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Mr. Chabot: Morning, can we have
come to order and I want to

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thank everyone for being here
today. When an entrepreneur

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starts a business, one of the
first challenges faced is

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getting the money needed to
produce a new product or a new

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patent idea. Often an
entrepreneur will reach out to

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friends and family for early
support and sometimes a small

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monetary investment. This common
phenomenon of family and friends

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investment is far more common
than it's commonly realized.

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After all, we all want to see
our friends and family succeed,

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particularly in a new business
adventure. While access to

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capital has always been a
concern for small firms, the

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Great Recession and some
legislation, some would argue I

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would Dodd Frank, for example,
have made access to capital even

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more difficult. Fortunately,
there are alternative lending

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options to assist small
businesses and getting the

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financing they so desperately
need. Today's hearing will

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examine a growing trend across
America, the rise of peer to

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peer or p2p lending, and what it
means for small businesses. A

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recent survey by the New York
Federal Reserve found that while

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small businesses primarily still
look to large conventional

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lenders for financing, during
the first half of 2014, nearly

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20% of entrepreneurs looked to
an online lender for credit. And

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in the United States, the p2p
lender, with the largest market

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share Lending Club has seen the
value of its total loans funded

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for small businesses explode
from around 850,000 in 2007, to

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over $22 million in 2012. This
increase in p2p lending for

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small businesses, if it
continues, could have a

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tremendously positive impact on
small businesses and their

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growth and on the American
economy overall. Today, we are

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fortunate to be joined by a
distinguished group of witnesses

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who all have insight into this
fast growing phenomenon. I want

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to thank our panel for taking
time away from their jobs and

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making the trip to Washington
for this important hearing. And

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we look forward to your
testimony. And it's often said

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that what keeps a great idea
from becoming a great business

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is execution. While access to
the funds needed to start a

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business plays a huge role in
that success. There are people

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all around our country with
great ideas. Hopefully today we

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can examine how innovative
funding models can help more

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Americans turn their great ideas
into reality. And I would now

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like to yield to the ranking
member Miss Velazquez for

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opening remarks.

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Ms. Valezques: Thank you, Mr.
Chairman. Following the 2000

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financial crisis, the small
business credit market tightened

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dramatically contracting at
twice the rate of broader

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financial markets. After banks
pulled back $160 billion in

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capital, many entrepreneurs were
forced to turn to non

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traditional sources to stay
afloat. One alternative to

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emerge was peer to peer lending.
Peer to peer lending allows

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small businesses to directly
solicit funding from a pool of

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interested lenders and investors
over the internet website. Web

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based technologies reduce costs
and interest rates making p2p

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Business Loans an attractive
alternative to credit cards. p2p

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offers a new a number of
benefits to both small

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businesses and investor for
small business borrowers. The

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biggest advantage is being able
to access capital when

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traditional lenders are willing
to make a loan. p2p P platforms

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also provide loans that are
often too small to be profitable

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for most banks, typically under
$35,000. on the investor side,

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the communal and open nature of
p2p lending reduces fraud while

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technology based risk assessment
helps investors about each

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individual loan. Although peer
to peer lending provides

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significant advantages, there
are drawbacks peer to peer

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lending platforms reserve the
right to reject small business

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applications just like banks,
the Federal Reserve found only

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8% of business loan applications
are accepted by the largest

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platform. The study also found
that peer to peer loans had an

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average interest rate over 13%
double that of traditional

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sources. Similarly, peer to peer
loans have higher default rates,

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increasing investor risks as
more people learn of that

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vantages of peer to peer
lending. The industry grew

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rapidly through the mid 2000s.
In 2008, the SEC took notice and

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citing Investor Protection
classify peer to peer lending

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loans as securities, this most
subjected lending platforms to a

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host of rigid registration
requirements. As a result, many

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industry participants have
raised concerns that the current

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environment is limited in the
markets growth potential. Very

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few platforms have taken the
costly steps of registering with

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the SEC prevented many retail
investors from participating in

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peer to peer lending. At the
same time, large institutional

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investors have been attracted to
peer to peer lending by high

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yield less oversight on lower
costs. while increasing access

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to capital is a laudable goal.
The peer to peer market is now

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dominated by the same
institutions, it was meant to

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circumvent raising concerns
about the direction of this

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nursing industry. Today's
hearing will provide members an

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opportunity to learn about the
peer to peer lending market and

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how it has facilitated Small
Business access to capital. With

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more firms turning to the
internet based lenders including

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crowdfunding sites, and peer to
peer lending, it is important,

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the committee examine how we can
ensure these platforms increase

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Small Business access to capital
while protecting both borrowers

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and investor. I just want to
take this opportunity to thank

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all the witnesses for being here
today.

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Mr. Chabot: Thank you very much.
And we ask the committee members

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of their opening statements,
submit them for the record. And

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I'd like to take just a moment
to explain our lighting system

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here, you'll each be given five
minutes to testify, the green

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light will be on for four
minutes, the yellow light will

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come on to let you know you got
a minute to wrap up. And then

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the red light will come on. And
we would ask that you try to

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adhere to that five minutes, if
at all possible give you a

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little leeway, but not a lot. So
we appreciate it. And now I'd

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like to introduce our our panel.
And we'll begin with our first

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and I'll introduce each of you
before you testify. Our first

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witness is Rajkamal Iyer, who is
an associate professor of

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finance at the MIT Sloan School
of Management. Professor iyer's

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research focuses on the area of
banking and contract theory,

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with a particular interest in
understanding the role of

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interbank markets in the
provision of liquidity. We

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appreciate you being here and
we'll get to your testimony in

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just a minute. Our next witness
is Sam Hodges, who is the co

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founder and managing director of
funding circle, a peer to peer

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lending platform focused
exclusively on small businesses.

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Mr. Hodges is responsible for
overseeing the overall strategic

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direction and day to day
operation of funding circle in

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the US, and we welcome here as
well. Our third witness will be

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Zachary green. And I'm very
pleased to introduce Mr. Green

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because he happens to be from my
district. He's the CEO and

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founder of m m n eight Foxfire.
In Cincinnati. Mr. Green

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previously served in the United
States Marine Corps, and was

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working as a volunteer
firefighter when he developed

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the idea for his small business,
which as he'll tell you in a

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minute is meant to keep
firefighters safe and we thank

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you for your service to our
country and also for making the

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trip from the first district to
be with us today. And I now like

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to yield to the ranking member
Miss Velazquez for introducing

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her witness.

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Ms. Valezques: Thank you, Mr.
Chairman. It's my pleasure to

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introduce Mr. Peter Renton. He
is the founder of Lend Academy,

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the leading educational resource
for the peer to peer lending

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industry. His blog is the most
widely read website about peer

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to peer lending, and through his
writing and video courses. He

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has helped 10s of 1000s of
people understand this new asset

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class. He is considered the
world's leading expert on peer

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to peer lending, and often
consult with companies looking

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to enter the space. He is also
the co founder of the lending

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conference, the world's first
conference dedicated to peer to

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peer lending an online lending
industry and he's the author of

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the Lending Club storing the
definitive guide to the world's

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largest peer to peer lender.
Thank you and welcome.

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Mr. Chabot: Thank you very much.
And Professor Iyer, you're

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recognized for five minutes.

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Rajkamal Iyer: Thank you for
giving me the opportunity to be

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here this morning. As you have
read, I was interested in

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banking and financial
intermediation, and that led me

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naturally to look at peer to
peer markets. Then I learned

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that these new online markets
had been developed to provide

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access to credit for small
businesses and individuals. What

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was interesting about these
markets was that loans were

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funded by a group of small
investors as compared to

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sophisticated lender, lenders
and loan officers and our But

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other intermediaries, one of the
big problems in credit markets

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in general have been screening
of investors. So in a sense, how

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do you really understand the
credit worthiness of people who

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are borrowing. So what was
fascinating about these markets

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is to think about whether small
individuals who are lenders can

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actually screen effectively the
borrower's creditworthiness,

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because at the end of the day,
if you cannot figure out the

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risk of whom you're lending to,
then these markets cannot be

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sustainable and survive in the
long run. So what we did with

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our co authors in University of
Chicago and Harvard, is, at that

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time, one of the biggest lenders
in this market was prosper. So

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we got data from prosper, and
all the loan applications and

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the loans which were funded by
this website, what we in this

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website, what you have is
individual lenders can basically

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decide whether they want to fund
a loan, and they rely on hard

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information. And they also rely
on soft information, which is

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all the postings which borrowers
say about themselves. What was

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very interesting was that we
found these guy these small

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lenders do remarkably well. In
fact, when you look at the

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default rates, the
predictability of default rates

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for these borrowers, if you look
at the credit score, like

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Experian, or something, we found
that these lenders actually have

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a 45% Higher predictability than
just using the credit score. So

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they do much better in terms of
effectively predicting default

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than just the credit score,
which banks and many other

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lenders use. Having said that,
so what we basically kind of say

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is these markets, the people who
are lending in these markets are

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not stupid, okay? They're not
losing money in general. Now,

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what is also interesting is
these markets just beyond

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looking at hard information,
we're using stuff which was non

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standard, like they were using
soft information to effectively

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screen borrowers. So what we
found is for the low credit

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score borrowers, these markets
are relying much more on soft

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information to basically judge
the effectiveness of lending. So

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in a sense, given that these
markets could screen borrowers,

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and also the non collateralized
bent nature of lending, because

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these markets don't require
collateral, one of the takeaways

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which we had was that this could
be a viable and a sustainable

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source of funding for small
borrowers who might be limited

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to payday lending or other
costly sources of finance, to

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actually meet their
requirements. One could ask what

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are the risks of these markets
in finance, there's no without

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risk, there is no return. So
there's always some risk. So

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what we basically thought, in a
sense, at this point, investors

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have risks because there is
going to be some default, but

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they can effectively judge the
risk. So they're not, it's not

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like they're not able to price
this risk correctly. Now, in

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terms of the platforms, the
platforms themselves are not

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leveraging up, they're just
acting like an intermediary,

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which matches lenders to
borrowers. So at that point,

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they're not like a bank, which
basically takes on leverage and

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lends on its own behalf. So
they're from an asset, these

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platforms are just matching
platforms where they bring

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together lenders and borrowers
and the lenders decide what is

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the rate to lend to. So at some
level, that's something which is

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doesn't pose a big risk at this
point to the system now. So one

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could ask, are borrowers better
off borrowing from these

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platforms as compared to banks?
Do they offer better rates?

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That's a very tricky question.
Because at some level, all the

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studies which you just quoted,
there is a selection of people

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who go on to these platforms. So
the ideal counterfactual would

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be to look at the same person
when he applies for a loan at a

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lending platform versus a bank
and see what's the rate we have?

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Okay, we don't have that
counterfactual at this point,

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because we don't see that
clearly. So in essence, at this

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point, from the study we have
done generally, the rates on

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this platform range from 6% to
11%, on average, 14%, which is

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pretty much very similar to the
lending rates, which banks offer

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00:14:06.750 --> 00:14:11.190
to small borrowers who are at a
certain level of credit risk. So

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even if the rates offered by
these platforms are very similar

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to banks, they provide an
alternative because there's more

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competition at some level, which
is always beneficial for people

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00:14:20.160 --> 00:14:24.810
to basically have another option
to lend. So effectively, at this

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point, given the nascent nature
of this industry, our take is

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that regulating this industry
would kind of inhibit his

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growth. But having said that,
one does need to watch the fact

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that how these industries
evolve, to make sure that that

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is not a constraint. Thank you.

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Mr. Chabot: Thank you very much.
And Mr. Hodges you recognized

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for five minutes.

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Mr. Hodges: Mr. Chairman,
Ranking Member Velazquez and

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members of the committee. Thank
you very much for for having me

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here today. I'm Sam Hodges, co
founder of funding circle and

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also a small business owner.
Before starting funding circle,

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my partners and I were very much
alike. For the hard working

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entrepreneurs, you know,
aspiring small business owners

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in each of your districts, we
built up a chain of fitness

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centers all across the country.
And as we push to new open new

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locations, what we found is even
with strong traction, it was

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very hard to get access to
credit, that that experience

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really inspired us to start
funding circle as a wave a

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better way for small businesses
to get access to loans. Founded

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in 2010 funding circle is now
the world's leading marketplace

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lender dedicated to small
business. Since then, we've lent

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out over a billion dollars to
over 8000 small businesses

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across the United States and
also the UK. And we're currently

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lending out about $75 million
per month, in ranging from a

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logistics business in the
Midwest, to health care services

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business in suburban Atlanta, to
multi unit salad company in San

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Francisco, we're focused on is
helping the 28 million small

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businesses in the United States
get access to the capital they

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need to grow and to expand. Our
loans address the core of the

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small business credit gap term
loans of $25,000, up to

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$500,000. These are loans that a
small business owner can use to

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expand her storefront, open a
new location, hire more staff,

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or potentially launch a new
product. And not only are loans

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delivered very quickly, inside
of a few days, but they're also

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delivered in a highly
transparent fashion. They're

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also fairly priced with interest
rates ranging from about 6% up

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to 21%. With payments spread
over a one to five year term.

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And today, if you ask the
average small business owner

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whether they have access to the
credit they need to grow and

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expand, I think what you'd find
is in many cases, the answer is

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a resounding no. Even as our
economy recovers, and despite

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attempts such as the Jobs Act to
facilitate the flow of capital

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to smaller companies in United
States, many small businesses

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remain unable to access the
credit they need. We think that

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funding circle and other
marketplace platforms like ours

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can be a meaningful part of the
solution to this problem. So to

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give you a sense of how this
works, we another marketplace

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lenders function by matching
supply of capital with demand on

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one side of the market or small
businesses and on the other are

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a mix of individuals and
institutions who lend through

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off, we provide a transparent
marketplace that's information

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rich that allows those investors
to make good decisions as to

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where to direct their capital.
This year, we anticipate lending

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over a billion dollars through
the model. Now without access to

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term capital, what we're seeing
is small businesses are actually

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commonly entering into short
term credit arrangements with

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lenders who oftentimes charge
APR is between 50 and 100%. For

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example, a small business may
take a cash advance in exchange

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for allowing the lender to
deduct a portion of credit card

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sales, and what is generally
known as a merchant cash

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advance. Well, these are
appropriate in some

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circumstances. For example,
funding of working capital

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purchasing inventory, for
example, such short term and

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high rate products can be
misused and oftentimes leads

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small businesses to use these
short term financings to

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actually cover longer term
funding needs. The two

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attributes, short durations and
very high rates drive many small

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businesses into Downward cycles
of re borrowing, in which they

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take out more and more debt to
roll over their obligations. We

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frequently see the damage these
arrangements can inflict on

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small business, otherwise
healthy companies are throttled

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by overwhelming and unexpected
debt service. And if this issue

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sounds familiar, that's because
it is. Regulators I think

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rightly saw that the same
connection payday lending were

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very high rates of default and
re borrowing actually led

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consumers into debt traps. In
response to this trend funding

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circle is committed to working
with other marketplace lenders,

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other responsible credit
providers, and small business

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advocates to promulgate
effective self regulatory

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standards for non banks small
business financing, will we

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expect these standards to cover
a broad spectrum of practices,

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transparency around pricing
stands out as a particularly

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important focal point. At
funding circle we prominently

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disclose total and periodic
costs of loans, we offer an easy

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to understand format, including
our interest rate, as well as

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our fees. With this information,
a small business owner can

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evaluate the true cost of credit
and make a really good informed

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purchasing decision for that
loan. In contrast, many other

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lenders quote financing costs of
factoring or Bahrain and refuse

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to provide actually an
annualized interest rate or any

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disclosure around fees. In
addition, they oftentimes charge

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hidden fees. And sometimes
they'll advertise no prepayment

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penalties, despite the fact that
if a borrower to repay that

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actually owe all future payments
due including interest. So in

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contrast, the very transparency
of the marketplace lending or

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peer to peer model actually
helps ensures that only the

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borrowers who should be able to
pay back alone actually take one

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out. And we believe that
supporting marketplace lenders

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represents a critical
opportunity for policymakers

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00:19:25.800 --> 00:19:28.680
policymakers to help improve
small business owners access to

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credit, while also giving them a
reasonable path to growth. So at

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funding circle, we're striving
to build a better financial

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world. We're trying to craft a
transparent market driven

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approach that delivers much
needed capital to great small

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businesses all across the
country. It's our strong belief

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that marketplace lending will be
beneficial for these small

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businesses, for the investors
who are putting capital behind

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them and for our country as a
whole. Thank you again for the

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00:19:50.760 --> 00:19:52.830
time and for everything you're
doing on behalf of American

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small business.

