As our team prepares to attend LendIt 2017, the World’s Biggest Show in Lending and Fintech in New York next month, we find ourselves thinking about the current state of federal regulation in marketplace lending.
In industry news today, there’s a lot of buzz regarding updates to the special purpose fintech charter announced by the Office of Comptroller of the Currency (OCC) late 2016, as well as President Trump’s rollback of the Dodd-Frank Act, which would account for major regulation changes in 2017.
This month, we take a look at these trends and invite discussion about the implications these might have on marketplace lending moving forward.
Regulation Isn’t Something New
It might be argued that the relatively low level of federal intervention in fintech has both helped and hurt the MPL industry. In some ways, it has encouraged creativity and innovation in the alternative lending space, greatly contributing to the sector’s rapid growth. On the other hand, lack of regulation has also produced problems of transparency and ethics that have threatened to upend that very growth.
Yet while some have considered marketplace lending the “Wild West” of the industry, the sector hasn’t been exempt from external regulation. Since 2015, federal agencies such as the Treasury Department, the FDIC, the OCC, and the U.S. Securities and Exchange Commission have been making recommendations for greater regulation in marketplace lending. Early last year, the Consumer Financial Protection Bureau (CFPB) also started allowing consumer complaints regarding marketplace lenders.
And oversight of the industry isn’t limited externally to government groups either. Across the board, there is a recognized need for regulation in marketplace lending.
Back in 2015, David Klein, the CEO and a co-founder of CommonBond, published an article on American Banker outlining ways that the government can spurn creativity in marketplace lending. Additionally, the Small Business Borrowers’ Bill of Rights, as well as the Marketplace Lending Association (which includes Lending Club, Prosper and Funding Circle) were established within the industry as part of an effort to “self-regulate.”
Enter the OCC Fintech Charter
In December last year, the OCC detailed their plans for a new fintech charter in a white paper entitled Exploring Special Purpose National Bank Charters for Fintech Companies.
The announcement was met with optimism from the Executive Director of the Marketplace Lending Association, Nat Hoopes. “The OCC has clearly recognized the significant positive impact FinTech companies are having on our economy,” he tells Peter Renton of Lend Academy. “Whether through a new national charter, bank partnership, or state law portability, clear, consistent standards are essential, and we look forward to working with the OCC and other federal and state regulators on these important issues.”
Timothy Li, founder and CEO of Kuber Financial, echoed the sentiment as well. “The concept is what the Fintech sector needs to catapult these innovations into 2017 and beyond,” he writes in a recent article on Crowdfund Insider. “The possibilities seemed immense.”
Yet Li argues that the proposed charter could potentially damage the advantage fintech companies currently have with banks, as the reason the banks support fintech companies is because “they are not bound by outdated and overzealous regulation.”
“One of the central arguments of the OCC’s proposal is that the charter will put Fintech and Banks on the same playing field,” writes Li. “The OCC provided us an illusion that somehow Fintech companies are at a disadvantage and only with a Federally issued bank charter would we finally become competitive to the banks.”
And Li isn’t the only one opposed to OCC’s latest proposal. Crowdfund Insider recently posted over one hundred comments and feedback on the OCC charter — from the New York State Department (who responded to the charter with the title “Turf War!”) to Moody’s response, which outlines the potential benefits of a fintech charter.
Rollback of the Dodd-Frank Act
In related news, President Trump is purportedly looking to rollback the Dodd-Frank Act, which was created in response to the 2008 financial crisis. According to the recent Bloomberg article, the Trump administration doesn’t believe that Dodd-Frank “addressed real issues in the financial system.”
“While [the marketplace lending industry] has thrived due to reduced oversight from lending authorities, a wave of deregulation in Washington could be a curse rather than a blessing as it can further erode the legitimacy fintech pioneers have started to garner since the great recession,” Nav Athwal writes in a recent Forbes article.
Despite its shortcomings, Athwal believes that the Dodd-Frank Act could actually be good for the industry. In addition to providing legitimacy, Athwal says, regulation might also enforce accountability, helping to prevent “abusive practices and events that lead to the economic crisis and subsequent recession.”
There is no doubt that many would welcome a rollback of Dodd-Frank, should the administration decide upon it. But Athwal cautions that it should be executed “in a way that still protects consumers from the bad faith acts of banking leaders.” Though at this point, it is unclear whether the rollback will meet those conditions of consumer protection.
Protecting Both Consumers and Innovators
As Patrick Harker, Philadelphia Federal Reserve Bank President, stated recently at the Payment Systems in the Internet Age conference: “Regulation is not just a question of protecting consumers; it’s a question of protecting the innovators as well.”
When it comes to marketplace lending, leading with honest, equitable, and transparent practices is important. Supporting small business, entrepreneurship, and innovation in the space is equally important as well.
What are your thoughts on current regulations in the marketplace lending space? We encourage your comments below. We also look forward to discussing this (and other lending topics) in greater detail with attendees at LendIt 2017.