Regulation Archives - Lend Academy

The OCC and FDIC Both Propose a Madden Fix

The two banking regulators have each put forward proposal to fix the Madden issue, we cover that as well as the varied reactions to this news

November 19, 2019 By Peter Renton Leave a Comment

The Madden saga has been plaguing the marketplace lending industry for years now. We have covered this issue on Lend Academy more than any other regulatory topic. Ever since the 2015 Madden v. Midland decision by the Second Circuit the industry has been weighed down by uncertainty.

There is finally some real light at the end of the tunnel. In the last two days we have heard from both the OCC and the FDIC on the Madden issue, something they called unfathomable in a joint amicus brief in Colorado a couple of months ago. They have each given notice of their proposal that would clarify the “valid when made” doctrine once and for all.

At the core of the issue is the ambiguity created by the Madden decision. A loan can be valid when it is made but if it is sold or transferred can suddenly become invalid in the Second Circuit states of NY, CT and VT. This has led to reduced consumer lending to these states and also concern that, given no regulatory clarity, this could expand to other states.

Here are links to the OCC and FDIC proposals. There will be a 60-day comment period where interested parties can weigh in. Given the high profile nature of this case many public comments have already been made from several interested parties.

Reaction to the OCC and FDIC Proposals

[Read more…]

Talking Fintech Regulation at the 4th Annual Online Lending Policy Summit

Highlights from the fourth annual Online Lending Policy Summit held in Washington DC last week

October 31, 2019 By Peter Renton Leave a Comment

Congressman Bill Foster, interviewed by John Kromer of Buckley LLP, kicks off the Online Lending Policy Summit

I was in Washington DC last week for the fourth annual Online Lending Policy Summit. This one day event is put on by the Online Lending Policy Institute (OLPI) where regulators, lawmakers and the industry come together to discuss regulatory frameworks and responsible innovation.

The day of the Summit also happened to coincide with the day that Mark Zuckerberg was testifying before the House Financial Services Committee. There were several Congressmen who spoke who are on that committee, so Facebook’s move into financial services, specifically their Libra initiative, became one of the themes discussed throughout the day.

They kicked off the event with Congressman Bill Foster (D-IL) who is Chairman of the House Artificial Intelligence Task Force as well as a member of the House Financial Services Committee. He also happens to be the only member in Congress with a PhD in physics. He believes that AI is going to disrupt financial services as much as other parts of the economy and many jobs will be impacted. He also stressed that it is important to be able to explain any AI decision impacting consumers in a simple manner. One interesting comment he made was about the state of the US government today, it has not been structured for a world where technology is the largest industry. When it comes to interest rate caps he believes that this should be a data driven decision. If the cap cuts too deep it could harm consumers. He will be paying close attention to what California is doing in this area.

The energetic Congressman Trey Hollingsworth (R-IN) talked about the divide between urban and rural areas and how fintech innovation, particularly online lending platforms, can help to bridge the divide. As branches for banks and credit unions close rural Americans often feel that they cannot participate in the same economy as urban Americans. His north star is to ensure that rural Americans have access to today’s financial system. He also said it is important for regulators to be harnessing the latest technology and that regulatory uncertainty has the potential to delay innovation in the long run to the detriment of the US economy. He closed by telling the audience that he is a big fan of the important work we are doing in fintech. Then he was off to question Zuckerberg. [Read more…]

Congress Passes New Law to Mandate IRS Modernization

The Taxpayer First Act of 2019 will create a real time API-based process for income verification

June 17, 2019 By Peter Renton Leave a Comment

When LendingClub’s founder and then CEO Renaud Laplanche testified before congress in December 2013 he was asked what the federal government could do to help facilitate more access to capital. Renaud answered that easy access to IRS data would really help move the needle for a company like LendingClub. Nothing happened.

