Marketplace Lending ‘Untested’: Treasury

How will online lenders fare in an adverse credit environment? More transparency on loans and securitization markets is needed, says Treasury.
Matthew HellerMay 11, 2016
Marketplace Lending ‘Untested’: Treasury

The U.S. Treasury Department has called for greater transparency in online lending and warned that the industry “remains untested” in an adverse credit environment.

In a white paper released Tuesday, the agency made several recommendations for oversight of online lending based on a nearly year-long survey of the “evolving market landscape” and stakeholder opinions.

The responses to the survey “strongly supported and agreed on the need for greater transparency for all market participants,” Treasury reported. “Suggested areas for greater transparency include pricing terms for borrowers and standardized loan-level data for investors.”

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As The Wall Street Journal reports, online lending is relatively opaque, partly due to less regulation compared with traditional banks and fewer disclosure requirements for small-business loans in particular.

Treasury officials are now weighing options such as asking marketplace lenders to report data on loans and securitizations on a register that is made publicly available. Greater transparency in the loans sold to investors would help lenders securitize those loans and sell them to banks.

“The secondary market for loans is still undeveloped and there are areas where additional regulatory clarity would be beneficial,” Antonio Weiss, counselor to Treasury Secretary Jacob Lew, said during a conference call with reporters.

The industry accounts for only a tiny portion of the total lending market, but Treasury estimates that loan origination by online lenders could reach $90 billion by 2020. Given that online lenders are dependent on investors rather than depositors for funding, regulators are concerned they could be exposed to liquidity risk if investors react fearfully to negative news.

“This industry remains untested through a complete credit cycle,” Weiss said. “The new business models were developed in a period of low interest rates, declining unemployment, and relatively strong overall credit conditions.”

Treasury said more research is needed to monitor liquidity. It supports exploring legislative solutions to extend borrower protections and oversight to small-business marketplace loans.

In addition, Treasury said that increasing mortgage and auto loans originated by online marketplace lenders, potential cybersecurity threats, and compliance with anti-money laundering requirements will require ongoing monitoring.

The white paper recommends that a standing working group for online marketplace lending be created by regulatory agencies in cooperation with the private sector.