The online lending industry remains somewhat unregulated and wholly untested, the Treasury Department said in a new report reviewing the emerging business model.
Online lenders that make direct loans to consumers and small businesses may fall through cracks in the federal regulatory scheme and may only be subject to state rules, the Treasury said.
Notably, the Treasury said the online lending industry has not been tested in an economic downturn.
“It will be critical to monitor how online marketplace lenders test and adapt models if and when credit conditions become weaker,” the report read. “Higher charge-off and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.”
Platform lenders that partner with a depositor institution to originate loans use the institution's charter to make loans nationally without obtaining state licenses. If an issuing depository institution quickly sells the loan to an online marketplace lender, federal regulators may not have oversight of the servicing of the loan, according to the Treasury.
“While state legal and regulatory frameworks are outside the scope of this paper, direct lenders that use state lending licenses to originate loans directly are not subject to a federal banking regulator's supervisory authority, except to the extent the lenders may be subject to CFPB supervision,” the report read.
The Treasury recommended the establishment of an interagency working group to monitor the lenders.
“The interagency working group would enable the member agencies to coordinate efforts toward identifying areas where additional regulatory clarity could protect borrowers and investors and expand access to credit,” the Treasury added.
The Treasury recommended the working group include the Treasury, as well as the CFPB, the FDIC, the Federal Reserve, the Federal Trade Commission, the Office of the Comptroller of the Currency, the SBA, the Securities and Exchange Commission and a state bank supervisor representative — but not the NCUA.
The industry itself also should develop ways to ensure a sound borrower experience, promote transparency, expand credit through partnerships that ensure safe and affordable credit, and use government data in providing access.
“Online marketplace lenders should strive to provide strong customer service from origination to repayment, even in cases where borrowers face financial difficulties,” the report read.
NAFCU praised the report.
“Treasury's report largely confirms our concern that there exists an uneven playing field for overregulated credit unions as compared to online marketplace lenders, which are not subject to the same disclosure rules and underwriting standards that apply to traditional lenders,” Vice President of Government Affairs and General Counsel Carrie Hunt said.
NAFCU said that financial regulators should ensure that online lenders comply with federal regulations, such as the Truth in Lending Act.
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