Four years later, in December 2017, then head of Funding Circle USA, Sam Hodges, penned an op-ed in Techcrunch arguing for pretty much the same thing. By that stage there was a bipartisan bill before Congress, co-sponsored by Rep. Patrick McHenry (R-NC) and Senator Cory Booker (D-NJ), called the IRS Data Verification Modernization Act of 2017. Nothing became of that bill in the previous Congress.

Fast forward to last week and movement has finally been made. That previous bill has become part of the Taxpayer First Act which was quietly passed by the U.S. House and Senate last week and it now heads to the President’s desk for his signature which may happen as early as this week. This is a bipartisan bill with 28 co-sponsors from both parties.

The Taxpayer First Act does many things to help modernize the IRS but the most important for the lending community is the mandate for IRS information. In particular this bill “requires the IRS to implement a fully automated program for disclosing taxpayer information for third-party income verification using the Internet”.

What this means is that lenders will have API access to taxpayer information rather than the archaic system today that relies on paper and fax processing. The existing system is pretty much unusable for online lenders who must rely on other sources of data. The new system will be a consent-based system obviously, with the borrower providing consent for a third party to request IRS information in real time.

Nat Hoopes, the head of the Marketplace Lending Association has been working on this with various parties on Capitol Hill for a long time. Here is what he had to say about the passage of this new bill:

Congress is taking a big leap forward in requiring the IRS to upgrade its systems for income verification in the context of online loan applications and credit decisions. The MLA has had a couple of top legislative priorities on Capitol Hill since our Association launched back in 2016, and this is one of them. If it’s implemented properly, an API-based process for income verification can help reduce fraud, cut out unnecessary middleman costs, and help get more tailored products into the hands of both small businesses and consumers. It’s still going to take some time for that promise to be realized, but there’s potentially a lot to be excited about.

The key for this to actually be useful will be in the implementation as Nat points out. Oversight will be needed to make sure this new process meets the needs of industry and is widely available. But don’t hold your breath. Nothing moves quickly in government and the IRS is notorious for running on outdated IT systems. The bill contains a three-year deadline to implement this new system.

As they say the best time to have started this was many years ago, the second best time is today.

You Can’t Find Lending Club on the SEC Website

August 6, 2012 By Peter Renton 4 Comments

As you may know every loan on both Lending Club and Prosper is a security that is registered with the SEC. Not only that but the quarterly and annual financial reports for both companies are also filed with the SEC.

The SEC has the Electronic Data-Gathering, Analysis, and Retrieval system, known as EDGAR, that allows anyone to query their entire database of filings for information on any registered company. Which means you can search the filings for Lending Club and Prosper.

If you type Prosper into the company search form on EDGAR you can easily find the official filings of Prosper Marketplace Inc (the official name of Prosper) as well as their new entity Prosper Funding LLC which is still in the approval process. But type in “Lending Club” and you receive the message: No matching companies. What gives? [Read more…]

President Obama to Sign New Crowdfunding Law This Week

April 2, 2012 By Peter Renton 6 Comments

It was the 19^th century German leader Otto von Bismarck who said, “Laws are like sausages. It’s better not to see them being made.” Despite the warning I have been paying attention to the Crowdfunding bill that made its way through Congress these past few months.

It started as H.R. 2930. This was a relatively simple bill that had just three main provisions and could be detailed on a single page. This bill had broad bipartisan and White House support. But like most things in Washington, it was not that simple.

This week President Obama will sign H.R. 3606 Jumpstart Our Business Startups (JOBS) Act into law. This act is a combination of several bills and contains a multitude of provisions relating to business financing. Section III of the law is all about crowdfunding. For the first time the United States will have a law on the books that acknowledges this new kind of business financing. And let’s give credit to Congress for agreeing on something. This bill passed the Senate with a vote of 73 to 26 and passed the House last week with a 380 to 41 majority. Clearly this was a popular bill. [Read more…]

Crowdfunding Bill Likely to Become Law Very Soon

March 2, 2012 By Peter Renton 5 Comments

Last year the U.S. House passed a crowdfunding bill (H.R. 2930 – Entrepreneur Access to Capital Act) but it has never made it to a vote in the Senate. That looks set to change.

