US Treasury Eyes Online Marketplace Lending

by Dechert LLP
Contact

In an interesting and unusual development, the Treasury Department has issued a notice seeking public input on the online marketplace lending business for small businesses and consumers (“Notice”), setting forth 14 questions for comment. Treasury indicates that it is interested in the potential for marketplace lending to expand access to credit to historically underserved market segments. Of particular note, Treasury looks for input on how the financial regulatory framework should evolve to support the safe growth of the industry. Treasury also invites market participants to provide input that would help it to become better informed on the impact of online marketplace lending on the broader economy. The deadline for filing comments is September 30, 2015.

Structure of the Marketplace Lending Sector

The Notice describes the recent growth of the both the small business and consumer lending components of the marketplace lending sector. It notes that the sector began as peer-to-peer lending which allowed investors to provide financing to individual borrowers. It has now expanded as venture capital funds, hedge funds and banking entities have begun to participate in the sector.

The Notice explains that marketplace lenders provide loans through an online method rather than physical locations, generally using automated underwriting models. It describes three models used in the sector:

  • Balance sheet lenders that retain credit risk in their own portfolios and are generally funded by private funds;
  • Online platforms (formerly referred to as “peer-to-peer”) that, through the sale of securities such as member-dependent notes, obtain the financing to enable investors to fund borrowers and as a result of the contingent nature of the payment obligation on the securities do not retain credit risk on the loans; and
  • Bank-affiliated online lenders that are funded by banks that originate loans and directly assume the credit risk.

The Notice indicates that many marketplace lenders have pursued a model in which they partner with banks. Under these arrangements, a bank acts as the lender to borrowers that apply through an online platform. The loans are then purchased by another party, which could be an investor in a transaction facilitated by a marketplace lender – or by the marketplace lender itself – which funds the loan purchase by note sales.

The legal implications of a bank origination model in the consumer sector are currently the focus of industry concern as a result of a ruling by the U.S. Court of Appeals for the Second Circuit which found that usury preemption available to a national bank did not transfer to a purchaser of a loan originated by the bank. For further information, please refer to DechertOnPoint, Second Circuit Denies Request for Rehearing in Madden v. Midland Funding Case.

Risk Retention Considerations

As discussed above, Treasury asks interested parties to respond to 14 separate questions. One question related to risk retention can be expected to receive particular attention and comment from market participants.

Just as other markets begin to grapple with the implications of the final risk retention rule adopted in October 2014, Treasury asks the extent to which marketplace lenders should be required to have “skin in the game” (i.e., whether marketplace lending should be subject to risk retention, perhaps even in the non-securitization context). Market participants are currently contemplating whether “skin in the game” requirements would have the effect of aligning investor interests with platform or lender interests – and, if so, whether any such alignment or realignment is necessary considering the business model. To date, one of the strengths of marketplace lending has been the ability of marketplace lenders to remain adaptive and provide access to capital for underserved markets. We believe the implications of applying risk retention to online marketplace lenders will be of significant concern to market participants and anticipate significant response to this particular question.

Regulatory Implications

In entering into the marketplace lending area, Treasury does not suggest that the sector has any financial stability implications. Nor does it suggest that there are indications of problematic practices in the sector.

Treasury notes that, in some instances, marketplace lenders are subject to regulation by the Consumer Financial Protection Bureau, the Federal Trade Commission or other federal agencies. Such federal regulation would generally be focused on consumer rather than small business lending.

Questions in the Notice suggest that Treasury may follow-up on the Notice with recommendations for regulatory or legislative initiatives in regard to the marketplace lending area. Such initiatives could affect the interests of marketplace lenders, their investors, banks and borrowers.

Interested parties should consider providing Treasury with the benefit of their perspectives on marketplace lending practices and issues as it begins to evaluate what, if any, actions the Federal government should take in this area.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.