FinTech remains a hot topic for government regulators. The Federal Trade Commission (FTC) threw its hat into the ring yesterday with a half-day discussion of marketplace lending and its implications for consumers. The forum included panels on the current state of marketplace lending, potential future consumer protection issues as the market evolves, and a presentation on marketplace lending websites. The forum comes on the heels of the Treasury Department’s white paper on marketplace and online lending, and outreach to industry participants by California and New York financial services regulators.
Although it is difficult to forecast specific actions the FTC may take in the online lending space, we note a few key takeaway from the discussion:
- Regulatory Themes: The discussion covered a broad range of topics relevant to marketplace lending, but the FTC’s moderators consistently returned to particular themes:
- Whether underwriting models used by marketplace lending present unique or heightened fair lending concerns. The participants were asked to discuss whether marketplace lenders were taking advantage of “alternative” consumer data, such as information from social media, in their underwriting models. Moderators also asked whether the proprietary algorithms and scoring models used by marketplace lenders created any fair lending risk beyond those associated with more traditional underwriting models.
- Whether marketplace lenders used information about consumers in making credit decisions that fell outside the protections of the Fair Credit Reporting Act (FCRA). An FTC moderator, and a panelist from the Treasury Department, expressed concern that certain types of alternative underwriting data might fall outside the scope of the FCRA. In particular, they expressed concern that consumers would not have the right to review such information for accuracy and request corrections, and may not even be informed that such information was being used as part of a credit decision.
- At what point in the online application process do marketplace lenders disclose the loan terms being offered to the consumer. The timing of loan term disclosures was discussed during the panels, but was particularly prominent during the presentation of the FTC research office’s review of marketplace lending websites. The FTC research office internally scored websites, in part based on how many clicks from the landing page were required to reach disclosures about the loan terms. Although the presenter stated the ratings were arbitrary and not based on any statutory requirement, the report assigned the lowest score to any website where it took more than two clicks to learn what specific fees were charged by the lender.
- Whether marketplace lenders and related third parties, including lead generators, were complying with laws on sharing and securing consumer data, such as Title V of the Gramm-Leach-Bliley Act. The FTC moderators asked a number of questions about the information that marketplace lenders request from consumers, how that information is used, who it may be shared with, and how it is secured. Many of these questions touched on issues in recent FTC enforcement actions, including how consumers are informed about the use of their personal information, for what purposes lenders share consumer information, and how lenders supervise third parties with whom they share such information.
- Whether marketplace lenders require consumers to give authorization for automatic debits. One of the FTC’s moderators and Jessica Rich, the Director of the FTC’s Bureau of Consumer Protection, highlighted “mandatory or default” preauthorized electronic payments as an issue of concern in the marketplace lending industry.
- Website Review: The FTC research office’s website review focused on the top fifteen consumer lending websites, which were selected using traffic data. Study highlights include:
- observations on the marketing and disclosures made on each website, including the minimum APR and maximum loan amounts offered, origination fees and other charges, and whether an application affects a consumer’s credit score; and
- if the websites were tracking user visits on the site (using Google’s Ghostery app).
- Cooperation with Regulators and the California DBO: Throughout the event, panelists representing marketplace lenders stressed the need for cooperation between industry and regulators. The panelist representing the California Department of Business Oversight (DBO) agreed, and expressed the DBO’s desire to work with industry participants, including as part of the DBO’s recent outreach to fourteen marketplace lenders. In particular, the DBO representative stated the need for installment loans to California borrowers in amounts of $2,500 or less, and the DBO’s desire to sit down with firms to figure out how to make such loans work.
The FTC’s next FinTech forum will cover issues related to crowdfunding and peer to peer payments and will take place in fall 2016 in DC. Need more info on the CFPB and other government regulators interest in marketplace lending? Check out the recent blog, FinTech and Marketplace Lenders under Scrutiny.