It has been a long time coming. A trade association has been on the minds of many people in the marketplace lending industry, including myself, for quite some time. Today, Funding Circle, Lending Club and Prosper announced the formation of the first association that establishes a business code of conduct across marketplace lending. The association will officially be called the Marketplace Lending Association (MLA) and is a non-profit membership organization.
It is based somewhat on the UK model where the Peer to Peer Finance Association (P2PFA) is the voice of the industry there. Even though the P2PFA has only eight members out of more than 100 platforms, it is a powerful organization that helped formulate regulation in the UK. The three founding members of the MLA have been quietly developing this new organization here for many months and they decided to launch it on the eve of LendIt. Like the P2PFA, it is not an association that is open to everyone, although any platform can apply. But there is a long list of standards that must be in place before a platform can be considered for membership.
The MLA is Open to True Marketplace Lenders
On the MLA website is a six page document that details the operating standards that all members must commit to follow. Membership is only open to true marketplace lenders which is defined as “platforms that match at least 75% of loans, by dollar, with commitments for funding from investors, before the loans are issued.” So, basically balance sheet lenders are not eligible – the majority of a platform’s loan volume must come from their marketplace.
There are five key operating standards:
- Investor Transparency and Fairness – detailed loan level data must be made available to investors.
- Responsible Lending – ensure transparent and fair loan pricing in adherence with fair lending laws.
- Safety and Soundness – have a six month operating cash reserve and establishment of business continuity plans.
- Governance and Controls – maintain strong internal controls to ensure compliance with laws.
- Risk Management – maintain robust risk models with fraud detection and anti-money laundering while protecting all customer data.
These are all reasonable standards which most established platforms have in place already. The one sticking point that I am sure many of the major online lending platforms may have an issue with is the 75% threshold for marketplace loans. Industry leaders like OnDeck and Avant both have active marketplaces but are probably well below this threshold.
I have spoken with representatives of the three founding members several times in recent weeks and they are all very committed to this new effort. But it is still very much in its nascent stages. While the MLA has a website and operating standards it has no staff yet and they are just beginning their search for an executive director. Having said that, I intend to support this initiative in any way I can and I hope they can get all the necessary pieces in place quickly.
My Take
Now, there are other association initiatives that are in various stages of formation. I know of at least three different efforts beyond the MLA and it is quite possible we will see other efforts successfully launch. But one thing is clear. This industry needs a unified voice inside Washington DC.
We are in this interesting phase right now where the industry is maturing but we have not had an independent voice to lobby on our behalf in Washington. In my conversations with people there this is a critical missing piece for us. While Lending Club, OnDeck and others now have executives on staff based there an independent voice will be far more effective I have been told.
The MLA is using the very successful model pioneered by the P2PFA in the UK, although that was established in 2011, so in some ways they have a five year head start. But it is better late than never and I hope this initiative gains some real traction this year. We will likely see other more inclusive organizations launch supporting the broader online lending community and I think that will be appropriate. But with the three industry leaders backing the MLA this will be an organization that will immediately provide some legitimacy to our industry.
You can see quotes from the CEOs of the three founding members in the official press release. And for those people who will be at LendIt USA 2016 I will be moderating a panel discussion with representatives of all three platforms specifically talking about the MLA, its goals and vision.
