view of the bureaus of this country to the specific process the congress established identifying a larger participant within a specific market. Thank you for the clarification. Its the hook that allows kind of more spread. A lot of time government sort of like an invasive plant, once it gets in a field it just keeps growing. And the only way to get it out is to dig it up beirut and branch. If its actually doing something useful, you at least have to prune it to make sure it doesnt overtake everything else. I think companies defined themselves under regulatory scrutiny are frustrated because there seems to be no satisfaction Companies Find suspect theres always more pic that stick which are in the Digital Asset space. We have seen Digital Asset Companies Come to the cfpb saying, or come to the sec in particular saying please regulate us. We want clarity. Were happy to cooperate with you. What do you need to know . And they share in this information and they never get an answer. Its like hotel, for any sort of way. You can never check out. You can never leave. So could you highlight the particular challenge Digital Asset Companies Confront cfpb trying to put hooks in them and regular environment where in no other part of the economy are the getting real clarity . I agree, congressman. Think the lack of regulatory clarity in the Digital Asset space presents a a real problm for Market Participants there. Its my view the proposed rule only muddies the waters here. Not only does lack of riskbased justification make the room unjustified but it also leaves Market Participant in the dark regarding how theyre supposed to prioritize compliance and whether there are even supposed to be covered by the proposed rule. Yeah, so thank you. I hope that we do what our committee has set out to do is provide that regulatory clarity. We passed it in 21. We passed a a ban on Central Bank Digital currency. We passed stablecoins legislation and we importantly protected the right of self custody. Are there any concerns at the cfpbs approach threatens self custody . Because frankly one of the most important protections we found as Companies May be havent flourished, they that problems, some have failed, users have been harmed notably by ftx, is an self custody of way to protect yourself . Self custody would address the risk that ftx presented, and the proposed rule lack of clarity regarding whether these technologies are covered only makes it harder for developers and users to deploy that technology, given the regulatory uncertainty. Thank you. My time is expired at the yield. We turn to the gentle than from texas green for five minutes. Thank you, mr. Chairman. I thank the Ranking Member and the witnesses as well. Professor, the Consumer Federation of america weaselly submitted a statement on Payments Fraud for Senate Banking Committee Hearing outlining how the scale of Payment Fraud is sizable and increasing, including payment apps. The statement indicated that consumers have reported 100 million in unauthorized transactions on cash out, and 57 million on venmo and 2022 alone. How with the cfpb proposed rule help to alleviate the method of Payment Fraud in the market . So with respect to fraud specifically, when the cfpb has supervision over a firm conducts regular examinations to ensure compliance with of course change it guidelines, in this case related to electronic funds transfer act obligations or account fraud. Usually the aim is to make sure the company is a fortifying itself with Consumer Protection measures as well is trying to thwart Consumer Fraud before it occurs. The bureau can closely monitor compliance with these apps to ensure Payment Companies have, for instance, robust dispute resolution mechanisms as well as disclosures. And, of course, the bureau can also assess a Companies Risk assessment strategies and the bureau can in that way delve into sort of the intricacies of the Payment Companies operations and pin point vulnerabilities and fraud hotspots. Supervision for sure will not fall all fraud problems but it can go a long way to make sure companies are doing their part to flag fraud before it happens. Is it fair to say that consumers are better protected with the benefit of the consumer Protection Bureau as opposed to without the benefit pgh. Yes, i think that is absolutely true. And with the other members of the panel be so kind as to indicate whether you think Fraud Protection is something that we ought to be concerned with . Do you think that Fraud Protection is something that we should concern ourselves with . Would you kindly raise a hand . Let the record reflect that all have raised their hand. Let me move quickly to another aspect of this that im concerned with. There have been some suggestions that the threshold should be raised to 10 million as opposed to the 5 million where it is currently proposed to be elevated to. What would be the consequences of raising the threshold, professor, im calling on you again. My understanding is that the cfpbs setting of a threshold at 5 million transactions on a calendar year was designed to enable the bureau to supervise those firms that have the most significant share of this general use Digital Consumer payment application market, and that it was based on available data suggesting that there is a very high concentration within this market. So a very small number of firms processing millions, perhaps billions of dollars worth of transactions in a year. While there are many other firms that are not captured by the rule but they handle fewer transactions. The focus was really on trying to supervise the firms that have the most Critical Role in the market. Youve indicated a small number. I have intelligence indicating that the agency has estimated that the threshold would capture approximate 17 