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Mr. Chabot: Thank you very much,
Mr. Green, you're recognized for

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00:19:55.890 --> 00:19:56.430
five minutes.

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00:19:57.000 --> 00:19:58.950
Zachary Green: Good morning. My
name is Zachary Green and I'm

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00:19:58.950 --> 00:20:01.920
the CEO and founder emanate
Foxfire would like to personally

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00:20:01.920 --> 00:20:04.440
thank Chairman Chabot and the
members of the small business

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00:20:04.440 --> 00:20:07.470
committee for inviting me here
today. As a young man growing up

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in Cincinnati, Ohio, I had three
distinct dreams. I wanted to

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become a Marine, a firefighter
and entrepreneur, dedication,

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honor, teamwork, and most of all
mission accomplishment or some

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of the lifelong values that
garnered from my time in the

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court. I recognize that having
the opportunity to pursue the

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American dream is because of
those have gone before us. And

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we must never forget the way the
land of the free only because of

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the brave. Several years later
and about 50 additional pounds,

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I fulfilled my second dream of
becoming a volunteer

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00:20:33.000 --> 00:20:36.060
firefighter, a rich American
tradition started by one of our

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00:20:36.060 --> 00:20:39.000
founding fathers Benjamin
Franklin. Being a firefighter

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much like a being a Marine
taught me that no obstacle is

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too large, no hill is too steep,
and all challenges can be solved

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through leadership teamwork and
perseverance. After on the fire

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service, we have to solve the
problem at hand we don't have

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the option of calling 912 After
the homeowner calls 911. The

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summers and parasite on the 20
palms were unbearable Marine

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Corps officer training Quantico
was extremely challenging as

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00:21:00.570 --> 00:21:02.730
being a firefighter running into
a burning building when

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everybody else is running out.
But all these pales in

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00:21:05.550 --> 00:21:07.740
comparison to the challenges I
have recently encountered

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00:21:07.740 --> 00:21:11.190
fulfilling my third dream.
becoming an entrepreneur, I came

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up with the idea of emanate
Foxfire was on the tailboard of

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00:21:13.800 --> 00:21:16.530
my fire engine. As a
firefighter. Some of our biggest

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00:21:16.530 --> 00:21:18.960
risks are accountability and
disorientation all of which are

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compounded exponentially in the
dark. I remember seeing a

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special about September 11, and
how the 911 Commission report

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noted several times how
photoluminescent materials help

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people evacuate the Twin Towers
before they collapsed. I thought

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of ways I could apply the same
technology to firefighter

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accessories. And over the next
several months I drove from fire

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station of fire station selling
the accessories out of the trunk

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of my car. Sales steadily
increased in my former Fire

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Chief Robert really sat me down
and said he believed in me in

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this product. He said I
shouldn't just treat this as a

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hobby, but rather look at a way
to really grow a company. As I

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00:21:50.220 --> 00:21:52.380
walked out of his office, I
remember the words of one of my

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00:21:52.380 --> 00:21:54.900
favorite leaders, Teddy
Roosevelt. And any moment of

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00:21:54.900 --> 00:21:57.480
decision, the best thing you can
do is the right thing. The next

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00:21:57.480 --> 00:21:59.490
best thing is the wrong thing.
And the worst thing you can do

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00:21:59.490 --> 00:22:03.630
is nothing. I refinance my home,
maxed out my credit cards took

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00:22:03.630 --> 00:22:06.390
nearly all my family savings to
officially start my journey to

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00:22:06.390 --> 00:22:09.480
entrepreneurship. I'm proud to
say that now we have more than

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00:22:09.480 --> 00:22:12.990
60,000 firefighters using our
products. Additionally, we have

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00:22:12.990 --> 00:22:15.300
grown our safety line of
products such as eco friendly

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00:22:15.330 --> 00:22:17.790
exit signs that never need
maintenance batteries or

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00:22:17.790 --> 00:22:20.370
electricity on like this one
behind me up here on the wall.

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And, and we have a patented
product that goes on the edges

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00:22:25.560 --> 00:22:27.930
of stairs that illuminate the
stairwells of sports arenas,

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00:22:27.930 --> 00:22:31.440
high rises universities and all
over the US and abroad. Thanks

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00:22:31.440 --> 00:22:33.870
to the help of the US Department
of Commerce's commercial

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00:22:33.870 --> 00:22:37.140
services divisions. We've also
exported this technology to more

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00:22:37.140 --> 00:22:39.960
than 25 countries throughout the
world, including the Civil

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00:22:39.960 --> 00:22:43.800
Defence Headquarters of the
United Arab Emirates, and 2013.

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00:22:43.800 --> 00:22:46.500
emanate Foxfire was awarded the
Excellence and Entrepreneurship

397
00:22:46.500 --> 00:22:48.990
Award and I was named
Entrepreneur of the Year by the

398
00:22:48.990 --> 00:22:51.750
Ohio Chamber of Commerce, I
could have not been more proud

399
00:22:51.750 --> 00:22:54.900
but every day is a significant
struggle. wonderfox fires

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00:22:54.900 --> 00:22:57.420
biggest challenges when many
business owners shares the

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00:22:57.420 --> 00:23:01.140
access to working capital. And I
love my mother very much. But

402
00:23:01.140 --> 00:23:04.110
the words of one of my mentors
cannot ring more true cash is

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00:23:04.110 --> 00:23:06.900
more important than your mother.
I always thought the more

404
00:23:06.900 --> 00:23:09.240
Foxfire grew and the more we
sold, the less I would have to

405
00:23:09.240 --> 00:23:12.360
worry about capital, I couldn't
have been more wrong. When I

406
00:23:12.360 --> 00:23:14.340
realized that my personal
investments would not be enough

407
00:23:14.340 --> 00:23:16.980
to finance our rapid growth I
raise capital from friends and

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00:23:16.980 --> 00:23:20.100
family. With that capital I
hired more staff I bought more

409
00:23:20.100 --> 00:23:22.380
inventory but it still was not
enough to keep up with our

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00:23:22.380 --> 00:23:25.560
supply chain and overhead costs.
Our next work with a local

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00:23:25.560 --> 00:23:28.290
venture capital advisory firm
and raised additional equity

412
00:23:28.290 --> 00:23:30.960
funds. And those funds coupled
with lines of credit from our

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00:23:30.960 --> 00:23:33.480
regional lender, the Bank of
Kentucky allowed us to continue

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00:23:33.480 --> 00:23:36.420
to grow. Almost every
entrepreneur I know has the same

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00:23:36.420 --> 00:23:39.300
recurring nightmare running out
of money. Several months ago,

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00:23:39.300 --> 00:23:41.910
due to several unforeseen
circumstances almost happened.

417
00:23:42.180 --> 00:23:44.310
We were fortunate to find a new
stream of revenue through

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00:23:44.310 --> 00:23:47.070
streetshares. A peer to peer
lender described by the press as

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00:23:47.070 --> 00:23:50.310
Shark Tank meets eBay. We
presented our business case with

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00:23:50.310 --> 00:23:53.070
historical financials tax
returns and a pitch describing

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00:23:53.070 --> 00:23:56.220
how we would use the new funds.
streetshares is a peer to peer

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00:23:56.220 --> 00:23:58.920
internet based marketplace that
matches borrowers and lenders by

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00:23:58.920 --> 00:24:02.160
shared social affinity such in
this case veterans lending to

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00:24:02.160 --> 00:24:04.830
veterans to drive down rates and
the risk of going through a

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00:24:04.830 --> 00:24:08.730
reverse auction model. And under
36 hours Foxfire receive the

426
00:24:08.730 --> 00:24:11.580
money we needed and the interest
rate was in the teens. If we'd

427
00:24:11.580 --> 00:24:14.040
gone through the same process
with traditional financial

428
00:24:14.040 --> 00:24:16.710
institutions could have taken
months. If we'd gone to one of

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00:24:16.710 --> 00:24:19.590
the small business payday type
letter lenders that could have

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00:24:19.590 --> 00:24:22.620
charged us an outrageous APR.
The street show alone had a

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00:24:22.620 --> 00:24:25.860
reasonable APR but was just as
fast. If it were not for the

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00:24:25.860 --> 00:24:28.890
quick access to an online peer
to peer loan, I fear the worst

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00:24:28.890 --> 00:24:31.920
could have happened to Foxfire.
This is the perfect example of

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00:24:31.920 --> 00:24:34.800
how the free market can ask
faster than a larger traditional

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00:24:34.800 --> 00:24:38.280
institutions and keep that
American Dream alive. I became a

436
00:24:38.280 --> 00:24:41.610
US Marine became a firefighter.
And thanks to new ways to fund

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00:24:41.610 --> 00:24:45.030
for startups like peer to peer
micro loans. I'm on my way to

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00:24:45.030 --> 00:24:47.580
becoming a successful
entrepreneur. Thank you again

439
00:24:47.580 --> 00:24:48.420
for your time today.

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00:24:49.200 --> 00:24:55.470
Mr. Chabot: Thank you very much
appreciate it and having spent

441
00:24:56.160 --> 00:25:01.770
last Sunday with my wife of 41
years and My mom who's 90 and my

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00:25:01.770 --> 00:25:04.260
mother in law who's 95? I'm not
going to tell them what you just

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00:25:04.260 --> 00:25:04.500
say.

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00:25:05.880 --> 00:25:07.440
Zachary Green: I didn't let my
mom proofread this.

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00:25:09.360 --> 00:25:13.050
Mr. Chabot: But we did. We do
remember it. So, thank you, Mr.

446
00:25:13.050 --> 00:25:14.760
Ryan, you're recognized for five
minutes.

447
00:25:16.380 --> 00:25:18.780
Peter Renton: Thank you, Mr.
Chairman. Mr. Chairman, Ranking

448
00:25:18.780 --> 00:25:22.260
Member. Thank you, Mr. Chairman,
Ranking Member Valezques,

449
00:25:22.470 --> 00:25:24.600
members of the committee. I
really appreciate you inviting

450
00:25:24.600 --> 00:25:27.900
me here today. My name is Peter
Renton and I helped run three

451
00:25:27.900 --> 00:25:31.560
businesses that are all focused
on the p2p lending industry. I'm

452
00:25:31.560 --> 00:25:34.260
the founder and CEO of lend
Academy, which operates the

453
00:25:34.260 --> 00:25:38.190
leading p2p lending blog,
podcast and Community Forum. I'm

454
00:25:38.190 --> 00:25:41.250
also the co founder and CEO of
the lender Conference, which is

455
00:25:41.250 --> 00:25:44.820
the first and largest conference
series dedicated to the broader

456
00:25:44.820 --> 00:25:49.200
online lending community. I'm
also a co founder of NSR invest,

457
00:25:49.230 --> 00:25:52.050
which is an investment and
analytics platform that provides

458
00:25:52.050 --> 00:25:54.660
access to peer to peer
marketplaces for financial

459
00:25:54.660 --> 00:25:57.780
advisors, institutional
investors and individuals. As

460
00:25:57.780 --> 00:26:01.440
you can tell, I am not from this
country. I grew up in Sydney,

461
00:26:01.440 --> 00:26:04.410
Australia, where my father was
an entrepreneur, and I joined

462
00:26:04.410 --> 00:26:07.470
the family printing business one
year after graduating college.

463
00:26:08.070 --> 00:26:10.890
Like most entrepreneurs in
Australia, I dreamed of one day

464
00:26:10.920 --> 00:26:13.830
starting a business in this
country. And I was able to do

465
00:26:13.830 --> 00:26:17.640
that in 1991 when I moved to
Denver, Colorado to expand our

466
00:26:17.640 --> 00:26:20.700
family printing business. Since
then, I've started several other

467
00:26:20.700 --> 00:26:24.360
businesses, and in 2003, I
proudly became a United States

468
00:26:24.360 --> 00:26:28.200
citizen. I've been investing in
p2p lending platforms now often

469
00:26:28.200 --> 00:26:31.860
referred to as marketplace
lending platforms since 2009.

470
00:26:32.130 --> 00:26:34.740
And I've been covering this
industry full time as a blogger

471
00:26:34.740 --> 00:26:38.640
and analyst since 2010. What I'd
like to do in this testimony is

472
00:26:38.640 --> 00:26:40.980
give you a little history and
overview of the p2p lending

473
00:26:40.980 --> 00:26:44.670
industry, particularly as it
pertains to small business. In

474
00:26:44.670 --> 00:26:47.970
this country, p2p lending began
in 2006. With the launch of

475
00:26:47.970 --> 00:26:51.420
prosper, industry leader Lending
Club followed Just a year later,

476
00:26:51.930 --> 00:26:55.470
the SEC decided in 2008 that the
loans issued by these companies

477
00:26:55.500 --> 00:26:57.780
were in fact securities and
should be registered with the

478
00:26:57.780 --> 00:27:02.280
SEC. So both companies went
through a long and expensive

479
00:27:02.310 --> 00:27:06.060
registration process to allow
themselves to remain open to non

480
00:27:06.060 --> 00:27:09.300
accredited investors and to
comply with this decision. To

481
00:27:09.300 --> 00:27:13.290
this day. These companies are
the only p2p lending platforms

482
00:27:13.290 --> 00:27:16.020
to have undertaken this
registration process. While

483
00:27:16.020 --> 00:27:19.170
there are dozens of platforms
today, every other company is

484
00:27:19.170 --> 00:27:22.740
only open to accredited or
institutional investors. It

485
00:27:22.740 --> 00:27:25.350
should be noted that Lending
Club and prosper are primarily

486
00:27:25.350 --> 00:27:29.280
consumer lending platforms, but
they have been doing quasi small

487
00:27:29.280 --> 00:27:33.570
business loans since inception.
Many small business owners use

488
00:27:33.570 --> 00:27:36.480
their personal credit to fund
their businesses. I've done that

489
00:27:36.480 --> 00:27:39.720
myself in the past. Since
inception, Lending Club and

490
00:27:39.720 --> 00:27:43.980
prosper have originated around
$200 million in personal loans

491
00:27:44.190 --> 00:27:47.340
that were actually used for
small business purposes. In

492
00:27:47.340 --> 00:27:50.220
addition to these personal
business loans Lending Club has

493
00:27:50.220 --> 00:27:53.220
had their own small business
lending operation for over a

494
00:27:53.220 --> 00:27:55.890
year offering term loans of
between one and five years.

