Garnet Capital Advisors Blog

Traditional banks have finally launched an outright attack on marketplace lenders. The old guard and upstarts had long held an uneasy peace, complete with several high-profile partnerships across the divide.

Treasury sought comments
The offensive came in the form of comment letters urging the Treasury Department to step in with regulations, reported American Banker.

"It is not enough to simply put rules in place that protect consumers," said a joint letter from the Consumer Banking Association and American Bankers Association. "We must ensure that these rules are clearly articulated and that lenders fully comply. Currently alternative lenders have little regulatory oversight and typically only see examinations in response to consumer complaints."

Treasury announced this summer it would begin taking comment letters on the burgeoning marketplace lending industry, which provides loans online, free from many of the regulations and due diligence requirements shouldered by traditional banks. Those letters recently began being made public.

Not surprisingly, the sharpest call for new regulations came from the community banking sector. James Kendrick, vice president of Independent Community Bankers of America, called some peer-to-peer lenders "predatory" operations that "charge some crazy, obscene" rates of interest.

Rate disclosure mandate?
One company that invests in marketplace loans joined the call for further government oversight.

"Harm can be done by platforms offering very high rates for short-term loans," the firm's letter read, "especially on the small-business side where usury laws do not apply. Regulators should take a hard look at any platform that does not disclose the rate being charged - these lenders are likely to harm less savvy borrowers."

Let new industry develop, say P2P lenders
One marketplace lender that specializes in small business loans urged federal regulators to let the nascent industry keep evolving on its own. That's perhaps not a surprising point of view, given that the lender's high rates have already touched off a class action suit.

"It would be premature and potentially harmful to small-business owners," the company wrote, "if additional regulation were imposed to codify particular lending models or credit products at this early stage of industry development."

Exponential growth
While the marketplace lending sector started small, it is in a period of rapid growth. Peer-to-peer lenders originated $1 billion worth of loans in 2010 compared to the $12 billion written in 2014. Morgan Stanley predicts the sector's volume to reach $122 billion in five years.  

In research cited by Bloomberg Business, McKinsey & Co. analysts said traditional banks face an inflection point soon vis-a-vis peer lenders: Should they fight them or join them?

"The window for making this choice is narrowing," the McKinsey report concluded. "Banks must decide soon, probably within three years, or the choice will be made for them."

Wary partnerships
It's worth noting that not all traditional banks see it as a black-and-white issue. Many have started partnerships of various kinds with new-era lenders like Lending Tree, currently the biggest single network. Several had positive things to say about the sector in their letters to Treasury. American Banker highlighted positive comments by Alliance Partners LLC, which works with Lending Club in a partnership through the BancAlliance Network.

It wasn't in the letters to Treasury, but even the CEO of the nation's largest bank has made conciliatory noises toward marketplace lenders.

"Silicon Valley is coming," wrote Jamie Dimon of JP Morgan Chase this spring in a message to shareholders. "We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense."

There's no question the rise of marketplace lending has implications for how banks manage, sell and buy loan portfolios. Any questions or concerns can be discussed with loan sale advisory firm Garnet Capital Advisors.