The Great Online Lending Schism of 2016
This concern was evident in the responses to Treasury’s request for information on “online marketplace lending.” As previously observed, Treasury’s view of online marketplace lending – a “segment of the financial services industry that uses investment capital and data-driven online platforms to lend to small businesses and consumers” – is inherently broad, encompassing more than just marketplace lenders - matching consumer and small business borrowers with investors – to also include balance sheet lenders, lenders that operate on tribal lands, and more.
As such, several respondents sought to make the distinction between their models compared to other lenders. Blue Elephant (an investment management firm focused on alternative lenders) and Bond Street (an alternative small business lender) targeted businesses, such as merchant cash advance and payday lenders, and urged regulators to apply additional regulations to those businesses. Similarly, one respondent stated that consumer loans “offered in this space are not payday-type loans with short terms and high rates.” Beyond this, Lending Club sought to differentiate marketplace lenders from balance sheet lenders, stating that companies “that use their balance sheets to make loans are not marketplace lenders, and may be better described simply as balance sheet lenders." In our own comment letter we noted that while similarities exist between platforms, “there are also significant differences that may be material from a policy or regulatory perspective.” There was also the question of whether market segmentation could be applied with some of the view that segmentation could be applied based on regulation, funding, or by product, while other respondents were of the view that any segmentation would be difficult to achieve.
Regardless of the difficulty, a few lenders have gone beyond the use of pen and paper to actually form a trade association based on their own lending model. Earlier this week, marketplace lending titans Lending Club, Prosper Marketplace, and Funding Circle announced the launch of the Marketplace Lending Association.
To be sure, other online lending platforms have formed industry-led initiatives such as the Small Business Borrowers’ Bill of Rights – a set of standards applicable to signees “that puts the rights of [small business] borrowers at the center of the lending process” – which Funding Circle and Lending Club are signatories to. Not to mention the recent launch of the Coalition for Responsible Business Finance where the steering committee “will craft best practices that reflect consensus across several different business practices within the non-traditional small business lending sector.” (The Coalition is a separate group from the Small Business Borrowers’ Bill of Rights, but the two groups are apparently in talks)
The difference? The Small Business Borrowers’ Bill of Rights and the Coalition for Responsible Business Finance focus not on a particular business model or product, but on alternative small business finance and responsible lending practices. Meanwhile, the Marketplace Lending Association is focused on educating policy makers and regulatory officials about the importance of their own particular model. As its FAQ states: “As interest in marketplace lending continues to grow and different lending models emerge, we believe there is a need for more education and awareness around the unique advantages of the marketplace lending model to ensure the prudent growth of our industry continues.”
Whether additional online lenders form associations to protect their own online lending business models remains to be seen, but the recent move by Lending Club, Prosper, and Funding Circle is certainly interesting at a time when regulatory scrutiny of online lenders continues to grow, and the use of the term “online lending” becomes overly broad.