495
00:27:56.250 --> 00:27:58.950
Lending Club does not share
their loan volume here, but my

496
00:27:58.950 --> 00:28:00.960
understanding is that this
initiative is still relatively

497
00:28:00.960 --> 00:28:04.470
small but it is growing quickly.
Prosper has a referral program

498
00:28:04.470 --> 00:28:07.530
with on debt capital, the
largest online Small Business

499
00:28:07.530 --> 00:28:07.920
lender.

500
00:28:09.240 --> 00:28:12.390
I should explain the variety of
products offered by the broader

501
00:28:12.390 --> 00:28:16.020
online lending industry. There
are term loans such as what San

502
00:28:16.020 --> 00:28:18.210
Fran funding circle just
described a Lending Club also do

503
00:28:18.210 --> 00:28:21.390
those. These a one to five year
amortizing loans with relatively

504
00:28:21.390 --> 00:28:23.880
low interest rates, there are
lines of credit that can be

505
00:28:23.880 --> 00:28:27.300
drawn against as the need
arises. This is a very wide

506
00:28:27.300 --> 00:28:30.480
range of interest rates.
Merchant Cash Advance is the

507
00:28:30.480 --> 00:28:33.390
most high interest option. These
are short term advances with

508
00:28:33.390 --> 00:28:36.450
repayments tied to credit card
charges. There is invoice

509
00:28:36.450 --> 00:28:38.970
finance, also known as
factoring, where small

510
00:28:38.970 --> 00:28:42.360
businesses can get immediate
cash for their receivables. And

511
00:28:42.360 --> 00:28:45.600
there's also crowd funding which
is actually can often confused

512
00:28:45.600 --> 00:28:48.900
with p2p lending, it is not
lending at all. It can be equity

513
00:28:48.930 --> 00:28:51.150
and equity based investment or
it can be a rewards based

514
00:28:51.150 --> 00:28:55.410
donation. So what can government
do? I appreciate the fact that

515
00:28:55.410 --> 00:28:58.080
you're having this hearing and
that you are interested in

516
00:28:58.080 --> 00:29:00.990
learning more about this
industry. The continued growth

517
00:29:00.990 --> 00:29:03.420
of this industry will provide
many benefits to small business

518
00:29:03.420 --> 00:29:06.780
owners and the economy as a
whole. As to what government can

519
00:29:06.780 --> 00:29:09.750
do. Here I would like to
describe some of the actions the

520
00:29:09.750 --> 00:29:13.380
UK government has taken. They
provide a blueprint for

521
00:29:13.380 --> 00:29:15.630
supportive actions that a
government can take to impact

522
00:29:15.630 --> 00:29:20.280
this industry. Number one since
2002. Since 2012, the British

523
00:29:20.280 --> 00:29:23.640
business bank, which is wholly
owned by the UK government, has

524
00:29:23.640 --> 00:29:27.120
been investing in small business
loans issued by online platforms

525
00:29:27.120 --> 00:29:30.360
like funding circle in the UK.
While the total investment is

526
00:29:30.360 --> 00:29:33.990
relatively small, this action
has given the industry there a

527
00:29:33.990 --> 00:29:37.530
tremendous boost in credibility
and trust among investors and

528
00:29:37.530 --> 00:29:41.490
borrowers. They have also
created a new regulatory

529
00:29:41.490 --> 00:29:45.720
framework specifically for the
p2p lending industry. And last

530
00:29:45.720 --> 00:29:48.540
year, the UK Government
announced the creation of a bank

531
00:29:48.630 --> 00:29:52.200
mandatory referral scheme where
banks that reject small

532
00:29:52.200 --> 00:29:55.710
businesses for a loan must refer
these businesses to alternative

533
00:29:55.710 --> 00:29:58.950
lenders. Now, I'm not saying the
US government should copy these

534
00:29:58.950 --> 00:30:02.340
actions but Rather, they provide
some ideas of how governments

535
00:30:02.340 --> 00:30:06.420
can support this burgeoning
sector. I firmly believe that

536
00:30:06.450 --> 00:30:08.970
small business lending is going
through a transformation that

537
00:30:08.970 --> 00:30:11.730
will have a dramatic impact on
the growth of small business in

538
00:30:11.730 --> 00:30:14.850
this country. I hope and trust
that you will see the benefits

539
00:30:14.850 --> 00:30:18.030
we bring, and will be supportive
of this transformation. Thank

540
00:30:18.030 --> 00:30:18.180
you.

541
00:30:18.660 --> 00:30:21.570
Mr. Chabot: Thank you very much,
and will now each member will

542
00:30:21.570 --> 00:30:23.790
have five minutes to ask
questions, should they choose to

543
00:30:23.790 --> 00:30:27.840
do so and I'll begin with myself
and Mr. Hodges. Mr. Iyer, I'll

544
00:30:27.840 --> 00:30:31.440
begin with you two, what are the
common legal and regulatory

545
00:30:31.440 --> 00:30:36.090
challenges associated with peer
to peer lending?

546
00:30:38.130 --> 00:30:41.010
Mr. Hodges: Sure, I can, I can
go first. So I think that the

547
00:30:41.010 --> 00:30:43.800
biggest regulatory and legal
challenge is just the frankly,

548
00:30:43.800 --> 00:30:48.210
the complexity of having to deal
with the overlapping set of

549
00:30:48.210 --> 00:30:51.570
federal as well as state level
rules, both on the lending or

550
00:30:51.570 --> 00:30:54.330
borrowing side, visa vie, how
you provide capital to the small

551
00:30:54.330 --> 00:30:56.700
business owner, and then also on
the security side, which is

552
00:30:56.700 --> 00:30:59.400
really around how you take those
learned loans, and then turn

553
00:30:59.400 --> 00:31:03.270
them into a product that allows
institutional and individual to

554
00:31:03.300 --> 00:31:06.360
to put money to work, we've
invested literally hundreds of

555
00:31:06.390 --> 00:31:09.030
1000s of dollars, probably over
a million dollars, just in kind

556
00:31:09.030 --> 00:31:11.400
of figuring out the right
framework for doing all of that.

557
00:31:11.580 --> 00:31:13.800
So I think, you know, some
effort of simplification could

558
00:31:13.800 --> 00:31:15.000
be could be very beneficial.

559
00:31:15.510 --> 00:31:16.740
Mr Chabot: Thank you, Professor.

560
00:31:17.940 --> 00:31:20.280
Rajkamal Iyer: The, when you
really think about it, at some

561
00:31:20.280 --> 00:31:23.280
level, peer to peer markets,
when they originate loans and

562
00:31:23.280 --> 00:31:26.160
sell it to investors, they are
like invest in like, you can

563
00:31:26.160 --> 00:31:28.980
think of them as junk bonds,
they basically are issuing debt

564
00:31:28.980 --> 00:31:32.400
notes to investors. So the
problem is one has to be very

565
00:31:32.400 --> 00:31:35.100
careful of understanding what is
the quality of the notes they're

566
00:31:35.100 --> 00:31:38.100
issuing, which is where the
Securities Act really comes in,

567
00:31:38.280 --> 00:31:42.060
to protect investors. So that's
where the whole regulatory

568
00:31:42.060 --> 00:31:43.170
regime comes into play.

569
00:31:44.010 --> 00:31:47.460
Mr. Chabot: Thank you. Mr.
Green, let me turn to you next.

570
00:31:48.060 --> 00:31:54.240
Could you elaborate on the p2p
lender that you worked with? And

571
00:31:54.240 --> 00:31:58.380
what made you confident that
that was the right option? And

572
00:31:58.500 --> 00:32:01.380
do you have you have a sample I
think your product here if I

573
00:32:01.410 --> 00:32:03.540
because I, I know you do,
because I saw it before the

574
00:32:03.570 --> 00:32:06.720
hearing. And if you wanted to
show it, you certainly wouldn't

575
00:32:06.720 --> 00:32:08.010
have any objection to that. So
we can.

576
00:32:08.010 --> 00:32:10.980
Zachary Green: Never miss an
opportunity to sell what you're

577
00:32:10.980 --> 00:32:13.980
talking about, basically,
through a series of, we have a

578
00:32:14.310 --> 00:32:16.680
very generous line of credit
through bank of Kentucky. And

579
00:32:16.680 --> 00:32:19.110
one thing that Bank of Kentucky
has been wonderful is like

580
00:32:19.140 --> 00:32:21.570
professor I had mentioned, they
didn't just look at our

581
00:32:21.570 --> 00:32:24.000
financials, they looked at
holistically our whole entire

582
00:32:24.000 --> 00:32:27.120
business plan. And what we had
the problem we were working with

583
00:32:27.120 --> 00:32:30.420
a much larger traditional
financial bank or institution,

584
00:32:30.570 --> 00:32:32.430
they wanted to see five
consecutive years of

585
00:32:32.430 --> 00:32:35.340
profitability, I'd only been in
business three years. And very

586
00:32:35.340 --> 00:32:38.340
few startups are profitable in
those early couple of years. So

587
00:32:38.340 --> 00:32:42.630
we were in a situation where we
had to get access to capital

588
00:32:42.630 --> 00:32:45.450
within the next couple of weeks.
And I'd been seeing all this

589
00:32:45.450 --> 00:32:48.240
information on radio ads and
direct mailing pieces. And of

590
00:32:48.240 --> 00:32:51.480
course, never pay any attention
to it until all of a sudden it

591
00:32:51.480 --> 00:32:53.970
came up to something that I
needed. The reason we went with

592
00:32:53.970 --> 00:32:57.720
that specific count streetshares
was because they're a veteran

593
00:32:57.720 --> 00:33:00.810
owned company. And I think it
comes down to trust, we both as

594
00:33:00.810 --> 00:33:03.240
borrowers have to trust the
lenders, and the lenders have to

595
00:33:03.240 --> 00:33:06.420
trust the borrowers. And by
having a marketplace that has

596
00:33:06.630 --> 00:33:09.270
veterans helping other veterans
bidding on those loans, it's a

597
00:33:09.270 --> 00:33:12.780
it's a lot more I feel, made me
more comfortable to accept that

598
00:33:12.780 --> 00:33:15.510
loan. And it's been a great
access and, and this is the sign

599
00:33:15.510 --> 00:33:17.820
that I want to see all those
replaced with because you never

600
00:33:17.820 --> 00:33:18.540
need any back.

601
00:33:18.540 --> 00:33:20.760
Mr. Chabot: Now, how is that
different from the one that we

602
00:33:20.760 --> 00:33:23.370
have in the hearing room here.
So this uses photoluminescent

603
00:33:23.370 --> 00:33:26.010
Zachary Green: Technology,
traditional exit signs use light

604
00:33:26.010 --> 00:33:29.580
bulbs, and electricity and
batteries, those are all bad for

605
00:33:29.580 --> 00:33:32.280
the environment, they all cost a
lot of money to maintain. This

606
00:33:32.280 --> 00:33:36.180
uses a patented type of
photoluminescent material very

607
00:33:36.180 --> 00:33:38.220
similar to what was used in the
World Trade Towers to help

608
00:33:38.220 --> 00:33:41.220
people find their way out. And
as a result, we can save

609
00:33:41.250 --> 00:33:44.040
businesses, hundreds of millions
of dollars and ongoing

610
00:33:44.040 --> 00:33:46.980
maintenance costs. And you never
have to replace these they have

611
00:33:46.980 --> 00:33:49.470
literally a lifetime guarantee
on them. So once you put them

612
00:33:49.470 --> 00:33:52.500
up, they work all the time and
in an emergency when the power's

613
00:33:52.500 --> 00:33:55.590
out. That's the time you really
need the exit sign with this the

614
00:33:55.590 --> 00:33:57.900
photoluminescence the glow in
the dark is gonna light up the

615
00:33:57.900 --> 00:34:00.210
whole entire area and show
people how to get out safely.

616
00:34:00.600 --> 00:34:02.640
Mr. Chabot: Thank you. Mr.
Hodges. Let me get back to you

617
00:34:02.640 --> 00:34:06.780
for a moment. Um, funding circle
originated in the UK, United

618
00:34:06.780 --> 00:34:10.710
Kingdom, I believe, which is
seen globally as the country I

619
00:34:10.710 --> 00:34:14.430
believe leading the way for peer
to peer lending. Could you

620
00:34:14.430 --> 00:34:17.280
discuss some of the differences
between the two countries if

621
00:34:17.280 --> 00:34:20.760
you're aware of them as relates
to p2p lending, and where we

622
00:34:20.760 --> 00:34:23.400
might be able to learn from the
UK's approach?

623
00:34:23.459 --> 00:34:25.229
Mr. Hodges: Sure thing. So I
think the biggest difference

624
00:34:25.229 --> 00:34:28.319
between the UK and the US from a
regulatory perspective is in the

625
00:34:28.319 --> 00:34:30.809
UK we have a simplified
regulatory framework that

626
00:34:30.809 --> 00:34:33.929
specific to peer to peer or
marketplace lenders, whereas in

627
00:34:33.929 --> 00:34:35.999
the United States, what you're
really dealing with is a whole

628
00:34:35.999 --> 00:34:39.299
set of kind of archaic lending
as well as securities rule on

629
00:34:39.299 --> 00:34:42.059
the security side particularly,
you know, the the main laws that

630
00:34:42.059 --> 00:34:45.659
can dictate how these businesses
work or the 33 Act 34 Act, the

631
00:34:45.659 --> 00:34:48.179
Investment Company Act in the 40
Act. These are These are laws

632
00:34:48.179 --> 00:34:50.669
that didn't really anticipate
the the internet and even

633
00:34:50.669 --> 00:34:53.759
subsequent measures to make
modify that was really haven't

634
00:34:53.759 --> 00:34:56.609
made it easier for businesses
like funding circle to operate.

