WASHINGTON — On Tuesday, the U.S. Treasury Department issued a white paper detailing its view of the online financing marketplace. The paper, “Opportunities and Challengers in Online Marketplace Lending,” provides an overview of what the agency heard in response to the Request for Information it made in the summer of 2015. It also contains research on and recommendations for the industry.
The white paper establishes an overview of the evolving market landscape, reviews stakeholder opinions, and provides policy recommendations. The paper also acknowledges the benefits and risks associated with online marketplace lending, and highlights certain best practices applicable to established and emerging market participants.
“Advances in technology and the availability of data are changing the way consumers and small businesses secure financing,” white paper’s executive summary states. “Through this effort, Treasury took steps to understand the potential opportunities and risks presented by this evolving industry. By engaging directly with industry, Treasury hoped to foster discourse about how this industry could best serve the financial needs of the American public.”
According to the agency’s press release, the Treasury received approximately 100 responses to its Request for Information from online marketplace lenders, trade associations, consumer and small business advocates, academics, investors, and financial institutions. Comments received covered a wide range of issues, but several common themes emerged, including:
1. Use of Data and Modeling Techniques for Underwriting is an Innovation and a Risk: Commenters agreed the use of data for credit underwriting is a core element of online marketplace lending, and one of the sources of innovation that holds the most promise and risk, according to the white paper.
“While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcome and the potential for fair lending violations,” the white paper read, in part. “Importantly, applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions.”
2. There is Opportunity to Expand Access to Credit: Responses suggested that online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital.
“Although a majority of consumer loans are being originated for debt consolidation purposes, small business loans are being originated to business owners for general working capital and expansion needs,” the paper states. “Distribution partnerships between online marketplace lenders and traditional lenders may present an opportunity to leverage technology to expand access to credit further into underserved markets.”
3. New Credit Models and Operations Remain Untested: “New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions,” the white paper read. “However, the industry remains untested through a complete credit cycle. Higher charge-off and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.”
4. Greater Transparency Can Benefit Borrowers and Investors: According to the white paper, respondents to the Treasury’s request for information strongly support and agreed on the need for greater transparency for all market participated. Suggested areas for greater transparency include pricing terms for borrowers and standardized loan-level data for investors.
5. Secondary Market for Loans is Undeveloped: Although loan originations are growing at high rates, the white paper noted, the secondary market for whole loans originated by online marketplace lenders is limited. “Request for Information commentators agreed that active growth of a securitization market will require transparency and significant repeat issuances,” the white paper read.
6. Regulatory Clarity Can Benefit the Market: Respondents to the agency’s request for information had diverse views of the role government could play in the market. However, according to the white paper, a large number argued that regulators could provide additional clarity around the role and requirements for the various participants.
The white paper also included the following recommendations to the federal government and private sector participants:
1. Support more robust business borrower protection and effective oversight;
2. Ensure sound borrower experience and back-end operations;
3. Promote a transparent marketplace for borrowers and investors;
4. Expand access to credit through partnerships that ensure safe and affordable credit;
5. Support the expansion of safe and affordable credit through access to government-held data; and
6. Facilitate interagency coordination through the creation of a standing working group for online marketplace lending.
In developing its white paper, the Treasury consulted with staff from other agencies, including the Consumer Financial Protection Bureau, Federal Deposit Insurance Corp., Board of Governors of the Federal Reserve System, the Federal Trade Commission, the Office of Comptroller of the Currency, Small Business Administration, and the Securities and Exchange Commission.
To view the white paper, click here.