[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EXAMINING OPPORTUNITIES AND
CHALLENGES IN THE FINANCIAL
TECHNOLOGY (``FINTECH'') MARKETPLACE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 30, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-70
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
31-326 PDF WASHINGTON : 2018
-----------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
BLAINE LUETKEMEYER, Missouri, Chairman
KEITH J. ROTHFUS, Pennsylvania, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina AL GREEN, Texas
ANDY BARR, Kentucky KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas DENNY HECK, Washington
MIA LOVE, Utah GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
C O N T E N T S
----------
Page
Hearing held on:
January 30, 2018............................................. 1
Appendix:
January 30, 2018............................................. 39
WITNESSES
Tuesday, January 30, 2018
Hoopes, Nathaniel, Executive Director, Marketplace Lending
Association.................................................... 4
Knight, Brian, Director, Program on Financial Regulation and
Senior Research Fellow, Mercatus Center, George Mason
University..................................................... 5
Levitin, Adam J., Professor of Law, Georgetown University Law
Center......................................................... 10
Peters, Brian, Executive Director, Financial Innovation Now...... 7
Smith, Andrew, Partner, Covington and Burling, LLP............... 9
APPENDIX
Prepared statements:
Hoopes, Nathaniel............................................ 40
Knight, Brian................................................ 52
Levitin, Adam J.............................................. 84
Peters, Brian................................................ 108
Smith, Andrew................................................ 119
Additional Material Submitted for the Record
Hollingsworth, Hon. Trey:
Written statement from the Consumer Financial Data Rights
Group...................................................... 130
Written statement from WebBank............................... 134
Waters, Hon. Maxine:
Written statement from the National Community Reinvestment
Coalition.................................................. 139
Hoopes, Nathaniel:
Responses to questions for the record from Representative
Posey...................................................... 156
Knight, Brian:
Responses to questions for the record from Representative
Posey...................................................... 160
Levitin, Adam J.:
Responses to questions for the record from Representative
Posey...................................................... 163
Peters, Brian:
Responses to questions for the record from Representative
Posey...................................................... 165
Smith, Andrew:
Responses to questions for the record from Representative
Posey...................................................... 169
EXAMINING OPPORTUNITIES AND
CHALLENGES IN THE FINANCIAL
TECHNOLOGY (``FINTECH'') MARKETPLACE
----------
Tuesday, January 30, 2018
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Present: Representatives Luetkemeyer, Rothfus, Royce,
Lucas, Posey, Ross, Pittenger, Barr, Tipton, Williams, Trott,
Loudermilk, Kustoff, Tenney, Clay, Maloney, Meeks, Scott,
Green, and Heck.
Also present: Representatives Hensarling, Hollingsworth,
Emmer, and Cleaver.
Chairman Luetkemeyer. The committee will come to order.
Without objection, the Chair is authorized to require recess of
the committee at any time. This hearing is entitled,
``Examining Opportunities and Challenges in the Financial
Technology, or Fintech, Marketplace.''
Before we begin, I would like to thank the witnesses for
appearing today, I appreciate your participation and look
forward to the discussion. I now recognize myself for 5 minutes
for the purposes of an opening statement.
From all the electronic payment in use, through blockchain,
and crytpo-currencies, advances in technologies are changing
the way financial markets operate and the way that consumers
access credit. Use of these new technologies has proven to spur
innovation that aids in the delivery of services and products
to consumers and small businesses. These advancements come at a
time when bank lending to borrowers with less than pristine
credit, small businesses, and startups seems to have stalled.
According to a recent study by Deloitte, marketplace
lenders, for instance, accounted for loan originations worth
almost $40 billion over the last decade. Today, many online
lenders have a technology to offer consumer and small business
loans with better terms and conditions.
An increasing role for fintech also shows the financial
needs of Americans have changed. The rise of online banking and
mobile payment technologies have revolutionized the way
Americans interact with institutions and make financial
decisions.
While we should always advocate for innovation that helps
the American people and the economy, we must also understand
the implications this type of technical revolution can have on
consumers and financial institutions.
So my colleagues on this subcommittee have raised questions
over both potential positives and negatives these types of
lenders may have on underserved borrowers and communities.
These are conversations that need to take place so we can have
a holistic view of this diverse and growing marketplace.
It is also important to spend time understanding regulatory
regimes surrounding fintech, predominantly regulated by the
States. Questions have recently been raised as to whether or
not Federal laws that apply to similar products and companies,
should apply to fintech.
At the Federal level, the previous Comptroller of the
Currency, championed an optional Federal charter for fintech
companies, an idea that has been debated in Congress for a
number of years. The Trump Treasury Department has also opined
on ways in which to support safe online lending platforms.
This subcommittee will continue to deliberate measures
surrounding fintech that will promote freer and fairer lending
to more American families and businesses.
So the bills, including a bill introduced by the gentleman
from Indiana, Mr. Hollingsworth, will provide certainty in the
marketplace and encourage community banks to partner with
fintech companies to better serve their customers.
As we examine these complex issues, we must be careful not
to unnecessarily stifle access to capital. We should aim to
foster a better understanding of the many facets of fintech and
create an environment that fosters responsible innovation
without jeopardizing consumer protections or creating an uneven
playing field.
The bottom line is that this is a universe that seems to
evolve on a nearly daily basis. It is my intention to hold a
number of hearings on fintech. I am confident that today's
conversation will be a great start, and I will again thank our
witnesses for their time.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, Ranking Member of the subcommittee, for 5 minutes for an
opening statement.
Mr. Clay. Thank you, Mr. Chairman, and I will not take the
entire 5 minutes, but I appreciate you holding this hearing to
examine opportunities and challenges in the fintech
marketplace. Thank you to each of the witnesses for shedding
light on this subject.
In June 2016, the Obama Administration held a White House
fintech Summit to engage with stakeholders about the potential
for fintech. Then in January 2017, the Administration compiled
its takeaways into a statement of principles as a policy
framework for the fintech ecosystem.
The 10 principles encourage stakeholders to; one, think
broadly about the financial ecosystem; start with the consumer
in mind; promote safe financial inclusion and financial health;
recognize and overcome potential technological bias; maximize
transparency; strive for interoperability and harmonize
technical standards; build in cybersecurity, data security, and
privacy protections from the start; increase efficiency and
effectiveness in financial infrastructure; protect financial
stability; and continue and strengthen cross-sector engagement.
Under the Trump Administration, the Treasury Department has
indicated plans of releasing a paper on non-bank financial
institutions, financial technology, and financial innovation as
part of their comprehensive financial regulatory review
pursuant to Executive Order 13772 from President Trump.
It is unclear when Treasury's fintech paper may be
released, so this is a timely and important hearing. Thank you
all, again, to each of today's witnesses, and I yield back the
balance of my time.
Chairman Luetkemeyer. The gentleman yields back.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, Vice Chair of the subcommittee, for 2 minutes to
deliver an opening statement.
Mr. Rothfus.
Mr. Rothfus. Thank you. Thank you, Mr. Chairman. I want to
thank you and the Ranking Member Clay for calling today's
hearing on the fintech marketplace. This is an important topic,
and it demands the attention of policymakers.
Just as the growth of fintech presents us with regulatory
questions and the challenge of dealing with disruptive
technological change, it also represents a tremendous
opportunity to make more and better financial products
available to an even greater number of consumers.
As we look at communities that have lost their local bank
or underserved areas trying to get back on their feet, fintech
can be a solution. New online lending programs, mobile banking,
and other developments can help bring capital back into places
that brick and mortar institutions abandoned a long time ago.
I should mention that fintech is an issue in which I have a
parochial interest. Western Pennsylvania has become a fintech
hub, drawing on the region's high quality workforce and premier
educational institutions.
Major western Pennsylvania financial institutions, like PNC
and BNY Mellon, have ventured into the fintech space, setting
up dedicated facilities to cultivate new ideas. The region is
also home to promising incubators, like SteelBridge, as well as
independent entrepreneurs who work tirelessly to bring new
fintech products to market.
I had the privilege of meeting with many of western
Pennsylvania's fintech leaders and learning about the
opportunities and challenges they face.
I hope that our work on this committee will help to allow
for continued innovation while providing sufficient supervision
and consumer protection. I look forward to hearing from today's
witnesses how we can take our first steps on this important
issue.
With that, Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back.
With that, let us introduce the panel today. We welcome the
testimony of Mr. Nathaniel Hoopes, Executive Director,
Marketplace Lending Association; Mr. Brian Knight, Director of
the Program on Financial Regulation and Senior Research Fellow
at the Mercatus Center, George Mason University; Mr. Brian
Peters, Executive Director, Financial Innovation Now; Mr.
Andrew Smith, Partner, Covington and Burlington, Professor Adam
Levitin, Professor of Law, Georgetown University Law Center.
Each of you will be recognized for 5 minutes to give an
oral presentation or testimony. Without objection, each of your
written statements will be made part of the record.
As a tutorial on the lights, some of you may not have been
here before, green means go. At the 1-minute mark, a yellow
light will come on, hopefully you can wrap it up at that point.
Red means stop, and hopefully we can wrap it up very quickly.
With that, Mr. Hoopes, you are recognized for 5 minutes.
STATEMENT OF NATHANIEL HOOPES
Mr. Hoopes. Thank you, Mr. Chairman, Ranking Member Clay,
members of the committee for the opportunity to testify here
today. I also would like to thank the staff for their hard
work.
The Marketplace Lending Association (MLA) formed in 2016.
It has grown to 20 member companies. The criteria for
membership are that platforms meet a standard of safety
responsibility toward consumers and to the marketplace.
MLA members must be transparent with consumers about APR,
annualized rates, any penalties or fees in the loans, and not
offer any so-called payday or high-cost installment loans to
find in numerous places, including the Military Lending Act as
loans above 36 percent APR.
In small business lending, MLA member platforms adhere to
the Responsible Business Lending Coalition, a group of both
for-profit and non-profit entities that came together to create
the borrower's bill of rights or to an equivalent standard.
Mr. Chairman, Ranking Member Clay, this industry is
effectively serving the broad American middle class, one that
remains the engine for economic growth and prosperity today. It
is also creating opportunities for investors that previously
were reserved only for the wealthiest borrowers or the
wealthiest in America.
MLA members can save borrowers as much as $20,000 in
student loan refinancing. They can save members thousands of
dollars in refinancing high-cost credit card debt.
They can reach the broad underserved population in America.
They can help those underserved populations secure a better
financial future for themselves, for their families, and for
small businesses.
Today, I would like to talk about opportunities for this
committee, and indeed for Congress generally, to take action to
support legislation and new chartering opportunities for some
financial technology firms that can broadly advance the
interests of America's middle class.
So what are marketplace loans? Fintech data tracking firm
dv01 advises that more than a million marketplace loans were
issued last year; the average loan balance $14,000, the average
APR 14.7 percent. These are far from the short-term, high-rate
products that many associated with the earliest days of online
lending.
These are also well-regulated loans. These are loans that
are overseen by the FDIC (Federal Deposit Insurance
Corporation), loans overseen by State consumer protection
regulation, and loans that are offered in a transparent way to
consumers across America.
Today, there is more than $1.023 trillion in outstanding
credit card debt. That is an enormous debt that borrowers have
an opportunity to refinance with marketplace lenders at lower
rates.
