Membersof the House Financial Services Committee expressed concern about an array of issuesregarding the burgeoning digital lending space, from data security to consumer protection.
Investorsand analysts are worried about impending regulation for the new industry, and anumber of lawmakers during a hearing spoke up about high interest rates chargedby certain digital lenders. Small-business loans, a focus for much of the new digitallending industry, are typically exempt from consumer protections such as usury limitson interest rates.
Rep.Lacy Clay, D-Mo., pressed a panelist from CAN Capital on why his company declinedto join the Small Business Borrowers' Bill of Rights, which promises to providetransparent information about small-business loans. Privately held CAN Capital isone of the largest U.S. digital lenders focused on small-business lending.
ParrisSanz, chief legal officer for CAN Capital, said the company is committed to transparentinformation for its borrowers. He said the company is worried about uniform adherenceacross the industry to certain provisions of the bill of rights. He also said annualpercentage rate is not necessarily the best measure of a small-business loan, favoringinstead total cost of capital.
Sanzparried pointed questions from both sides of the political aisle. Rep. Steve Pearce,R-N.M., followed Clay's line of questioning with inquiries into CAN Capital's marketshare. Pearce asked whether CAN Capital is taking share from other lenders or reachingnew, underserved customers, to which Sanz responded that there is a mixture of both.Pearce also expressed general concern about data security in the industry.
Digitallenders did appear to have supporters at the hearing. Rep. David Scott, D-Ga., saidthe Treasury Department's white paper from May suggested micro-business loans —those less than $100,000 — carried many of the same characteristics as consumerloans and should be treated similarly.
"Itgot me to thinking: What is the real difference between these loans? If we holdmicro business loans to the same standards as consumer loans, what impact is thatgoing to have on businesses gaining access to capital?" Scott said.
Throughoutthe hearing, CAN Capital's Sanz, as well as Sachin Adarkar, general counsel forProsper Marketplace Inc.,pressed lawmakers to not pass additional laws governing their industry. Both digitallending representatives argued that any additional regulation would stifle accessto credit.
Sanzand Adarkar explained that digital lenders are subject to the same consumer protectionlaws as community banks. At the other end of the spectrum, Gerron Levi, directorof policy and government affairs for the National Community Reinvestment Coalition,underscored the differences and risks in how digital lending activity is supervised.
"Marketplacelenders do not have [banks'] level of rigor in terms of examination protocol,"Levi said. "They may be subject to the law, but whether their actual retaillending falls under supervisory examination protocol of any of the financial regulatorsor the CFPB really is the pinpoint question."