[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]





 
                    EXAMINING THE OPPORTUNITIES AND


                  CHALLENGES WITH FINANCIAL TECHNOLOGY


                   (``FIN TECH''): THE DEVELOPMENT OF


                       ONLINE MARKETPLACE LENDING

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 12, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-97
                           
                           
                           
                           
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                 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
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                   RANDY NEUGEBAUER, Texas, Chairman

STEVAN PEARCE, New Mexico, Vice      WM. LACY CLAY, Missouri, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  RUBEN HINOJOSA, Texas
MICHAEL G. FITZPATRICK,              DAVID SCOTT, Georgia
    Pennsylvania                     CAROLYN B. MALONEY, New York
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
MARLIN A. STUTZMAN, Indiana          STEPHEN F. LYNCH, Massachusetts
MICK MULVANEY, South Carolina        MICHAEL E. CAPUANO, Massachusetts
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANDY BARR, Kentucky                  DENNY HECK, Washington
KEITH J. ROTHFUS, Pennsylvania       KYRSTEN SINEMA, Arizona
FRANK GUINTA, New Hampshire          JUAN VARGAS, California
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
MIA LOVE, Utah
TOM EMMER, Minnesota

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 12, 2016................................................     1
Appendix:
    July 12, 2016................................................    41

                               WITNESSES
                         Tuesday, July 12, 2016

Adarkar, Sachin, General Counsel and Chief Compliance Officer, 
  Prosper Marketplace............................................     6
Levi, Gerron S., Director of Policy & Government Affairs, 
  National Community Reinvestment Coalition......................    11
Nichols, Rob, President and Chief Executive Officer, American 
  Bankers Association............................................     8
Patel, Bimal, Partner, O'Melveny & Myers LLP.....................    10
Sanz, Parris, Chief Legal Officer, CAN Capital Inc., on behalf of 
  the Electronic Transactions Association........................     4

                                APPENDIX

Prepared statements:
    Adarkar, Sachin..............................................    42
    Levi, Gerron S...............................................    45
    Nichols, Rob.................................................    54
    Patel, Bimal.................................................    63
    Sanz, Parris.................................................    75


                    EXAMINING THE OPPORTUNITIES AND



                  CHALLENGES WITH FINANCIAL TECHNOLOGY



                   (``FIN TECH''): THE DEVELOPMENT OF



                       ONLINE MARKETPLACE LENDING

                              ----------                              


                         Tuesday, July 12, 2016

             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 2 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Pearce, Posey, 
Fitzpatrick, Westmoreland, Luetkemeyer, Mulvaney, Pittenger, 
Barr, Rothfus, Guinta, Tipton, Williams, Emmer; Clay, Meeks, 
Scott, Velazquez, Sherman, Delaney, Heck, Sinema, and Vargas.
    Also present: Representatives Hultgren and Hill.
    Chairman Neugebauer. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Today's hearing is entitled, ``Examining the Opportunities 
and Challenges with Financial Technology (`Fin Tech'): the 
Development of Online Marketplace Lending.''
    Before we begin, I would like to thank our witnesses for 
traveling here today to share their perspectives on this 
important issue. It is my understanding that we may be 
interrupted at some point for votes. I will alert everyone when 
votes are called, and I will recess the hearing so members may 
vote. We will then resume the hearing once votes are completed.
    I ask unanimous consent that any member of the full 
Financial Services Committee who is not a member of the 
subcommittee be allowed to testify at the conclusion of the 
questioning by the subcommittee members.
    I now recognize myself for 5 minutes to give an opening 
statement.
    Today's hearing is focused on the development of online 
marketplace lending. It is the first in a series of hearings on 
financial technology or FinTech that I plan to convene in this 
subcommittee.
    Online marketplace lending, sometimes referred to as peer-
to-peer lending, has developed rapidly over the last decade. By 
leveraging technology, adding new lending platforms, and 
underwriting the logarithms, marketplace lenders have provided 
expanded avenues of credit for consumers and small businesses 
alike.
    At the most basic level, online marketplace lenders provide 
borrowers with faster access to credit than brick and mortar 
lenders at loan levels traditionally not offered by banks. 
These lenders process these loans using online applications and 
automated underwriting that often allow funding decisions in 
less than 72 hours.
    Many consumer-focused lenders specialize in certain 
segments of lending such as education loans, debt consolidation 
or personal loans. Small business lenders are able to work with 
businesses to address cash flow issues and provide capital for 
growth and expansion projects.
    This type of financing is especially important given the 
depressed small dollar, small business lending since the 
financial crisis.
    While certainly only a fraction of the $5 trillion in 
existing consumer debt, marketplace lending shows signs of 
tremendous growth potential and identifiable challenges.
    Over the last year we have seen a growing attention paid to 
this market by Federal regulators, the media, and other market 
participants, for example, the Office of the Comptroller of the 
Currency, and the Treasury Department, who have considered the 
appropriate Federal regulatory framework for these lenders.
    One proposal being considered would offer a limited 
national banking charter that could provide operational 
efficiency and regulatory clarity. To date I have appreciated 
the measured and thoughtful approach taken by the OCC and the 
Treasury on these issues.
    Banks have grappled with the questions surrounding 
competitiveness and partnership. Some have been quick to point 
out an uneven regulatory structure while others have embraced 
the opportunity to partner with lenders to leverage their 
technology and consumer reach.
    I am hopeful that our community financial institutions will 
benefit most from these technological advancements and 
partnerships. Market analysts and the media have closely 
examined and scrutinized the market's development and 
anticipated where new growth or consolidation might occur.
    For example, there has been a significant shift from retail 
investor funding to institutional investor funding, which has 
facilitated the growth in originations. Some analysts estimate 
that the market will reach almost $90 billion by 2020.
    The improvement of capital markets is also seen in the 
securitization process. The market saw its first securitization 
in 2013, and as of today there has been a cumulative 
securitization of $10.3 billion.
    On the other hand, a 2016 report from Deloitte predicts 
that the future of the market will see large consolidations in 
strategic partnership with traditional banks.
    To make better policy decisions it is incumbent upon us to 
understand the business models and the product offerings of 
these lenders, understand how banks and lenders compete and 
collaborate, and finally understand the current regulatory 
framework and how policy decisions may determine the market's 
future.
    I hope today that members will walk away with a better 
understanding of the market, its participants, and 
where we are headed.
    I will now recognize the gentleman from--
    Mr. Clay. Missouri.
    Chairman Neugebauer. --Georgia for--
    Mr. Clay. I have it.
    Chairman Neugebauer. Oh, Mr. Clay is here.
    Mr. Clay. I am here.
    Chairman Neugebauer. I'm sorry.
    Mr. Clay. I am here, Mr. Chairman. I'm sorry.
    We are playing musical chairs today, but we will manage.
    Chairman Neugebauer. Yes. The ranking member is now 
recognized for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman, and thank you to each of 
our witnesses for their testimony today.
    The promise of FinTech or marketplace lending is the 
ability to use innovation to improve upon the financial 
marketplace for the benefit of our stakeholders. That includes 
consumers and small business owners that have often been 
underserved by traditional institutions in the financial 
services sector.
    At the end of the day, all of America benefits when our 
financial system ensures that access to responsible credit is 
nondiscriminatory, transparent and safe for business and 
individual consumers.
    Maintaining that type of financial system should also be 
our priority when thinking about marketplace lending. That 
means that FinTech or marketplace lending consumers must have 
clear access to transparent information about the products that 
they are receiving.
    That means that marketplace lenders also need to be 
transparent about their use of alternative data, provide 
consumers with the means for challenging the accuracy of that 
data, and ensure that the data does not discriminate against 
consumers based on protected characteristics.
    It means that FinTech investors must be provided with 
accurate info on the quality of the loans that they are 
investing in and the associated credit risk.
    And finally, that means that marketplace lending or FinTech 
cannot ignore the credit and capital needs of communities of 
color and women and minority-owned businesses.
    Innovation is important and I applaud the marketplace 
lending sector for using innovation to expand the suite of 
financial products and services available to consumers. Going 
forward, it is my hope that your innovation will also extend to 
improving access to credit for underserved consumers as well.
    Thank you again to each of today's witnesses and I look 
forward to your testimony.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Neugebauer. I now recognize the gentleman from 
Georgia, Mr. Scott, for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman, and 
appreciate this opportunity to give an opening statement. I 
think that this new area of the financial system interacting 
with our rapidly changing technology is not only one of the 
more fascinating aspects of our economy but is very 
definitively the future.
    We need not look any further than our last retail 
statistics where I think in the last I think it was 8 days 
before the Christmas holidays, 62 percent of all of the retail 
activity happened online. It is sort of like now we have the 
future right in our hands with the BlackBerry.
    And with this comes a lot of innovations and it is 
important to me and to the State of Georgia because this is one 
of the fastest and growing industries in the State of Georgia 
and also because right now we have 71 million unbanked or under 
banked individuals in our system.
    And we have to make sure that they have access to credit. 
And we also want to make sure with the rapid innovations and 
the technological changes that are happening that we move with 
caution to make sure that our policies that we put forward are 
neither overreaching nor under reaching but that we reach that 
delicate balance.
    So Mr. Chairman, I really look forward to this hearing and 
with that I will yield back the balance of my time.
    Chairman Neugebauer. I thank the gentleman.
    Today, we welcome the testimony of Mr. Parris Sanz. He is 
the chief legal officer of CAN Capital, testifying on behalf of 
the Electronic Transactions Association.
    Mr. Sachin Adarkar is the general counsel and chief 
compliance officer for Prosper Marketplace.
    Mr. Rob Nichols is the president and CEO of the American 
Bankers Association.
    Mr. Bimal Patel is a partner of the law firm O'Melveny & 
Myers.
    And Ms. Gerron Levi is the director of policy and 
government affairs at the National Community Reinvestment 
Coalition.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Mr. Sanz, you are now recognized for 5 minutes.

  STATEMENT OF PARRIS SANZ, CHIEF LEGAL OFFICER, CAN CAPITAL 
   INC., ON BEHALF OF THE ELECTRONIC TRANSACTIONS ASSOCIATION

