Don’t Look Now, But The US Treasury is Staring At Marketplace Lending

The US Department of Treasury is concerned about marketplace lending. Again.

The Financial Stability Oversight Council which was established per Dodd Frank to monitor excess risks to the financial system by bank and nonbank financial entities categorized marketplace lending as one in its annual report.

Concerned by the quick proliferation of nonbank lenders, the FSOC said that new financial products, its delivery mechanism and the business practices involved although contribute to “efficient” financial intermediation, the technology-backed underwriting models pose credit risk.

“Marketplace lending is an emerging way to extend credit using algorithmic underwriting which has not been tested during a business cycle, so there is a risk that marketplace loan investors may prove to be less willing than other types of creditors to fund new lending during times of stress,” the report said, worrying about the possible erosion of lending standards.

The Treasury however recognizes that the threat is still moderate but is still cautious.

“Financial regulators will need to continue to be vigilant in monitoring new and rapidly growing financial products and business practices, even if those products and practices are relatively nascent and may not constitute a current risk to financial stability.”

This is not the first time marketplace lending industry has garnered attention from authorities. Last month, (May 10th) the Treasury released a white paper titled “Opportunities and Challenges in Online Marketplace Lending” listing the risks associated with data and modeling techniques and the new data model being untested through a complete credit cycle.

The CFPB is also turning its attention towards small business lenders. Bloomberg reported that the agency wants to collect credit data in small business lending.

However, there are some who believe that regulating the lending industry cannot have a one-size-fits-all solution, nor does it need one. Thomas Weinberger, partner at Schulte Roth and Zapel is less inclined to believe that this will affect different market segments. “Marketplace lending has a self correcting system where if default rates go up, investors won’t buy,” he said. “The discipline is enforced by the capital.”