The US Department of Treasury (DoT) has issued a request for Information (RFI) on the lending practices of marketplace lenders. The information gathering exercise is designed to support regulation of online lending platforms as well as understanding how the platforms make cheaper credit available and discuss the potential risks of the sector.
“We are open to hearing success stories and potential public policy solutions,” a Treasury official told Private Debt Investor. He emphasized that it is an information-seeking exercise, since it is a relatively new area with little public data available. The official said it did not automatically mean there will be tighter regulation of the sector in the near future. “This is way of gathering information and checking with the public on what they are seeing in the industry from all levels,” the official said.
Unlike the banking sector, there is no dedicated regulatory body or commission to oversee the lending practices of online marketplace lenders but the sector is subject to consumer and investor protection laws.
The RFI asks 14 key questions including how platforms evaluate identity, credit and fraud risk based on electronically gathered data. There are also questions about privacy, cybersecurity threats and consumer protection concerns. The document also seeks to find out if the current statutory and regulatory regimes adequately cover the risks.
“Through this RFI, the Treasury is seeking to study the potential for online marketplace lending to expand access to credit and how the financial regulatory framework should evolve to support the safe growth of this industry,” the RFI notice said.
The questions further seek clarity on the categorization of different borrowers based on size and credit score as well as examining lenders’ relationships with traditional banks and community development financial institutions. The note also asks about the steps taken by industry participants toward regulatory compliance.
DoT, through the RFI, is looking for suggestions on what the role of the Federal Government should be in driving the growth of the segment.
The notice also seeks information on the loan servicing, fraud detection, credit reporting and collections practices of the online platforms and how they differ from those of traditional banks.
Apart from a string of questions, the RFI also pointed out that the problem of poor access to bank credit is ‘acute’ for smaller businesses that are seeking smaller value loans for shorter terms-a gap that could be filled by the online marketplace lenders. More than half of the small businesses that applied for credit in 2014 sought loans of $100,000 or less. At the same time, more than two thirds of businesses with under $1 million in annual revenue that applied for credit received less than the full amount that they sought and half received none.
Technology-enabled online lending platforms can potentially lower the cost of credit and expand access of credit to this underserved market of consumers and enterprises, the DoT note concluded.
The RFI is posted on the Federal Register website to and responses from industry players and members of general public are due by 31 August from industry players and members of the general public. The responses would be posted on www.regulations.gov. The comments will be reviewed by the office of Consumer Policy and Small Business Community Development and Affordable Housing Policy that is part of the larger office of financial institutions.