Federal Lawmakers Consider Fintech

Financial Services Law

Federal lawmakers discussed financial technology at a recent hearing, with topics ranging from regulatory sandboxes to marketplace lending.

What happened

In an effort to learn more about fintech, the Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee held a hearing titled “Examining Opportunities and Challenges in the Financial Technology Marketplace.”

Lawmakers examined the current regulatory landscape and considered the need to amend or modernize it to allow financial services entities to use fintech to deliver new products and services to consumers.

In his opening statement, Subcommittee Chair Rep. Brett Luetkemeyer (R-Mo.) noted that loan originations that passed through marketplace lenders accounted for almost $40 billion over the past ten years, adding that online lenders are sometimes able to offer better lending terms to borrowers. Rep. Luetkemeyer also noted an increase in mobile banking and lending.

Testimony on some of the obstacles facing the fintech industry included a discussion of Madden v. Midland Funding, a 2016 decision from the U.S. Court of Appeals for the Second Circuit where the court refused to find that the National Bank Act preempted state law usury claims against the assignee of a national bank.

The decision presents problems for fintechs that seek to partner with banks because “market participants will no longer be willing to enter into these types of transactions, thereby depriving consumers, banks, and the economy of the many benefits of bank partnerships with fintech providers while also hampering the liquidity necessary to support a robust lending market,” explained Andrew Smith, a Washington, D.C., attorney in private practice.

Smith encouraged legislators to pass a bill that would effect a Madden fix,” which would “resolve any uncertainty about a bank’s ability to use third-party service providers by confirming the principle that when a bank enters into a loan agreement, it is the bank that has made the loan. A bank thus may export its location-state’s interest rate on any loan to which the bank is a party,” Smith said. The measure would “provide much-needed guidance to courts and help preserve the benefits of bank-fintech partnerships for consumers and the economy in general,” he added.

Also advocating for change, Nathaniel Hoopes, executive director at the Marketplace Lending Association, threw his support behind the Office of the Comptroller of the Currency’s proposal to grant special purpose national bank charters while highlighting the ability of fintechs to serve the “broad American middle class.”

“Marketplace lending platforms are delivering new, beneficial products to consumers, in locations that many banks no longer can serve; and increasing needed competition in key markets,” Hoopes testified. “[Fintech] is also bringing greater democracy to investment in credit—providing investment opportunities once only available to the wealthiest or largest institutional investors in society.”

Multiple witnesses discussed the possibility of “regulatory sandboxes” that could allow fintech companies to explore new ideas without fear of legal action. Brian Knight, director of the Program on Financial Regulation and senior research fellow at the Mercatus Center at George Mason University, told lawmakers companies should be able to avoid liability as long it will make “customers whole if the firm causes harm owing to a violation of the law.”

“Ensuring that regulations do not burden fintech lenders more heavily than their bank competitors are burdened and that the validity of their loans is not in doubt are important steps toward helping realize the promises of innovation,” Knight added. Georgetown University Law Center Professor Adam J. Levitin agreed that sandboxes could provide a benefit to fintech companies but expressed some concern about potential fragmentation of the regulatory system.

Brian Peters, executive director at Financial Innovation Now, urged lawmakers to update the regulatory system and “try new approaches” that enhance economic participation and improve access. “The benefits [of fintech] could be enhanced through a modernized financial regulatory structure that keeps pace with innovation and meets the needs of today’s consumers and commerce,” he said. “The current structure is needlessly fragmented and inconsistent among federal regulators, and varies widely across state jurisdictions.”

To view the hearing, click here.

Why it matters

After the hearing, the lawmakers provided their takeaways from the testimony, such as the fact that modern developments in digital technology are changing the way in which many financial services are offered and delivered. “Congress and the federal prudential regulators must continue to examine this innovative marketplace to understand the opportunities and challenges it presents, and to ensure that financial services entities are allowed to use fintech to deliver new products and services while also protecting consumers,” the lawmakers said in a press release.