The Treasury Department’s notice and request poses 14 detailed questions to gather public information concerning the role of marketplace lending in the financial services industry.
On July 16, 2015, the U.S. Department of the Treasury (the Treasury) issued a notice and request (the Request) for public information concerning the role of marketplace lending in the financial services industry. Treas. Notice 138 (July 20, 2015). Marketplace lenders, or “peer-to-peer lenders” as they are often referred to, are online platforms that match investors with borrowers. Some platforms cater to small business borrowers, others focus on consumer lending, and others focus on real estate lending, receivables factoring, student loan origination and much more. The marketplace lending industry originated $12 billion in loans of various types in 2014, two platforms have gone public, and several securitizations of these loans have been packaged and sold. Yet, the industry has remained largely ignored by policymakers and regulators on any systemic basis — until now. In the consumer area, there are a host of federal laws that apply to loans made to consumers, and many states also act to protect borrowers, regardless of who the lender is. Nevertheless, the state-by-state patchwork of laws and regulations, and the application of securities and banking laws designed for other purposes and generally applicable here, have caused slower evolution of this marketplace than would otherwise have been possible had the “rules” been more carefully and robustly designed.
The Treasury’s request bears the hallmark of a preliminary, information-gathering inquiry. The Treasury posed 14 detailed questions to market participants regarding the following:
- the different models used by marketplace lenders and how these models may raise different regulatory concerns
- the role electronic data plays in marketplace lending and the risks associated with the use of electronic data
- how marketplace lenders tailor their business models to meet the needs of diverse consumers
- whether marketplace lending expands access to credit to underserved markets
- marketing techniques utilized by marketplace lenders
- the process used by marketplace lenders to analyze the creditworthiness of borrowers
- the relationship between marketplace lenders and traditional depository institutions
- the processes marketplace lenders use to manage certain client operations, including loan servicing, fraud prevention and collections
- the role the government could play in effecting positive change in the marketplace lending industry
- whether marketplace lenders should be subject to risk retention rules
- the harms that marketplace lending may pose to consumers
- factors that investors should consider when making investment decisions
- the secondary market for loan assets originated in the peer-to-peer marketplace
- whether there are other key issues that policymakers should monitor.
The Treasury Request specifically excluded from its inquiry comments relating to higher-cost consumer loans that are the subject of a soon-to-be-issued proposed regulation relating to small-dollar loans with interest rates exceeding 36 percent by the Consumer Financial Protection Bureau (CFPB). Comments on the Request will be accepted by the Treasury until August 31, 2015.
The Request has a generally positive tone and discusses the role that marketplace lenders have played to date in providing access to credit to small businesses and consumers who, in many cases, have faced barriers in accessing credit. Marketplace lenders are able to deliver credit at a lower cost, in a more expedited fashion, and to a more diverse group of borrowers than traditional banks. One question posed by the Treasury asks how marketplace lenders can continue to meet the needs of consumers who are part of traditionally underserved markets.
Some of the questions posed, however, reflect a complete misunderstanding of how marketplace lenders operate. Loans facilitated by marketplace lenders, which often use third-party banks to originate loans to consumers, are subject to the full panoply of federal and state consumer financial protection laws because they are typically originated by regulated financial institutions. In addition, investors in marketplace loans typically are investing in securities, thereby providing them with the protection of the U.S. securities laws relating to disclosure and fraud. And, some new industry investors are investing in marketplace loans through investment funds designed for these purposes, which funds are subject to regulation by both the Securities and Exchange Commission and the states.
Of some concern is the reference to how the government could help foster the marketplace lending industry. Governmental intervention in this space at this time could have the impact of increasing costs and compliance risks and restricting innovation. To date, Congress and the Obama administration have let marketplace lenders develop in a free-market manner. Nevertheless, even the hardiest free-market advocates recognize the need for governing principles and adherence to basic ethical standards, but the questions concerning “risk retention,” and their ilk, suggest that the requestors are thinking of these platforms as if they were banks, which they most certainly are not. There is no “promise” of the return of invested capital (as there is in a bank) nor a promise of any specific return (returns are a function of the underlying investments’ performance only — in that respect they are truly “peer-to-peer”).
The reference to requiring lenders to have “skin in the game” clearly could increase the costs of doing business in this space and needs to be justified from a policy standpoint. As a nascent industry, it occupies a miniscule portion of both the small business and consumer lending marketplace, and any suggestion of requiring a portion of a loan from a risk standpoint seems premature.
The Treasury’s Request will likely foster a discussion of the merits of government regulation of the marketplace lending industry. The best interests of the marketplace lending industry, which has few dominant players and no trade association, would be best served by thoughtful interaction with Treasury officials to bring them up to speed on how the industry has policed itself and developed within the current regulatory confines of banking, broker-dealer, investment fund, investment advisory and securities laws, and delineation of what issues need to be addressed to bring about clarity and, therefore, efficiency in the marketplace. There is some movement in this regard, as we await the results of the recent Capitol Hill pressure on the CFPB to promulgate regulations that will implement section 1071 of the Dodd-Frank Act. These regulations will impose reporting requirements with respect to the types of persons receiving small business loans similar to the reporting requirement that mortgage lenders are subject to under the Home Mortgage Disclosure Act.