How the Government Can Spur Innovation in Marketplace Lending
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The evidence is building that marketplace lending is rivaling and even beating traditional banks at breadth of product offerings, pricing, technology and service.
In the face of the industry's growth, the government is seeking more information. In July, the Treasury Department sought public comment on information about marketplace lending, including what the federal government could do to improve regulations and foster innovation in the industry.
Many companies involved in marketplace lending, including CommonBond, commented on the department's request. From the perspective of this new industry, the government has a massive opportunity to improve marketplace lending, and therefore lending in general.
Based on the public comments, I see four ways the federal government can help spur innovation in marketplace lending:
Create a low-cost federal credit facility for responsible marketplace lending.
Traditional banks have a large advantage in cost of funds over marketplace lenders. The banks enjoy unique, government-sponsored benefits such as consumer deposits that are federally insured and access to the Federal Reserve's discount window, which provides loans to banks at below market rates.
A federal government credit facility, which responsible marketplace lenders could tap into at a low cost, can help facilitate even stronger products for consumers. A fairer system where banks and marketplace lenders play by the same rules would emerge. A lower cost of capital for marketplace lenders means borrowers will receive better rates.
Harmonize federal and state rules for marketplace lending.
Marketplace lenders must follow a patchwork of federal and state regulations and laws. Unfortunately, many of these antiquated rules did not anticipate how technology would change financial services. Federal and state policymakers should work to streamline existing laws and regulations on items related to lending licenses, as just one example.
Uniform rules will reduce compliance costs for lenders. In turn, companies can become more competitive on both price and choice.
Share government-held data to improve underwriting.
The federal government should aggregate, anonymize and share loan-level data with marketplace lenders. Take student loans, for example. The Department of Education, which runs the federal government student loan program, could release data by field of study in addition to data by institution in the student loans.
Lend Academy, which co-hosts the annual LendIt conference, proposed that the Federal Reserve lead data-sharing efforts to provide more insight and transparency into the marketplace lending industry.
Shared government data would allow lenders to make more informed lending decisions, and in turn, make credit more accessible to more consumers in a responsible way.
Promote a fluid secondary market for marketplace lending investors.
Currently, individual investors have to hold assets purchased through marketplace lenders to term instead of having the option to trade them in a secondary market, unless they are willing to sell them at a significant discount.
The bond market has an efficient secondary market for debt investments. Marketplace lending should have one too. It would add further liquidity to the lending system and create a more secure environment for investors and a stronger set of well-priced products for consumers.
A robust secondary market will allow marketplace lenders to offer even better rates for consumers by increasing the size of its investor base.
David Klein is the CEO and a co-founder of CommonBond, a marketplace lending platform that lowers the cost of student loans for borrowers and provides financial returns to investors. He can be reached @DavidXKlein.