[Federal Register Volume 80, Number 138 (Monday, July 20, 2015)]
[Notices]
[Pages 42866-42868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17644]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY


Public Input on Expanding Access to Credit Through Online 
Marketplace Lending

AGENCY: Office of the Undersecretary for Domestic Finance, Department 
of the Treasury.

ACTION: Notice and request for information.

-----------------------------------------------------------------------

SUMMARY: Online marketplace lending refers to the segment of the 
financial services industry that uses investment capital and data-
driven online platforms to lend to small businesses and consumers. The 
Treasury Department is seeking public comment through this Request For 
Information (RFI) on (i) the various business models of and products 
offered by online marketplace lenders to small businesses and 
consumers; (ii) the potential for online marketplace lending to expand 
access to credit to historically underserved market segments; and (iii) 
how the financial regulatory framework should evolve to support the 
safe growth of this industry.1 2
---------------------------------------------------------------------------

    \1\ The Consumer Financial Protection Bureau (CFPB) has broad 
authority governing standards that may apply to a variety of 
consumer loans issued through this segment, and it has recently 
announced that it is considering proposing rules that would apply to 
payday loans, vehicle title loans, deposit advance products, and 
certain high-cost installment loans and open-end loans. See ``Small 
Business Advisory Review Panel for Potential Rulemakings for Payday, 
Vehicle Title, and Similar Loans: Outline of Proposals Under 
Consideration and Alternatives Considered'' (March 26, 2015), 
available at http://files.consumerfinance.gov/f/201503_cfpb_outline-of-the-proposals-from-small-business-review-panel.pdf. The potential 
content, effects, and policy underpinnings of CFPB rules are outside 
the scope of this RFI, and comments responding to this RFI should 
not address these CFPB rulemakings or their potential effects on 
marketplace lending to consumers. Thus, the RFI only seeks comment 
on online marketplace lending not covered in the potential 
rulemakings, which, under the current framework, would include 
comments on the making or facilitating of a loan by online lender to 
consumers with a term of more than 45 days and an annual percentage 
rate (as defined in 10 U.S.C. 987(i)(4)) that (I) does not exceed 
36% or (II) exceeds 36% provided the loan neither provides for 
repayment directly from a consumer's account or paycheck nor creates 
a non-purchase money security interest in a vehicle. This framework 
is currently under discussion, however, and the CFPB may ultimately 
change the scope of any proposed or final CFPB regulation.
    \2\ The activities on online marketplace lending platforms also 
may entail the offering of securities that are subject to the 
federal securities laws.

---------------------------------------------------------------------------
DATES: Submit comments on or before: August 31, 2015.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via U.S. mail or commercial delivery. We will not accept comments by 
fax or by email. To ensure that we do not receive duplicate copies, 
please submit your comments only one time. In addition, please include 
the Docket ID and the term ``Marketplace Lending RFI'' at the top of 
your comments.
     Federal eRulemaking Portal: You are encouraged 
to submit comments electronically through www.regulations.gov. 
Information on using Regulations.gov, including instructions for 
accessing agency documents, submitting comments, and viewing the 
docket, is available on the site under a tab titled ``Are you new to 
the site?'' Electronic submission of comments allows the commenter 
maximum time to prepare and submit a comment, ensures timely receipt, 
and enables the Department to make them available to the public.
     U.S. Mail or Commercial Delivery: If you mail 
your comments, address them to Laura Temel, Attention: Marketplace 
Lending RFI, U.S. Department of the Treasury, 1500 Pennsylvania Avenue 
NW., Room 1325, Washington, DC 20220.
     Privacy Note: The Department's policy for 
comments received from members of the public (including comments 
submitted by mail and commercial delivery) is to make these submissions 
available for public viewing in their entirety on the Federal 
eRulemaking Portal at www.regulations.gov. Therefore, commenters should 
be careful to include in their comments only information that they wish 
to make publicly available on the Internet.

