For some in the space, borrowers and investors as an example, marketplace lending, or online lending, is a well-tested and important part of the digital transformation of an industry that continues to grow and mature to meet market demands. However, regulators often see it much differently. The long-awaited report by New York Department of Financial Services (NYDFS), released this week, reveals these insights in greater detail.
Following an extensive survey of online lenders with comment from associations and other stakeholders, NYDFS recognized the industry’s role in opening credit to underserved populations that are ignored by risk averse banks.
However, NYDFS simultaneously recommended increased regulation, challenging the arrangement that many online lenders have with national banks that usurps the application of state laws. Specifically, the NYDFS asked for usury limitations (25 percent) to be applied to online lenders and equal application of consumer protection laws. The latter is not a simple request as laws are diverse from state-to-state and sometimes not that well defined.
Navigating Uncharted Waters
“DFS supports the promise that new technologies are able to reach more consumers, but innovation must also be responsible, and all associated risks must be appropriately managed, including by strong underwriting standards, compliance with usury laws, and capital requirements. All lenders must operate on a level playing field and address market risk,” NYDFS Superintendent Maria T. Vullo stated in a press release.
In many ways, this is uncharted waters for regulators, who are accustomed to overseeing more conservative banks that are reliant on traditional data and methods. They also have the looming shadows of payday lenders that—from a distance—can be too easily confused with an online lender. The difference of course is the very foundation of online lending, technology, which drives transparency for borrowers and investors. It can transform the underwriting to better reach underserved communities.
MarketPlace Lending Association Executive Director Nat Hoopes noted to LendIt Fintech News: “One of the key reasons that leading online lenders have come together to form this Association is to set high standards for conduct; only platforms that offer low APR, affordable, transparent, borrower friendly products are eligible for MLA membership. We will continue to offer independent data and information to the Department that will help them continue to draw these distinctions as they move forward.”
Trust and Innovation
Innovation is the difference and needs to become a cornerstone for regulators—with the leadership and support of online lenders—to better address their concerns and enable them to fulfill their mission to protect consumers.
Moreover, it is important to note that this is still just a report and is just an early, but important step, in the development of the legal environment that online lenders will need to operate. It is hoped that legislators and the powers-that-be understand that regulation must embrace and encourage innovations and understand this industry should not be treated—or pushed to become—the traditional approach to lending.
Peter Renton of LendIt Fintech News said it best: “Fintech platforms have brought great innovation to the lending business. They have not only expanded access to credit but have made the borrowing process faster and more efficient. These kinds of innovations should be encouraged not stymied as the New York DFS seems to want to do.”
As we’ve said before, through the full integration of digital technology to streamline the lending process and improve customer service, marketplace lenders are setting a new standard for borrowers. It will be interesting to see the continued evolution of digital lending and we look forward to supporting the ecosystem with trusted technology.