How MPLs Can Fight The Regulatory Burden

MPL legal compliance regulation

CFPB, along with the state regulators, are cracking the whip on FinTech companies. California has advanced a lot of enforcement actions and investigatory measures. The Telephone Consumer Protection Act (TCPA) is one such regulation under which a lot of companies have come under scrutiny. Regulators have tightened the screws and the ripple effect has been […]

MPL legal compliance regulation

CFPB, along with the state regulators, are cracking the whip on FinTech companies. California has advanced a lot of enforcement actions and investigatory measures. The Telephone Consumer Protection Act (TCPA) is one such regulation under which a lot of companies have come under scrutiny.

Regulators have tightened the screws and the ripple effect has been felt by all players, big and small. To cope with the chaos, marketplace lenders (MPL) are hiring law firms to manage regulatory actions and ensure compliance. One such law firm is Ballard Spahr, one of the biggest law firms dealing with banking regulations.

What’s Going On With Marketplace Lending?

MPL have witnessed some crucial developments of great interest to Ballard Spahr.

  • The industry has witnessed a substantial upsurge in regulations. The respected financial newspaper American Banker has hit hard at the lack of regulation in marketplace lending. Most importantly, MPLs were themselves pointing fingers at each other. This has solidified the perception that the industry is not regulated.
  • The case of Madden v. Midland Funding, and the Lending Club fiasco, made matters worse. These events triggered an overreaction from regulators, and the market as a whole. This led to investors abandoning MPL-generated loans, which caused further operational disruptions.

TCPA restricts telephonic solicitations and the use of automated telephonic equipment. If someone is telemarketing without permission, there is a $500 per call statutory penalty. But companies have found a loophole by leveraging offshore call centers who impersonate hotel chains for extracting personal client information. This is then further sold as a lead to the lending industry. Pearson and his team ensure their clients are approved for telemarketing and are operating within the boundaries of the law.

How Ballard Spahr Helps MPLs Stay Compliant

Ballard Spahr’s list of clientele ranges from high profile commercial banks like Chase, Goldman, and BofA, PE and hedge funds, payday lenders, auto title lenders, and others who primarily focus on finance and debt collection.

Based in Philadelphia, Ballard Spahr has more than 500 lawyers across the United States specializing in litigation, business, finance, intellectual property, public finance, and real estate law. Scott Pearson heads the division concentrated on marketplace lending.

Pearson is widely regarded as an expert on the unique issues faced by this industry. He specializes in defending clients against the regulatory actions from Consumer Financial Protection Bureau (CFPB) and state authorities. Since the inception of CFPB, the regulatory compliance burden has increased manifold. Coupled with credit crisis of 2008, the workload for Pearson and his law firm has increased drastically. His clients not only seek his representation and legal advice, but they also want his firm to make sure their companies comply with CFPB regulations. Over the years, Pearson’s face off with regulatory authorities has helped him to understand what is required by regulators and on what points the prosecutors/class action lawyers are going to attack. This insight is extremely valuable for his clients.

What tilted Pearson’s interest in MPL were two major litigations in which he defended merchant cash advance (MCA). One was for Rewards Network and another was for AdvanceMe, which later became Capital Access Network (CAN). As a result of these two path-breaking cases, he gained a lot of insight into key compliance issues.

There’s also a lot of confusion surrounding the scope and definition MCA. According to Pearson, MCA is not a loan if structured properly, and if the originator complies with regulations, there’s no reason to face scrutiny. A prime example is AdvanceMe. It started as an MCA but now is a leading SME lender; Pearson and the General Council did all the consumer agreements for the company to provide an extra layer of security.

With so much happening, it’s hard for Pearson to predict how the MCA space will shape up in the future. He believes the current trend of companies entering and exiting the space will continue.

There’s a lot of demand for capital by the SME segment. But regulations and compliance issues have made some companies afraid to take the plunge. Therefore, being able to structure the product properly, and per the highest legal standards, is extremely important for survival. With the FinTech industry and the attendant regulations evolving, having a competent law firm is a necessity. Ballard Spahr have the expertise and the experience to be a valuable partner for MPLs.