    Mr. Sanz. Thank you, Chairman Neugebauer, Ranking Member 
Clay, and members of this subcommittee. Thank you very much for 
inviting me here today at this important hearing regarding the 
opportunities and challenges regarding online and marketplace 
lending.
    My name is Parris Sanz. I am the chief legal officer of CAN 
Capital. I am testifying here today on behalf of my company as 
well as the Electronic Transactions Association, the leading 
trade association in the payments industry, of which we are a 
member.
    CAN Capital was founded in 1998 by a woman small-business 
owner. She struggled to access commercial loan products that 
would address her seasonal cash flow needs. And when she was 
unable to do so, she made it her cause to solve the issue of 
access to credit for small businesses.
    Now, some 18 years later, CAN Capital has the longest 
operating history in this space. Our risk and underwriting 
models have been tested and proven during the previous credit 
crisis, and we have provided small businesses with access to 
over $6 billion.
    We have served hundreds of different industries across the 
United States from medical practices to restaurants to 
automotive shops. The proceeds of our products are used for 
business purposes like hiring new employees, purchasing new 
equipment and managing cash flow.
    As we all know, small businesses are the backbone of our 
economy. They account for half of the total workforce and over 
the last 20 years they accounted for two of the three net new 
jobs in the country.
    But despite their importance to our economy, these small 
businesses struggle to obtain the capital that they need to 
sustain and grow their businesses, especially since the Great 
Recession.
    In major surveys, small business owners report that they 
are often unable to access the capital they need through 
traditional small business loans. Part of the problem is that 
traditional financial institutions face high costs to originate 
these small business loans.
    It can cost as much for a bank or other financial 
institution to originate a $100,000 loan as to originate a loan 
for $1 million to $3 million, making it uneconomical for these 
institutions to provide access to these small dollar loans.
    This creates an acute problem for Main Street because loans 
of $100,000 and less account for 90 percent of all small 
business loans. Fortunately for our country's underserved small 
businesses, new and innovative technology platforms are 
presenting alternatives to traditional small business loans and 
expanding access to capital.
    Online lending platforms like CAN Capital provide small 
businesses with fast and easy access to the loans they are 
seeking. Loans of $100,000 and less and loans of shorter 
duration that are often better suited to the operating needs of 
small businesses.
    With the help of our data-driven algorithms to assess the 
financial strength of potential borrowers, CAN Capital enables 
fast funding decisions in minutes and can deliver capital the 
same day or the next day.
    Our industry's approach to evaluating risk has expanded 
access to many underserved small businesses. This is because 
companies like CAN Capital use data-driven underwriting models 
that assess the financial strength of the business itself as 
opposed to focusing solely on the FICO score of the business 
owner.
    As a result, we have been able to safely make available 
capital to many underserved small businesses that would 
typically be overlooked by traditional financial institutions 
simply because of a low FICO score on the part of the business 
owner.
    As the committee begins to evaluate the regulatory 
framework of our industry, we ask you to be sensitive to the 
risks that additional regulation of non-bank platforms could 
stifle innovation and possibly roll back the access to capital 
the platforms like CAN Capital have provided.
    Contrary to claims that online small business lending is 
unregulated, the industry is subject to multiple layers of 
Federal and state regulation. Also, companies like CAN Capital 
that partner with banks become subject to a significant amount 
of additional regulation and supervision, both by the Federal 
banking agencies that oversee the bank as well as by the bank 
itself.
    Any additional regulation beyond this would certainly risk 
restricting small businesses' access to much needed capital. 
Instead, we urge policymakers to facilitate further innovation 
in the small business lending space through a number of means.
    Encourage online platforms to participate in Federal 
programs such as the loan guarantee program of the SBA. 
Encourage referral partnerships between online lending programs 
and traditional financial institutions to expand access to 
capital to deserving small businesses.
    Encourage industry self-regulatory efforts with respect to 
loan disclosures and borrowers' rights. And finally support 
initiatives to create a harmonized policy framework that 
streamlines existing state laws for online lending.
    I would also like to note that our industry and the small 
business community we serve are especially concerned about 
calls by some public officials to regulate small business loans 
in the same way as consumer loans.
    Commercial loans consistently have been regulated 
differently than consumer loans for multiple reasons, including 
the role of commercial credit as a driver of the economy and 
the sophistication of the users.
    As part of a thoughtful analysis, we ask policymakers to 
carefully study the important differences between commercial 
and consumer lending before making any decisions to conflate 
these vastly different categories.
    We applaud Chairman Neugebauer, Ranking Member Clay, Small 
Business Committee Chairman Chabot and other Members of 
Congress who have pushed back against these efforts in a recent 
letter to Treasury Secretary Liu.
    On behalf of the thousands of small businesses that we 
serve, we ask other Members of Congress to please do the same.
    I thank the committee for the opportunity to testify and I 
look forward to answering your questions. Thank you.
    [The prepared statement of Mr. Sanz can be found on page 75 
of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Adarkar, you are now recognized for 5 minutes.

    STATEMENT OF SACHIN ADARKAR, GENERAL COUNSEL AND CHIEF 
            COMPLIANCE OFFICER, PROSPER MARKETPLACE

    Mr. Adarkar. Good afternoon, Chairman Neugebauer, Ranking 
Member Clay, and members of the subcommittee. My name is Sachin 
Adarkar. I am the general counsel and chief compliance officer 
of Prosper Marketplace. And I am honored to be here today 
representing Prosper.
    Prosper Marketplace launched in 2006 as the first U.S. 
marketplace lending platform. Our proprietary online platform 
connects borrowers looking for unsecured loans with individuals 
and institutions who wish to invest in those loans.
    To date more than $6 billion in loans have been funded 
through the Prosper platform. The loans help people refinance 
high interest credit card debt or pay for large expenditures 
such as medical bills.
    All the loans originated through the Prosper platform are 
made by WebBank, an FDIC-insured industrial bank under a credit 
policy approved by WebBank's board of directors. Prosper 
services all of the loans made through the platform.
    Prosper is the second largest consumer marketplace lending 
platform in the United States. Some marketplace lending 
platforms, such as Prosper, offer investors the opportunity to 
invest in the loans made through the platform, while other 
platforms retain those loans and hold them on their balance 
sheet as investments.
    The Prosper platform offers borrowers access to fixed rate 
consumer loans ranging from $2,000 to $35,000 with 3-year and 
5-year terms. We facilitate a fast and transparent loan 
origination process that includes clear disclosures of all 
costs and fees and access to competitive interest rates.
    The minimum FICO score for eligibility on our platform is 
640, and the average FICO score is 705. The most common reason 
for taking out a loan on our platform is to refinance 
unsecured--I am sorry--to refinance existing unsecured debt 
such as on a credit card at a lower interest rate and on more 
affordable terms.
    Prosper uses mostly automated processes to verify the 
identity of borrowers and assess their credit risk. We have 
developed innovative technology to make these processes more 
efficient and effective.
    For investors, the Prosper platform offers access to an 
attractive asset class with steady cash flows and consistent 
returns. The estimated weighted average return on loans 
originated through our platform in June 2016 is just above 7.4 
percent.
    In order to help investors make well-informed decisions we 
provide them with a high level of transparency. At the time an 
investor is considering investing in a loan or a related 
security, we provide them with detailed but anonymized data 
regarding the borrower's credit characteristics.
    After an investor has purchased a loan or a security, we 
also provide them with detailed performance data regarding the 
loan on an ongoing basis. We believe this approach creates an 
open and fair process for all participants in our marketplace.
    Loans originated through the Prosper platform are subject 
to the same comprehensive regulatory framework as loans 
originated through any traditional consumer lending platform. 
All loans must comply with the Truth in Lending Act, the Equal 
Credit Opportunity Act, the Fair Credit Reporting Act, the 
Patriot Act, and a host of additional laws and regulations.
    The loan program is subject to direct regulatory oversight 
by WebBanks' regulators, the FDIC and the Utah Department of 
Financial Institutions. The FDIC also has direct examination 
and enforcement authority over Prosper under the Bank Service 
Company Act.
    Additionally, Prosper is subject to the enforcement 
authority of the CFPB and the examination and supervisory 
authority of numerous state licensing bodies. Finally, the 
retail portion of our investor offering is subject to oversight 
by the SEC, as well as State securities regulators.
    We have developed a robust compliance management program 
that includes strong controls, policies and procedures and 
governance for all aspects of our operations. We are proactive 
in raising issues of potential concern with regulators. And we 
are committed to continuing this open and transparent dialogue 
going forward.
    We recently joined with other leading marketplace lending 
platforms to form the Marketplace Lending Association, which 
aims to facilitate this dialogue and encourage the responsible 
growth of our industry.
    We believe Marketplace Lending brings significant value to 
both borrowers and investors and that it will play an 
increasingly important part in the financial industry in years 
to come.
    I want to thank you for this opportunity to provide an 
overview of our business and industry and I welcome future 
opportunities to discuss these issues. Thank you.
    [The prepared statement of Mr. Adarkar can be found on page 
42 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Nichols, you are now recognized for 5 minutes.

    STATEMENT OF ROB NICHOLS, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, AMERICAN BANKERS ASSOCIATION

    Mr. Nichols. Thank you, Mr. Chairman, and Ranking Member 
Clay. My name is Rob Nichols, and I am the president and CEO of 
the American Bankers Association. The topic of your hearing, 
Mr. Chairman, is a very timely one.
    New technologies are quickly changing the way businesses 
connect with consumers. FinTech is a term used to capture this 
rapid convergence of banking and technology.
    While it has been used to refer to tech-focused startups, 
innovative technologies are offered by banks and startups 
alike.
    While these technologies may feel new, at their core they 
are leveraging technology to deliver traditional banking 
products and services.
    Make no mistake. Banks are pro innovation, pro consumer and 
very technology-focused. Banks have pioneered ATMs, credit 
cards, online banking, remote check deposit, et cetera.
    Banks continue this innovation today, investing billions of 
dollars annually to bring their customers the latest technology 
apps delivered through secure and trusted channels. One such 
product, for example, was developed by a mutual bank in New 
England that recently announced its express business loan, 
which allows small businesses to apply for a loan, get approval 
and receive funding, all online and in less than 3 minutes.
    Banks have a long history of course of serving customer 
needs and have established entrusted relationships. These 
relationships are backed by a culture of compliance and 
regulatory oversight that ensures customers are protected. When 
innovative products are delivered through bank channels, 
customers get a great experience backed by a relationship they 
can trust.
    In addition, banks are actively partnering with FinTech 
startups to bring their customers the latest technologies. When 
banks innovate with startups, customers win. This is why the 
banking industry supports policies that empower banks and 
enable them to innovate and enable them to partner.
    If they are better able to integrate these technologies, 
customers will have greater access to safe, innovative 
financial services.
    One way to facilitate this is to offer banks and startups a 
safe place to innovate new products. This program, often 
referred to as a sandbox or a greenhouse, would allow banks and 
startups to test real world products that otherwise they would 
not be able to offer.
    Importantly, while the same rules typically apply to banks 
and non-banks alike, a lack of proactive oversight and 
supervision can mean that customers may receive inconsistent 
treatment from non-banks. Some have advocated adding consumer 
protections to small business loans to address this.
    We believe a better approach is to focus on the differences 
between the two that lead to very different outcomes, namely 
oversight. Problems that are emerging in the small percentage 
of online loans should not drive radical and unnecessary 
changes that risk impairing a market that has served businesses 
well for decades, like this gentleman made.
    Regulators are currently examining the potential of a 
Federal FinTech charter to address this lack of oversight. As 
they examine this issue we urge them to consider how any such 
charter would differ from a bank charter and ensure that it 
provides customers bank level protections.
    It is important to note that while technology can drive 
innovation and add value, it is not the replacement for a 
community presence. Community banking is a relationship 
business that is not replicable by technology.
    While banks are driving technological innovation, they 
remain invisible presence supporting their local communities as 
they always have through community outreach and countless hours 
of volunteering, something that cannot be done through a 
keystroke or an algorithm.
    FinTech technologies present tremendous opportunities for 
banks and customers alike. They have the potential to promote 
financial inclusion, giving greater access to financial 
services on better terms.
    These benefits though are only possible if we empower banks 
to innovate and partner with startups. The banks' investment in 
innovation today has the potential to benefit customers and 
businesses now and for many, many years to come. These 
innovations will only add value if banks, startups and 
regulators can collaborate.
    Mr. Chairman and ranking member, the ABA stands ready to 
work with Congress and regulators to help make this happen. 
Thank you very much for holding this hearing.
    [The prepared statement of Mr. Nichols can be found on page 
54 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Patel, you are now recognized for 5 minutes.

