Academic journal article Rutgers Computer & Technology Law Journal

Regulating Online Marketplace Lending: To Be a Bank or Not to Be a Bank?

Academic journal article Rutgers Computer & Technology Law Journal

Regulating Online Marketplace Lending: To Be a Bank or Not to Be a Bank?

Article excerpt

I.   Introduction                               163 II.  History and Development of Online Lending       Practices                                 166 III  Market Demand for Credit and Current       Regulatory Scheme                         169 IV.  Market-to-Market Analysis                  178 V.   Special Purpose Charters                   185 VI.  Conclusion                                 190 

I. INTRODUCTION

The United States Treasury Department defines Online marketplace lending as the "segment of the financial services industry that uses investment capital and data-driven online platforms [featuring algorithmic underwriting models to] lend either directly or indirectly to consumers and small businesses." (1) In other words, "[m]arketplace lending is the process of connecting non-originator loan investors [, such as individuals and non-traditional investors,] with borrowers." (2) Marketplace Lending benefits lenders and borrowers by extending "credit to a broader range of borrowers." (3) Marketplace lenders are currently "less encumbered by rules," thereby "minimizing compliance costs" and allowing for more efficient loan processing than traditional bank lending. (4) Lack of regulatory oversight has led to a "proliferation of new companies and new product offerings" which provide capital to numerous small businesses and consumers, but is not without any consequences. (5) This note will explore the regulatory framework developing around marketplace lending.

On May 10, 2016, the United States Treasury Department released its white paper on online marketplace lending, "Opportunities and Challenges in Online Marketplace Lending." (6) The emerging market of marketplace lending gives unprecedented access to funding on behalf of consumers, students, and small businesses because the "low-cost operating model for platforms which allows for lower rates for borrowers as well as solid returns for investors." (7) Now, these lenders offer "small business loans, education loans, and health care finance loans." (8) The Supreme Court of the United States denied certiorari to Marketplace Lending cases in 2015 and 2016, and has not since considered any Marketplace Lending case, exposing Marketplace Lending to uncertainty and risk due to varying circuit cases. (9)

Although there are many facets of, and regulatory problems (10) with, online marketplace lending, this article will evaluate regulatory proposals and concerns of Online Marketplace platforms for small and medium-sized enterprises ("SMEs"). This article will not address Regulation Crowdfunding, (11) nor regulatory concerns with peer-to-peer lending generally. Part II will explain the historical progression of peer-to-peer lending to modern day marketplace lending. Part III will explore the market demand for credit and analyze the current proposed regulatory scheme. Part IV will provide a market-to-market analysis of marketplace lending from economic and regulatory viewpoints. Part V will address special purpose charters provided by the Office of the Comptroller of Currency ("OCC").

II. HISTORY AND DEVELOPMENT OF ONLINE LENDING PRACTICES

Marketplace lending began with individuals providing capital to other individuals in what is a "'peer-to-peer' model". (12) Marketplace lending now encompasses more complex entities such as "funding by institutional investors,... hedge funds, banks, and insurance companies, seeking to provide financing that ultimately is used to fund consumer and small business loans of various types in order to gain access to additional lending channels and favorable rates of return." (13) Additionally, "[m]arketplace lenders also use public offerings, venture capital, securitizations, and loans from banks as funding sources." (14) Despite the recent rapid growth, "marketplace lending remains a relatively small part of the $3.3 trillion U.S. consumer lending market." (15) Moreover, "marketplace lending is an emerging way to extend credit using algorithmic underwriting which has not been tested during a business cycle, so there is a risk that marketplace loan investors may prove to be less willing than other types of creditors to fund new lending during times of stress. …

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