Marketplace Lending Risk
In general, marketplace lending inherits and shares the variety of business (operational) and financial risks of financial services companies. A inventory of specific risks includes
Payment Term Transparency
Marketplace lending firms offer various loan types and terms, particularly for small business loans. It can be difficult for small businesses to understand and compare loan terms such as the total cost of capital or the annual percentage rate.
Small Business Borrower Protections
Current federal laws and regulations applicable to marketplace lending generally apply to consumer loans and not small business loans or other commercial loans. For example, the Truth in Lending Act, which among other things, requires the lender to show the cost and terms to the borrower, applies to consumer loans but generally not small business loans. According to Treasury, small business loans under $100,000 share common characteristics with consumer loans, yet do not receive the same protections. However, the report also notes that small business loans may receive protection under the enforcement of fair lending laws under the Equal Credit Opportunity Act
Unlike traditional lending companies that look at a person’s credit reports (which include reported installment credit and revolving credit) some marketplace lenders also take into account or have considered using less traditional data (e.g., utilities, rent, telephone bills, educational history, even data gleaned from social media) during the underwriting process. However, according to Treasury, data-driven algorithms used by marketplace lenders carry the risk for potential fair lending violations. According to staff from FTC, marketplace lenders must ensure that their practices meet fair lending and credit reporting laws. The use of less traditional data also introduces the risk that the data used are inaccurate and concerns that consumers may not have sufficient recourse if the information being used is incorrect.
The marketplace lending subsector experienced considerable growth following the 2007-2009 economic downturn in an environment with tightened lending standards and low interest rates. In addition, little is known about how the industry will perform in other economic conditions such as a recession, which could lead to delinquency and defaults of marketplace loans. According to the Congressional Research Service (CRS), it is also possible that loan servicing could be disrupted in the event the marketplace lender goes out of business.