Fintech lenders told a House subcommittee Tuesday that thefederal government must give them the freedom to innovate, but the president of the American Bankers Associationand others said they are concerned that such companies lacksufficient government supervision.

“The difference is oversight,” ABA President Rob Nichols toldthe House Financial Institutions and Consumer CreditSubcommittee.

Nichols said while banks and other traditional financialinstitutions are subject to extensive examinations, independentonline lenders do not receive the same scrutiny.

The Treasury Department reported in May online lenders that make direct loans toconsumers and small businesses may fall through cracks in thefederal regulatory scheme and may only be subject to state rules,the Treasury said.

Nichols said that oversight is possible when banks work withonline lenders.

“When banks innovate and partner with startups to deliver newtechnologies their customers win,” he said.

While no credit union witness testified, Brad Thaler, NAFCU'svice president of legislative affairs, wrote the subcommittee aletter calling for closer oversight of fintech companies.

“NAFCU believes that, in addition to modernizing rules,financial regulators must also require online market lenders tomeet the basic consumer protection requirements such as the Truthin Lending Act, underwriting standards for loans, and applicablestate usury laws, just as credit unions must do now,” Thaler saidin the letter.

Nichols also said online lending cannot replace traditionalbanking.

“It is important to note that while technology can driveinnovation and add value, it is not a replacement for a communitypresence,” he said. “Community banking is a relationship businessthat is not replicable by technology.”

However, online lenders defended their industry, saying theyhelped small businesses and others that traditional banks do notreach.

“Traditional lenders have been unable to effectively address theneeds of small businesses because of high customer acquisitionand underwriting costs, outmoded and cumbersome underwritingmethods and overhead costs associated with their brick and mortarbranches,” Parris Sanz, chief legal officer at CAN Capital,the largest alternative small business finance company.

He said, for instance, it may be uneconomical for banks andother financial institutions to make business loans of$150,000.

Sanz said the federal government should be sensitive to the riskthat additional regulation of nonbank lenders will stifleinnovation and competition.

However, Gerron Levi, director of policy and government affairsat the National Community Reinvestment Coalition, delivered anominous warning about some online lenders.

“We see echoes of the early days of the subprime mortgage boom,in which rapidly growing nonbank mortgage lenders innovated in theworst possible way: By loosening credit standards, layeringsignificant and multiple forms of risk, and causing financial harmto borrowers who could ill afford to repay the loans,” shesaid.