The Senate’s fintech fight

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Jul 19, 2023 View in browser   By Zachary Warmbrodt Presented by Structured Finance Association Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. A bipartisan group of senators and the Biden administration are about to clash over the future of fintech lending. At issue in the dispute: Whether the SBA can proceed with a plan, heralded by Vice President Kamala Harris, that would let algorithm-wielding financial technology startups play a bigger role in issuing government-backed small business loans — a program that’s dominated by traditional lenders. The administration’s plan will be challenged this afternoon by the Senate Small Business Committee. The panel is expected to approve a bill by Chair Ben Cardin and ranking member Joni Ernst that would rein in the SBA changes, which also include a loosening of underwriting standards. The SBA is pushing back (more on that below). For the last several months, Biden officials have framed their SBA revamp as a way to direct more financing to entrepreneurs — including people of color — who lack access to loans. But the new rules have triggered fierce opposition from senior lawmakers. They’ve raised concerns that the SBA lending program at issue would be exposed to financial losses from riskier loans and that the SBA isn’t prepared to police nonbank fintech firms that don’t otherwise have a federal regulator. The banking lobby has been urging Congress to walk back the SBA’s plan. The legislation from Cardin and Ernst would discourage fintechs in a variety of ways. It would cap and slow their entry into the SBA’s flagship “7(a)” lending program and beef up regulatory requirements. It includes a carveout for nonbank lenders to offer smaller loans on an expedited basis, but the loans would be backed by a smaller government guarantee. It would also undo an attempt by the SBA to ease restrictions on loans to businesses affiliated with larger corporate entities. Cardin in a statement to MM described the bill as a way to ensure “adequate oversight for SBA while responsibly enlarging the [Small Business Lending Company] program, codifying sensible underwriting and affiliation standards, and incentivizing small dollar lending.” Cardin, who is retiring, said the other big element of the bill — making permanent the SBA’s Community Advantage Program — “something I have long fought for to meet the capital needs of underserved borrowers.” An Ernst spokesperson was a bit more provocative, citing accusations that some fintechs facilitated PPP loan fraud and warning that “allowing an unlimited number of fintechs into SBA programs, while at the same time loosening underwriting standards, is a recipe for disaster.” The Biden administration isn’t rolling over. An SBA spokesperson said the agency is concerned about provisions in the bill that would “weaken access to credit for small business owners by reducing lender options in the marketplace and making it more difficult to qualify for an SBA loan.” The SBA plans to keep working with lawmakers to “improve” the legislation. The SBA will likely have to face off against the banking industry, too. The Independent Community Bankers of America — which lobbies for online lenders to face regulatory scrutiny comparable to banks — said it will try to ensure the legislation “receives strong support.” Absent a last-minute inclusion in the annual defense bill, which appears unlikely, look for the fight to play out over the next several months. The leaders of the House Small Business Committee also want to pass legislation to rein in the SBA changes and are expected to have their own ideas of how to do so. “The dynamics of the Senate are quite different than that of the House,” House Small Business Chair Roger Williams told MM in a statement. “We are committed to working on policy solutions to address these concerning changes to the SBA’s flagship lending program and will independently evaluate any agreement that is made in the Senate.” It’s Wednesday — Send tips, please: Zach Warmbrodt, Sam Sutton.   A message from Structured Finance Association: Did you know? Securitization serves all kinds of markets, even those traded on iTunes! Music royalties from artists like Miles Davis, Otis Redding, James Taylor, Phil Collins, R.E.M, Stevie Nicks, Isaac Hayes, Cyndi Lauper, and Pink Floyd are secured by bonds issued by members of the Structured Finance Association. Learn more at www.structuredfinance.org.   