Consumer financial services at a crossroads: Marketplace lending

by White & Case LLP
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Supervision

Federal regulators

Although the CFPB does not have direct supervisory or regulatory oversight over marketplace lending generally, industry participants remain subject to consumer financial protection laws enforced by the Bureau. While no specific focus on such lenders was noted in the past years, the CFPB’s supervision and guidance on lending issues also generally applies to marketplace lending. For instance, the CFPB issued its first (and only) No-Action Letter in September 2017 to a marketplace lending platform that uses automated models for underwriting unsecured, non-revolving credit.3 However, in light of the Bureau’s recent interest in consumers with subprime or deep subprime credit histories, we expect the CFPB to shift its supervisory focus to marketplace lenders in an effort to ease subprime consumers’ access to credit markets.4 We also note that the Bureau issued a request for information regarding the use of alternative data to assess creditworthiness in February 2017,5 which would affect marketplace lenders, especially new fintech entrants and online platforms. Although the new CFPB leadership acknowledged that this initiative is ongoing, it did not provide any update regarding such request.6

The FDIC and the OCC have also highlighted certain risks involved in developing relationships between supervised financial institutions and third-party lenders. In March 2017, the FDIC updated its Examination Manual to address such concern, including how to manage and minimize associated risks.7 In June 2017, the OCC issued additional guidance for managing operational, compliance, reputation, strategic, and credit risk presented by third-party business relationships of national banks and federal savings associations.8

Although federal agencies have not been at the forefront in overseeing marketplace lenders, they could become more proactive should the OCC begin to license special-purpose national banks or the FDIC resume chartering ILCs and should marketplace lenders seek to obtain such charters.

Congress

In 2017, Congress considered several bills that could affect marketplace lenders. Notably, the House passed three bills that, if successful in the Senate, would substantially benefit marketplace lenders. The CHOICE Act and the Protecting Consumers’ Access to Credit Act, passed by the House in June 2017 and February 2018 respectively, would legislatively overturn the Second Circuit’s decision in Madden v. Midland Funding.9 If enacted, it would make interest rates on loans valid so long as they were valid at the time the loan was originated—regardless of whether the loan is later sold, assigned or transferred to a third party that could not have originated such a loan under state usury laws.10 The MOBILE Act, passed in January 2018, would allow online lenders to obtain a borrower’s personal information from a scanned image of his/her driver license.11 Other bills have also been proposed, offering additional ways to change the Madden holding.12

“The Second Circuit [Madden] decision has caused considerable uncertainty and risk for many types of bank lending programs. Being able to offer consistent terms nationwide is vital to scaling the Marketplace lending business, which in turn allows lenders to access cheaper investment capital and then pass the savings on to the borrowers.”
House Financial Services Committee  Chairman, Rep. Jeb Hensarling (R-TX)1

Enforcement

CFPB

The CFPB has not prioritized enforcement of the marketplace lending industry. In 2017, no new enforcement actions were introduced; instead (as described above), the Bureau issued its first No-Action Letter to an online lender.13 A federal court also resolved an action brought in 2013 by the Bureau against an online loan servicer that employed unfair, deceptive and abusive servicing practices by executing automatic debits from customers’ accounts and violating state usury laws. Although the Court sided with the Bureau, it only approved a fraction of the relief sought.14

Moving forward, we expect the CFPB to maintain the status quo for marketplace lenders, especially because such lenders represent a relatively low number of consumer complaints submitted to the Bureau.15 The CFPB’s new leadership is likely to rely on state AGs to police marketplace lenders—as the former CFPB leadership did.16

State regulators

By contrast, state financial regulators have actively sought to protect consumers from unlicensed online marketplace lenders. The New Hampshire Department of Banking was particularly active in this space, reaching several settlements with industry participants for operating without a required license.17 In March 2018, the Massachusetts Division of Banks also obtained a settlement with an online marketplace lender on similar grounds.18

Other state regulators have also taken notice and sought to gauge the risks associated with a growing marketplace lending industry. In March 2018, the New York Department of Financial Services (NYDFS) sent an online survey to marketplace lenders operating in New York in an effort to gather information regarding their business practices, including lending practices, interest rates and costs charged, and related consumer complaints and investigations. A report will follow by July 1, 2018.19 A similar initiative was undertaken by the FTC,20 as well as by the California Department of Business Oversight (DBO) in December 2015,21 the latter highlighting the industry’s significant growth rate and corresponding risks to consumer financial protection, while also stressing the need to implement a regulatory structure that works effectively for marketplace lenders.22 Although enforcement action has yet to materialize, state regulators’ interest may signal a shift in focus.