Small business owners report they are very pleased with
having new online options. 95 percent report they would
consider taking another loan with another online lender.
So imagine the possibilities if we could update the
regulatory framework, one that we use today designed for a 19th
and 20th century banking system that didn't envision the
Internet to one where startups, small businesses, and
innovators can better serve consumers, businesses, students.
To do that, encourage the Congress to move the Protecting
Consumers' Access to Credit Act, a bill sponsored by members of
this committee that passed earlier in November.
I would also support the committee to look at the IRS Data
Modernization Act. That one bill would enable a small business
lender to verify a borrower's income in real time, rather than
waiting weeks, a time that often in today's economy they don't
have, and to serve a small business owner with a better product
because they have a better picture of that person's true
financial profile.
Finally, this committee should support options for fintech
firms to apply for charters. The special purpose national bank
charter at the OCC (Office of the Comptroller of the Currency)
and the FDIC, ILC charter are both under development. I
appreciate the time, and I thank the committee.
[The prepared statement of Mr. Hoopes can be found on page
40 of the appendix.]
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we recognize Mr. Knight for 5 minutes.
STATEMENT OF BRIAN KNIGHT
Mr. Knight. Thank you, Chairman Luetkemeyer, Ranking Member
Clay, and the members and staff of the subcommittee. I am
honored to testify today.
Whether it is a mortgage to buy a first home, the ability
to quickly and cheaply send money to a loved one, or accessing
credit when in need, financial services are vital to the
American dream.
Advances provided by financial technology, or fintech, have
the potential to provide Americans with better, cheaper, and
more inclusive financial services. Unlocking that potential
requires modernizing the regulatory environment to encourage
innovation and competition while providing Americans with
necessarily consumer protection.
Because while financial technology may be able to help
people, there is a risk that mis-regulation will inhibit this
possibility. So Congress should modernize regulation to foster
innovation, competition, and inclusion.
Financial services are seeing a series of potentially
significant changes, including the removal of geographic
limitations thanks to the Internet and mobile devices, use of
new algorithms, and machine learning, the entrance of firms
from outside traditional finance, including both startups and
well-established companies like Amazon, and the rapid adoption
of new services by customers.
Peer-to-peer and mobile payment are now practical. As well
as daily payments for workers, removing the need to wait for
payday. There are also innovations like cryptocurrencies, which
some believe could entirely remake the financial system, along
with the capital markets, real estate, and other industries.
While not a panacea, these innovations show real promise.
For example, there is evidence that innovative lenders can
offer borrowers credit at better rates or extend credit to
borrowers who would otherwise have trouble accessing it.
Evidence also indicates that innovative lenders are
replacing banks in communities where banks have been forced to
leave because it is no longer profitable for them to serve. And
that algorithmic underwriting may lead to less discrimination
than traditional underwriting.
However, there is also risk. While technology enables
legitimate businesses to reach new customers without regard for
distance, it also allows fraudsters to find new victims. While
cryptocurrencies allow the oppressed to avoid the predations of
their government, it can allow those same governments to avoid
sanctions.
Done well, initial coin offerings (ICOs) might make our
capital markets more efficient. Done poorly, they leave both
investors and well-meaning but ignorant companies exposed.
While there are risks, we must remember two things. First,
there is no regulatory vacuum. Regulators currently have and
are using the power to prohibit and punish violations of the
law.
Fintech lenders that partner with banks are subject to
regulation by the bank's regulators and the CFPB (Consumer
Financial Protection Bureau). And the CFPB, SEC (U.S.
Securities and Exchange Commission), FTC (Federal Trade
Commission), and CFTC (Commodity Futures Trading Commission)
have all brought enforcement actions in fintech-related areas
and will continue to do so.
Second, we must remember that traditional finance also
presents risk. As such, fintech innovations should not be
judged against perfection, but against the status quo. While
some regulation is necessary to protect Americans, the current
regulatory environment unduly impedes positive innovation in
several ways.
In the interest of time, I will limit my discussion to
three. First, many non-bank fintech firms are subject to
burdensome State-by-State regulation in areas where banks
offering comparable products enjoy broad uniformity thanks to
Federal law. This makes it difficult, if not impossible, for
these innovative firms to compete directly with banks.
The OCC charter previously mentioned is one possible avenue
to address this problem, at least for some firms, but it is
unclear whether or not it will move forward and whether or not
it will be viable if it does. Even if the OCC charter does move
forward, it should not be the only option available.
Second, even if firms partner with banks, recent litigation
and regulatory actions have called into question the legitimacy
of those partnerships. This risks reducing access to those most
in need of new options.
Third, the United States lacks a scalable way for companies
to safely experiment with new technologies. Countries,
including the United Kingdom, Australia, and Singapore, have
pursued a so-called regulatory sandbox to provide firms a way
to try new products with a lower regulatory burden while still
protecting consumers.
While some regulators at the Federal and State level are
working to become more welcoming to innovation, the
fragmentation of our regulatory system makes it hard to create
a program that provides a truly friendly environment for
experimentation.
Congress can help encourage better financial services for
all Americans. It can do this by providing certainty to the
bank partnership model, a path to regulatory equity that can
include both the OCC and the States, and a mechanism for State
and Federal regulators to allow innovators to try new ideas
while protecting investors.
Doing so will help ensure our financial system is
competitive, innovative, and inclusive for the future.
I look forward to our discussion, and thank you for your
time.
[The prepared statement of Mr. Knight can be found on page
52 of the appendix.]
Chairman Luetkemeyer. The gentleman yields back.
Mr. Peters, you are recognized for 5 minutes. Welcome.
STATEMENT OF BRIAN PETERS
Mr. Peters. Thank you, Chairman Luetkemeyer, Ranking Member
Clay, and members of the committee for the opportunity to
testify. My name is Brian Peters, and I am the Executive
director of Financial Innovation Now, FIN, an alliance of tech
companies working on policies to make financial services more
accessible, safe, and affordable.
The members of FIN are Amazon, Apple, Google, Intuit, and
PayPal. These companies are at the forefront of America's
economic growth. They collectively employ over 700,000 people
and spend more on R&D, $40 billion annually, than any other
companies in the United States.
They are innovating many new financial tools, such as
digital wallets, secure online payments, personal finance apps,
and access to capital for small businesses. Many of these tools
work in partnership with traditional financial institutions.
We believe that one of the best opportunities of technology
is the potential to improve financial inclusion and increase
access. 25 percent of Americans remain unbanked or underbanked,
but there is growing evidence that the mobile Internet is
helping to reduce some of the traditional barriers to financial
services.
The speed of money also matters. In our era of instant
messaging it does not make sense that it can still take days
for a payment to clear.
For those on a tight budget, like half of Americans living
paycheck to paycheck, this delay could cause undue hardship in
the form of high cost alternative financial services, sometimes
costing 10 percent of income just to access money when it is
most needed.
Fortunately, the Federal Reserve is shepherding a
commendable industry-led effort to achieve faster payments by
2020. FIN is a part of this effort and supports the Fed's
leadership because we want real-time payment clearing to be a
24/7 reality as soon as possible.
Financial management applications also offer another area
of promise. These tools have helped millions of consumers and
business to create budgets, set savings goals, avoid fees, and
find better offers. It is like having your own personal
accountant.
Small businesses also have new options. FIN members already
offer a broad set of small business technology tools, including
payment processing, payroll, inventory management, sales and
data analytics, and shipping logistics, just to name a few, all
of which make basic elements of running a business faster and
less expensive, both online and on Main Street.
We are now expanding this technology toolbox with the
addition of capital. It is our broader integration of these
tools that enables small businesses to utilize their own sales
and accounting data to qualify for capital quickly and
conveniently. Importantly, early research shows that these
sources of capital are filling gaps for underserved small
businesses.
All of these tools mean more competitive and broader
economic growth. These benefits could be enhanced through
policies that keep pace with innovation and meet the needs of
today's consumers and commerce.
My written testimony contains a number of commonsense
policy proposals for the committee's consideration. I will
briefly mention several.
No. 1, create an optional national money transmission
license. Payment innovators currently are regulated under a
fractured regime in nearly every State.
An optional, national license would offer consistent
safeguards and it would enhance innovation and consumer access
to new payment options evenly across the country.
No. 2, update the Card Act to include oversight of card
network rules and their impact on consumer choice and access to
payments.
No. 3, restore the valid when made principle. FIN thanks
the committee for passing the Protecting Consumers' Access to
Credit Act introduced by Congressman McHenry and Congressman
Meeks.
No. 4, support the good institutional work of financial
regulators to better address technology, such as the OCC's
Office of Innovation and the Consumer Financial Protection
Bureau's Project Catalyst.
Financial Innovation Now thanks the committee for the
opportunity to testify, and we look forward to working with you
toward a better financial services future. Thank you.
[The prepared statement of Mr. Peters can be found on page
108 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Peters.
Mr. Smith, and the professor, you guys have a tough bar to
go over here in these. I have three guys, and they hit their
time right on the dot here.
Mr. Smith, welcome. You are recognized for 5 minutes.
STATEMENT OF ANDREW SMITH
Mr. Smith. Thank you, yes, a hard act to follow. Everyone
hit it right on the money. Chairman Luetkemeyer, Ranking Member
Clay and members of the subcommittee, thank you for the
opportunity to appear before you. My name is Andrew Smith. I am
a Partner in the law firm of Covington and Burling and
currently serve as the Chairman of the Consumer Financial
Services Committee of the American Bar Association.
I am appearing this morning on my own behalf to testify
about the opportunities and challenges presented by fintech and
the need to amend existing laws to ensure the continued ability
of banks to partner with fintech firms to deliver new and
innovative products and services to consumers.
The use of fintech to offer credit products to consumers
enhances competition and increases consumer access to high-
quality credit offered conveniently over the Internet and
mobile devices.
But, the electronic marketing, origination, and servicing
of credit products is technically demanding. And many banks,
particularly community banks, don't have the technical
expertise to provide these products safely and efficiently.
Smaller banks also may not have the capital and liquidity
to achieve the critical mass needed for a national lending
program. Fintech firms, for their part, need banks to access
the payment system and to establish a national platform to
offer products on a 50-State basis.
In other words, banks and fintech firms need one another,
and the relationship between them can pay big dividends for
consumers and for the economy.
The FDIC has recognized the importance of permitting banks
to partner with fintech firms to offer credit products to
consumers and has laid out a robust regime for supervising
these relationships, including 12-month examinations cycles,
concurrent risk management, and consumer protection
examinations, and direct supervision of the fintech firms
themselves.
Allowing banks and fintech firms to partner with one
another to offer credit to consumers enables consumers to work
with a federally supervised lender giving them greater
confidence and security and helping to integrate them into the
traditional banking system.
All of these benefits, however, are being threatened by a
new line of court decisions concluding that, even where a bank
made the lending decision, funded the loan, and is the legal
lender, the bank may not be the so-called true lender if the
bank does not have the quote/unquote ``predominant economic
interest'' in the loan.
Many courts have reviewed the loan agreement to determine
that the bank is, indeed, the lender, and that there is no
basis to upset the agreed-upon relationship between the lender
and the borrower.
Other courts, however, have taken it upon themselves to
look through the loan agreement and the legal rights and
obligations of the parties to make a subjective determination
that the bank is not the true lender. These courts have held
that a third-party service provider or even an investor might
be the actual lender.
