Treasury Department Calls For More Oversight, Regulations Of The Online Lending Industry

Image courtesy of frankieleon

Sure, the idea of sitting on your couch in your boxers and picking a loan from a list of preselected lenders seems like an easy and fairly straight-forward process. But federal officials say the relatively new online lending industry is rife with potential risks and should be subjected to additional oversight.

The Department of Treasury released a white paper [PDF] on Tuesday highlighting the need for more oversight of online lending after receiving feedback from lenders and customers about the industry.

From those responses, the Department crafted a set of recommendations for regulators and lending companies to consider.

First, the Department believes there needs to be more robust borrower protections, especially those seeking small business loans.

While federal laws protect borrowers, they are often limited to what they apply to, such as a loan obtained for personal, household, or family purposes.

The Department notes that any potential regulations should create uniform consumer protections across financial institutions and online marketplace lenders.

“Effective oversight could enable greater transparency in small business online marketplace lending that could lead to better outcomes for borrowers,” the Department states in the paper, noting that it would be willing to work with Congress to consider legislation to address the issues.

Other recommendations the Department outlines in the paper include:

• Ensuring sound borrower experience and back-end operations – To best serve these borrower needs, industry should adopt standards designed to provide a sound borrower experience from customer acquisition straight through to collections in the event of delinquency or default.

• Promoting a transparent marketplace for borrowers and investors – For a well-functioning market to develop, there must be a wider investor base, an active and stable secondary market. To do this, the industry should create standardized representations, warranties, and enforcement mechanisms, consistent reporting standards for loan origination data and ongoing portfolio performance, and consistent market-driven pricing methodology standards.

• Expanding access to credit through partnerships that ensure safe and affordable credit – For technology to truly expand access to underserved markets, more must be done to serve borrowers who are creditworthy, but may not be scoreable under traditional credit scoring models.

• Supporting the expansion of safe and affordable credit through access to government-held data – The online lending market would benefit from smart disclosures and data verification sources. Verification could be done by creating a database that pulls information from other agencies.

• Facilitating interagency coordination through the creation of a standing working group for online marketplace lending – The formation of an interagency working group is a common federal policy tool for facilitating coordination on cross-cutting issues that could improve market efficiencies for this rapidly changing industry.

Additionally, the Department says it identified other areas of the online lending that would benefit from additional monitoring including how companies address credit scoring, interest rates, and cybersecurity issues, among other things.

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.