The Consumer Financial Protection Bureau signaled its increasing scrutiny of the growing online marketplace for loans, encouraging borrowers to submit complaints when they encounter problems with online lenders.
The step is significant because the CFPB uses its robust database of consumer complaints to determine how it supervises companies, enforces laws and writes regulations.
Monday’s announcement is the latest sign that federal officials are playing catch-up with financial technology companies. The online lenders have proliferated in recent years, leaving gaps in regulations that have worried consumer advocates and frustrated competitors in the traditional financial industry.
“All lenders, from online startups to large banks, must follow consumer financial protection laws,” Richard Cordray, CFPB director, said in a statement. “By accepting these consumer complaints, we are giving people a greater voice in these markets and a place to turn to when they encounter problems.”
The watchdog agency also issued guidance for consumers, offering information about what to look for before taking out loans from online lenders. The bureau’s advice noted that consumers should watch out for the possibility of losing important protections, such as loan forgiveness, when they refinance certain loans—such as student loans and service-member benefits—with new loans advertised with lower interest rates.
The latest announcement is part of CFPB’s stepped up activities to police the financial technology sector. Last week, the agency took its first enforcement action over data security in the online payment sector, ordering Dwolla, a Des Moines startup, to pay a $100,000 penalty for misrepresenting how it protected consumers’ data.
Dwolla, which has neither admitted or denied the allegations, has said the CFPB’s claim focuses on practices that date back to 2011 and 2012, and that its current data-security steps meet industry standards.
The CFPB’s new scrutiny could add a speed bump for online lenders who already are seeing their growth slow amid financial market gyrations, economic weakness and growing competition. Marketplace lenders—often called “peer-to-peer” lenders—offer various types of financial products, such as installment loans, mortgages, student loans and auto loans. They generally handle underwriting and customer services for the borrowers, and once the loans are originated, they transfer their ownership to investors.
According to a World Economic Forum report last year, small- and medium-sized lenders were projected to issue loans totaling $12 billion in the online marketplace in 2015, up from $5 billion in 2014.
Both the CFPB and the Federal Trade Commission have taken enforcement actions against more conventional online lenders in recent years, alleging they deceived consumers. The CFPB’s latest action, in November, involved an administrative lawsuit against Delaware-based Integrity Advance LLC, alleging that it failed to disclose the cost of short-term loans. A representative for Integrity Advance couldn’t be reached.
The agency has also called out refinanced student loans, a product offered by online lenders such as Social Finance Inc., or SoFi, and banks such as Darien Rowayton Bank, as a type of credit that consumers should be careful about. These kinds of loans have ballooned in popularity over the past few years. In 2015, $2.7 billion of securities backed by such loans were issued, almost four times the levels of 2013 and 2014 combined, according to rating agency DBRS Inc.
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