Marketplace lending connects consumers and small businesses seeking online and timelier access to credit with individuals and institutions seeking investment opportunities. Marketplace lenders use traditional and may use less traditional types of data and credit algorithms to assess creditworthiness and underwrite consumer loans, small business loans, lines of credit, and other loan products. The marketplace lending subsector originated as person-to-person lending where individual investors financed loans to consumers. The investor base for online marketplace lenders has expanded to include institutional investors such as hedge funds and financial institutions. Additionally, there has been the emergence of a market for securitizations of marketplace lending loans—both consumer and small business loan- backed offerings. Marketplace lending firms have evolved to offer a wide variety of loan products and services to consumers and small businesses and have recently begun to offer mortgages, life insurance, and auto loans. Although a number of marketplace lending models exist, publications we reviewed highlighted two common models: direct lenders and platform lenders. Direct lenders, also known as balance sheet lenders, use capital obtained from outside sources to fund loans and often hold loans on their balance sheet. Examples of direct lenders include CAN Capital, Kabbage, and SoFi. Platform lenders partner with depository institutions to originate loans that are then purchased by the lender or by an investor through the platform. Examples of platform lenders include LendingClub Corporation, Prosper, and Upstart. However, there are various permutations based on these two common models. For example, direct lenders like OnDeck have developed hybrid models, selling some whole loans to institutional investors while retaining servicing responsibilities. The marketplace lending process for the two models typically begins with a prospective borrower filling out an online application on the marketplace lending platform’s website. Marketplace lenders use traditional and may use less traditional types of data and credit algorithms to assess creditworthiness and underwrite loans. Marketplace lenders use traditional credit data (e.g., credit scores, income, and debt repayment history) but, according to publications we reviewed, may also use less traditional data such as monthly cash flow and expenses, educational history, payment and sales history, and online customer reviews. After assessing the creditworthiness and needs of the applicant, the marketplace lender will approve or deny the borrower’s loan request. Generally, the loan will include a principal amount, an interest amount, and the marketplace lender may charge a servicing fee for collecting and transmitting payments and handling collections in case of a default. Funding a borrower’s request depends on the business model of the marketplace lender. Direct lenders typically originate the loan, hold most or all of the loans on their own balance sheets, earn interest on the loans, and carry credit risk for the entire loan (the risk is that the borrower does not repay), see figure 1. These lenders can raise funds to make loans by issuing equity to institutional investors (in addition to other means). Platform lenders match investors (institutional or individual) to loans that a depository institution, such as a bank, originates (see fig. 2). If the loan is made and transferred to investors, the platform lender services the account. Investors have the option of either partially or fully funding a loan. Consumers: can use term loans from marketplace lenders to cover personal expenses (such as home or medical expenses); consolidate debt; or refinance student loans, among other reasons. According to Treasury, three marketplace lenders offer consumer loans ranging from $1,000 to $40,000. Treasury also indicated that marketplace lending firms generally provide consumer loans to prime and near-prime borrowers although some marketplace lending firms target subprime borrowers or applicants without credit scores or with a limited credit history. Small Businesses: can use short and fixed-term loans, lines of credit, and merchant cash advances from marketplace lenders, among other products and services, to finance business expenses and expansions, among other reasons. According to a Federal Reserve Bank of Cleveland publication, limited data are available about the types of small businesses that use online lenders, why they have chosen to apply, how successful they are in obtaining funds, and how satisfied they are with their experiences as borrowers. Lower costs: Marketplace lenders’ online structure may reduce overhead costs because not all firms have brick-and-mortar locations. In addition, the algorithms used by marketplace lenders to underwrite credit decisions may result in lower underwriting costs when compared to banks’ underwriting costs. Expanded access to credit: Marketplace lending may expand credit access to underserved populations that may not meet traditional lending requirements or that seek smaller loans than those that banks traditionally offer. Faster service: According to Treasury, marketplace lenders can provide funding decisions within 48 to 72 hours from when applications are submitted. According to an SBA Office of Advocacy publication, LendingClub Corporation advertises that potential applicants can receive a quote within minutes and that its approval and funding process typically takes 7 days, Kabbage Inc. can provide same-day approval for small business loans, and