State AGs

Unlike state regulators, state AGs did not appear to focus on marketplace lenders in their 2017 enforcement efforts, with the exception of the Colorado AG, who filed two actions against industry participants that charged illegal delinquency fees and used an illegal “choice of law” provision.23 In light of the Bureau’s recent call for states to take the lead in enforcing consumer protection laws, we expect that state AGs will more actively enforce this space in the future.24

"I do not doubt the sincerity of the good actors that may be trying to navigate difficulty the Madden ruling potentially caused [but the CHOICE Act] will go much further to allow other parties . . . to evade or outright disregard state-level laws."27

Class action litigation

In March 2017, a leading industry participant avoided a class action brought in the District Court for the Southern District of New York for charging usurious interest rates and successfully compelled arbitration.25 In August 2016, a California federal court approved a US$2.4 million settlement in a class action lawsuit against a leading online marketplace lender over allegations that the online lender ran hard inquires on credit reports in violation of FCRA.26

Moving forward, increased state involvement may also lead to increased class action litigation targeting marketplace lenders.

Fintech outlook and marketplace lending

Fintechs in this space have principally focused on pairing borrowers with lenders online, and built AI-based scoring algorithms used to evaluate alternative data sources to assess creditworthiness and price loans. As in other market segments, these innovative approaches may yield significant benefits to subprime consumers, but also may raise novel fair lending and financial inclusion considerations.

1 Rachel Witkowski, Bill to Unwind Madden Ruling Clears House, But Senate Is Question Mark, American Banker (Feb. 14, 2018), https://www.americanbanker.com/news/bill-to-unwind-madden-ruling-clears-house-but-senate-is-question-mark?tag=00000156-32ff-d79b-a377-3effa4570000.
2 Id.
3 CFPB, No-Action Letter to Upstart, Inc., (Sept. 14, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_upstart-no-action-letter.pdf
4 CFPB, Semi-Annual Report, at 5 (Apr. 2, 2018), https://files.consumerfinance.gov/f/documents/cfpb_semi-annual-report_spring-2018.pdf.
5 CFPB, Request for Information Regarding Use of Alternative Data and Modeling Techniques in the Credit Process, 82 Fed. Reg. 11183 (Feb. 21, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-02-21/pdf/2017-03361.pdf
6 CFPB, Semi-Annual Report, at 13 (Apr. 2, 2018), https://files.consumerfinance.gov/f/documents/cfpb_semi-annual-report_spring-2018.pdf
7 FDIC, Compliance Examination Manual, Third Party Risk (Mar. 2017), https://www.fdic.gov/regulations/compliance/manual/7/vii-4.1.pdf.
8 OCC, Bulletin 2017-21 (Supplementing Bulletin 2013-23) (Jun. 7, 2017), https://www.occ.treas.gov/news-issuances/bulletins/2017/bulletin-2017-21.html
9 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).
10 H.R. 10 (Financial CHOICE Act of 2017), 115th Cong. (Jun. 26, 2017); H.R. 3299 (Protecting Consumers’ Access to Credit Act of 2017), 115th Cong. (Jul. 19, 2017). 
11 H.R. 1457 (MOBILE Act of 2017), 115th Cong. (Mar. 9, 2017).
12 See, e.g., H.R. 4439 (Modernizing Credit Opportunities Act), 115th Cong. (Nov. 16, 2017) (amending several federal laws to circumvent the Madden ruling); H.R. 3760 (Protecting Consumers from Unreasonable Credit Rates Act of 2017), 115th Cong., (Sept. 13, 2017) (establishing a federal usury limit of 36%); S. 1642 (Protecting Consumers’ Access to Credit Act of 2017), 115th Cong. (Jul. 27, 2017) (considering interest rates on loans valid so long as they were valid at the time the loan was originated, regardless of whether or not the loan is later sold, assigned, or transferred to a third party).
13 CFPB, No-Action Letter to Upstart, Inc., (Sept. 14, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_upstart-no-action-letter.pdf.
14 Consumer Fin. Prot. Bureau v. CashCall, Inc. et al., case no. 2:15-cv-07522 (N.D. Cal. Sept. 25, 2015).15 CFPB, Monthly Complaint Report, Vol. 24 (Jun. 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/

