CFPB Actions Put Marketplace Lenders in the Crosshairs

Yesterday, the Consumer Financial Protection Bureau (CFPB) announced that it will begin to accept complaints related to online marketplace lenders.

The Bureau also released a  Consumer Bulletin that provides an overview of marketplace lending and outlines tips for consumers who are considering taking out loans from these types of lenders.

The simultaneous actions are a sure sign that the CFPB intends to increase the regulatory scrutiny under which those firms operate. “When consumers shop for a loan online we want them to be informed and to understand what they are signing up for,” said CFPB Director Richard Cordray. “All lenders, from online startups to large banks, must follow consumer financial protection laws. By accepting these consumer complaints, we are giving people a greater voice in these markets and a place to turn to when they encounter problems.”

Marketplace lending (sometimes referred to as “peer-to-peer” or “platform” lending) is a relatively new kind of alternative lending. Marketplace lending uses online “platforms” to connect consumers or businesses who seek to borrow money with investors willing to buy or invest in the loan. Generally, the marketplace lending platform handles all underwriting and customer service interactions with the borrower. Once a loan is originated, the company generally makes arrangements to transfer ownership to the investors while it continues to service the loan. The platform collects principal and interest payments from borrowers and sends the payments, less certain fees that the platform keeps, to investors. Marketplace lending platforms generally market both new loans and loans that can be used to refinance existing debt.

The Consumer Bulletin offers information for consumers who are considering a loan from a marketplace lender, including:

• Important consumer protections apply: Marketplace lenders are required to follow federal and state consumer financial protection laws.
• Be careful about refinancing certain types of debt: While some marketplace lenders may advertise lower interest rates, in some cases consumers could lose important loan-specific protections by refinancing an existing debt. Specifically, consumers should know that they may sign away certain federal benefits, such as income-driven repayment for federal student loans or servicemember benefits related to debt incurred prior to entering active duty.

The consumer bulletin also highlights general steps consumers should take when shopping for a loan, including a loan from a marketplace lender. Key tips include:

• Look at income and spending: Before taking out a loan, consumers should evaluate how much they can afford and really need to borrow. Consumers should understand the total cost of the loan as well as what the total monthly cost will be each month.
• Check credit reports: Consumers should check their credit report to make sure there are no errors that could keep them from getting credit or getting the best available terms on a loan. Consumers should be sure the information in the report is accurate and up-to-date.
• Shop around: Consumers who consider interest rates offered by multiple lenders or brokers may see substantial differences in the rates. Consumers should compare the costs and terms of loans to find the deal that is best for them.

insideARM Perspective

insideARM has written extensively in the past on “alternative” and “marketplace” lending. The industry is growing on an exponential basis. Marketplace lenders are viewed as the new frontier (i.e. “potential client”) by many in the ARM industry.

Last Fall, insideARM held its inaugural First Party Outsourcing Summit. Several marketplace lenders participated in the conference. (Editor’s Note: The second annual First Party Outsourcing Summit will be held October 17-19 at the Eaglewood Resort & Spa – Itasca, Illinois (just outside of Chicago).

Not all marketplace lenders are the same; they come in various shapes and sizes. For example, some focus primarily on consolidation loans, some on sub-prime borrowers, others on refinancing of student loans, and still others on small business loans.  The industry is diverse. There are many variations on the same theme.

Yesterday’s announcement is a clear indication that the CFPB is now recognizing that millions of consumers take out personal loans online.  The announcement and Consumer Bulletin will increase consumer awareness of CFPB regulation of the industry, and correspondingly increase the number of complaints received.