    STATEMENT OF BIMAL PATEL, PARTNER, O'MELVENY & MYERS LLP

    Mr. Patel. Chairman Neugebauer, Ranking Member Clay, and 
members of the subcommittee, thank you for the opportunity to 
appear and to testify before you about the development of 
online marketplace lending.
    My name is Bimal Patel. I am a partner and the head of 
financial advisory and regulation practice at O'Melveny & 
Myers, and was formerly for 3 years a senior executive at the 
FDIC before I rejoined O'Melveny.
    Since returning to private law practice I have advised 
marketplace lending platforms, banks and investors on 
commercial and regulatory issues in this industry.
    According to the Treasury Department in its recent white 
paper on online marketplace lending, and I am quoting now, 
``Online marketplace lending refers to the segment of the 
financial services industry that uses investment capital and 
data-driven online platforms to lend to small businesses and 
consumers.''
    Within this broad framework, marketplace lending business 
models vary considerably, focusing on different consumer 
segments with different operational and underwriting models.
    The online marketplace lending industry is growing rapidly. 
According to date reported by the California Department of 
Business Oversight, the aggregate volume of loan originations 
made by 13 of the largest online lenders grew from just under 
$2 billion in 2010 to just under $16 billion in 2014, which is 
an increase of 699.5 percent.
    While their business models and target customer segments 
can vary significantly, many online marketplace lenders share 
some common characteristics, including a user friendly online 
experience, a non-traditional services funding, a balance sheet 
light economic model, and alternative credit decision 
algorithms.
    Despite the industry's growth, it still constitutes a very 
small percentage of the U.S. credit markets which encompass 
several trillion dollars. Thus, there appears to be substantial 
opportunity for the industry to grow.
    One key point of distinction within marketplace lending 
models centers on whether a particular marketplace lender 
partners with a bank in its origination process. Federal law 
currently permits banks to export their home state rate of 
interest to all borrowers regardless of the state in which a 
borrower resides.
    Consequently loans originated by banks whose home States 
have no effective usury limitation, a limitation on maximum 
interest rates, can carry higher interest rates than loans 
originated by other banks and non-bank lenders. Thus, some 
marketplace lending models depend on such a partnership to 
enable them to underwrite loans at rates that would otherwise 
violate state usury laws.
    As an alternative to partnering with a funding bank, 
marketplace lenders can engage in lending by procuring state 
lending licenses in which they make loans, but these loans are 
subject to state law interest rate restrictions that vary by 
state and impose administrative and financial burdens that can 
be prohibitive to certain business models.
    Depending on the precise business model of a marketplace 
lender in the category of borrower to which it caters, a series 
of consumer protection data privacy, securities and anti-money 
laundering laws that I have identified in my written testimony, 
are generally applicable to lenders either directly or 
indirectly through bank partners.
    Recent developments also indicate that the prudential 
banking regulators, CFPB and state regulators and taking a keen 
interest in this area and that further regulatory developments 
are forthcoming.
    As I mentioned previously, there appears to be substantial 
opportunity for this industry to expand and to further economic 
growth and economic opportunity for U.S. consumers and 
businesses.
    This growth will be dependent on economic and commercial 
considerations as well as State and Federal policy 
developments. I thank the committee for taking an interest in 
these important issues and I welcome your questions.
    [The prepared statement of Mr. Patel can be found on page 
63 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And now Ms. Levi, you are recognized for 5 minutes.