Authors:

Written with Heena Dhir.

Allen Taylor

Wednesday October 12 2016, Daily News Digest

consumer financial protection bureau

News Comments Today’s main news: There is a battle brewing over how the CFPB should be managed. The U.S. courts got involved and gave oversight of the bureau to the executive branch. On top of that, there are issues over interpreting Section 8 of the Real Estate Settlement Procedures Act. The court was not nice […]

consumer financial protection bureau

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United States

United Kingdom

European Union

Australia

New Zealand

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News Summary

United States

PHH CORPORATION, ET AL., PETITIONERS v. CONSUMER FINANCIAL PROTECTION BUREAU, RESPONDENT On Petition for Review of an Order of the Consumer Financial Protection Bureau (CFPB File 2014-CFPB-0002) (United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT), Rated: AAA

This is a case about executive power and individual liberty. The U.S. Government’s executive power to enforce federal law against private citizens – for example, to bring criminal prosecutions and civil enforcement actions – is essential to societal order and progress, but simultaneously a grave threat to individual liberty.

Of course, the President executes the laws with the assistance of subordinate executive officers who are appointed by the President, often with the advice and consent of the Senate. To carry out the executive power and be accountable for the exercise of that power, the President must be able to control subordinate officers in executive agencies. In its landmark decision in Myers v. United States, 272 U.S. 52 (1926), authored by Chief Justice and former President Taft, the Supreme Court therefore recognized the President’s Article II authority to supervise, direct, and remove at will subordinate officers in the Executive Branch.

In 1935, however, the Supreme Court carved out an exception to Myers and Article II by permitting Congress to create independent agencies that exercise executive power.

In the Dodd-Frank Act of 2010, Congress established a new independent agency, the Consumer Financial Protection Bureau. Congress established the CFPB as an independent agency headed not by a multi-member commission but rather by a single Director. No independent agency exercising substantial executive authority has ever been headed by a single person. Until now.

The Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law. (To be sure, judicial review serves as a constraint on illegal actions, but not on discretionary decisions within legal boundaries; therefore, subsequent judicial review of individual agency decisions has never been regarded as sufficient to excuse a structural separation of powers violation.) That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case.

What is the remedy for that constitutional flaw? PHH contends that the constitutional flaw means that we must shut down the entire CFPB (if not invalidate the entire Dodd-Frank Act) until Congress, if it chooses, passes new legislation fixing the constitutional flaw. But Supreme Court precedent dictates a narrower remedy. To remedy the constitutional flaw, we follow the Supreme Court’s precedents, including Free Enterprise Fund, and simply sever the statute’s unconstitutional for-cause provision from the remainder of the statute. With the for-cause provision severed, the President now will have the power to remove the Director at will, and to supervise and direct the Director. The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury.

Appeals Court Deals Setback to Consumer-Watchdog Agency (Wall Street Journal), Rated: AAA

A federal appeals court delivered a strong rebuke to the government’s new consumer-finance watchdog, declaring the agency’s unusual independence to be unconstitutional, and ordering its powers be curbed.

The judges also harshly criticized the enforcement action that led to the court ruling. It ordered the agency to reconsider the penalties that the CFPB had imposed on a mortgage lender for allegedly overcharging consumers.

The broad rhetoric of the majority opinion is also inflaming the fractious political debate over the CFPB and the sweeping 2010 Dodd-Frank law that created it, emboldening Republican critics who have long pushed legislation that would go further in limiting the agency’s authority.

At issue was a case the CFPB initiated in 2014 against PHH, a New Jersey-based mortgage lender. Eventually the bureau ordered the company to shed $109 million for allegedly accepting kickbacks from mortgage insurers.

The case first went to an administrative judge who found PHH violated the law but ordered a relatively small sanction: $6.4 million. CFPB Director Richard Cordray took a much stiffer view of the law and of the extent of PHH’s alleged violations, imposing the considerably larger penalty of $109 million.

