United States: Understanding The Evolving Legal And Regulatory Landscape For Consumer Marketplace Lending

Last Updated: September 28 2015
Article by Jonathan L. Pompan and Andrew E. Bigart

As online consumer marketplace and peer-to-peer lending (Marketplace Lending) continues to grow into the mainstream, Marketplace Lending platform operators (Operators), lenders, and their service providers will come under greater scrutiny from federal and state regulators and policymakers. This pressure will likely increase as small dollar lenders, banks, credit unions, and institutional investors shift from traditional lending to Marketplace Lending in search of new markets and the potential for higher (or safer) returns. And, as is usually the case, additional scrutiny will lead to questions of whether there are adequate consumer protections for Marketplace Lending.

This article summarizes the complex and evolving regulatory framework for Marketplace Lending and provides suggested best practices for mitigating potential risk. In particular, we see three broad trends that will drive operational and regulatory risk for the industry moving forward:

  1. Increased operational costs driven by regulatory pressure;
  2. Increased regulatory and examination risks, most likely pushed by the Consumer Financial Protection Bureau (CFPB) and Securities and Exchange Commission (SEC); and
  3. Increased emphasis on compliance with consumer protection laws and regulations, in particular the need to implement an effective, efficient compliance management system (CMS).


We address these challenges below, along with suggestions for how Operators, lenders, and others in the industry can minimize potential regulatory risk and set up their businesses for long-term success.

What is Marketplace Lending?

With origins in crowdfunding, Marketplace Lending involves the use of online and other financial technology (FinTech) to allow direct lending between individuals (e.g., peers) in the consumer lending marketplaces. A traditional Marketplace Lending Operator, for example, manages an online platform that connects consumers seeking to obtain loans with other consumers interested in lending their own money to borrowers. The Operator does not lend its own funds; rather, the Operator makes money by charging fees and interest for each loan originated through the platform. In recent years, Operators have begun to expand operations by partnering with banks and institutional investors to fund lending platforms. A hedge or private equity fund, for example, might fund loans through a platform or purchase loans that have been bundled and securitized.

Although Marketplace Lending has received considerable attention in recent years as a disruptive force, the business model, at a basic level, involves many of the same steps as traditional lending – the marketing, underwriting, closing, servicing, securitization (in some cases), and collection of loans (if defaulted). All of these activities, as outlined below, have traditionally been subject to significant state and federal regulation and oversight. The fact that these activities take place through a different mechanism may not always protect Operators, lenders, and their service providers from federal and state regulatory scrutiny.

What Federal and State Laws and Regulations Govern Consumer Marketplace Lending?

Marketplace Lending—like other forms of lending—is subject to a host of federal and state consumer protection laws and regulations. So much so, in fact, that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) directed the U.S. Government Accounting Office (GAO) to issue a report exploring potential future approaches for regulating Marketplace Lending. The GAO report, issued in 2011, identified two approaches: The first, an SEC-centered approach, would focus on protecting investors in connection with the purchase of federally regulated securities. The second, a CFPB-centered approach, would place the CFPB in charge of regulating Marketplace Lending loans as "consumer financial products."

Although the GAO did not recommend a particular approach, the CFPB is well positioned to take the lead in supervising and regulating Marketplace Lending. The CFPB, after all, has broad supervisory and examination, rulemaking, and enforcement authority over traditional lenders and a broad consumer protection mandate. Until a lead regulator emerges, however, the Marketplace Lending industry must be cognizant of the overlapping roles of the various federal (and even state) regulators. These regulators include, among others:

  • Consumer Financial Protection Bureau. The CFPB is an independent federal agency responsible for enforcing "Federal consumer financial law," including Dodd-Frank's prohibition on unfair, deceptive, or abusive acts or practices (UDAAP) in consumer financial products and services. The CFPB's supervisory and enforcement authority extends to certain banks and nonbank entities that offer or provide financial products or services, including any "larger participants" in markets for consumer financial products and services that the CFPB defines by rule.
  • Federal Trade Commission (FTC). The FTC is responsible for enforcing many federal consumer protection laws. In addition, the FTC investigates nonbank financial services providers that may be engaged in unfair or deceptive acts or practices. The FTC, for example, recently brought an enforcement action against an individual who engaged in deceptive acts and practices in raising funds for a crowdfunding campaign.
  • Banking Regulators. Depository institutions are subject to comprehensive federal regulation and examination to ensure their safety and soundness. These regulators include the Office of the Comptroller of the Currency; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; National Credit Union Administration; and the Office of Thrift Supervision for federal thrifts.
  • Securities and Exchange Commission. The SEC enforces federal securities regulation to protect investors through disclosure requirements and antifraud provisions that can be used to hold companies liable for providing false or misleading information to investors. Several Marketplace Lending platforms have registered with the SEC in connection with selling securities in the form of loan promissory notes to the public.
  • State Regulation. State regulators often supervise nonbank financial services providers; however, the scope of state-level powers and levels of supervision vary by state. In addition, most states have usury, collection, and advertising laws that are enforced by state attorneys general. In addition, many states have licensing requirements that extend to lenders, brokers, and debt collectors that potentially apply to Marketplace Lending.


