Over the past 10 years, advances in technology have changed the way people live their lives. No longer must a person leave her home to purchase clothing, groceries or even a car. The marketplace for retail goods has migrated online, and, it appears, the financial industry is not far behind.
Recently, many companies have emerged that strive to efficiently and effectively utilize technology to provide consumers with capital that has historically been unavailable. And with a 100 percent increase between 2014 and 2015 in the amount of unsecured consumer credit originated by just the top two of these “online marketplace lenders,” they appear to be succeeding.
This success, however, has triggered the scrutiny of regulatory agencies, including the U.S. Department of Treasury and the Federal Trade Commission (“FTC”). To better understand how online marketplace lenders operate, what efforts online marketplace lenders are taking to protect their customers and how existing regulations impact the overall online marketplace lending industry, the FTC has initiated a series of forums focused on financial technology, the first of which was held on June 9, 2016.
In that forum, the FTC invited eight individuals from federal and state regulatory agencies, online marketplace lenders and consumer protection groups to discuss the current state of online marketplace lender regulations and how the regulations could be improved.
Industry representatives argued that the overlap between current federal and state regulations, and the uncertainty it causes, makes it difficult, if not impossible, for online marketplace lenders to ensure that they are complying with the law, which, in turn, discourages online marketplace lenders from making credit available to persons most in need of it. They also claimed that the industry is not underregulated, but, instead, misregulated. According to the industry representatives, applying decades-old regulations to such a nascent and innovative industry stifles creativity and fails to provide needed consumer protection.
Consumer protection advocates countered that the industry is, indeed, underregulated. They voiced concerns over the safety of consumers’ private information collected by online marketplace lenders, including, among other things, Social Security and bank routing numbers. They also took issue with online marketplace lenders using “alternative data,” which consists of information mined from unverified internet sources, in making approval decisions.
The FTC has a long way to go before being able to appropriately and effectively regulate online marketplace lenders. However, its willingness to engage in dialogues such as the one that occurred on June 9, 2016, is a step in the right direction.