The fast-growing online lending business has brought a new twist to one of the most sensitive topics in lending: geography. Lenders, including online services known as “peer to peer” marketplaces, aren’t allowed to discriminate based on age, race and other factors. Skipping neighborhoods, or marketing to one neighborhood over another, has been the basis for “redlining” suits in which federal regulators accuse banks of discrimination.
The fair-lending rules were written before the boom in online lending – and they don’t deal specifically with the investors who fund the loans online. That has created questions about whether it is appropriate for investors in online loans to look at geographic data, something some say is important to their investment choices.
The Equal Credit Opportunity Act defines creditors as lenders who make credit decisions and set terms, such as interest rates. It doesn’t specifically refer to investors in these platforms, which didn’t yet exist when the act was passed in the 1970s. The CFPB, one of the agencies that enforce federal fair-lending laws, is beginning to review the structure of new lending platforms. The agency said it aims to ensure that companies aren’t incorporating potentially discriminatory factors into marketing or underwriting.
More than $37 billion in U.S. consumer and business digital marketplace loans were made from 2007 to 2015, said analysts at Autonomous Research. About 16% of people who buy loans from online marketplaces use a borrower’s state to make lending decisions, said NSR Invest, a marketplace-lending investment-advisory firm.
The two largest sites that sell loans to retail investors, LendingClub Corp. and Prosper Marketplace Inc., said they don’t discriminate or enable their investors to discriminate and don’t make potentially discriminatory data available. In late 2014, LendingClub stopped disclosing the city or neighborhood where a borrower lives beyond the first three digits of the ZIP Code.
Still, many investors say they consider geography and other unconventional factors when funding loans. “Plenty of investors, myself included, avoid Florida and Nevada,” said Simon Cunningham, a peer-to-peer investor who runs an online information service called LendingMemo Media LLC. Ashees Jain, founder of a peer-to-peer investment firm called Blue Elephant Capital Management, said that when oil prices began dropping in 2014, the firm stopped lending in Texas, Pennsylvania and Virginia. “We are now seeing unemployment going up there,” he said.
At Asset Avenue Inc., an online platform that connects investors with small real-estate entrepreneurs, ZIP Codes are among the criteria, along with type of property and the borrower’s credit rating. “Geography is a very large indicator of the quality of a loan,” said David Manshoory, president.