Online lenders attract more attention from regulators

Online lenders, led by the Lending Club of San Francisco, have grown explosively over the past few years, lending billions to consumers who can quickly obtain large sums simply by filling out a few online forms.

Now, state and federal authorities are looking to take steps to more tightly regulate the industry.

The Consumer Financial Protection Bureau this week called on borrowers to alert the federal agency to any complaints they have about the companies, a move seen in the industry as a potential prelude to further action by the watchdog consumers.

“It’s probably a signal that the office decided to send to companies: be careful, our eyes are on you,” said Scott Pearson, a partner in the Los Angeles office of the law firm Ballard Spahr, which represents lenders in the Marlet. “It’s a sign that regulators are paying attention to what market lenders are doing.”

The CFPB’s call for complaints comes the same week as California officials are moving forward with a broad investigation into the online lending industry.

Both the state Department of Business Oversight and the CFPB have turned their attention to what are known as marketplace or peer-to-peer lenders — online businesses that offer loans to consumers and small businesses, then sell these loans to investors.

There are now dozens of such lenders, using online applications and fast underwriting systems to issue loans, often for tens of thousands of dollars at widely varying interest rates. Market lending grew from about $1 billion in 2010 to $12 billion in 2014, according to an estimate by Morgan Stanley.

This growth has caught the attention of consumer advocates, who are concerned about how lenders protect customer data and whether they comply with federal and state lending laws. Now regulators are also taking notice.

At the federal level, the CFPB has not said what action, if any, it might take in the market lending sector. In Monday’s announcement, bureau chief Richard Cordray said only that market lenders had to abide by existing rules.

“When consumers buy a loan online, we want them to be informed and understand what they’re signing up for,” Cordray said in a statement. “All lenders, from online start-ups to large banks, must comply with consumer financial protection laws.”

Pearson said the additional review could mirror what the CFPB has done in other industries.

The bureau recently sued auto lenders, alleging they charge higher interest rates to minority borrowers, and debt collection firms for using illegal tactics. He also enacted new rules requiring mortgage lenders to provide more information to borrowers.

“To the extent that there’s any kind of discrimination, that’s something the bureau would be very interested in. And to the extent that there’s anything they believe is unfair, misleading or abusive,” Pearson said.

State regulators are also looking into the industry. In December, the California Department of Business Oversight asked 14 market lenders, including Lending Club and Prosper, to submit detailed information about their companies, as part of an investigation that could lead to changes in the regulations of the State.

Companies have until Wednesday to submit information. Department spokesman Tom Dresslar said he believed all 14 companies would meet the deadline.

When the investigation first leaked, Dresslar said it had been in the works for months. But the announcement followed the revelation that San Bernardino gunman Syed Rizwan Farook had borrowed $28,500 from Prosper in the weeks leading up to the Dec. 2 rampage.

There was no evidence to suggest the loan was out of the ordinary.

The department asked lenders to provide information about their business in California, including the number and dollar amount of loans made over the past six years and details about their loan sales.

“We might decide that they’re not properly regulated or they’re not properly complying with California loan law,” Dresslar said. “We could decide that everything is fine. Our minds are wide open.

Some of the issues the state is likely to consider include whether lenders follow securities law when selling loans to investors and the extent to which lenders are subject to California securities law. loans.

Al Goldstein, chief executive of Chicago-based online lender Avant, another of the firms involved in the California investigation, said the heightened interest from regulators was not surprising.

“Our expectation was that we were going to come under scrutiny,” he said. “We always expected regulators to take an interest in it. It’s the nature of business.

Goldstein said the regulatory review could reveal some bad practices but shouldn’t be a problem for Avant and other companies that play by the rules.

“When regulators come to talk to us, they won’t have any surprises,” he said.

Although regulators have yet to take concrete action, one of the industry leaders recently made changes to its business, perhaps anticipating regulatory action.

The Lending Club said late last month that this would change the way it works with the bank that makes loans on behalf of the Lending Club.

In asking WebBank of Salt Lake City to issue its loans, Lending Club said it could charge nationwide interest rates based on the lending laws in the home state of the bank, Utah, rather than the law of the borrower’s home state.

But in an unrelated case last year, a federal appeals court ruled that if a bank had run out of interest in a loan, that protection might not apply.

In a statement last month, Lending Club said WebBank will now retain a stake in all loans, a move to ensure the company doesn’t have to comply with state-by-state rules.

“We believe this new structure will strengthen the foundation of our program to provide borrowers with the ability to access affordable credit nationwide,” Lending Club chief executive Renaud Laplanche said in a statement.

Even then, Dresslar said the question of whether the Lending Club and others are required to comply with state loan laws is something the Department of Corporate Oversight is looking into as part of its review. his investigation.

“Whether an online lender has a relationship with a bank that supposedly absolves them of the responsibility of reporting lending activity in California – we consider this an open question,” said he declared.

Twitter: @jrkoren

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