OnDeck can provide funding within 24 hours. According to representatives from one industry organization we spoke with, faster service is beneficial to small businesses that may need quick access to credit in an emergency, such as a restaurant that needs its oven or refrigerator repaired to continue operations. Payment term transparency: Marketplace lending firms offer various loan types and terms, particularly for small business loans. It can be difficult for small businesses to understand and compare loan terms such as the total cost of capital or the annual percentage rate. According to a Federal Reserve 2015 survey, one reason for small business lenders’ dissatisfaction with online lenders was a lack of transparency. Small business borrower protections: Current federal laws and regulations applicable to marketplace lending generally apply to consumer loans and not small business loans or other commercial loans. For example, the Truth in Lending Act, which among other things, requires the lender to show the cost and terms to the borrower, applies to consumer loans but generally not small business loans. According to Treasury, small business loans under $100,000 share common characteristics with consumer loans, yet do not receive the same protections. However, the report also notes that small business loans may receive protection under the enforcement of fair lending laws under the Equal Credit Opportunity Act. Use of less traditional data in credit decisions: Unlike traditional lending companies that look at a person’s credit reports (which include reported installment credit and revolving credit), publications we reviewed indicate that some marketplace lenders also take into account or have considered using less traditional data (e.g., utilities, rent, telephone bills, educational history) during the underwriting process. However, according to Treasury, data-driven algorithms used by marketplace lenders carry the risk for potential fair lending violations. According to staff from FTC, marketplace lenders must ensure that their practices meet fair lending and credit reporting laws. The use of less traditional data also introduces the risk that the data used are inaccurate and concerns that consumers may not have sufficient recourse if the information being used is incorrect. Uncertainty about performance in full credit cycle: According to publications we reviewed, the marketplace lending subsector experienced considerable growth following the 2007-2009 economic downturn in an environment with tightened lending standards and low interest rates. In addition, little is known about how the industry will perform in other economic conditions such as a recession, which could lead to delinquency and defaults of marketplace loans. According to the Congressional Research Service (CRS), it is also possible that loan servicing could be disrupted in the event the marketplace lender goes out of business. Partnerships: According to Treasury, some marketplace lenders have sought partnerships with traditional banks and community development financial institutions (CDFI) in various models. According to a CRS report, in a white label partnership, a traditional bank sets underwriting standards, originates the loan, and holds the loan once issued. The bank can integrate a marketplace lending firm’s technology services to originate the loan. For example, JPMorgan Chase & Co. partnered with OnDeck to offer small business loans to JPMorgan Chase & Co. customers. In referral partnerships, banks refer customers who do not meet a bank’s underwriting standards, or who are seeking products the bank does not offer, to a marketplace lender. In turn, the bank may collect a fee from the marketplace lender. Referrals may also allow CDFIs to reach customers that may otherwise not be served. For example, in 2015, Regions Bank, Fundation Group LLC (an online small business marketplace lender), and TruFund (a CDFI) partnered to provide small loans to underserved small businesses. Self-regulatory efforts: A number of self-regulatory marketplace lending efforts were established with the intent of developing responsible innovation and mitigating and reporting risks to potential borrowers seeking marketplace lending products. However, limited information is available on the impact of these efforts. Four examples are discussed below. The Marketplace Lending Association (MLA) was established in April 2016 to represent the marketplace lending industry. MLA states that one of its goals is to support responsible growth in the marketplace lending sector. The Online Lenders Alliance represents firms offering loans online. The Alliance provides resources including a consumer hotline, a portal to report fraud, and consumer tips. In 2016, three small business lending platforms formed the Innovative Lending Platform Association. The Association developed the Straightforward Metrics Around Rate and Total cost (SMART) Box tool to help small businesses understand and assess the cost of their small business finance options. For example, some metrics described in the SMART Box tool include total cost of capital, annual percentage rate calculations, and average monthly payment amounts. Its goal is to include clear and consistent pricing metrics, metric calculations, and metric explanations to help small businesses understand and assess the costs of their small business finance options. In 2015, the Responsible Business Lending Coalition launched the Small Business Borrowers Bill of Rights to foster greater transparency and accountability across the small business lending sector.