FOR FURTHER INFORMATION CONTACT: For general inquiries, submission 
process questions or any additional information, please email 
[email protected] or call (202) 622-1083. All responses 
to this Notice and Request for Information should be submitted via 
http://www.regulations.gov to ensure consideration. If you use a 
telecommunications device for the deaf (TDD) or a text telephone (TTY), 
call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Request for Information

    The Treasury Department is seeking public comment through this RFI 
to study (i) the various business models of and products offered by 
online marketplace lenders to small businesses and consumers; (ii) the 
potential for online marketplace lending to expand access to credit to 
historically underserved market segments; and (iii) how the financial 
regulatory framework should evolve to support the safe growth of this 
industry.
    In particular, the Treasury Department is interested in responses 
to the following questions. We also seek any additional information 
beyond these questions that market participants believe would assist in 
our efforts to become better informed of the impact of online 
marketplace lending on small businesses, consumers, and the broader 
economy.
    Online marketplace lenders may be subject to regulations 
promulgated by various agencies including, but not limited to, the CFPB 
and the Federal Trade Commission.
    Respondents should provide as much detail as possible about the 
particular type of institution, product (e.g., small business loan, 
consumer loan), business model, and practices to which their

[[Page 42867]]

comments apply. Responses to this RFI will be made public.

II. Purpose

    Historically, many American households, small businesses, and 
promising new enterprises have faced barriers in accessing affordable 
credit from traditional lenders. To date, the large majority of online 
marketplace consumer loans have been originated to prime or near-prime 
consumers to refinance existing debt. Online marketplace lending has 
filled a need for these borrowers by often delivering lower costs and 
faster decision times than traditional lenders. Non-prime consumers 
face other challenges in obtaining traditional bank-originated credit, 
particularly due to having thin or no credit files or damaged credit. 
Moreover, high underwriting costs can make it uneconomical to make 
small-value consumer loans. For example, it can cost the same amount to 
underwrite a $300 consumer loan as a $3,000 loan. Small-value loans to 
non-prime consumers thus have often come with triple digit annual 
percentage rates (APR). Some online marketplace lenders, however, are 
developing product structures and underwriting models that might allow 
making loans to non-prime borrowers at lower rates.\3\
---------------------------------------------------------------------------

    \3\ As noted elsewhere, the CFPB is contemplating issuing a rule 
that would regulate ``payday'' and related loans, including loans 
with terms greater than 45 days and an APR greater than 36%, if the 
loan also provides for repayment directly from a consumer's account 
or paycheck or includes a non-purchase money security interest in a 
vehicle. Such consumer loans are outside the scope of this RFI.
---------------------------------------------------------------------------

    With respect to small businesses, a number of studies have shown 
that these borrowers are more dependent on community banks for 
financing than larger firms, which have access to other forms of 
finance including public debt and equity markets. While larger 
businesses typically rely on banks for 30 percent of their financing, 
small businesses receive 90 percent of their financing from banks.\4\ 
Small business lending, however, has high search, transaction, and 
underwriting costs for banks relative to potential revenue--it costs 
about the same to underwrite a $5 million dollar loan as a $200,000 
loan \5\--and many small business owners report they are unable to 
access the credit needed to grow their business. According to Federal 
Reserve survey data released in February 2015, ``a majority of small 
firms (under $1 million in annual revenues) and startups (under 5 years 
in business) were unable to secure any credit in the prior year.'' \6\
---------------------------------------------------------------------------

    \4\ ``2011 Economic Report of the President,'' Council of 
Economic Advisors. The White House.
    \5\ ``The Future of Finance,'' Goldman Sachs Equity Research, 
March 3, 2015.
    \6\ ``The Joint Small Business Credit Survey, 2014,'' a 
collaboration among the Federal Reserve Banks of New York, Atlanta, 
Cleveland and Philadelphia. Released February 2015.
---------------------------------------------------------------------------

    The challenge is particularly acute for small business loans of 
lower value and shorter terms. More than half of small businesses that 
applied for credit in 2014 sought loans of $100,000 or less. At the 
same time, more than two thirds of businesses with under $1 million in 
annual revenue that applied for credit received less than the full 
amount that they sought and half received none.\7\ Technology-enabled 
credit provisioning offers the potential to reduce transaction costs 
for these products, while investment capital may offer a new source of 
financing for historically underserved markets. The 2014 Small Business 
Credit Survey indicated that almost 20 percent of applicants sought 
credit from an online lender.
---------------------------------------------------------------------------

