On May 10, 2016, the US Treasury issued its much anticipated white paper on marketplace lending. The whitepaper follows Treasury’s July 2015 request for information. The white paper highlighted some keys risks and made six concrete recommendations for future action.
More specifically, the white paper noted that the use of sophisticated data-driven algorithms may result in unexpected correlations that could result in disparate impacts and give rise to fair lending violations. The use of data outside of regulated credit reports also creates the risk that borrowers may have no redress if information used as a basis for an underwriting decision proves inaccurate. Treasury made it a point to note, however, that marketplace lenders that partner with banks may be subject to regulation and examination by prudential bank regulators under the US Bank Service Company Act.
The recommendations to address the risks associated with marketplace lending while still realizing many of the potential benefits were:
- More effective oversight over lenders and more protections for small business borrowers, which could require additional legislation
- Better integration of regular servicing and special servicing of loans in default
- Standardization of products and data to promote a more transparent market place
- Expand borrower access to marketplace loans through partnerships with community development financial institutions
- Better access to government data, such as social security data and tax data, to assist marketplace lenders in verification of information
- Creation of a standing interagency working group of financial services regulators to support responsible innovation
This, of course, is just the starting point of financial regulators’ efforts to support innovation while ensuring comprehensive oversight. The white paper is available here.