These court decisions have the potential to upset the well-
settled commercial expectations of the various participants in
the transaction because if the bank is not the true lender,
then the Federal banking laws may not apply, and the underlying
loan, or even a whole portfolio of loans, may be considered to
be invalid under State lending laws.
This type of uncertainty is unacceptable to participants in
financial markets, and if these decisions start to take hold,
banks may find it impossible to find firms willing to partner
with them on acceptable terms, and we would risk losing all of
these demonstrated consumer and economic benefits of
partnerships between fintechs and banks.
Although the law, in my judgment, already is crystal clear
that if a bank makes a loan, then the bank is the lender,
legislation has been introduced that would reiterate and
reconfirm this bedrock principle and would make clear that the
existence of a service or an economic relationship between a
bank and another person doesn't change the fact that the bank
made the loan.
This legislation would create greater certainty in
commercial relationships and provide the additional clarity and
direction to these courts considering true lender challenges.
Thank you again for inviting me to testify. I would be happy to
answer any questions.
[The prepared statement of Mr. Smith can be found on page
119 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Smith.
Professor. Welcome. You are recognized for 5 minutes.
STATEMENT OF ADAM LEVITIN
Mr. Levitin. Thank you. Mr. Chairman Luetkemeyer, Ranking
Member Clay, members of the subcommittee, good morning.
My name is Adam Levitin. I am a Professor of law at
Georgetown University. Thank you for inviting me to testify
here. I am testifying solely as an academic who studies
consumer finance. I have no financial interest in any fintech
company.
I would like to note that a number of my students from my
consumer finance class are here today, and I am glad that they
are having the opportunity to witness the legislative process
in action.
Chairman Luetkemeyer. Do they get extra credit for that,
professor?
Mr. Levitin. I certainly will take it into consideration.
There are a huge range of non-bank financial services
companies that fall under the rubric of fintech. Some offer
payment services and some offer credit services. Some compete
with banks and some partner with banks. Some fintechs provide
services that can really help improve Americans' financial
lives, as you have heard from the other witnesses.
But other fintechs, particularly in the credit and
cryptocurrency areas, engage in predatory and abusive behavior.
While it is easy to get caught up in the hype around fintechs,
it is important to distinguish among them and take actions to
facilitate the good players in the fintech space without also
protecting the abusive ones.
My written testimony contains several concrete suggestions
for the subcommittee to consider, and I would like to highlight
three of them. First, I would urge the subcommittee to consider
the creation of a Federal money transmitter license.
It is a Federal felony to transmit money without a license,
and the current money transmitter licensing regime is State-
based. This might make sense for small money transmitters
operating from a store front or two, but it makes little sense
to require companies like Amazon, Apple, or PayPal, that
operate national Internet-based payments platforms, to get 50
different money transmitter licenses. A Federal money
transmitter license will eliminate duplicative State regimes.
I would, however, also urge that any Federal money
transmitter licensing regime be paired with an insurance
requirement to protect consumer funds held by transmitters such
as balances in PayPal accounts. These balances are currently
uninsured, and that is concerning.
Second, the committee should consider steps to encourage
greater consumer financial data portability. Banks are often
reluctant to enable the sharing of consumer's data with
fintechs whom they correctly see as potential competitors.
But this is precisely why such data portability should be
encouraged. Consumer banking relationships are sub-optimally
sticky. Consumers don't switch financial relationships when
they should, and that means consumers end up overpaying for
their banking services.
Giving consumers' greater right regarding the portability
of data, that their own transactions have generated, would help
them improve the competitive landscape of consumer financial
services. I would like to relatedly endorse a point that Mr.
Peters made about amending the Card Act with regard to card
association rules.
Third, I strongly urge the subcommittee not to encourage
predatory lending through rent-a-bank schemes. Unfortunately,
both H.R. 4439, the Modernizing Credit Opportunities Act, and
H.R. 3299, the so-called Madden Fix Bill, do precisely this.
These bills are blank checks for predatory lending. These
bills enable banks to launder loans for non-bank lenders by
letting the non-bank lenders buy not just the loans from the
banks, but also the benefit of Federal preemption of State
consumer protection laws.
It is frankly outrageous that Congress would even consider
facilitating such an abuse of the banking system. Federal
preemption of State law is part of a package that goes with an
extensive system of Federal regulation to which fintechs are
not fully subject.
Preemption is a personal privilege for banks, and it is
really not something they can sell, yet that is exactly what
H.R. 4439 and H.R. 3299 do. These bills put preemption of State
laws up for sale.
I recognize that H.R. 3299 is presented as a bill to
protect so-called marketplace lenders, but it is drafted so
broadly that it also shields Internet payday lenders and debt
buyers.
Indeed, both bills would actually enable payday lending in
roughly half the States that prohibit it outright, and they
would effectively void the interest rate and rollover
limitations that are imposed by the half of States that do
allow payday lending but regulate it. In other words, H.R. 3299
and H.R. 4439 are bills that authorize unrestricted payday
lending nationally.
If Congress wants to do that, it should be upfront about
what it is doing rather than claiming that it is restoring a
legal doctrine or reining in errant court decisions.
There are a lot of ways that fintechs can improve
consumers' lives, and we should encourage them when they do
that. But the fintech buzz word should not be a license for
permitting risky, abusive or fraudulent behavior in the
financial system. I look forward to your questions.
[The prepared statement of Mr. Levitin can be found on page
84 of the appendix.]
Chairman Luetkemeyer. Thank you, Professor.
Would your students please raise their hand? Very good.
Well, welcome, and if you need an excuse for the rest of your
classes that you are going to skip today, let me know. We can
help you out with that.
But again, I thank all the witnesses for their testimony
today. We have a little housekeeping issue here right quick.
Without objection, the gentleman from Illinois, Mr.
Hultgren, the gentleman from Indiana, Mr. Hollingsworth, the
gentleman from Minnesota, Mr. Emmer, the gentleman from
Missouri, Mr. Cleaver, are permitted to participate in today's
subcommittee hearing.
While not members of the subcommittee, they are all members
of the Financial Services Committee. We appreciate their
participation today.
This is, as you can see, a very, very interesting and very
much needed conversation to have. We have a lot of other
members that want to participate today, so we look forward to
the discussion. Let me recognize myself for 5 minutes and begin
the discussion.
Mr. Knight, you are recognized as the director of Program
on Financial Regulation, so can you give me just a little
discussion here with regards to fintech is an area where we
need to be very careful.
We want to make sure we don't--we want to continue to allow
innovation. We want to make sure we keep a level playing field.
So how do you thread the needle on regulating too much, not
enough, make sure that people are protected yet allow the
innovation it takes.
Can you just describe a little bit what you think would be
a scenario under which we can keep the playing field level and
allow innovation and still protect consumers?
Mr. Knight. Thank you, sir. I will try.
Chairman Luetkemeyer. It is a big question, I know.
Mr. Knight. It is a challenging question. The important
thing that we need to think about is keeping the consumer
always in mind first and foremost. There is nothing sacred
about any particular type of financial service. It is all about
what serves the customer's need.
If something better comes along that displaces payday or
banks or marketplace or whatever, and it serves customers'
needs better, we should allow that to happen and not shed a
tear. So that is the first goal post.
With regards to a level playing field, which is obviously a
phrase that gets thrown around a lot, we need to regulate to
the risk. To compare and contrast banks with marketplace
lenders, banks fund their loans, in part, through federally
insured deposits.
Federal insurance of the deposit, the fact that they are
using deposits that are given to them by customers with the
understanding that the customer can demand it back at any time,
that the customer is not taking on any risk that their balance
will go down, implicates certain rules and regulations and a
certain legitimate need for a certain type of consumer
protection.
Loans that are funded by investors who know they are
putting their money up for risk and are not federally insured
present different types of consumer protection risks.
In that case, the concern should be around the investor,
not taking on extra contractual risk. By this I mean if I
invest money in a loan, I understand I am taking on the risk
that the borrower might default.
What I am not taking on is the idea that the lender might
fail and sever the connection between me and the borrower. So
the borrower, check in hand, willing to pay off his loan, just
doesn't know where to send it to, and I am sitting on the other
end unable to get funding. Things like backup servicing
provisions would be very important in that respect.
With regards to our mindset, one thing we need to think
about is the idea of enabling and helping regulators get a
better understanding of the pace of innovation because it is
ever increasing. Regulators, while well-meaning, often find
themselves behind the times a bit.
That is one of the reasons why I commend that we look at
the concept of something like a regulatory sandbox, which, as
with everything else in this space, there are some definitional
issues.
But an environment where regulators can engage with
companies in a scalable way, that companies can try new things
out with the understanding that they must protect their
consumers. If consumers are harmed due to a violation of the
law, the company stands ready to make them whole.
Chairman Luetkemeyer. If I can interject just 1 second,
that is an interesting way to go. We need to be looking at this
because basically what you are saying is we need to allow pilot
projects with safe harbors for the entities to be able to
develop a product, and if it works, fine. If it doesn't work,
they can move on.
But there needs to be in place a regulatory regime within
which they allow that to happen. Is that basically what you are
saying?
Mr. Knight. Absolutely, with two other caveats. One, this
pilot program should not be a place where only favored firms
can get in and obtain major competitive advantage. There are
ways we can mitigate against that risk.
Two, the pilot program should not just be necessarily at
the Federal level. The States present an excellent venue for
this and can serve as, as the cliche goes, laboratories of
democracy.
But because of the overlapping and fractured nature of
Federal regulation in this space, there is going to have to be
some clarification, some forbearance instituted to allow that
to be viable.
Chairman Luetkemeyer. OK. My time is about up. I will yield
my time back.
With that, we will go to the other gentleman from Missouri,
Mr. Clay. You are recognized for 5 minutes. He is the Ranking
Member.
Mr. Clay. Thank you, Mr. Chairman. Professor Levitin,
according to Federal Reserve Board Governor, Lael Brainard, and
I quote, ``It is often hard for the consumer to know what is
actually happening under the hood of the financial app they are
accessing.''
``The app's websites and terms and conditions of fintech
advisors and data aggregators often do not explain how
frequently data aggregators will access a consumer's data or
how long they will store that data. If things go wrong,
consumers may have limited remedies, and it is not uncommon to
see terms and conditions that limit the fintech advisor's
liability to the consumer to $100,'' unquote.
Professor Levitin, do you agree with Governor Brainard's
concern? What can Congress do to address these privacy issues?
Mr. Levitin. So I absolutely agree with Ms. Brainard's
concerns. There are a few steps Congress can take to address
these issues. First would be, legislation that would restrict
the use of binding mandatory arbitration clauses in consumer
financial contracts.
Unfortunately, Congress voted to overturn very narrowly, by
one vote, to overturn the CFPB's rulemaking to that effect. But
that is something that Congress should revisit.
Second, besides the arbitration limits, Congress should
also consider legislation that would restrict stipulated
damages clauses in consumer financial contracts. I haven't
thought through the details of what that would look like, but
that should be something Congress should consider.
Mr. Clay. Would any other panelist like to address how we
protect consumers' data as well as the whole hacking of the
checking account and credit card? Anyone?
Mr. Peters.
Mr. Peters. I would be happy to address this. First,
Governor Brainard's comments in the financial technology space
generally are very thoughtful and very welcome. She has brought
a deep level of insight to this, especially with respect to
consumer protection issues.
