Congress Questions Online Lenders as It Weighs Reforms

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WASHINGTON — Online marketplace lenders found themselves in the congressional crosshairs Tuesday just as some lawmakers are attempting to provide the industry with sought-after reforms.

The House Financial Services subcommittee on financial institutions held a hearing on the emerging sector that has drawn scrutiny from Washington not only for its growth but also recent financial troubles at some companies such as Lending Club.

Members of the committee and witnesses from the banking and marketplace lending industries debated a host of issues, including federal efforts to create a fintech charter, effects on the industry of potential regulation and marketplace lenders' use of customer data.

Rep. Steve Pearce, R-N.M., raised concerns about what he called the "unsettling" amount of data that online lenders can use to underwrite loans.

"If a lender has access to my buying habit then they can tell everything about me," Pearce said. "They know what political party I'm in, they know who I'm going to vote for in the next election, they know what I'll buy, they know what I'll pay for it, everything."

Rep. Lacy Clay, D-Mo., questioned one witness, Parris Sanz, chief legal officer for the small-business lender CAN Capital, over how transparent the company is to borrowers about its pricing.

"Does CAN Capital disclose annualized interest rates or APRs to your small-business borrowers?" Clay said.

When Sanz tried to respond, explaining why the company is not covered by the Small Business Borrowers' Bill of right, Clay cut him off. "I'm not going to let you filibuster my question," Clay said. "What are your annual interest rates?"

Yet despite the scrutiny, some lawmakers appear willing to try to move legislative reforms sought by the marketplace lending industry. On Monday, Rep. Patrick McHenry, R-N.C., introduced two bills that would seek to simplify online lenders' operations.

One of the proposals would ensure online lenders that partner with banks to issue loans could use federal law to pre-empt state interest rate limits. The other bill would allow online lenders to simplify the collection of a customer's income data through the creation of a dynamic Internal Revenue Service data set.

"Innovation in financial services has created more convenient and secure ways to meet the demands of American consumers," McHenry said in a press release Tuesday. "For these to succeed, however, Washington must rethink its own laws and regulations to keep up with the growth and creativity in the private sector."

At the hearing, Rep. Andy Barr, R-Ky., said policymakers should encourage innovation, not slow it down.

"This fintech revolution is really quite exciting in many respects, from the standpoint of innovation and, obviously, filling a gap in demand in the financial marketplace," he said. "It's very important that Congress and regulators not overreact to stifle innovation."

Meanwhile, the Office of the Comptroller of the Currency has raised the idea of creating a banklike fintech charter, which would bring the benefit of a single regime — instead of requiring fintech firms to comply with a whole host of state laws — but would also likely bring more regulation.

Testifying at the hearing, Rob Nichols, chief executive of the American Bankers Association, said a charter could "address" a "lack of oversight" for nonbanks that currently do not face federal regulation. "As [regulators] examine this issue we urge them to consider how any such charter would differ from a bank charter and ensure that it provides customers bank-level protections."

Sanz suggested that a federal fintech charter would not be an automatic solution to the problem of abiding by multiple state requirements.

"There are a tremendous amount of details that would have to be explored and vetted thoroughly to understand exactly what the tradeoffs are for a company like mine that's strictly a small business balance sheet model," Sanz said. "Commercial finance companies can certainly operate in the face of the state patchwork. There are certain downsides to that. But whether or not a limited charter would be the answer, I think the devil is in the details."

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