635
00:34:56.789 --> 00:34:59.249
So I think that's the biggest
difference, specific regulation

636
00:34:59.249 --> 00:35:02.369
as opposed to We've kind of a
mix of different older

637
00:35:02.369 --> 00:35:06.839
regulations. I think the second
big piece is, as Peter mentioned

638
00:35:06.839 --> 00:35:09.749
before, the UK Government has
decided that this is as a

639
00:35:09.749 --> 00:35:13.019
proactive measure for funneling
capital of small businesses a

640
00:35:13.019 --> 00:35:15.929
very effective thing to do. And
so the British business bank

641
00:35:15.929 --> 00:35:19.439
actually invests in a fractional
piece of every single fractional

642
00:35:19.439 --> 00:35:21.569
loan that we do currently, which
we're really excited about and

643
00:35:21.569 --> 00:35:24.089
serves as a point of credibility
in the United States, it would

644
00:35:24.089 --> 00:35:26.669
literally take an act of
Congress to get the SBA to do

645
00:35:26.669 --> 00:35:28.679
something similar. And so
there's just not necessarily the

646
00:35:28.679 --> 00:35:29.969
same kind of level of support.

647
00:35:29.969 --> 00:35:33.950
Mr. Chabot: Well, you've come to
the right place for that. And my

648
00:35:33.950 --> 00:35:36.860
time has expired. The gentlelady
from New York ranking member is

649
00:35:36.860 --> 00:35:37.280
recognized.

650
00:35:37.280 --> 00:35:40.820
Ms. Valezques: Thank you, Mr.
Chairman, Mr. Renton, as the CEO

651
00:35:40.820 --> 00:35:44.360
of both Land Academy and the
lended conference, what are the

652
00:35:44.360 --> 00:35:48.980
most asked questions you receive
from prospective Small Business

653
00:35:48.980 --> 00:35:52.730
borrowers looking to use peer to
peer lending?

654
00:35:53.810 --> 00:35:56.600
Peter Renton: Well, I'm the most
asked question that I receive

655
00:35:56.600 --> 00:35:59.720
is, can you please fund my loan?
That's what that's what most

656
00:35:59.720 --> 00:36:04.970
people want. But in seriously
the what what small business

657
00:36:04.970 --> 00:36:08.390
borrowers want to know is, are
they getting ripped off. And so

658
00:36:08.390 --> 00:36:12.050
they want to basically know that
they're the options that are

659
00:36:12.050 --> 00:36:15.410
available to them are
appropriate. And they also want

660
00:36:15.410 --> 00:36:18.170
to know, what's the quickest,
and Zach just talked about he

661
00:36:18.170 --> 00:36:21.860
needed, they needed funds
quickly. So that speed is one of

662
00:36:21.860 --> 00:36:24.590
the things people don't want to
they know, a banks gonna take

663
00:36:24.590 --> 00:36:26.900
one or two or three months they
need, they need something

664
00:36:26.900 --> 00:36:29.180
quicker than that. So they want
to know what their options are.

665
00:36:29.180 --> 00:36:29.510
When it comes.

666
00:36:29.510 --> 00:36:32.600
Ms. Valezques: So Mr. Hodges,
how do we balance that, you

667
00:36:32.600 --> 00:36:36.830
know, small business, they need
money, they need it now? And to

668
00:36:36.860 --> 00:36:41.450
how do they know that they are
what they are being offered is

669
00:36:41.720 --> 00:36:45.500
transparent, that they're not
hidden fees? And so how do we

670
00:36:45.500 --> 00:36:46.220
balance that?

671
00:36:46.580 --> 00:36:49.490
Mr. Hodges: So for us, it really
comes down to transparency. So

672
00:36:49.490 --> 00:36:51.770
from the very moment that a
small business comes to our

673
00:36:51.770 --> 00:36:54.890
site, and uses our rate or
effective rate calculator to

674
00:36:54.890 --> 00:36:57.320
figure out how much the cost of
financing would be, we are

675
00:36:57.320 --> 00:37:00.620
completely transparent about the
interest rate, our origination

676
00:37:00.620 --> 00:37:03.950
fee, and any other potential
fees that a borrower might pay

677
00:37:03.950 --> 00:37:06.590
over the lifetime of the loan.
And I think it's ultimately kind

678
00:37:06.590 --> 00:37:09.350
of banding together around
transparent practices. That's

679
00:37:09.350 --> 00:37:12.380
what in many ways can set this
this segment apart from other

680
00:37:12.380 --> 00:37:13.160
digital lenders.

681
00:37:14.210 --> 00:37:18.590
Ms. Valezques: Mr. Renton, so
many times run right after the

682
00:37:18.590 --> 00:37:25.130
financial crisis 2008. Where
credit was tightening by

683
00:37:25.400 --> 00:37:30.380
financial institutions, we held
so many hearings here about the

684
00:37:30.410 --> 00:37:34.190
inability of small businesses to
access capital, but most

685
00:37:34.190 --> 00:37:38.630
importantly, smaller loans. And
when we question financial,

686
00:37:38.660 --> 00:37:41.840
traditional financial
institutions, they said that

687
00:37:42.050 --> 00:37:47.930
smaller loans were too costly.
Now we hear that according to

688
00:37:47.930 --> 00:37:53.570
one, industry expert,
institutional investors now

689
00:37:53.600 --> 00:37:59.330
account for 80 to 90%. of the
lane lending taking place on a

690
00:37:59.330 --> 00:38:05.210
peer to peer platform. Are you
seeing this trend? Yes. And do

691
00:38:05.210 --> 00:38:10.280
you think that? How can we
explain that on the one hand,

692
00:38:10.460 --> 00:38:14.180
they don't lend through
traditional traditional markets?

693
00:38:14.180 --> 00:38:17.660
Right. But now they're taking
advantage of this? Is that is

694
00:38:17.660 --> 00:38:22.580
because tradition, traditional
banking regulations that they're

695
00:38:22.580 --> 00:38:25.790
trying to circumvent? And
oversight, please?

696
00:38:25.880 --> 00:38:28.850
Peter Renton: I don't think so.
First, let's let's address the

697
00:38:28.850 --> 00:38:33.290
first part of that question. And
there is, there is no doubt that

698
00:38:33.290 --> 00:38:37.940
institutional investors are very
looking at this asset class and

699
00:38:37.970 --> 00:38:41.030
devoting a lot of capital to it.
But I also want to, I want to

700
00:38:41.030 --> 00:38:44.120
defend the retail investor, I'm
a retail investor myself have

701
00:38:44.120 --> 00:38:48.890
been for many years. And I have
found that whereas there's been

702
00:38:48.890 --> 00:38:51.110
there was a time a couple years
ago, where things were a little

703
00:38:51.110 --> 00:38:55.640
bit, they had to make some, some
tweaks to their systems. But

704
00:38:55.640 --> 00:38:58.970
today, retail investors get a
good deal. retail investors can

705
00:38:58.970 --> 00:39:02.600
invest on Lending Club and
prosper on funding circle, they

706
00:39:02.600 --> 00:39:06.770
can invest in loans, and it's
very, the set the level the

707
00:39:06.770 --> 00:39:10.190
playing field is level, they
have made it that way. Now, as

708
00:39:10.190 --> 00:39:13.190
to as to, you know,
institutional investors, why

709
00:39:13.190 --> 00:39:15.830
they're why they're doing it. I
mean, obviously, they're doing

710
00:39:15.830 --> 00:39:19.430
it for yield. These are, these
are often people that are

711
00:39:19.430 --> 00:39:22.640
institutions that weren't
involved in the lending business

712
00:39:22.640 --> 00:39:26.090
at all these were, there are
some hedge funds. There are some

713
00:39:26.210 --> 00:39:29.360
insurance companies, these are
companies that, for the most

714
00:39:29.360 --> 00:39:33.860
part, are new to to the lending
industry. And the fact that

715
00:39:33.860 --> 00:39:35.720
they're deploying capital of
might have gone into the

716
00:39:35.720 --> 00:39:37.640
equities market or the bond
market and they're deploying it

717
00:39:37.640 --> 00:39:38.480
into this industry.

718
00:39:38.870 --> 00:39:43.580
Ms. Valezques: Thank you. So you
don't see any type of impact on

719
00:39:43.610 --> 00:39:46.280
on the retail investors?

720
00:39:46.310 --> 00:39:47.420
Peter Renton: I don't see a
negative impact.

721
00:39:47.420 --> 00:39:52.130
Ms. Valezques: Okay. Thank you,
Mr. Green, then SBA. The Small

722
00:39:52.130 --> 00:39:56.330
Business Administration has in
essence presence in the peer to

723
00:39:56.330 --> 00:40:00.770
peer lending plus market if the
Small Business administration

724
00:40:00.770 --> 00:40:06.890
where to get more involved? What
would you like to see them do

725
00:40:06.920 --> 00:40:09.680
for small business owners like
yourself.

726
00:40:10.280 --> 00:40:13.070
Zachary Green: We actually did
start working with the SBA for

727
00:40:13.070 --> 00:40:16.190
one of the loans that we ended
up walking away from. And the

728
00:40:16.190 --> 00:40:19.040
reason was strictly it took too
much time, there's just too much

729
00:40:19.040 --> 00:40:21.620
paperwork, there was too much
red tape, there was just too

730
00:40:21.620 --> 00:40:25.040
many hoops to run through. And
in a small business, one week in

731
00:40:25.040 --> 00:40:27.980
my business is like a year in a
fortune 500 business, we don't

732
00:40:27.980 --> 00:40:32.330
have the time to go through all
that type of, for lack of a

733
00:40:32.330 --> 00:40:35.480
better word red tape to get
through that. So if they do get

734
00:40:35.480 --> 00:40:37.430
involved, we'd like to see them
speed the process up.

735
00:40:37.610 --> 00:40:40.250
Ms. Valezques: Thank you. My
time is up. I had a question for

736
00:40:40.250 --> 00:40:41.120
you, sir. But.

737
00:40:42.230 --> 00:40:44.990
Mr. Chabot: Well, we'll give
we'll give the gentlelady

738
00:40:44.990 --> 00:40:46.520
additional minutes if she'd like
to go ahead now.

739
00:40:47.450 --> 00:40:49.670
Ms. Valezques: You make a
statement before and while you

740
00:40:49.670 --> 00:40:53.120
were given your testimony where
you say that you could

741
00:40:53.150 --> 00:40:59.660
effectively judge over the
internet risks. Can you explain

742
00:40:59.660 --> 00:41:01.100
that a little further.

743
00:41:03.160 --> 00:41:07.240
Rajkamal Iyer: So at some level,
at some level, the measure of

744
00:41:07.240 --> 00:41:10.840
risk is basically the lack how
you can predict the likelihood

745
00:41:10.840 --> 00:41:13.960
of default based on some way
you're lending on. So credit

746
00:41:13.960 --> 00:41:18.310
score is a thing, right? People
care about 707 5600. So if you

747
00:41:18.310 --> 00:41:20.800
look at where the credit score
predicts default, what is the

748
00:41:20.800 --> 00:41:23.350
explanatory power of credit
score and predicting default,

749
00:41:23.680 --> 00:41:27.130
and the interest rate which
lenders bid on this? In

750
00:41:27.130 --> 00:41:29.650
predicting default, you find
that the interest rate which

751
00:41:29.650 --> 00:41:33.040
these platform lenders come
together and bid has a much

752
00:41:33.040 --> 00:41:36.070
better predictive power in terms
of default as compared to just

753
00:41:36.070 --> 00:41:37.000
using the credit score?

754
00:41:37.270 --> 00:41:37.810
Ms. Valezques: Thank you.

755
00:41:37.900 --> 00:41:40.420
Mr. Chabot: Okay. Don't waste
time spark. gentleman from

756
00:41:40.420 --> 00:41:42.880
Missouri, Mr. Luke De Meyer,
who's also the Vice Chairman of

757
00:41:42.880 --> 00:41:44.140
committees recognized five
minutes.

758
00:41:44.500 --> 00:41:45.910
Luke De Meyer: Thank you, Mr.
Chair. And thank all of you for

759
00:41:45.910 --> 00:41:48.820
being here today. And it's a
great subject to discuss your

760
00:41:49.870 --> 00:41:54.160
cut lots of questions. You know,
just a minute ago, Mr. Ira, you

761
00:41:54.160 --> 00:41:59.110
made the comment about bidding
for by the investor bidding, do

762
00:41:59.110 --> 00:42:02.770
these investors or they say we
have to have X amount of percent

763
00:42:02.770 --> 00:42:06.370
return on our investment are
they? So what how to take what

764
00:42:06.370 --> 00:42:07.420
you give or has this.

765
00:42:07.630 --> 00:42:10.150
Rajkamal Iyer: What happens is
you post a loan, so you say I

766
00:42:10.150 --> 00:42:15.130
want to borrow $10,000, at 10%,
or whatever. Investors decide

767
00:42:15.130 --> 00:42:18.100
how much they want to fund. So
they could say, I'm willing to

768
00:42:18.100 --> 00:42:21.340
bet 1000, I'm going to put a
million to put in $1,000, for X

769
00:42:21.340 --> 00:42:24.490
percent. So there is like an
auction, which happens. And then

770
00:42:25.090 --> 00:42:28.480
as soon as the whole amount gets
paid on, the lowest interest

771
00:42:28.480 --> 00:42:30.880
rate goes to the to the
borrower. So exactly what

772
00:42:30.880 --> 00:42:31.660
happened exactly.

773
00:42:31.810 --> 00:42:33.250
Luke De Meyer: Mr. Hodges,
you're in the you're in the

774
00:42:33.250 --> 00:42:36.700
business, how do your investors
bid on?

775
00:42:36.730 --> 00:42:39.370
Mr. Hodges: So in our case, we
actually set the price? Well, we

776
00:42:39.370 --> 00:42:42.400
found historically is actually,
the pricing that an auction

777
00:42:42.400 --> 00:42:45.070
mechanism would dictate is
driven more by liquidity than

778
00:42:45.070 --> 00:42:47.680
actual the underlying credit
risk. That's just for frost,

779
00:42:47.680 --> 00:42:47.800
what's

780
00:42:47.800 --> 00:42:49.420
Luke De Meyer: What's the
average return on your, your

781
00:42:49.420 --> 00:42:51.070
investor gets investing money
with you?

782
00:42:51.130 --> 00:42:53.260
Mr. Hodges: It really depends on
how much risk appetite that they

783
00:42:53.260 --> 00:42:55.870
have, if they want to invest in
safer loans, then you're talking

784
00:42:55.870 --> 00:42:58.720
about an effective yield to the
investor in the mid to high

785
00:42:58.720 --> 00:43:00.700
single digits, if they're
willing to go off the credit

786
00:43:00.700 --> 00:43:03.280
spectrum a little bit and take
more risks and more volatility

787
00:43:03.400 --> 00:43:05.230
than we have investors who are
who are earning in the low

788
00:43:05.230 --> 00:43:05.740
teens?

789
00:43:06.700 --> 00:43:09.550
Luke De Meyer: How much you got,
I think you said a billion

790
00:43:09.550 --> 00:43:12.160
dollars that you're trying to
put out, or you've had out this

791
00:43:12.160 --> 00:43:14.800
this last year you did, what's
percentage of loss do you have

792
00:43:14.800 --> 00:43:15.130
on that?