I represent a number of companies that are obviously
innovating in incredible ways. We take the view that many of
the apps and the technology that people have in their pocket
enable all kinds of consumer disclosure and better awareness
because the technology itself is that much more dynamic.
With respect to the issue you alluded to of consumers
accessing their financial data, they are doing that because it
is their data and because they want to make better sense of
their financial lives. They are using technology tools to
better manage their finances, to find savings, to better
budget.
When we think about that dynamic, we work with financial
institutions, and there has actually been a lot of progress
made to help address the needs of the shared customer to make
sure that we have a more technologically sophisticated and
efficient way to enable that application to work.
There is still a lot more work to be done among industry
players to get us to that more efficient connection, and we are
getting there, but we need more effort.
Mr. Clay. Yes, but Mr. Peters, don't you also agree that
they are also exchanging data among these different companies
so that they can market to these consumers? It may be a hard
sell and it may not be, but don't consumers have--should they
have a say in who can look at their data?
Mr. Peters. I believe they should have sufficient
disclosure and there should be transparency about how the
technologies they have are operating, yes.
Mr. Clay. How do we protect those consumers, too? There are
also bad actors, too, that access this data or sometimes can
access it in there. The protections are not foolproof, so what
do we do about that?
Mr. Peters. Well, our companies, in many ways, are security
companies first. We didn't start off developing another product
and then add security on to it, so we take security very
seriously.
When it comes to this specific issue, there is a way of
doing this called open application interfaces which are a
secure and a more efficient way for consumers to establish that
connection.
The challenge we have in financial services is that there
are very many financial institutions, thousands, and what we
need to do is work toward a standardization to allow all these
financial institutions to use that approach. That is a secure
way to it, and it would address many of the concerns you have.
Mr. Clay. I thank you for your response.
I went over. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
We have to go with the Vice Chair of the committee, Mr.
Rothfus, the gentleman from Pennsylvania is recognized for 5
minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Knight, if I can ask you a couple of questions? It
might be helpful to take a look at what some other countries
are doing in this space. How does the U.S. compare to other
major countries in terms of fintech regulation?
Mr. Knight. Well, I will be honest with you, it is a mixed
bag. There are certain countries, the United Kingdom being held
up as a general leader, who have taken a very concerted effort
to become a leader in the space and have been very innovative
in their regulation.
Now, some of that advantage is just baked in. Unlike the
fragmented system the United States has, the U.K. has, I
believe at this point, three financial regulators, and the
Financial Conduct Authority (FCA) is their primary consumer
protection regulator.
And that allows them to house a lot of innovative products
in the FCA, like the sandbox, like Project Innovate, and gives
a one-stop shop for companies to check off all the regulatory
boxes. The U.K. also doesn't have the federalism that we have.
Other countries like Singapore and Australia have followed
suit, again, a more unified situation and allowing programs
like regulatory sandboxes to allow for innovation.
On the other hand, in the United States it is not all bad.
Some of our regulators have been making concerted efforts to
become more innovation-friendly. We have certain advantages
from a commercial perspective.
The fact that we have such a leadership in the I.T. and
finance areas help us. The problem is, in other respects, our
financial regulatory system creates headwinds that we have to
struggle against.
Mr. Rothfus. I think I am going to ask Mr. Peters a little
bit about the regulatory headwinds that might be out there. You
represent a group of companies that are becoming increasingly
active in fintech. As you look at the existing landscape, does
the current framework we have, from a regulatory perspective,
hinder growth?
Mr. Peters. I would say that, yes, there are challenges.
Mr. Rothfus. You talked a little about the standardization.
Just give us an idea of what the chief regulatory impediment
might be in the space of growing fintech?
Mr. Peters. It is twofold. One, we have to consider that
technology and financial services, whether the tools are coming
from my companies as technology companies or they are coming
from financial institutions, technology and financial services
are fundamentally integrated.
But many of our financial laws were written in a paper or
earlier era. Continually we always need to look for
opportunities to update, to make our regulatory regime
consistent with the modern world that we are operating in.
But, number two, one of the bigger challenges, is just the
fractured nature, particularly of State-by-State, regulation.
There have been some efforts at the State level, which are
commendable, to gain some level of uniformity.
But especially with respect to State money transmission
licensing, that is a very significant delay to entry in the
market, and it holds consumers back from accessing, ultimately,
what they ought to be able to get equally and easily across the
country.
Mr. Rothfus. Mr. Smith, some people tend to describe
fintech as an adversarial development from the perspective of
existing brick and mortar banks. When I read your testimony, it
is clear that you don't think that is necessarily the case. Can
you elaborate on how fintech could actually help traditional
banks serve their customers better?
Mr. Smith. Well, fintech has a special role to play with
respect to community banks insofar as the very biggest banks,
the credit card issuing banks, for example, already have access
to technology sometimes by going out and purchasing the fintech
companies. But smaller banks don't have that same luxury.
What we find is that fintech is a way for smaller banks to
punch above their weight, to serve customers that they wouldn't
otherwise serve, to offer products they wouldn't otherwise
offer, to diversify risk in a way that they wouldn't otherwise
be able to.
One of the things that we are seeing, and in my written
statement I cite to an ABA study that says fintech is really do
or die for community banks. ABA estimates that there is a $100
billion pool of profits for community banks generally.
If community banks are able to capitalize on financial
technology to offer new products, they may be able to grow that
pie by--the estimate is $15 billion. If they don't, that pie
gets smaller by $20 billion.
So we are talking about a significant swing in potential
profits if community banks are unable to capitalize on
financial technology to offer new and innovative products to
their customers.
That is a big deal, and that is something that we don't
want to jeopardize by depriving community banks of the ability
to access financial technology in that way, by partnering with
fintech firms.
Mr. Rothfus. You bet.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from New York, Mr. Meeks.
You are recognized for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman. Let me thank all of the
gentlemen for your testimony today. It is tremendously
important what we are discussing.
I would think that from what I have heard, each and every
one of you want to make sure that we don't have individuals who
are trying to take advantage and/or fraud the system or those
that want to harm consumers.
We are trying to figure out a way that we can move forward
so that there would be more opportunities for individuals who
may not have access to capital.
In the communities that I represent and grew up in, there
are not a lot of individuals, whether small businesses or other
ones, that don't have access to capital. A lot of banks are not
lending to those communities anymore.
I hope that we are not saying that we won't--or anyone is
saying--I didn't hear anyone say that we don't want there to be
opportunities within those communities for individuals to have
access to financial services.
I know from my own lifetime I have seen in the communities
I represent where people say that there should be nothing
there. We want to protect those folks. When we don't have
anything there loan sharks take over.
I want to put the loan sharks and the predatory lenders out
of business. That is what all of you all want to do.
As a result, let me ask Mr. Hoopes a question, under
current regulation the line between legitimate third-party
lending relationships and abusive charter arrangements is
unclear.
On one hand, both Democratic and Republican Administrations
have encouraged third-party lending relationships because of
their potential to expand credit access to underserved
communities, of which I am concerned about.
This includes the Cordray CFPB through its non-action
letter program. But nevertheless, our banking regulators have
also used their current enforcement authorities to stamp out
abusive relationships, including past bank relationships with
abusive payday lenders.
Can you tell this committee or can help this committee
distinguish between your members' partnerships and abusive
relationship that regulators under both Democratic and
Republican Administrations have discouraged now and in the
past?
Mr. Hoopes. Thank you for the question. You are absolutely
right. There is great evidence that partnerships between
originating banks and marketplace lenders are delivering
products to underserved communities, places where bank branches
have closed and delivering products that are more affordable
than the products that were available from traditional
institutions and doing so by using advanced techniques that go
beyond just looking at a traditional FICO score.
Only financial technology companies that are applying those
methods can reach those borrowers. To be clear, the bank
partnerships are how those loans are being made nationwide.
For almost 15 years now, banks have not been permitted to
offer any abusive payday loan or to partner with a payday
lender.
The Center for Responsible Lending has said in some of its
written materials that prohibition language from the Office of
the Comptroller of the Currency has been generally effective in
preventing payday lending from coming into the banking system
or via partnership.
To answer Professor Levitin's remarks earlier, the
legislation Protecting Consumers' Access to Credit Act that you
mentioned that you support and many others do as well, cannot
become an avenue for abusive lending because the bank can't
make the loans, the abusive loans, in the first place. Bank
regulators have not permitted such arrangements in their
regulated entities.
I think we do a number of things. Marketplace Lenders,
again, as I mentioned in my testimony, only issue loans that
are in compliance with the FDIC's guidance. Their guidance is
that loans must be capped at 36. Again, that makes sense
because the bank is the one originating the loan.
Mr. Meeks. Because I am running out of time, I just want to
ask another quick question because I think that we are starting
to get the FDIC and the OCC to look and to be regulators, as
opposed to having anything that is unregulated, which is what
my focus is.
But also, I sent a letter to the OCC which talked about,
Community Reinvestment Act (CRA), some of the response to make
sure that people are responding to our local communities.
In response to my letter the OCC required that fintech
firms, that receive national charters, develop business plans
that demonstrate their commitment to serving underserved
populations.
Can you describe how important those requirements are
toward establishing confidence among fintech lenders who
receive the benefits of national charters and moderate income
individuals and families?
Chairman Luetkemeyer. We will give you 30 seconds.
Mr. Hoopes. Absolutely. So financial inclusion is core to
the business model of the companies in the Marketplace Lending
Association.
To the extent that they are interested in pursuing national
bank charters we have gone on record as saying that a financial
inclusion requirement that would be a nationwide requirement
updating the current CRA framework, makes a lot of sense. It is
critical that when given the privilege of a charter that you
also have a responsibility.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we recognize the gentleman from North Carolina,
Mr. Pittenger. He is recognized for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman. Thank you again to
each of you for joining us today and offering your expertise to
this committee. It is very much valued.
I would say that I join with others on this committee who
believe that the bedrock of our economy is found in the
entrepreneurial spirit and the spirit and the choices that are
given in the marketplace. To that end, as one who believes in
free markets, I believe that it is important that they remain
open and competitive.
With that in mind, Mr. Knight, I would ask you to begin
with, and others can chime in if they like. What evidence do
you see in the existing regulatory environment that hinders
future growth to the fintech industry?
Mr. Knight. Thank you, Representative Pittenger. What we
are seeing in particular, the State-by-State nature of
regulation for money transmission and lending, is causing firms
to either not engage, pull back from lending for certain
borrowers.
Have trouble either obtaining the necessary licenses
because it is estimated to take between 1 to 2 years and $1
million to $2 million in certain cases, from engaging in
entering the space.
One of the risks we may find is that the only firms that
are coming in now are going to be already large and well-
established firms, which is fine.
New competition is great, but we also want a place where
brand new startups can actually get in and compete. We are
seeing that risk.
Mr. Pittenger. Anyone else want to comment on that? Very
good.
I would say this again for all the panel. There has been
some talk out there that the fintech industry is unregulated.
Is this an accurate representation?
Mr. Knight. Absolutely not. The financial technology
industry with the caveat that, of course, fintech is a broad
term, but for what we are talking about today there is
regulation. There is regulation at the Federal level through
the CFPB to the extent there is a bank partnership the bank
regulators get involved.