    \7\ Ibid.
---------------------------------------------------------------------------

    While online marketplace lending is still a very small component of 
the small business and consumer lending market, it is a rapidly 
developing and fast-growing sector that is changing the credit 
marketplace. In less than a decade, online marketplace lending has 
grown to an estimated $12 billion in new loan originations in 2014, the 
majority of which is consumer lending.\8\ Through this RFI, Treasury is 
seeking to study the potential for online marketplace lending to expand 
access to credit and how the financial regulatory framework should 
evolve to support the safe growth of this industry.
---------------------------------------------------------------------------

    \8\ ``Global Marketplace Lending: Disruptive Innovation in 
Financials,'' Morgan Stanley Research, May 2015.
---------------------------------------------------------------------------

III. Background

    Online marketplace lending broadly refers to the segment of the 
financial services industry that uses investment capital and data-
driven online platforms to lend either directly or indirectly to small 
businesses and consumers. This segment initially emerged with companies 
giving investors the ability to provide financing that would be used to 
fund individual borrowers through what became known as a ``peer-to-
peer'' model. However, it has since evolved to include a diverse set of 
individual and institutional credit investors who seek to provide 
financing that ultimately is used to fund small business and consumer 
loans of various types to gain access to additional credit channels and 
favorable rates of return.
    Companies operating in this industry tend to fall into three 
general categories: (1) Balance sheet lenders that retain credit risk 
in their own portfolios and are typically funded by venture capital, 
hedge fund, or family office investments; (2) online platforms 
(formerly known as ``peer-to-peer'') that, through the sale of 
securities such as member-dependent notes, obtain the financing to 
enable third parties to fund borrowers and, due to the contingent 
nature of the payment obligation on such securities, do not retain 
credit risk that the borrowers will not pay; and (3) bank-affiliated 
online lenders that are funded by a commercial bank, often a regional 
or community bank, originate loans and directly assume the credit risk.
    Additionally, some of these companies have adopted a business model 
in which they partner and have agreements with banks. In these 
arrangements, the bank acts as the lender to borrowers that apply on 
the platform. The loans are then purchased by a second party -- either 
by an investor, in which the transaction is facilitated by the 
marketplace lender, or by the marketplace lender itself, which funds 
the loan purchase by note sales. While the loans are not pooled, small 
investors can obtain a return by making small investments in a number 
of notes offered by a marketplace lender through its platforms.
    Online marketplace lenders share key similarities. They provide 
funding through convenient online loan applications and most have no 
retail branches. They use electronic data sources and technology-
enabled underwriting models to automate processes such as determining a 
borrower's identity and credit risk. These data sources might include 
traditional underwriting statistics (e.g., income and debt 
obligations), but also often include other forms of information, 
including novel data points or combinations. Online marketplace lenders 
typically provide borrowers with faster access to credit than the 
traditional face-to-face credit application process. Small business 
online market place lenders, provide small businesses with lower value 
(less than $100,000) and shorter terms.

Key Questions

    1. There are many different models for online marketplace lending 
including platform lenders (also referred to as ``peer-to-peer''), 
balance sheet lenders, and bank-affiliated lenders. In what ways should 
policymakers be thinking about market segmentation; and in what ways do 
different models raise different policy or regulatory concerns?
    2. According to a survey by the National Small Business 
Association, 85

[[Page 42868]]

percent of small businesses purchase supplies online, 83 percent manage 
bank accounts online, 82 percent maintain their own Web site, 72 
percent pay bills online, and 41 percent use tablets for their 
businesses.\9\ Small businesses are also increasingly using online 
bookkeeping and operations management tools. As such, there is now an 
unprecedented amount of online data available on the activities of 
these small businesses. What role are electronic data sources playing 
in enabling marketplace lending? For instance, how do they affect 
traditionally manual processes or evaluation of identity, fraud, and 
credit risk for lenders? Are there new opportunities or risks arising 
from these data-based processes relative to those used in traditional 
lending?
---------------------------------------------------------------------------

    \9\ ``2013 Small Business Technology Survey,'' National Small 
Business Association.
---------------------------------------------------------------------------