201706_cfpb-Monthly-Complaint-Report-50-State.pdf.
16 See CFPB, Prepared Remarks of CFPB Director Richard Cordray at the National Association of Attorneys General (Feb. 26, 2014), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-national-association-of-attorneys-general
17 See In re Klarna Inc., case no. 17052 (Nov. 8, 2017), https://www.nh.gov/banking/orders/enforcement/documents/17-052-co-20171108.pdf; In re RockLoans Marketplace LLC, case no. 17-071 (Oct. 24, 2017), https://www.nh.gov/banking/orders/enforcement/documents/17-052-co-20171108.pdf; In re Upstart Network, Inc., case no. 16-034 (Dec. 20, 2016), https://www.nh.gov/banking/orders/enforcement/documents/16-034-co020161220.pdf; In re Prosper Funding LLC and Prosper Marketplace, Inc., case no. 16-035 (Nov. 23, 2016), https://www.nh.gov/banking/orders/enforcement/documents/16-035-co-20161123.pdf.
18 In re LendingClub Corp., et al., 2018-0001 (Mar. 12, 2018), https://www.mass.gov/consent-order/lendingclub-corporation-and-springstone-financial-llc
19 NYDFS Sends Survey Request To Online Lenders, The National Law Review (Mar. 21, 2018), https://www.natlawreview.com/article/nydfs-sends-survey-request-to-online-lenders. The NYDFS initiative follows two bills introduced in the New York Assembly and Senate, directing the financial regulator to issue an online lending report by April 15, 2018. See NY A.08938, Gen. Assemb. (Jan. 8, 2018); NY S.07294, Gen Assemb. (Jan. 5, 2018).
20 FTC, A Survey of 15 Marketplace Lenders’ Online Presence (Jun. 9, 2016), https://www.ftc.gov/system/files/documents/public_events/944193/

a_survey_of_15_marketplace_lenders_online_presence.pdf
21 California Dep’t of Business Oversight, California DBO Announces Inquiry into ‘Marketplace’ Lending Industry (Dec. 11, 2015), http://www.dbo.ca.gov/Press/press_releases/2015/DBO%20Inquiry%20Announcement%2012-11-15.pdf.
22 California Dep’t of Business Oversight, Summary Report Of Aggregate Transaction Data (Apr. 8, 2016), http://www.dbo.ca.gov/Press/press_releases/2016/Survey%20Response%20Summary%20Report%2004-08-16.pdf. See also California Dep’t of Business Oversight, California Online Lending Grows by More Than 930% Over Five Years (Apr. 8, 2016), http://www.dbo.ca.gov/Press/press_releases/2016/Survey%20Response%20Release%2004-08-16.pdf
23 Colorado v. Marlette Funding LLC, case no. 1:17-cv-00575-PAB-MJW (D. Colo. Mar. 3, 2017); Meade v. Avant of Colorado LLC, case no. 1:17-cv-00620-WJM-STV (D. Colo. Mar. 9, 2017).
24 Rachel Witkowski, AGs, Not CFPB, Should Take Greater Role On Enforcement: Mulvaney, American Banker (Feb. 28, 2018), https://www.americanbanker.com/news/ags-not-cfpb-should-take-greater-role-on-enforcement-mulvaney.
25 Bethune v. LendingClub Corp. et al., case no. 1:16-cv-02578 (S.D.N.Y. Apr. 6, 2016).
26 Heaton v. Social Fin., Inc., case no. 3:14-cv-05191 (N.D. Cal. Aug. 10, 2016).
27 Id House Financial Services Committee, Ranking Member, Rep. Maxine Waters (D-CA)

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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.

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