If they are accessing the capital markets, as many of these
firms, particularly marketplace lenders will do, the SEC is
involved. For cryptocurrency firms they are regulated either as
money transmitters by FinCEN and the States, or if they are
engaged in commodities transactions the CFTC has jurisdiction.
If they are engaged in securities transactions the SEC has
jurisdiction.
The FTC has jurisdiction over certain areas. There have
been numerous enforcement actions in the financial technology
space. So to say that it is unregulated is inaccurate.
Now, to say it is regulated exactly the same as banks is
not necessarily true either, but then we need to ask what are
the relevant risks? Are the relevant regulations the same?
So for example, fintech lenders are subject to Truth in
Lending, Equal Credit Opportunity Act, all of the Federal
consumer protection laws engaged in lending.
They are not subject to the same safety and soundness
requirements as banks because they don't have Federal deposit
insurance. They don't take deposits. They don't have access to
the discount window.
So they are not generating that type of risk. The risk they
are generating is a consumer protection risk, and they are
subject to the same consumer protection laws.
Mr. Pittenger. Very good.
Mr. Levitin. May I add something to that?
Mr. Pittenger. Yes, Professor.
Mr. Levitin. I would agree with everything that Mr. Knight
says, but fintechs are subject to the same laws but not to the
same supervision mechanism.
The CFPB has supervision authority actually going and doing
exams over large banks. It does not over most fintechs.
Mr. Pittenger. Thank you. I need to move on. I have less
than a minute. I would like to ask what can Congress and
prudential regulators do to facilitate the adoption of fintech
to the U.S. without putting consumers at risk?
Mr. Knight, you can proceed on that if you like?
Mr. Knight. Sure. So among the things they could do is, as
mentioned previously, create an environment where firms can
innovate while maintaining appropriate consumer protection.
We can provide certainty to the relationships with banks.
We can streamline the licensing requirements. The answer might
be something like the OCC charter. We should also look at ways
to allow State-licensed entities to operate on a national
basis, like we do with State-chartered banks.
Mr. Pittenger. Thank you.
Mr. Hoopes, I would just ask what can be done to help grow
our local communities, particularly rural areas? I have a very
rural part of my district.
Mr. Hoopes. Absolutely. Marketplace platforms are available
to borrowers wherever the Internet is available. One of the
initiatives that we are supporting is rural broadband access.
We think it is one of the only ways that a borrower is
going to find us, rather than a potentially worse product at a
local storefront or strip mall, is if they can access the
Internet. So, that is a key initiative for Congress to continue
to work on.
Mr. Pittenger. Thank you.
My time has expired.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we recognize the distinguished gentleman from
Georgia, Mr. Scott, for 5 minutes.
Mr. Scott. Thank you very much, Mr. Chairman. Welcome
panel.
Fintech, no question about it, is really dramatically
reshaping how Americans are now receiving their financial
services and doing an excellent job of that.
Nowhere is that more poignant than in their capacity to be
able to help, work, and partner with traditional banks so that
they can better serve underserved communities at a reduced
cost.
You take Kabbage, for example, in my city of Atlanta, doing
a remarkable job using their innovative capacity of the speed
of their computers to do wonderful things like helping people
that they pay their loan back faster. They get a reduced cost.
All of that is going well.
But 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. They
vary from State to State.
On top of that you have the OCC moving for a charter for
these fintech companies. You have them all chomping at the bit
now to regulate from the OCC, CFPB, Treasury, the Fed. This is
getting to be very problematic.
So let me ask you, Mr. Smith, what do you say about this?
How does this patchwork, this whole situation could lead to
increased cost and do just the opposite?
Mr. Smith. Well, you are right. Thank you for the question,
first of all, and you are right that the patchwork of
regulation can lead to stifled innovation, and it has. One of
my biggest concerns is that it can be so prohibitively
expensive to build a national platform on a State-by-State
basis that it becomes an enormous barrier to entry for a new
firm with a bright new technology.
So as an example, I am a lawyer here in Washington, DC. We
advise a lot of companies on these issues. Conservatively it
would take 2 years and a couple of million dollars to license
and build a platform through the State-by-State licensing
system.
Now, the other problem is that many States don't even
permit you to offer certain of these products. So, offering a
credit card, for example, through a State licensed model would
be impossible. But what we have in this country are a variety
of different regulatory models, so the State-by-State model
works for some.
For some being a bank works. For others partnering with a
bank can work. We want to make sure that we preserve the
benefit of all of those regulatory systems.
By partnering with a bank it is not a free pass for a
fintech firm. You are going to be subject to this pervasive
scheme of Federal banking oversight, Federal banking agency
oversight, including direct examinations of the fintech firm
itself. That is quite substantial.
I don't see why we wouldn't. If we have an opportunity to
put people in a good bank product, why wouldn't we do that? Why
wouldn't we capitalize on that?
Mr. Scott. Well, thank you. Thank you, Mr. Smith.
Now, Professor Levitin, in your statement you said that
fintech companies can be risky and fraudulent. We need to hear
you. How so? Because this is an important hearing and that is
the one thing we do not want our fintech companies to be. So
could you tell us what you mean by that?
Mr. Levitin. Sure. On its simplest and easiest level we can
just take cryptocurrency companies. We have seen plenty of
fraud in the cryptocurrency space, and it seems to be growing,
where consumers invest--
Mr. Scott. You said crypto space?
Mr. Levitin. Cryptocurrency, things like Bitcoin and
Ethereum, all kinds of--I am not quite sure how to describe
them other than cryptocurrencies. Where sometimes people think
that--
Mr. Scott. We are moving very fast.
Mr. Levitin. I am going to try and move fast. I see that
the time is running out--where people are deceived about the
nature of the investment that they are making.
It is important to note on the lending front the use of
bank partnerships has one and one purpose only, and that is the
evasion of State usury laws.
That there may be reasons to question about State usury
laws, but we should--if we are going to have fintechs operating
in that way there should be a Federal standard that they all
have to comply with.
Mr. Scott. OK. Mr. Smith, do you agree with what he said?
Mr. Smith. No, of course I don't.
The purpose of bank partnerships and bank relationships is
to expand access to consumer access to innovative products and
help banks compete better.
Mr. Scott. Thank you, Mr. Chairman. I appreciate it.
Chairman Luetkemeyer. You slipped an extra one in there,
Mr. Scott. That was pretty slick. The gentleman's time has
expired.
With that, we go to the gentleman from Kentucky, Mr. Barr,
Chairman of our Monetary Policy Committee. He is recognized for
5 minutes.
Mr. Barr. Thank you, Chairman. Appreciate you holding this
very important hearing, and obviously fintech has tremendous
potential and promise to enhance financial inclusion, to help
unbanked and underbanked individuals in this country access
financial services that they otherwise would not have access to
and the promise for low-cost financing and the speed of
payments.
This is a really innovative space, and it occurs to a lot
of us here as we look at how to improve the regulatory
framework we should first do no harm.
Mr. Knight, this concept of a regulatory sandbox is
intriguing to me. The fact that it has been tried in other
jurisdictions successfully without compromising consumer
protection is interesting so that we can foster innovation in
this space.
Let me either start with you, Mr. Knight or Mr. Smith. I
want to explore this Madden v. Midland decision a little bit
more and understand it a little bit more.
Can either one of you--well, let us start with Mr. Knight
since you have written extensively about this decision in the
2nd Circuit. Can you discuss this valid when made doctrine and
why it would be important to codify that decision?
Mr. Knight. Thank you. So--
Mr. Barr. Or that doctrine rather to overturn the decision?
Sorry.
Mr. Knight. Yes. Please don't codify Madden.
Mr. Barr. Right.
Mr. Knight. So the issue is whether or not a loan that was
valid when it was made, so a legal loan that the law, the
borrower, the lender all agreed was OK, can subsequently become
usurious and invalid, not because the obligation to the
borrower has changed in any way, in any material way, but
because the loan is sold to a third party.
In Madden what happened was it was a credit card that
defaulted and the credit card debt was ultimately sold to a
debt buyer who sought to collect on it.
While the loan was valid when held by the bank under
Federal law, the 2nd Circuit found that the loan had
subsequently become invalid, not because the loans terms had
changed but because the ownership of the loan had changed.
The obvious problem there is if you have a situation where
a bank wants to sell a loan, be it to a fintech firm or a debt
buyer or potentially in the securitization market, and the
buyer is not a bank in a State where that loan would have been
valid based upon the the bank's home State usury law, it calls
into question the validity of the loan, which cuts off or risks
cutting off funding because people are not going to fund loans
that they think are going to turn out to be--
Mr. Barr. Can you speak to the impact and the holding of
Madden in terms of credit markets? Has there been any
identifiable impact on access to credit for either consumers or
small businesses as a result of that decision?
Mr. Knight. Yes. Three professors in an article that is
forthcoming from the University of Chicago Journal of Law and
Economics, studied the impact of Madden in New York and
Connecticut versus the rest of the country and found that for
marketplace lenders, they were seeing less funding for loans
for borrowers with relatively low credit scores compared to the
rest of the country.
Mr. Barr. OK. So let us go to the lawyers real quick.
Mr. Smith, obviously Professor Levitin and other critics
have expressed concerns that these loans made by banks through
their fintech partners are really just an attempt to provide a
backdoor rent-a-bank model for payday lenders.
But isn't it true that the loans that would be regulated,
that these loans would be regulated just like all other loans
made by that bank, including the oversight by all the Federal
regulators, the FDIC, the OCC, the Federal Reserve, not to
mention the CFPB?
Mr. Smith. Right. To the extent the CFPB would have
jurisdiction over the bank. CFPB doesn't examine less than $10
billion in equity. Yes.
Mr. Barr. Sure, but the point is those banks are regulated.
Mr. Smith. Right.
Mr. Barr. And that loan, valid when made loan, is
regulated.
Mr. Smith. That is absolutely right, and the FDIC has been
a bulldog on this idea that it doesn't matter if the bank
originates the loan in partnership with a fintech firm. All of
that activity that happens to originate and service the loan,
that is as though it is happening inside the bank. It is going
to be examined in the same way.
Mr. Barr. So when we talk about financial inclusion and
access to affordable financial services, rural areas--I
represent a rural area in Kentucky.
How important is it to community banks, credit unions,
particularly in rural or underserved areas, to have access to
these relationships with these fintech companies to serve their
customers?
Mr. Smith. Well, for the community banks originating loans,
servicing loans, that is complicated. It is particularly
complicated when you are doing it over a mobile device or over
the Internet.
These community banks they don't have that know-how. The
credit unions, the same way. Credit unions operate frequently
through organizations called CUSOs, Credit Union Service
Organizations.
But they outsource everything. They outsource all of the
marketing, all of the origination, all of the servicing, and
they need to have access to these services in order to continue
to offer these products to their customers.
Mr. Barr. My time has expired.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we will go to the gentleman from Missouri. Mr.
Cleaver is recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman, and to the Ranking
Member Clay. I am not a member of this subcommittee, but the
Chair was kind enough to let me participate since our side is
almost finished. So I will try to be economical with the time I
have been given.
This issue, as I don't have to tell any of you, affects
many Americans even without them knowing it. It has the
potential to either dramatically expand the playing field for
funding new ideas from all corners of the country if it is done
correctly.
We also have to deal with problems that may emerge, and
that is why I hope this hearing today will be just the first,
Mr. Chairman, that Congress convenes on this tectonic but
consequential issue. And that it will ultimately end with
commonsense legislation.
