On March 7, 2016, the Consumer Financial Protection Bureau (CFPB) announced that it will be accepting complaints from consumers about the marketplace lending industry. The CFPB also released a consumer bulletin providing an overview of marketplace lending and tips for consumers applying for credit through these websites.
Marketplace lending is the blanket term used to describe the developing industry of non-bank online lending platforms that either lend directly to borrowers through the Internet or help borrowers to obtain credit from lenders or investors willing to fund a borrower's loan (sometimes called "peer-to-peer" lending). Observers estimate that total loan origination volume by marketplace lenders in 2015 may be as high as roughly $20 billion, and some larger lenders have even teamed with investment banks to package and sell securities backed entirely by marketplace loans.
Similar to other forms of consumer lending, marketplace lending involves activities that trigger a variety of federal and state consumer protection laws and regulations, and many participants are quickly finding out that the CFPB views them not as tech companies, but as consumer finance companies. The CFPB's press release quotes Director Richard Cordray as saying, "All lenders, from online startups to large banks, must follow consumer financial protection laws." The announcement indicates that the CFPB will expect marketplace lenders to provide the full range of consumer protections and disclosures that any other consumer lender would have to provide. While marketplace lending is projected to continue growing, many tech companies and start-ups looking to enter the industry do not have the compliance infrastructure necessary to meet the CFPB's expectations.
As we have seen in the past, the CFPB's announcement likely signals a pivot by the regulator toward heightened scrutiny of marketplace lending and eventual enforcement actions, whether through applicable statutes and regulations or the CFPB's more general unfair, deceptive, or abusive acts or practices authority. The CFPB uses the complaints it receives to identify noncompliance trends and to begin developing potential enforcement actions against perceived "bad actors." Information obtained from consumer complaints may also drive future supervisory and rulemaking activity. The CFPB expressed particular concern over the potential for consumers to lose important protections by refinancing debt through a marketplace lender. Certain loans like federal student loans and loans with servicemember benefits provide different repayment options or other benefits that could be lost through a marketplace refinancing.
It is worth noting that the CFPB's announcement is not the first indication that marketplace lending has become the focus of regulatory scrutiny. In July 2015, the Treasury Department issued a public request for information seeking comments from industry, consumer protection groups, and others about marketplace lending business models and recommendations for future regulation. In December 2015, the California Department of Business Oversight also issued an inquiry to marketplace lenders, to help the agency assess its licensing and regulatory approach to the industry. However, as we stated previously in our more fulsome discussion of regulatory challenges facing the marketplace lending industry (available here), the CFPB is well positioned to take the lead in supervising and regulating marketplace lending.