U.S. PIRG & Center for Digital Democracy
In response to a “Request for Information” from the U.S. Treasury Department, last week (30 September 2015) U.S. PIRG and the Center for Digital Democracy filed a detailed comment recommending that regulators take a close look at the activities of a new “Big Data” financial sector of online marketplace lenders, which includes so-called “peer-to-peer” lenders. While the sector has potential to be innovative and provide lower-cost loans to consumers, and to improve financial opportunity for underserved consumers, there are risks in “light-touch” regulation.
The emergence of digital platforms that provide new or expanded forms of financial services, including for lending and credit, is an important development. Consumers and small businesses now have additional options when seeking loans, where the promise of cost savings and greater efficiency because of their primarily online platform-based operations can be an important source of capital for the public.[i] USPIRG and CDD believe, however, that the “technology-enabled credit provisioning” marketplace should not be uncritically viewed as a panacea, especially for financially underserved and economically at-risk Americans.[ii]
We strongly advise against granting new entrants any “safe harbors” or other special treatment from fair lending or credit laws. Any marketplace efficiencies they obtain should not be at the expense of treating consumers fairly. USPIRG and CDD call on the Department of the Treasury to work with other agencies to propose or implement rules that integrate the online lending sector within the financial services regulatory sector.
We also concur with the excellent comments from our colleagues at Americans for Financial Reform and several of its member organizations. AFR is the leading civil society coalition comprised of consumer, labor, civil rights, senior, community and other organizations seeking to protect consumers in the financial marketplace. While our comments focus on describing the complexity of the digital financial system and making that point that the new online entrants are not special, we note the following highlights of our colleagues’ comments.
- Americans for Financial Reform explains concerns about “skin in the game.”
- Center for Responsible Lending emphasizes consumer protection, including the need for online lenders to comply with state laws.
- National Consumer Law Center emphasizes consumer protection, including concerns about shoddy underwriting and about the mandatory or default use of preauthorized electronic payments, in violation of the letter or spirit of the Electronic Fund Transfer Act.
- The Woodstock Institute also emphasizes a variety of consumer protection and fair lending issues, including the need for government to protect small businesses from unfair lending practices.
[i] http://www.pwccn.com/home/eng/peer_to_peer_feb2015.html. As noted by Morgan Stanley, “a key reason marketplace lenders are able to operate with a smaller spread is due to technology-driven cost advantages vs. banks, including a purpose-built platform online only application process, data-driven automated underwriting, scalable origination and servicing platforms, and lack of overhead related to a branch infrastructure.” It notes one advantage that raises questions on the need for regulation, the lack of “capital reserve requirements that “raise operating costs for banks.” Morgan Stanley, “Global Marketplace Lending: Disruptive Innovation in Financials,” 2015, http://www.morganstanley.com/ideas/p2p-marketplace-lending/.
[ii] http://www.nytimes.com/2015/09/14/business/dealbook/pitfalls-for-the-unwary-borrower-out-on-the-frontiers-of-banking.html?_r=0; http://www.pymnts.com/in-depth/2015/is-the-bloom-off-the-alt-lending-rose/; http://www.thenation.com/article/how-companies-turn-your-facebook-activity-credit-score/