Marketplace lending combines all of the following characteristics:
Loans are made to individuals and small businesses. Marketplace lenders may hold loans once they have been originated or sell the loans to investors. Potential Opportunities

Some industry observers assert that marketplace lending has inherent advantages over traditional lending, including the following: 
Cost structures may be lower. Some marketplace lending proponents argue that the automated underwriting used by marketplace lenders may be more accurate than traditional underwriting processes. Another challenge to traditional lenders is that assessing borrowers with a lack of credit history—which is vital to traditional credit assessments through credit scores—may involve too much uncertainty about the likelihood of repayment. Potential Risks

Some observers are concerned that a great deal of uncertainty surrounds the marketplace lending industry. These risks potentially threaten the borrowers of and investors in marketplace loans, marketplace lending companies themselves, and—if marketplace lending grows sufficiently in coming years—the financial system. Some observers are concerned that certain marketplace-lending companies could be threatened by changing economic conditions. Lenders have been able to do this successfully in recent years, but exclusively in a time of economic expansion and low interest rates. Many marketplace lenders originate a loan for a fee but do not hold the loan on their balance sheets. Investors in marketplace loans also face risks related to the accuracy of credit assessment. However, widespread failure of marketplace lenders—especially if these lenders grow to the point that they provide a substantial amount of credit to consumers and small businesses—could lead to a sharp contraction in the availability of credit to the economy. Regulation

Marketplace lending is subject to federal and state regulations and requirements. Although marketplace lending is subject to these rules and regulations, the existing regulatory system was designed prior to the advent of online marketplace lending. As a result, there is some uncertainty related to how regulation should be applied and how effective it can be. Potential lack of supervisory oversight. They assert that certain court decisions have created uncertainty regarding how existing laws and regulations will be applied to marketplace lenders and the loans they make. In addition, they argue that complying with 50 different sets of state laws and regulations is unnecessarily burdensome. By contrast, some observers have expressed concern over whether current regulations appropriately address the risks posed by marketplace lending. This section will cover issues related to the following:
Uncertainties over the degree to which federal or state laws and regulations apply to particular marketplace lenders and certain proposed solutions to create clarity; Supervisory authorities in regard to marketplace lenders; and Originate-to-sell models used by many marketplace lenders. In addition, the OCC stated that fintech firms granted the charter "will be subject to the same high standards of safety and soundness and fairness that all federally chartered banks must meet," and also that the OCC "may need to account for differences in business models and activities, risks, and the inapplicability of certain laws resulting from the uninsured status of the bank." "Originate-to-Sell" and the Risk-Retention Rule

When marketplace lenders sell a single loan or pieces of a single loan, they generally have not been required to adhere to risk-retention rules, which apply to issuers that pool many loans together into a single security, a common practice at banks and nonbank lenders. Traditional Lender Response

Incumbent lenders may respond to the emergence of marketplace lending in several ways, including no longer competing for small, unsecured loans; adopting the technology and practices of marketplace lenders; and entering into cooperative relationships with marketplace lenders. Small loans have low profit margins compared to large ones. One option for banks would be to independently start their own online, automated platforms and use more data in underwriting. Performance in Recession

Many uncertainties about marketplace lending will likely be clarified after the industry has been active during an entire economic cycle with a recession. In addition, potential investors and market analysts will be able to more meaningfully compare delinquency and default rates of marketplace loans relative to other lenders after a complete credit cycle, and the industry's relative performance may affect funding availability either positively or negatively. Regulatory Developments

As the marketplace lending industry develops, industry participants and policymakers will likely closely observe how laws and regulations are applied to marketplace lenders and what effect those applications have on the industry's growth and development.
Marketplace lending—also called peer-to-peer lending or online platform lending—is a nonbank lending industry that uses innovative financial technology (fintech) to make loans to consumers and small businesses. Although marketplace lending is small compared to traditional lending, it has grown quickly in recent years. In general, marketplace lenders accept applications for small, unsecured loans online and determine applicants' creditworthiness using an automated algorithm. Often, the loans are then sold—individually or in pieces—directly to investors (although holding the loans on their own balance sheet is not uncommon). More traditional lenders are more apt to use employees to make credit assessments and to have a greater need for office and retail space. Traditional lenders also may hold loans themselves, but when they sell loans they are more apt to package many loans together into large securities rather than to sell a single loan or pieces of a single loan, like marketplace lenders. Due to these differences and to marketplace lending's lack of industry track record, marketplace lending is facing uncertainty about its advantages, its risks, and how it should be treated by regulators.
Some observers assert that marketplace lending may pose an opportunity to expand the availability of credit to individuals and small businesses in a fair, safe, and efficient way. Marketplace lenders may have lower costs than traditional lenders, potentially allowing them to make more small loans than would be profitable for traditional lenders. In addition, some observers believe the accuracy of credit assessments will improve by using more data and advanced statistical modeling, as marketplace lenders do through their automated algorithms, leading to fewer delinquencies and write-offs. They argue that using more comprehensive data could also allow marketplace lenders to make credit assessments on potential borrowers with little or no traditional credit history.
Other observers warn about the uncertainty surrounding the industry and the potential risks marketplace lending poses to borrowers, loan investors, and the financial system. The industry only began to become prevalent during the current economic expansion and low-interest-rate environment, so little is known about how it will perform in other economic conditions. Many marketplace lenders do not hold the loans they make themselves and earn much of their revenue through origination and servicing fees, which potentially creates incentives for weak underwriting standards. Finally, some observers argue that lack of oversight may allow marketplace lenders to engage in unsafe or unfair lending practices.
Marketplace lenders are subject to existing federal and state regulations related to lending and security issuance, and some observers assert that the existing system is appropriate for regulating this lending. However, existing regulations were developed and implemented largely prior to the emergence of marketplace lending. Some observers argue that current regulation is unnecessarily burdensome or inefficient. By contrast, others argue that regulatory gaps and weaknesses exist and regulation should be strengthened. In addition, there is some uncertainty surrounding exactly how certain aspects of federal and state laws and regulations may be applied to marketplace lenders. Congress may consider policy issues related to these debates and uncertainties.
The evolution of the regulatory environment facing marketplace lenders is just one development that likely will occur in coming years. Traditional lenders that compete with marketplace lenders will adapt to the market entrants and market conditions, perhaps adopting certain marketplace lender technologies and practices. In addition, marketplace lending has not been through an entire economic cycle, and rising interest rates or the onset of a recession likely will reveal certain strengths and weaknesses of marketplace lending.