On Monday, July 20, 2015, the United States Treasury Department (UST) published a notice and request for information (RFI) in the Federal Register in order to request public comment on online marketplace lending. The RFI specifically requests comment on: the business models used and products offered by online marketplace lenders to small businesses and consumers; the potential for online marketplace lending to expand access to credit in underserved markets; and how the regulatory framework should develop to the support safe growth in the industry. Comments are due by August 31, 2015.
By way of background, the RFI indicates that online marketplace lending is generally regarded as the “segment of the financial services industry that uses investment capital and data-driven online platforms to lend either directly or indirectly to small businesses and consumers.” This market became initially popular as “peer-to-peer” lending and has evolved into an entire market of investors looking for favorable rates of return from new financing vehicles.
The notice from the UST indicates that there are three common categories of companies operating in this finance segment. First are the balance sheet lenders that retain credit risk in their portfolios. These may be backed by venture capital, hedge funds and family investment offices. The second category is comprised of online platforms (“peer-to-peer”) that sell securities to obtain the financing that enables third parties to fund borrowers, but do not retain credit risk as part of the transactions. Lastly, bank-affiliated online lenders, funded by a commercial bank, may originate loans and retain credit risk.
Despite their differences, each of these kinds of lenders, according to the RFI, share the following characteristics. First, the lenders provide funding through convenient online applications with few or no retail branch presence. Second, the lenders use electronic data sources and tech-powered underwriting models to automate the process. Finally, and perhaps most significantly, these lenders are able to provide faster access to credit than traditional lending. The information gleaned from this RFI on these similarities and differences will likely guide the UST policymaking in online marketplace lending.
The Federal Register Notice from the UST can be found here.
Locke Lord has a dedicated team of compliance and litigation attorneys who have significant experience handling various aspects of consumer finance. Locke Lord attorneys regularly advise financial institutions on regulatory compliance matters, new product development and represent clients in regulatory enforcement matters, class actions and various lawsuits in the U.S. and abroad. Visit Locke Lord’s Consumer Finance Regulatory Practice Group website or contact the author with questions or for assistance in responding to the Request for Information.