Everyone knows that marketplace lending is growing by leaps and bounds. But now there is data to quantify the industry's rapid emergence.
Thirteen of the online lending sector's largest firms made $15.91 billion in U.S. loans in 2014, up 700% from 2010, according to a report published Friday by the California Office of Business Oversight. In the first six months of last year, the same firms extended $12.47 billion in credit nationwide, the report found.
Those numbers account for loans made by Lending Club, Prosper Marketplace, Social Finance, Avant, Affirm, Funding circle, Kabbage, OnDeck Capital, CAN Capital, Fundbox, Bond Street, PayPal and Square. Dozens of other U.S. online lenders, most of them smaller, were not included in the report.
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California regulators on Monday identified 14 companies that the state is targeting as part of its recently announced inquiry into the marketplace lending industry.
December 14 -
The first state inquiry into marketplace lending is seeking information from a broad mix of companies, including consumer lenders, small-business lenders, and firms that are not primarily in the lending business.
December 11 -
The regulatory path may also be bumpier for P-to-P lenders that focus on subprime borrowers, predicts Raj Date, a former second-in-command at the Consumer Financial Protection Bureau.
June 22
The numbers were collected as part of a four-month-old inquiry by California officials into the marketplace lending industry. Much of the data that the companies submitted was not released Friday, but an eight-page report sheds some new light on some key aspects of the industry, including interest rates lenders charge and the percentage of defaults.
"It's crucial that we better understand the industry," Jan Lynn Owen, commissioner of the California Department of Business Oversight, said in a press release. "These companies are providing needed access to financing. But we want to make sure our regulatory structure adequately protects the interests of our consumers and small businesses, and works effectively for industry."
California's inquiry – lenders were asked in December to provide five years' worth of data, as well as narratives about their business models – could be a precursor to new state regulations.
The information will be used to assess how well the state's licensing and regulatory regime is working.
California officials appear to be interested in whether online lenders should be required to get state licenses; some of the sector's largest participants have chosen not to do so, and have gotten around state interest rate caps by partnering with banks that issue their loans.
CircleBack
California's request for information was just the first step in its inquiry into the marketplace lending sector. Looking ahead, state officials are not ruling out any options.
"Our team is in the process of analyzing those responses, and we will likely be sending companies follow-up requests for documents and information," Tom Dresslar, a spokesman for the Department of Business Oversight, said Friday.
"In terms of the end game, everything's on the table," Dresslar added. "If we find that there are gaps in the regulatory structure, we could decide that we want to propose some changes in policy, changes in the law."
Dresslar also indicated that California officials are more concerned about marketplace lenders that provide credit to small businesses than they are about consumer lenders.
Online small-business lenders are not subject to federal laws that require consumer lenders to disclose interest rates in a standard format, while also providing a variety of additional borrower protections. Some online small-business finance companies, particularly those that take a fixed percentage of the borrower's future credit-card sales, are frequently accused of trapping borrowers in a cycle of debt.
Regarding the lack of borrower protections for small businesses in federal law, Dresslar said: "It seems to us there's potentially a greater role for the states to come in and fill that gap."
Here are some other findings from the report:
- Consumer lending accounted for 82% of the total loan volume in 2014 at the companies surveyed, and small-business financing accounted for the remaining 18%.
- Credit can be extremely pricey for small businesses that turn to online lenders. One small-business lender, which was not identified, had a median annual percentage rate of 51.8% in the first half of 2015. The highest median APR among consumer lenders was 34.01%, according to the data.
- Delinquency rates across the industry vary substantially, which likely reflects the fact that some consumer lenders target low-risk borrowers while others focus on the subprime segment. One unidentified consumer lender reported a median 30-day delinquency rate of 0.03% in the first half of 2015; another reported a median 30-day delinquency rate of 17.94%.
