The online lending industry remains somewhat unregulated andwholly untested, the Treasury Department said in a new reportreviewing the emerging business model.

Online lenders that make direct loans to consumers and smallbusinesses may fall through cracks in the federal regulatory schemeand may only be subject to state rules, the Treasury said.

Notably, the Treasury said the online lending industry has not been tested in an economicdownturn.

“It will be critical to monitor how online marketplace lenderstest and adapt models if and when credit conditions become weaker,”the report read. “Higher charge-off and delinquency rates forrecent vintage consumer loans may augur increased concern if andwhen credit conditions deteriorate.”

Platform lenders that partner with a depositor institution tooriginate loans use the institution's charter to make loansnationally without obtaining state licenses. If an issuingdepository institution quickly sells the loan to an onlinemarketplace lender, federal regulators may not have oversight ofthe servicing of the loan, according to the Treasury.

“While state legal and regulatory frameworks are outside thescope of this paper, direct lenders that use state lending licensesto originate loans directly are not subject to a federal bankingregulator's supervisory authority, except to the extent the lendersmay be subject to CFPB supervision,” the report read.

The Treasury recommended the establishment of an interagencyworking group to monitor the lenders.

“The interagency working group would enable the member agenciesto coordinate efforts toward identify­ing areas where additionalregulatory clarity could protect borrowers and investors and expandaccess to credit,” the Treasury added.

The Treasury recommended the working group include the Treasury,as well as the CFPB, the FDIC, the Federal Reserve, the FederalTrade Commission, the Office of the Comptroller of the Currency,the SBA, the Securities and Exchange Commission and a state banksupervisor representative — but not the NCUA.

The industry itself also should develop ways to ensure a soundborrower experience, promote transparency, expand credit throughpartnerships that ensure safe and affordable credit, and usegovernment data in providing access.

“Online marketplace lenders should strive to provide strongcustomer service from origination to repayment, even in cases whereborrowers face financial difficulties,” the report read.

NAFCU praised the report.

“Treasury's report largely confirms our concern that thereexists an uneven playing field for overregulated credit unions ascompared to online marketplace lenders, which are not subject tothe same disclosure rules and underwriting standards that apply totraditional lenders,” Vice President of Government Affairs andGeneral Counsel Carrie Hunt said.

NAFCU said that financial regulators should ensure that onlinelenders comply with federal regulations, such as the Truth inLending Act.