Treasury to review online lending industry

The Treasury Department has launched a study of lenders in the online market, as the federal government seeks to determine whether regulation is keeping pace with the rapidly growing industry.

While many traditional banks have stopped making small business and consumer loans, a flood of online lenders have filled the void. Through investments from hedge funds and other institutions, market lenders say they are providing valuable credit to important and underserved segments of the economy, often with fewer problems and at lower cost.

The Treasury Department said in a statement Thursday that it was “looking to explore the potential of lending in online marketplaces to expand access to credit and how the financial regulatory framework should evolve to support the safe growth of the industry”.

For now, the Treasury’s effort seems more of an investigative exercise, rather than a deliberate attempt to establish new regulations. The ministry invites public comment on the sector and plans to host a roundtable this summer with input from the $12 billion industry, borrowers and consumer advocates.

Marketplace lending began as a peer-to-peer model, where individuals could lend money through a website to other individuals or a small business. Much of the investment today comes from large investors funneling hundreds of millions of dollars to market lenders.

Some of the more established companies, such as Lending Club and Prosper Marketplace, have increased their volume significantly in recent years, while facing an ever-increasing number of upstart competitors. Even Goldman Sachs is launching an online consumer loan operation that mimics part of the market approach.

Without the overhead of big banks, online lenders say they can charge lower interest rates and quickly make a decision on whether to extend credit. Most market lenders only facilitate loans, which are held by investors.

“Although it is only a small component of the total consumer and small business loan market, it is a rapidly developing and growing industry that is changing the way consumers and small businesses get credit,” Antonio Weiss, a senior Treasury official, wrote in a statement. blog post on the agency’s website.

Yet despite the largely favorable tone of Treasury statements, the department is also raising pointed questions about the loosely regulated industry.

In its request for information released Thursday, the Treasury said its questions relate to how borrowers are assessed for creditworthiness and whether lenders should be required to have “skin in the game”, meaning that they retain part of the risk in the event of default.


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David A. Albanese