House Financial Services Hearing on Online Marketplace Lending
House Financial Services Committee
Subcommittee on Financial Institutions and Consumer Credit
“Examining the Opportunities and Challenges with FinTech:
The Development of Online Marketplace Lending”
Tuesday, July 12, 2016
Key Topics & Takeaways
- Marketplace Lending Growth: Panelists described the various attributes that have led to growth in the marketplace lending sector, such as the ability of marketplace lenders to expand credit access to underserved borrowers.
- FinTech and Banks Benefit Each Other: Panelists described the partnerships that currently exist between marketplace lenders and banks and highlighted ways in which those relationships can be beneficially to borrowers as well.
- Supervision and Oversight of Marketplace Lenders: Panelists discussed the regulatory landscape for marketplace lenders. Panelist noted that while marketplace lenders are subject to many of the same regulations as banks the oversight of those regulations is different.
Speakers
- Parris Sanz, Chief Legal Officer, CAN Capital, on behalf of the Electronic Transactions Association
- Sachin Adarkar, General Counsel, Prosper Funding
- Rob Nichols, Chief Executive Officer, American Bankers Association
- Bimal Patel, Partner, O’Melveny & Myer
- Gerron Levi, Director of Policy & Government Affairs, National Community Reinvestment Coalition
Opening Statements
Chairman. Randy Neugebauer (R-Texas) provided an overview of marketplace lending and listed some of its core features such as faster access to credit, online applications and automated underwriting. Neugebauer stated that some project marketplace lending to reach $90 billion by 2020 and that to-date there has been $10.3 billion in marketplace lending securitizations.
Ranking Member William Lacy Clay (D-Mo.) stated that marketplace lending should benefit underserved consumers. Clay highlighted the need for transparency from lenders concerning the use of consumer data. He expressed concern regarding the potential use of data to discriminate against certain types of borrowers.
Rep. David Scott (D-Ga.) stated that there are currently 71 million underbanked individuals within the American system and that marketplace lending should be developed in a way to provide credit access to those individuals. He also noted the need to strike the appropriate policy balance between mitigating risk and providing credit access.
Witness Testimony
Parris Sanz, Chief Legal Officer, CAN Capital, on behalf of the Electronic Transactions Association
In his testimony, Sanz discussed the role online lenders play in expanding access to credit for small businesses. He stated that small business may have difficulty in obtaining loans of $100,000 or less through traditional lenders and that online lenders have been able to expand credit access for these borrowers. Sanz warned against the potential negative impact of burdensome regulation in this space.
Sachin Adarkar, General Counsel, Prosper Funding
In his testimony, Adarkar described the Prosper Market Place lending platform. Adarkar stated that the Prosper platform has funded $6 billion in loans since its inception. He noted that the most common reason for taking out loans is to refinance existing unsecured debt.
Rob Nichols, Chief Executive Officer, American Bankers Association
In his testimony, Nichols highlighted the need for innovation forward policies since those types of policies benefit the customers. He noted that banks are joining with technology startups and this has benefited consumers, and suggested offering banks and startups a space to safely test new products. Nichols opined that what is happening in a small amount of loans should drive regulation in this space.
Bimal Patel, Partner, O’Melveny & Myer
In his testimony, Patel provided an overview of online marketplace lending business models and discussed regulations which apply to various online lending models. Patel noted that loan originations in the marketplace lending space have increased by 699% since 2010. He also discussed state usury laws and how those laws impact marketplace lending practices.
Gerron Levi, Director of Policy & Government Affairs, National Community Reinvestment Coalition
In her testimony, Levi discussed supervisory and consumer protection protocols. She stated that the use of data has sufficient transparency and compensation fees also have transparency. She described a survey which found that 20 percent of small business used online lenders and their satisfaction was very low due to unfavorable repayment terms and high interest rates. Levi referenced Section 1071 of the Dodd-Frank Act and stated that consumers would benefit from the public dissemination of lender data.
Question and Answer
Marketplace Lending Growth
Rep. Stevan Pearce (R-N.M.) asked panelists for insights regarding why market share for marketplace lenders is growing. Sanz stated that a significant portion of small business borrowers are currently underserved and most growth has been from small businesses seeking loans of lesser amounts than a bank would typically fund. Pearce also expressed concern over potential risks, such as cybersecurity, that could be present for marketplace lenders. Nichols stated that customer data protection is critically important.
Rep. Denny Heck (D-Wash.) asked panelists if “fintech” presented a material competitive threat to the banking industry. Nichols stated that he did not see fintech as a threat and believes there is more opportunity than anything else. Nichols noted that there could be concerns if fintech companies were to receive preferential regulatory treatment compared to banks. He also stated that community banks can benefit from tech partnerships, which would also benefit borrowers.
Rep. Andy Barr (R-Ky.) asked if there are regulatory constraints on bank lenders that make small dollar loans unprofitable. Nichols stated that there are various regulatory headwinds which banks have been dealing with, particularly community banks. Barr stated that now may be the time to look at some deregulation for community banks to ensure a level playing field for lenders.
