The Treasury Department recently issued a request for information to explore various aspects of “online marketplace lending.” The RFI seeks comment on a broad array of online financial services companies that lend not only to consumers but also to small businesses. When considering the RFI in connection with other recent regulatory activity, including the Consumer Financial Protection Bureau’s forthcoming rules to collect small business loan data, momentum for additional policies and regulations governing small business loans is undoubtedly growing.
Purpose of the RFI. The RFI is intended to facilitate the Treasury Department’s “study [of] the potential for online marketplace lending to expand access to credit and how the financial regulatory framework should evolve to support the safe growth of this industry.” Creditors subject to the RFI include balance sheet lenders, peer-to-peer lending platforms, bank-affiliated online lenders, and bank-partnered arrangements.
The RFI notes that online marketplace lenders are developing innovative product structures and underwriting models that might facilitate loans to non-prime borrowers at lower rates than those offered by traditional lenders. It outlines the “particularly acute [need] for small business loans of lower value and shorter terms… [M]ore than two thirds of businesses with under $1 million in annual revenue that applied for credit [in 2014] received less than the full amount that they sought and half received none.” At the same time, the marketplace for online lending has grown to $12 billion in new loan originations in 2014.
Summary of Questions Posed. The RFI poses 14 key questions for public comment. Those questions are summarized below.
- Understanding the various business models. Do the different models and market segments in online marketplace lending pose different regulatory concerns, and how should those different models affect policy?
- Use of alternative data. What role is alternative electronic data playing to enable online marketplace lending, including identity evaluation, fraud, and credit risk? What new opportunities or risks does this data present?
- Variation among markets. How do business models vary based on borrower segments, such as small businesses and consumers, subprime borrowers, and borrowers with thin or no credit profiles?
- Serving the underserved. Is online marketplace lending expanding access to historically undeserved segments?
- Marketing. How are online marketplace lending customers acquired, including marketing channels, partnerships with traditional financial institutions, community development financial institutions, and others?
- Underwriting. How is creditworthiness and the ability to repay assessed, and how accurate are those assessments? Does the stated purpose of the loan affect underwriting? How does the process differ for small businesses from consumers?
- Use of service providers & achieving compliance. How do online marketplace lenders rely on the services of traditional lenders or depository institutions? How are industry participants achieving regulatory compliance with federal and state laws?
- Comparison to traditional lenders. Do online marketplace lenders operate differently than traditional lending institutions with respect to loan servicing, fraud detection, credit reporting, and collections? Are these services outsourced?
- Future regulation and leveling the playing field. What role can the federal government play in facilitating innovation in lending? Do non-banks have any advantages or disadvantages over banks, and if so, how can policymakers resolve the disadvantages?
- Securitization issues. Should platform or peer-to-peer lenders be required to retain risk (have “skin in the game”)? Whether risk retention concepts should apply in a non-securitization context, and if so, how?
- Risks. What risks does online marketplace lending present, such as privacy, cybersecurity, consumer protection, or others? Are these risks adequately addressed by existing regulations?
- Investments in online marketplace lenders. What factors do investors consider when interacting with online marketplace lenders? What operational arrangements are used when investments are made? What investment methods are used to finance platform assets? How is leverage used?
- Secondary market. Is there is a liquid secondary market for online marketplace-originated loans, and what are the advantages and disadvantages of such a secondary market?
- Other trends. What other key trends should be monitored as the online marketplace for lending develops?
Comments are due to the Treasury on or before August 31, 2015.
Moving in Tandem with the CFPB.
Treasury recognized that the broad scope of its RFI overlaps with the CFPB’s pending rulemaking on payday and high-cost installment loans, which would govern: 1) short term loans with repayment periods of 45 days or less; and 2) longer-term loans with an all-in APR that exceed 36% and that are repaid by direct access to a consumer’s account or paycheck. However, Treasury’s RFI goes further by seeking comment on loans outside the scope of the CFPB’s rulemaking, namely online consumer and small business loans with terms of more than 45 days and either: 1) APRs that are less than 36%; or 2) APRs that exceed 36% but are not repaid directly from a consumer’s account or paycheck.
Furthermore, the RFI was released shortly after a group of 19 Senators urged the CFPB to expedite a rulemaking on the collection of small business loan data. Section 1071 of the Dodd-Frank Act requires the CFPB to issue a rulemaking on the collection and reporting of small business loan data, but to date no regulatory action has been taken. If the CFPB and/or Treasury Department collect data that identifies problems in the online lending marketplace, expect some action to be taken.
Accordingly, this coordinated focus on small business loans by federal regulators should be watched closely by online marketplace lenders and the traditional financial institutions that support or compete with them.