Mueller Jackson
Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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Treasury’s Review of Marketplace Lending: Too Wide

By: Jackson Mueller
November 12, 2015

Prior to Treasury’s request for information, marketplace lending was spotlighted in the sector’s first-ever hearing in Congress. Members of the House Small Business Committee questioned the industry’s potential in addressing concerns about increasing access to capital small to medium sized businesses. Since then, an increasing number of financial regulatory officials have spoken about marketplace lending. For instance, Antonio Weiss, counselor to the secretary of the Treasury, remarked that it was “too soon to tell” if alternative underwriting methods used by marketplace lenders are better at assessing creditworthiness than traditional models. Anjan Mukherjee, counsel to the secretary and deputy assistant secretary for financial institutions at the Treasury, said the department is “cautiously optimistic about the growth of this industry.” Meanwhile, Federal Deposit Insurance Corporation staff stated in a recent advisory committee meeting (Start at 2:38:00) that they were unsure of platforms’ stabilities in times of stress—a statement reiterated in a number of comment letters to the Treasury. If official remarks aren’t enough to demonstrate U.S. financial regulatory interest in this space, more than 20 financial regulatory officials attended the American Banker Marketplace Lending + Investing Conference in New York earlier this month.

Stability concerns aside, there was one issue in particular that I noticed after reviewing each comment letter— an issue that could seriously complicate Treasury’s or another regulator’s efforts to understand the space.

First, just what is an “online marketplace lender”? The Treasury RFI states the following:

Online marketplace lending refers to the segment of the financial services industry that uses investment capital and data-driven online platforms to lend to small businesses and consumers.

As noted in our comment letter, the term “marketplace lending” is broad and encompasses multiple methods of lending, as can be seen from the responses to Treasury. The variety of responses and different lending segments involved makes it difficult to draft a one-size fits all definition of the sector (or coordinate an appropriate regulatory response, if needed). For journalists and others who cover the FinTech space, it was no surprise to see responses from such firms as Prosper, Funding Circle, Avant, Lending Club, OnDeck and SoFi, given their role and what they’ve been able to accomplish in online marketplace lending. But they are not the only ones. A number of comment letters came from online financial services providers located in tribal areas. They are active in the consumer lending space and urged Treasury to take into account tribal sovereignty and self-determination in developing a regulatory response. Also commenting were community banks and credit unions that are very concerned with competition from marketplace lenders. They pleaded with Treasury to alleviate regulatory burdens imposed on them that restricts their ability to lend. Comments also came in from institutional investors active in the space, from payment services providers, such as PayPal, and financial institutions that have partnered with marketplace lenders, to public interest groups, consumer advocates, trade associations representing a variety of players within and outside of the online lending marketplace, and others. This all goes to show that any attempt to apply a one-size-fits-all regulatory regime will prove difficult if not impossible, given the diversity of the players involved in this space.

The term becomes even more complex when you think about the different kinds of platforms involved and the diversity of the products they provide: balance sheet lenders, bank-affiliated lenders, platforms that focus solely on consumer financing or small business financing, those that cater solely to institutional investors versus platforms that attract retail and institutional investment, and so on. It remains to be seen whether Treasury or another regulatory body will provide a more tailored definition, or additional guidance, or would want to, for that matter.

Second, this lack of a formal definition complicates the extent to which online marketplace lenders are regulated. In my review of the comments, I had a hard time determining exactly which lenders were being discussed: payday lenders, merchant cash advance firms, tribal online lending firms, balance sheet lenders, platforms that serve only institutional investors versus retail, or every online lending platform in existence. A few firms tried to make the distinction between the services they provide and how that differentiates from other lenders, including lengthy sections on regulation to which they’re subjected. The diverse array of platforms out there were often lumped together under the “online marketplace lender” term, which ultimately makes Treasury’s job more difficult in declaring a winner, if that is possible, in the tug-of-war between platforms and outside interests over whether these platforms are truly regulated.

Third, aside from overarching regulatory concerns for the entirety of the marketplace lending industry, there was also the issue of fair competition. The American Bankers Association and the Consumer Bankers Association  drove home the point that online lenders and the products they offer “fundamentally resemble” traditional lenders. Others also noted that the credit underwriting process has not changed significantly over the last half-century, even with the influx of online lenders, with incumbent firms urging Treasury to provide clarity on existing regulation to which marketplace lenders are subjected, in addition to creating a level regulatory playing field between old and new firms. (The fairness pendulum also swung the other way as well, as a few comments suggested the need for a national lending charter for non-banks to compete on a level playing field with banks.)

Fourth, this search for regulatory harmony and the crowding of diverse platforms under the umbrella of “online marketplace lending” had the knock-on effect of conflating two separate models of lending: consumer lending and small business lending. Calls for regulatory harmonization seeped down into the actual business operations of the platforms themselves, with commenters taking the view that small business lenders should abide by the same regulations as platforms specializing in consumer lending. In fact, a significant number of comment letters focused on small business lending, with a number of commenters of the view that this area of lending is still the Wild West, and appropriate protections like those provided in the consumer lending space should be afforded to small businesses seeking capital. Distributed Finance Corporation went as far as to say that there is no real distinction between consumer and small business loans, saying the two types of products are “effectively the same”. Treasury’s Weiss hinted at this in recent remarks when he stated that “all borrowers—businesses as well as consumers—should have the same protections.” He added that since small businesses are run by people, those people receive protection as individual consumers, “but when they are called ‘small businesses’ they get no protection.”

Intuit suggested that consumer lending requirements for mortgages be expanded to cover all consumer loans and small business financing, while Lending Tree was of the view that a harmonized approach to regulating consumer and small business loans would lead to greater small business lending. The Community Reinvestment Fund suggested that policymakers “take the steps necessary to level the playing field and ensure the rules governing small business lending be applied evenly for all small business lenders—online or otherwise.” Meanwhile, the Small Business Majority and the Woodstock Institute went as far as to suggest a fiduciary rule, similar to that being developed by the Labor Department, should be applied to online marketplace lenders and/or brokers, to ensure borrowers are not being steered into high cost loans. Commenters also said that the Consumer Financial Protection Bureau should take a more active regulatory role in protecting small businesses.

But without a workable definition, it is hard to lay the groundwork for analysis and potential (additional) regulation of this sector. While some of the views expressed in the comment letters could have pertained to a particular segment of the online lending industry, those views could be misconstrued as being applicable to the entire sector, due to the lack of proper regulatory scope as to exactly which firms Treasury originally intended to capture under “online marketplace lending”. In addition, significant differences between the various platforms may be materially significant from a policy or regulatory perspective and should be considered as Treasury moves forward. This confusion is particularly worrisome. Along with several of the other commenters, I hope Treasury will be mindful of the many differences between platforms as it deliberates on marketplace lending.