WASHINGTON — Rep. Emanuel Cleaver, D-Mo., has emerged as one of the most outspoken members of Congress when it comes to fintech, both embracing its potential and calling for regulatory guardrails.

“If we fail to act on fintech, we are setting ourselves up for problems down the road,” Cleaver said in a recent interview. “Not because the fintech folks are evil … but because we are behind the curve.”

“We have a good chance now to build a road down which the wagon travels and I think we ought not to blow it.”

Rep. Emanuel Cleaver, D-Mo.
Rep. Emanuel Cleaver, D-Mo., said his investigation of the fintech sector has turned up evidence that minority business owners are being charged higher rates for online loans. Bloomberg News

Billions of dollars are flowing into the financial technology sector, but it remains unclear what kinds of actions regulators or policymakers may take to address the risks and rewards of the new products and services that are being offered. But many expect the issue to get more attention on Capitol Hill.

As the top Democrat on the House Financial Services housing and insurance subcommittee, Cleaver is lobbying for a methodical approach. He wants to study the issue first and figure out a way to ensure proper safeguards are in place. For starters, he wants Republicans to hold more hearings on the issue.

“We absolutely need to have representatives from fintech before the” Financial Services Committee, he said. “We have to have a good idea about fintech and online banking… before we start thinking about where they fit or will they be a new category altogether, separate and distinct from the big banks, from the community banks.”

Cleaver said that there has to be a congressional “study period” on the state of fintech, and that leaders in the space, “to the degree they can express it,” should tell Congress how they envision the future.

“If we are going to redesign this whole system, which I think is needed, then we are going to have to bring some of the smartest people before the committee,” he said.

The Senate Banking Committee held a hearing on fintech in September and House committees have held hearings as well, but Congress has yet to immerse itself in the debate.

Pitfalls of fintech

Cleaver is hardly anti-fintech. He voted in favor of legislation supported by online lenders, including a bill introduced by another leader in the fintech field, Rep. Patrick McHenry, R-N.C., that would clarify that bank loans made at one interest rate could be legally sold to a nonbank at the same rate.

But Cleaver has also been quick to identify potential problems at online lenders. In particular, he is concerned that gender and racial bias could be showing up in lending decisions.

Cleaver sent letters to four small-business online lenders over the summer asking them to share information about their products, fees and disclosures when making lending decisions. He also sent a letter to Lend Up Co., which is a consumer lender but offered to participate in Cleaver’s inquiry.

LendingClub, Biz2Credit and Prosper responded to Cleaver's letters, as did Fora Financial, but the House Democrat said Fora’s responses thus far have been unsatisfactory.

“They probably made a mistake,” Cleaver said.

However, the congressman said his investigation has turned up some evidence that minority business owners are being charged higher rates for online loans.

“I think I was correct that on the surface most people would say human beings are not making decisions, the decisions are made strictly on the merits, but a lot of the things that are done that hurt specific racial groups are subliminal and in some cases unintentional because humans created it,” said Cleaver.

He also added that the traditional credit reporting companies might need to review their practices.

“There is clearly a bias factored into the credit reporting agencies,” said Cleaver.

Fintech regulations

Cleaver sent a letter in March asking the Consumer Financial Protection Bureau to look at algorithms making lending decisions, but he also wants Congress to consider its own oversight duties.

“The CFPB is at least trying to get some kind of perspective on what” the online lenders “are doing but right now, I don’t think there is that much regulatory effort by Congress.”

Cleaver noted that it’s unclear how the CFPB will move forward under new leadership and Congress should pursue bipartisan legislation. However, he said it still seems logical to leave some of those responsibilities to the bureau.

“We need to be very careful and know what we are talking about as we begin to draft legislation” to regulate fintech companies, he said. “I think it should be bipartisan legislation creating directives to the CFPB.”

Housing finance reform

While Cleaver has been zeroing in on fintech, he will also play a central role in drafting housing finance reform legislation.

Republicans control the House and Financial Services Committee Chairman Rep. Jeb Hensarling, R-Tex., will likely be the most important player in negotiations in the lower chamber, but Cleaver will be a top voice for Democrats as ranking member of the housing subcommittee.

He said that he recently sat down the Rep. Sean Duffy, R-Wis., the subcommittee's chairman, and that they were able to find “three, four things that we agree on.”

“If Mr. Duffy and I are given the leeway, I actually believe that we can come up with something,” Cleaver said of reforming Fannie Mae and Freddie Mac. “We are moving in the right direction.”

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