On May 10, 2016, the U.S. Department of Treasury (Treasury) issued a white paper (the White Paper) that calls for increased regulation of online marketplace lenders. The White Paper is the product of a request for information (RFI) that Treasury issued last year about the benefits and risks of online marketplace lending.
Treasury received approximately one hundred responses to its RFI from industry, trade associations, consumer groups, and academics. According to Treasury, commenters cited significant benefits and risks associated with online marketplace lending. For example, as to the data-driven underwriting algorithms that are the hallmarks of online lending, commenters noted benefits like reduced underwriting time and costs. Commenters also noted the opportunities that online lending presents to significantly expand access to credit by allowing consumers to obtain loans without the need to be close to or visit the lender’s offices. However, commenters also warned that online lending presents unique fair lending risks as well as risks to consumers based upon inaccuracies, incompleteness, or non-representativeness of the data that lenders rely upon. Moreover, commenters warned that lenders’ innovative underwriting techniques and business models have yet to be tested in adverse economic conditions.
Furthermore, certain commenters highlighted the special risks associated with online small business lending. These risks arise from the fact that small business lenders are subject to substantially less oversight and regulation than are consumer lenders. These commenters urged greater scrutiny of small business lenders and the imposition of safeguards for small business borrowers, including greater transparency of pricing terms.
Responding to these comments, the white paper makes several recommendations to federal regulators and to the industry. First, it echoes calls for greater oversight and regulation of small business lending. Second, it recommends action to ensure a “sound borrower experience.” Third, it recommends greater transparency about the industry and its products for the benefit of both borrowers and investors. Fourth, it urges the industry to pursue partnerships that provide credit that is safe and affordable to borrowers. Fifth, it urges access to government data to support the expansion of safe and affordable data. Finally, it recommends the creation of a standing interagency working group for online marketplace lending to facilitate a coordinated approach to regulating the industry.
The White Paper also identifies several trends for further monitoring, including the evolution of credit scoring, the impact of changing interest rates and credit conditions, potential cyber-security threats, and anti-money laundering compliance.
The Treasury Department lacks authority to implement the recommendations set forth in the White Paper or to oversee lenders itself. Nevertheless, the White Paper is significant because it shines a spotlight on a fast-growing industry that has thus far escaped close regulatory scrutiny. The White Paper is expected to spur a discussion among legislators and regulators as to who should have primary jurisdiction over online marketplace lending and what types of regulations and safeguards should be imposed.