 STATEMENT OF GERRON S. LEVI, DIRECTOR OF POLICY & GOVERNMENT 
       AFFAIRS, NATIONAL COMMUNITY REINVESTMENT COALITION

    Ms. Levi. At the outset, I want to thank you, Mr. Chairman 
for convening this important hearing. Marketplace lending 
models certainly warrant closer examination and some 
congressional oversight.
    And Ranking Member Clay and others on the committee, I know 
you will be asking important questions about how marketplace 
lending models interface with the Nation's traditional banking 
infrastructure.
    Our marketplace lenders who are largely monoline financial 
service providers structures in ways that will ensure that they 
are resilient throughout business and economic cycles.
    What is the nature of Federal supervisory and examination 
protocols regarding consumer protections and fair lending laws 
and regulations? Whether interest across the various models are 
aligned so that FinTech players have the veritable skin in the 
game so that they have a stake in ensuring that loans are 
underwritten well, ability to repay is paramount, and lending 
is safe and sound.
    Importantly, we believe that all the members of the 
committee examine whether aspects of the industry's use of 
data, sophisticated but opaque proprietary underwriting 
algorithms, still insufficient transparency around pricing and 
loan terms, broker fee and compensation arrangements and other 
features are invoking parallels to the run up to the crises 
around predatory subprime lending and private label 
securitization.
    My name is Gerron Levi. I am the director of Policy and 
Government affairs at the National Community Reinvestment 
Coalition. NCRC and our 600 grassroots members quite simply are 
interested in creating opportunities for people to build 
wealth.
    We work with community leaders, policymakers and financial 
institutions to champion fairness in banking, housing and 
business development. I appreciate the opportunity to testify 
this afternoon.
    Though the industry is nascent, marketplace lending is a 
growing segment. When evaluating these online lending platforms 
and their sophisticated underwriting algorithms, NCRC certainly 
is interested in seeing how they can expand safe and 
sustainable credit. There is no doubt that innovative solutions 
are needed to address a fundamental issue.
    Small business lending is down and businesses are not 
getting off the ground or are dying on the vine for a lack of 
credit.
    According to a recent Wall Street Journal report, the 
number of loans issued by 10 of the largest banks in the United 
States has decreased 38 percent to $44.7 billion in 2014, which 
is down from a peak of $72.5 billion in 2006.
    Importantly, however, we want to see FinTech and all 
innovation and marketplace lending that is safe and 
sustainable.
    Consumer protections and fair lending protections should 
not be different for the borrower based on where they apply for 
the loan. We have also long supported all lenders in the 
marketplace, including marketplace lenders, being covered by 
and examined under the Community Reinvestment Act so that low 
and moderate income borrowers and underserved communities, 
including rural communities, are receiving the full benefit of 
lending and innovation in the financial marketplace.
    We have grown concerned about some of the dissatisfaction 
reports we are seeing in the marketplace from our members and 
others. A recent survey of small businesses by several Federal 
Reserve banks reveals that 20 percent of small businesses 
obtaining credit used online lenders with micro businesses 
using them to a greater extent.
    But their satisfaction with online lenders was very low. 
Online lenders received a score of 15 among firms approved for 
credit compared to 75 for small banks and 51 for large banks. 
Small business lenders complained about the lack of 
transparency, the unfavorable payment terms and very high 
interest rates.
    I cover a number of things in my written testimony, but 
among the concerns that we have are around data and 
transparency. We think similar to the Home Mortgage Disclosure 
Act not the mortgage lending side, Section 1071 of Dodd-Frank 
presents a great opportunity for marketplace lenders to 
publicly disseminate data on their small business lending 
activities, afford consumer protection and fair lending 
reasons.
    Let me just conclude by raising the issue that one of the 
other panelists raised around limited purpose charters for 
FinTech. We do have some concerns around that. We do want to 
see CRA extended in the case of limited purpose charters.
    We also want to make sure that retail lending done by 
marketplace lenders are examined under those charters. We just 
have concerns about whether that is appropriate in this 
instance before the great benefits of national charters are 
extended to these type of platforms, Federal pre-emption, 
access to the payment system. There are tremendous benefits 
from charters being extended and want to make sure that fair 
lending and consumer protections are extended in the process, 
and CRA.
    Thank you very much for the opportunity to testify and I 
welcome your questions.
    [The prepared statement of Ms. Levi can be found on page 45 
of the appendix.]
    Chairman Neugebauer. I thank the gentlewoman.
    The Chair now recognizes himself for 5 minutes for 
questioning.
    So this is an educational hearing and so to kind of set the 
platform here, Mr. Adarkar, can you walk me through a typical 
loan from application to securitization so we kind of get a 
picture of what this playing field looks like?
    Mr. Adarkar. Absolutely. So the average loan on our 
platform--all the loans made through our platform are unsecured 
consumer loans. The typical loan size is around $13,000 and the 
typical interest rate is 13.9 percent.
    So the way the process works is we market to potential 
borrowers through a number of sources. We send out direct mail 
pieces. We do email advertising. We do buy search words on 
Google. We also have some website partners who have comparative 
financial information sites.
    There are a number of places through which borrowers come 
to us.
    Once they come onto the website there is an online 
application process through which between the information they 
provide and the information we pull from their credit report, 
we can instantaneously make a decision for them about whether 
they qualify for credit and the terms on which they qualify.
    We present them with the terms that are available to them 
if they are eligible, and if they decide to move forward then 
there is sort of a two-track process that happens. On one track 
we then essentially post the terms of their loan application 
through our website with all personal information anonymized.
    And the investor members on our website can essentially 
make a commitment about whether this particular loan is one 
that they are interested in. This is something that is 
available to both retail and institutional investors.
    These days the demand is such on our platform that most of 
these requests are essentially fully funded instantaneously. So 
the sort of funding track is one part of the process.
    A second thing that is happening simultaneously is this 
sort of verification process which consists of a few 
components. The first thing is we need to verify the identity 
of each applicant to confirm identity fraud isn't involved.
    We also have a risk-weighted employment and income 
verification process just to confirm the key information 
related to their application to the extent that incorrect 
information either in the credit report or supplied by the 
borrower might increase the risk of default to an unacceptable 
degree.
    So that verification process is happening at the same time. 
And it typically takes from between 3 and 5 days. So once that 
process is completed, once we have verified the borrower 
information and we are ready to fund the loan, once we have 
received commitments from investors to fund the loan, then 
WebBank, who I mentioned is the bank partner that makes the 
loans originated through the platform, they fund the loans to 
the borrower out of their funds.
    The borrower receives the funds and 2 business days after 
the loan is originated WebBank sells the loans to Prosper. We 
then resell the loans to our investors.
    For institutional investors, they buy the entire loan 
outright. For retail investors, we break the loans into pieces 
and sell pieces of each loan to a group of retail investors 
which allows a broader range of folks to participate in the inv 
process.
    Chairman Neugebauer. So in that 2-day period between the 
time you fund the loan and you securitize or you bring your 
institutional investor in, you warehouse that loan for 2 days?
    Mr. Adarkar. During that 2-day period it is actually 
WebBank that retains ownership of the loan. They then sell it 
to us and we turn around and resell it to our investors.
    As soon as the loan is originated then we are responsible 
for servicing the loans, meaning we are the ones collecting 
payments from the borrowers, providing the borrower's 
information, passing those payments on to our investors, as 
well as providing our investors with regular proof of the 
loans.
    Chairman Neugebauer. Thank you.
    Mr. Nichols, how do you envision--I think you speak to this 
a little bit in your written testimony, but how do you envision 
marketplace lending kind of changing the environment in the 
more traditional banking space?
    Mr. Nichols. Mr. Chairman, as I said, our overall view on 
this is we think partnerships are fantastic and a good 
opportunity for both. I would say though I am optimistic about 
the future of community banking because of that personal touch.
    You have banks that have been operating in communities for 
decades. It is also good to have a bank that specializes in 
small business lending so that you can look someone in the eye 
and get a sense of what the business plan looks like.
    But I do think as a general observation community banks 
particularly, Mr. Chairman, can really benefit from a lot of 
these FinTech partnership opportunities, a lot of the larger 
banks have billions in R&D budgets and in laboratories and they 
are doing lots of work.
    They don't need as much assistance frankly as the community 
banks do. I think I may have shared this with you, but we have 
started a task force, Mr. Chairman, at the ABA, to really focus 
on this issue.
    And we have dealt with not only experts within the ABA and 
in the banking sector but have really fanned out across the 
United States to meet with folks all over the United States and 
even probably talked to some international participants to try 
to find ways where we can specifically help the U.S. community 
bank market partner with FinTech companies to better serve 
their clients and customers.
    And the recommendations, Mr. Chairman, of that task force 
will be out in the weeks ahead.
    Chairman Neugebauer. I thank the gentleman.
    Now, I recognize the ranking member of the subcommittee, 
Mr. Clay from Missouri, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Sanz, a number of marketplace lenders have opted to 
operate under the Small Business Borrowers Bill of Rights 
because they were concerned about the complaints that small 
businesses have been raising about marketplace lending 
practices.
    That bill of rights includes a commitment to disclose 
annualized interest rates or APR so that small business owners 
have a legitimate basis for comparing loan products, but CAN 
Capital did not opt into the Small Business Borrowers Bill of 
Rights. Does CAN Capital disclose annualized interest rates or 
APRs to your small business borrowers?
    Mr. Sanz. Congressman Clay, thank you for your question. We 
did not join the Borrower Bill of Rights group initially out of 
a number of concerns with what that set of principles was 
capable of achieving and not achieving.
    Certainly a lot of respect for the intent and impetus 
behind that group, but candidly, I don't know if Congress 
Members are aware but that bill of rights is selective in terms 
of the ones that you can sign up for.
    It is not like 10 commandments where you have to abide by 
them all. And CAN Capital had some concern about the teeth 
behind it and really was much more focused on trying to do 
something really palpable and meaningful.
    And so alternatively we, with Cabbage and Onda Capital 
formed the Innovative Lending Platform Association. And we are 
currently sponsoring the SMART Box initiative. SMART is an 
acronym that stands for Smart Metrics About Rate and Total 
Cost.
    The concept of total cost candidly is what we have learned 
in our 18 years of experience is the most meaningful cost 
metric to small businesses. Small business owners are very 
focused on maximizing their return on investment. They are 
focused on the ROI that they will obtain from the use of 
proceeds.
    And in our history we have determined that they really base 
their decisions on the total cost of capital, which is 
information that we provide on all the capital products.
    Mr. Clay. But you--wait a minute. Wait a minute now. I am 
not going to let you filibuster my question. What are your 
annual interest rates?
    Mr. Sanz. Many of our products don't involve interest and 
don't have an APR associated with them, but maybe to more 
directly answer your question, through the aisle PA and through 
the SMART Box initiative we will be disclosing APRs around all 
products.
    Mr. Clay. Okay.
    Mr. Sanz. The initiative is to create a standardized 
disclosure mechanism.
    Mr. Clay. Okay. Okay. What was the main APR of the loans 
that you provided to small businesses last year?
    Mr. Sanz. I couldn't tell you that off the top. I would 
have to get back to you with that information.
    Mr. Clay. Okay. Don't you think that having objective and 
comparable information is essential to empowering small 
business owners to decide which financial products are best for 
them?
    Mr. Sanz. Oh, absolutely, sir, but I would argue that there 
may be the assumption oftentimes made that APR is the only 
means of delivering pricing transparency. And what we would 
tell you from 18 years of operating in the small business 
finance space is that total cost of capital is a much more 
meaningful financial metric for our customers. And we disclose 
that clearly and--
    Mr. Clay. Okay.
    Mr. Sanz. --conspicuously.
    Mr. Clay. All right.
    Mr. Sanz. And we will also disclose APR though the SMART 
Box.
    Mr. Clay. I am sure that other members will have questions 
for you.
    Let me go to Ms. Levi. FinTech advocates have pointed to 
marketplace lending as a vehicle for expanding access to credit 
for traditionally underserved communities, yet the Department 
of Treasury report found that virtually none of the loans being 
made by marketplace lenders were going to the underserved 
communities of color and low and moderate income communities.
    Do you think that marketplace lenders are meeting the 
credit and capital needs of minority communities and other 
underserved groups?
    Ms. Levi. I really--there are a couple of ways to answer 
that. First of all, this is one of our issues. We really don't 
have enough data about how the market is operating.
    What I will--so in the same sense that you have home 
mortgage, the Home Mortgage Disclosure Act publicly available 
information about mortgages and who they are going to, on the 
marketplace lending side and just really small business lending 
more broadly we do not have that kind of comprehensive data.
    Now, section 1071 of the Dodd-Frank Act does present an 
opportunity to get that data, that marketplace lenders should 
be covered. Just preliminarily I would say that marketplace 
lenders from our evidence and from some of their annual report, 
like annual reports like Lending Club, are servicing prime 
customers, folks with 640 credit score or above.
    But it certainly is an issue that would need more 
information.
    I will also say that one of our members, Woodstock 
Institute, did a review of online lenders and found for, for 
example, CAN Capital effective interest rates of between 36 
percent and 60 percent as to your question, your last question.
    Mr. Clay. Okay. I am glad someone could answer my question. 
Thank you, Ms. Levi.
    And I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from New Mexico, the vice chairman of the 
subcommittee, Mr. Pearce, is recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. SANZ, I think you mentioned that you all have about $5 
billion more or less in loan transactions. Do you evaluate 
where your market share is coming from? Is it new loans that 
might not have been served or--I am thinking about Ms. Levi's 
observations that she is seeing our businesses die on the vine. 
We are seeing the same thing in New Mexico. So you are going 
out harvesting new or are you pulling market share from someone 
else?
    Mr. Sanz. There is some of both, but definitely a 