entities. Is that about what youve understood the keys to be . Thats what i understand based on information the bureau has provided. Seventeen entities, all right. Lets move to another area quickly. Cash app, is it true that cash app allows users to sell stocks, buy and sell stocks . Im not familiar with that particular function. Is anyone familiar with the function . If so, you may speak. Cash app, allowing users to buy and sell stocks . Well, ive received an indication that it does have this feature, and they can do so without a commission. This causes me some concern when we come if this is a case, because by and selling stocks is a means by which a good amount of fraud can occur when we dont have the cfpb protecting the consumer. Though im hopeful that maybe this is incorrect, and if it is i will understand, but if that im grateful that the cfpb is looking into this. I yield back the balance of a time. The gelatin from illinois is recognized for five minutes. Thank you. Just a quick question before a start and want to be quick but i did want to get this in the record. All of you before coming here side of truth in testimony form disclosing your government affiliations and contracts. I know a lot of you are speaking on behalf of things that would benefit the Tech Companies. A quick raise of hands. Do any of you have clients who are Tech Companies . Raise your hands. Mr. Kim, only you. Can you disclose the amount of money the tech firms pay you . I dont know, sir. Maybe we can follow up for the record. Thank you for letting us know. I want, i have a very naive hope you were to listen to this and maybe the most naive thing about that in congress i hope my wife and daughter watches because bee with us all going to be at home. I dont think wish while. I do not use paypal, i do not use venmo. Theyre completely addicted to it and they told their different rules here and im looking forward to celebrating being a returning here when i get home later today. First quick question for you, mr. Kim. Hopefully do you feel its important to maintain a wall banking . I think thats a policy question, sir. Im not qualified to enter that one. Okay. I certainly do. I asked the question because United States indigestible you mentioned customers interactions with paypal is a lot like using a bank. You want to expand of that, what you meant by that . Yes id be happy to. So when an individual uses nonbank intermediary, the payment still has to happen along the transmission line of the Banking System. Its just one step removed. So all of these nonbanking platforms sit atop the transmission lines of the Banking System but the consumer is not interacting with the bank. The intermediary is interacting with the bank. So the benefit related to, for instance, fdic insurance, run in favor of the intermediary. And that leaves of the consumer with the just what is essentially a contract claim against the intermediary. As long as the intermediary has assets to make good on withdrawal request, payment request, then everything is fine. But if the intermediary becomes insolvent, that insurance through the Banking System ultimately does not benefit the consumer. The consumer just has a claim in a bankruptcy against the intermediary, not unlike the customers of the now defunct ftx. I appreciate that because im a dyed in all deep free marketer, and like free markets mean everybody has to play on the same Playing Field an idea that if i use schwab and by doug hughes then the festivals, different incentives. That strikes me as a fundamentally anticapitalistic idea venmo. Theres this sort of libertarianism that says that we should never give her information to the government because we cant trust government information. The we should get all information to private companies that have no obligation to the Public Interest to consummate the data brokers who can then resell the information to other governments whose interests are antithetical to our own. Professor odinet in your test when you described this as a massive blind spot for the bureau, and i wonder if you could expand on why we need to be more vigilant protecting consumer data and what we need to guard against in this role . Thank you. The reason why i said that is because we dont exactly know, and it may be in some instances the companies that collect and process the data taken as you sophisticate Artificial Intelligence programs know exactly what you are doing when they use data to make decisions relative to a variety of products and services. Now, we do have some visibility into that when banks are doing so. Thats because banks are subject to supervision both by the bureau above a certain asset class but always by the credential regulators. But we know theres way more innovation happening in Data Processing and Artificial Intelligence outside the bank system in the nonbank system. So in that way the bureau needs sort of invisibility into whats happening on that side of house if you will because thats likely to be the place where there can be more consumer harm. I see ive got 15 seconds left to meet if we could followup in the record afterwards, i do have some concerns that in some of the carveouts for crypto, taken as weve seen some of the company site paypal developing stablecoins as weve seen some of the runs and other currencies, there are some blind spots so tonight if you thoughts about how we might improve the role to protect the time of the gentleman has expired. Thank you. Yield back. Feel free to respond to a writing on the question. The committee, we have votes on the floor, were going to take a recess for not less than five minutes and well come back and finish are questioning. We think our panel for excellent testimony today, so we are in recess for five minutes. [inaudible conversations] [inaudible conversations]