Yesterday House Majority Leader Eric Cantor announced that he would bring up and pass a jobs bill in the house next week. According to this article in The Hill it will also garner support from the Democrats. The new jobs bill is actually six bills one of which is H.R. 2930. As Forbes reported earlier in the week Senate Majority leader Harry Reid now supports H.R. 2930. Many of the other bills are also popular with both sides so it looks like we may well have a new crowdfunding law possibly as soon as later this month.

To recap, H.R. 2930 has three main components that will effect how small businesses are able to raise capital: [Read more…]

U.S. House Passes Crowdfunding Bill

November 9, 2011 By Peter Renton 11 Comments

I never talk politics on the blog here but I must commend the Democrats and Republicans for coming together last week. On November 3rd the Entrepreneur Access to Capital Act (known as H.R. 2930) was passed in a near unanimous vote by the House of Representatives.

I first covered this bill a few weeks ago as arguments were being discussed in a House Subcommittee. It came up for a vote in the U.S. House last week and it passed by a margin of 407-17. It has also received the backing of President Obama so if the Senate passes this bill (which, dare I say, is likely) it will soon become law.

One aspect of the bill has changed since it was introduced by Rep. Patrick McHenry. He wanted a $5 million limit on capital raising – that has been reduced to $1 million or $2 million. Here are the core tenets of this bill:

A $10,000 limit per investor (or 10 percent of annual income, whichever is less).
A cap on the amount a company can raise of $1 million per offering (and up to $2 million if audited financial statements are provided).
No limit on the number of accredited or unaccredited investors. [Read more…]

Possible Changes Coming to Allow More Crowdfunding

September 21, 2011 By Peter Renton 16 Comments

Last week with little fanfare or media coverage a House subcommittee met to discuss crowdfunding. The purpose of the meeting was to determine whether new legislation might be needed to allow small companies to raise money in a method more in line with 21st century practices.

While there was little media coverage of this meeting I did read this article in the Wall Street Journal (subscription required) and also coverage by Reuters on Yahoo News. The subcommittee of the House Committee on Oversight and Government Reform heard from top people at the SEC on this issue. Meredith Cross, the director of corporation finance at the SEC seemed open to possible changes.

Ms. Cross said the SEC, as part of its review of capital rules, was far along in a study to examine revisions to the 500-shareholder cap for private companies. The SEC is also working on a release to solicit public comment on issues relating to the strict ban on private companies publicizing their shares.

[Read more…]

Long Awaited Government Report on P2P Lending Released

July 8, 2011 By Peter Renton Leave a Comment

I first wrote about the GAO report on p2p lending last year. The GAO have been doing an analysis of the federal regulatory environment concerning p2p lending and would make recommendations to Congress on how to regulate this growing industry going forward. The report was released yesterday, two weeks early.

The full report is 78 pages long and while I haven’t read every word yet I have skimmed the report and to tell you the truth I am a bit disappointed. The upshot of their report is that they say it is difficult to know what the best regulatory environment will be because the industry is so dynamic and growing rapidly.

However, the report did identify two options for regulating p2p lending: [Read more…]

Why Some States Don’t Allow P2P Lending Investments

June 28, 2011 By Peter Renton 42 Comments

It is a question the customer service people at Prosper and Lending Club hear all the time. Why doesn’t my state allow me to invest? Now, I am not an attorney but I have been doing some research that I think many readers will find useful. I have found out that unfortunately, there is no one answer to that question.

I spent some time in the past couple of weeks talking with all kinds of people on this topic. I have spoken with people at Lending Club and Prosper and also with the securities regulators in several states. I came away from these discussions feeling somewhat negative about the whole thing.

In some ways I feel sorry for the legal people at Lending Club and Prosper. Every state has different requirements and some states make it so difficult that they are effectively excluding themselves from p2p investors. As laws stand right now it would be virtually impossible for any p2p lender to create a model that would please every state. So, what are the problems with the states that don’t allow p2p lending? [Read more…]