Together, each of the regulators noted above exercises a degree of jurisdiction over the Marketplace Lending industry. In particular, the business of consumer lending has long been subject to a host of federal and state laws and regulations, including:

  • Bank Secrecy Act—Requires financial institutions to adopt anti-money laundering policies and procedures;
  • Electronic Fund Transfer Act—Protects consumers by establishing the rights, liabilities, and responsibilities of parties in electronic funds transfers (EFTs);
  • Equal Credit Opportunity Act—Prohibits discrimination against credit applicants, establishes guidelines for evaluating credit information, and requires written notification when credit is denied;
  • Fair Credit Reporting Act—Requires a permissible purpose to obtain a credit report, "furnishers" to report information to credit reporting agencies (i.e., credit bureaus) accurately, notice by creditors who take adverse action based on credit reports, and creditors to develop and maintain an identity theft prevention program;
  • Fair Debt Collection Practices Act—Prohibits certain abusive and unfair acts and practices in connection with third-party debt collection of consumer debts;
  • Gramm-Leach-Bliley Act—Restricts disclosure of nonpublic personal information to nonaffiliated third parties, and requires financial institutions to notify their consumers about their information-sharing practices and the consumers' right to "opt out" in certain circumstances if they do not want their information shared with certain nonaffiliated third parties;
  • Securities Act of 1933—Requires an issuer engaged in the public offering of securities to register the securities with the SEC; and
  • Truth in Lending Act—Establishes uniform methods for calculating the cost of credit, disclosing credit terms, and resolving errors on certain types of credit accounts.

Practical Considerations for Consumer Marketplace Lending

Within this increasingly aggressive regulatory environment, there are, fortunately, steps that Operators, lenders, and their service providers can take to limit potential scrutiny. The starting point is the implementation of a comprehensive CMS that covers the entity's business operations and compliance with applicable laws.

Development of a Compliance Management System. A CMS should be integrated into a company's operations at every level. The focus on compliance must be both top-down and bottom-up, with the board and senior management exercising appropriate oversight to ensure that employees have the right direction, training, resources, and support to carry out the compliance function.

  • Provide appropriate training for board members, management, and staff that covers compliance with federal financial and consumer protection laws.
  • Implement underwriting policies with an eye toward preventing potential consumer harm.
  • Implement a process for regular internal and external audits to review operations for compliance with applicable legal requirements.
  • Develop systems to monitor for, respond to, and resolve consumer complaints and inquiries.
  • Develop third-party oversight, management, and training to ensure that service providers comply with applicable federal financial and consumer protection laws.


Prepare for and Cooperate with Examinations. While a regulator may lead with an investigation and not an examination, preparing in advance for a potential exam can help a company focus its compliance efforts and mitigate regulatory risk. In the event of a CFPB or other regulatory examination (or need for state licensure), the examinee should take steps to present its operations and compliance policies in the best possible light:

  • Designate an employee (preferably within the legal or compliance department) to serve as the Point of Contact for the regulator examination team and the document collection and production process.
  • Prepare and train staff who will likely interface with regulatory examiners.
  • Set up an initial meeting with examiners to explain the company's business model and set appropriate expectations.
  • Work with counsel to review all submissions to the regulator for responsiveness, privilege, and consistency.
  • Respond in a timely manner to examiner requests—work with examiners to identify their key areas of interest and how the company can provide the requested information.
  • Manage examiner expectations and maintain clear lines of communication.
  • Review the draft examination report closely to identify any factual inaccuracies or areas of potential misunderstanding. If the regulator identifies any areas of potential concern, work with counsel to identify steps to "self-correct" or resolve the issues prior to the regulator's issuance of a final examination report (as appropriate).


Monitor Legal Developments and Be Aware of Lending Activities That May Attract Heightened Scrutiny. The Marketplace Lending industry should keep a close eye on federal and state legal developments. As the legal framework continues to evolve, the industry must keep pace or risk drawing the attention of regulators. On March 26, 2015, for example, the CFPB announced several proposals to regulate short-term and longer-term consumer lending (focused, primarily, on payday and related lending). As explained by Director Richard Cordray in announcing the proposals, the Bureau is concerned that some lending products may extend "credit to people in a way that sets them up to fail." In this regard, the Bureau's proposals are an example of its focus on holding financial institutions responsible under certain circumstances for confirming that individual consumers can afford the institution's products or services. Although the proposals do not apply to Marketplace Lending, they nevertheless provide insight into the types of lending practices that have drawn scrutiny.

* * * * * * * * * *

As small dollar lenders, banks, credit unions, and institutional investors shift into this new market, so too will the regulators that enforce these laws and regulations. And, with the creation of the CFPB, there is now a single regulator of consumer financial products and services that has rulemaking, enforcement, and examination authority, including, potentially, over Marketplace Lenders and their service providers. Although the CFPB has been on the scene for only a few years, the Bureau has shown a willingness to use its tools aggressively to address perceived weaknesses in markets for consumer products and services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Richards Kibbe & Orbe LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Richards Kibbe & Orbe LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions