Alternative lending through online marketplaces and other venues has grown explosively over the past year. So too have concerns about their lending practices.
By some estimates there were more than 1,300 alternative lenders in 2015, which represents a 100 percent growth rate over the previous year, according to a recent survey by Balboa Capital. At the same time, many questions have been raised regarding transparency about fees, the interest rates charged on loans, and sometimes the scruples of the lenders themselves.
Hoping to alleviate some of those concerns, Funding Circle, Lending Club, and Prosper Marketplace announced this week they are forming a group called the Marketplace Lending Association. Its goals are to promote better policies around lending, including transparency, corporate governance, and sound risk practices.
The association will be open to any marketplace lender that meets a set of standards, which generally means being in existence for at least one year, having at least $1 million in revenue, and possessing the ability to match at least 75 percent of loan dollar values with commitments from investors prior to making the loans.
Marketplace lending is somewhat different from other alternative lending models, in that it provides an online platform that connects consumers and small business owners with institutions or individuals who provide the financing. In other models, companies such as Avant and OnDeck provide the financing directly.
In the past year, the alternative lending industry has made other attempts to assure borrowers and federal regulators, including forming an organization called the Responsible Business Lending Coalition, which produced a Small Business Borrowers Bill of Rights. That document identifies many of the same things that MLA has committed to, including not pressuring small business clients to borrow, and not signing them up for loans that the lender knows they will have a difficult time repaying. More than two dozen online lenders, including Funding Circle and Lending Club, are signatories.
The move toward transparency comes at a time when federal regulators are beginning to look more closely at the alternative lending industry, which comprises non-bank lenders that are not as tightly regulated as banks. In a recent speech, Securities and Exchange Commission Chair Mary Jo White said the SEC, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, among other federal agencies, are examining the marketplace lending industry.
"Marketplace lending platforms have a unique opportunity to make credit more affordable for consumers and more available to small business owners, while offering attractive investment opportunities to retail and institutional investors," Lending Club founder and chief executive Renaud Laplanche said in a statement. "This opportunity will only materialize if our technology and business model advantage is coupled with sound business practices that enable responsible lending products, consumer friendly and transparent terms, and relentless focus on compliance, security, and risk management."