Is More Regulatory Scrutiny on Tap for Online Marketplace Lenders?

By aiwpadminJuly 13, 2016

By John Egan.

It looks like government watchdogs are going to be keeping a more watchful eye on online marketplace lenders.

In a recent report, the U.S. Treasury Department recommends creating a publicly available registry — driven by the private sector — that would track data about online marketplace loans in an effort “to improve transparency for investors and borrowers.” The report encourages the private sector to collaborate with consumer advocates to ensure the registry would meet privacy and data security standards.

Referring in part to online marketplace loans, a separate report from the Treasury Department’s Financial Stability Oversight Council says financial regulators must “continue to be vigilant in monitoring new and rapidly growing financial products and business practices, even if those products and practices are relatively nascent and may not constitute a current risk to financial stability.”      

A session at the upcoming LeadsCon New York 2016 will delve into regulation of the burgeoning marketplace for online lending. The session is titled, “Is Online Lending the Next Uber? The Regulatory and Legal Framework Surrounding the Popular Alternative to Traditional Banking.”

The popularity of this alternative to traditional banking continues to rise, as noted in the Treasury Department and Financial Stability Oversight Council reports.

According to the council’s report, online marketplace lenders originated an estimated $18 billion to $36 billion in loans in 2015. The Treasury Department report cites one projection that the volume of online marketplace loans could skyrocket to $90 billion by 2020.

Among the leaders in this burgeoning marketplace — initially known as peer-to-peer lending — are Lending Club and Prosper, which depend on money from investors to back personal and business loans. A new entrant in the industry is Green Dot Money, an online lending marketplace aimed at low- to moderate-income consumers.

“As marketplace lending continues to grow, financial regulators will need to be attentive to signs of erosion in lending standards,” the Financial Stability Oversight Council says.

The Treasury Department points out that loans originated by online marketplace lenders are subject to many of the same federal laws as loans originated by traditional banks. However, marketplace lenders face much less regulation by federal agencies.

While some online marketplace lenders divulge extensive data about loans, others “are neither clearly nor systematically disclosing information to borrowers and investors,” the Treasury Department says. The department’s report cites the need for “clear communication” about borrowers’ interest rates and lending terms.

Referring to protection of consumers in the online lending marketplace, the Treasury report says: “Regulators should evaluate the fragmented nature of regulatory oversight, the lack of federal supervisory authority for certain non-bank lenders and the sophistication of big data in current regulations.”

In response to the Treasury report, Rob Nichols, president and CEO of the American Bankers Association, says his group welcomes the Treasury’s effort to get a better handle on non-bank lending. Yet Nichols bristles at enacting more laws to govern online marketplace lenders — a move that he says would make it more difficult and costly to originate loans.

“What is needed is proactive oversight to ensure that rules are followed and borrowers are treated fairly regardless of the provider,” Nichols says. “Banks already have a culture of compliance and strong regulatory oversight which should be emulated by all credit providers.”

Click here to register for LeadsCon New York 2016.


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