The US Treasury Department has warned of the fragility of the business models of a new crop of online lenders, a day after revelations of alleged mis-selling of loans at Lending Club shook confidence in the sector.
A white paper released on Tuesday represented the first attempt by a US regulator to produce a framework for supervising an industry which sprang up in the wake of the financial crisis. Operating under a patchwork of state and federal rules, online lenders such as SoFi and OnDeck Capital have grown rapidly. They have been winning over consumers and small businesses by claiming to provide faster cash at better rates than the lumbering brick-and-mortar lenders.
In the paper, more than nine months in the making, the Treasury noted that much of the innovation from the upstarts had been positive. But it added that many of the new platforms — some 400 or so in the US, at the latest estimate — had no experience of operating “through a complete credit cycle”. It warned of deterioration in the loans they are selling on to individual and institutional investors.