During a July 12, 2016, hearing, the House Subcommittee on Financial Institutions and Consumer Credit examined the opportunities and challenges related to financial technology, or FinTech. The focus of the hearing was to provide subcommittee members the opportunity to assess the development of online marketplace lending and how online lenders and banks interact. The hearing also examined the current regulatory structure and recent policy developments.
The witnesses appearing before the panel represented the FinTech industry, banking stakeholders, consumer advocacy groups, and the legal community.
Growing attention. In his opening statement, Subcommittee Chairman Randy Neugebauer (R-Texas) noted, "Over the last year, we have seen growing attention paid to this market by federal regulators, the media, and other market participants. For example, the Office of the Comptroller of the Currency and the Treasury Department have considered the appropriate federal regulatory framework for these lenders. One proposal being considered would offer a limited-national banking charter that could provide operational efficiency and regulatory clarity."
He added, "Banks have grappled with questions surrounding competitiveness and partnership. Some have been quick to point to an uneven regulatory structure, while others have embraced the opportunity to partner with lenders to leverage their technology and consumer reach." He said he and was "hopeful that our community financial institutions will benefit most from these technological advancements and partnerships."
Neugebauer concluded, "Today, I hope members walk away with a better understanding of the market, its participants, and where we are headed."
Regulatory initiatives. The OCC initiative alluded to by Neugebauer was the agency’s March 2016 white paper entitled "Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective," which discussed the principles that will guide the development of the agency’s framework for evaluating new and innovative financial products and services (see Banking and Finance Law Daily, March 31, 2016).
In its May 2016 white paper, "Opportunities and Challenges in Online Marketplace Lending," the Treasury Department provided an overview of the evolving market landscape, reviewed stakeholder opinions, and provided policy recommendations. The white paper also acknowledged the benefits and risks associated with online marketplace lending and highlighted certain best practices applicable to both established and emerging market participants (see Banking and Finance Law Daily, May 10, 2016).
Unmet need. Parris Sanz, Chief Legal Officer, CAN Capital, testifying on behalf of the Electronic Transactions Association, discussed the critical role online lending can play in expanding access to credit to small business owners. He noted that traditional small business loan programs are not able to adequately serve the capital needs of small businesses and that "[c]ompanies like CAN Capital and other ETA member companies have been able to address this unmet need by developing data-driven risk and underwriting models and user-friendly technology platforms to quickly and effectively provide small businesses with access to the capital." He concluded, "Policymakers should recognize the existing framework of federal and state laws that apply to online small business lending and be sensitive to the risk that additional regulation of non-bank platforms will stifle innovation and competition and rollback the expanded access to capital’" and he further suggested that "policymakers continue to monitor and learn about the industry and promote further innovation as well as increasing collaboration between traditional bank lenders and non-bank platforms."
Brings significant value. Sachin Adarkar, General Counsel and Chief Compliance Officer for Prosper Marketplace, which launched in 2006 as the first U.S marketplace lending platform, told the subcommittee that marketplace lending brings significant value to both borrowers and investors and that it will play an increasingly important part in the financial industry in the years to come. He noted, "Loans originated through the Prosper platform are subject to the same comprehensive regulatory framework as loans originated through any traditional consumer lending program" and added that the company is subject to the enforcement authority of the Consumer Financial Protection Bureau and the examination and supervisory authority of a number of state licensing bodies.
Visible presence. Providing a banking perspective, Rob Nichols, Chief Executive Officer, American Bankers Association, noted that banks are innovating and partnering with startups to help benefit their customers, but smart policies are key to facilitating a modern, high-tech system. Nichols also pointed out, "Banks have a long history of serving customers needs and have established trusted relationships. These relationships are backed by a culture of compliance and regulatory oversight that ensures customers are protected. When innovative products are delivered through bank channels, customers get a great experience backed with a relationship they can trust." He also remarked that banks "remain a visible presence, supporting their local communities as they always have through community outreach and countless hours of volunteering—something that cannot happen through a key stroke or algorithm."
Efficient matching. The testimony of Bimal Patel, a Partner and Head of the Financial Advisory and Regulation Practice at O’Melveny & Myers LLP, provided the subcommittee a number of perspectives on marketplace lending. After providing a brief overview of online marketplace lending business models, Patel described the market penetration and discussed some of the factors that have been identified as fueling the growth of online lending. Finally, he identified some of the statutes and regulations that currently apply to various online lending models and discussed some regulatory considerations and recent developments that will shape the continuing development of marketplace lending.
Regulatory response is critical. Finally, Gerron Levi, Director of Policy and Government Affairs for the National Community Reinvestment Coalition, discussed the need for Congress and regulators to act to ensure that predatory practices are prevented. She noted that the rapid growth of marketplace lending to small businesses provides "echoes of the early days of the subprime mortgage boom, in which rapidly growing non-bank mortgage lenders innovated in the worst possible way." Levi added, "If lightly regulated non-bank small business lenders—including financial technology (FinTech) firms—are left unchecked, our fear is the impact may be similar: millions of small businesses stuck with exploding loans they can’t afford, and the American taxpayer left on the hook to clean up the mess." She concluded, ""The regulatory response to FinTech companies will be critical in determining whether they are helpful and responsible financial institutions or whether they will become another in a line of predatory lenders that will ultimately become extinct after fleecing borrowers. The objective must be to apply a comprehensive set of regulations to FinTech companies and more traditional lenders so that consumers and financial institutions can both thrive in the marketplace."
Companies: American Bankers Association; CAN Capital; Electronic Transactions Association; National Community Reinvestment Coalition; O’Melveny & Myers LLP; Prosper Marketplace
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