    3. How are online marketplace lenders designing their business 
models and products for different borrower segments, such as:
     Small business and consumer borrowers;
     Subprime borrowers;
     Borrowers who are ``unscoreable'' or have no or thin 
files;
    Depending on borrower needs (e.g., new small businesses, mature 
small businesses, consumers seeking to consolidate existing debt, 
consumers seeking to take out new credit) and other segmentations?
    4. Is marketplace lending expanding access to credit to 
historically underserved market segments?
    5. Describe the customer acquisition process for online marketplace 
lenders. What kinds of marketing channels are used to reach new 
customers? What kinds of partnerships do online marketplace lenders 
have with traditional financial institutions, community development 
financial institutions (CDFIs), or other types of businesses to reach 
new customers?
    6. How are borrowers assessed for their creditworthiness and 
repayment ability? How accurate are these models in predicting credit 
risk? How does the assessment of small business borrowers differ from 
consumer borrowers? Does the borrower's stated use of proceeds affect 
underwriting for the loan?
    7. Describe whether and how marketplace lending relies on services 
or relationships provided by traditional lending institutions or 
insured depository institutions. What steps have been taken toward 
regulatory compliance with the new lending model by the various 
industry participants throughout the lending process? What issues are 
raised with online marketplace lending across state lines?
    8. Describe how marketplace lenders manage operational practices 
such as loan servicing, fraud detection, credit reporting, and 
collections. How are these practices handled differently than by 
traditional lending institutions? What, if anything, do marketplace 
lenders outsource to third party service providers? Are there 
provisions for back-up services?
    9. What roles, if any, can the federal government play to 
facilitate positive innovation in lending, such as making it easier for 
borrowers to share their own government-held data with lenders? What 
are the competitive advantages and, if any, disadvantages for non-banks 
and banks to participate in and grow in this market segment? How can 
policymakers address any disadvantages for each? How might changes in 
the credit environment affect online marketplace lenders?
    10. Under the different models of marketplace lending, to what 
extent, if any, should platform or ``peer-to-peer'' lenders be required 
to have ``skin in the game'' for the loans they originate or underwrite 
in order to align interests with investors who have acquired debt of 
the marketplace lenders through the platforms? Under the different 
models, is there pooling of loans that raise issues of alignment with 
investors in the lenders' debt obligations? How would the concept of 
risk retention apply in a non-securitization context for the different 
entities in the distribution chain, including those in which there is 
no pooling of loans? Should this concept of ``risk retention'' be the 
same for other types of syndicated or participated loans?
    11. Marketplace lending potentially offers significant benefits and 
value to borrowers, but what harms might online marketplace lending 
also present to consumers and small businesses? What privacy 
considerations, cybersecurity threats, consumer protection concerns, 
and other related risks might arise out of online marketplace lending? 
Do existing statutory and regulatory regimes adequately address these 
issues in the context of online marketplace lending?
    12. What factors do investors consider when: (i) Investing in notes 
funding loans being made through online marketplace lenders, (ii) doing 
business with particular entities, or (iii) determining the 
characteristics of the notes investors are willing to purchase? What 
are the operational arrangements? What are the various methods through 
which investors may finance online platform assets, including purchase 
of securities, and what are the advantages and disadvantages of using 
them? Who are the end investors? How prevalent is the use of financial 
leverage for investors? How is leverage typically obtained and 
deployed?
    13. What is the current availability of secondary liquidity for 
loan assets originated in this manner? What are the advantages and 
disadvantages of an active secondary market? Describe the efforts to 
develop such a market, including any hurdles (regulatory or otherwise). 
Is this market likely to grow and what advantages and disadvantages 
might a larger securitization market, including derivatives and 
benchmarks, present?
    14. What are other key trends and issues that policymakers should 
be monitoring as this market continues to develop?
    Guidance for Submitting Documents: We ask that each respondent 
include the name and address of his or her institution or affiliation, 
and the name, title, mailing and email addresses, and telephone number 
of a contact person for his or her institution or affiliation, if any.

    Dated: July, 13, 2015.
David G. Clunie,
Executive Secretary,
[FR Doc. 2015-17644 Filed 7-17-15; 8:45 am]
 BILLING CODE 4810-25-P