Patrick McHenryChairman

Washington, February 5, 2020 -

Today, the House Financial Services Committee is holding a hearing on the consumer benefits of partnerships between banks and nonbank lenders, including bank-fintech partnerships. When properly regulated, these partnerships can provide greater financial inclusion, spur technological innovation, and foster competition that ultimately benefits consumers.

Watch Republican Leader of the House Financial Services Committee, Patrick McHenry’s (NC-10), opening remarks here.

Ranking Member McHenry’s opening remarks as delivered:

“Madam Chair, thank you for holding this hearing. 

“I think it is important and essential that Congress understand how the banking industry is evolving in response to technological innovation. It also is essential to help Congress understand its role to ensure all consumers benefit from advances in technology. So, I think it’s a meaningful conversation that we can have today.

“Technological innovation over the past few decades has enabled faster, more accurate credit underwriting for a much broader population of borrowers. Much of this innovation has been driven by industry newcomers that have developed a new idea or business model faster in time than it takes to get a bank charter. So, these newcomers often partner with banks.

“Bank/nonbank partnerships can make sense for several reasons. First, economic. Because of their deposit-based funding, banks tend to have the cheapest possible cost of capital among all capital allocators.

“Second, capacity. Banks have relatively large balance sheets, enabling them to absorb new loans rapidly.

“Third, expertise, and expertise still matters. Banks are expert lenders—in other words, they are proficient in such tasks as underwriting, compliance, and securitizing or selling loans into the secondary market.

“One other major reason fintechs partner with banks is the special legal status banks have had for well over a century, actually a century and a half. Since the passage of the National Bank Act, Congress has given special privileges to banks, and that includes regulatory certainty about what interest rate banks are permitted to charge on a loan.

“When conducted properly, the benefits from this arrangement can be cost savings for fintechs and banks, better competition among banks, and better, faster, and cheaper banking products for all consumers.

“The best way to make sure that these partnerships live up to their promise is to provide a clear regulatory framework under which they can operate.

“To that end, I want to commend the recent efforts of the OCC and the FDIC for their proposed rulemaking that helps restore clarity to a segment of the market.

“Their proposed rules would clarify what we all thought we knew before 2015: that when a bank sells, assigns, or otherwise transfers a loan that was valid when it was made, that loan does not become invalid because of the transfer.

“This is a commonsense rule of contracting that has existed for over a hundred years, until in 2015, when the Second Circuit’s Madden decision decided that no, banks cannot be sure that their loans hold any value when sold.

“The Madden decision has been roundly criticized on its legal reasoning, but more importantly, economists have now measured the negative impact to consumers in the three states governed by this bad Madden decision.

“The uncertainty caused by the result has driven lenders away from those states. Borrowers with FICO scores below 625 have seen a 52% reduction in credit availability. Furthermore, personal bankruptcy filings rose by 8% more in those states relative to states outside the Second Circuit.

“We can clearly see the harm that results when lenders are faced with regulatory uncertainty.

“I am pleased we are hearing from experts today about the need for clear rules of the road. Technology is the key for more financial inclusion, and while we must provide oversight and certainty, we cannot fear innovation because we don’t understand it.

“I yield back.”