Statement of Benjamin Wiseman, Director, Office of Consumer Protection
Office of the Attorney General for the District of Columbia
Before the Committee on Business and Economic Development, Kenyan R. McDuffie, Chairperson
Public Hearing on Bill 24-0227, Financial Services Innovation and Regulatory Sandbox Creation Act of 2021
March 14, 2022
Introduction
Good afternoon, Chairman McDuffie, Councilmembers, staff and residents of the District. My name is Benjamin Wiseman, and I am the Director of the Office of Consumer Protection, in the District of Columbia’s Office of the Attorney General (OAG). I am pleased to provide comment on behalf of Attorney General Karl Racine and express OAG’s reservations concerning Bill 24-0227 (Sandbox Bill).
The Role of Regulatory Sandboxes
The Office of the Attorney General supports the laudable goal of encouraging new and innovative business in the District of Columbia. Responsible innovation in the consumer financial marketplace has the potential to provide consumers with expanded choices, lower prices, and greater access to credit, especially for District residents who have been left behind by traditional lending and other financial models. We are concerned, however, that the Sandbox Bill does not adequately protect District residents.
Regulatory sandboxes purport to foster experimentation and innovation by providing companies with broad immunity from rules and laws that would otherwise apply. Indeed, the regulatory sandbox proposed in this bill would provide broad legal immunity to fintech companies to purportedly foster experimentation and innovation. Fintech, which is shorthand for financial technology, is a phrase used to capture a wide range of financial products and services that rely on new technologies and the internet. Fintech includes online lending products, digital investment products, online payment systems, and even cryptocurrency. For example, Venmo and CashApp are fintech companies that offer online peer-to-peer payment services.
Promoting innovation, however, should not come at the expense of District consumers. OAG has seen firsthand the risks posed by many new fintech products. Regulatory sandboxes are inherently dangerous because they allow new, untested financial products and services to be tested on consumers without normal legal protections in place. As I will explain in more detail below, OAG has seen how risky fintech products can harm District residents. For example, OAG has taken action against online fintech lenders that purport to offer easy access to small dollar loans when in fact the loans they provide are predatory products that have illegal interest rates that trap consumers in a cycle of debt. A regulatory sandbox might be used to provide cover for such risky and harmful products.
Because of the dangers in regulatory sandboxes, very few jurisdictions have enacted laws enabling them. Most states, including those that share the District’s values of strong protections for vulnerable and low-income residents, have rejected sandboxes in favor or a more cautious and consumer-oriented approach to fintech companies. Indeed, when the Consumer Financial Protection Bureau under the Trump administration proposed a regulatory sandbox, General Racine joined twenty-two Attorneys General to oppose the proposal. A coalition of 50 public interest groups, including the National Consumer Law Center, also wrote a letter opposing the program, noting it could put consumers at risk.
OAG urges extreme caution in enabling these types of loopholes for fintech companies. Rather than providing companies with broad immunity in the form of a sandbox to test products on vulnerable or low-income residents, we should be strengthening our consumer protection laws, and updating them as appropriate to meet the needs of innovative tech. Innovation must occur within a framework that maintains strong protections for consumers and does not unfairly advantage businesses that follow District laws.
The Office of Attorney General’s Role in Overseeing Developments in the Fintech Industry
OAG is actively engaged in ensuring fintech companies comply with District law. In fact, our office is one of the leaders in this space across the country. We have several ongoing investigations of fintech companies that interact with District residents. These investigations are focused on a myriad of issues, including whether these companies are misleading District consumers about the cost and benefits of their services.
In addition, in 2020 and 2021, OAG brought lawsuits against two fintech lenders, Opportunity Financial and Elevate Credit, that provided thousands of loans to District residents with interest rates as high as 250%. The District’s interest rate cap on lending is 24%. These fintech lenders claimed that they were only loan “servicers,” not lenders, providing innovative algorithms and platforms to facilitate lending by banks. Our investigations showed, however, that the companies were in fact the true lenders behind the loans and thus liable under the District’s consumer protection and usury laws. OAG recently reached settlements with Opportunity Financial and Elevate Credit, which will return at least $4.8 million in restitution to District residents and result in over $1 million in additional debt relief to consumers.
OAG has also been active on the legislative front. In 2021, OAG introduced legislation that would ban companies from using algorithms that discriminate against people who, for example, apply for a job, seek a place to live, or try to get a loan. Automated decision-making algorithms are often employed by fintech companies as innovative tools, but they can reflect and replicate historical bias and exacerbate inequalities in marginalized communities.
It is abundantly clear to our office that the fintech arena, though full of promise for helpful innovations, also requires vigilant oversight and enforcement to prevent abuses.
Concerns About Proposed Bill 24-0227 and the Need for OAG Involvement.
In addition to OAG’s concerns with regulatory sandboxes generally, we have serious concerns with the sandbox that would be created by this bill. I will touch on just a few of them.
First, given OAG’s vast experience with fintech companies and consumer protection enforcement, we are concerned that the proposed legislation does not include any involvement of the Office of the Attorney General. Rather, the authority to provide broad immunity from liability to companies rests solely within one person at one District agency. This framework is problematic because it could undermine OAG’s critical consumer protection enforcement activities, including the enforcement matters just discussed. For example, a target of an OAG enforcement action may try to seek shelter through the sandbox waiver. A more appropriate and consumer-oriented framework would require OAG, and potentially other District agencies, to review and approve any waiver providing immunity to applicants.
Second, we are concerned with the broad powers granted the Commissioner. The bill would allow the Commissioner to waive important consumer protections, for any reason, in the sole discretion of the Commissioner. The bill does not include any approval criteria or factors that the Commissioner must consider before granting a waiver. There also is no requirement that the Commissioner provide a reason, or that the justification for granting a waiver is made public so that District residents can provide input. OAG does not support providing such broad safe harbors to companies, as contemplated in the Sandbox Bill, without meaningful transparency.
Third, the proposed monetary limits for products are too high. For instance, lenders can offer loans in amounts up to $15,000, with aggregate loans of up to $50,000 per consumer. This is far greater than similar limits in other jurisdictions the have enacted regulatory sandboxes. For many District consumers, losing such large sums would be catastrophic.
Fourth, the proposal allows fintech companies to experiment on up to 25,000 District consumers. By comparison, Arizona’s regulatory sandbox only allows transactions with up to 10,000 consumers. Arizona has a population more than ten times greater than the District’s population. Simply put, this places too many District residents at risk.
Finally, OAG has concerns with the proposal’s definition of innovation. Under the bill’s broad and vague definition, a fintech company would qualify for sandbox protection even if it were using existing technology to offer a product. Sandbox protections, if made available, should only be provided to a smaller, and more narrowly defined subset of fintech proposals.
Conclusion
OAG believes in supporting responsible innovation. But fostering innovation should not include providing broad grants of immunity to companies that may put our consumers at risk. Bill 24-0227 would do exactly that, allowing companies to offer risky products to tens of thousands of District residents without strong consumer protections or meaningful transparency. We urge the Council not to enact a regulatory sandbox. If it is to do so, we strongly suggest that this bill be modified to better protect District consumers. We would be happy to work with you, Chairman McDuffie, and the Council, to suggest such modifications to this bill. Thank you