Driving the day Former Treasury Secretary Robert Rubin speaks at the Economic Club of Washington, D.C., at 8:30 a.m. … The CFTC hosts its second voluntary carbon markets convening at 11:30 a.m. … SEC Chair Gary Gensler testifies at Senate Appropriations at 2:45 p.m. … Senate Small Business votes on SBA legislation at 3 p.m. CFTC nears climate move — Our Allison Prang scoops that the CFTC is preparing to draft guidance that would address standards for carbon market trading, according to an announcement agency Chair Rostin Behnam will make today. Behnam, who will speak at a CFTC event this morning, wants to take public comment on the guidelines. The CFTC can’t directly regulate carbon offsets — a tool companies can use to mitigate their greenhouse gas emissions — but it has authority over futures contracts tied to the credits. You can read more about the CFTC’s role in carbon trading in MM’s interview with Behnam from May. Fink, Dimon get their “ESG month” moment — Rep. Bill Huizenga, a senior House Financial Services Republican, warned the CEOs of Wall Street’s biggest money managers Tuesday about their influence and pressed them to explain how they balance environmental and social goals with investor needs. The Michigan Republican sent the letter as the committee spends the month discouraging ESG investing practices via hearings and legislation.   SUBSCRIBE TO POWER SWITCH: The energy landscape is profoundly transforming. Power Switch is a daily newsletter that unlocks the most important stories driving the energy sector and the political forces shaping critical decisions about your energy future, from production to storage, distribution to consumption. Don’t miss out on Power Switch, your guide to the politics of energy transformation in America and around the world. SUBSCRIBE TODAY.     Huizenga issued the requests to BlackRock CEO Larry Fink, JPMorgan Chase CEO Jamie Dimon, Goldman Sachs CEO David Solomon and others. We’ve noted that House Republicans have been holding their fire a bit when it comes to big asset managers. But Huizenga told our Jasper Goodman that they aren’t off the table. "We've got a longer runway than just this month," he said. "Asset managers are absolutely part of that conversation, they're part of the mix. We're in both formal and informal conversations with them." Americans for Financial Reform held a briefing for Hill staff Tuesday to warn that anti-ESG bills would insulate public company management from investor input and undermine regulations that would give investors more information. AFR has a readout here.   A message from Structured Finance Association:   Artificial Intelligence Lawmakers want AI finance study in defense bill — Our Eleanor Mueller reports that the Senate will likely attach a provision to the annual defense bill that would require bank regulators to produce a report on AI, including its uses by the financial services industry and the agencies themselves. Sen. Mike Rounds (R-S.D.) filed the amendment. The defense bill, which the Senate is considering this week, is also expected to include Banking Committee legislation that would crack down on fentanyl trafficking.   UNLEASH THE FUTURE OF HEALTHCARE WITH POLITICO, A 7/20 INTERACTIVE EVENT: Imagine a future where rare genetic diseases are not only treatable, but potentially curable. Where our approach to chronic illness takes a monumental leap forward. That future is already taking shape in the form of next-generation health care treatments such as gene therapy. Join POLITICO on Thursday, July 20 and delve into the burgeoning field of gene therapies, which hold the power to redefine our health care landscape. Are you ready to explore this new frontier in health care? Don't miss this chance to be part of the conversation. REGISTER NOW.     Crypto The latest on House crypto votes — House Agriculture Chair G.T. Thompson (R-Pa.) told reporters Tuesday that Republicans will introduce their crypto market structure bill this week before voting on the proposal next week, our Meredith Lee reports. The proposal from Thompson and House Financial Services Chair Patrick McHenry (R-N.C.) would give the CFTC new crypto authority and put new restrictions on the SEC’s oversight of digital assets. The Financial Services Committee will vote on the bill first, followed by the Agriculture Committee, according to aides. Thompson acknowledged Republicans are “still working” on getting Democrats to support the legislation.   A message from Structured Finance Association: Safety in numbers is true in finance like everywhere else. When loans are pooled together into a bond, the bond’s value stays stable even if a few of the bundled loans aren’t repaid on time. The risk of default is reduced. Structured finance is all about packaging loans together to reduce overall risk and in that way lower the cost of financing for borrowers. This process, called securitization, allows banks to sell loans and to make new loans at prevailing market rates. The result: A dynamic – and safer – financial services system for everyone. Thanks to years of experience and market reforms, the benefits are widespread for lenders, savers, and consumers. The Structured Finance Association represents every participant in the securitization market. Find out more at www.structuredfinance.org.     Follow us on Twitter Mark McQuillian @mcqdc Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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