793
00:43:15.430 --> 00:43:18.160
Mr. Hodges: So our global
annualized Loss level is about

794
00:43:18.160 --> 00:43:22.210
2%. It varies a lot by credit
tier in our safest credits, our

795
00:43:22.210 --> 00:43:25.810
A plus credits, it's well under
1%. For riskier credits, as you

796
00:43:25.810 --> 00:43:28.900
move out, it can be as high as
five or 6% annualized. And what

797
00:43:28.900 --> 00:43:31.300
we're really trying to do is
just provide a fair price a fair

798
00:43:31.300 --> 00:43:34.270
and transparent price that gives
investors sufficient return,

799
00:43:34.420 --> 00:43:36.970
while at the same time making
sure the money the borrower is

800
00:43:36.970 --> 00:43:39.850
getting is priced inside their
own return envelope.

801
00:43:39.910 --> 00:43:42.790
Luke De Meyer: How easy is it
for the investor to divest

802
00:43:42.790 --> 00:43:46.510
themselves of this loan or
security that they purchase

803
00:43:47.170 --> 00:43:50.590
through you? In other words,
let's say that invest $100,000

804
00:43:50.620 --> 00:43:53.710
with you. But two years from
now, I want my money back or I

805
00:43:53.710 --> 00:43:55.870
think that the company, even
that have invested with is going

806
00:43:55.870 --> 00:43:58.660
south and I want to get out how
quickly how easy is it for me to

807
00:43:58.660 --> 00:44:00.010
divest myself of that investor.

808
00:44:00.190 --> 00:44:01.630
Mr. Hodges: So this works
actually quite differently in

809
00:44:01.630 --> 00:44:03.670
the UK, where we have a good
chunk of our business versus the

810
00:44:03.670 --> 00:44:06.670
US given the the the actual
securities regulations. In the

811
00:44:06.670 --> 00:44:10.000
UK, we actually have the world's
most active secondary market of

812
00:44:10.000 --> 00:44:13.450
any peer to peer lender. And so
meaningful share of our

813
00:44:13.480 --> 00:44:15.910
fractional notes, the actual
investments of loans are

814
00:44:15.910 --> 00:44:18.310
actually traded on a secondary
basis, which we're really

815
00:44:18.310 --> 00:44:21.010
excited about. Unfortunately, in
the US the way the securities

816
00:44:21.010 --> 00:44:23.470
rules are written, it's actually
much harder to do that. And

817
00:44:23.470 --> 00:44:25.990
they're both state level blue
sky laws as well as well as

818
00:44:25.990 --> 00:44:28.660
federal laws that make it
difficult to to craft a

819
00:44:28.660 --> 00:44:29.350
secondary market.

820
00:44:29.920 --> 00:44:31.780
Luke De Meyer: So once I once I
invest with you, I'm locked in

821
00:44:31.780 --> 00:44:32.230
pretty well.

822
00:44:32.230 --> 00:44:33.950
Mr. Hodges: Correct and so
people are taking your liquidity

823
00:44:33.950 --> 00:44:35.180
and we're very transparent about
that.

824
00:44:35.480 --> 00:44:37.250
Luke De Meyer: Okay, do you have
a particular industry that you

825
00:44:37.250 --> 00:44:40.430
specialize in providing funds
for or do you use to go across

826
00:44:40.760 --> 00:44:42.050
all industries in particular,

827
00:44:42.080 --> 00:44:44.390
Mr. Hodges: We're very
diversified. No one industry

828
00:44:44.390 --> 00:44:46.280
accounts for more than about 8%
of the book.

829
00:44:48.280 --> 00:44:50.740
Luke De Meyer: Mr. Iyer, you
talked about soft information,

830
00:44:50.740 --> 00:44:52.660
can you explain what soft
information is?

831
00:44:52.840 --> 00:44:57.100
Rajkamal Iyer: So now there are
two models in the peer to peer

832
00:44:57.100 --> 00:45:00.370
market which are competing one
is the model that is immediately

833
00:45:00.370 --> 00:45:03.910
platform decides the rate. The
other is investors like Zachary

834
00:45:03.910 --> 00:45:07.030
was thinking decide what is the
rate how much they bet. Soft

835
00:45:07.030 --> 00:45:10.240
information could be anything
which is non verifiable, which

836
00:45:10.240 --> 00:45:13.420
is basically credit score is
hard information which is based

837
00:45:13.420 --> 00:45:16.360
on your past credit history past
payments and other things soft

838
00:45:16.360 --> 00:45:19.150
information could be somebody
says I'm a veteran fighter I

839
00:45:19.150 --> 00:45:23.860
basically did this XYZ you have
a picture you have your anything

840
00:45:23.860 --> 00:45:26.320
which is non verifiable,
subjective, we put it on the

841
00:45:26.320 --> 00:45:29.500
bucket of non standard soft
information, you actually find

842
00:45:29.500 --> 00:45:33.490
that for people with low credit
scores, investors use a lot of

843
00:45:33.490 --> 00:45:35.350
soft information as a screening
mechanism.

844
00:45:35.380 --> 00:45:37.060
Luke De Meyer: We've got an
algorithm put together that they

845
00:45:37.060 --> 00:45:40.690
can figure this out. Yeah, I've
seen this before. This is this

846
00:45:40.690 --> 00:45:46.300
is very interesting stuff. Mr.
Renton quick question for you.

847
00:45:47.920 --> 00:45:51.400
You know, there's been a couple
of comments about needing some

848
00:45:51.430 --> 00:45:54.040
government intervention here and
always kind of cringed, it's

849
00:45:54.040 --> 00:45:56.320
like, don't be, you know, be
careful what you wish for here.

850
00:45:57.370 --> 00:46:00.430
Can you tell me are they have
there been any abuses that

851
00:46:00.430 --> 00:46:06.640
you've seen in the marketplace
with the different peer to peer

852
00:46:06.640 --> 00:46:11.230
lending groups? Are people who
accumulate money? The crowd

853
00:46:11.230 --> 00:46:12.820
funding? Is there something
there that we need to be

854
00:46:12.820 --> 00:46:15.460
watchful for, that we really
need to take a look at? Or is it

855
00:46:15.910 --> 00:46:18.520
everything? Is it pretty well,
the rules we have in place? are

856
00:46:18.520 --> 00:46:20.170
they sufficient right now and
put that way?

857
00:46:20.290 --> 00:46:23.110
Peter Renton: Well, as far as
abuses go, there have been,

858
00:46:23.380 --> 00:46:26.890
they've really been no cases of
abuses on the platform level.

859
00:46:27.010 --> 00:46:28.630
Now, of course, there's always
gonna be borrowers who are

860
00:46:28.630 --> 00:46:32.920
looking to commit fraud. And for
the most part, you know, the

861
00:46:32.950 --> 00:46:36.760
platform's do a very good job of
really isolating those and and

862
00:46:36.760 --> 00:46:39.760
rejecting them. But as far as
the on the investor side and the

863
00:46:39.760 --> 00:46:42.040
platform side, there's been no
cases of abuses whatsoever.

864
00:46:42.630 --> 00:46:44.970
Luke De Meyer: So at this point,
you really don't need to have a

865
00:46:44.970 --> 00:46:48.270
lot of government intervention,
the system is actually policing

866
00:46:48.270 --> 00:46:49.380
itself well enough.

867
00:46:49.590 --> 00:46:51.480
Peter Renton: Yeah, I think that
it would, it would, it would be

868
00:46:51.480 --> 00:46:54.690
nice if there was if it was, it
was some specific guidelines for

869
00:46:54.690 --> 00:46:57.390
this industry. But I think the
system as it as it is, today is

870
00:46:57.390 --> 00:46:57.810
working.

871
00:46:58.320 --> 00:47:00.000
Luke De Meyer: I see my time is
up. Thank you, Mr. Chairman. And

872
00:47:00.000 --> 00:47:01.170
thank all of you for being here
today.

873
00:47:01.199 --> 00:47:03.179
Mr. Chabot: gentleman's time has
expired. The gentleman from New

874
00:47:03.179 --> 00:47:04.979
Jersey, Mr. Payne is recognized
for five minutes.

875
00:47:07.870 --> 00:47:13.840
Mr. Payne: Thank you, Mr. Chair,
to the ranking member. Kind of

876
00:47:13.870 --> 00:47:20.650
along that line. Mr. Iyer, this
question really goes to customer

877
00:47:20.650 --> 00:47:28.180
service, and you know, the
possibility of hidden fees and

878
00:47:28.180 --> 00:47:32.410
what have you. What recourse
does a person have with peer to

879
00:47:32.410 --> 00:47:35.110
peer lending sites? When
something goes wrong?

880
00:47:38.200 --> 00:47:40.510
Rajkamal Iyer: You mean, the
borrower or the lender?

881
00:47:41.200 --> 00:47:41.920
Mr. Payne: The borrower?

882
00:47:42.760 --> 00:47:45.820
Rajkamal Iyer: I guess, when you
say something goes wrong, he has

883
00:47:45.820 --> 00:47:49.270
the money, right? So in a sense,
he went once the bidding is

884
00:47:49.270 --> 00:47:53.230
done, and you get the money, you
have, you have the funds. So you

885
00:47:53.230 --> 00:47:55.750
are the one who basically can
make things go wrong, because if

886
00:47:55.750 --> 00:47:59.170
you can default go from that
side the intermediary is is the

887
00:47:59.170 --> 00:48:03.310
one who is held hostage by the
borrower. Okay. The risk is that

888
00:48:03.310 --> 00:48:06.070
there are hidden fees and things
which are non transparent what I

889
00:48:06.070 --> 00:48:09.070
was getting at, but I guess
these markets are quite

890
00:48:09.100 --> 00:48:12.010
transparent in the sense that
they're hardly to charge hardly

891
00:48:12.010 --> 00:48:14.770
any fees, which are opaque, and
they're actually very

892
00:48:14.770 --> 00:48:18.100
transparent in that sense. So I
guess the risk of borrowers is

893
00:48:18.100 --> 00:48:20.500
pretty low, because you can see
exactly what you're getting

894
00:48:20.500 --> 00:48:20.890
into.

895
00:48:23.670 --> 00:48:26.190
Mr. Payne: You know, has there
been any research done? And the

896
00:48:26.370 --> 00:48:30.960
economic demographics of most
lenders, the types of businesses

897
00:48:30.960 --> 00:48:35.640
that they fund, and, you know,
and in what geographical areas?

898
00:48:36.029 --> 00:48:37.559
Rajkamal Iyer: So that's a very
interesting question.

899
00:48:37.589 --> 00:48:41.789
Unfortunately, you don't, the
lenders are anonymous. In all

900
00:48:41.789 --> 00:48:44.069
these peer to peer lending
platforms, you only see the

901
00:48:44.069 --> 00:48:48.329
borrowers. So you don't know who
is funding, what kind of loans

902
00:48:48.539 --> 00:48:51.299
and whether they have expertise
in funding. So that's a question

903
00:48:51.299 --> 00:48:53.009
which I don't think I would be
able to answer.

904
00:48:57.570 --> 00:49:06.000
Mr. Payne: All right. Let's see.
And, you know, Mr. Wrenn, we've

905
00:49:06.000 --> 00:49:09.660
heard earlier, you know, on
average, 8% of business loan

906
00:49:09.660 --> 00:49:13.770
applications are accepted in the
peer to peer platform. Can you

907
00:49:13.800 --> 00:49:19.140
elaborate on why you think that
may be the case? And what what

908
00:49:19.140 --> 00:49:21.780
can we do to increase that
number, if you think it should

909
00:49:21.780 --> 00:49:22.530
be increased?

910
00:49:23.460 --> 00:49:27.000
Peter Renton: So I think the 8%
number, it refers to the

911
00:49:27.000 --> 00:49:31.860
consumer side of p2p lending and
on the small business side I

912
00:49:31.860 --> 00:49:33.750
mean, Sam could obviously give
you the exact number for his

913
00:49:33.750 --> 00:49:38.730
platform I believe it's much
higher than 8% And again, I mean

914
00:49:38.760 --> 00:49:41.790
there are there but there having
said that, there are still rules

915
00:49:41.790 --> 00:49:46.020
and and guidelines these these
platforms put in place like if

916
00:49:46.020 --> 00:49:49.920
you are a startup with no
history, it's going to be hard

917
00:49:49.920 --> 00:49:52.830
for you to find a loan if you've
if you've never made money in

918
00:49:52.830 --> 00:49:54.360
your in the history of your
business. You're going to find

919
00:49:54.360 --> 00:49:57.090
it hard to make a lot to get a
loan through the through the the

920
00:49:57.090 --> 00:49:58.890
major online lending players

921
00:50:01.110 --> 00:50:06.030
Mr. Payne: And so, you know,
that's always the interesting

922
00:50:06.120 --> 00:50:10.920
aspect of this as well. I mean,
how does someone get started? If

923
00:50:10.920 --> 00:50:14.880
you? You know, your point was
you needed five years, but you

924
00:50:14.880 --> 00:50:18.930
only had three? I mean, you
know, how do you? How do you

925
00:50:18.960 --> 00:50:20.490
overcome that obstacle?

926
00:50:21.030 --> 00:50:23.190
Zachary Green: This is the
ultimate entrepreneurs dilemma.

927
00:50:23.190 --> 00:50:27.210
You need money to buy product
and to start marketing. But yet

928
00:50:27.210 --> 00:50:29.760
without any revenue stream, how
do you get that started? You

929
00:50:29.760 --> 00:50:32.070
know, what comes first the
chicken or the egg type thing?

930
00:50:32.700 --> 00:50:35.790
It's, it's tough. And it's not
only tough to get started, it's

931
00:50:35.790 --> 00:50:38.580
even tougher, someone said
success is the hard part

932
00:50:38.580 --> 00:50:42.300
failures, easy success of
continuing on to grow. And as

933
00:50:42.300 --> 00:50:45.330
those I get nervous when I get
these large deals comes in, come

934
00:50:45.330 --> 00:50:48.540
in, because I do I have enough
capital to be able to put the

935
00:50:48.600 --> 00:50:51.480
materials together in the early
days. Now, I'm confident that we

936
00:50:51.480 --> 00:50:54.660
can do that. But early on, it's
a constant challenge. At the end

937
00:50:54.660 --> 00:50:56.790
of the day, you've got to have
someone that you can look at all

938
00:50:56.790 --> 00:50:58.950
the financials in the world, it
comes down, do you believe in

939
00:50:58.950 --> 00:51:01.020
that entrepreneur? Do you
believe they have a pure heart

940
00:51:01.020 --> 00:51:03.780
and a good idea, and they're
solving a product in a unique

941
00:51:03.780 --> 00:51:06.510
way, and if they are, put the
risk in there and invest?

942
00:51:06.660 --> 00:51:09.480
Mr. Payne: So and I was gonna
mention that in your case,

943
00:51:09.480 --> 00:51:14.130
you're fortunate that you came
up with a great idea, and

944
00:51:14.190 --> 00:51:20.940
something that is necessary and
useful in society. So as that

945
00:51:20.940 --> 00:51:25.680
made it a bit easier for you to
have people kind of go along

946
00:51:25.680 --> 00:51:27.480
with investing?

