Is the Consumer Financial Protection Bureau ready to Rock Marketplace Lenders World?

Trade Financing Matters welcomes this guest post from Susan Joseph, a former General Counsel of a start-up peer lending financial services/tech disrupter.

The Consumer Financial Protection Bureau (CFPB) was created by the Dodd-Frank Act and is a US government agency whose mandate is to protect consumers of financial services and products. This means there are strong federal rules that protect consumers. It also means there is federal enforcement if you break those rules, and that enforcement can result in injunctions that shut your business or fines and penalties.

The CFPB has a broad reach and can specifically make rules effecting banks, payday lenders, mortgage servicers, debt collectors and other financial companies and can regulate virtual currencies. Since its creation, it has collected millions of dollars in restitution and penalties and is considered a vigilant if not aggressive consumer advocate. If the CFPB determines there is a violation, it can bring an enforcement action-the type you hope you never see in the headlines.

An article from January 9 National Mortgage News has some telling predictions about the CFPB’s agenda.

Debt Collection: Significant rules will likely be adopted to address debt collection. How far will they go? The Banks are hoping to escape the rules and claim their unique relationship as the first party with the credit and deposit relationship deters them from engaging in bad debt collection acts. They’re trying to preserve the relationship and argue it would be bad business for them to behave badly.
Of course, some banks have already engaged in some of these bad acts, so Consumer groups think the CFPB should regulate the entire credit life cycle from debt buyers, collectors, and first party creditors to banks collecting both for themselves and others to “even the playing field.” Expect a big fight here.

Payday Lending: If this part of the ecosystem is regulated, it will affect the banks, nonbanks and online lenders because the CFPB can regulate all those parties. Marketplace lenders offering this product should keep a close eye on this. If, for example, the amount of times a consumer can draw credit within a certain timeframe is limited, the platform algorithms and pricing will have to be adjusted and perhaps entire business model will have to evolve as well.

Arbitration Clauses: CFPB is also taking a look at mortgage arbitration clauses. If the use of “forced arbitration” through these clauses is banned in credit agreements, it raises the cost of doing business because the potential litigation costs are immediately increased. Does this then send a tremor through the rest of the credit industry for non mortgage lenders using a “forced arbitration” clause?

Enforcement Activity: What’s likely on the agenda: Mortgage Servicing, Telecommunications companies charging 3rd party fees for products unauthorized by the consumer and more global and granular disclosure in consumer complaint narratives.

Disparate Impact: Simply put, this is unintentional discrimination that happens when only certain customers can borrow and the auto lenders will be facing these issues. If lending platforms engage in this as well through thier underwriting algorithm, however well intended and complete, they could be in hot water.

Regulations are here to stay and ever increasing. Compliance will become a more important part of everyone’s business. You can bank on that. Businesses will have to evolve and adapt to this new and more complicated environment. But, perhaps this is a good thing. If everyone operates at a better practices standard, don’t we all win?

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First Voice

  1. Roger Clegg, Center for Equal Opportunity:

    Here’s why the “disparate impact” approach is bad:

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