Monday, January 15, 2018

Timeline: The First Decade Of Alternative Lending

From CB Insights, Jan. 4:
As alternative lending matures into what some in the industry are calling "alternative lending 2.0," we look at the sector's evolution since 2005. 

UK-based lender Zopa pioneered peer-to-peer (P2P) lending in 2005, quickly followed by US contenders Prosper Marketplace and LendingClub in 2006. These companies allowed borrowers to cut out financial institutions, while promising transparency, efficiency, and lower costs.

By December 2014, venture-backed alternative lenders OnDeck Capital and Lending Club had gone public on the NYSE. By 2015, equity funding to the alternative lending industry had hit an all-time high, with private companies including SoFi, Avant, and Kabbage receiving a collective $6.3B from investors.

In the following two years, however, momentum in the space slowed: 2017 saw the highest number of acquisitions, mergers, and shutdowns in the sector to date, while a formal crackdown in China aimed to reduce the thousands of players operating in the country’s sector.

So where does that leave the state of alternative lending today?

In this post, we analyze how regulation, consolidation, and exits have impacted the alternative lending sector — and what to expect moving forward.
As the relatively unregulated alternative lending industry continues to grow in loan volume, regulators are starting to pay attention. Below, we look at of some of the major regulatory moves to date across major markets.

United States
The US has taken a largely reactive regulatory approach to alternative lending, attempting to apply existing rules and regulations to the emerging field. 

Rather than a single rule-making body tasked with monitoring and regulating the alternative lending space, regulation comes through a collection of federal agencies. 

Consumer Regulations
The Consumer Financial Protection Bureau (CFPB) is the federal agency in charge of regulation for all consumer-based financial products.

In October 2017, the CFPB finalized a rule aimed at payday lenders, requiring them to determine upfront whether consumers can afford to repay loans via credit checks on CFPB registered systems. This rule covered all loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.

While these restrictions are unlikely to affect any major alternative lending company operating now, they prevent startups from creating payday lending companies.

Fintech Innovation
Congressman Patrick McHenry proposed sandbox regulation in September 2016 as part of a new bill, the Financial Services Innovation Act of 2016 (H.R. 6118.), which still remains in the House.
If passed, fintech companies would be required to demonstrate to regulatory agencies that their innovations serve the public interest, improve access to financial products and services, and do not impose undue risk to consumers or the financial system....MUCH MORE