CFPB’s Latest P2P Scrutiny Signals Maturing Mkt, Ahluwalia Says

By Vy Phan

March 9, 2016

Bloomberg First Word by Adam Tempkin (March 9, 2016)

The Consumer Financial Protection Bureau’s March 7 announcement that it is now accepting complaints about online marketplace lenders will probably have little effect on larger platforms such as Lending Club, Avant and SoFi, because they already provide terms, fees and product types in a clear manner, Ram Ahluwalia, CEO of PeerIQ, said in a telephone interview.

These platforms offer fixed-term, no-prepay penalties, etc., Ahluwalia said

“But some of the smaller shops that offer high APR small-dollar loans, or disguise fees, may be impacted by the increased scrutiny”

NOTE: PeerIQ is a credit risk analytics firm serving the peer-to-peer lending sector

On Monday, CFPB also released consumer bulletin that provides overview of marketplace lending and outlines tips for consumers who are considering taking out loans from these types of lenders

“When consumers shop for a loan online we want them to be informed and to understand what they are signing up for,” said CFPB Director Richard Cordray in Monday’s announcement

Ahluwalia says: “There is a perception that the marketplace-lending area is not regulated, but actually it is very heavily regulated” (e.g., Fair Credit Reporting Act, ECOA, SEC)

“The increased scrutiny from the CFPB is more evidence that the industry is moving from niche to mainstream; it comes along with maturation of the asset class”

For example, according to Sept. 30 letter from Prosper Marketplace to U.S. Treasury in response to a request for information, marketplace-lending industry is already subject to “extensive” federal and state regulation, including but not limited to:

“Dodd-Frank, TILA, ECOA, FCRA, Servicemembers Civil Relief Act, Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act, privacy and data security laws, Bank Secrecy Act, federal and state debt collection laws (following best practices even when these laws are not technically applicable), and federal and state securities laws”

Spreads have widened across all credit asset classes, especially emerging ABS issuers; in marketplace lending, there is a de-linking of the originator from the balance sheet, which historically were combined, Ahluwalia said

“But now we see the rise of emerging ABS issuers whose brands are not well understood in the ABS market, and they’re all looking to attract dollars from the same investors. It can be a challenging environment”

“But if you can understand the credit risk, separate the macro phenomenon from the underlying credit performance, you can potentially find value”

For example, BB-rated slice of CHAI 2016-MF1 deal was at iSwap+990; “that is almost better than buying the loans themselves,” plus CE on top of it

“Pricing has been challenged lately, so there’s the fear that dealers will increase costs on warehousing lines”

There’s also an increasing trend of marketplace-lending issuers creating their own asset mgrs to create a semi-permanent source of capital

One example is Prosper’s possible launch of a U.K.-based closed-end vehicle to deepen funding sources