Policy & Issues

Financial technology companies – and marketplace lending companies in particular – face the limitations of an overlapping state and federal regulatory framework. While the Conference of State Banking Supervisors and a consortium of various states have begun a dialogue to assess and propose solutions to ease that burden, a more uniform nationwide regulatory structure is crucial in ensuring that consumers and business owners can gain access to the convenient, affordable credit options they clearly need. To that end, successful and responsible fintech firms and marketplace lending platforms of today may be able to serve customers better if they are able to apply to become the de novo banks of tomorrow, and the MLA has long supported reinvigorating the FDIC-supervised Industrial Loan Company charter and the OCC’s efforts to provide the Special Purpose National Bank (SPNB) charter to fintech firms. Treasury and federal banking regulators could also examine ways that requirements under the Bank Holding Company Act, and the Dodd Frank Act’s Volcker Rule, both related to ownership stakes limit de novo applications without meaningful improvements to safety and soundness. Additionally, the interpretation of the Change of Bank Control Act should be modified to provide more opportunity for de novo charters in situations where the shareholder of the parent company of the entity sponsoring a bank has less than 50% ownerships stake and will not have any active role in the bank subsidiary management.

MLA supports efforts by Congress and federal banking regulators to take steps to re-affirm the longstanding principle that a bank-originated loan is “valid when made.” Such action is important to ensure continued liquidity and stability in credit markets in the wake of judicially-created uncertainty for sales of a broad range of bank loans. This could include interpretive guidance from federal banking regulators as well as becoming more active in filing amicus curiae briefs in pending court cases in the state and federal courts. As a key counterpart to such valid when made guidance, additional guidance from federal banking regulators that reaffirms time-honored bank lending powers would create greater recognition that there are legitimate and wholly responsible partnerships between FDIC insured banks who are the “true lenders” and the third parties who provide services to those firms. Recent attempts by courts to provide a “test” of when an entity is the “true lender” – if broadened beyond specific cases – would create significant disruption to our financial system. Similarly, through interpretive guidance and amicus curiae briefs, federal banking regulators could provide greater clarity at critical junctures.

Congress recently asked the IRS to complete a study of the steps required to develop an application programming interface (API) and automated processing service for instantaneous delivery of 4506-T form, and legislation to require an upgrade to an API has passed through the House of Representatives. The MLA encourages the IRS to prioritize this modernization of government technology which would simplify the process for borrowers to apply for credit by facilitating secure access to consumer-permissioned tax return data.

BPC IRS Data Support Letter

Recent years have seen the growth of bipartisan consensus in favor of reducing monthly student loan payments as a key way to help student loan borrowers. While direct federal benefits such as “income-based- repayment” options have been advanced to help lower income borrowers struggling with high federal student debt loads, a strong private refinancing market is the only way for borrowers who do not meet the income-based repayment criteria to save as they pay off their loans (via lower interest rates reflecting strong credit profiles). The existing $1.3 trillion US student loan pool includes approximately $200 billion in higher credit quality student loan borrowers, many of whom, based on their career and income advancement, are being charged above-market rates. If refinanced at a lower rate, these student loan borrowers would reduce their monthly payments, creating more flexibility for borrowers to save for the future or to purchase homes and other goods, supporting the US economy. Bipartisan legislation (S. 796) introduced by Senators Thune and Warner, would provide a new tool to assist employers in recruiting and retaining quality employees by allowing them to help qualified employees repay student loans on a tax-free basis. It would do so by extending the current Employer Education Assistance Program to employees who have finished their education and are saddled with outstanding student loan debt. Currently, the Employer Education Assistance Program allows employers to pay up to $5,250 in educational expenses to help employees finance continued education without being taxed on the employer assistance. Existing programs cannot provide help to individuals who already have incurred past student loan debts. The MLA also encourages policy-makers to support a re- calibration of credit risk retention rules for student loan ABS refinancing transactions within certain credit parameters where there is well documented evidence that the loan collateral has outperformed asset classes that are currently provided an exemption. This policy change would help private lenders increase capacity and reach more students with lower-cost refinancing options that would reduce these monthly interest costs.

As a member of the Responsible Business Lending Coalition, the MLA supports state legislation in California that would be first in the nation to give small business owners the same protections that Truth in Lending laws have given consumer borrowers for more than half a century. Recently approved by the state Assembly and Senate on bipartisan votes, SB 1235, by Sen. Steve Glazer, (D-Orinda) would require lenders and other finance companies to provide clear and consistent disclosures to small business owners when they offer them financing and when they close a deal.  At the time financing is offered, the financer would have to disclose the following:

  • Total amount of financing
  • Total cost of financing
  • Term length
  • Frequency and amount of payments
  • Pre-payment policies
  • Annualized rate

The disclosures respond to research by the U.S. Federal Reserve Bank and closely follow recommendations from the Conference of State Bank Supervisors.  The information in the disclosures would help small business owners understand the costs and consequences of the financing options available to them in the commercial lending market, which is rapidly evolving.  SB 1235 was supported by a broad coalition that included dozens of responsible lenders, small business groups and advocates for policies that promote economic opportunity. These include Opportunity Fund, the NFIB, Small Business California, Small Business Majority and the California Association for Micro-Enterprise Opportunity.

MLA enters coalition for better disclosure for small business borrower

There are significant reporting burdens associated with being a simple retail platform investor in this asset class that are arguably unnecessary, expensive, and time-consuming when compared with the requirements for investors in other comparable instruments. Second, pass-through entities that invest in marketplace loans could be made eligible for the same favorable treatment now available to certain pass-through entities that invest in hard assets (REITs), given the role of marketplace loans in supporting Main Street small businesses and middle-class consumers. Third, banks are permitted to deduct loan charge-offs as an ordinary expense, rather than treat them as capital losses, but fund investors are not, which creates an uneven playing field for the same asset. A corollary to allowing charge-offs to be deductible should be specifying that selling charged-off loans would not cause the loss to be treated as a capital loss instead of a business expense. Finally, there is a related issue which is the tax status of foreign investors that purchase interests in marketplace loans. Foreign investors’ treatment could be more explicitly tied to the tax status of the entity through which they invest. The current situation of trying to divine through “facts and circumstances” if the investor is engaged in loan origination activities is far too vague and uncertain, and the consequences of “getting it wrong” are currently prohibitive.