It may be of some value for us to know that South Korea has
already issued rules on cryptocurrency. My concern is that if
we are not clever and smart we are going to end up seeing a lot
of the countries which whom we do business actually moving
further than we have in this arena.
This is serious stuff. I am also concerned that while I
have some concerns about fintech, I do believe that the
financial technology is a force of good in this country and not
a foreboding force for expanding and exacerbating racial and
income inequality in the United States.
We can't hold back the waves of progress. They are coming.
We need to be ready to deal with them as quickly as we can. I
would like to ask a question.
Professor Levitin, at the end of your testimony you
discussed the importance of the Consumer Bureau moving forward
to implement Section 1071 of Dodd-Frank and collecting small
business lending information.
Would you please discuss why this is important and how
having less data in the small business lending space makes it
infinitely more difficult for policymakers to assess what
adjustments may be needed?
Mr. Levitin. Well, I would hope that everyone in this room
would support evidence-based regulation, that we want to be
regulating based on facts not based on just the way we think
the world ought to work.
We can't do that unless we have data. Unfortunately there
is not very good data that is currently available about small
business lending.
Marketplace lending, a lot of it is either formally small
business lending or functionally small business lending. A
contractor who operates just as a sole proprietor who might
borrow money to purchase a pickup truck that he is going to use
to drive his kids to school, but also that he is going to use
for business.
Is that small business lending? Arguably so. Any which way,
if we want to do good regulatory policy we need to know what is
going on in small business lending, and particularly we want to
know if there is discrimination in small business lending.
Are small business people of color, women-owned small
businesses, are they getting credit on the same terms and with
the same ease as other small businesses?
We have no way of knowing without the Section 1071 data
collection. It is a shame the CFPB hasn't started that
collection already, and I would urge the current leadership of
the CFPB to take action on it.
Mr. Cleaver. Yes. My concern is not that there is this
wolf-like intentionality to discriminate against certain
groups, but that when we are dealing with algorithms we are
putting down opinions and ideas from human beings that play
out.
I appreciate the time, Mr. Chairman.
Thank you all for being here.
Chairman Luetkemeyer. The gentleman yields back his time.
With that we go to the distinguished gentleman from
California, Mr. Royce, the Chairman of the Foreign Affairs
Committee. He is recognized for 5 minutes.
Mr. Royce. Thank you very much, Mr. Chairman.
Mr. Hoopes, technology of course can improve the quality of
underwriting and obviously then lead to more accessible loans,
more affordable loans. So I introduced this bill. It is a
bipartisan measure, the Credit Score Competition Act.
What that does is to mandate that the GSEs modernize their
acceptance of new credit score modeling in order to evolve into
a circumstance where the products that can offer information,
like telephone bills, utility bills, and those are the obvious
ones, but the industry understands there are many, many other
risk correlators out there that really would help those
underserved consumers who have very thin or nontraditional
credit histories.
So that is the concept. So could you discuss the benefits
of technology to the underwriting process as it applies to that
goal? What obstacles might exist for fintech applications to
build on these platforms and maybe reference the concept behind
the legislation?
Mr. Hoopes. Absolutely. So what my members have found is
that FICO is not particularly predictive. They have moved
beyond FICO in their modeling.
Obviously traditional metrics are still used, but
additional data points have proven to help my members move
borrowers, who if analyzed by a traditional player would have
considered them subprime, and moved them into more of a prime
bucket in terms of the pricing that they are getting on credit.
The only way they are able to do that is by assessing a
variety of data points and finding ones that suggest that the
person will be responsible, more responsible even than their
thin credit file would originally suggest.
So the purposes of the legislation are absolutely right on
for what our members have experienced in the financial market.
Mr. Royce. Thank you.
My second question, my last question, I am a very strong
believer as we have had these debates in the past here in the
committee, that effective regulation of interstate commerce
should be done on a very uniform basis.
This doesn't necessarily mean a national regulator. It
could mean at the very least those standards set by one body.
By the way, I don't believe this only applies to financial
technology marketplace issues. It should apply--it is a basic
economic principle.
So in the past, jurisdiction-by-jurisdiction regulation has
led to a situation where we have political pull and over-
politicized and balkanized laws, very clearly, that lead to
inefficient markets. Obviously it leads to barriers of entry or
at least manipulation in order to prevent entry into a market.
You see incumbent interests trying to block fresh faces
from coming into these markets. You can see how they do it. So
how do we avoid this outcome in the fintech space?
I guess a national charter might be one concept. You could
look at the industrial loan company charter as a model or other
models along that line. But I would just like to ask the panel
for their thoughts very quickly on this?
Mr. Smith. So I agree 100 percent with you in your
misgivings about State-by-State regulation. On the other hand,
what we have in this country is a multiplicity of regulatory
models and some models work for some players, other models work
for other players.
So State-by-State licensing always has a place. Becoming a
bank always has a place. Getting an industrial loan company
charter always has a place. Partnering with a bank should--we
should make sure that we ensure that fintech firms are able to
partner with banks.
Banks are able to partner with fintech firms and not have
courts come in after the fact and unravel those transactions
and decide that, in fact, someone else, not the bank was the
true lender.
Mr. Royce. Other commentary?
Mr. Peters. I would just say quickly for financial
innovation, what we appreciate is the idea of optionality, that
there be many options available. So when we recommend that
there be a Federal money transmission license that it is
optional.
So that those who choose to go through the States can still
do that if they want. It is that optionality in the system that
would be beneficial to, as Mr. Smith said, the specific
business model depending on how it is arranged.
Mr. Hoopes. Well, I will just jump in also. I couldn't
agree more. Just to put a finer point on how unprecedented the
Madden decision was. The idea is not that the banks can't make
the loans.
It is simply that they can only sell loans that were made
in certain States to certain borrowers. You talk about
balkanization. You simply can't operate that way.
Mr. Royce. Thanks. Thanks, Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that we go to the gentleman from Texas. Mr. Green is
recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing. I am interested in knowing more about steps that
have been taken, Mr. Hoopes, by your association to benefit
consumers and self-regulate. Can you please give some
indication as to what you are doing please?
Mr. Hoopes. Absolutely. The core on the small business side
is the small business borrower bill of rights. That, again,
that I mentioned earlier, is a joint effort with for-profit
entities in the association and also non-profit entities like
Accion and the Aspen Institute to really look at from the
perspective of the small business borrower.
It is a little bit of the Golden Rule. If you are a small
business and you have a million things to worry about, being
duped by a financial institution probably isn't one of them.
So that effort is part of our criteria for membership, so
you have to adhere to those standards or you have to find an
equivalent standard. So that is around things like disclosure
of APR. Again, APR is a way to compare products across terms.
Do I want to take out a series of 2-month loans at maybe a
higher APR or do I want to take out a single loan that might be
a larger dollar size at a lower APR that is longer term. Being
able to compare products is a key part of choice.
Candidly in the small business area a lot of the consumer
protections, we heard earlier how in small business lending and
consumer lender, start to merge in very, very small entities.
That effort, that self-regulatory effort, while it hasn't
been adopted by the entire industry is an effort to say that
those small business borrowers are people too and so they
deserve the protections that come with disclosing upfront APR,
disclosing if there are any pre-payment penalties or fees.
Making sure that people know what they are getting
themselves into and really right-sizing the financing so that
you are only being able to be a profitable lender when your
borrower is set up for success, as opposed to set up for
failure.
Mr. Green. Do you believe these to be beneficial to the
consumer as well as to the members of your association?
Mr. Hoopes. Well, absolutely. I think that educating--
Mr. Green. Let me just follow up quickly because I have
another question. If this is the case, how would you have all
of the businesses adhere to what you believe to be reasonable
policies?
Mr. Hoopes. Sure. So we don't think that our initiative is
the only way that you can skin the cat. There are other ways
potentially to offer robust disclosure that inform borrowers
what they are getting themselves into. I think greater
education.
This type of hearing is a way that people can be made aware
of the differences between players that are online or acting
through storefronts.
Mr. Green. Allow me to intercede and ask another question.
Do you think Congress has a role to play in regulation?
Mr. Hoopes. It does.
Mr. Green. OK.
Let us move to Mr. Levitin. Let us talk about the risk
associated with the cryptocurrencies and that is not a term
that I find favor with. I am not sure that we are dealing with
a currency, but for our purposes and for this hearing, what are
some of the risks that we have to concern ourselves with?
Mr. Levitin. I think the largest one is simply fraud. That
consumers are going to be duped into investing in
cryptocurrencies that they may not understand or that even if
they understand that there is theft within by a cryptocurrency
player.
Beyond that though, even when there is not fraud or not
theft, there is a tremendous investment risk in
cryptocurrencies. I think what we have seen with Bitcoin prices
over the last year is a classic example of extreme volatility
in an investment.
It is not a particularly suitable investment for most
consumers, and I worry that you have consumers who don't really
understand the risks, even when there was an outright fraud,
but they don't understand the risks they are taking by
investing in cryptocurrencies.
I would also add one other thing which is a major use of
cryptocurrency is money laundering. Beyond speculative value
that is really the major purpose for the use of
cryptocurrencies and that is not something that we should want
to encourage.
Mr. Green. I completely agree.
My time is up, so I will yield back, Mr. Chairman.
Chairman Luetkemeyer. This gentleman's time has expired.
We will now go to another gentleman from Texas. Mr.
Williams is recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman and for holding this
hearing in the financial technology industry, which has shown
tremendous growth since 2010 and is becoming increasingly
important to individual consumers and small businesses alike.
This segment represents the new opportunities in the
communities I represent, and I am interested to find out more
about the future of this industry segment and the role Congress
plays. We are doing a good job of that today, and I want to
thank all the witnesses for being here and your expert
testimony.
My first question is to you Mr. Smith. I would like to take
a few minutes to discuss the impact that fintech has had on
community banks. As a member of this committee I continue to
fight for community banks and small institutions that are the
backbone of Main Street, which I represent.
In your testimony you discuss that banks often choose to
partner with already existing fintech companies rather than
enter these markets on their own because they would incur great
expense.
So what factors can you identify that contribute to that
great expense? Does it have more to do with technology and not
knowing the market or other costs that push banks toward
partnerships with fintech companies?
Mr. Smith. Well, so the first issue is the technology that
you mentioned. Offering these products through an electronic
platform is a complicated thing to do. So what we are talking
about here is marketing, originating, servicing a credit
product electronically.
That is something that a community bank wouldn't
necessarily have the expertise to do on its own without help
from an outside fintech firm or without spending millions of
dollars and years to develop its own technology.
Now, of course, the biggest banks can do that. But it is
the small banks that need to rely on others to help them offer
these products.
The other issue is liquidity. Smaller banks need capital,
need people to whom they can sell these loans, whether it is
participations in the loans or the whole loans, in order to get
back to the business of lending.
They can't be overexposed to any particular set of credit
risks, and they need to be able to sell these loans so that
they can deploy their capital back in the lending business. I
want to caution though that there is a lot of talk about how
banks are no longer at risk. That is not right.
When a bank originates a loan, the bank is always on the
hook as the original lender for Truth in Lending, for unfair
deceptive practices, for fair lending.
