The U.S. Treasury Department is beginning to analyze the growing alternative-lending industry, according to comments by Anjan Mukherjee, a Treasury official who advises the secretary of the Treasury.
The Treasury issued a request for information on the industry in July and has started analyzing more than a hundred responses that it received, Mr. Mukherjee said, speaking at the Marketplace Lending + Investing conference, hosted by SourceMedia Inc., in New York on Wednesday.
Alternative lenders, many operating online platforms and backed by venture capital, have been able to grow largely without regulatory oversight. Some thought that the interest from the Treasury might lead to new rules.
“Just because we put an RFI out doesn’t mean we’ll end up with a rule,” Mr. Mukherjee said. He added, however, that the Treasury might formulate opinions and share them with lawmakers and that might affect regulations.
Alternative lenders have made numerous about the benefits of the emerging industry, such as providing access to loans for consumers and small businesses that otherwise couldn’t get banked, as well as offering loans at a lower price and at a faster pace. The Treasury is trying to see whether that is true, as well as what regulation may be necessary to ensure “safe growth” of the industry, Mr. Mukherjee said.
“What’s clear today,” Mr. Mukherjee said about consumer lenders, is that reaching lower-income consumers isn’t yet happening and that the new lenders are offering loans to consumers who can already get loans from traditional sources. The new small-business lenders, by contrast, have a real potential “to serve small businesses that didn’t have access to…credit,” he said.
Commenters submitting responses in the RFI raised plenty of questions around the sustainability of the industry, Mr. Mukherjee said.
They wondered, for example, whether credit-evaluation algorithms that include nontraditional metrics such as social media activity of a consumer or a business would fair well in a changed economic environment. “A number of commentators said: It looks good right now. What will happen in a situation of economic stress?” he said.
Similarly, it is unclear what would happen should interests rates increase, he said. “At the moment the industry is a high-yielding product for investors,” but capital providers may move onto “greener pastures” should interest rates rise.
Commenters wondered, Mr. Mukherjee said, whether credit-decision algorithms are fair. “Particularly when incorporating of nontraditional metrics, you might have unintended correlations that may lead to discriminatory” credit decisions or “redlining,” he said. “That’s something we are focused on.” He said, “it’s too early to tell whether any of that of is happening,” adding that “all borrowers need to have a level playing field.”
It is critical, Mr. Mukherjee said, that online lenders treat cybersecurity seriously. “Online marketplaces safeguard a lot of sensitive consumer and small-business” data, he said.
Another area of discussion that received a lot of comments had to do with the marketplace lending business model itself. Some believe that it is important for loan originators to keep a portion of the loans on their own books, but that conflicts with the business models many venture-backed marketplace lenders chose where they only connect borrowers with capital providers.
Mr. Mukherjee said that there were detractors and supporters for both ideas, but he didn’t indicate what conclusion the Treasury is drawing on the subject.
“We are cautiously optimistic about the growth of this industry,” he said.