Emerging online lenders ask lawmakers for time, patience

Emerging online lenders ask lawmakers for time, patience
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Online lenders are pleading with lawmakers for time and patience as they attempt to solve one of finance’s most stubborn issues.

Marketplace lenders — companies that specialize in small-scale commercial and consumer loans that aim to cut costs through algorithm-powered underwriting — say they have the potential to expand credit access to millions of underserved Americans.

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A House panel on Tuesday attempted to grapple with the basics of the nascent businesses as some members worried new start-ups lacked the ability or interest to prevent discriminatory lending.

“At the end of the day, all of America benefits when our financial system ensures that access to responsible credit is safe,” said Rep. William Lacy Clay (D-Mo.), top Democrat on the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.

“Marketplace lending consumers must have clear access to transparent information about the products they’re receiving,” Clay said.

Marketplace lenders are a key cut of an emerging wave of business in financial technology. So-called “FinTech” companies specialize in using modern technology to fill gaps in services offered by traditional banks.

Using algorithms to reduce the time and labor it takes to underwrite a loan, marketplace lenders aim to provide cheaper loans at a smaller cost and principal. Some firms loan money from investors, while others partner with banks.

Representatives of marketplace lenders touted their services and warned lawmakers that further regulation could stifle and stall FinTech companies that already struggle to keep up with financial rules created for large banks.

“Be sensitive that additional risk to non-bank platforms can stifle innovation,” said Parris Sanz, chief legal officer for lender CAN Capital representing the Electronic Transactions Association. “The industry is subject to multiple layers of state and federal regulation,” given its dual nature as a technology and financial company.

Lawmakers were quick to praise marketplace lending’s potential to offer credit to underserved or unserved businesses and communities. 

“Marketplace lending shows signs of tremendous growth potential and identifiable challenges,” said Rep. Randy NeugebauerRandy NeugebauerWarren’s regulatory beast is under fire – and rightfully so Dem senators to Trump: Don't tell consumer bureau chief 'you're fired' Overnight Finance: Carson, Warren battle at hearing | Rumored consumer bureau pick meets Trump | Trump takes credit for Amazon hirings | A big loss for Soros MORE (R-Texas), the subpanel’s chairman. “I hope members walk away with a better understanding of the market, its participants, and where we are headed.”

But the industry faces skepticism over oversight and regulatory compliance 

Gerron Levi, director of policy and government affairs for the National Community Reinvestment Coalition, said she feared another financial meltdown if marketplace lenders weren’t held to high oversight standards.

“If lightly regulated non-bank small business lenders — including FinTech firms — are left unchecked, our fear is the impact may be the same: 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,” said Levi, according to prepared testimony.

Rep. David Scott (D-Ga.) expressed concerns about marketplace lending expanding too quickly for regulators to grasp it.

“This is one of the fastest growing industries in the state of Georgia and right now we have 71 million unbanked or underbanked individuals in our system,” said Scott. “We want to make sure that they have access to credit ... and that we move with caution.”

Brick-and-mortar banks also have their doubts about marketplace lending. Rob Nichols, CEO of the American Bankers Association, said that new lenders were great partner for community banks, but couldn’t supplant them.

Nichols called community banking “a relationship business that is not replicable by technology,” as those smaller banks shutter and struggle to handle up with post-recession financial regulation.

“While banks are driving technological innovation, they remain a visible presence, supporting their local communities as they always have through community outreach and countless hours of volunteering,” said Nichols, “something that cannot happen through a keystroke or algorithm.”