Disclosures
Clay asked the panelists about disclosures, particularly of interest rates. Sanz stated that work is being done to improve transparency and disclosures for consumers and borrowers.
Rep. Keith Rothfus (R-Pa.) asked if any single disclosure requirement would be adequate considering as there are varying products in the marketplace lending industry. Sanz stated that there is currently ample disclosure for consumers so that consumers can understand the cost of the capital associated with the product. He continued that there is support towards additional disclosure which would show things like annual percentage rates.
Market Place Lending and Minority Groups
Clay asked Levi to provide thoughts on the recent findings by the Department of Treasury that few marketplace lending loans are going to minorities. Levi stated that more data is needed to fully understand which segments of the market are currently underserved. He said that prime customers are receiving access to credit but there is a lack of clarity regarding other market participants.
Regulation of Marketplace Lenders
Scott discussed the importance of consumer protection and asked for panelists to explain the difference in oversight between banks and marketplace lenders. Nichols stated that the difference is oversight, as the relationships that the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) have with the U.S. banking sector is quite defined and those types of relationships are different for marketplace lenders. Adarkar stated that the Consumer Financial Protection Bureau (CFPB) has the same enforcement authority with marketplace lenders as it does with banks.
Rothfus asked panelist for their views on the current state of regulation for marketplace lenders. Adarkar stated that marketplace lenders are regulated as any consumer lending program would be, and that the primary difference is more at the oversight level for the entity as opposed to regulation of the loan program itself.
Rep. Roger Williams, (R-Texas) expressed concern regarding regulation within the business loan industry, specifically for loans under $100,000. Sanz stated that small business loans drive the economy whereas consumer loans are often for debt consolidation. He described the differences between small business borrowers and consumer loan borrowers by stating that small business owners usually have a sophisticated understanding of the products that are sought out.
While discussing regulation, Adarkar stated that status quo had allowed for a reasonable balance to develop and that future regulation could potentially disrupt the industry in negative ways.
Rep Robert Pittenger (R-N.C.) asked panelists to describe the regulation currently in place for marketplace lenders. Sanz stated that marketplace lenders are subject to multiple layers of state and national regulation such as fair lending laws, Regulation B, federal and state laws, and an additional layer of regulation due to bank partnerships.
Madden vs. Midland
Neugebauer asked Patel for views regarding the court decision in the Madden vs Midland case.
Patel stated that Madden has been a source of uncertainty on whether or not interest rates charged on certain loans are valid.
For more information on this event, please click here.
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House Financial Services Committee
Subcommittee on Financial Institutions and Consumer Credit
“Examining the Opportunities and Challenges with FinTech:
The Development of Online Marketplace Lending”
Tuesday, July 12, 2016
Key Topics & Takeaways
- Marketplace Lending Growth: Panelists described the various attributes that have led to growth in the marketplace lending sector, such as the ability of marketplace lenders to expand credit access to underserved borrowers.
- FinTech and Banks Benefit Each Other: Panelists described the partnerships that currently exist between marketplace lenders and banks and highlighted ways in which those relationships can be beneficially to borrowers as well.
- Supervision and Oversight of Marketplace Lenders: Panelists discussed the regulatory landscape for marketplace lenders. Panelist noted that while marketplace lenders are subject to many of the same regulations as banks the oversight of those regulations is different.
Speakers
- Parris Sanz, Chief Legal Officer, CAN Capital, on behalf of the Electronic Transactions Association
- Sachin Adarkar, General Counsel, Prosper Funding
- Rob Nichols, Chief Executive Officer, American Bankers Association
- Bimal Patel, Partner, O’Melveny & Myer
- Gerron Levi, Director of Policy & Government Affairs, National Community Reinvestment Coalition
Opening Statements
Chairman. Randy Neugebauer (R-Texas) provided an overview of marketplace lending and listed some of its core features such as faster access to credit, online applications and automated underwriting. Neugebauer stated that some project marketplace lending to reach $90 billion by 2020 and that to-date there has been $10.3 billion in marketplace lending securitizations.
Ranking Member William Lacy Clay (D-Mo.) stated that marketplace lending should benefit underserved consumers. Clay highlighted the need for transparency from lenders concerning the use of consumer data. He expressed concern regarding the potential use of data to discriminate against certain types of borrowers.
Rep. David Scott (D-Ga.) stated that there are currently 71 million underbanked individuals within the American system and that marketplace lending should be developed in a way to provide credit access to those individuals. He also noted the need to strike the appropriate policy balance between mitigating risk and providing credit access.
Witness Testimony
Parris Sanz, Chief Legal Officer, CAN Capital, on behalf of the Electronic Transactions Association
In his testimony, Sanz discussed the role online lenders play in expanding access to credit for small businesses. He stated that small business may have difficulty in obtaining loans of $100,000 or less through traditional lenders and that online lenders have been able to expand credit access for these borrowers. Sanz warned against the potential negative impact of burdensome regulation in this space.
