The fast-growing peer-to-peer loan industry which is beginning to attract more attention in Washington, both positive and negative got an enthusiastic thumbs-up Wednesday from the chairman of a key congressional committee.
During a House hearing, P-to-P industry representatives called on the U.S. government, which currently applies a patchwork of long-standing rules to the nascent sector, to follow the regulatory example set by the United Kingdom.
The U.K. has established a specially tailored regulatory regime, including a requirement that banks, after turning down small businesses that want a loan, refer rejected applicants to alternative providers of credit.
Sam Hodges, managing director of Funding Circle USA, a peer-to-peer marketplace that specializes in small-business loans, said that in the United States: "There's just not necessarily the same kind of level of support."
"Well, you've come to the right place for that," House Small Business Committee Chairman Steve Chabot, R-Ohio, responded with a chuckle.
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Wednesday's hearing focused on the small business side of P-to-P lending, or marketplace lending, as it is often called. The industry's larger segment involves loans to consumers. P-to-P marketplaces use online underwriting platforms to match borrowers with loan investors, earning fees for their matchmaking role.
P-to-P loans to small businesses are often significantly more expensive than comparable loans offered by banks. But the borrowers that turn to these online sources of credit are frequently unable to qualify for bank loans, so it is unsurprising that they would pay higher interest rates. The P-to-P marketplaces won praise from lawmakers Wednesday for extending credit to businesses that cannot find it elsewhere.
During prepared remarks, Chabot cited survey data that found 20% of U.S. entrepreneurs had looked to an online lender for credit. "This increase in P-to-P lending for small businesses, if it continues, could have a tremendously positive impact on small businesses and their growth, and on the American economy overall," he said.
But other committee members, particularly on the Democratic side of the aisle, expressed greater skepticism about the P-to-P industry. Some of their concerns involved the often confusing ways that interest rates and fees are disclosed to small-business borrowers.
Hodges, who said that his company discloses the costs of its loans in a prominent and easy-to-understand manner, acknowledged that some other lenders make confusing or misleading disclosures.
He noted that some firms refuse to provide an annual interest rate, charge hidden fees, or advertise no prepayment penalties when in fact the borrower would have to pay interest in order to close out the loan early.
But Hodges also indicated that the industry can effectively police itself. "Funding Circle is committed to working with other marketplace lenders, other responsible credit providers and small-business advocates to promulgate effective self-regulatory standards," he said.
Richard Eckman, a partner at the law firm Pepper Hamilton, said in an interview after the hearing that marketplace lenders should be aware of their potential liability with respect to small-business loans. The Federal Trade Commission has authority to bring enforcement actions against offenders, he noted.
"What kind of disclosures are these companies providing to potential customers?" Eckman asked. "Are they clear? Are they fair? Are they deceptive in any way?"
U.S. loan volume in P-to-P lending reached $9 billion last year, up from just $1.2 billion two years before. That still represents an infinitesimal fraction of the U.S. credit market, but the sector's rapid growth has caused policymakers to sit up and pay closer attention.
Some observers have praised the industry for making loans that banks will not touch, while others have expressed worry about how these firms will fare in a souring economy or during a liquidity crunch.
At Wednesday's hearing, the focus was largely on what policymakers can do to facilitate the P-to-P sector's continued growth.
Hodges noted that only the two largest P-to-P lenders in the United States, Lending Club and Prosper, have registered with the Securities and Exchange Commission. Firms that have not gone through that process, which Hodges described as expensive and time-consuming, are open only to accredited or institutional investors.
He noted that numerous U.S. securities laws were written before the P-to-P industry's inception. "These are laws that didn't really anticipate the Internet," Hodges said.