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Washington’s chance to encourage responsible marketplace lending

As policymakers, lawmakers and industry representatives gather in Washington this week for the first ever Marketplace Lending Summit, the future of online lending and its regulatory framework will undoubtedly be a topic of much debate.

Marketplace lending has experienced transformative growth over the past decade, moving from a host of scrappy start-ups to large-scale operations that originated $29 billion in loans last year alone. As with any maturing business, the industry has had ups and downs. But the mission that fueled development of these companies — democratizing credit to provide new avenues of affordable financing for all types of borrowers – remains critically important.

{mosads}Marketplace lenders have grown because they provide opportunities for consumers, small businesses, and investors that are desperately needed in our economy. Marketplace loans are helping millions of borrowers pay down debt, save money on annual interest costs, while expanding access to affordable credit for those who previously faced much higher rates or loan rejections. In a large survey of borrowers conducted in June 2016, marketplace borrowers reported cutting their interest rates by more than a third, resulting in savings of more than $1,000 compared to traditional consumer finance products.

On the investing side, hundreds of thousands of investors in marketplace loans – from mom and pop retail investors to institutions managing money for mutual funds, pension funds and foundations — have generated solid annual returns of around 7% to 8% over the past eight years. Those are the types of returns investors used to be able to count on from holding bonds but no longer can. Finding such opportunities for solid yields will be critical for Americans investing for retirement, education and financial security at a time when interest rates on government securities and highly rated corporate debt hover barely north of zero.  

The sector is also serving an increasingly important function for a new generation of borrowers and investors who are not wedded to the traditional way of accessing credit.  As the Office of the Comptroller of the Currency noted recently “Millennials have the majority of their financial lives ahead of them, and they have demonstrated great receptivity to technical innovation in financial services.”  

The question now is whether the U.S. will keep its lead in financial technology through policies that encourage innovation or cede it – and the economic benefit the industry provides — to other countries who are eager to take the lead as a financial technology incubator.  

The potential for this industry to thrive will depend on many factors, including confidence in the integrity of the products and services marketplace lenders offer. Marketplace lenders are currently taking steps to ensure that their approach to governance and organizational structure evolves alongside the regulatory framework.

One of the Marketplace Lending Association’s key goals in Washington is to promote sound practices and public policy that enables the industry to grow responsibly. To that end, the qualifying criteria for membership in the MLA are focused on two key operating standards: all annual interest rates must be below the 36% threshold and APRs and other terms must be clearly disclosed to all prospective borrowers.

Regulators rightly want to make sure consumers are adequately protected, while also ensuring that new opportunities for those same people are not snuffed out by bureaucratic inertia or inflexibility. For that to be the case, there must be sufficient room for “responsible innovation” in America’s regulatory framework. Fortunately, while there are certain areas where regulatory compliance in the U.S. could be simpler, America remains fertile ground for new financial products and services.  As Comptroller of the Currency Thomas Curry noted recently: “Innovation is not free from risk, but when managed appropriately, risk should not impede progress.”

Nathaniel “Nat” Hoopes is the executive director of the Marketplace Lending Association

The views expressed by authors are their own and not the views of The Hill.


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