Marketplace Lenders Face Heat Over Use of Consumer Data
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Consumer groups are urging federal regulators to look more closely at whether online marketplace lenders are complying with a wide swath of longstanding borrower-protection rules.
The advocates' concerns underscore the tension between a burgeoning industry that was born in the digital age and a regulatory framework that largely predates its inception. They also put pressure on agencies such as the Consumer Financial Protection Bureau and the Federal Trade Commission, which must decide how vigorously to examine the online lending sector.
In comments filed recently with the Treasury Department, the U.S. Public Interest Research Group and the Center for Digital Democracy called for greater scrutiny of the lenders' extensive use of consumer data.
The advocacy groups are worried that the use of new types of data, including information gleaned from applicants' social media accounts, will result in fewer loans to minority borrowers. They are also concerned about personal data being misused in ways that threaten consumer privacy.
"We're telling the regulators that we don't think these firms deserve a soft touch," said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group.
[Coming this November: Marketplace Lending + Investing. Hear how participants in this fast-growth niche are using data and technology to propel lending into the 21st century.]
Likewise, the National Consumer Law Center raised questions about whether online firms are complying with a law that bars lenders from requiring borrowers to use any particular repayment method.
Marketplace lenders often encourage borrowers to set up automatic electronic debits, which are cheaper to process than checks and also result in higher repayment rates. But consumer advocates say that the law protects borrowers by allowing them to maintain control of their bank accounts.
"It enables consumers to prioritize their bills and prevents lenders from grabbing the consumer's paycheck before food or rent is paid," the National Consumer Law Center wrote in its comment letter.
The pressure from consumer groups came in response to a Treasury Department solicitation of public comment on the marketplace lending industry, which represents Washington's first broad inquiry into the sector. Banking trade groups raised several similar concerns in their own letters.
A Treasury spokesman said in an email Friday that the department received around 100 comments before Wednesday's deadline.
No one questions that marketplace lenders are currently subject to a slew of federal consumer protection laws. Those include the Fair Credit Reporting Act, which relates to the use of consumer data, the Equal Credit Opportunity Act, which prohibits discrimination in various parts of the consumer finance industry, and the Electronic Fund Transfer Act, which bars lenders from requiring a particular repayment method. The question is how closely the new crop of lenders should be scrutinized for compliance.
In their own letters to Treasury, marketplace lenders noted that many of their customers are enjoying significant savings by refinancing existing credit card debt and student loans at lower interest rates.
They also urged regulators to tread carefully in a fast-evolving sector. "It is simply too early to say whether certain models raise policy and regulatory concerns, because models are still shifting rapidly," wrote Earnest, a San Francisco firm that refinances student loans.
The consumer groups acknowledged that consumers are reaping some benefits from marketplace loans but said that should not prevent regulators from exercising vigilance.
For instance, the U.S. Public Interest Research Group called on the federal government to analyze the proprietary algorithms that online lenders use to make loan decisions, in order to make sure that they are treating customers fairly.
"No secret sauce, no Coca-Cola formula," Mierzwinski said.
Paul Leonard, West Coast director of the Center for Responsible Lending, said that for companies that do not fit into existing regulatory boxes, a balance needs to be struck between fostering innovation and protecting consumers. "It's definitely a challenge," he said.
So far, the CFPB has been noncommittal about its approach to online marketplace lending, which has grown tremendously over the last three years.
"We are still studying" the business, Paul Sanford, the agency's assistant director for supervision examinations, said during a panel discussion Thursday at a conference hosted by the Federal Reserve Board and the Conference of State Bank Supervisors.
Roberto Hernandez, a partner at PricewaterhouseCoopers, said that he expects regulators to eventually issue guidance that will provide greater clarity to marketplace lenders about their regulatory responsibilities. "I do not know if it is going to be the CFPB or another regulator, or all the regulators combined," he said.
Paul Davis contributed to this report.