Are Personal Loans Becoming Safer With New Regulations?

The nation’s consumer watchdog agency, the Consumer Financial Protection Bureau, is planning to supervise the largest online lenders beginning in late 2017, according to press reports. This would mark the first time that marketplace lenders, chiefly peer-to-peer (P2P) platforms, would face direct CFPB regulation the way that banks currently do.

Marketplace lenders typically offer unsecured personal loans that are paid back in regular installments. P2P online platforms bring together private lenders with borrowers, and offer a good alternative to traditional loans.

The proposed expansion of the CFPB’s supervisory powers would create a role in overseeing installment lenders as well as car-title lenders. The Bureau’s move is in response to the growing popularity of marketplace lenders such as LendingClub and Prosper Marketplace.

Vehicle-title loans and small-dollar installment loans are not new, but the ubiquitous growth of online P2P marketplace lenders is a new wrinkle that significantly enlarges the audience for these loans.

The CFPB had been expected to propose its new rules by September 2016, but the inclusion of P2P marketplace lenders will probably push back the unveiling of the new proposals for several months, making it unlikely that the rule would go into effect before late 2017. A spokesperson for the CFPB said that any comment on the rules would be “premature.”

Installment lenders are not to be confused with payday lenders, which require full repayment on a short deadline rather than sponsoring installment payments.

Car-title lenders issue installment loans collateralized by the borrower’s vehicle. Many P2P marketplace lenders initially underwrite the loans they make, and then sell the loan notes to investors. P2P lenders can offer a variety of loans, including personal loans, mortgages, auto loans and student loans.

The CFPB hinted last month that it was heading down this path when it issued a notice to consumers that it was accepting complaints about online marketplace loans. The notice mentioned that marketplace lenders have not been subject to the same extent of oversight as credit unions and traditional banks.

The new CFPB proposal would fill a regulatory gap that exists due to the lack of direct federal supervision of marketplace loans. However, these lenders are subject to general consumer protection laws overseen by the Federal Trade Commission and the CFPB, and publicly owned lenders must meet the reporting requirements of the U.S. Securities and Exchange Commission.

The new rules will allow the CFPB to oversee large marketplace lenders’ operations and to access their data without first opening an enforcement action that might be challenged in court.

The CFPB’s new oversight will cause marketplace lenders to reconsider their infrastructure and regulatory compliance models, in the opinion of Michael Gordon, a former senior official at the CFPB.

At least on marketplace lender executive, LendingClub CEO Renaud Laplanche, has already praised the prospects for increased regulation, saying that improved disclosure and transparency would play to the lender’s strength. For some other marketplace lenders, the new rules will signal a wake-up call to improve their compliance procedures.