Calif.'s Inquiry Adds to Mounting Scrutiny of Marketplace Lenders

California regulators are seeking information from a broad swath of firms — including consumer lenders, small-business lenders, and even companies that are not primarily in the lending business — as they start to examine the marketplace lending industry.

Spokespeople for online consumer lenders Prosper Marketplace, Avant and Social Finance and small-business lenders OnDeck Capital and Kabbage confirmed Friday that they are among the 14 companies that received a data request from the California Department of Business Oversight.

Also on the list are Lending Club, PayPal, Square, according to a source familiar with the matter. The latter two firms are primarily payment companies, but they also have business-lending arms. Spokespeople for Lending Club and PayPal declined to comment, and Square did not respond to requests for comment.

A press release from the Department of Business Oversight on Friday did not name the specific companies that received the 17-page information request. But Tom Dresslar, spokesman for the department, said that responses from the companies on the list should give the agency an understanding of the size of the marketplace lending sector and also how various business models work.

"Folks shouldn't assume that this group of 14 is going to be the entire universe of lenders that end up being part of this inquiry," Dresslar said.

Although California's inquiry is in its early stages, it could be a precursor to new state regulations. As the nation's most populous state and the headquarters of many of the fast-growing sector's largest firms, California will likely have more sway over the industry than any other state.

The Department of Business Oversight asked the 14 companies to provide five years' worth of data about their businesses, including information about their loan volume, annual percentage rates, delinquent loans and investor bases.

The information, which is due by March 9, will be used to assess how well the state's licensing and regulatory regime is working, officials said.

"These online lenders are filling a need in today's economy, and we have no desire to squelch the industry or innovation," Jan Lynn Owen, the department's commissioner, said in the press release. "We have a duty, however, to protect California consumers and businesses, and they have more and more at stake as this industry grows."

Friday's announcement followed reports that Prosper provided a $28,500 loan to one of the shooters in last week's terrorist attack in San Bernardino, Calif., which has led to greater scrutiny of the marketplace lending business. However, California's inquiry was already in the works before the mass shooting.

While California's information request is wide-ranging, the issue of whether the online lenders should be required to get state licenses appears to be of particular interest to state officials.

Some marketplace lenders have gotten lending licenses in each state where they make loans.

But other firms, including PayPal, Prosper and Lending Club, have taken a different route. Those companies partner with banks that originate their loans, a setup that has allowed them to avoid state-level interest rate caps.

Dresslar said that the state licensing issue is not limited to the applicability of interest rate caps. He noted that his agency also has the authority to closely monitor the advertising and marketing practices of licensed lenders.

"The issues go beyond interest rates, to cover a wider range of their business conduct," he said.

At the start of California's inquiry, officials do not have a predetermined outcome in mind, according to Dresslar. "We're not going into this endeavor with any preconceived notions," he said.

Potential outcomes include "The status quo is peachy keen," as well as "We've got some gaps some gaps in the current regulatory structure that need to be filled," he added.

The department licenses and regulates state-chartered banks and credit unions, as well as nonbank lenders and other financial firms.

The agency has not been in contact with state lawmakers about the marketplace lending industry but would start a dialogue with members of the California Legislature if it determines there are gaps in the current regulatory regime that should be filled, Dresslar said.

California is the first state to launch an inquiry into the fast-growing marketplace lending business.

"I do think it is evidence that regulators, whether on a state or federal level, are increasingly looking at this industry," said Michael Tarkan, an analyst at Compass Point Research & Trading.

In Washington, the Treasury Department recently conducted a similar effort aimed at gathering more information about the technology-driven lending sector.