significant portion of the small business market that is 
underserved by traditional financial institutions.
    So just to clarify one metric, with respect to the $6 
billion of capital to which we have provided access, some 
portion of that is in the form of loans.
    Another portion is in the form of a purchase of 
receivables. It is a true sales transaction. It doesn't entail 
interest and that is probably some of the complexity that I was 
struggling to get to answer Congressman Clay.
    Mr. Pearce. Okay.
    Mr. Sanz. That being said, our model was designed--
    Mr. Pearce. With all due respect, I just wanted an answer 
to the one narrow question. I have several more to ask, so I 
appreciate the answer.
    Mr. Adarkar, you seemed to have thought about the process 
quite a lot. Where do you see some of the greatest likelihoods 
of abuse in this system, high tech system of quick looks? Where 
are the--just to help us evaluate that if you would?
    Mr. Adarkar. The potential for abuse in terms of fraud is 
something that we take very seriously and we actually feel--
    Mr. Pearce. No, I am not asking for your feeling on it. 
What are the greatest risks? Where will they originate from? 
Because I have some in my mind and I will ask about them if you 
would rather, but I want to know. You are more a specialist 
than me.
    So I am sitting here looking and so the news report today 
says things that my car is telling the car dealers about me. In 
other words, you have access to information and so among that 
information you would know my tendency that if I will buy a 
product or if I will take a loan at this rate then why would 
you give me a better loan?
    You would fit it there. Do you see that manipulation of 
data that I think most Americans are frightened by?
    Mr. Adarkar. I don't see that as being a risk on our 
platform.
    Mr. Pearce. How about you, Ms. Levi? Do you see that as 
being a problem? You are talking about loans in the nature of 
36 percent, which seems a little bit above the market rate, so 
do the people you advocate see that as being a potential 
problem that they access the information on the part of very 
fast financial analyses would give insights that might affect 
the rates or how or when or how long?
    Ms. Levi. Yes, and I assume you are talking about the 
information that the lender is receiving and inputting into 
their algorithms to make the lending--
    Mr. Pearce. Yes, the CFPB is right now taking information 
on every human being, 300 million people in the United States. 
And if a lender has access to my buying habits then they can 
tell everything about me. They know what political party I am 
in. They know who I am going to vote for in the next election.
    They know what I buy. They know what I will pay for it. 
Everything, and that is very unsettling that lenders would come 
into that.
    Mr. Nichols, you are saying that the banks are glad and 
willing partners and that is reassuring because typically I 
look at the local people as being the connect to keep the 
abuses out of a system.
    Tell me if you are contemplating these possibilities of 
just vast amounts of information being fed to you without even 
your knowledge? I don't know. I am just looking for where the 
system can go wrong and where it needs to be looked at.
    Mr. Nichols. I would just say, Congressman, as a general 
observation this issue of protection of data is so, so 
important in our new marketplace with all the rogue actors out 
there, with breaches, with cyber. You read about it every 
single day.
    So this issue of keeping customer data protected is a 
critically important aspect of the exercise of any partnership 
with any type of company--
    Mr. Pearce. I understand that, but still you see Facebook 
and they would pull down posts by conservatives. They took a 
political bent and so even though you have the desire to 
protect, you still have the Snowdens out there. You still have 
somebody who will sell every single bit of information they 
get.
    You get hacking into the system. And I for one see dramatic 
possibilities in the marketplace that we are discussing, but I 
also see some risks. So I don't know.
    Ms. Levi, do you talk about businesses dying on the vine. 
Do you go to those businesses and say hey, there is no platform 
out here? Do you ever one-on-one talk to people and say there 
might be another opportunity. Don't die. Because again, that is 
a problem we face in New Mexico since CFPB is really clamping 
down many people are just not lending as much.
    Ms. Levi. Yes. We do interface with small businesses 
through some of our business centers in providing technical 
advice, counseling them on how to procure safe and sustainable 
credit. Absolutely.
    Mr. Pearce. Okay. All right. Thanks.
    I will yield back to the chairman.
    Chairman Neugebauer. I have been advised the votes have 
started. We are going to go to the gentleman from Georgia, Mr. 
Scott, for his questioning and then we are going to recess. I 
think we have five votes and then we will reconvene.
    Mr. Scott, you are recognized for 5 minutes.
    Mr. Scott. All right. Thank you.
    As we all know with this rapidly changing technology, 
consumer protection is even more extremely vital regardless of 
where the loan is issued, either in the bank or even online.
    And what I am gathering from the testimony I am hearing 
from one side that this new online marketplace lending is 
covered by adequate regulations for consumer protections. But 
then on the other side I am hearing that they aren't enough.
    So Mr. Nichols, let me ask you and Mr. Adarkar, on what you 
think are the differences in the type of consumer protection 
provided by banks versus the type that is provided by a FinTech 
company?
    Mr. Nichols. Sir, there is really one big delta. As the 
gentleman articulated, all the laws that they are subject to, 
that is correct. The difference is oversight.
    Mr. Scott. Yes.
    Mr. Nichols. Because of the supervisory relationship that 
all these banking regulators have with banks, it is the 
oversight relationship. That is key.
    Mr. Scott. Let me ask you, Mr. Nichols, if you would 
explain thoroughly so that I would understand. When you speak 
oversight give us an example so we can be clear.
    Mr. Nichols. The relationship, the FDIC, the Fed, the OCC, 
all these entities have with U.S. banks they have visibility 
into what the banks are doing in terms of cyber, honoring 
people's privacy, their data, looking at the safety and the 
soundness of the institution, looking at systemic risk.
    The oversight model of the U.S. banking sector is quite 
defined.
    Mr. Scott. Yes.
    Mr. Nichols. That is the big delta at this moment, and that 
is what I know the OCC is thinking about in terms of if there 
is going to be a non-bank charter. This is the sort of issue 
that they are grappling with is the oversight delta.
    That is the key difference between the two.
    Mr. Scott. Mr. Adarkar, do you concur?
    Mr. Adarkar. Sure. I would just add that the CFPB has the 
same enforcement authority with respect to marketplace lenders 
as it does with respect to banks, just two additional points. 
For all marketplace lenders they are either operating in 
partnerships with banks to originate their loans or originating 
directly.
    As I mentioned, if they are partnering with banks then they 
are subject to the supervisory and examination authority of the 
banks under the Bank Services Company Act. If they are lending 
directly then they are subject to the state licensing and 
oversight requirements of all the States in which they are 
lending and they are subject to examination and supervision by 
the licensing bodies of those States.
    Mr. Scott. Okay. Let me ask the panelists about our small 
businesses. This is the backbone of our American economy and 
data clearly demonstrates that lending to these critical 
drivers of our Nation's economy is still struggling to rebound 
from the post-recession.
    So when I saw Treasury, if you recall, the May 2016 white 
paper, drawing the conclusion that micro business loans, 
meaning any loan to a small business of $100,000, shared the 
same characteristics as consumer loans and then suggested that 
such loans should be subject to the same consumer protections.
    It got me to thinking what is the real distinction between 
these loans? If we hold these micro business loans to the same 
standards as consumer loans, what impact is that going to have 
on businesses gaining access to capital?
    Ms. Levi. I do want to just briefly hit on the examination 
issue. There are several marketplace lending models and whereas 
traditional banks do come under an examination protocol, bank 
examiners go onsite. They examine their lending under CRA they 
examine their lending.
    Marketplace lenders do not have that level of rigor in 
terms of examination protocol. And you really have to look at 
the various models to determine.
    They may be subject to the law, but whether their actual 
lending, their retail lending falls with under supervisory 
examination protocols of any of the financial regulators or the 
CFPB really is the pinpoint question. You have asked the 
pinpoint question.
    Mr. Scott. Thank you.
    Mr. Sanz, did you--
    Mr. Sanz. Yes. Thank you, Congressman Scott. I would tell 
you that a critical difference between consumer and commercial 
lending is that commercial loans power the economy by enabling 
growth, hiring jobs, creating jobs, excuse me, buying 
inventory, expansion, et cetera. So the use cases for the 
capital is very different from between the commercial and the 
consumer markets.
    Also I would indicate that the distinction in the 
regulation between commercial and consumer lending has been 
very sharp throughout the decades. You can see that in the 
Truth in Lending Act in 1968. And one of the many reasons 
underpinning that is that when you are talking about small 
business owners you are talking about sophisticated users of 
credit.
    So just to give you a brief example of the kind of 
customers that we have at CAN Capital, we are not talking about 
consumer hobbyists, Congressman. We are talking about business 
owners who have been in business 13 to 14 years, who are doing 
an average revenue of $1 million to $2 million a year.
    They have brick and mortar locations. They are managing 
their insurance, their taxes, their payroll, their licenses. 
These are absolutely sophisticated users of capital.
    Mr. Scott. Thank you.
    Chairman Neugebauer. I thank the gentleman. I have been 
informed now that what was a five-vote series is going to be an 
11-vote series. The good news some of those will be 2-minute 
votes, so I ask our witnesses to take a little break here.
    And this hearing stands in recess subject to the call of 
the chair.
    [recess]
    Chairman Neugebauer. The committee will come to order. We 
will now resume questioning, and I yield to the gentleman from 
Missouri, Mr. Luetkemeyer, chairman of our Housing 
Subcommittee, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Thank you all for being here today. I was interested in the 
last individual's, Mr. Scott's questioning with regards to 
small business. I guess my question is I think Mr. Adarkar, you 
also do individuals, do you not?
    Mr. Adarkar. Yes. We only do consumer loans. We do not do 
small business loans.
    Mr. Luetkemeyer. You do not do small business loans.
    Mr. Adarkar. That is right.
    Mr. Luetkemeyer. Mr. Sanz, you do small business loans and 
not consumer loans. Is that correct?
    Mr. Sanz. Correct. We do only small business loans.
    Mr. Luetkemeyer. So but you both do online lending, right? 
Okay. You both do lending online.
    Mr. Sanz. Correct.
    Mr. Adarkar. Correct.
    Mr. Luetkemeyer. Okay.
    Mr. Nichols, one of the things that you talked about a 
while ago, and it is interesting because I was somebody back in 
2012 or the 112th Congress, 113th Congresses, both filed a bill 
to have a non-bank Federal charter for online lending. And lo 
and behold I got criticized excessively both those terms and 
now here we are looking at doing this.
    So I guess I was ahead of my time. It is not necessarily 
where I am at most of the time, but anyway I was on this issue 
perhaps.
    You indicated that the ABA would be supportive of non-bank 
charters. Is that right?
    Mr. Nichols. If designed properly and thoughtfully, yes, 
sir.
    Mr. Luetkemeyer. Do you see an opportunity for banks to get 
into this online lending?
    Mr. Nichols. Many banks are already in online lending, yes.
    Mr. Luetkemeyer. It would seem to me to be an opportunity 
to expand into a different area, to deliver a different kind of 
service, offer a different product. I know that you said you 
are partnering with other people, but I would think that even 
the banks themselves would maybe try to look at doing this 
themselves as well.
    Mr. Nichols. Yes, absolutely.
    Mr. Luetkemeyer. Okay. I assume that the banks have to 
comply with all different sorts of regulations. It would make 
sense that the FinTech companies would be doing the same 
things, would they not?
    Mr. Nichols. In the context, Congressman, of this idea, the 
concept of a FinTech charter, there are kind of some general 
principles as we are approaching that and as we are meeting 
with the regulators, the OCC and others.
    I think you have a charter because it is designed to serve 
the public good in some way, shape or form. So I think if there 
are level protections, level safeguards, in exchange for pre-
emption which is presumably one of the reasons why there is a 
desire to be in a charter of that nature.
    Mr. Luetkemeyer. Do you think that online lending would 
help you with your CRA rating?
    Mr. Nichols. Would it help with the rating?
    Mr. Luetkemeyer. Yes, with CRA?
    Mr. Nichols. I would answer it this way. I think the idea 
of if you are lending in a community I think the idea of CRA 
being applicable probably makes sense to banks and non-banks.
    Mr. Luetkemeyer. If online lenders have to comply with all 
the regs that banks comply with they need to comply with CRA, 
too? Mr. Sanz?
    Mr. Sanz. Yes, Congressman. I think that there is a good 
deal of thought that would have to go in to structure that. I 
am not a CRA expert, but to the extent that we are regulated in 
the same way, which I would argue largely we are today because 
of bank relationships.
    Mr. Luetkemeyer. Mr. Adarkar?
    Mr. Adarkar. Yes. I think it would depend on the sort of 
principle rationale that was underlying the bank charter and 
the sort of rationale for the supervision. But certainly, the 
goals of the CRA to the extent the CRA is intended to promote 
expanded access to credit is something that the space is 
certainly supportive of and believe that we are already being 
supportive of today.
    Mr. Luetkemeyer. Mr. Cordray is quoted as saying that, 
``small business lending is going to be one of his policy 
priorities in the next 2 years.'' And he really thinks the 
lines between commercial and consumer lending are blurry.
    Obviously he needs a different set of glasses. Mr. Nichols, 
can you--or, yes, give me a difference between commercial and 
consumer lending that Mr. Cordray would understand here?
    Mr. Nichols. I actually think there are some pretty 
significant differences there, Congressman. And I don't share 
the view of Mr. Cordray in this area.
    Mr. Sanz. If I could add, Congressman?
    Mr. Luetkemeyer. Yes. You deal with one section of it.
    Mr. Sanz. Definitely. I would highlight a number of 
differences. I think in the consumer market you typically see 
much smaller balance transactions. I think Mr. Adarkar was 
indicating that their average transaction is about $13,000.
    Mr. Luetkemeyer. What would the CFPB--need to protect the 
consumer from in your situations that you deal with business 
loans?
    Mr. Sanz. I couldn't tell you net of the regulations to 
which we are subject today. Certainly, the CFPB has some plans 
for working on the 1071 information gathering regs, but today 
we are subject to a significant amount of regulation that I 
would argue provides sufficient protections for small business 
owners.
    Mr. Luetkemeyer. It looks like he is trying to get in some 
place where he is really not necessarily needed to go and 
probably for sure not welcome. But I thank you for that.
    And I yield back the balance of my time. Thank you, Mr. 
Chairman.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Washington, Mr. Heck, is recognized 
for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman, and indeed thank you so 
very much for holding a hearing on this topic, which I find 
interesting and timely and important. I am genuinely 
appreciative.
    Mr. Nichols, I want to begin by using this opportunity to 
remind everyone present. I was inspired by your very evocative 
use of term sandboxing greenhouse. And I want to remind 
everybody that Mr. Posey and I had been working for quite some 
time on a no action letter legislation to expand upon what CFPB 
