The Department of Justice is taking a more interested look into the world of online financial services — lending in particular — as an area ripe for potential abuse as technology is replacing old school safeguarding systems.
Leslie Caldwell, the assistant attorney general who leads the DOJ's criminal unit, told Reuters last week that the DOJ "has an eye on" online lending.
Mainly because, instead of being backed by deposits and other such traditional infrastructure, online lenders specialize in creating loans backed by investors.
"There are a lot more of these peer-to-peer lenders, kind of mom-and-pop lenders," Caldwell said. "It's hard to say what those loans are worth and hard to predict the performance of those loans."
And yet, hard to predict though they may be, they are still frequently packed into securities and sold, which may sound familiar as a similar bright idea was applied to mortgage underwriting — right up until the moment such loan packages nearly detonated the entire global economy when the U.S. real estate bubble burst.
On the whole, Caldwell noted, online lending is a small fraction of total lending, and there is nothing inherently wrong with the industry.
"I'm not saying ... that we've uncovered a massive fraud but just that there's a potential for things to go awry, like when underperforming loans were being sold in residential mortgage-backed securities," Caldwell said.
Caldwell's critique perhaps rings with a bit more sting than it might otherwise given that the DOJ is currently investigating Lending Club, the biggest and most viable player in online lending. Lending Club — and the potentially illegal antics of its departed CEO, Renaud Laplanche — has already drawn the interest of the New York state financial regulator, which has launched an official inquiry into Lending Club's business within the Empire State.
Virtual currency is another technology-driven financial industry the Justice Department is following, Caldwell said.
"We see virtual currency as another example of something that there's inherently nothing wrong with, but there's a lot of potential for abuses," she said.
Caldwell, who returned to the Justice Department in 2014 after more than 10 years in private practice, noted that the government's goal is not to shut down new markets.
"Our goal is not to put companies out of business but to stop bad behavior and punish bad criminal behavior," Caldwell said.