As more consumers and small-business owners skip the bank and turn instead to online lenders for loans, policy makers in Washington are looking more closely at the operations to determine whether they should be more tightly regulated.
While it is widely acknowledged that the lenders provide a vital service by making business financing faster and easier to obtain, elected officials and some experts in the field have expressed concern about the opaque terms and high interest rates some loans carry. Because the online lenders operate outside the traditional banking system, they face fewer regulatory restrictions than mainstream banks.
Lawmakers and government officials have taken a fairly hands-off approach to the industry so far, but those in the industry acknowledge that the scrutiny on them is increasing â and new rules may follow.
âWe seem to be at an inflection point,â said Karen G. Mills, a senior fellow at Harvard Business School. âThe market is so active and alive with new entrants that itâs gotten the attention of regulators, and they are recognizing that there is no straightforward or apparent answer to the question of who is going to regulate this sector.â
Ms. Mills, a former administrator of the Small Business Administration, is a co-author of a widely cited paper published last year drawing attention to the fact that online lending âfalls between the cracksâ for federal agencies and is now largely regulated at a state level.
On Thursday, a member of the House Small Business Committee made her own request for information. Nydia M. VelÃ¡zquez of New York, the committeeâs ranking Democrat, sent a letter asking the Consumer Financial Protection Bureau and the Securities and Exchange Commission to comment on whether they have the legal authority and resources they need to oversee the online lending market adequately.
Furthermore, the Treasury Department is studying the responses it received to a recent request for data and commentary from industry participants.
Online lenders use their own algorithms and underwriting systems to make rapid credit decisions, advancing funds quickly, sometimes within hours, to individuals and businesses. They fill a market gap, especially for small businesses, which have struggled to find lenders for loans of $ 250,000 or less, an amount too small for many banks to bother with.
The first online marketplace lenders began operating around a decade ago, but the number of companies in the field and their transaction volume have increased rapidly in recent years. Loan origination has doubled every year since 2010, reaching $ 12 billion last year, according to an analysis by Morgan Stanley. Lending Club, one of the most prominent lenders, went public last year.
Federal regulatory officials are moving cautiously, unwilling to disrupt a still-fledgling industry, but the Treasury Department says that a few themes emerged in the 99 responses it received to its information request.
âCommenters almost universally agreed on the need for, and benefits of, greater transparency,â Antonio Weiss, a counselor to the Treasury secretary, said in a speech last month at an industry conference.
Small-business loans should have standardized pricing disclosures so that borrowers can better understand the cost and directly compare different loan products, he suggested.
A recent study indicated how tricky those comparisons can be. The Federal Reserve Bank of Cleveland gathered 44 small-business owners and asked them to evaluate several loan options. Most initially said they found the comparison easy, but when asked for specific details on the loansâ interest rates and costs, the participants frequently gave incorrect answers.
Another issue raised in the responses to the Treasury Departmentâs survey is that small-business loans generally have fewer regulatory protections than consumer loans, allowing companies to charge rates much higher than those permitted to be levied on individuals.
âMany commenters highlighted the need to establish a level playing field,â Mr. Weiss said.
That idea doesnât please some lenders. Noah Breslow, the chief executive of OnDeck, a lender that deals exclusively in small-business loans, said that rates that seem punishing â OnDeck has at times made short-term loans with an annual percentage rate of more than 100 percent â can make sense in a business context when capital can be used to buy inventory, hire workers and generate revenue.
The increased competition among lenders as the market grows is already working to bring down costs and increase the options for borrowers, he said. OnDeck says its weighted average A.P.R. has dropped from nearly 66 percent at the start of 2013 to 42.7 percent last quarter.
âWeâre one of 50 short-term lending companies.â he said. âAs the market gets bigger, borrowers have a higher level of choice than theyâve had in the past.â
Those involved in the Treasury Departmentâs inquiry say it is open-ended, with no decisions yet about what recommendations for changes, if any, will be made.
The three senators gathering information â Jeff Merkley of Oregon, Sherrod Brown of Ohio and Jeanne Shaheen of New Hampshire, all Democrats â have asked the Treasury Department and the Small Business Administration to respond to their request by the end of the month.