July 16 — Seeking to better understand increasingly popular ways to borrow money, the Treasury Department July 16 said it will be seeking comment on peer-to-peer and other forms of online marketplace lending, asking, for example, if the new lenders pose greater privacy or other risks to consumers than traditional banks.
The Request for Information (RFI), to be posted in the Federal Register July 17, signals that the new forms of lending has caught the eye of federal regulators, said Compass Point Research & Training analysts Isaac Boltansky and Michael Tarkan in a note to investors July 16.
“This RFI serves as a clear signal that policymakers are both heartened by the promise of the burgeoning marketplace lending industry while still cautious regarding the existing regulatory framework,” they wrote, predicting that “additional scrutiny of the model’s regulatory framework is ahead.”
Marketplace lending remains a small component of the overall lending market, Antonio Weiss, counselor to U.S. Treasury Secretary Jack Lew, wrote in a July 16 blog post announcing the RFI. But Weiss said, “it is a rapidly developing and fast-growing sector that is changing the way consumers and small businesses secure credit.”
Research conducted by Morgan Stanley found that in less than a decade, online marketplace lending has grown to an estimated $12 billion in new loan originations in 2014, Weiss said.
Companies operating in the space include online lenders backed by hedge funds or venture capital, online “peer-to-peer” lending platforms, and bank-affiliated online lenders, according to the RFI.
The Treasury notice seeks comment on the potential for online marketplace lenders to expand access to credit for those borrowers who have been historically underserved by traditional banking sources. The notice laid out some potential benefits to small businesses, as well as individual borrowers who do not qualify for prime interest rates.
Up to now, online borrowers have been those at or near prime, and the new lenders have “filled a need for these borrowers by often delivering lower costs and faster decision times than traditional lenders,” the notice said. Some lenders are now developing products and underwriting models for greater numbers of non-prime borrowers.
Online lending also could reduce transaction costs for small businesses, which have struggled to get traditional loans for banks, the notice said.
The Treasury Department is also concerned about potential pitfalls for consumers participating in the rapidly-growing online marketplace. “What privacy considerations, cybersecurity threats, consumer protection concerns, and other related risks might arise out of online marketplace lending?” the notice asked.
With large numbers of small businesses making financial transactions online, the RFI said “there is now an unprecedented amount of online data available on the activities of these small businesses” and asked how that might impact fraud and other credit risks for lenders. Treasury also wants to know how accurately online marketplace lenders assess borrower creditworthiness, along with loan servicing, fraud detection and debt collection practices.
Peer-to-peer lenders connect borrowers with individual investors willing to provide funding. The companies that provide the online platforms, such as Lending Tree and Prosper, do not suffer the losses when borrowers default on the loans.
The Treasury request asked to what extent peer-to-peer lenders should be required to have “skin in the game” for the loans they facilitate.
Lending Tree did not comment and a Prosper spokeswoman said the company welcomed the “information-based approach” to the Treasury inquiry.
Nessa Feddis, senior vice president for the American Bankers Association, said online lenders should be subject to the same regulations as banks and other traditional lenders.
She said Treasury needs to examine how online lenders determine the borrower's ability to repay loans and what measures are in place to protect private information. “Otherwise we could repeat the mistakes of the past,” she said.
Consumer groups also welcome the inquiry, according to Edmund Mierzwinski, consumer program director for U.S. PIRG.
Online marketplace lenders may be able “to offer credit at lower costs, and to more consumers, but we do want to make sure that their offerings comply with all consumer lending laws,” he told Bloomberg BNA
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