The Perils of Success: Recent Regulatory Focus Heightens Potential For Future Risk

Marketplace LendingTwo recent regulatory actions – one by the Consumer Financial Protection Bureau, the other by the California Department of Business Oversight – highlight the increased scrutiny facing marketplace lenders from a consumer protection perspective. Companies involved in the marketplace lending industry will likely face additional regulatory inquiries and heightened scrutiny throughout the remainder of 2016, as the industry’s relationship with government regulators on all levels continues to evolve. As marketplace lenders continue to generate greater interest from both consumers and traditional financial services companies, so too will these lenders face rising regulatory risks.

CFPB Inquiry
Earlier this month, the CFPB announced it would start accepting consumer complaints concerning marketplace lending for inclusion in its database. To this point, the CFPB had not said what steps—if any—it might take to regulate the marketplace lending industry. In conjunction with this announcement, the CFPB also released a consumer bulletin outlining information the agency considers important for consumers interested in securing a marketplace loan. In the press release, CFPB Director Richard Cordray stated that the Bureau required all marketplace lenders comply with existing rules. The consumer bulletin in particular highlighted potential concern for consumers who could lose legal protections by refinancing debt with a marketplace lender.

The CFPB’s announcement is the second federal regulatory inquiry of the marketplace lending inquiry, following a July 2015 inquiry from the Department of the Treasury. The Department issued a public request for information from industry leaders, consumer protection groups, and other related persons about the recommendations for future regulation of the industry, along with information about marketplace lending business models prevalent in the industry. The Department also acknowledged the potential overlap of regulatory authority between it and the CFPB in the RFI.

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Crowdfunding 101

Crowdfunding BasicsThe concept of “crowdfunding” offers a new option to startups and small businesses for raising capital, although it is a greatly misunderstood and misused term. It refers to the pooling of money from a crowd for the funding of a project or venture, whether utilizing a donation model, reward model, royalty model, debt model or equity model. Securities laws apply when equity or debt securities are offered.

Title III of the JOBS Act added a new Section 4(a)(6) to the Securities Act, which provides an exemption from the registration of such securities provided the issuer complies with certain rules and restrictions. To implement this amendment, federal crowdfunding rules were enacted by the SEC on October 30, 2015 as Regulation Crowdfunding. The rules are expected to become effective on May 16, 2016.

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