Regulatory Drumbeat Grows Louder for Marketplace Lenders

The U.S. marketplace lending industry has hit a notable milestone: the sector is now big enough, and growing at a fast enough clip, to attract the Obama Administration's sustained attention.

That much was clear Wednesday, as officials from the Treasury Department and the White House spoke about the online lending industry at separate conferences in New York and Washington.

In New York, a Treasury official addressed the possibility that the government's watchful eye, which many observers expect will eventually lead to new regulations for the industry, will wander after a new president takes office in 2017.

"It's a low likelihood," said Anjan Mukherjee, Treasury's deputy assistant secretary for financial institutions, during a question-and-answer session at American Banker's Marketplace Lending + Investing conference.

While Mukherjee acknowledged that the next administration could de-emphasize this priority, he also noted that the majority of Treasury's staffers are not political appointees and will therefore keep their jobs when a new president is elected.

Earlier this year, the Treasury Department solicited public feedback on the marketplace lending industry, and Mukherjee noted that the agency is still in the process of reviewing those comments.

Last week, another Treasury official described some of the key themes that emerged in the public comments, and argued that small-business owners who turn to online lenders need additional protections.

Mukherjee reiterated that point Wednesday.

"Let's make sure that the protections that consumers enjoy are also enjoyed by small businesses," he said. "We're not working on any rule in that regard, but that's just an observation that comes out of the comments."

Mukherjee noted that Treasury is not a regulatory agency, and said that the department's request for public comment is not necessarily a precursor to new rules. But he also pointed out that Treasury has been sharing its thoughts about the marketplace lending industry with other federal agencies.

Given the fragmented U.S. financial regulatory framework, Mukherjee said that he hopes Treasury can provide guidance to the various agencies with relevant jurisdiction.

"We need to make sure the risk in this industry is being distributed in a safe and sustainable way," he said.

At the same time, Mukherjee made clear that marketplace lending is not currently a priority for the Financial Stability Oversight Council, which is responsible for taking steps to prevent future crises. Morgan Stanley projects that U.S. marketplace lenders will originate $23 billion in loans this year, but expects that figure to rise to $122 billion by 2020.

"It's safe to say that the industry is not yet at a point where it poses a safety and soundness risk to the financial system," Mukherjee said.

At a separate conference in Washington, Adrienne Harris, a special assistant to President Obama for economic policy, also delivered remarks about marketplace lending, but her speech was closed to the press.

Other conference attendees focused on the question of whether U.S. officials should take a prescriptive, rules-based approach to regulation of the online lending industry, or instead lay out broader principles that industry participants are expected to follow.

Daniel Gorfine, associate general counsel at OnDeck Capital, a leading online small-business lender, and adjunct fellow at the Milken Institute, argued that prescriptive rules do not make sense for the budding financial technology industry.

"That said, over time as the market starts to mature, and you have more outcomes that you can measure, it may become increasingly reasonable to consider rules that can codify best practices and deter certain negative behaviors," Gorfine said.

Seth Wheeler, a former White House adviser on the issue who is now a guest scholar at the Brookings Institution, said that it is important to strike the right balance between rules-based and principles-based regulation.

"Advocates of a principles-based approach hope that it would encourage more innovation, but we need to be thoughtful about the tradeoffs," he told American Banker. "For example, a rules-based approach generally has the benefit of allowing firms to better understand where the bright lines are, and how they'll be implemented in supervision and in exams. And while innovators desire room to experiment, they also want certainty."

Kevin Wack contributed to this report