currently has issued for themselves.
    And in fact we have worked with Jeff Sharp from your office 
considerably. He has done a great job I think on behalf of your 
membership. I have continued to believe that expanding upon 
what they, CFPB initially proposed would be a good and 
important step forward in this area and I want to acknowledge 
that.
    And then I would like to ask you to characterize the degree 
to which you see FinTech as a material competitive threat, if 
at all?
    Mr. Nichols. I don't see it as a threat. I would see it as 
a threat if the supervisory framework, Congressman, evolved in 
such a say that they would have some of the benefits and not 
some of the responsibilities and obligations.
    For example, in the context of the Congressman's question 
about the charter. If you are going to have some of the 
benefits of a charter you should have the duties and the 
responsibilities I think of being in a charter.
    So if public policy were to evolve in an unfortunate way I 
think there could be a challenge there directly answering your 
question.
    That said, I do see more. If the public policy environment, 
Congressman, evolves the right way I see a lot of opportunity. 
I really do.
    Mr. Heck. I really appreciate that you said that because I 
actually see, and I am not sure if I did before 6 or 8 years 
ago, more opportunity for collaboration and partnership here.
    I am frankly a whole lot more concerned about things like 
the bit coin and getting outside the payment rails altogether. 
You are banking still the backbone of transaction in this 
economy.
    Ms. Levi, first of all, thanks for standing up on behalf of 
people who on occasion need help to be dealt with fairly and 
equitably. I also appreciated that you acknowledged in your 
testimony that small business lending was down pretty 
significantly last year.
    And I am wondering if you would briefly characterize 
because I would like a couple of the other people to answer as 
well why you think that is and what it is you think we should 
do about it? Because I see that, again, this whole conversation 
is about access to capital on behalf the people who serve as 
parts of the engine of this economy. And you acknowledge there 
is an issue here, so why do you think that is going on? And 
what should we do about it?
    Ms. Levi. I think that banks have a responsibility. A lot 
of the small business lending that has declined is because 
banks are not providing it. And that CRA has a role there to 
play.
    Some of it is on the demand side as well. There is no less 
demand for small business loans in some regard. There is also a 
need for about 70 percent of small businesses want loans under 
$250,000.
    Banks are not really interested in being in that line of 
business per se. They may not deem it profitable. That is also 
an issue. There are a number of issues.
    There is a role for innovation, for financial products for 
small businesses, but the important thing for us is to ensure 
that these products come with the full panoply of consumer 
protection, fair lending examination and that, for example, a 
number of the panelists said that CRA should apply but it is 
how it applies. Is the retail lending also examined?
    Mr. Heck. Thank you very much.
    I want to give Mr. Nichols just 15 seconds to--
    Mr. Nichols. There are so many interesting statistics here, 
Congressman. Just today the NFIB Small Business Optimism Index 
came out saying that 5 percent of small business owners 
reported that their borrowing needs were not met--5 percent.
    And that only 2 percent of small business owners in the 
survey sample reported that financing was their top business 
problem, so there are a lot of really interesting statistics.
    Mr. Heck. So do you--just to clarify. You think the 
perception that there isn't capital available for small 
business may be exaggerated beyond what actually exists? Is it 
fair to surmise that from what you just said?
    Mr. Nichols. No. I would say it slightly differently. It is 
having traveled extensively across the country it is different 
regionally based on business models. So I can't answer it in a 
static way.
    Mr. Heck. Yes, yes, I got it. Thank you.
    Thank you, Mr. Chairman. I appreciate your indulgence.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Kentucky, Mr. Barr, is recognized for 5 
minutes.
    Mr. Barr. Thanks, Mr. Chairman, and thanks to our 
witnesses. This FinTech revolution is really quite exciting in 
many respects from the standpoint of innovation and obviously 
filling a gap or some demand within the financial marketplace.
    But as we look and as this marketplace evolves, I think it 
is important that we strike the right balance. On the one hand 
making sure that the existing regulatory regime or the gaps in 
regulation perhaps as some may argue, do not prevent a level 
playing field on the one hand.
    On the other hand, I think it is very important that 
Congress and regulators not overreact to stifle innovation. So 
I kind of want to explore that tension a little bit with Mr. 
Sanz, Mr. Adarkar and then Mr. Nichols as well.
    So some FinTech companies are actually asking for more 
regulation in the form of a Federal charter or a Federal 
license. Mr. Sanz, I take it you are not very enthusiastic 
about that concept?
    Mr. Sanz. I wouldn't say that I am not enthusiastic. I 
would say that there are a tremendous number of details that 
would have to be explored and vetted thoroughly to understand 
exactly what the tradeoffs are for a company like mine that is 
strictly a small business balance sheet model.
    And so commercial finance companies can certainly operate 
in the face of the state patchwork. There are certain downsides 
to that. But whether or not a limited charter would be the 
answer I think the devil is in the details.
    Mr. Barr. Mr. Adarkar?
    Mr. Adarkar. So sort of echoing Mr. Sanz's comments. I 
guess what I would emphasize is that I do feel that the status 
quo has allowed a reasonable balance to develop in the sense 
that the existing regulatory framework I do feel like has 
created a reasonable balance between consumer protection on the 
one hand and allowing these innovative companies to bring their 
innovations to market and to grow and to prosper at the same 
time.
    And so I would be cautious about a new structure for that 
reason just without knowing more about where the tradeoffs 
would lie.
    Mr. Sanz. And if I can please add, Congressman? I think it 
is also really important to note that many of us on the panel 
here today do work with bank partners and that we have 
established relationships with them through which we have the 
oversight of the bank itself as well as a Federal regulator. 
And that model works.
    There have been some recent uncertainties created in that 
part of the market as a result of Madden v. Midland and other 
things, very excited to see Congressman McHenry's bill of last 
night that would address that.
    Mr. Barr. I think competition and choice and providing 
consumers with choices and alternatives is I think a hallmark 
of consumer protection.
    But I am curious to know and maybe this is a question for 
Mr. Nichols, what is it that is creating demand for non-bank 
lending that has fostered an environment in which FinTech 
companies have grown and filled in the gap?
    Is it perhaps that there are regulatory pressures on 
community banks, credit unions, other bank lenders that make it 
unprofitable for institutions to provide consumer credit, small 
dollar loans or the products that the FinTech, the online 
lending industry has provided?
    Or is the risk profile of an unsecured loan in the $10,000 
to $15,000 range simply not in the business model of a bank, 
and that is to Mr. Nichols.
    Mr. Nichols. Clearly, there are regulatory headwinds in the 
post Dodd-Frank landscape that banks of varying sizes have been 
dealing with. There is no question there. I would also observe 
that a number of the loans, and I think she cited this earlier 
in her testimony, a number of the loans are refinancing 
unsecured debt and other things.
    And to your earlier question I just wanted to jump in 
there, if I may? In the context of a FinTech charter, if you 
are going to get the benefits of a charter, the concept of this 
nature, I should say, there are duties and responsibilities 
that would come with that, presumably with pre-emption.
    And then the big question and what I think the oversight--
of what I think the OCC is thinking about hard here is, again, 
what does the oversight model look like? That is I think the 
big question. That is what I think Mr. Curry and his colleagues 
are dealing with.
    But to your question, there are a lot of headwinds facing 
banks, particularly community banks and the regulatory 
supervisory framework is certainly among those.
    Mr. Barr. I would say that as we look at maybe if there is 
a need to level the playing field I think we instead of having 
government pick winners and losers I think we need to look at 
de-regulating some of the areas where we are talking about the 
Financial Choice Act.
    These community banks are unable to actually compete. But 
in the meantime we don't want to stifle innovation where the 
FinTech industry is really providing access to capital where 
because of perhaps regulation the traditional banking model is 
not able to provide that, that credit for consumers, businesses 
and entrepreneurs.
    Thank you. I yield back.
    Chairman Neugebauer. I now yield to the gentleman from 
Pennsylvania, Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Mr. Sanz, in your testimony you note that the online 
marketplace lending industry is varied and rapidly evolving and 
that lending models vary based on the nature of the borrower 
and the mechanisms used to fund the loans.
    I would also add that many online marketplace lenders offer 
different types of financing to small businesses for more 
traditional loans to merchant cash advances. With this in mind, 
do you believe that any single disclosure requirement can 
sufficiently convey useful information in such an 
unstandardized industry?
    Mr. Sanz. Thank you, Congressman. I would tell you that in 
our experience at CAN Capital we have found that the simple 
price ratio disclosure that discloses total cost alongside the 
basic economics of the transaction, the amount of money being 
provided, the amount of money that is either the receivables 
that are being purchased or the repayment amount associated 
with the loan, provides ample information to the small business 
owner to understand completely the cost of the capital 
associated with the product that they ultimately select.
    What I would tell you, though, is that very much support 
moving to additional disclosures that not only would highlight 
the total cost of capital but that would also reflect the APR 
of these loans to absolutely create a set of uniform 
disclosures across all of these diverse products in this space, 
not only merchant cash advance but loans of various sorts, some 
of which use merchant cash advance-like payment features, 
namely where the payment is a fixed percentage of an electronic 
transaction stream or what have you.
    That will truly empower small business owners not only to 
understand the price of the product that they are looking at, 
which I think we enable today, but also to have an ability to 
do an apples-to-apples comparison of the different products in 
the space.
    Mr. Rothfus. Should there be a tailoring of disclosure 
requirements based on the unique attributes of the financial 
products that will be offered through FinTech?
    Mr. Sanz. I think there will be the need for some specific 
disclosures around particular products so that customers are 
completely clear on how APR disclosures, for example, are made.
    So for example with a merchant cash advance product, which 
is a purchase of future receivable at a discount, no maturity 
date, no interest component, no obligation to pay if the 
business fails, you will have to assume certain things in order 
to provide an APR disclosure.
    You will have to assume the period of time over which the 
purchased receivables are delivered. You will have to assume 
basically a perfect performance against future expectations of 
revenue.
    And you will also have to further assume that it is a loan 
product to begin with, which a merchant cash advance is not. 
That being said I do believe firmly that an APR disclosure will 
enable small business customer to be able to compare these 
different products even though some of them are not loans and 
don't have loan-like features.
    Mr. Rothfus. Mr. Patel, would the failure of a marketplace 
lender represent a threat to financial stability?
    Mr. Patel. Thank you for your question, Congressman. The 
answer is it depends on a number of factors. One factor is the 
size of the market and as I laid out in my written testimony 
and in my introductory remarks, to this point the size of 
online marketplace lending is a mere fraction of the total 
credit market in the United States.
    It also hinges on the originate to distribute model that is 
used in marketplace lending but at the moment given the nascent 
stage of the industry and its size, I would say that we are a 
little bit from that conversation being ripe. Feel free to ask 
a follow up if you would like.
    Mr. Rothfus. I wanted to get feedback on the extent of 
regulation that is out there right now because there are 
critics of the industry who argue that it is an unregulated 
industry and that this supposed lack of regulation opens up 
participants to significant risks.
    Specifically Mr. Adarkar, is the online marketplace lending 
unregulated?
    Mr. Adarkar. No, I don't feel that is the case, 
Congressman. As I indicated earlier, the loans themselves and 
the protections offered to customers of the consumer loans from 
marketplace lenders are subject to the exact same framework of 
protections as any traditional consumer lending program would 
be.
    As Mr. Nichols pointed out, the difference is more in terms 
of oversight at the entity level as opposed to regulation of 
the loan products themselves.
    Mr. Rothfus. Okay.
    I thank the chairman and I yield back.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from New York, Mr. Meeks, is recognized 
for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman. Mr. Chairman, a few 
days ago--it seemed like it was just a few days ago, maybe it 
was about a week ago--I had the privilege to welcome OCC 
Comptroller Curry to my district in Queens, New York. And we 
went over and toured and visited some small banks in downtown 
Jamaica.
    We made some stops at bank branches that had closed, 
highlighting the challenges that banks are facing today in 
serving underserved communities and operating in the financial 
industry that is increasingly or increasing dependent on online 
platforms.
    One of our witnesses actually, Ms. Levi of NCRC joined us 
on that tour with the controller and took part in the ensuing 
discussions. And I just first want to welcome you as a member 
of this panel.
    Mr. Chairman, for several months now, I have been calling 
for us to rethink, and I do think we need to rethink, on how 
banking in the Community Reinvestment Act, CRA, should be 
regulated because much has changed over the last 40 years since 
this law was initially enacted.
    For example, we know that banks have closed nearly 5,000 
branches since the financial crisis and that a great amount of 
financial services are now occurring through online platforms. 
FinTech offers both great opportunities to reach millions of 
Americans and small businesses that are currently underserved. 
And there are some great opportunities there also.
    But also it raises questions and concerns in terms of equal 
access and consumer protections. So I think that this is a 
timely hearing and very important for us to have this 
discussion because we want to make sure that access is even and 
we don't have greater disparities that begin to appear.
    So I guess my first question is for Ms. Levi, who says 
FinTech companies are not covered under the CRA. How can we be 
assured that the needs of low to moderate income individuals 
and communities are not left behind?
    Ms. Levi. And we can't without that kind of coverage. CRA 
is an affirmative obligation. It requires financial 
institutions to reach out and serve, provide services, loan 
products, to low and moderate income communities, underserved 
communities and borrowers.
    And banks have that affirmative obligations, but there are 
a number of players in the financial marketplace who do not. 
And without that affirmative obligation you do see gaps in the 
types of products serving that segment of the market, low and 
moderate income borrowers.
    Mr. Meeks. We have to continue to press a little bit 
because I think that when we look at the wave of the future, 
technology is just going to be more and more and we have to 
make sure that we are not leaving folks behind.
