On July 13th, the Subcommittee on Financial Institutions and Consumer Credit of the Congressional Committee for Financial Services, held a hearing on marketplace lending and Fintech (financial technology). A number of witnesses from the financial industry, including marketplace lenders, banks, law firms and consumer groups appeared before the Committee. The hearing’s timing makes perfect sense as a number of governmental regulatory agencies are examining the operations and impact of Fintech and marketplace lending platforms. In recent months there have been open comment periods, white papers and other rulemaking mechanisms by which federal agencies hope to gain a better understanding of this fast-growing online industry.
Moderating the hearing was subcommittee chairman Congressman Neugebauer, who opened the proceedings by saying, “Online marketplace lending, sometimes referred to as peer-to-peer lending has developed rapidly over the last decade. Leveraging technology, new lending platforms and underwriting algorithms, marketplace lenders have provided expanded avenues of credit for consumers and small businesses alike.”
Reaching underserved communities
And this is the primary thrust of the marketplace lending market, especially peer-peer-lenders—to provide a reasonable financing alternative to a consumer base shut out from traditional lenders due a variety of reasons, most often because they lack the stellar credit rating banks and other lenders require. It is one of the reasons that the market has been so successful all over the world, including in developing nations.
This fact was acknowledged by the committee who stressed that online lending platforms open up access to credit to underserved communities, particularly minorities. Banks are feeling the heat, as was expressed by banking representatives at the hearing. They would like to see regulations that will cool the growth of the online lending business, but this does not appear likely. Banks will have to figure out a way to deal with marketplace lending and Fintech innovations.
Marketplace lending is evolving
The marketplace lending industry is also morphing. In the beginning peer-to-peer lending was about people lending to people. As the market has mushroomed, online lenders have attracted institutional and retail investors, in addition to private investors. What has remained a constant is the unique qualifying algorithm that not only accurately determines the lending risk for the lending platform, but offers a much more consumer friendly door through which a borrower can enter. Brian Korn, a partner with Manatt testified that online lending platforms do not allow for discrimination, as can exist at other traditional lending institutions. The approval is based solely on data.
Congressional committees are eager to learn
The hearing was much like being in a classroom, as there was broad-based and bi-partisan interest in learning as much about marketplace lending as possible. As federal regulators begin to dive more thoroughly into the market, especially on the heels of the recently announced PayDay rules, this congressional committee is jockeying to be in a position to assert authority, should the time come. But first it needs to know what it is dealing with. Committee Members sought to understand the business practices and offerings of marketplace lenders and how they compete with banks. Also they wanted to gauge what impact policymaking will have on the overall health of the industry.
One factor that was foremost in the minds of Members was that marketplace lenders provide access to loans to marginalized consumers, many of whom make up their constituency.
It did not appear that there was any rush on behalf of the Committee members to write regulatory legislation.