947
00:51:27.510 --> 00:51:29.700
Zachary Green: It does, I think
somebody had a really good

948
00:51:29.700 --> 00:51:31.740
point, they said, when you're a
successful entrepreneur, you

949
00:51:31.740 --> 00:51:34.260
need to solve a complicated
problem in a very unique and

950
00:51:34.260 --> 00:51:36.960
elegant way, you have to have an
unfair competitive business

951
00:51:36.960 --> 00:51:39.270
advantage. And you also have to
have a really incredible

952
00:51:39.270 --> 00:51:41.160
marketing, sales and
distribution, when you can put

953
00:51:41.160 --> 00:51:43.920
all three of those together, it
makes a lot easier to get not

954
00:51:43.920 --> 00:51:47.730
only equity based financing, but
also debt based financing, the

955
00:51:47.730 --> 00:51:50.040
challenges the debt based
financing, they just most of the

956
00:51:50.040 --> 00:51:52.590
time, the larger banks just only
want to look at the spreadsheet,

957
00:51:52.590 --> 00:51:54.900
and they don't look at it
holistically. And again, what

958
00:51:54.960 --> 00:51:57.690
Dr. Ayers shared is so true. And
we saw that with our small

959
00:51:57.690 --> 00:52:00.690
regional lender, they looked at
the why rather than just

960
00:52:00.690 --> 00:52:02.700
strictly the numbers that we had
in the past.

961
00:52:02.790 --> 00:52:05.010
Mr. Payne: Okay, thank you. I
yield back.

962
00:52:05.310 --> 00:52:06.780
Mr. Chabot: Thank you, the
gentleman's time has expired.

963
00:52:06.780 --> 00:52:09.360
The gentleman from New York, Mr.
Gibson is recognized for five

964
00:52:09.360 --> 00:52:09.720
minutes.

965
00:52:10.139 --> 00:52:13.679
Mr. Gibson: I thank the
chairman. Another informative

966
00:52:13.679 --> 00:52:17.879
hearing thank both the chairman
and the ranking member, thanks

967
00:52:17.879 --> 00:52:21.359
to the panelists as well helped
me helped me better understand

968
00:52:21.899 --> 00:52:26.549
this piece here. I can imagine a
number of factors, why

969
00:52:26.579 --> 00:52:31.739
individuals would be turned down
for conventional loan helped me

970
00:52:31.739 --> 00:52:34.889
understand a little bit better,
maybe with some finer

971
00:52:34.919 --> 00:52:39.659
resolution, how someone sort of
misses that, but it gets into

972
00:52:39.659 --> 00:52:43.649
your window, your 8% why that
would be unattractive, to a

973
00:52:43.649 --> 00:52:47.669
conventional loan, but yet
attractive to to to the

974
00:52:47.669 --> 00:52:48.089
industry.

975
00:52:51.570 --> 00:52:53.700
Mr. Hodges: I guess I can take a
first crack at the question. I'm

976
00:52:53.700 --> 00:52:56.670
going to use a very good one. I
guess my our perspective on this

977
00:52:56.670 --> 00:53:00.000
is most banks use most mostly a
check checklist based

978
00:53:00.000 --> 00:53:02.910
underwriting approach, where a
small business needs to meet all

979
00:53:02.910 --> 00:53:05.520
of a variety of different
criteria, number of years in

980
00:53:05.520 --> 00:53:08.640
business, amount of revenue type
of industry, particularly if

981
00:53:08.640 --> 00:53:12.030
it's a cyclical industry, they
may not want at all amount of

982
00:53:12.060 --> 00:53:14.520
you know, tax return and
profitability, when particularly

983
00:53:14.520 --> 00:53:16.830
in the early days, most small
businesses don't run with tax

984
00:53:16.830 --> 00:53:20.850
return and profitability, and so
forth. Whereas in our case, at

985
00:53:20.850 --> 00:53:22.710
funding circle, what we're
really looking to do is develop

986
00:53:22.740 --> 00:53:25.980
a comprehensive perspective on
the business really understand

987
00:53:25.980 --> 00:53:28.710
on a forward looking basis, what
is going to be the cash flow

988
00:53:28.710 --> 00:53:31.560
that business? And can that
business support a loan? If so

989
00:53:31.560 --> 00:53:34.200
we're happy to lend to them. So
it's really the flexibility of

990
00:53:34.200 --> 00:53:36.810
our underwriting model, and also
the flexibility of our pricing

991
00:53:36.840 --> 00:53:39.660
that allows us to offer credit
to many small businesses who

992
00:53:39.660 --> 00:53:40.800
otherwise don't have access.

993
00:53:42.000 --> 00:53:44.310
Mr. Gibson: Yeah, thanks. And
then just to follow up on that.

994
00:53:45.600 --> 00:53:50.280
So has there been Have you ever
had for funding circle? Have you

995
00:53:50.280 --> 00:53:55.950
ever had an independent audit of
some kind? And are there any

996
00:53:55.980 --> 00:53:59.070
industry ratings in this in this
field?

997
00:54:00.120 --> 00:54:02.340
Mr. Hodges: To my knowledge,
there are no industry ratings,

998
00:54:02.340 --> 00:54:04.740
per se, there's certainly
consumer ratings. So for

999
00:54:04.740 --> 00:54:08.130
example, we use Trustpilot. To
gather feedback from our

1000
00:54:08.130 --> 00:54:11.490
customers, we also track very
carefully our net promoter

1001
00:54:11.490 --> 00:54:15.780
score, or net promoter score in
the US is about 70%, which

1002
00:54:15.780 --> 00:54:18.480
really excited about in the UK,
it's 89%. So it's actually a

1003
00:54:18.480 --> 00:54:21.930
pretty, pretty high level.
Beyond that, I guess, in terms

1004
00:54:21.930 --> 00:54:25.770
of, you know, how we're
evaluated. You know, it's more

1005
00:54:25.800 --> 00:54:28.890
around auditing the specific
operational practices that we

1006
00:54:28.920 --> 00:54:30.570
were that we use, and
particularly now that we're

1007
00:54:30.570 --> 00:54:32.940
partnering with, with banks,
actually, on the referral basis,

1008
00:54:33.060 --> 00:54:35.280
we've actually gone through
pretty extensive audits just to

1009
00:54:35.280 --> 00:54:37.410
make sure that every piece of
the business is really clean.

1010
00:54:41.730 --> 00:54:43.650
Mr. Gibson: Any other comments
from the from the panel?

1011
00:54:46.409 --> 00:54:49.469
Rajkamal Iyer: So I'll just make
one comment, which is where this

1012
00:54:49.499 --> 00:54:52.439
industry is heading to in a
sense, initially, you used to

1013
00:54:52.439 --> 00:54:55.199
see stuff that people used to
post and other people used to

1014
00:54:55.199 --> 00:54:59.399
bed. Now what's happening is the
trend is because that limit

1015
00:54:59.399 --> 00:55:03.449
scale A lot of platforms are
doing the screening themselves.

1016
00:55:03.899 --> 00:55:08.099
So Zach, if the platform Zachary
was talking about allows people

1017
00:55:08.099 --> 00:55:12.239
to bed, but the platform Sam is
talking about, they decide the

1018
00:55:12.239 --> 00:55:15.719
screening. I think there is
merits to both. But I think it's

1019
00:55:15.719 --> 00:55:17.819
something when somebody gets
turned down, they should have

1020
00:55:17.819 --> 00:55:22.289
the option to go on to a reverse
auction site. So that just in

1021
00:55:22.289 --> 00:55:24.389
case they got it wrong,
investors have a choice to get

1022
00:55:24.389 --> 00:55:28.829
funding because they might want
to lend. That's that's something

1023
00:55:28.829 --> 00:55:31.319
which the market has to decide.
But that would be a viable

1024
00:55:31.319 --> 00:55:31.949
alternative.

1025
00:55:33.630 --> 00:55:35.910
Peter Renton: And I think that
is happening, I think, you know,

1026
00:55:35.910 --> 00:55:39.270
will I know people that are
going to multiple sites at the

1027
00:55:39.270 --> 00:55:43.080
same time, because they, they
they want to, they want to see

1028
00:55:43.080 --> 00:55:44.820
what see what the different
rates that they're going to get.

1029
00:55:44.820 --> 00:55:49.080
And I don't see anything wrong
with that. I think there are

1030
00:55:49.080 --> 00:55:53.670
different models out there. As
Raj was saying, and, you know,

1031
00:55:53.670 --> 00:55:57.180
the predominant model today is
the fixed price model where the

1032
00:55:57.180 --> 00:56:00.210
platform sets the risk. That is
that, you know whether that wins

1033
00:56:00.210 --> 00:56:02.280
out in the end is it remains to
be seen, but that's certainly

1034
00:56:02.280 --> 00:56:04.740
the way it looks like. That's
certainly the most predominant

1035
00:56:04.740 --> 00:56:05.220
one today.

1036
00:56:06.630 --> 00:56:08.310
Mr. Gibson: I thank you,
gentlemen, your testimony has

1037
00:56:08.310 --> 00:56:10.560
been helpful to me. I yield
back, Mr. Chairman.

1038
00:56:10.560 --> 00:56:12.610
Mr. Chabot: Thank you. The
gentleman yields back. The

1039
00:56:12.610 --> 00:56:15.340
gentlelady from North Carolina.
Ms. Adams is recognized for five

1040
00:56:15.340 --> 00:56:15.730
minutes.

1041
00:56:16.060 --> 00:56:18.130
Ms. Adams: Thank you, Mr.
Chairman, Ranking Member

1042
00:56:18.130 --> 00:56:22.480
malesko. And thank you,
gentlemen, for your testimony. I

1043
00:56:22.480 --> 00:56:26.050
agree that small businesses are
the engines that drive our

1044
00:56:26.050 --> 00:56:30.370
economy. Over the past several
years, we've seen a severe

1045
00:56:30.370 --> 00:56:34.300
credit crunch within our
financial markets, banks have

1046
00:56:34.300 --> 00:56:37.960
not given loans at the same rate
as previous years. So with that,

1047
00:56:37.960 --> 00:56:42.970
Mrs. Hodges, let me ask you
about funding circle, which was

1048
00:56:42.970 --> 00:56:45.790
founded based on your
experiences as a business owner,

1049
00:56:46.120 --> 00:56:52.240
who had difficulty getting
access to to credit. So with

1050
00:56:52.270 --> 00:56:54.760
funding circle being one of the
largest peer to peer lending

1051
00:56:54.760 --> 00:56:58.480
sources, can you share a
potential market threats, both

1052
00:56:58.480 --> 00:57:01.360
financially and technologically
that peer to peer lenders

1053
00:57:01.660 --> 00:57:05.800
currently face or that you
foresee that may deter lending?

1054
00:57:08.140 --> 00:57:10.540
Mr. Hodges: At this point, what
I'd say is, even though some of

1055
00:57:10.540 --> 00:57:12.790
us are getting to scale, we're
still very much in the early

1056
00:57:12.790 --> 00:57:15.790
days of developing the business,
small business lending Term

1057
00:57:15.790 --> 00:57:20.140
Lending is a $270 billion market
in the United States, if you put

1058
00:57:20.140 --> 00:57:22.570
in kind of shorter term lending,
it's probably closer to 600 or

1059
00:57:22.570 --> 00:57:25.450
$700 billion. So none of us are
really meaningful yet. And I

1060
00:57:25.450 --> 00:57:28.360
guess what I'd say is, you know,
cutting through the noise, you

1061
00:57:28.360 --> 00:57:30.220
know, it's small business, a
very fragmented market, cutting

1062
00:57:30.220 --> 00:57:32.320
through the noise and making
sure that a small business owner

1063
00:57:32.320 --> 00:57:34.450
really understands what your
product does, and how it's

1064
00:57:34.450 --> 00:57:37.240
differentiated from what all
else is out, there is one of the

1065
00:57:37.240 --> 00:57:40.900
major things that we focus on in
terms of kind of competitive

1066
00:57:40.900 --> 00:57:44.260
threats or big looming hazards.
There's nothing that's really

1067
00:57:44.260 --> 00:57:46.810
keeping us up at night, it's
really just around operating the

1068
00:57:46.810 --> 00:57:49.300
business in a very reliable way,
and making sure that we're

1069
00:57:49.300 --> 00:57:50.950
scaling in a responsible
fashion.

1070
00:57:52.120 --> 00:57:53.800
Ms. Adams: Can you tell us a
little bit about the

1071
00:57:53.800 --> 00:57:57.430
demographics of the businesses
that your company services?

1072
00:57:57.490 --> 00:57:59.950
Mr. Hodges: Sure, so our
borrowers are all across the

1073
00:57:59.950 --> 00:58:04.120
country. And they also range
very widely in terms of their

1074
00:58:04.120 --> 00:58:06.640
ethnic education background,
certainly gender as well. And

1075
00:58:06.640 --> 00:58:09.280
we're very proud of lots of
different stories of small

1076
00:58:09.280 --> 00:58:12.220
business owners who have had
very bad experiences with the

1077
00:58:12.220 --> 00:58:16.180
banking system, but who have
subsequently taken loans from

1078
00:58:16.180 --> 00:58:19.510
us. In terms of the type of
business it can range all the

1079
00:58:19.510 --> 00:58:22.300
way from kind of retailers
service businesses to consumers,

1080
00:58:22.480 --> 00:58:25.750
through like manufacturing and
logistics, to, you know,

1081
00:58:25.750 --> 00:58:28.090
businesses, b2b businesses, and
businesses that are that are

1082
00:58:28.090 --> 00:58:31.330
serving other companies. And
what we've developed is a an

1083
00:58:31.330 --> 00:58:33.850
underwriting framework and
origination approach that allows

1084
00:58:33.850 --> 00:58:35.440
us to serve a very broad base.

1085
00:58:36.220 --> 00:58:39.250
Ms. Adams: Okay. Now, a peer to
peer lending is a very good

1086
00:58:39.250 --> 00:58:44.710
model for some communities. But
many minority owned firms, with

1087
00:58:44.710 --> 00:58:48.490
the capacity to move to the next
level, need different types of

1088
00:58:48.490 --> 00:58:52.990
access to affordable capital.
And still, many of these firms

1089
00:58:52.990 --> 00:58:57.880
jump higher for less. So what
models or policy recommendations

1090
00:58:57.880 --> 00:59:01.540
can you offer to the committee
that we might explore that would

1091
00:59:01.540 --> 00:59:05.230
be beneficial to minority owned
firms on both traditional and

1092
00:59:05.230 --> 00:59:06.940
non traditional platforms?