Mr. Cordray’s interpretation of the real-estate law differed substantially from that of the Department of Housing and Urban Development, which administered the law before the CFPB came into existence.

The appeals-court ruling Tuesday said Mr. Cordray’s interpretation was incorrect. And it said the CFPB “violated bedrock due process principles” by applying its new interpretation retroactively.

Why now is the perfect time to invest in real estate (Housing Wire), Rated: A

If you have been on the fence about getting into real estate investing, now may be the best time to take that first dive into this business.

In recent years, there appears to be an upswing in the real estate market, prompting experienced investors to return and even inspiring confidence in newbie investors to try their hand at investing.

Three reasons why now may be the best time to invest in real estate:

One of the first signs that the real estate market is seeing improvement is that the prices of homes are steadily rising. The rental market for real estate investing also appears to be seeing a change for the better due to this lower inventory of distressed properties which is raising the prices of rentals, giving buy and hold investors important insight into where to invest based on the current market trends. Another important sign that the tides are turning in a positive direction is the fact that foreclosures are on the decline.

How Marketplace Lending Could Help Diversify a Struggling Portfolio (Equities.com), Rated: A

The advantages that marketplace lending has over traditional lending include lower costs, greater efficiency, and trust. Thanks to savings and loan scandals, the banking industry bailout, and the rise of digital technology, people are losing trust in traditional lending institutions. Modern tracking systems mean greater transparency all around, and borrowers and lenders no longer need the middle man to connect them. Technology is the connector.

American Banker reports that 13 of the marketplace lending sector’s largest companies grew by 700%between 2010 and 2014. Real estate crowdfunding (RECF) is a huge part of that sector.

After you’ve identified the weaknesses in your current portfolio, you want to identify the strengths in potential marketplace lending investments. Do you want to invest in student loans, real estate crowdfunding, or another corner of the marketplace lending sector? Your best bet is to choose a sector with which you are familiar.

Get Actual Growth With 8% Yields (NASDAQ), Rated: A

The other day, I stumbled across (literally) a recent research report from Lazard’s (NYSE: LAZ ) asset management arm. Looks like REITs have delivered some strong as rope five year numbers.

So does it make sense to put new money to work in the sector? I believe so.

Drilling down a bit more into the report, Lazard sees net operating income (NOI) growth for the sector at an annual average of 3.5%. While at first blush that doesn’t seem too terribly exciting, the translation would be average annual dividend growth of 5% to 7% overall. Not too shabby in a world of sub 5% GDP growth for developed nations and, in some cases, negative yields in sovereign bonds.

Advisory Services Network buys 5,070 stake in Lendingtree Inc (TREE) (The Market Digest), Rated: B

Advisory Services Network scooped up 575 additional shares in Lendingtree Inc during the most recent quarter end , the firm said in a disclosure report filed with the SEC on Oct 7, 2016. The investment management firm now holds a total of 5,549 shares of Lendingtree Inc which is valued at $505,070.Lendingtree Inc makes up approximately 0.10% of Advisory Services Network’s portfolio.

5 B2B Customer Engagement Trends To Inspire Your Brand (TGDaily), Rated: A

As the eCommerce industry matures, it’s interesting to watch how different companies respond to try and gain a competitive edge.

In 2016, online engagement is crucial for retail business. Users are shrewder than ever and have become accustomed to streamlined, aesthetically-pleasing platforms; if a retailer’s online store front is clunky or poorly designed, they’ll simply go somewhere else.

Here are five sites, ranging from the upcoming to the well-established, that have identified specific needs in their respective markets, and developed strategies to set them apart from their competitors and boost user engagement:

  1. Treated.com: Streamlining User Processes
  2. Captain Train (Trainline.EU): Mastering the Fundamentals
  3. Klarna: Offering a Safety Feature Your Competitors Don’t
  4. Halifax: Recognising the Power of Apps
  5. eBay: Utilising Tech to Increase CTR on Mobile Searches

Who’s Stealing Lending Club’s Borrowers? (deBanked), Rated: AAA

A shocking amount of borrowers pay off their Lending Club loans early, the data shows, but the trend has accelerated recently. What’s happening out there?