    In fact, let me see, Mr. Nichols, let me ask a question. 
Online marketplace lending is expanding access to credit into 
some segments by providing loans to certain borrowers who might 
not otherwise have received it.
    And I am constantly--I met with some folks today hearing 
that partnerships between banks and FinTech firms may offer the 
best model. You have some banks and FinTech firms and they get 
together.
    Can you please help us to understand how such partnership 
between online marketplace lenders and traditional lenders can 
help in leveraging technology to expand access to capital and 
into underserved markets?
    Mr. Nichols. There is kind of the best of both worlds here. 
You have the innovation and the technology solution that a lot 
of these new FinTech companies are bringing to the market, 
which is fantastic.
    And then you have what banks, particularly community banks 
have, which is the trust and the customer relationship. And it 
is that pairing, Congressman, that I think is so powerful and 
that I think what will help allow us to serve customers, 
clients and communities better.
    I went on and on in the written testimony, but I think it 
is that pairing that is trying to bring--
    Mr. Meeks. Are there any risks, or what risks does the bank 
fear most or is most concerned about when you don't have the 
FinTech firms or FinTech firms are operating outside of those 
kind of partnerships?
    Mr. Nichols. We talked a little bit about that and the way 
I view that is that the potential for risk is that you have an 
unlevel supervisory arrangement or a supervisory set of 
arrangements where you have banks subject to a set of duties 
and responsibilities that are perhaps different than some of 
the FinTech market entrants.
    But what the biggest delta, sir, in the area of oversight. 
And that is what I think the regulators are going to grapple 
with. So Mr. Adarkar has said a number of times eloquently and 
correctly that they are subject to the same laws.
    However, banks in the United States have--there is an 
oversight relationship with the regulators that provides 
remarkable visibility into what banks are doing in a whole host 
of areas, CRA and dozens and dozens of other areas.
    That is, I think, the future question that regulators need 
to grapple with properly and thoughtfully.
    Mr. Meeks. Thank you. I am out of time.
    Chairman Neugebauer. I now yield to the gentleman from 
Texas, Mr. Williams, for 5 minutes.
    Mr. Williams. Thank you, Mr. Chairman. And thanks to all 
the witnesses for your testimony today.
    I am a small business owner, have been for 44 years. I am 
from Texas and I am a car dealer. And I can tell you since 
January of 2008 Main Street has never hurt as much as it hurts 
today.
    I wanted to being this afternoon by going back to a couple 
of comments made by Mr. Sanz in his written testimony that I 
found to be of particular value.
    First of all, access to capital is the lifeblood of small 
businesses and a major factor of their success and failure.
    Second, business owners want to focus on running their 
businesses not searching for funds. And finally, and maybe most 
importantly, all small businesses utilize funds to generate a 
return on investment.
    Now, I have said this once, I have said it a thousand 
times, I don't know, frankly, how a new business starts or 
secures capital in this current regulatory environment. I just 
can't see how it can happen.
    But new and innovative technologies are expanding lending 
platforms. In our full committee hearing this morning we heard 
from witnesses that confirmed to us that small business lending 
is down and community banks are consolidating. The very last 
thing we need is additional regulations that stifles 
innovation.
    So particularly concerned when I saw that the Treasury 
Department suggested we should be regulating small business 
loans of under $100,000 in a similar manner as consumer loans. 
Now, from past hearing we have heard how well that has worked 
now for the consumer loan industry, haven't we?
    So Mr. Sanz, the question to you. You noted that 
implementing this recommendation would impact 90 percent of 
small business loans. Can you go into greater detail on that 
topic?
    Mr. Sanz. Yes, absolutely, and thank you for those 
comments, Congressman. We at CAN capital and within the 
industry that serves small business are greatly concerned at 
those comments from certain public officials that loans of 
$100,000 and less would be regulated in the same way as 
consumer loans.
    Especially given, to your comment, sir, that we are talking 
about 90 percent of all small business loans in our economy. 
These are the use cases that small businesses have for smaller 
balance loans, for shorter term use cases.
    And I think it is very important to note that the use of 
these small business products in the economy is what is truly 
driving the economy.
    Oftentimes the consumer products that we are talking about 
are for debt consolidation, for consumers with higher FICO 
scores that are simply adding no net new capital into the 
economy. But with the small business products we are talking 
about credit that is going to create new jobs, that is used for 
expansion, to purchase inventory, and to manage cash flows.
    And one important metric that we follow at my company is 
the growth of our customers year-over-year. We are very 
concerned to make sure that we are helping small businesses 
grow.
    In some years we have seen same store sales between the 
first time that we underwrite a customer to the last time equal 
4 percent growth. Sometimes it has been 9 percent growth.
    So I think that that is some small indication of what firms 
like CAN Capital are enabling in the economy.
    We are a small part of the economy. It is nascent, but it 
is growing. But I think it is serving a critical need for 
capital for these very important use cases that power the 
economy.
    Mr. Williams. Thank you.
    Mr. Patel, a question for you, are there competitive 
advantages or disadvantages with regards to regulatory 
structure for marketplace lenders as compared to banks?
    Mr. Patel. So in the current moment, as other panelists 
have alluded to, marketplace lenders are subject to a suite of 
laws and regulations that I have made reference to in my 
written testimony, either directly or indirectly. And I will 
elaborate on this for just a moment.
    Those that partner with originating banks are subject to 
regulations both from a contractual perspective with our bank 
partners if our bank partners are engaging in proper due 
diligence on the front end. But also via potentially the Bank 
Service Company Act as well as an equivalent provision in Title 
X of the Dodd-Frank Act.
    For those firms, marketplace lending firms that do not use 
an originating bank partner, they can be subject to many of the 
Federal laws that I made reference to in my written testimony, 
but are also subject to state licensing requirements and 
oversight from state authorities in which they are licensed to 
do business.
    So the marketplace lenders are in my view subject to a wide 
suite of existing laws and regulations, both on the consumer 
protection side, the Bank Secrecy Act side, as well as 
securities laws.
    Mr. Williams. Okay. Real quick, Mr. Sanz, can you explain 
how business borrowers and business borrowers are different?
    Mr. Sanz. Absolutely. Thank you, Congressman. One of the 
many things that you see first of all is a level of 
sophistication on the part of the small business owner.
    As I indicated before, our small business customers 
typically have been in business 13, 14 years on average. They 
do $1 million to $2 million of revenue a year. They have brick 
and mortar locations. They are managing their taxes, insurance, 
payroll, et cetera.
    These are absolutely sophisticated users of capital and, 
again, the use case for the capital is very different than a 
consumer product in the economy.
    Commercial credit is driving the economy by creating jobs 
and enabling growth and expansion, whereas oftentimes consumer 
products are introducing lately no net new capital into the 
economy, so extremely different use cases, very different 
product features and uses.
    Mr. Williams. Thank you for your testimony.
    I yield back.
    Chairman Neugebauer. The Chair new recognizes the gentleman 
from California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. Thank you. Mr. Chairman, we have never had an 
easier time for blue chip borrowers to borrow money. They are 
getting it at rates, there are some governments that are 
borrowing money at negative interest rates.
    But I think all the companies that will start in garages 
this century will be more important to us at the end of the 
century than the Fortune 100 companies today. If I could buy 
stock in all the garages I would sell the stock in the whole 
Dow.
    So we would all dream of a world in which every 
entrepreneur can borrow all the capital they need at prime. 
That world can't exist because 1 out of 20 of those 
entrepreneurs is going to go bankrupt.
    And so we need to have a sector of the economy that can 
lend at prime plus eight. And--excuse me, speaking of 
technology.
    Now, we have the FDIC. Those subject to the FDIC, the 
depository institutions who promise this guarantee are going to 
face substantially more regulation than others. So the question 
is who is going to make these prime plus eight loans? Is it 
going to be the depository institutions?
    I have had the regulators here and I begged them and 
implored them to allow banks to make prime plus eight loans 
with some small portion of their capital. And they smile and 
nod and then they don't do anything.
    So I will ask Mr. Nichols, do your members want to make 
prime plus eight loans that--and will the regulators ever allow 
you to do so?
    Mr. Nichols. The members that I represent are--
    Mr. Sherman. And when I say a prime plus eight loan, I mean 
a loan where that is the fair return given the risk the lender 
is taking.
    Mr. Nichols. I understand, and obviously I can't speak for 
all the members. They are not a monolithic group, but 
Congressman, as a general observation, allowing market rates to 
be set I think is a general--in our nation it is one of the 
things that makes our country great.
    Mr. Sherman. Do any of your members have a major part of 
their business that says we are lending money to companies that 
have a 1 in 20 chance of going bankrupt, but we are going to 
make it up with higher interest rates?
    Do you know of a major or do you know of a bank that has a 
department that does that?
    Mr. Nichols. Off the top of my head, Congressman, no.
    Mr. Sherman. Okay. And you know the industry pretty well. 
So there has to be somebody out there loaning money to the 
companies that have a 1 in 20 chance of being bankrupt, going 
bankrupt, because those are the only companies that have a 1 in 
200 chance of being the next Amazon. And there is nobody in 
banking doing that and I don't know whether that is your 
business model or your regulators, probably both.
    So I will ask Mr. Sanz, do your members make loans at prime 
plus eight where that--and do you make loans to companies that 
have a 1 in 20 chance of going bankrupt?
    Mr. Sanz. Yes and yes, Congressman. The cost of capital to 
which we provide access is risk-based. We got our start in 1998 
by designing models that would provide access to capital for 
small businesses that have less than perfect FICO scores.
    Mr. Sherman. Yes.
    Mr. Sanz. And we were able to build models based largely on 
firmographic data that helped us assess the health of the 
business, so--
    Mr. Sherman. And it is not just the FICO score. If the 
pizza tastes like cardboard, the business is going bankrupt.
    Mr. Sanz. Absolutely, Congressman. I would tell you that 
what is important to us some of the elements that are very 
important to us as we look at the financial strength of a small 
business, we are looking to underwrite is their revenue, their 
revenue trends, their time in business. Firmographic data--
    Mr. Sherman. I would also point out that we also have the 
venture capitalists, the initial public offerings, a host of 
other means and Reg. D and we have talked Jobs Act, et cetera, 
a host of other ways of providing capital that expects a much 
higher rate of return than prime or prime plus two and that is 
willing to take substantially greater risks.
    I just hope that when the American Bankers Association 
comes back here in a few years they say, Sherman, you prodded 
those regulators. You prodded us and five and 10 percent of our 
members are spending--they are having 10 percent of their 
portfolios being lent out to businesses that have a 1 in 20 
chance of going bankrupt and we are charging prime plus eight. 
But you are not there and somebody needs to be.
    Mr. Nichols. One thing I would say, Congressman, what makes 
the community banking model in this country so special is that 
with great respect to the current evolution of FinTech, a 
keystroke or an algorithm is never going to replace one person 
looking at another in the eye and saying let us talk about your 
business plan. Let us talk about your assumptions. Let us talk 
about your modeling.
    Mr. Sherman. Yes. And when your regulators--
    Mr. Nichols. That personal touch--
    Mr. Sherman. --let you do that, you should do that.
    Mr. Nichols. I understand. I am saying but that personal 
touch, particularly on the part of community banks is not 
likely to be replaced any time soon in my opinion.
    Mr. Sherman. I will just say from the standpoint of the 
business, we like to tell you that we love our bankers because 
of their personality and the confidence that they give and the 
personal relationship. We really just want the money and while 
it would be good to get a loan based on that personal 
relationship, if we don't get it we will deal with Mr. Sanz's 
computer and we will be just fine.
    I will yield back.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from New Hampshire, Mr. Guinta, is 
recognized for 5 minutes.
    Mr. Guinta. Thank you very much, Mr. Chairman. I appreciate 
you being here today and dealing with our vote schedule in the 
middle of our hearing.
    I am very interested in learning a lot more about the 
online marketplace. I am interested in seeing the new 
innovative and technology platforms that grow and give more 
opportunities and options to individuals.
    I represent New Hampshire. Small business is our backbone. 
Ninety percent of our economy is driven by small business. We 
have almost 300,000 people employed by small business owners.
    And while I think our community banks in New Hampshire do a 
great job of providing access to capital to individuals, there 
are those who still have challenges with access to capital and 
particularly in part, from what I hear and what I am told by my 
community bankers, are the regulatory challenges of Dodd-Frank.
    And so it is a concern to me when I then talk to a customer 
of a bank who says because of the restrictions I cannot grow, 
expand or start my business. So this space is interesting to me 
because I think it provides more alternatives and options.
    But first I would like to start with Mr. Sanz. And I know 
that you have covered this a little bit before, but I am 
hopeful that my New Hampshire constituents will hear it and 
appreciate it.
    If you could just quickly talk about the online small 
business marketplace and how it actually would provide more 
access to capital to those individuals that may not otherwise 
benefit from the existing bank that they have?
    Mr. Sanz. Absolutely. Thank you for the question, 
Congressman. I would tell you that the way in which firms like 
CAN Capital have expanded access to capital for underserved 
small businesses, is through a focus on technology and data-
driven algorithms.
    I think with all respect to bankers and the banking 
community, that we value. We have a banking partner. It has 
been difficult for banks to provide access to loans of 250 and 
less, maybe even a million and less to small business because 
of very high costs of acquisitions, search costs, underwriting 
costs of various sorts.
    Companies like CAN Capital we embrace the technology-
enabled model that significantly reduces those costs by 
automating many features of the underwriting process, by 
building data-driven models that take certain inputs and 
provide some significant insight into the current and future 
financial health of the small business and their eligibility 
for loans and their ability to pay.
    So by relying on technology, building data-driven models 
and, candidly, over 18 years, amassing data about those 
transactions, those daily interactions with customers, 
developing very deep insights into hundreds of different 
industries that enable us to identify like customers almost 
instantaneously and predict their future financial health and 
underwrite them on that basis.
