Congress has taken note of the rise of companies that utilize technology to make financial services more efficient, or fintechs as they have commonly become known, and their increasing role in the financial services market.
In a House Financial Services Subcommittee on Financial Institutions and Consumer Credit hearing on Tuesday, Subcommittee Chairman Randy Neugebauer (R-Texas) noted that while online marketplace lending represents only a fraction of the $3.5 trillion in outstanding consumer debt, it shows both tremendous growth potential and identifiable challenges.
“Over the last year, we have seen growing attention paid to this market by federal regulators, the media, and other market participants,” Neugebauer said in his opening statement at the hearing. “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.”
The key takeaways from the hearing, according to the Committee, is that online marketplace lending is expanding access to credit by providing loans to certain borrowers who might not have otherwise received capital, and the new credit models present an opportunity to leverage technology to expand credit access into underserved markets.
“We believe 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,” said Sachin Adarkar, General Counsel, Prosper Funding, one of the witnesses in the hearing.
“For various reasons stated above, traditional small business loan programs are not able to adequately serve the capital needs of our nation’s small businesses,” said Parris Sanz, Chief Legal Officer, CAN Capital, a witness in the hearing. “This is especially true when small businesses need $100,000 or less, which accounts for 90% of small business loans. Companies 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 they need to grow their businesses and, in turn, help propel the U.S. economy.”
For at least a few months, the financial industry has been discussing the possibility of a national bank charter for non-bank fintechs. The Office of the Comptroller of the Currency (OCC) has warned that fintechs would not replace banks in the financial industry, but at the same time the OCC has encouraged dialogue between fintechs and banks to foster responsible financial innovation. The OCC held a forum on June 23 including representatives from both fintechs and banks to have such a dialogue.
“Banks have grappled with questions surrounding competitiveness and partnership,” Neugebauer said. “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. I am hopeful that our community financial institutions will benefit most from these technological advancements and partnerships.”
Neugebauer noted improvements in capital markets, citing $10.3 billion in cumulative securitizations since the first securitization in 2013. But at the same time, he cited a report from Deloitte earlier this year which predicts large consolidations and strategic partnerships with traditional banks. Neugebauer said in order to make better policy decisions, the Subcommittee must do three things: Understand business models and product offerings of fintechs; understand how banks and lenders compete and collaborate; and understand the current regulatory framework and how policy decisions may determine the market’s future.
Witnesses at the hearing included Parris Sanz, Chief Legal Officer, CAN Capital, on behalf of the Electronic Transactions Association; Sachin Adarkar, General Counsel, Prosper Funding; Rob Nichols, CEO, American Bankers Association; Bimal Patel, Partner, O’Melveny & Myer; and Gerron Levi, Director of Policy & Government Affairs, National Community Reinvestment Coalition (click the witness’s name to read his or her testimony).
Neugebauer said that Tuesday’s hearing was the first in a series he intends to convene on fintechs, noting that online marketplace lending (also known as peer-to-peer lending) has increased rapidly over the last decade.