WASHINGTON — Marketplace lenders are still so new that their business model is untested and unproven, raising fears both for consumers and the industry at large, Federal Deposit Insurance Corp. officials and several bankers said Thursday.
During a meeting of the agency's advisory committee on community banking, Chairman Martin Gruenberg said the FDIC is watching the explosive growth of marketplace lending — internet-based companies that match borrowers with pools of capital.
"This is something we'll be paying close attention to…the impact on insured institutions as well as the general risk in the financial marketplace here," Gruenberg said.
From a policy standpoint, regulators are trying to balance safety and soundness without stifling innovation and a booming business model that has proven efficient in extending loans to consumers and small businesses.
But bankers speaking at the meeting made it clear that they see marketplace lenders as lightly-regulated threats.
"It's a competitor by every sense of the word," said John Tolomer, president and chief executive officer of $560 million-asset The Westchester Bank based in Yonkers, New York.
Leonel Castillo, president and CEO of $74 million-asset American Bank of Commerce in Provo, Utah, agreed.
"LendingTree, Kabbage … they are getting into [lending] because they see a financial opportunity and I think we as an industry make a mistake if we don't pay attention to that because those are our customers and our communities and clearly they are seeing something that we are not providing so they seek out these higher priced alternatives," Castillo said in a conversation after the committee convened.
James Lundy, CEO of $13 billion-asset Western Alliance Bank in Phoenix, said in an interview after the meeting that he doesn't oppose marketplace lenders, but would like to see them have to comply with some of the same regulations that banks do.
"I am for free competition and open competition so I am not as concerned about marketplace lenders stepping on the banks turf as I am to a level playing field," he said.
Regulators, meanwhile, appeared more worried about how marketplace lending would fair in a downturn. So far, they have benefited from a purge of debt overhang following the financial crisis and a steadily improving economy.
"Algorithmic and model-based lending does have its limitations," said Rae Ann Miller, the associate director of the FDIC's division of risk management supervision.
The models have been used in "good times" and a 680 FICO score six years ago does not look like a 680 FICO score today, she added.
"The loss rates on that change. So it is unproven and it remains to see what would happen in a time of stress," Miller said.
James Watkins, senior deputy director of the FDIC's division of risk management supervision, said the agency put marketplace lending on the agenda because "we wanted to raise this awareness…to identify here's a new competitor."
FDIC officials' comments come as other regulators are also focusing on marketplace lending. Two administration officials made comments about the industry on Wednesday suggesting that policymakers are watching this area closely.
During the event, Miller hinted regulators are taking a wait-and-see approach.
"The jury is still out on whether the Lending Club and Prospers of the world are at scale either -- it's still very small, they've built these platforms, hired people, have expenditures and raised capital, but ultimately it's a finance company, and you know margins are slim, and it's uncertain whether they've found a different mousetrap that will work in the long term," she said.