Noting the boom in online lending platforms, on July 20, 2015, the US Treasury Department published a “Request for Information” (RFI) seeking comments on the services, products and operational structure of online marketplace lending, which the RFI defined as small business and consumer lending through the use of “investment capital and data-driven online platforms.” The deadline for comments is August 31, 2015.
In the RFI, Treasury divided online marketplace lending into three general categories:
- Balance sheet lenders that retain the loans in their portfolios with venture capital, hedge fund and family office investors
- Online platforms (‘‘peer-to-peer’’) that use the sale of securities to raise funds to enable third parties to fund borrowers and do not retain the credit risk that the borrowers will not pay
- Bank-affiliated online lenders that are funded by a commercial bank, often a regional or community bank, and that originate the loans and directly assume the credit risk
Treasury also noted the use by online marketplace lenders of banks to make the loans, which are then sold to a second party, usually an investor or the marketplace lender itself. This can be advantageous to the nonbank lender because if a bank with federal deposit insurance makes the loan (which generally would be the case), the bank can “export” the interest rate from the state in which it is located to the borrower. A nonbank lender is restricted by the borrower’s state usury laws in charging interest on loans.
Citing statistics showing the difficulty of small businesses and consumers with weak credit histories in obtaining credit, Treasury noted that “[t]echnology-enabled credit provisioning offers the potential to reduce transaction costs for these products, while investment capital may offer a new source of financing for historically underserved markets.”
In seeking comments, Treasury posed 14 very detailed questions for the public to address in their comments. The topics covered in the questions include seeking statistics and information on how these online marketplace lending platforms conduct their business, whether these online marketing platforms are expanding credit availability for historically underserved portions of the market, and what the federal government could and should be doing to facilitate innovation in this area.
As part of those detailed questions, Treasury noted that online marketplace lenders use “electronic data sources and technology-enabled underwriting models to automate processes such as determining a borrower’s identity and credit risk.” Treasury asked: “What privacy considerations, cybersecurity threats, consumer protection concerns, and other related risks might arise out of online marketplace lending?” Does credit risk include the credit risk of a consumer’s social media “friends” or connections—and does the online marketplace lender have an obligation to notify the consumer of this determination of risk? What is the effect on a consumer if one of those “electronic data sources” is hacked and a consumer’s identity is stolen? Finally, if online marketplace lenders are collecting individually identifiable information about consumers’ identities and credit risk, does that collection become a hacker target?
Commenters should note that this RFI is separate and apart from proposals being considered by the Consumer Financial Protection Bureau regarding regulation of payday lending and other high cost and open end loans. For example, the RFI excludes loans to consumers with repayment periods greater than 45 days and an annual percentage rate of 36% or greater if the loan also provides for repayment directly from a consumer’s bank account or paycheck or includes a non-purchase money security interest in a vehicle.