Three of the biggest names in the US marketplace lending industry have combined to create a trade association, forming a united front against ever-closer regulatory supervision.
On Thursday the chief executives of Funding Circle, Lending Club and Prosper said they had launched the Marketplace Lending Association, a non-profit body which would promote responsible business practices among the online operators, and “sound public policy”.
The trio — which have originated about $20bn of loans between them — is at the forefront of an industry that has seen originations double every year since 2010, by connecting needy borrowers with investors keen for high-yielding assets. Total assets across the sector could rise to $122bn by 2020, according to Morgan Stanley, potentially depriving the brick-and-mortar banks of billions of dollars of income.
“As an industry, there’s not one specific issue we’re particularly worried about — the space is already heavily regulated, with borrower protections on one side and securities rules on the other,” said Sam Hodges, co-founder and US managing director of Funding Circle, which is based in London.
“But it is really important to be in active dialogue with regulators, to provide a forum for thoughtful discussion as the industry develops. Specific regulation [for the marketplace lenders] could be a healthy thing.”
The announcement comes as regulators are beginning to look more closely at the sector, sometimes at the urging of the big banks, amid fears that its explosive growth could come at the cost of the stability of the broader financial system.
The Office of the Comptroller of the Currency said last week it was seeking comments on a white paper on “responsible innovation” in marketplace lending, among other areas, while the Federal Deposit Insurance Corporation warned its regulated banks last month to ensure that they buy loans from only the most robust online lenders. The Consumer Financial Protection Bureau has also weighed in, announcing that it has set up a special desk to handle complaints relating to loans originated by marketplace lenders.
Meanwhile, the companies themselves are bulking up compliance teams, while adding board members with deep experience of financial regulation. This week Sheila Bair, former FDIC chief, joined the board of Avant, a Chicago-based consumer lender which recently hired its first full-time head of government relations. Raj Date, former second-ranked official at the CFPB, sits on the board of Prosper, while Lending Club has Lawrence Summers, the former Treasury Secretary.
The launch of the MLA comes on the eve of LendIt, the biggest annual get-together for the industry, to be held this year in San Francisco. The Washington DC-based association will be funded initially by the three founder members, which will each nominate a director for the board. Membership is open to any platform that commits to a set of operating standards endorsed by the MLA.
Within a few months, the MLA would hire an executive director and staff, said Mr Hodges, making it an equivalent body to the UK’s Peer2Peer Finance Association, launched in 2011.
The idea of a lobby group for this emerging industry in the US made sense, said David Klein, chief executive of CommonBond, a student-loans specialist serving some 14,000 borrowers.
“Right now we’re lining up against various agencies individually,” he told an event in New York last week. “We’re telling our stories uniquely, rather than combined.”