Online lenders brace for new regulatory framework

NEW YORK, Sept 16 (IFR) - US regulators are turning up the heat on the struggling online lending sector amid worries the nascent industry is not doing enough to protect customers or prevent reckless lending practices.

Top federal bank regulator Thomas Curry, US Comptroller of the Currency, this week told marketplace lenders in Washington D.C. to expect a tougher regulatory framework for the industry this autumn.

“The framework will support responsible innovation,” Curry told attendees gathered at the marketplace policy summit.

“Innovation can’t be responsible if it abuses customers.”

The specifics are not yet clear, though Curry said the Office of the Comptroller of the Currency would be collaborating with other regulators.

Calls for tougher guidelines which are more in line with those that govern the rest of US banking have been building for a while following an explosive expansion in the online lending industry and a series of high-profile missteps.

Some US$29bn of consumer loans were originated by so-called marketplace lenders in 2015 - a six-fold increase from 2013, according to the OCC.

Recent scandals, including those at Lending Club, have quashed loan growth this year - but stricter regulation is still needed, market participants say.

“Some of it has been self-inflicted,” said Joe Toms, a former executive at both Lending Club and Prosper, and currently the president of Freedom Financial Asset Management.

You have to have strict lending standards, and know your regulatory issues are buttoned up, he said.


Some are also leery about the potential for lenders’ algorithms to run afoul of existing fair lending practices.

Tracking minivan ownership, for example, to cherry-pick potential borrowers could be breaking consumer protection rules and leave lenders susceptible to lawsuits.

Bob Linderman, Freedom Financial Network’s general counsel, warned that using such data as a proxy for lending based on assumptions of a person’s marital status is illegal under the Equal Credit Opportunity Act.

Data from AARP, a popular association of retired workers, also cannot be used as a proxy for age discrimination, he said.

“If there wasn’t a need for it, you wouldn’t have them,” Martin Mitchell, a managing director at compliance consultant firm Professional Bank Services, said about the anti-discrimination safeguards for borrowers.


Another worry is possible fallout from a recent California federal district court decision against online payday lender CashCall.

The court ruled in late August that CashCall used deceptive practices when trying to collect on loans in 16 states that exceeded local, legal interest rate caps.

The decision can be appealed. But the ruling sparked increased concern around the practice of “exporting” lender-friendly interest rate regimes across state lines.

“Investors are wary to buy loans where interest rates are considered usurious,” said Jennifer Taub, a professor focused on financial reform at Vermont Law School, at the conference.

“I hope regular marketplace lenders distinguish themselves from this.”

Gilles Gade, CEO at Cross River Bank, said the onus was on marketplace lenders to make loans that adhere to high lending practices.

“We either believe in our loans we make, or we don’t,” Gade said.

Cross River partners with more than a dozen marketplace lenders, but keeps a portion of each loan it originates and conducts its own vetting and compliance checks.

Other also advocated responsible business practices.

“We believe you need to have skin-in-the-game,” said Toms. (Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Shankar Ramakrishnan)