31 Hoosier Banker January 2016 FEATURE Every industry and marketplace is facing some measure of paradigm-shaking digital disruption these days. Among the newest financial industry disruptors are online marketplace lenders, the deceptively benign name for potentially predatory nonbank lending platforms proliferating on the Internet. Many of these technologybased lenders are digitally slickedup credit providers of least and last resort. None offer a glimmer of relationship banking whatsoever. For several reasons, the Independent Community Bankers of America 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 marketplace 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 consumers, 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 oversight or constraints. Some solely serve consumers. Others cater exclusively to small businesses. Some specialize in payday, purchasefinance, education or merchant cashadvance financing. Virtually all are driven by Wall Street and hedge fund investors impatiently seeking the biggest, most immediate investment returns. A borrower’s ability to understand or repay these loans is the least motivation for these companies. Moreover, the inherent risks online marketplace lenders carry have an ominously familiar pattern. Higher defaults are hardwired into their assumptions. Their computergenerated lending typically involves little to no underwriting. No collateral is involved. The creatively disparate 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 aggressively offloading their loans into securitized investment vehicles on Wall Street. Yet despite their troubling characteristics, these lenders are proliferating like digital dandelions. 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 necessary to protect consumers and our overall economy. Moreover, as an alternative to these lenders, we are also asking Treasury officials to work with ICBA to ease the considerable regulatory burdens of community banks that are discouraging their truly productive, responsible lending. Technology and innovation should bring progress and solve problems, not spread new dangers 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. t A Digital Danger About the Author Camden R. Fine is president and chief executive officer of the Independent Community Bankers of America. He came to ICBA from Midwest Independent Bank, Jefferson City, Missouri, where he chartered and organized the bankers’ bank and served as president and CEO for nearly 20 years. A long-time member of ICBA prior to becoming the association’s president and CEO, Fine served on several association standing committees and on the ICBA board of directors. The author can be reached at: cam.fine@icba.org.
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