1093
00:59:09.100 --> 00:59:11.620
Mr. Hodges: So I think the place
that we start is around self

1094
00:59:11.620 --> 00:59:16.030
regulation of non bank lenders.
And we're working currently with

1095
00:59:16.060 --> 00:59:19.150
a number of other players in the
space to make sure that we all

1096
00:59:19.150 --> 00:59:22.480
have very responsible standards
around disclosure around the

1097
00:59:22.480 --> 00:59:24.580
effective rates that we're
charging through, and also our

1098
00:59:24.580 --> 00:59:26.950
collections and servicing
practices. Because historically,

1099
00:59:26.950 --> 00:59:29.530
if you look at what's gone bad
in in small business lending,

1100
00:59:29.950 --> 00:59:31.750
those are those are certainly
areas where problems have

1101
00:59:31.750 --> 00:59:34.900
occurred. In terms of policy
recommendations, I guess what

1102
00:59:34.900 --> 00:59:37.900
I'd say is, I think for now,
many of us are really focused

1103
00:59:37.900 --> 00:59:41.050
again on self regulation. That
being said, to the extent that

1104
00:59:41.080 --> 00:59:43.180
disclosure, you know,
particularly came up as

1105
00:59:43.180 --> 00:59:45.940
something that you know, folks
who take a closer look at I do

1106
00:59:45.940 --> 00:59:48.010
think that disclosure around
rate and kind of effective

1107
00:59:48.010 --> 00:59:50.170
financing charges might be a
good place to start.

1108
00:59:50.620 --> 00:59:52.810
Ms. Adams: Thank you would
either the other gentleman like

1109
00:59:52.810 --> 00:59:54.070
to respond to that question?

1110
00:59:54.070 --> 00:59:58.560
Zachary Green: I think a great
idea it knows no color, no

1111
00:59:58.560 --> 01:00:00.870
religion, no background, if you
Have a great idea. And you're

1112
01:00:00.870 --> 01:00:03.540
able to put it out there and the
market supports that. And they

1113
01:00:03.540 --> 01:00:06.870
see that then hopefully they'll
the funding will come along with

1114
01:00:06.870 --> 01:00:07.170
that.

1115
01:00:09.120 --> 01:00:12.090
Peter Renton: I would just say
that they're one of the great

1116
01:00:12.090 --> 01:00:14.940
things about these online
marketplaces is that they

1117
01:00:14.940 --> 01:00:18.540
operate online. So there's
really the geographically have,

1118
01:00:18.810 --> 01:00:21.330
they're completely open to
everybody. It's not like there

1119
01:00:21.330 --> 01:00:24.900
are certain certain banks that
don't operate in certain areas,

1120
01:00:24.900 --> 01:00:27.840
or you have to travel through
two hours to go to your local

1121
01:00:27.840 --> 01:00:32.160
bank. The great thing about
online is that there that is

1122
01:00:32.190 --> 01:00:34.530
convenient to the entire
country, and there's no

1123
01:00:34.530 --> 01:00:38.250
discrimination whatsoever when
it comes to access. And so I

1124
01:00:38.250 --> 01:00:42.120
think having that having that be
a central tenant. And the other

1125
01:00:42.120 --> 01:00:44.880
thing I'd say, is there, there's
been talk of partnerships with

1126
01:00:44.880 --> 01:00:49.920
CDFIs, which I think is it's
still in its infancy. But you

1127
01:00:49.920 --> 01:00:54.390
know, CDFIs, and community
banks, could very well use some

1128
01:00:54.390 --> 01:00:57.510
of the technological know how
that these online platforms

1129
01:00:57.510 --> 01:01:02.040
have. And I know there's been
some talks in this area. And I

1130
01:01:02.040 --> 01:01:07.050
think that's somewhere where,
you know, organizations that

1131
01:01:07.050 --> 01:01:10.590
serve these under underserved
areas can really benefit.

1132
01:01:10.890 --> 01:01:12.240
Ms. Adams: Thank you. I yield
back.

1133
01:01:13.349 --> 01:01:14.879
Mr. Chabot: Thank you.
Gentlelady yields back, the

1134
01:01:14.879 --> 01:01:17.669
gentleman from New York, Mr.
Hanna, who is the chairman of

1135
01:01:17.669 --> 01:01:21.419
the Small Business Subcommittee
on contracting and workforce is

1136
01:01:21.419 --> 01:01:22.439
now recognized for five minutes.

1137
01:01:24.220 --> 01:01:37.750
Mr. Hanna: him credit for that.
I don't think he would be in the

1138
01:01:37.750 --> 01:01:45.310
same jam today, if he was doing,
what you're doing. The the

1139
01:01:45.310 --> 01:01:49.780
information that you provide
your investors with, you know,

1140
01:01:50.110 --> 01:01:53.470
there are experienced, there are
qualified investments or ways to

1141
01:01:53.470 --> 01:01:57.280
do that. I love what you do. I
think it serves a great purpose.

1142
01:01:57.280 --> 01:02:00.880
And I think that in the
marketplace, in fit, as long as

1143
01:02:00.880 --> 01:02:04.240
there's transparency, and Mr.
Hodges To be frank, you may have

1144
01:02:04.240 --> 01:02:08.560
a small loss ratio, but loss
ratios are measured over time.

1145
01:02:08.830 --> 01:02:11.710
Not I mean, that might be last
year as next year is could be

1146
01:02:11.710 --> 01:02:17.980
much worse. I'm curious about
the the due diligence that you

1147
01:02:17.980 --> 01:02:22.330
provide, other than the obvious
quality of diversity you have,

1148
01:02:22.360 --> 01:02:26.530
which is a big piece of it. How
do you how do you say to people

1149
01:02:26.530 --> 01:02:29.920
that send you in what are your
lower limits? And maybe this is

1150
01:02:29.920 --> 01:02:34.990
asked, I apologize for being
late. But how do you how do you

1151
01:02:35.140 --> 01:02:40.120
inform people who are giving you
large amounts of money, what

1152
01:02:40.120 --> 01:02:45.430
their true risk is, in the
revisit Mr. Milk conditions over

1153
01:02:45.490 --> 01:02:49.750
over history was extremely low,
not that much more than any

1154
01:02:49.750 --> 01:02:51.460
other bond. So.

1155
01:02:53.680 --> 01:02:56.410
Mr. Hodges: Sure, so similar to
how we think about the borrower

1156
01:02:56.410 --> 01:02:59.710
side of our business. Also, on
the investor side, our watchword

1157
01:02:59.710 --> 01:03:02.230
really is around transparency
and disclosure. And so what I

1158
01:03:02.230 --> 01:03:05.440
mean by that is when an investor
comes to us be at an individual

1159
01:03:05.440 --> 01:03:08.110
or an institution and wants to
buy the loans or pieces of loans

1160
01:03:08.110 --> 01:03:11.530
through us, what we provide is
really detailed information

1161
01:03:11.530 --> 01:03:14.020
about historically how small
business credit is performed at

1162
01:03:14.020 --> 01:03:16.870
different points in the cycle.
We also provide full disclosure

1163
01:03:16.870 --> 01:03:20.260
on our current loan book. And
lastly, on a loan by loan basis,

1164
01:03:20.350 --> 01:03:22.840
we provide very detailed
financial information on a go

1165
01:03:22.840 --> 01:03:25.420
forward as well as historical
basis that allows them to

1166
01:03:25.420 --> 01:03:28.060
understand what is the debt
service coverage ratio, which is

1167
01:03:28.060 --> 01:03:30.310
really the the business's kind
of cash flow ability to pay back

1168
01:03:30.310 --> 01:03:33.310
the loan, the level of asset
coverage, and then also some of

1169
01:03:33.310 --> 01:03:35.320
the characteristics of the
business itself.

1170
01:03:36.970 --> 01:03:38.770
Mr. Hanna: What do you look for
in a net worth of a guy who's

1171
01:03:38.770 --> 01:03:41.530
going to a woman, whoever, it's
gonna send you a check to

1172
01:03:41.530 --> 01:03:42.070
invest?

1173
01:03:42.190 --> 01:03:45.100
Mr. Hodges: So in the United
States, we limit our marketplace

1174
01:03:45.100 --> 01:03:47.950
to accredited investors only. So
they have to meet the SEC

1175
01:03:47.950 --> 01:03:50.950
accredited investors, whatnot,
million dollars, it's million

1176
01:03:50.950 --> 01:03:53.500
dollars, no net worth outside of
your home? You know,

1177
01:03:53.950 --> 01:03:55.750
Mr. Hanna: when you're speaking
to minority groups and their

1178
01:03:55.750 --> 01:03:59.530
ability to access what you do,
not just minorities, but anybody

1179
01:03:59.530 --> 01:04:02.860
who might want to borrow money,
there's lower limits to the

1180
01:04:02.860 --> 01:04:06.460
borrower to give up you have
lower limits for for the

1181
01:04:06.460 --> 01:04:09.010
investor? What are the lower
limits for the borrower? I mean,

1182
01:04:09.280 --> 01:04:11.650
how does how far down the food
chain do you go?

1183
01:04:11.680 --> 01:04:15.250
Mr. Hodges: Sure. So currently,
our limits on the borrower side,

1184
01:04:15.280 --> 01:04:17.650
our business needs to have been
around for at least two years,

1185
01:04:17.650 --> 01:04:20.560
so two years worth of tax return
information, so that we can

1186
01:04:20.560 --> 01:04:23.050
really assess how that business
is performed and make some

1187
01:04:23.050 --> 01:04:25.000
prediction around how we think
it'll perform in the future.

1188
01:04:25.390 --> 01:04:27.880
Secondly, the individual behind
the business needs to have a

1189
01:04:27.880 --> 01:04:31.630
FICO score of 620 or higher. We
use that as a qualification

1190
01:04:31.630 --> 01:04:34.420
criteria. It's actually a
minority of the signal we use to

1191
01:04:34.420 --> 01:04:37.600
eventually approve the loan. The
business needs to have been

1192
01:04:37.600 --> 01:04:40.840
profitable in at least one of
the last two years. Obviously,

1193
01:04:40.840 --> 01:04:42.700
if the business has been around
longer than that, and most of

1194
01:04:42.700 --> 01:04:44.800
our businesses have, and our
average business has been around

1195
01:04:44.800 --> 01:04:47.380
for about eight years, then you
know, it's easier to kind of get

1196
01:04:47.380 --> 01:04:50.410
a gauge of profitability. Those
are really the fundamental

1197
01:04:50.440 --> 01:04:53.230
qualification criteria, just to
be eligible for funding Circle

1198
01:04:53.230 --> 01:04:53.920
line at this point.

1199
01:04:54.130 --> 01:04:56.500
Mr. Hanna: You feel pretty good
about the future. I mean, you

1200
01:04:56.530 --> 01:05:00.970
with all this due diligence on
your part and informing people

1201
01:05:00.970 --> 01:05:06.340
and setting those standards for
borrowers. You must have done

1202
01:05:06.340 --> 01:05:11.650
projections on your own
expectations of loss. And if

1203
01:05:11.650 --> 01:05:15.670
your returns are x, you do
subtract that What are you? What

1204
01:05:15.670 --> 01:05:16.360
are you projecting?

1205
01:05:16.780 --> 01:05:19.840
Mr. Hodges: Sure. So we have
done extensive kind of testing

1206
01:05:19.840 --> 01:05:23.380
and analysis around how our
current book would perform

1207
01:05:23.560 --> 01:05:26.710
either in an economic downturn
or in an environment with

1208
01:05:26.710 --> 01:05:29.680
meaningfully higher interest
rates. And what we see is

1209
01:05:29.710 --> 01:05:31.990
certainly the loss rates, the
fall and loss rates would go up

1210
01:05:31.990 --> 01:05:34.960
meaningfully, but still an
investor who's sufficiently

1211
01:05:34.960 --> 01:05:38.020
diversified, meaning they hold
pieces of at least 100 loans

1212
01:05:38.200 --> 01:05:40.750
actually wouldn't lose any
principle based on the stress

1213
01:05:40.750 --> 01:05:41.500
testing that we've done.

1214
01:05:41.950 --> 01:05:44.410
Mr. Hanna: So that you feel
you're at least 100% covered on

1215
01:05:44.410 --> 01:05:45.220
the bottom side.

1216
01:05:45.700 --> 01:05:48.130
Mr. Hodges: I never would say
100% covered, right. There's

1217
01:05:48.130 --> 01:05:50.020
always there's always
idiosyncratic risks.

1218
01:05:50.020 --> 01:05:51.220
Mr. Hanna: I'm not sure what you
just said, though, but I

1219
01:05:51.220 --> 01:05:53.620
appreciate where you're going.
Thank you. My time is expired.

1220
01:05:54.340 --> 01:05:54.640
Thank you.

1221
01:05:54.640 --> 01:05:57.280
Mr. Chabot: the gentleman yields
back the gentlelady from New

1222
01:05:57.280 --> 01:05:59.080
York. Ms. Clark is recognized
for five minutes.

1223
01:05:59.110 --> 01:06:01.060
Ms. Clark: I thank you, Mr.
Chairman, and I thank our

1224
01:06:01.060 --> 01:06:13.690
ranking member Miss Velazquez.
Okay, you can hear me okay. That

1225
01:06:13.690 --> 01:06:17.740
better? Okay. Is on.

1226
01:06:21.950 --> 01:06:24.500
Mr. Chabot: We'll restart his
time. So she has a full five

1227
01:06:24.500 --> 01:06:25.010
minutes. So.

1228
01:06:25.460 --> 01:06:29.000
Ms. Clark: Thank you. Okay. Let
me thank our witnesses. This is

1229
01:06:29.000 --> 01:06:33.470
a very intriguing and important
subject that we're discussing

1230
01:06:33.470 --> 01:06:35.660
today, because access to
capital, we know was a

1231
01:06:35.660 --> 01:06:38.750
fundamental building block for
small businesses in the United

1232
01:06:38.750 --> 01:06:43.430
States. And during the financial
crisis of 2008, it led banks to

1233
01:06:43.430 --> 01:06:49.370
pulling out $106 billion dollars
in lending in the lending

1234
01:06:49.370 --> 01:06:53.330
market. So this has compelled
small businesses to seek the

1235
01:06:53.360 --> 01:06:57.080
necessary loans from non
traditional lending sources,

1236
01:06:57.230 --> 01:07:00.980
such as peer to peer lending. We
have seen that these peer to

1237
01:07:00.980 --> 01:07:04.790
peer lending marketplaces are
subject to high risk and

1238
01:07:04.790 --> 01:07:09.650
potentially fraudulent services
or activities. What suggestions

1239
01:07:09.650 --> 01:07:14.270
might you have to improve the
current regulatory climate and

1240
01:07:14.300 --> 01:07:17.810
oversight environments for peer
to peer marketplaces to

1241
01:07:17.810 --> 01:07:22.040
counteract practices of fraud or
other illicit investing

1242
01:07:22.040 --> 01:07:24.290
practices? Have you thought that
through?