Sachin Adarkar, General Counsel, Prosper Funding
In his testimony, Adarkar described the Prosper Market Place lending platform. Adarkar stated that the Prosper platform has funded $6 billion in loans since its inception. He noted that the most common reason for taking out loans is to refinance existing unsecured debt.
Rob Nichols, Chief Executive Officer, American Bankers Association
In his testimony, Nichols highlighted the need for innovation forward policies since those types of policies benefit the customers. He noted that banks are joining with technology startups and this has benefited consumers, and suggested offering banks and startups a space to safely test new products. Nichols opined that what is happening in a small amount of loans should drive regulation in this space.
Bimal Patel, Partner, O’Melveny & Myer
In his testimony, Patel provided an overview of online marketplace lending business models and discussed regulations which apply to various online lending models. Patel noted that loan originations in the marketplace lending space have increased by 699% since 2010. He also discussed state usury laws and how those laws impact marketplace lending practices.
Gerron Levi, Director of Policy & Government Affairs, National Community Reinvestment Coalition
In her testimony, Levi discussed supervisory and consumer protection protocols. She stated that the use of data has sufficient transparency and compensation fees also have transparency. She described a survey which found that 20 percent of small business used online lenders and their satisfaction was very low due to unfavorable repayment terms and high interest rates. Levi referenced Section 1071 of the Dodd-Frank Act and stated that consumers would benefit from the public dissemination of lender data.
Question and Answer
Marketplace Lending Growth
Rep. Stevan Pearce (R-N.M.) asked panelists for insights regarding why market share for marketplace lenders is growing. Sanz stated that a significant portion of small business borrowers are currently underserved and most growth has been from small businesses seeking loans of lesser amounts than a bank would typically fund. Pearce also expressed concern over potential risks, such as cybersecurity, that could be present for marketplace lenders. Nichols stated that customer data protection is critically important.
Rep. Denny Heck (D-Wash.) asked panelists if “fintech” presented a material competitive threat to the banking industry. Nichols stated that he did not see fintech as a threat and believes there is more opportunity than anything else. Nichols noted that there could be concerns if fintech companies were to receive preferential regulatory treatment compared to banks. He also stated that community banks can benefit from tech partnerships, which would also benefit borrowers.
Rep. Andy Barr (R-Ky.) asked if there are regulatory constraints on bank lenders that make small dollar loans unprofitable. Nichols stated that there are various regulatory headwinds which banks have been dealing with, particularly community banks. Barr stated that now may be the time to look at some deregulation for community banks to ensure a level playing field for lenders.
Disclosures
Clay asked the panelists about disclosures, particularly of interest rates. Sanz stated that work is being done to improve transparency and disclosures for consumers and borrowers.
Rep. Keith Rothfus (R-Pa.) asked if any single disclosure requirement would be adequate considering as there are varying products in the marketplace lending industry. Sanz stated that there is currently ample disclosure for consumers so that consumers can understand the cost of the capital associated with the product. He continued that there is support towards additional disclosure which would show things like annual percentage rates.
Market Place Lending and Minority Groups
Clay asked Levi to provide thoughts on the recent findings by the Department of Treasury that few marketplace lending loans are going to minorities. Levi stated that more data is needed to fully understand which segments of the market are currently underserved. He said that prime customers are receiving access to credit but there is a lack of clarity regarding other market participants.
Regulation of Marketplace Lenders
Scott discussed the importance of consumer protection and asked for panelists to explain the difference in oversight between banks and marketplace lenders. Nichols stated that the difference is oversight, as the relationships that the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) have with the U.S. banking sector is quite defined and those types of relationships are different for marketplace lenders. Adarkar stated that the Consumer Financial Protection Bureau (CFPB) has the same enforcement authority with marketplace lenders as it does with banks.
Rothfus asked panelist for their views on the current state of regulation for marketplace lenders. Adarkar stated that marketplace lenders are regulated as any consumer lending program would be, and that the primary difference is more at the oversight level for the entity as opposed to regulation of the loan program itself.
Rep. Roger Williams, (R-Texas) expressed concern regarding regulation within the business loan industry, specifically for loans under $100,000. Sanz stated that small business loans drive the economy whereas consumer loans are often for debt consolidation. He described the differences between small business borrowers and consumer loan borrowers by stating that small business owners usually have a sophisticated understanding of the products that are sought out.
While discussing regulation, Adarkar stated that status quo had allowed for a reasonable balance to develop and that future regulation could potentially disrupt the industry in negative ways.
Rep Robert Pittenger (R-N.C.) asked panelists to describe the regulation currently in place for marketplace lenders. Sanz stated that marketplace lenders are subject to multiple layers of state and national regulation such as fair lending laws, Regulation B, federal and state laws, and an additional layer of regulation due to bank partnerships.
Madden vs. Midland
Neugebauer asked Patel for views regarding the court decision in the Madden vs Midland case.
Patel stated that Madden has been a source of uncertainty on whether or not interest rates charged on certain loans are valid.
For more information on this event, please click here.