Online Marketplace Lending on Review by California Regulator
Why it matters
Demonstrating the continuing regulatory interest in online lenders, the California Department of Business Oversight (DBO) announced an inquiry into the marketplace lending industry. While the agency expressed “no desire to squelch the industry or innovation,” the DBO said it remained obligated to “protect California consumers and businesses,” particularly as the industry grows. To gain insight, the DBO sent an online survey to 14 marketplace lenders specializing in both personal and small business loans with a request for five-year trend data about their loan and investor funding programs, as well as information about their business models and online platforms. In addition to assessing the size of the industry in California, the DBO said it hopes the information gathering will further understanding of the different types of programs used by marketplace lenders.
As the online lending marketplace grows, so does regulator interest. The most recent regulator taking a closer look at the industry: California’s Department of Business Oversight (DBO), noting that the national online lending market grew from $1 billion to $12 billion in loans between 2010 and 2014.
“These online lenders are filling a need in today’s economy, and we have no desire to squelch the industry or innovation,” DBO Commissioner Jan Lynn Owen said in a statement about the inquiry. “We have a duty, however, to protect California consumers and businesses, and they have more and more at stake as this industry grows. We want to assess the effectiveness and proper scope of our licensing and regulatory structure as it relates to these lenders.”
To that end, the DBO sent an online survey to 14 marketplace lenders, requesting five-year trend data about their loan and investor funding programs as well as information about their business models and online platforms.
Specifically, the regulator requested the total number of customers, loans, and dollar amount of loans, with information broken down between personal and business loans, for each year from 2010 to 2015 (through June 30). Questions about the median loan amounts (with the number of loans under $2,500) and median annual percentage rate (APR) as well as a breakdown of APR ranges were also included.
The DBO sought information about loan delinquency for loans past due 30 or more days as well as many details about investor funding (the total number of investors along with information about types of investors—institution or retail, for example—and the average percentage of loans held by investors). For each set of questions, the survey first requested national data and then an identical inquiry limited to California.
To complete the survey, the DBO asked online marketplace lenders to describe their business models and platforms. The description of the business model should include the types of products offered (such as loan originations or loan brokering services) and whether the company acquires or retains interest in loans made over the platform by others. For the company’s platform, the regulator asked for an explanation of the parties to the transaction and the role each plays, as well as how the underwriting process works with a hypothetical loan and securities transaction from the borrower’s application to the full repayment of the loan, complete with a flow of funds chart.
Recipients of the survey included companies that specialize in personal or small business loans, or both, with a response requested by March 9, 2016.
The DBO noted two primary objectives to the data and information collection. First, a better sense of the industry’s size in California (where some of the largest marketplace lenders are headquartered), with an idea about how many consumers and businesses it touches in the state.
In addition, the regulator is seeking a better understanding of the various loan and investor funding programs used by marketplace lenders. “That knowledge, in turn, will help the DBO assess how the state’s licensing and regulatory regime is working, and should work, when it comes to the industry,” the agency said.
The DBO is not the first regulator to seek information about the burgeoning online marketplace lending industry. In July, the Department of the Treasury published a Request for Information, seeking public comment on the various business models and products offered by such lenders to both small businesses and consumers, the potential for the market to expand access to credit to historically underserved segments, and how the regulatory framework should evolve to support the “safe growth” of the industry. The agency is still in the process of reviewing the more than 100 comments received.
To read the DBO’s announcement of the inquiry, with a link to the survey, click here.