Self-Regulation of Marketplace Lending Does Not Go Far Enough: FTC
Marketplace lenders have unveiled a number of self-regulatory plans over the last year in an attempt to stave off government intervention. But a top official at the Federal Trade Commission said Thursday that what has been done so far is not sufficient to protect borrowers.
"To be meaningful, these types of efforts need robust procedures to monitor compliance and tangible consequences when the rules aren't followed," said Jessica Rich, director of the FTC's consumer-protection bureau.
"Otherwise, you can't be sure that companies have the incentive to comply, or are complying. And again, the standards aren't meaningful if that's the case."
Industry representatives swiftly rejected the Treasury Department's assertion that new legislation is needed to protect small-business owners.May 10
In a rapidly growing market outside the purview of the Truth in Lending Act or state usury caps, online lenders' rates and fees can be next to impossible to compare.August 26
Rich did not dismiss the self-regulatory efforts out of hand, but she did express greater skepticism about what is being done by the private sector than other federal officials have shown in public remarks. The comments came during an FTC public forum in Washington about the marketplace lending industry.
Rich was careful not to comment on any particular self-regulatory initiative. A number of them have sprouted up in recent months. The efforts are mostly focused on online small-business lending, a sector that has been dogged by allegations of unfair and deceptive practices, and where borrowers lack the same legal protections that consumers enjoy.
The Small Business Borrowers' Bill of Rights, launched last August, has been signed by Lending Club, Funding Circle, and a number of other for-profit and nonprofit lenders. It includes provisions related to pricing disclosures, underwriting processes, loan broker fees and debt-collection practices.
In addition, the Innovative Platform Lending Association, co-founded by OnDeck Capital, Kabbage and CAN Capital, is developing standardized pricing disclosures that would make it easier for small-business borrowers to comparison-shop.
OnDeck executives touted their self-regulatory initiative on Thursday, saying that it addresses perceived concerns about a lack of pricing transparency, and has been well received by policymakers.
"I believe we are being very proactive in doing the right things," OnDeck Chief Financial Officer Howard Katzenberg said at the company's investor day event.
But in Washington, FTC officials were more focused on the potential pitfalls of self-regulation.
During a panel discussion, an FTC attorney asked Conor French, the general counsel at Funding Circle USA, about the possibility that some companies will not abide by industry-developed standards. Funding Circle, Lending Club and Prosper Marketplace recently founded the Marketplace Lending Association, which has said that its members will be required to adhere to a set of operating standards.
French acknowledged that today there are no mechanisms for ensuring compliance with self-regulatory standards. He said that the Marketplace Lending Association plans to address the enforcement issue after it hires an executive director.
"And that's why we're going to be careful before we expand membership. We want to make sure that we have in place the type of process that we can feel comfortable … that folks are abiding by those standards," he said.
French also addressed concerns about what would happen to a marketplace lender's existing borrowers in a scenario where an online platform is forced to shut down. Those worries have grown more acute over the last few months as many platforms have had a hard time finding buyers for their loans.
French noted that the Marketplace Lending Association requires its members to maintain business continuity plans. "So that if we go out of business, there still would be someone to connect that borrower to that investor, to make sure that we could service that asset," he explained.
Meanwhile, consumer advocates who spoke at the FTC event expressed concern about the marketplace lending industry's ability to handle a credit downturn.
"I would say I'm very worried about it," said Lauren Saunders, associate director of the National Consumer Law Center, noting that many online platforms do not retain the risk of loans going bad. "It's a model that turned out to be problematic in the mortgage market."
Saunders also called on marketplace lenders to work with borrowers who can no longer afford to make their payments — by offering loan modifications, for example.
It remains to be seen whether the industry's effort to police itself will be enough to forestall action by Washington.
In a marketplace lending white paper published in May, the U.S. Treasury Department was complimentary of the Small Business Borrowers' Bill of Rights. But Treasury also argued that small-business loans under $100,000 share common characteristics with consumer loans, and expressed willingness to develop borrower-protection legislation.
Alan Kline contributed to this story.