Lenders Offering Personal Loans Online Face Regulatory Headwinds

Technology always inspires change, and one change that was brought by the internet was the ability of lenders to offer personal loans online. Instead of having to take time off from work to meet with a banker or travel to lender’s storefront, borrowers could submit a loan request from home whenever it was most convenient for them. The application process was typically quick and easy, the borrower did not risk being identified by neighbors or co-workers when entering a lender’s store and there was no risk of being overheard requesting a loan by phone. However, new regulations are making things more difficult for lenders offering personal loans online.

Regulatory Issues Facing Lenders Offering Personal Loans Online

Although the early releases did not specifically include personal loans online, from the moment that the Consumer Financial Protection Bureau released its first white paper on payday loans, the news has been dominated by the new regulations that the agency would be issuing. The new rule was finalized by the CFPB in October 2017. The new regulations cover loans that require borrowers to repay most or all of the loan in a lump sum payment. This includes payday loans, vehicle title loans and installment loans featuring balloon payments.

The regulations state that lenders must comply whether they operate from a physical storefront or online. The new rule applies to payday lenders, banks, credit unions and any other provider of loans covered by the rule.

States Have Been Expanding Laws Regarding Personal Loans Online

A decade ago, few states had laws pertaining to lenders who offered personal loans online. In fact, many states did not have a legal position on cash advance or payday loans. A few states banned short-term, high-interest loans outright or capped interest rates too low for loans made to customers with credit difficulties to be profitable. However, as the CFPB became more vocal about small-dollar loans with high interest rates, an increasing number of states began to enact legislation covering these types of credit products.

For example, payday loans are illegal in New York whether the resident obtains them in person or online. Since the loans are illegal, borrowers are not legally required to repay them. Similar laws exist in several other states, including Georgia, New Jersey, Connecticut and North Carolina. More states are expected to pass laws that specifically include personal loans online as well as those obtained through storefronts.

Even Marketplace Lenders Are Potentially Facing Increased Regulation

Marketplace lenders, originally called peer-to-peer lenders, were born in the high-tech environment of San Francisco. These lenders make both personal and business loans by connecting borrowers with investors who are willing to invest or purchase the loan.

Since 2015, a variety of federal agencies have shown an interest in marketplace lenders, according to the Bank Administration Institute. In July 2015, the Department of the Treasury issued a request for information. In November 2015, the FDIC advised banks on risk management for purchased loans, suggesting that regulators may be considering regulating lenders by leveraging the lenders’ banking relationships. In March 2016, the CFPB — following the same pattern used for designing regulations for payday lenders — asked borrowers to submit any complaints related to online lenders.

There is also the possibility that the Securities and Exchange Commission may decide to exert its regulatory powers over marketplace lenders, according to the American Bankers Association. However, unless the SEC decides that the loans are actually retail investments, the SEC may not take a stance on the issue. However, the Office of the Comptroller of the Currency has also been soliciting comments and will likely be the first federal agency to address the issue of marketplace lending.

What Is the Future of Personal Loans Online?

The CFPB already has its hands full. Trump, no fan of the agency, circumvented attempts by the agency’s departing director to name his own successor by appointing Mick Mulvaney to head the agency. Like Trump, Mulvaney is anti-CFPB and has been rather vocal about his feelings. The spurned would-be acting director is still waging a court battle over the issue, so things are a bit confused at the agency right now. Since the Republicans have already overturned one of the CFPB’s rules through the Congressional Review Act, the agency may not be too eager to launch any new initiatives in the immediate future.

In an article on Forbes.com that was published in 2016, the author predicted that there would be little done in the way of regulating online lenders during 2017. So far, the author has been correct.

However, in the world of government regulations, things can turn on a dime. If Trump can manage to get a kindred spirit approved as the permanent director of the CFPB, the agency will probably need some time to adjust to a new philosophy, a new leader and a new vision for the agency. In the midst of so much instability, it is unlikely that the CFPB will be extremely proactive about reining in online lenders.

Other federal agencies, however, are enjoying greater stability. This allows them the luxury of the business-as-usual attitude denied the CFPB. The question is whether they have enough interest to devote their time to the issue.

The greatest threat to lenders offering online personal loans is likely to develop at the state level. There are still many who feel that regulations for financial institutions are the domain of the states; they feel that the CFPB has overstepped its jurisdiction and infringed on the rights of the states. Should it appear that the CFPB rules will be thrown out, some states will no doubt feel compelled to take matters into their own hands.

The Story Is Not Yet Complete

With so many complex issues, the fate of online lenders remains unknown. You might want to follow this developing story by visiting the Personal Money Store and reading some of the many helpful articles posted there.