Lawmakers struggle to find right balance on fintech policy

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WASHINGTON — The House Financial Services Committee held a hearing Tuesday on the fintech industry as Congress is still beginning the conversation about what federal fintech policy should look like.

“Fintech is an area where we need to be very careful. We want to make sure we continue to allow innovation," said Rep. Blaine Luetkemeyer, R-Mo., chairman of the subcommittee on financial institutions and consumer credit, which hosted the hearing.

For years now, officials and some firms have hinted at a desire for clearer government policy on fintech dealing with issues such as licensing, consumer protection, the interplay between state and federal regulation, and how newer companies like marketplace lenders access the banking system, among others.

“I hope this will be just the first that Congress convenes on this tectonic but consequential issue and it will ultimately handle some kind of common sense legislation,” said Rep. Emanuel Cleaver, D-Mo. “While I have some concerns about fintech, I do believe that financial technology is a force of good in this country.”

Currently, fintech firms encounter a patchwork of mostly state laws and regulations, and must engage with a cadre of regulators in order to operate a multistate platform.

Some newer nonbank providers have urged policymakers to develop a more universal framework. The Office of the Comptroller of the Currency, for example, has developed a federal fintech charter, but to date has not considered any applicants.

Some lawmakers, while not taking sides, said there should be a more harmonized framework as state and federal regulators appear to be in a turf battle.

“There are critics out there who are saying that there should be more protection, and that protection should be at the state level. But here is the problem. We have 50 states," said Rep. David Scott, D-Ga.

State and federal regulators are "all champing at the bit to regulate," Scott said. “This is becoming very problematic.”

Andrew Smith, a partner at Covington & Burling, testified at the hearing that obtaining a money transmitter license in all 50 states is costly.

“Conservatively, it would take two years and a couple million dollars to get to license and build a platform through the state-by-state licensing system,” said Smith.

Companies that choose to partner with banks have also run into regulatory and legal roadblocks, including the recent decision Madden v. Midland Funding, which determined that nonbanks in one state that purchase debts issued by banks in another state can open themselves up to claims of state usury violations.

Congress is currently considering legislation to address concerns of marketplace lenders about the effects of the court decision.

"We should make sure that we ensure that fintech firms are able to partner with banks and that banks are able to partner with fintech firms and not have courts come in after the fact and unravel those transactions, and decide that someone else and not the bank was the true lender,” said Smith.

But others counter that policymakers should ensure that any policies do not allow companies to market predatory products.

“The use of bank partnerships has one and one purpose only that is the evasion of state usury laws,” said Adam Levitin, a law professor at Georgetown University, who also testified at the hearing.

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