Regulation

Online Lenders to See More Regulation … And Soon

In a move that may add insult to injury, the online lending sector may have to gird for more regulation amid the stings of rather souring headlines that have come out of the sector for months.

Reuters reported on Friday (Sept. 16) that online lenders are under scrutiny in the United States amid regulators’ concerns that the companies are “not doing enough to protect customers or prevent reckless lending practices.”

Though no specifics — at least in terms of actual proposed curbs on certain business practices or certain boosts to consumer protections — were divulged this past week, Reuters did note that Thomas Curry, who serves as U.S. comptroller of the currency (OCC), which regulates federal banks, told online lending industry stakeholders at a marketplace policy gathering that a new framework will be forthcoming this fall, and that framework, said Curry, “will support responsible innovation … Innovation can’t be responsible if it abuses customers.”

It might come as no surprise to see that there are at least initial stirrings from regulators to bring tougher rules to bear on the online lending industry. As has been widely reported, the industry, as young as it is, has been marked by a series of events that has brought the very models of some firms into question. The highest profile example revolves around Lending Club, of course, with management shuffles amid findings of loan falsification. Concerns over dwindling demand from would-be investors (taking on the loans) have raised the question of just what these firms, and regulators, can do to engender confidence. Consider the fact that as much as $29 billion in loans were originated just last year, according to stats from the OCC, and as Reuters noted, that tally is up sixfold in just two years.

Still, the need for safeguards in this lightly regulated industry begs the question of just how and which safeguards are needed. One area of concern, according to the newswire, comes as different algorithms have been used to help establish lending criteria and yet may bump up against, and transgress, fair lending practices. The ability to use criteria that might seem off the beaten path — Reuters noted, for example, the ability to track minivan ownership — may, in fact, place those lenders under a microscope that could result in lawsuits, as such tracking may be in violation of privacy rules.

In addition, renewed debate over the rates charged by these online lenders looms. One tell on where regulators might focus energies comes from a court decision that was handed down in California against CashCall, a payday lender, last month. The court ruled that the firm used “deceptive” practices in conjunction with its efforts to collect on loans that had been made across 16 states, exceeding state-mandated interest rate ceilings.

Beyond the court rulings, the Consumer Financial Protection Bureau also said that it has been looking into a number of ways to supervise online lenders and payday lenders, under a broad umbrella that ties into the general concept of “installment” loans. That sea change could take effect as soon as within the next year.

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