Regulators who have been vocal about their concerns with marketplace lending practices are in the spotlight, with the Financial Stability Oversight Council (FSOC) calling on them to actively monitor the industry and consumers for risks introduced from new business practices or products. In 2016 alone, the OCC, FTC, CFPB, FDIC, Treasury Department and key states like California and New York have each signaled to the industry their increased focus on “responsible innovation,” which is often a precursor to “and don’t say we didn’t tell you we were on our way.”
Although FSOC’s focus on Bitcoin received the lion’s share of Twitter attention the first few days after the report was released, their focus on marketplace lending as a potential systemic risk vulnerability merits industry attention. FSOC is clearly focused on the marketplace lending’s significant growth and the anticipated increase in growth trajectory. Online lenders originated $22 billion in U.S. consumer and business loans last year, according to Autonomous Research. While that was just 6% of the total volume for such loans, the sector is expected to grow 75% this year, the financial research firm estimates.
Whether the industry agrees with FSOC is a separate issue – is there over-reliance on institutional investors and securitizations for funding? Has there been an erosion in lending standards because of untested underwriting models? Do these risks actually pose a risk of broader contagion?
What we can all agree on is that regulators are being called to action and manage identified market and consumer protection risks. For many marketplace lenders, the coordinated federal regulation would be a welcome relief from fragmented, cumbersome state rules – but it comes with significant pressure on internal resources to adopt new business practices and develop internal controls that regularly pass very detailed regulatory exams.
Once federal regulations are proposed, precedent suggests the industry will be given little time to implement. Marketplace lenders should be focusing now on developing robust, automated end-to-end loan management processes on their platforms. These processes should also incorporate key market-conduct, credit and liquidity controls throughout the life-cycle of the loan to meet new requirements, to monitor behavior and to manage internal and external reporting.
In our ongoing regulatory and compliance blog posts, we are going to focus on the topical risk and compliance issues in marketplace lending gaining regulatory attention. We have many clients interested in automating their compliance controls, and while approaches are different across the board, the common denominator is the same: how does compliance become more effective, how can it be automated (read: be less human-intensive) and how can it be less intrusive to the business?
Million-dollar questions with, hopefully, much smaller price-tags. Stay tuned. If you would like to ask me questions directly you can reach me at william@Cloudlendinginc.com
Ileana Falticeni joined Cloud Lending Solutions as Vice President, Compliance and Regulations. Falticeni was previously Managing Director, Global Co-Head of Origination and Financing Compliance for Barclay’s Bank and was a management consultant for Compliance and Regulatory transformation initiatives with TD Bank. The opinions expressed by Ms. Falticeni and those providing comments are theirs alone and do not reflect the opinions of Cloud Lending Solutions or any employee thereof. Cloud Lending Solutions is not responsible for the accuracy of the information supplied by Ms. Falticeni.