Online lenders told to come clean on how they work
Financial technology start-ups and online lenders should provide their borrowers and their investors with more transparency into how they arrive at proprietary credit scores, according to a report Tuesday from the Treasury Department.
It said that computer programs the companies use can make the process run faster and cut costs, but they also can distort credit scores and carry "the potential for fair lending violations."
"Applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions," the report said.
Fintech lenders including SoFi have originated billions in online loans in part thanks to proprietary algorithms they use to grade borrowers.
The report also revealed plans for a standing working group for the lenders, through "interagency coordination," which suggests that fintech companies may face a rising tide of regulation.
It comes at a difficult point in the nascent industry's development. On Monday, LendingClub announced its CEO, Renaud Laplanche, would depart amid an inquiry into the fintech company's business practices.
One of the issues that caused a rift between Laplanche and his board — regarding his disclosure of his ownership of a fund that invested in LendingClub loans — was addressed in the Treasury report, but briefly. The report acknowledged that start-ups including LendingClub have sought to form hedge funds, in part to continue fueling loan originations. It did not suggest any regulatory action might be taken, however.
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The report also highlighted the disparity in origination fees between lenders' products. Small businesses often get hit with higher fees because they don't have the same protection as consumers, it said.
Treasury officials acknowledged that the budding industry is a long way from being able to pose a hazard to the U.S. economy akin to what the housing market represented in the years leading up to the global financial crisis. The report estimated a $1 trillion marketplace for online lenders and said loan origination could skyrocket to $90 billion by 2020.
The officials also issued a warning should fintech issuance rise to take a substantial portion of global market share. The U.S. consumer lending market is worth about $3.5 trillion, according to the report.
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"This industry remains untested through a complete credit cycle," said Antonio Weiss, counselor to the secretary of the Treasury, on a conference call with reporters.