A handful of financial start-ups have formed a lobbying group to press for legislation to ease regulation of their activities and provide federal support for lending outside the traditional banking system.
Executives at members of the Coalition for New Credit Models called their businesses the "wind and solar" of the financial services industry, with the potential to revolutionize the transmission of funds from savers to borrowers and open the flow of credit to consumers who have few dealings with banks and to small and midsize businesses.
Because of the upheaval created by the banking crisis, "something different is coming and we want to have a seat of the table," Chris Larsen, the chief executive and co-founder of Prosper Marketplace Inc., a San Francisco peer-to-peer lending service and a member of the trade group, said in an interview Tuesday.
Other members include Progreso Financial, a Mountain View, Calif. lender to "underbanked" Hispanics, and New York's SecondMarket Inc., which runs an online trading platform for illiquid assets like auction-rate securities and whole loans. The trade group represents both for profit and nonprofit ventures.
The Coalition for New Credit Models is being run by Israel Klein of Podesta Group, a lobbying firm in Washington. Among his previous jobs, Klein was the deputy staff director for communications for the Joint Economic Committee while it was chaired by Sen. Charles Schumer, D-N.Y.
Larsen said in a press release that the group's members "are at risk of being suffocated by rigid regulations that threaten rather than embrace new technologies and models."
One goal for the group is to secure legislation establishing bank regulators alone as the proper overseers of peer-to-peer lending. Prosper was forced to shut down its service for nine months until its registration statement was declared effective by the Securities and Exchange Commission in July.
In the interview, Larsen argued that, unlike bank regulators, securities regulators are not in a position to balance the need for transparency with privacy concerns of consumer borrowers because of their focus on corporate issuers.
Larsen said his company and Lending Club Corp. of Sunnyvale, Calif. — both "heavily funded" by venture capital — are the only two peer-to-peer lending companies that have completed the SEC registration process, and are now protected from competitors by the regulatory hurdle.
"But we are looking ten years out," he said. "We want p-to-p to be the new way that banks operate, the new way that consumer finance operates," meaning that the participation of other firms is desirable.
James Gutierrez, Progreso's CEO, said the government could support nontraditional lenders by guaranteeing loans made to them by banks. Such support, he said, could be contingent on the nontraditional lenders' products meeting standards, such as affordability criteria, terms of at least three months and accompanying financial literacy education.
The standards could be defined in legislation, or be administered by an agency like the proposed Consumer Financial Protection Agency, Gutierrez said.
But he said the trade group is worried that "CFPA and other ideas — while they're needed — it may actually curtail innovation. It may actually curtail, more importantly, access."