1243
01:07:26.000 --> 01:07:29.810
Peter Renton: I'll take this I
am. Yeah, as I said earlier, I

1244
01:07:29.870 --> 01:07:35.000
there has actually been no cases
of fraud in this country from on

1245
01:07:35.000 --> 01:07:38.900
the platform side. Now that the
borrower sides a different story

1246
01:07:38.900 --> 01:07:41.210
on the consumer side, and I
don't know if Sam can probably

1247
01:07:41.210 --> 01:07:45.500
talk about his experiences with
fraud, but fraud on the platform

1248
01:07:45.500 --> 01:07:50.420
side, which is really is a
problem in some countries, it

1249
01:07:50.420 --> 01:07:54.470
simply has not been a problem in
this country. I think, the even

1250
01:07:54.470 --> 01:07:56.690
though, that there's a myriad of
rules and regulations that these

1251
01:07:56.690 --> 01:08:00.560
platforms have to adhere to. And
for the most part that works

1252
01:08:00.560 --> 01:08:02.810
when it comes to deterring
fraud.

1253
01:08:03.110 --> 01:08:07.070
Ms. Clark: So are you saying
that there is no necessity for

1254
01:08:07.070 --> 01:08:09.620
that in the United States? Is
that what you're saying?

1255
01:08:09.920 --> 01:08:11.750
Peter Renton: I think, yes, I
think we have the.

1256
01:08:12.410 --> 01:08:16.250
Ms. Clark: Saying there's no
necessity to put any safeguards

1257
01:08:16.250 --> 01:08:17.510
or regulations in place.

1258
01:08:17.510 --> 01:08:18.080
Peter Renton: I think that.

1259
01:08:18.080 --> 01:08:19.500
Ms. Clark: Fraud is non
existent.

1260
01:08:19.530 --> 01:08:22.770
Peter Renton: The safeguards
that are in place today are

1261
01:08:22.770 --> 01:08:25.020
sufficient to deter fraud.
That's what I'm saying.

1262
01:08:29.370 --> 01:08:31.920
Mr. Hodges: Not at all, if I
can, if I can speak that

1263
01:08:31.920 --> 01:08:35.220
directly, I guess on the on the
platform fraud side, I guess

1264
01:08:35.220 --> 01:08:37.260
what I'd say is, we're already
heavily regulated, we're

1265
01:08:37.260 --> 01:08:39.570
regulated as a securities
business, we own a broker

1266
01:08:39.570 --> 01:08:42.900
dealer, all the information we
provide to our investors who are

1267
01:08:42.900 --> 01:08:45.990
buying pieces of loans through
us have to comply with the

1268
01:08:45.990 --> 01:08:49.530
disclosure standards, this SEC
has set up and under securities

1269
01:08:49.530 --> 01:08:52.740
law for any private offering.
So, you know, certainly making

1270
01:08:52.740 --> 01:08:54.720
sure that what we what we send
to investors to make sure

1271
01:08:54.720 --> 01:08:56.970
they're making a good decision.
It's a really important piece of

1272
01:08:56.970 --> 01:08:59.460
the business. But I think those
rules are already fully in

1273
01:08:59.460 --> 01:09:02.580
place. On the borrower side,
fraud is an extensive problem.

1274
01:09:02.730 --> 01:09:05.640
We in and other platforms have
been hit extensively by fraud

1275
01:09:05.640 --> 01:09:07.500
rings, the United States. And
that's one of the things that

1276
01:09:07.500 --> 01:09:09.750
we're working together on just
to make sure that we can

1277
01:09:09.750 --> 01:09:11.010
identify fraud and weeded out.

1278
01:09:12.360 --> 01:09:17.010
Ms. Clark: Said that you've set
standards sufficient enough to

1279
01:09:17.040 --> 01:09:22.440
address the whole idea of risk.
And how the risk is distributed

1280
01:09:22.470 --> 01:09:23.610
among the investors.

1281
01:09:24.540 --> 01:09:26.760
Mr. Hodges: I guess I would say
is yes, particularly on the

1282
01:09:26.760 --> 01:09:30.060
fractional side, on the
institutional side, which is in

1283
01:09:30.060 --> 01:09:32.730
for us, and in many other
platforms, a hold on business.

1284
01:09:32.910 --> 01:09:35.070
Those are very large
institutions who are investing

1285
01:09:35.070 --> 01:09:37.410
millions of dollars. And we work
with them to structure

1286
01:09:37.410 --> 01:09:39.330
arrangements where they're
getting sufficient information,

1287
01:09:39.360 --> 01:09:41.730
as well as sufficient
diversification to make sure

1288
01:09:41.760 --> 01:09:44.310
they know what they're getting.
On the fractional side, as I

1289
01:09:44.310 --> 01:09:47.130
said, they're already expensive
rules in place, which we follow

1290
01:09:47.130 --> 01:09:50.370
assiduously just to make sure
your investors are protected

1291
01:09:50.430 --> 01:09:53.250
fully. You know what they get?
We believe so.

1292
01:09:54.270 --> 01:09:57.690
Ms. Clark: Very well. My second
question quickly is with the

1293
01:09:57.690 --> 01:10:00.630
increased popularity of the peer
to peer lending In platforms,

1294
01:10:00.630 --> 01:10:04.230
we're seeing an increased rate
of rejection for small business

1295
01:10:04.230 --> 01:10:06.960
applicants through these
platforms, this can lead to a

1296
01:10:06.960 --> 01:10:10.440
gap in access to capital for our
small businesses, which can

1297
01:10:10.440 --> 01:10:13.470
result in small businesses
closing their doors, what

1298
01:10:13.470 --> 01:10:16.830
suggestions might you have for
Congress to implement, that

1299
01:10:16.830 --> 01:10:19.740
would be conducive for small
businesses to continue to be

1300
01:10:19.740 --> 01:10:23.190
able to access the capital that
they need through the peer to

1301
01:10:23.190 --> 01:10:24.630
peer lending platform.

1302
01:10:26.430 --> 01:10:29.520
Mr. Hodges: One idea borrowing
from what we've seen in the UK,

1303
01:10:29.520 --> 01:10:32.100
where we also operate is
actually having turned down

1304
01:10:32.100 --> 01:10:35.010
requirements where if a bank is
going to go and turn down a

1305
01:10:35.010 --> 01:10:37.500
small business for credit, they
actually have the responsibility

1306
01:10:37.500 --> 01:10:39.570
to send that small business
somewhere else. So the small

1307
01:10:39.570 --> 01:10:41.790
business owner knows that there
are other options. So there's

1308
01:10:41.790 --> 01:10:43.320
one policy measure, I think
that'd be it.

1309
01:10:44.700 --> 01:10:46.740
Ms. Clark: Maybe well, I thank
you, gentlemen, very much for

1310
01:10:46.740 --> 01:10:49.290
your testimony here today. I
yield back. Mr. Chairman.

1311
01:10:49.440 --> 01:10:51.450
Mr. Chabot: Thank you. The
gentlelady yields back. And I

1312
01:10:51.450 --> 01:10:53.430
want to apologize for that,
Mike, I don't think the

1313
01:10:53.430 --> 01:10:55.500
gentlelady was correct. I don't
think it was working properly,

1314
01:10:55.500 --> 01:10:59.460
it will definitely look into it
and take care of it. And I now

1315
01:10:59.460 --> 01:11:03.180
like to yield the ranking member
has one final question.

1316
01:11:03.180 --> 01:11:07.200
Ms. Valezques: Just one final
question. Because I represent

1317
01:11:07.200 --> 01:11:11.040
New York, my congressional
district in New York, and part

1318
01:11:11.040 --> 01:11:15.900
of my district were devastated
by Sandy. And a lot of small

1319
01:11:15.900 --> 01:11:21.060
businesses suffered, because the
financial assistance that they

1320
01:11:21.060 --> 01:11:26.730
needed in terms of disaster
loans, when it took too long for

1321
01:11:27.750 --> 01:11:32.130
SBA and FEMA to process those
loans. And we all know that when

1322
01:11:32.130 --> 01:11:35.850
disaster strikes, natural
disaster is a small business do

1323
01:11:35.850 --> 01:11:40.590
not get the financial assistance
that they need. A lot of those

1324
01:11:40.590 --> 01:11:46.740
businesses might have to shut
down their businesses. 40% of

1325
01:11:46.740 --> 01:11:51.840
small businesses do not reopen
after a disaster. So my question

1326
01:11:51.840 --> 01:11:55.830
to you is in the aftermath of
Hurricane Sandy, small

1327
01:11:55.830 --> 01:11:59.610
businesses recovery was hampered
by low, slow disaster long

1328
01:11:59.610 --> 01:12:05.550
process. Did your platform fund
any business in Sandy impacted

1329
01:12:05.550 --> 01:12:12.120
area? And do you think peer to
peer lending is a viable option

1330
01:12:12.180 --> 01:12:13.770
for disaster recovery?

1331
01:12:16.920 --> 01:12:20.040
Mr. Hodges: So I can start. We
certainly have made loans to

1332
01:12:20.040 --> 01:12:22.740
small businesses in the the
sandy disaster area. Matter of

1333
01:12:22.740 --> 01:12:25.410
fact, I remember anecdotally, a
number of businesses who'd had

1334
01:12:25.410 --> 01:12:27.000
interruptions in their
operations, but were really

1335
01:12:27.000 --> 01:12:29.790
looking to get back on track
coming in applying for for for

1336
01:12:29.790 --> 01:12:32.850
credit. And so yes, that is
something that we've seen, in

1337
01:12:32.850 --> 01:12:34.770
terms of whether this is an
effective measure for disaster

1338
01:12:34.770 --> 01:12:37.440
recovery. To be honest, it's not
something we've taken a really

1339
01:12:37.440 --> 01:12:40.410
close look at. But certainly
what I'd say is when you know,

1340
01:12:40.440 --> 01:12:42.840
we see an opportunity in the
market, where there are gonna be

1341
01:12:42.840 --> 01:12:45.390
a concentration of small
businesses who kind of need to

1342
01:12:45.390 --> 01:12:47.910
expand need to grow need to, you
know, invest in their storefront

1343
01:12:47.910 --> 01:12:49.800
and equipment, those are
opportunities where we just

1344
01:12:49.800 --> 01:12:52.410
frankly, go and market more. So
there's a bit of a kind of a

1345
01:12:52.650 --> 01:12:54.150
factor that already makes it
happen.

1346
01:12:55.530 --> 01:12:58.050
Rajkamal Iyer: So there has been
some studies done on disasters

1347
01:12:58.050 --> 01:13:02.700
and other places like, and they
have looked at these markets

1348
01:13:02.700 --> 01:13:04.620
when they were serviced by
payday lenders after the

1349
01:13:04.620 --> 01:13:07.800
disaster strikes, as compared to
when peer to peer platforms came

1350
01:13:07.800 --> 01:13:12.090
up. And they do find that people
recovery from these shocks are

1351
01:13:12.090 --> 01:13:14.670
much better because of these
people go to peer to peer

1352
01:13:14.670 --> 01:13:18.780
platforms, and post a listing
for loan and they get it. So in

1353
01:13:18.780 --> 01:13:22.230
a sense, people are the
information of whether people

1354
01:13:22.230 --> 01:13:24.660
can access these platforms,
maybe people don't know, so they

1355
01:13:24.660 --> 01:13:27.660
don't post it. But if that is
available, these platforms are

1356
01:13:27.660 --> 01:13:28.140
useful.

1357
01:13:31.710 --> 01:13:34.200
Peter Renton: I really think
it's a great idea that one of

1358
01:13:34.200 --> 01:13:37.650
the things that these platforms
have an advantage over his

1359
01:13:37.650 --> 01:13:43.620
speed. And they can they can
move very quickly. I think, you

1360
01:13:43.620 --> 01:13:47.760
know, like, we're still this is
still a pretty nascent industry.

1361
01:13:48.000 --> 01:13:51.660
And there's not a whole lot of
infrastructure in place compared

1362
01:13:51.660 --> 01:13:53.550
to sort of the traditional
financial the traditional

1363
01:13:53.550 --> 01:14:00.120
banking system. But I think if
if we I think, you know, Sam can

1364
01:14:00.120 --> 01:14:02.040
probably talk about this as
well, I think if there was some

1365
01:14:02.040 --> 01:14:05.850
sort of arrangement in place
that encouraged the platform's

1366
01:14:05.850 --> 01:14:08.670
to really focus on the on the
hottest areas, they could, they

1367
01:14:08.670 --> 01:14:09.840
could move very quickly, I
think.

1368
01:14:09.870 --> 01:14:13.200
Ms. Valezques: Because all these
businesses, they have insurance

1369
01:14:13.230 --> 01:14:18.780
and but they need that immediate
financial assistance. And it

1370
01:14:18.780 --> 01:14:25.530
could work out in through also
SBA as a bridge loan, until they

1371
01:14:25.530 --> 01:14:29.160
get the money that that they
need that they are entitled to.

1372
01:14:29.970 --> 01:14:32.130
Peter Renton: There are also
other online platforms that

1373
01:14:32.130 --> 01:14:35.550
aren't really peer to peer but
that operate in a similar way

1374
01:14:35.550 --> 01:14:38.430
from the borrower side that are
even there even faster. There's

1375
01:14:38.430 --> 01:14:43.440
there's companies like cabbage
and ondeck that provide provide

1376
01:14:43.440 --> 01:14:48.480
cash to businesses, literally
within minutes. And those are

1377
01:14:48.480 --> 01:14:53.430
the sorts of platforms that
might will also be able to work

1378
01:14:53.490 --> 01:14:56.130
much, much quicker than the
traditional bank. Yeah. Thank

1379
01:14:56.130 --> 01:14:56.340
you.

1380
01:14:57.000 --> 01:14:59.550
Mr. Chabot: Thank you very much.
The gentleday's time has

1381
01:14:59.606 --> 01:15:02.780
expired. I want to thank the
entire pay Animal y'all did

1382
01:15:02.836 --> 01:15:05.613
really a great job and
testifying here. We really

1383
01:15:05.670 --> 01:15:09.126
appreciate your time. We know
you have other commitments, and

1384
01:15:09.183 --> 01:15:12.356
you came here to help members of
the committee to better

1385
01:15:12.413 --> 01:15:15.586
understand the entire peer to
peer lending, process your

1386
01:15:15.643 --> 01:15:18.873
perspective on it. And as we all
know, it certainly is an

1387
01:15:18.930 --> 01:15:21.990
alternative. It's one of the
important ways that small

1388
01:15:22.046 --> 01:15:25.503
businesses nowadays can have
access to capital. And that is a

1389
01:15:25.560 --> 01:15:29.130
critical element in a business
being successful. And as we grow

1390
01:15:29.186 --> 01:15:32.530
small businesses, we're growing
jobs in this country. And I

1391
01:15:32.586 --> 01:15:36.043
think we all agree, we need to
do a better job doing that. So

1392
01:15:36.100 --> 01:15:39.046
we couldn't have the
unemployment rate come down and

1393
01:15:39.103 --> 01:15:42.560
have every American who wants a
job have access to one. So we

1394
01:15:42.616 --> 01:15:45.960
want to thank you for your
contributing to that cause and I

1395
01:15:46.016 --> 01:15:49.303
would acid members have five
days to submit statements and

1396
01:15:49.360 --> 01:15:52.363
supporting materials for the
record and if no further

1397
01:15:52.420 --> 01:15:55.536
business to come before the
committee. We're adjourned.

1398
01:15:55.593 --> 01:15:56.160
Thank you.