Pub. 4 2016 Issue 2

16 The Community Banker www.mibonline.org Fine Points A DIGITAL DANGER By Camden Fine, President and CEO of ICBA Related Reading Read last month’s Fine Points column “Wild, Wild Tech” about FinTech firms, at www.independentbanker.org . E very industry and market- place is facing some mea- sure of paradigm-shaking digital disruption these days. Among the newest financial industry disruptors are on- line marketplace lenders, the deceptively benign name for potentially predatory nonbank lending platforms proliferating on the Internet. Many of these technology-based lenders are digitally slicked-up credit providers of least and last resort. None offer a glimmer of rela- tionship banking whatsoever. For several reasons, ICBA is concerned about the risks these emerging credit providers could be spreading. Their risky, virtually unregulated and rapidly expanding lending is troubling—for borrowers, for our economy, for our financial system. Scions of Silicon Valley and Wall Street, online market- place lenders are a creation of today’s teeming petri dish of so-called FinTech technology innovation. These nonbank firms rely on powerful Big Data software engines to mine the Internet for information that feed black-box algorithms to justify their high-cost loans and nearly instantaneous credit approvals. Speed is their novelty and allure. For many consum- ers, the credit they offer is too easily obtained—and too easily misunderstood. Often targeting the most unsophisticated and desperate borrowers, online marketplace lenders offer caveat emptor credit that is unbridled by any mainstream regulatory over- sight or constraints. Some solely serve consumers. Others cater exclusively to small business- es. Some specialize in payday, purchase-finance, education or merchant cash-advance financing. Virtually all are driven by Wall Street and hedge fund investors impatiently seeking the biggest, most immediate in- vestment returns. A borrower’s ability to understand or repay these loans is the least motiva- tion for these companies. Moreover, the inherent risks online marketplace lenders carry have an ominously familiar pattern. Higher defaults are hardwired into their assump- tions. Their computer-generated lending typically involves little to no underwriting. No collateral is involved. The creatively dispa- rate data these companies rely on have never before supported widespread credit decisions. Their obscure lending practices are untested by any reasonable measure of time or economic stress. And mirroring activities during the financial crisis, some marketplace lenders are aggres- sively offloading their loans into securitized investment vehicles on Wall Street. Yet despite their troubling characteristics, these lenders are proliferating like digital dan- delions. Because of all of their real dangers, ICBA is sounding a warning bell, and we may ask community bankers to help us in the future. In comment letters and industry forums, we have encouraged Treasury and other public officials to study the products, businesses practices and risks of these lenders. We are asking them to consider whatever regulations are neces- sary to protect consumers and our overall economy. Moreover, as an alternative to these lend- ers, we are also asking Treasury officials to work with ICBA to ease the considerable regulato- ry burdens of community banks that are discouraging their truly productive, responsible lending. Technology and innovation should bring progress and solve problems, not spread new dan- gers or harm. We still feel the recent pain brought by activities trumpeted as financial progress that soon became financial scourges. For our still-recovering citizens, economy and country, ICBA emphatically says never again.