Marketplace lenders have been quite a bit in the news these days. Just
about every aspect of this business model is being looked at by investors and
regulators – particularly the regulators and most particularly the CFPB!
Just yesterday, the Bureau announced that it would start tracking
complaints relating to online marketplace lending. From this we can infer –
given the CFPB’s past method of rulemaking by enforcement – that these complaints
will lead to heightened scrutiny, which will lead to non-judicial proceedings,
which will lead to enforcement by settlement.
The Bureau will be adding these complaints to its complaint database,
and especially that part of the database that involves “financial technology,”
the term applied to the systemic technological process whereby individuals and even
small businesses obtain access to loans funded by investors. This initiative
was not just a tactic spawned out of its own regulatory mandate, since it was
established after the Treasury sent out a request for information about the
industry’s operation last summer.
Director Richard Cordray has stated that the Bureau wants to ensure
that consumers know exactly what to expect when they are seeking a loan. The
CFPB’s modus operandi reminds me of
the policing equivalent of “taking names and numbers,” for, to quote Director
Cordray, by collecting complaints, the CFPB will have a “better idea of how the
marketplace lending industry works.” Having collected the complaints in Stage
1, probably Stage 2 will start the examination and non-judicial proceedings, thereafter to
Stage 3, where settlements will flourish without adjudication of the claims in
a court.
States Cordray:
“When consumers shop
for a loan online, we want them to be informed and to understand what they are signing
up for…All lenders, from online startups to large banks, must follow consumer
financial protection laws.”
I dare say that most of us would agree with such a platitude!
The Bureau has also issued a consumer bulletin on marketplace lenders, highlighting
issues that consumers should consider before they take out a loan using this
type of loan origination platform.
How did marketplace lending get started? Online marketplace lenders –
otherwise known as “peer to peer lenders” – actually began to grow as a result
of the 2008 financial crisis. The goal of the marketplace lender was to offer
credit financing to consumers and small businesses that were being shut out of
the traditional banking system. These lenders saw their loan volumes surge
after 2008, due to the fact that many banks strongly tightened their
underwriting standards, resulting in more and more potential borrowers being denied credit. In
effect, both consumers and small businesses, having been pushed aside with few
financial resources, found marketplace lenders a viable option.
These are not large loans. Typically, they are small, with small
businesses applying for loan amounts under $100,000 and consumers applying for
even smaller loan amounts. So this business model is a volume-based proposition.
Unit volume is the key metric, and volume is very high. So high, it seems, that
the Treasury claims this segment of the lending industry originated about $12
billion in loans in 2014.
Upstream of the marketplace lender are the investors that purchase a
cache of the loan units. The investors are mostly institutional; for example,
pension funds, hedge funds, and so forth. Like many past instances of loan
product securitization, this is Wall Street all the way! Companies that have
made it to the top tier are such as Prosper Marketplace and Lending Club.
Lenders that sell their loans to investors are subject to all state and
federal consumer financial protection laws as well as, where applicable,
regulation by the Securities and Exchange Commission; and, to the extent that
an investor has an alliance with a bank, that bank is also subject to the rules
set forth by its prudential regulator.
But, oddly, there simply is no specific federal regulation at this time
for online marketplace lenders – which leads us back to the Treasury’s interest
and, mutatis mutandis, the CFPB’s
escalation of monitoring and probable enforcement by settlement.
Since the Bureau has said that it expects to release a “larger
participant” rule for consumer installment and vehicle title loans, such a rule
giving the CFPB the authority to examine and directly supervise the largest
firms in an industry, it is quite likely that this new rule will either
directly state its application to marketplace lenders or be interpreted to
include them.
Clearly, marketplace lenders have been responding to the financing needs of consumers and small businesses. It is equally obvious that consumers and small businesses want the financing being offered. Therefore, it will be important to determine whether any new regulations will constrain the fulfillment of those needs.
Jonathan Foxx
President & Managing Director
Lenders Compliance Group