In addition, banks frequently have credit risk, either
because they retain a participation, because they have
repurchase risks, or because they have what is called pipeline
risk where there are concerns that their counter party may not
have--and this is outlined in fact in Professor Levitin's
testimony, that the counterparty that stands ready to purchase
these loans may not be able to make good on its obligations. So
there is risk there, too.
So it is not a free pass for banks. It is not a free pass
for fintech firms, but it works for consumers.
Mr. Williams. OK. Next question also, Mr. Smith, one
section of your testimony that stands out to me is the study
you highlighted by the American Bankers Association, which says
by 2020 community banks could lose as much as $15 billion to
fintech firms and other banks going digital.
On the flip side if they adopt fintech, and we have talked
about this, they could gain as much as $20 billion in revenue
by 2020. So those numbers are pretty dynamic.
What kinds of new business is created when community banks
go into the fintech space, and what kinds of customers can they
serve that they would not otherwise?
Mr. Smith. So my focus in the testimony is on credit
partnerships and lending partnerships, but I think that any
financial product--whether it be a prepaid card or a peer-to-
peer payment service, all of these bank products, deposit
taking over the Internet, all of these bank products--can be
offered through the use of financial technology and community
banks.
There is no reason why community banks can't do that too as
long as they have the know-how.
Mr. Williams. OK, another one for you. You identified the
good that community bank partnerships with fintech can bring,
but in your testimony you also mentioned that there are
problems.
One of the most prominent obstacles, your point, as you
pointed out in your testimony, was the uncertainty over
inconsistent true lender decisions. I agree with you that
without that certainty, market participants might not be
willing to enter the market so this can have the ripple effect
of hurting consumers and banks alike.
So real quick, to what extent would the Modernizing Credit
Opportunities Act proposed by my colleague from Indiana, Mr.
Hollingsworth, solve this problem?
Mr. Smith. Well, so in theory there is no problem. I think
that the law is crystal clear on this subject that if a bank
makes a loan then the bank is the lender. But apparently some
courts are being led astray, and when I say some I mean a very
few.
We have several cases that address this issue. In many of
those cases the court has said, yep, I am looking at the loan.
The bank is the lender. That is the end of the story.
A couple of other courts though have said, no, let us look
beyond this transaction. Let us figure out who has the quote/
unquote ``predominant economic interest'' in the transaction.
And that is the rub. That is where the uncertainty comes in.
We need to make sure and I think Mr. Hollingsworth's bill
would do this effectively, to basically reinforce what we all
know that the law already requires.
Mr. Williams. Thank you for your testimony. I yield.
Chairman Luetkemeyer. Mr. Williams' time has expired.
With that, we go to the gentleman from Washington. Mr.
Heck, is recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman, very much.
I would like to begin by asking each of you to answer very
briefly how you define fintech space. It just seems to me that
this is incredibly amorphous, and in order for us to begin to
make progress on advancing our thinking about how we may or may
not need to update regulations we ought to have a sense of what
this is.
So starting with you, Mr. Hoopes and going down the line
and briefly please, I have a couple of other questions. How do
you define the fintech space?
Mr. Hoopes. I guess, I will focus on lending since that is
what we do. In lending I think the fintech space is, firms that
are offering credit and using processes, all the Internet,
technology-enabled machine learning to really transform the
experience for the borrower.
Then on the flip side also create opportunity for
investors. Again, all done in a way that is remarkably
different, faster, more efficient, more transparent than
previous examples.
Mr. Heck. Speaking of being faster, quicker, more
efficient, because I really want to hear briefly from each of
you. Thank you sir.
Mr. Knight. So most broadly the application of technology
to the provision of financial services. For these purposes the
provision of financial services by non-banks via non-
traditional underwriting or delivery mechanisms.
Mr. Heck. Mr. Peters?
Mr. Peters. Well, I actually agree with you and don't use
the term fintech as often as I can. I try to avoid it. For us
it is using technology to make people's lives simpler and
safer.
Mr. Heck. Mr. Smith?
Mr. Smith. So I have a prop here. To me it is offering
financial products and services to consumer and small business
over this.
Mr. Heck. Over a mobile device?
Mr. Smith. That is it.
Mr. Heck. Professor?
Mr. Smith. And everything that goes along with it.
Mr. Levitin. I am going to try and do this in 280
characters or less. Non-bank financial services companies
without a brick and mortar presence.
Mr. Heck. So it seems to me that there are a lot of
different businesses that are in this space. You have mobile
payment, mobile banking, which really rests right on top of
banking. You have marketplace lenders who are literally in
direct competition.
Theoretically you also have cryptocurrencies which could
serve, if they were completely robust, and I am not suggesting
they ever will be, to replace banks.
Do I have that about right, Mr. Peters?
Mr. Peters. My companies look at blockchain and the
technology and we find it very interesting, but we take no
position on it.
Mr. Heck. The question wasn't whether you have a dog in
this fight. The question was whether or not if they were ever
fully developed they would, in fact, be replacing banks.
Mr. Peters. We just don't have a position or opinion on it.
Mr. Heck. I didn't ask you if you were for or against it,
Brian.
Mr. Peters. For us the underlying technology is very, very
interesting and very compelling. I think we are watching it
develop.
Mr. Heck. All right. So for anybody who wants to answer
this question, I have been paying a lot of attention to the
push to finally get to the point where we make faster payments,
an area of financial transaction where we ride the rest of the
world, frankly.
I was interested recently to learn that the Fed actually
levies a fee for anything that is posted after 5 p.m. I
wondered if that was an example of an impediment to getting to
faster payment?
But more broadly, I would be interested if any of you have,
very quickly as time is winding down, examples of other
regulations that might keep us at the Fed level or anywhere
else from getting to the faster payment scheme much like the
rest of the world.
Professor, let us start with you and go down the line in 50
seconds.
Mr. Levitin. Well, I am not sure I have an answer that is
directly on point to your question.
Mr. Heck. OK.
Mr. Smith?
Mr. Smith. The same.
Mr. Heck. Mr. Peters?
Mr. Peters. I don't think it is just the regulation that
needs to be removed. I think the Fed is shepherding a very
commendable process to get industry, through an industry-like
solution here.
They are shooting for 2020. There will be a variety of
solutions that come to market and hopefully, we have
interoperability and ubiquity of faster payments by that date.
That is something we care very much about. It matters.
Mr. Heck. You want to see it happen.
Mr. Peters. We do, absolutely.
Mr. Heck. Mr. Knight?
Mr. Knight. So the product of regulation, one of the
challenges we face, is the number of F.I.s we have in this
country relative to other countries. If you look at the
countries that have done faster payments, they have few large
F.I.s rather than many relatively small F.I.s like you see
here.
Mr. Heck. Mr. Hoopes, in the time I do not have remaining?
Mr. Hoopes. The IRS Data Verification Modernization Act
would enable much faster disbursement of loans. You would be
able to, as a lender, verify somebody's income when they have
already agreed to share that information.
Mr. Heck. Thank you, Mr. Chairman. I am yielding,
evidently.
Mr. Loudermilk [presiding]. The gentleman yields back his
time.
The Chair recognizes himself for 5 minutes for questioning.
I find ourselves in an interesting position, but not a
position we haven't been in before in America. Recently, I read
an old newspaper article from the early 1900's from a very
prominent national newspaper that said humans will never fly
and shouldn't. This was at the time when two bicycle mechanics
from Ohio were attempting to fly, Orville and Wilbur Wright.
I see where we are in the fintech industry, especially from
someone who spent 20 years in the I.T. business. In an
interesting position, because this is a consumer-driven
solution to a demand by consumers to apply technology we have
available, as was said earlier, to make their lives better,
simpler, and provide something that, because of various
reasons, much being government regulation, that traditional
financial institutions couldn't provide them in many cases.
We often find ourselves where traditional bureaucrats or
government regulators find themselves, in a position where they
are trying to put a round peg in a square hole.
This new industry, this new technology which is demanded by
consumers and many of the younger generation is we find
ourselves in government telling them, no, you can't have what
you want because it doesn't fit the traditional model or ideas
that we have.
We find ourselves uniquely in this position again of how do
we bring these ideas and these technologies to fruition which
the market has brought themselves, but to ensure that the
consumers are protected.
It requires government to catch up with the time, which is
very difficult to do sometimes.
Mr. Hoopes, some, including Professor Levitin, have stated
that bank-fintech partnerships raise concerns about safety and
soundness and consumer protections. Is this accurate, and can
you explain a little more about the relationship between banks
and fintech?
Mr. Hoopes. Sure. It is absolutely not accurate. If
anything, a bank partnership brings additional regulation and
supervision onto a fintech. That is pretty clear. The FDIC, in
the case of State charter banks or the OCC, has the ability to
directly supervise third parties.
Mr. Loudermilk. [presiding]. OK, thank you very much. I do
appreciate the illustration somebody used about this device,
because our world revolves around this device.
This device is really an empowerment of the individual. You
can do everything from booking a flight and a hotel and
planning your whole vacation right here on this device. It has
become the lifeline for many people in America today.
I have often thought if you applied the regulations that we
have applied to things from health care to everything else to
this, you would actually have a revolt by many Americans,
because the restrictions it would add.
But another concern I have in the remaining time is as we
migrate to more technology, security becomes a greater issue
because we do tend to consolidate a lot of information, which
is one of the advantages of blockchain technology in whatever
area we are going to utilize that.
Mr. Peters, I know that in your comments you addressed some
security concerns, and as you know, the expansion of EMV chip
technology on payment cards has increased acceptance by
merchants and has resulted in significant decline of point-of-
sale fraud. However, on the online marketplace this has been
increasing. What can we do to help in the online sector?
Mr. Peters. It is a good question. Obviously, as I
mentioned, we are security companies first and large
organizations come to our companies, Northrop Grumman, the CIA.
They believe that we know what we are doing when it comes to
security.
As you pointed out, on that device that we all have in our
pockets or on our wrists or maybe elsewhere through a voice
assistant, we are adding layers and layers of security to that,
whether it is encryption, whether it is biometric
authentication. In the applications themselves there are a
whole host of security measures in place.
So we believe that in the online environment, there are
actually many more opportunities, many of which we have been
developing now for years, to ensure that you do have actually a
higher level of security and authentication than you may have
in the brick and mortar environment.
From a policy perspective, I would say that our system
right now is, in terms of the pricing around security and fraud
reduction, is somewhat arbitrary.
It would be worthwhile for the committee to explore a way
to align the incentives of security for merchants and for banks
and card networks around that, rather than an arbitrary level.
Mr. Loudermilk. [presiding]. OK. Thank you very much, and
my time has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney.
Mrs. Maloney. Thank you so much, and I thank you and the
Ranking Member for calling this hearing and all of the
participants.
First, I would like to ask Professor Levitin, one of the
cautionary tales about fintech that you cited in your
testimony, was the bitcoin exchange called Mt. Gox. Back in
2014, Mt. Gox was the largest bitcoin exchange in the world.
But then someone hacked the exchange, and stole $450
million, as in million, worth of bitcoins. They disappeared in
thin air, and the exchange collapsed overnight and many people
lost their hard-earned earnings.
I am extremely concerned about virtual currencies like
bitcoin, because a great number of average investors are
pouring their life savings into virtual currencies, and they
stand to lose a great deal of money when this bubble eventually
bursts, as nothing is backing it up now.
People are treating these things as investments, when they
are just currencies. And that, in my opinion, is a big problem,
because there are absolutely no protections for these investors
like we have in stocks and bonds.
