The recent announcement by the California Department of Business Oversight (DBO) that it has launched an inquiry into the marketplace lending industry represents an important development that could presage increased industry scrutiny by state regulators.  The inquiry is directed not only to consumer and small business lenders, but also to merchant cash advance providers.

According to the DBO, it is seeking “to assess the effectiveness and proper scope of [the DBO’s] licensing and regulatory structure” as it relates to marketplace lenders. As part of the inquiry, the DBO has sent an online survey to 14 marketplace lenders engaged in consumer and/or small business lending. The survey is quite general in nature, seeking information on loans made between January 1, 2010, and June 30, 2015, such as the numbers of loans in California and nationally, APRs, delinquencies, and investor information. The survey also asks the respondents to describe their business models and platforms. Survey responses are due by March 9, 2016.

According to news reports of comments made by a DBO representative, this is only the beginning of the inquiry, which likely will extend to additional lenders.

Marketplace lenders are already the subject of increasing attention by federal regulators. In July 2015, the U.S. Department of the Treasury issued a request for information regarding online marketplace lending. In addition, the Consumer Financial Protection Bureau appears to have a growing interest in marketplace lending, as signaled through the attendance of CFPB representatives at a recent industry-sponsored conference.  (The CFPB has also been sharpening its focus on small business lending.)

Although the March deadline for survey responses suggests that the California inquiry may proceed slowly, we have observed a significant uptick in state regulatory focus on state licensing requirements and usury limits. Marketplace lenders therefore would be well-advised to revisit their compliance with state licensing laws and their vulnerability to “true lender” and Madden v. Midland Funding, LLC challenges. By the same token, merchant cash advance companies should be revisiting their true sale compliance both in their purchase agreements and at the operations level.

Ballard Spahr’s Marketplace Lending Task Force 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 expertise.

For more information about this alert, contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky, Practice Leader Jeremy T. Rosenblum, Marketplace Lending Task Force Leader Scott M. Pearson,  Mortgage Banking Group Practice Leader John D. Socknat, or Glen P. Trudel.

Copyright © 2015 by Ballard Spahr LLP.
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