California Opens Inquiry into Marketplace Lending

California officials have opened a broad inquiry into the marketplace lending business, seeking data from industry participants that will be used to assess the effectiveness of the state's current regulatory regime.

As part of the inquiry, the state is asking 14 firms to provide five years of data about their businesses, including information about their loan volume, annual percentage rates, delinquent loans and investor bases. The responses are due by March 9.

"These online lenders are filling a need in today's economy, and we have no desire to squelch the industry or innovation," Jan Lynn Owen, commissioner of the California Department of Business Oversight, said Friday in a press release. "We have a duty, however, to protect California consumers and businesses, and they have more and more at stake as this industry grows."

The department's press release did not identify the firms that received the survey but said that the companies offer both personal loans and small-business loans. Many of the largest participants in the technology-focused marketplace lending sector are based in California, including Lending Club, Social Finance and Prosper Marketplace.

Friday's announcement follows reports that Prosper provided a $28,500 loan to one of the shooters in last week's terrorist attack in San Bernardino, Calif., which has led to greater scrutiny of the marketplace lending business. However, California's inquiry was already in the works before the mass shooting.

State officials did not identify any particular regulatory issues that are on their radar, but they did say that the data they gather will be used to assess how well the state's existing regulatory structure, which predates the advent of marketplace lending, is working.

One issue that could arise as part of the inquiry involves state licensing.

Some marketplace lenders have gotten licenses in each state where they make loans, but others, including both Lending Club and Prosper, have taken a different route. They instead partner with banks that originate their loans, a setup that has allowed the firms to avoid state-level interest rate caps.

Some players have challenged whether those lenders should be allowed to charge rates that exceed local usury limits and, more generally, avoid the level of regulation under which banks operate. A court ruling this year has called into question the legality of the usury exemption as well. 

California is the first state to launch an inquiry into the fast-growing marketplace lending business. At the federal level, the Treasury Department recently conducted a similar effort aimed at gathering more information about the industry.

The California Department of Business Oversight licenses and regulates state-chartered banks and credit unions, as well as nonbank lenders and other financial firms.