So I am working on a bill that would treat virtual
currencies that are being used as investments as securities so
that investors will get basic investor protections, like
adequate disclosures and rules against market manipulation and
market fraud.
But another big problem in this space, which you
highlighted with the example in your testimony of Mt. Gox, is
that the virtual currency exchanges are constantly being
hacked. Just last weekend, another virtual currency exchange in
Japan was hacked, and they lost over $550 million worth of
virtual currency, the largest cyberheist in history.
So my bill would also subject virtual currency exchanges to
exchange-like regulation by the SEC, including robust
cybersecurity standards to ensure that these massive
cyberheists stop happening.
Now, in no way do I want to interfere with the innovative
technology that is coming into being through these currencies,
but this doesn't hamper that, which has great promise for the
future.
So my question, Professor Levitin, is do you think that we
should just let virtual currencies continue to be the Wild West
with no protections whatsoever, or do you think we need to
start taking some precautions on virtual currencies so that
people don't lose their entire savings in these markets, which
has been happening?
Then I invite others to give us your comments and beliefs
on what is happening.
Mr. Levitin. Mrs. Maloney, I believe you are exactly right
that there needs to be a regulatory framework for virtual
currencies or cryptocurrencies.
I think there is a fine line, though, between creating such
a regulatory system and putting a stamp of legitimacy on
virtual currencies as investments, and I think one would want
to be careful about that.
Of course, if they are regulated in a safe and prudent
fashion, then I think the concerns about legitimizing virtual
currencies as an investment are reduced.
I think it is important to note that any securities law-
based regulatory regime, doesn't in any way reduce the
potential benefits from the underlying blockchain technology.
This is any securities-based regime would be about the use
of virtual currencies as investments and the underlying
technology that has been used for a lot of other things would
not be affected by it.
Unfortunately, there is not any good solution for the
hacking problem. We can have legislation directing optimal
security standards, but the nature of hacking is it is not
always preventable. It is just how well can a company fortify
itself so that it is a less inviting target than some other
company?
I think this is going to be a problem that is going to
bedevil financial regulation, not just a virtual currencies,
but also banks are common targets for hacking. I think this is
going to be a problem going forward for quite a while.
Mrs. Maloney. Would anyone else on the panel like to
respond? No? OK.
My time is up. Thank you.
Mr. Loudermilk. [presiding]. The Chair now recognizes the
gentleman from Indiana, Mr. Hollingsworth, for 5 minutes.
Mr. Hollingsworth. Well, good afternoon. I appreciate
everybody being here. I have to tell you, so I have listened to
much of the testimony and am still really excited about the
opportunities that could be afforded by the expansion of
fintech, frankly, the opportunity for more and more individuals
across this country to get access to credit to use to build a
better future for themselves, for their families, and for their
communities.
Frankly, this is exactly what we have seen technology do in
a variety of spaces. Enable and empower companies to reach
consumers that they wouldn't otherwise be able to reach,
because we are lowering the transaction costs.
Instead of having to build a huge branch in a local small
town community, like I have all the way across my district, we
are enabling these products, these offerings to be made over
the rails of existing technology.
We are finding people who may, by traditional standards,
have challenging credit scores or challenging situations, but
through new algorithms, new technology, and new capabilities
are saying they might be great credit risks for these type of
products.
I am excited about that, and obviously in participating in
development of that through my Modernizing Credit Opportunities
Act, which I recently introduced as a bipartisan piece of
legislation to help ensure that this opportunity remains robust
for technology companies to be involved in.
Mr. Smith, what I wanted to ask you was, a lot of things
have been said about this particular piece of legislation, but
the reality is we are not breaking any wild new frontier ground
here with regard to this legislation, but rather re-enforcing
what has been an existing precedent and principle for many,
many years and ensuring that same principle applies to this
operation just because it is technology. Is that right?
Mr. Smith. That is right. That the law is very clear where
the bank makes the loan, where the borrower agrees to repay the
bank, the bank is the lender.
Mr. Hollingsworth. Right.
Mr. Smith. That is the end of the story. You shouldn't be
guessing at the motives or intentions of all of the different
participants to this transaction.
If what we are talking about is making a loan to a consumer
over this device, there are a lot of different people who play
a role in that, and there is a lot of different expertise that
plays a role in that. The bank has to hire out for that
expertise.
Banks have always done this. So big banks have tens of
thousands of service providers. Nothing different than what we
are talking about here. Bank asking others to help it provide
innovative products to consumers and to small businesses.
Mr. Hollingsworth. Absolutely. So again, this is the same
product, in effect, sometimes different offerings, but the same
basic product that is being offered by banks all the way around
the world. That has always been offered by lending
institutions.
It is run over new and innovative rails, in effect, that
lower those transaction costs and enable them to reach deeper
into communities, whether that is small rural communities like
I have in district, or whether it is in more urban densely
populated areas that might not otherwise be able to reach all
those communities.
But ultimately it is the same basic product, same basic
principles applying and the legal precedents that have been in
existence and allow the secondary market to flourish. We are
just saying those same principles need to apply here. Is that
right?
Mr. Smith. That is right. I would say though that this
financial technology enables banks, particularly community
banks, smaller banks, that wouldn't otherwise have access to
this technology frequently to offer new products.
So to offer an open-end product, rather than a simple
personal loan or to offer an auto loan. Or to reach, as you
say, different communities, different people through different
channels.
Mr. Hollingsworth. Yes.
Mr. Smith. So those aspects of it are new, but the bottom
line is it is credit. Here is the other bottom line. If it is
being offered by a bank, it is being supervised by a Federal
banking regulator.
Mr. Hollingsworth. Right, right. You bring up a great
point, because not only will this enable more people to be able
to have access to credit than otherwise wouldn't be able to,
but also open up the number of products that they might have
access to. Because no single product fits everybody.
I have different needs in Jeffersonville, where I am from,
than an hour and a half north in the suburbs of Indianapolis in
Greenwood. Those needs are very different.
We used to have community institutions that served those
particular needs, and we have become more and more challenged
because of some of the regulatory framework to have those
individual community institutions serving those communities,
serving those individuals with unique and different products.
This is really going to open that up.
With the small amount of time that I do have left, I would
like to enter these letters of support into the record: This
one from the Innovative Lending Platform Association, this one
from Consumer Research at Free Market Consumer Group, this one
from the Electronic Transactions Association, and this one from
TechNet.
Mr. Loudermilk. [presiding]. Without objection.
Mr. Hollingsworth. Thank you. With that, I will yield back,
Mr. Chairman.
Chairman Luetkemeyer. The gentleman yields.
The Chair now recognizes the gentleman from Minnesota, the
slapshot king of Alaska, Mr. Emmer, for 5 minutes.
Mr. Emmer. Thank you is in order, Mr. Chair. Thank you for
letting me participate today. Thank you for the esteemed panel
that we have on what I consider an amazing topic.
Despite the way I look, my youthful looks, I know all about
this cryptocurrency stuff. But it has been an area that I have
been very interested in since I got here.
To the panel, as you may have seen, the Chairman of the SEC
and the CFTC recently co-authored an op-ed in the Wall Street
Journal where the concept of a more direct regulatory approach
toward financial technology was discussed.
They said that quote, ``Cryptocurrencies lack a fundamental
characteristic of traditional currencies,'' closed quote, and
quote, ``other hallmarks, such as governance standards,
accountability and oversight, and regular and reliable
reporting of trading and related financial data,'' close quote.
That is what makes it go. You are here because--I also read
in that article that the problem is typical currencies have the
backing of a sovereign.
People are in this space. They started in this space
because they were looking to get away from that. There is an
argument about the way different governments handle their
currency, and they wanted more freedom.
The question, I will start with Mr. Peters. In many ways,
it seems like the potential for blockchain technology, virtual
currency, and other fintech advances, runs parallel to the
early days of the Internet, which benefited from a light touch
or hands-off approach to regulation. Do you agree with this
statement?
Mr. Peters. I agree that there are many similarities to the
early days of the Internet in the way you understand the
underlying technology. With respect to policy, my organization
does not have a particular position on it.
Mr. Emmer. Well, let me ask this. I will follow up with
you. What are your thoughts on additional regulation in this
space? We talked about it generally.
Everybody assumes we have banks, we have this, we have
that, so this should be regulated. But I fear that the second
you start doing this, you are going to suffocate what is an
incredibly fertile ground.
To the people who say there is tremendous risk when
investing in new technologies, to Professor Levitin. There is
always risk. That is with the greatest risk comes the greatest
reward.
There is this thing called buyer beware. So I just ask, if
that is what we are talking about, where is that regulatory
balance? And should there be?
Yes, Mr. Peters?
Mr. Peters. For us, we are focused on the digital wallets
that we already have in the marketplace. In many ways, the
challenge from a regulatory perspective is one of scope and
operational efficiency in terms of how you bring a service to
market.
Without any specific position on blockchain or
cryptocurrency, our existing laws based on U.S. currency are
focused on that regulatory impediment.
Mr. Emmer. That is the problem. Now we are going to try and
make cryptocurrency follow along as though it is U.S. currency.
Mr. Knight, maybe you can answer the same question?
Mr. Knight. Sure. We need to keep in mind that the early
Internet is a good parallel. The early Internet was regulated
with a light touch.
There were, however, still regulations for things like
fraud. If I defrauded you over the Internet, I still went to
jail. Because you need certain regulations to enable a market,
otherwise people won't come.
One thing I do think we need to be looking at in this
space, particularly with regards to things like the securities
laws is, are there areas where the technology allows us to
address a risk that we are currently looking to regulation to
address? And then if so, roll back that regulation so that
duplicative regulation is no longer necessary.
That is not to say that there aren't significant challenges
that we are seeing right now, and the SEC has shown admirable
restraint in the ICO space.
But at a certain point, if you are committing securities
fraud, you have to be held accountable or else the securities
market could seize up.
The CFTC and the SEC have done a reasonably good job of
trying to target legitimate bad actors and take them out, as
they should, while working with just the hapless and ignorant
and helping them get back into compliance and unwind their
offerings.
Mr. Emmer. Well, one thing I want to point out before my
time runs out, and I guess in a way ask Mr. Hoopes, you were
talking about how your members can actually--the algorithms,
the way that they can qualify people for different loans and
the discrimination piece is gone.
Is it fair to say that your members can actually get more
information and more reliable information using algorithms on
information that is already available on the Internet?
Mr. Hoopes. That is correct.
Mr. Emmer. So isn't that going to solve a whole bunch of
problems going forward? Don't we have to worry about
overregulating in this space?
Mr. Hoopes. Yes, I do worry about overregulation. You also
have to realize financial services is a very regulated
framework. All of our members work really hard to ensure that
as they do new things, they remain in compliance with all
existing law.
Mr. Emmer. Well, I appreciate it.
Mr. Chairman, thank you for your patience. Thank you for
letting me go here right at the end. I could continue this for
a long time, but will be done for today. Thank you.
Mr. Loudermilk. [presiding]. The gentleman's time has
expired. I would like to thank our witnesses for their
testimony today. This is an important area we will be hearing
more and more about, and hopefully we will be more engaged in
this.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
[Whereupon, at 12:03 p.m., the subcommittee was adjourned.]
A P P E N D I X
January 30, 2018
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]