3.07% of people that took a 36-month loan from Lending Club in the 2nd quarter of this year had already paid them off in full just two months later, according to report published by Compass Point. That’s double the pace that Lending Club experienced three years ago. Meanwhile, 1.51% of Q2 borrowers paid off their 36-month loan in less than 1 month!

United Kingdom

LendInvest Selects NetSuite To Support Rapid Growth (PRNewswire), Rated: B

LONDON, Oct. 11, 2016 /PRNewswire/ — NetSuite Inc. (NYSE: N), the industry’s leading provider of cloud financials / ERP andomnichannel commerce software suites, today announced that LendInvest, the United Kingdom’s leading online platform for property lending and investing, has joined a growing list of financial technology (FinTech) firms that have implemented NetSuite OneWorld to support rapid business growth. LendInvest is now relying on NetSuite OneWorld to run mission critical business processes including financial consolidation, revenue recognition, multi-currency in British Pounds and Euro, multi-tax compliance, and multi-subsidiary management.

Peer-to-peer lender Zopa is now profitable — a year ahead of schedule (Business Insider), Rated: A

Peer-to-peer lender Zopa pulled forward plans to break even by a year after troubles in the industry and global economy at the start of 2016, according to its CEO.

CEO Jaidev Janardana announced in a speech at marketplace lending conference LendIt Europe in London on Tuesday that the platform turned a profit in September.

City grandee backtracks over peer-to-peer lending (Financial Times), Rated: AAA

Lord Adair Turner, former chairman of the UK’s financial regulator, warned in February that peer-to-peer lenders could be the source of losses that would “make the worst bankers look like absolute lending geniuses”.

However, he backtracked from this stance during a speech to industry professionals on Tuesday, stating that online peer-to-peer lending platforms — which match individual lenders seeking high returns with people and small businesses who want to borrow — could perform credit underwriting as well as established banks.

The Peer-to-Peer Lending Association also said it feared confusion and “misunderstanding” among consumers about the differences between peer-to-peer lending and equity crowdfunding — which involves investors buying shares in small unlisted start-ups — and called for a ban on the practice of maturity transformation which Lord Turner singled out for criticism.

We need tougher regulation, say peer-to-peer lenders (Financial Times), Rated: A

Peer-to-peer lenders have said there is an “urgent” need for tougher regulation of their own sector to ensure that consumers understand the risks they are exposed to, thus avoiding a future backlash if investments fail to perform.

Advertisements from lenders suggesting peer-to-peer loans were like a bank or savings deposit with instant access were “unhelpful”, said the trade body. Its members — eight platforms who control 75 per cent of the total UK market — are calling for the regulator to set out common standards for declaring bad debts, and strict guidelines over how loans are marketed to consumers.

If standardised rules were not put in place to protect investors, it warned there may be “significant potential consumer detriment going forward”.

Bank of England rate-setter thinks sterling could fall further (City A.M.), Rated: A

The newest member of the monetary policy committee (MPC) has said the pound could continue to fall given inherent weaknesses in the UK economy.

Michael Saunders, who joined the Bank of England’s rate-setting committee over the summer, told MPs today: “Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further.”

The comments echo those made by the former governor of the Bank of England, Mervin King, who said yesterday the fall in the pound was good news for the UK economy.

Despite his comments, Saunders said he was not explicitly predicting a further fall in the pound, adding: “I am fairly agnostic as to whether any further depreciation is likely.”

One of Peter Thiel’s investors says Goldman Sachs’ fintech efforts are doomed to fail (Business Insider), Rated: A

Goldman Sachs’ plans to get into the online lending industry were largely dismissed by a panel of US fintech insiders at the LendIt Europe conference in London on Tuesday.

The panel were asked what they made of the investment bank’s yet-to-launch service Marcus, an online platform that will make small consumer loans — a big departure for the bulge-bracket investment bank.

Goldman has reportedly had 100 people working on the project, according to the New York Times, a huge staff compared to a fintech startup.

But three out of the four panelists dismissed the investment bank’s chances in the market.

