The U.S. Department of the Treasury has issued a request for information (RFI) regarding online marketplace lending. The RFI reflects the Treasury Department’s recognition that online marketplace lending “is a rapidly developing and fast-growing sector that is changing the credit marketplace” even though it “is still a very small component of the small business and consumer lending market.” The RFI is published in today's edition of the Federal Register, and responses are due on or before August 31, 2015. This is a very significant development since this scrutiny may presage more regulation of this industry.

The RFI describes “marketplace lending” as “the segment of the financial services industry that uses investment capital and data-driven online platforms to lend directly or indirectly to small businesses and consumers.” It describes marketplace lenders as falling into three general categories:

  • Balance sheet lenders that retain credit risk and are typically funded by venture capital, hedge fund or family office investments;
  • Online platforms that obtain financing through the sale of securities to enable third parties to fund borrowers and do not retain credit risk of  borrower non-payment; and
  • Bank-affiliated online lenders funded by a commercial bank that originate loans and directly assume credit risk.

It also notes that some companies have agreements with banks, whereby the bank makes loans to borrowers that apply on the platform, and the loans are then purchased by investors or the marketplace lender itself.

The RFI contains a series of questions involving 14 areas of interest. According to the Treasury Department, the information it seeks is intended to allow it to study the business models of online marketplace lenders and the products offered to small businesses and consumers; the potential for online marketplace lending to expand credit access for historically underserved markets; and how the financial regulatory framework should evolve to support the industry’s “safe growth.”

The Treasury Department also seeks additional information that marketplace participants believe would assist the Department’s efforts to become better informed about the impact of marketplace lending on small businesses, consumers, and the broader economy. 

The RFI follows on the heels of the Second Circuit decision in Madden v. Midland Funding, LLC, which raises serious questions about the legal underpinning of a large segment of the marketplace lending industry—the ability of a purchaser of loans from banks to continue to charge the contract interest rate. We recently conducted two webinars focusing on issues of interest to marketplace lenders. In one webinar we focused on the implications of Madden for marketplace lenders, and in the other we probed a wide variety of legal issues facing the marketplace lending industry. (Copies of our webinar slides and audio links to both webinars are available upon request to our clients and friends.)  Many of these same issues will be studied by the Treasury Department.

In the RFI, the Treasury Department notes that it only seeks comments on online marketplace lending that would not be covered by the Consumer Financial Protection Bureau’s potential rulemaking concerning payday and other small-dollar, high-rate loans. (We have reviewed the CFPB’s contemplated proposals for such loans in a series of four blog posts.)

Although this is not the first study conducted by a government agency about marketplace lending, the RFI is important because, to date, federal regulators have paid relatively little attention specifically to the marketplace lending business. (In July 2011, as required by the Dodd-Frank Act, the Government Accounting Office conducted a study and issued the report  “Person-to-Person Lending: New Regulatory Challenges Could Emerge as the Industry Grows.”)  The industry clearly has their attention now.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for counseling marketplace lending businesses in both the peer-to-peer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, and provide extensive consumer regulatory advice and state licensing guidance.

For more information, contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, Scott M. Pearson at 424.204.4323 or pearsons@ballardspahr.com, Glen P. Trudel at 302.252.4464 or trudelg@ballardspahr.com, or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.


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