[Editor’s Note: This is a guest post from Michael Mann and Margot Laporte. Michael Mann is a partner in the Washington, D.C. office of Richards Kibbe & Orbe LLP. Margot Laporte is an associate in the Washington, D.C. office of Richards Kibbe & Orbe LLP.]
The recent growth of marketplace lending platforms has resulted in non-bank entities, such as hedge funds, engaging in activities that could conceivably be construed as consumer lending transactions. The Consumer Financial Protection Bureau (the “CFPB”) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as an independent agency within the Board of Governors of the Federal Reserve System to regulate the offering and provision of consumer financial products and services and to enforce federal consumer financial laws against banks and other covered entities. Currently, the CFPB does not have authority over non-bank entities that engage in activities such as marketplace lending that do not constitute the offering or provision of financial products or services directly to consumers. However, as marketplace lending becomes more sophisticated, the line will continue to blur between the regulated consumer lending activities of banks and other covered entities, which include the origination, brokerage, and servicing of mortgage, student, and payday loans, and the unregulated marketplace lending activities of non-bank entities, which includes the provision of liquidity to online lending platforms that originate loans to consumers.
While marketplace lenders historically have partnered with originating banks that are subject to regulation by the CFPB and other banking regulators, as the marketplace lending space expands, we expect that the sources of funding will expand as well. In this article, we outline the potential risks and theories of regulation for non-bank entities engaged in funding and other activities related to marketplace lending and suggest several areas where proactive policies and procedures implementing best practices in advance of specific regulatory guidance would benefit non-banks engaged, directly or indirectly, in the fast evolving marketplace lending industry. [Read more…]