Treasury Pushes for Tighter Controls on Marketplace Lenders
WASHINGTON – The Treasury Department on Tuesday capped off a nearly yearlong inquiry into the burgeoning marketplace lending industry with a policy paper that calls for increased transparency and customer protections while also highlighting the sector's potential for expanding credit access.
Antonio Weiss, counselor to Treasury Secretary Jack Lew, said in a conference call Tuesday morning that the advent of algorithmic underwriting shows promise, but regulatory safeguards must be put in place to ensure that borrowers are protected.
"While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations," Weiss said. "In other words, just because a lending decision is made by an algorithm doesn't mean it's fair or unbiased."
Fed up with the hassles of applying for a multitude of state licenses and relying on bank partners, fintech firms are increasingly interested in applying for a national bank charter and federal regulators are considering ways to accommodate them.
The relevant question is no longer whether new regulations will come for the fast-growing industry, but what form they should take.
The federal government's first broad inquiry into the fast-growing peer-to-peer loan industry raises several important questions, including whether banks will lobby for a clampdown on these lightly regulated competitors.
The 45-page paper calls on Congress "to consider legislation that addresses both oversight and borrower protections."
It notes that while online lenders can help expand access to credit and flexible terms, there is also more potential for exploitation. The paper said that only 15% of small business lenders approved for financing from marketplace lenders were satisfied with their experience, citing high interest rates, unfavorable repayment terms and lack of transparency as chief concerns.
It cites nascent efforts within the industry to curb abuses, such as the Small Business Borrower's Bill of Rights, but said that "effective oversight" – particularly for loans under $100,000 – "would protect self-employed and microbusiness owners while minimizing the compliance burden on larger business loans."
The paper also recommends expanded partnerships between online lenders and community development financial institutions, or CDFIs, to "reach more borrowers in distressed communities."
The paper notes that the marketplace lending industry is still immature and certain aspects need to be more closely examined and developed. For example, the lack of a secondary market for many loans originated through online borrowers will likely change over time, but any trend toward securitization needs to be done in a way that is transparent and creates reliable products. That can be done, in part, by having the industry adopt standardized terms, such as warranties, representations and enforcement mechanisms, as well as consistent reporting standards and pricing methods.
The paper also calls for the expanded availability of government-held data – such as individual borrowers' income and assets – to help them verify borrowing capacity and reduce the potential for delinquency.
Finally, the Treasury calls for the establishment of an interagency working group with representatives of the Consumer Financial Protection Bureau, Federal Deposit Insurance Corp., Federal Reserve, Federal Trade Commission, Office of the Comptroller of the Currency, the Treasury, Small Business Administration and the Securities and Exchange Commission.
The white paper is the culmination of a request for information launched by the Treasury last July, seeking public comment on various aspects of the growing online lending market, including the impact of marketplace lending on market segmentation, considerations for anti-money-laundering and fraud, and the considerations for traditionally underserved demographics.
Regulators have been gradually paying more attention to the question of how to fit marketplace lending into the existing legal framework. The OCC recently issued a white paper of its own on fintech, while the CFPB and several state regulators are launching inquiries into potential abuses and concerns. Some studies suggest that the industry has grown by over 700% in four years, making it one of the hottest sources of growth in finance.