Online marketplace lenders have a target on their backs. Their steep rise in online lending by such companies as Lending Club and Prosper are attaining Billion dollar levels. Expanding digital and mail advertising campaigns are now reaching out to millions of consumers offering eye-catching lending deals. Right on cue, to no one’s surprise, the regulatory watchdogs are landing and they have the lenders in their crosshairs. Could this put the brakes on the online lending boom?
As marketplace lending grows and matures it is natural, even expected, for policy makers and regulators to stand up and take notice. While in the overall world of finance direct online lenders are still relatively small, more and more frequently amounts are measured in billions – not millions – as lending inevitably moves online. At some point in the future these numbers will be discussed using the term trillions as the total addressable market for marketplace lending is huge.
The Consumer Financial Protection Bureau (CFPB) is the progeny of the Dodd-Frank Act signed into law in 2010. The toddler agency has grown rapidly in the rush to right the wrongs of the Great Recession. It describes itself as a 21st century agency that empowers consumers to take control over their finances. While only a few years old, the regulator with the power of enforcement has a budget topping $600 million for 2016 (for comparison sake the octogenarian SEC has a budget of about $1.5 billion). From 2014 to 2016, full-time employees are expected to jump by 22.5% to 1,690 for this fiscal year. But when you are the new financial regulator on the block – you are looking to do more, not less, to justify that annually increasing budget. Non-bank lenders may find themselves lining up in the sights of CFPB as its empire expands.
Now the CFPB is not the only risk. The US Department of Treasury launched a study into marketplace lending last summer. While not a regulator per se, Treasury is representative of the growing government interest targeting marketplace lending.
The expanding regulatory scrutiny has not gone unnoticed by the online lenders who are well-versed in how the banks have been morphed into regulated utilities. A lesson learned is that the online lenders will be smart to step out in front of the anticipated microscope treatment of both federal and state agencies by ensuring that their practices and benefits to consumers are fair and well understood.
The industry has not been completely preoccupied with their dramatic platform growth as to ignore the potential for a shifting regulatory landscape. The announcement of the Small has seen almost 40 signatories join to “put borrowers first”. Engendering a transparent and consumer-friendly lending environment has been embraced by these entities including major players like Lending Club, Funding Circle, DealStruck, Bond Street and more. But this is not enough. The consumer side of the equation must be addressed too. The industry must step up and define, as a group, the best practices necessary to thrive and grow. And this must be accomplished with a team of representatives visiting the halls of Congress, Treasury, the CFPB and more.
Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group
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