The CFPB has its eye on the biggest marketplace lenders in the U.S., and it is leaning toward bringing those online businesses under its supervision within the next year or so. That transition would see this class of lenders facing — for the first time — comparable levels of scrutiny to their bank (and physical FI) counterparts.
The new idea being floated involves classifying marketplace lenders, who operate online and also offer smaller loans with set payments, as installment lenders that are under the CFPB’s jurisdiction and regulations.
“Marketplace lending has grown in popularity and so has the CFPB’s own knowledge of a variety of lenders in the market,” said Lucy Morris, a partner at Hudson Cook and the CFPB’s former deputy enforcement director.
The agency, she said, is using the rules on the biggest market participants “to really expand its supervisory authority, including over emerging lenders, and the statute allows for that.”
Installment lending and vehicle-title loans are by no means new products, but the power of the Web, the cloud and a variety of other technological advances have made the practice more common — and thus more interesting to the team over at the CFPB. The format is slightly distinguished from its better-known cousin, payday lending, in that the terms are usually much shorter and loans must be paid in full.
The CFPB has been pursuing this quietly for some time. Last month, it began soliciting consumer complaints about marketplace lending, writing in a notice to consumers that marketplace lending “does not have the same history of government supervision and oversight as” traditional banks and credit unions.
As of right now, marketplace lenders have no direct federal supervisor, though they are still subject to FTC and CFPB consumer protection laws. Many are also bound to reporting requirements with the SEC. By adding the CFPB as a federal supervisor, the agency would gain access to lenders’ data and operations and would not have to open an enforcement action.
“The power to examine companies is more subtle and often more powerful than filing lawsuits,” said Michael Gordon, partner at WilmerHale and former senior counselor to CFPB Director Richard Cordray. “If the bureau establishes authority in this area, marketplace lenders will need to quickly re-examine their regulatory compliance models and infrastructure.”
Among the larger players likely to be effected by this move are Lending Club and Prosper — neither of which had any direct comment on the recent move by the CFPB. However, a previous statement by Lending Club CEO Renaud Laplanche indicates that it is not overly worried and actually thinks a stricter regulatory environment helps its business.
“We would expect any new regulation or supervision to impose greater transparency in loan terms and disclosures, which are areas where we are already ahead of the market,” Laplanche said on the company’s earnings call.
Marketplace lenders often say they already comply with existing consumer protection laws, but former CFPB examiners say some of the nonbank lenders’ own reviews aren’t carried out with the same rigor as a CFPB examination.
However, Anthony Gibbs, a former CFPB regional supervisor who is now a senior director with Alvarez & Marsal Financial Industry Advisory Services in Chicago, believes that not everyone will be so enthused.
“This will be a wake-up call for some marketplace lenders,” he told The Wall Street Journal, noting that lenders often think they are more compliant than they are and are somewhat less likely to hold themselves accountable to the same standards as a third party would, particularly when that third party is the CFPB.