ANGELES — Online lenders, led by San Francisco’s
Lending Club, have grown explosively over the last few
years, lending billions to consumers who can quickly get
large sums by simply filling out a few online forms.
state and federal officials look to be taking steps
toward more tightly regulating the industry.
Consumer Financial Protection Bureau earlier this month
called for borrowers to alert the federal agency of any
complaints they have about the firms, a move seen in the
industry as a potential prelude to further action by the
likely a signal that the bureau has decided to send to
companies: Watch out, our eyes are on you," said
Scott Pearson, a partner in the Los Angeles office of
law firm Ballard Spahr who represents marketplace
lenders. "It’s a sign that the regulators are
paying attention to what marketplace lenders are
CFPB’s call for complaints came the same week
California officials moved forward with a broad inquiry
into the online lending business.
the state Department of Business Oversight and the CFPB
have turned their attention to so-called marketplace or
peer-to-peer lenders — online firms that offer loans
to consumers and small businesses, then sell those loans
are now dozens of such lenders, which use online
applications and speedy underwriting systems to issue
loans, often for tens of thousands of dollars at widely
varying interest rates. Marketplace loan originations
have grown from about $1 billion in 2010 to $12 billion
in 2014, according to a Morgan Stanley estimate.
growth has attracted the attention of consumer
advocates, who are concerned about how lenders protect
customer data and whether they comply with state and
federal lending laws. Now regulators are taking notice
the federal level, the CFPB has not said what, if any,
action it might take in the marketplace lending
business. In this month’s announcement, bureau
Director Richard Cordray said only that marketplace
lenders need to comply with existing rules.
consumers shop for a loan online we want them to be
informed and to understand what they are signing up
for," Cordray said in a statement. "All
lenders, from online startups to large banks, must
follow consumer financial protection laws."
said the additional scrutiny could mirror what the CFPB
has done in other industries.
bureau has recently gone after auto lenders, alleging
that they charge higher interest rates to minority
borrowers, and debt-collection firms for using illegal
tactics. It has also enacted new rules requiring
mortgage lenders to provide more information to
the extent there’s any kind of discrimination going
on, that’s something the bureau would be very
interested in. And to the extent there’s anything they
believe is unfair, deceptive or abusive," Pearson
regulators are looking at the industry too. In December,
the California Department of Business Oversight asked 14
marketplace lenders, including Lending Club and Prosper,
to submit detailed information about their businesses,
part of an inquiry that could lead to changes in state
the inquiry was first disclosed, department spokesman
Tom Dresslar said it had been in the works for months.
But the announcement followed the revelation that San
Bernardino shooter Syed Rizwan Farook had borrowed
$28,500 from Prosper in the weeks before the Dec. 2
has been no evidence to suggest that the loan was out of
department asked lenders to provide information about
their business in California, including the number and
dollar amount of loans issued over the last six years
and details about their loan sales.
could decide they’re not adequately regulated or that
they’re not adequately complying with California
lending law," Dresslar said. "We could decide
everything’s hunky-dory. Our minds are wide
of the issues the state is likely to weigh include
whether lenders are following securities law when
selling loans to investors and the extent to which
lenders are subject to California lending law.
Goldstein, chief executive of Chicago online lender
Avant, another of the firms involved in the California
inquiry, said the increased interest from regulators isn’t
expectations were that we were going to be heavily
scrutinized," he said. "We always expected
regulators to get interested. It’s the nature of the
said regulatory scrutiny could expose some bad practices
but shouldn’t be a problem for Avant and other
companies following the rules.
regulators come and talk to us, they’ll have no
surprises," he said.
regulators have yet to take any concrete steps, one of
the industry’s leaders has recently made changes to
its business, possibly anticipating regulatory action.
Club said late last month that it would change the way
it works with the bank that issues loans on Lending Club’s
having Salt Lake City’s WebBank issue its loans,
Lending Club has said it can charge interest rates
nationwide based on lending laws in the bank’s home
state of Utah rather than on the law in a borrower’s
in an unrelated case last year, a federal appeals court
ruled that if a bank no longer has an interest in a
loan, that protection might not apply.
a statement last month, Lending Club said WebBank will
now keep an ownership stake in all loans, a move aimed
at making sure that the company won’t have to abide by
believe this new structure will strengthen the
foundation of our program to provide borrowers the
ability to access affordable credit on a nationwide
basis," Lending Club Chief Executive Renaud
Laplanche said in a statement.
so, Dresslar said whether Lending Club and others are
required to follow state lending laws is something that
the Department of Business Oversight is looking into as
part of its inquiry.
fact that an online lender has a relationship with a
bank that purportedly relieves them of the
responsibility to report loan activity in California —
we consider that an open question," he said.