When will a large number of retail investors have p2p lending exposure in their portfolios… perhaps they already do? (altficredit), Rated: A

In the past five years the growth rate of p2p has been stellar with origination volumes almost doubling each year suggesting over the medium term it could grow to be much, much larger. Some industry bulls have even predicted that a large majority of retail income investors could have a significant level of portfolio exposure within a decade.

LendInvest cuts rates on vanilla bridging products (Specialist Lending Solution), Rated: A

Online specialist lender LendInvest has cut the rates on its vanilla bridging products by as much as 11 basis points per month.

The products are categorised as Tier 1 residential bridging and represent LendInvest’s cheapest range.

How I learned to stop worrying and love SoFi (Global Capital), Rated: A

The online lender is adept in identifying what it calls HENRYs— High Earners, Not Rich Yet — and trying to lock them in for life.

SoFi’s designated HENRYs will be shacking up, marrying, having children and living on until their deaths are greeted with a nice fat check from their corporate benefactor. But it might be the perfect business model for capturing the loyalty of millennials and tapping into their vast spending power as the largest age demographic in the US.

By introducing itself as a one shop stop for future high earners, which it locks in early, SoFi is building loyalty across its customer base. After all, if you’ve refinanced your student loans, met your wife and financed big purchases through SoFi, what’s the harm in adding a mortgage or life insurance to the package?

Of course, this level of engagement with its customers is driven by SoFi collecting a tremendous volume of data, at a time when fears over corporate meddling in peoples’ personal lives is at a fever pitch.

In the post-crisis era when the quality of the technology at traditional banks continues to lag behind and customer service is widely distrusted by consumers, companies like SoFi will likely continue to look more appealing to the next generation of spenders, even if the business model has to cautiously tread the line between modern convenience and corporate surveillance state.

European Union

Aurora Exchange enlists Maiden Life and Mangopay for P2P lending platform (Finextra), Rated: A

Aurora Exchange, a consumer loans exchange for responsible borrowers announced two major partnerships that pave way for bringing transparent and cost efficient consumer lending to the European market.

“With Maiden Life, we can combine the benefits of FinTech and InsurTech in one reliable customer journey,” says Jarno Piironen, CEO of Aurora Exchange Oy.

Aurora Exchange has chosen MANGOPAY as its custodian and payments technology provider.

P2P outfit LendingWell wins LendIt pitch trophy (Finextra), Rated: B

LendingWell, a single-platform P2P lending partner, has today been announced the winner of PitchIt @ LendIt, a competition aiming to find a future star within the online lending and fintech space.

LendingWell is an innovative single-platform P2P lending partner that provides access for both retail investors and independent financial advisors to the broader P2P lending market.

Australia

Move over term deposits, peer-to-peer lending is on the rise for Aussie investors (Mozo), Rated: A

Individual Aussie investors have lent an average of $13,508 in the last nine months as they chase better returns in a low-yield environment, according to leading peer-to-peer lender RateSetter.

This figure is a 25.4% increase from the $10,770 lent in the previous nine months.

Not only have lending amounts gone up, but also the number of lenders getting involved in the peer-to-peer lending scene. RateSetter reported double the number of investors registered with its platform over the last nine months.

New Zealand

Commerce Minister must clear the way for P2P lending (Business.Scoop), Rated: B

Press Release – ACT New Zealand

ACT Leader David Seymour is calling on the Minister of Commerce to allow peer-to-peer platforms flexibility about who they charge for their service.

Thailand

The Regulatory Framework for Peer-to-Peer Lending Industry in Thailand (Crowdfund Insider), Rated: A

Peer-to-peer lending, which is also known as social lending or crowdlending, has drastically increased in the recent years in many countries around the world. The total volume of peer-to-peer lending activities has been growing rapidly. A good example is or the volume of peer-to-peer lending activities in U.K. which has doubled every year in the last four years.

Peer-to-peer lending may be used in many ways if it is properly regulated by the responsible authorities. This is one of the reasons that lead to the issuance of the 

George Popescu
Allen Taylor