A Federal Reserve study that cast the online lending industry in a negative light has become a flash point in the debate over the sector’s impact on U.S. consumers.
The research released late last week drew fire from industry groups and the company that provided the data, which questioned the study’s conclusions and the methods economists at the Federal Reserve Bank of Cleveland used to arrive at them. One trade group, the Marketplace Lending Association, went so far as to say that the Cleveland Fed should retract the report.
In a report titled “Three Myths about Peer-to-Peer Loans,” the authors called into question a narrative frequently told by digital lenders — that the sector’s customers typically refinance existing debt at lower interest rates, boost their credit scores and improve their financial health.
What the researchers found instead was that consumers who turn to online loans typically end up in deeper debt, and have lower credit scores, than similarly situated consumers who do not borrow from the same companies.
The study relied on data from the credit bureau TransUnion. A researcher at the Cleveland Fed said that the study was based on a subset of nonbank companies that were flagged by the Chicago-based credit bureau as marketplace lenders.
But Ezra Becker, a senior vice president at TransUnion, took issue Wednesday with that claim.
He said that TransUnion sent the data to the Cleveland Fed a long time ago for a different study, and that none of the data the firm provided distinguished between peer-to-peer loans, so-called fintech loans and traditional personal loans.
“We have no understanding of how the Federal Reserve Bank of Cleveland could have used our data to reach the conclusions they did,” Becker said. “We need to talk with them further to better understand their methodology.”
Becker added that TransUnion has conducted its own research on fintech loans, and that its findings do not align with those of the Cleveland Fed.
After conferring with TransUnion, Nathaniel Hoopes, the executive director of the Marketplace Lending Association, called on the Cleveland Fed to retract its report.
He noted that the data used by the Cleveland Fed covers a much wider swath of companies than the U.S. consumer lenders that are generally classified as peer-to-peer lenders.
“Just in defining the industry, they are literally off the mark by many orders of magnitude and tens of billions of dollars,” Hoopes said in an email. “Without clarification, they risk tarnishing the Fed research and policy brand.”
An assessment of the Cleveland Fed’s findings hinges at least to some degree on which companies get counted as online lenders, marketplace lenders or peer-to-peer lenders, and whether those are even useful labels.
The researchers said they did not have access to names of the specific lenders that were included in the data they analyzed. But the identities of those companies matter, largely because firms that are typically classified as online lenders have a wide variety of business models.
For example, Social Finance, or SoFi, lends at relatively low interest rates to consumers with strong credit profiles. LendingClub and Prosper Marketplace charge higher rates to consumers who are somewhat less creditworthy. Firms like LendUp and Elevate often charge triple-digit annual percentage rates to consumers who might otherwise turn to payday loans.
Online lending is an umbrella term meant to cover the new breed of digitally focused nonbank lenders, but even that label has lost some of its meaning as more banks make loans over the Internet.
“It’s almost time to stop thinking of online loans versus not-online loans,” said David Snitkof, chief analytics officer at Orchard Platform, a data provider. “Because the real question is, are you creating a product that has value for consumers?”
Researchers at the Cleveland Fed acknowledged that their study does not distinguish between the various types of online lenders.
“Our hope is just to open the conversation,” said Elena Loutskina, a contributing author on the study. “It would be great to look deeper, and think about how to disentangle the good players and bad players in this industry.”
The Cleveland Fed also acknowledged that the paper’s use of the term “peer-to-peer lending” sparked confusion among readers.
“Our goal was to contribute to research around this dynamic industry, but we understand use of the term ‘peer-to-peer’ as shorthand for a set of loans originated by peer-to-peer and other online lenders has led to some confusion around the study,” the Cleveland Fed said in an emailed statement.
Other parts of the study came under fire, too. The study noted that delinquency rates for online loans have risen, and drew a parallel with rising late-payment rates in the subprime mortgage market between 2001 and 2007.
“There is no apt comparison between the two, and rhetorical flourishes such as this set back the serious research surrounding online lending that is warranted,” Cornelius Hurley, the executive director of the Online Lending Policy Institute, another industry group, said in an email.
Meanwhile, consumer advocacy groups argued that the Cleveland Fed’s research bolsters their opposition to legislation, supported by the online lending industry, which is currently pending in Congress.
That legislation would make clear that online lenders that partner with banks to originate loans do not have to abide by state-by-state interest rate caps. The House Financial Services Committee debated the measure on Wednesday.
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Updated November 15, 2017 at 2:26PM: This story has been updated to reflect criticism of the Cleveland Fed study by TransUnion, and a call by the Marketplace Lending Association for the study to be retracted.