    Mr. Guinta. So given the fact that we have had 800,000 
fewer small businesses started during the last several years 
nationally, which is where I think we can point to a problem 
with economic growth and a problem with wage inequality or the 
term that I hear, wage inequality.
    There is less job opportunity and availability. When you 
have 800,000 small businesses that have not been created that 
should have been. So that is why to me I think that there is an 
opportunity here for greater access.
    One thing I wanted to ask Mr. Adarkar, I am also concerned 
about either the unbanked or the under banked and how this can 
provide greater access to that space and that community?
    Mr. Adarkar. Thank you, Congressman. We believe our 
platform expands access to credit by reducing the cost of 
credit.
    Mr. Guinta. Yes.
    Mr. Adarkar. Now, as a result of the combination of 
innovative technology, as well as operational efficiencies in 
the sort of focused expertise we bring to our particular 
product, we believe we are able to price our borrowers at a 
rate that more accurately reflects the cost of their credit. 
And in that way, we believe that we are able to expand access.
    Mr. Guinta. Okay. I appreciate it. Thank you all for being 
here today. Thank you, Mr. Chairman, and I yield back.
    Chairman Neugebauer. The Chair now recognizes Mr. Pittenger 
for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And I thank each of you all for your endurance and patience 
today. I started my first business in the 1980s and I had to 
borrow $150,000 from a banker, and he knew me and I knew him. 
And I was very fortunate to get the loan.
    He was paid back. We had a good mousetrap. We had a good 
idea. And this some years later I was asked to join a community 
bank board, and this was during the 1990s. And from the time we 
chartered the bank until the time we sold the bank to a mid-
sized banking institution.
    And, we knew who to loan money to. I was kind of the P.R. 
guy and we had a lot of golf tournaments and cocktail parties 
and a good relationship. And they knew us and we really knew 
them and when in our loan meetings there was a box we checked 
on character. And we knew those folks.
    Now, I don't see a box on character today to check. And 
that entrepreneur has been the lifeblood of our economy. It is 
what has made America so unique, that people come to America 
for opportunity and to take their idea and their dream, their 
vision, their work ethic, the risk and to build something.
    And now I believe our entire economy is really threatened 
for the long term because an entrepreneur doesn't have a place 
to go. And I think that is the greatest threat, challenge we 
have in the future.
    So as one who believes in markets and open markets and free 
markets and competitive markets, I am grateful for choices that 
we have in the marketplace that allow someone to identify their 
cost of capital and prime plus eight or whatever that is and 
they fit that in their model. And if it works it works. And 
they go off and run.
    So I applaud the work that is being done and the effort and 
the tenacity and the genius of folks who get out there to 
create something that is really needed in our economy today.
    With that in mind, Mr. Sanz, I would just like to get some 
understanding. There is a lot of conversation that your 
business is not regulated. Yet I have read in your testimony in 
the appendix a broad matrix of applicable laws and regulations 
that you have to respond to and comply with.
    Could you outline some of these existing laws and that you 
have to comply with and then give us a framework of what you 
have to be accountable to?
    Mr. Sanz. Absolutely. Thank you for the question, 
Congressman. So today in our business we are subject to 
multiple layers of Federal and State regulation. We act both as 
a direct lender.
    We also have a relationship with a partner bank and as a 
result we are subject to rules and regulations, for example, 
regarding fair lending at the Federal level, ECOA and Reg. B on 
the commercial credit side. We are subject to both Federal and 
state laws regarding unfair and deceptive acts and practices, 
the various other laws that we set forth in the appendix.
    And importantly we are subject to an additional layer of 
regulation through the relationship that we have with our bank 
partner. That results in not only being subject to the 
oversight of the bank's own Federal regulators, the FDIC, but 
also to the bank itself, which entails requiring a robust 
compliance management system, regular third-party audits by 
reputable audit firms, as well as approximately quarterly 
audits by the bank itself for compliance with the credit 
policies, all compliance policies and procedures under AML, 
BSA, FCRA, et cetera.
    Mr. Pittenger. Thank you. Give me a better understanding of 
how business borrowers and consumer borrowers are different?
    Mr. Sanz. I am sorry, sir. I didn't hear you.
    Mr. Pittenger. Business borrowers and consumer borrowers--
    Mr. Sanz. Thank you, sir.
    Mr. Pittenger. --the distinction between the two?
    Mr. Sanz. Thank you, sir, I appreciate it. What we see in 
our business absolutely is a number of things. I have said 
before, and I hope you don't mind my repeating, one major 
difference is the use case for the capital.
    What we see in the consumer industry is consolidation of 
debt at somewhat lower prices. What we see on the commercial 
side of the ledger is that capital is being used to drive the 
economy, to the creation of new jobs, expansion, remodeling, 
managing cash flow.
    We also see in our customer base a very high level of 
sophistication. Business owners, like many Members of Congress 
who have been here today, namely people who have been running 
businesses for decades, who are managing revenue in the 
millions of dollars, who are accessing capital for 50,000, 
100,000, 150,000 as you indicated, Congressman, to drive their 
businesses forward, so very different uses and significantly 
different profiles in terms of the user.
    Mr. Pittenger. Thank you.
    I would yield back. My time is up.
    Chairman Neugebauer. I thank the gentleman.
    I would ask unanimous consent that one Democrat and one 
Republican have one mini-round here.
    And with that I will yield 5 minutes to the gentleman from 
Georgia for an additional question.
    Mr. Scott. Okay. Thank you. Thank you, Mr. Chairman.
    I want to make sure I get some clarity on where everybody 
stands regarding this May 2016 letter that the Treasury 
Department has put forward. And I started on that before the 
last session.
    And the paper made the conclusion that the micro business 
loans, any loan to a small business under $100,000 shares 
similar characteristics as consumer loans and should be subject 
to the same consumer protection.
    So I think we need a clarity answer from each of you all. 
Do you all--who agrees with this conclusion? Now, the 
marketplace lenders, if I am correct, you are currently 
regulated under the Truth in Lending Act.
    Is that correct? Anti-money laundering and the Fair Credit 
Reporting Act, but you are not under the same level of scrutiny 
as the traditional banks. Is that where we are? Am I correct 
there?
    Mr. Adarkar. Congressman, sorry, I think I would 
distinguish between marketplace lenders engaged in consumer 
lending versus those engaged in small business lending. And my 
point earlier is that we are--for marketplace lenders engaged 
in consumer lending the regulatory framework is the same as it 
is for traditional bank lending programs.
    Ms. Levi. I would like to add--
    Mr. Scott. Okay.
    Ms. Levi. --the bottom line, whether it is $25,000, 
$100,000, whatever the size of the loan the bottom line is that 
marketplace lenders should be subject to things like the Equal 
Credit Opportunity Act, the Fair Credit Reporting Act. Not only 
subject to, but examined under.
    Mr. Scott. Yes.
    Ms. Levi. This lending has to be supervised and examined in 
the same way that depositories are examined. And if they do not 
comply with fair lending laws and regulations, those products 
really should not be in the marketplace.
    Mr. Scott. The other part I want to get at is that as we 
are bouncing back from the recession, perhaps the most targeted 
group that is struggling the most to get access to this credit 
are African Americans. Am I right? Does anybody disagree with 
that?
    Ms. Levi. It certainly is what you see in the HMDA data.
    Mr. Scott. Yes.
    Ms. Levi. There has been a tremendous drop off on certainly 
where we have data you do see that.
    Mr. Scott. Right. And so the issue becomes can we get any 
indication from you all as to which way we should go here in 
Congress to get a more even playing field to try to figure out 
why there is this inability, particularly with the African 
American community to get access, and particularly because that 
is a community that desperately needs this wealth building 
process in this community to start a new business, which many 
want.
    Ms. Levi. Let me--
    Mr. Scott. To hire a new employee to get themselves lifted 
up.
    Ms. Levi. Let me say this. The fact that you do not have 
affirmative obligations like CRA for non-bank lenders--
    Mr. Scott. Yes. Explain when you say affirmative action.
    Ms. Levi. In other words, depository institutions under CRA 
they have to be affirmatively reaching out--
    Mr. Scott. Yes.
    Ms. Levi. --outreach providing products and services to low 
and moderate income borrowers in the community. It is an 
affirmative, an obligation that requires that they take a step 
forwards. Non-bank institutions by and large do not have those 
kind of affirmative obligations on them.
    So if you don't have that you are going to see some gaps. 
And let me just say this. Also not having fair lending reviews 
is a problem. Let me give you an example from the bank context.
    We have seen 15 instances in the last few years of large 
redlining settlements--
    Mr. Scott. Yes.
    Ms. Levi. --consent orders as a result of direct 
supervision by CFPB, HUD and state attorney generals. You have 
to be reviewing the lending to ensure that it is fair and 
equitable to low-and moderate-income communities, minorities, 
rural communities, and the like.
    Mr. Scott. Okay.
    I see my time is up, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    My last question is when marketplace lending started off 
kind peer-to-peer, then we started having some institutional 
investors come in. Then we have seen the securitization.
    And so I guess the first question is is some people kind of 
have said that the current economic situation and policy of the 
Fed has a whole bunch of people out there looking for a lot of 
yield.
    This was a perfect storm where the marketplace lenders came 
in and were able to provide an opportunity for lenders to get--
or for investors to get a higher return and for borrowers to 
get a lower interest rate.
    Going forward how do you sustain your business model where 
the economic conditions, one, change and secondly interest rate 
environment changes? Does anybody want to pick that one up?
    Mr. Sanz. Thank you, Congressman. I would tell you that 
with respect to CAN Capital we don't sell any of the assets 
that we originate. We are a balance sheet model. We retain all 
the risk of all of the assets that we either originate or that 
we buy from a bank partner. And we rely on lines of credit from 
lenders.
    We don't have future flow arrangements. We are not 
originating to sell. And so I don't know that with respect to 
my business model that I could directly address your question 
because we are not a marketplace lender in that sense.
    Chairman Neugebauer. Okay.
    Mr. Adarkar? Go ahead.
    Mr. Adarkar. Sure. Thank you, Mr. Chairman. What I would 
say on the investing side of our business is a significant 
portion of the investors on our platform, whether they are 
retail or institutional, are value-driven. And they are 
attracted by the risk-adjusted returns of our product.
    So in that sense I do not believe that a change in the 
interest rate environment would change the value they saw in 
our asset relative to the risk reward tradeoff in comparable 
asset classes.
    On the borrowers' side of the business, our most typical 
borrower is someone who is refinancing higher interest credit 
card debt. So for those folks we would expect that rates, the 
competing rates they were seeing in that sector were sort of 
moving in line with the general movement in interest rates 
overall.
    So we do not expect that a change in the interest rate 
environment would hurt that side of our business either.
    Mr. Nichols. Mr. Chairman, I would say obviously banks are 
looking for some interest rate normalcy. That is just an aside. 
But one of the advantages here of being a bank is you have the 
stable funding aspect and that banks will be there for you in a 
credit or an economic downturn, which is certainly an advantage 
of the U.S. banking system in the context of your question.
    Chairman Neugebauer. And so then what we have heard a lot 
of discussion today about is looking at what kind of regulatory 
environment do--marketplace lenders need to operate in, which 
what we have seen happen to our friends in the banking industry 
is we saw more regulation put on them that changed their 
business model.
    So if the regulatory environment gets more aggressive in 
the marketplace lending what is the likely outcome of change? 
Will you have to change your business model and will that 
change your funding model as well?
    Mr. Adarkar?
    Mr. Adarkar. Sure. What I would say in that respect is with 
all due respect to Mr. Nichols, I believe that what has driven 
the success in our space is not necessarily a difference in 
allocation of regulatory resources so much as it is our ability 
to develop innovative technology, our ability to create 
operating efficiencies and our ability to focus and develop 
product expertise in a very specific area with a very 
particular type of product to a degree that would be difficult 
for most traditional banks.
    And so I do feel like there are certain inherent 
significant competitive advantages that explain the great bulk 
of our success that would still be present in a different 
regulatory environment.
    Of course any new regulatory scheme we would like to see it 
apply in a way that was balanced and fair across the spectrum 
of lenders and in a way that didn't overly stifle innovation. 
But we don't believe that regulatory change would necessarily 
go at the heart of what we see to be our competitive advantage.
    Chairman Neugebauer. Mr. Patel, Madden V. Midland Funding, 
how is that ruling going to impact marketplace lenders?
    Mr. Patel. So I would say Madden has been a source of 
uncertainty in this industry. Frankly, the Madden case, the 
resolution of it is still uncertain. There are a couple of 
issues to be decided on remand by lower courts.
    Chairman Neugebauer. Can you talk a little bit more into 
your microphone there for me?
    Mr. Patel. Can you hear me now, sir?
    Chairman Neugebauer. Yes.
    Mr. Patel. Great. Sorry. Madden has been a source of 
uncertainty. The resolution of the case is yet uncertain. There 
are a couple of issues that need to be resolved by the lower 
courts, specifically the application of valid when made and 
choice of law issues.
    But more to the macro point on Madden, Madden creates 
uncertainty as to whether or not interest rates charged on 
certain loans are valid and thus whether those loans comply 
with a series of legal requirements, including state usury 
laws, potentially even Federal RICO laws.
    So on the whole this is one reason I would expect that 
certain FinTech companies are advocating on behalf of a 
national charter of some sort whether a bank charter or 
something more limited, because they want to quell some of the 
uncertainty created by the Madden decision, which frankly 
depending on your read, is distinct from court of appeals cases 
in other areas of the country.
    Chairman Neugebauer. I want to thank the--
    Mr. Scott. I want to do that.
    Chairman Neugebauer. --oh, I am sorry.
    Mr. Scott. Yes. If I could, Mr. Chairman, I would like to 
introduce for the record this letter of July 11th from the 
National Association of Federal Credit Unions (NAFCU).
    Chairman Neugebauer. Without objection, it is so ordered. I 
would like to thank our witnesses for your testimony today. And 
without objection, I would like to submit the statement of the 
Financial Services Roundtable. We had the credit union and the 
report from the Financial Innovation Now.
    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.
    Again, I thank our witnesses for your patience, and with 
that, the hearing is adjourned.
    [Whereupon, at 5:40 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             July 12, 2016
                             
                             
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