On March 7, the Consumer Financial Protection Bureau ("CFPB") announced it was accepting consumer complaints regarding online marketplace lenders.1 From the tone of the early press, this has been perceived by some as a significant new event, with the Bureau finally "taking aim" at marketplace lenders. A closer reading of the bulletin, however, reveals that the CFPB's announcement may be more show than substance.
The More Things Change, the More They Stay the Same
For example, the CFPB announced that it is "now"
taking complaints regarding online marketplace lenders. In fact,
depending on the product offered by a particular lender, the Bureau
has been accepting complaints about marketplace lenders for quite
some time. This is because the CFPB's consumer complaint system
was built out product-by-product—for example, credit
cards,2 then mortgages,3 then student
loans4—and not based on the market delivery
channels of those products, such as online versus storefront or
bank versus non-bank.
The CFPB's own press release alludes to the product-by-product
structure of the CFPB's consumer response system when it
states: "[b]ecause marketplace lenders offer several types of
consumer loans, a consumer submitting a complaint should select
among the different complaint categories for products and services
that best apply to their situation. For example, a consumer can
select products such as 'mortgage,' 'consumer
loan,' or 'student loan.'" Given this
product-oriented focus, it should not be surprising that consumers
were already filing complaints about marketplace lenders before
this bulletin, and that those lenders have responded, as confirmed
by a review of the CFPB's consumer complaint
database.5
So what has changed about the CFPB's gathering of complaints
regarding online marketplace lenders? The answer, in short, is not
much. The front page of the CFPB's complaint webpage
doesn't give the option to select "marketplace
lending" as a product type, and there is no direct reference
to marketplace lending on that page.6 There are no
references to marketplace lending when a consumer seeks to submit a
complaint about a mortgage, auto loan, or student loan. Indeed,
other than a single sentence on the "Other Consumer Loan"
complaint page, clarifying that marketplace loans are a type of
installment loans,7 there are no references to
marketplace lending or options to select marketplace lending as a
complaint type anywhere on the Bureau's complaint portal.
Key Takeaways
Despite the lack of substance in the CFPB's announcement,
the press release and accompanying consumer bulletin do contain
some important lessons for businesses that are in or considering
entering online marketplace lending.
First, the release signals that the CFPB intends to stake out
significant turf regarding this emerging market. Online marketplace
lenders have a number of state and federal regulators who may claim
jurisdiction over their activity. As a national agency with
authority over both banks and non-banks, the CFPB may see itself as
best positioned to comprehensively address this market. Its ability
to do that, however, is hampered by its current lack of supervisory
authority over most non-bank marketplace lenders.
This lack of supervisory authority—which the CFPB recently
stated it intends to remedy by passing a larger participant rule
regarding installment lending8—leaves the Bureau
with three principal levers: consumer education, consumer response
(i.e., the complaint process), and enforcement. The March 7 release
touches on two of these three levers, by providing consumer
education and inviting consumer complaints.
Does that mean an onslaught of CFPB enforcement activity
specifically targeted at marketplace lenders is close at hand? We
think not, based on the CFPB's own lengthy list of near-term
priorities set forth in its February 25 blogpost.9 That
document, which outlines nine broad priorities over the next two
years, addresses the concept of open-use credit but barely touches
on marketplace lending, focusing more on traditional payday lending
and related debt collection practices.
Given that the CFPB will be hard pressed to accomplish even these
nine identified priorities, we think it unlikely it has the
capacity to add a tenth, channel-specific priority at this time.
Rather, we expect the CFPB to rely primarily on consumer education
and the bully pulpit in the near term while it gathers information
about how the market functions. That said, if the Bureau's
priorities touch on your company's consumer lending, you may
expect an increased focus, regardless of the channels you
use.
Second, the release highlights the CFPB's expectations
regarding online lenders' compliance management systems.
Advocates for depository institutions have at various times
criticized the CFPB for having a double standard when it comes to
compliance expectations, permitting a higher tolerance for mistakes
when it comes to non-banks. In his statement about marketplace
lending, however, Director Cordray made clear that when it comes to
consumer lending, the CFPB expects compliance from all lenders,
from online startups to large banks.
While not necessarily a cause for alarm, non-bank lending entities
should ensure that their compliance programs reasonably fit the
size and complexity of their business, and that appropriate
consumer protections are in place. For those lenders who have
focused on growth, technology, and customer acquisition over legal
compliance, the time to add a new priority is now. Because while we
do not expect sweeping enforcement activity in the near term, the
CFPB may look for an outlier in the market to make an example of
and signal its enforcement presence.
Third, the CFPB's announcement may be seen as an intentional
effort to encourage consumers to complain about their experiences
with the online marketplace lending industry. Regardless of whether
the CFPB uses these complaints to generate enforcement leads, if
the Bureau is successful in drawing a substantial number of
complaints, it will be significant to market participants. The
CFPB's complaint database, which contains unverified and
anonymous complaints, is searchable by other regulators and by the
plaintiffs' bar, who may consider the information useful in
their own efforts.
Further, given the competitive nature of the marketplace, the
reputational impact of these complaints can have serious
consequences on individual companies and potentially the entire
fledgling industry. Marketplace lenders need to understand the
Bureau's complaint system and figure out how to limit any
negative impact both by heading off complaints before they enter
the system and dealing with them effectively once they have been
made.
While the CFPB's marketplace lending announcement is not really
anything new, market participants should not be complacent but
should instead use this time to build out or fine-tune their
compliance functions in preparation for increased CFPB interest
down the road.
Footnotes
1 Press Release, CFPB, "CFPB Now Accepting Complaints on Consumer Loans from Online Marketplace Lender" (Mar. 7, 2016).
2 Press Release, CFPB, "CFPB Ready to Help Consumers on Day One" (July 21, 2011).
3 Sartaj Alag, "CFPB Mortgage Complaint System Is Up and Running," CFPB BLOG (Jan 5, 2012).
4 Press Release, CFPB, "CFPB Now Taking Private Student Loan Complaints" (Mar. 5 2012).
5 CFPB,Consumer Complaints (last visited Mar. 9, 2016).
6 "Submit a Complaint," CFPB (last visited Mar. 9, 2016).
7 "Submit an Online, Store, or Other Loan Complaint to the CFPB," CFPB (last visited Mar. 9, 2016) ("Other loan complaints can be about problems ... other installment loans, such as those used for person-to-person or "marketplace" lending....").
8 Kelly Cochran, "Fall 2015 Rulemaking Agenda," CFPB BLOG (Nov, 20, 2015) (discussing plans to develop a "larger participant" rule for installment lending).
9 CFPB, "Policy priorities over the next two years" (Feb. 25, 2016).
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