Certain Compliance Risks in Marketplace/Peer-to-Peer/Online Lending

By Tony Nolan, Joseph Valenti, and Christopher Bell

The online marketplace lending industry has experienced substantial growth in the past few years.  Its share of the global lending market is predicted to continue its increase.  In the United States, regulators are starting to take notice.

The first major sign of interest came from the U.S. Treasury.  On July 16, 2015, it issued a Request For Information to better understand the impact of online marketplace lending on small businesses, consumers, and the broader economy.

The second sign came on November 6, 2015.  The FDIC issued a Financial Institution Letter (FIL492015) cautioning banks about the risks of purchasing loans originated by “alternative” non-bank, peer-to-peer, or marketplace lenders and imposing additional requirements on banks purchasing interests in such loans.

The third sign is the ongoing response by the U.S. Congress to the tragic terrorist attacks in San Bernardino, California on December 2, 2015.  It came to light that the attackers obtained (under a pretext) $28,500 from the online marketplace lender Prosper, which they allegedly used to reimburse their arms dealer.

These developments—and potential future action by regulators and policymakers—are detailed in a recent client alert by K&L Gates available here.

As noted in the alert, Prosper publicly stated that it follows U.S. identify-verification and screening procedures required by law.  Last week, in an e-mail to investors, Prosper announced that it would be raising its rates by an average of 1.4%, citing “the current turbulent market environment that we have witnessed since the beginning of 2016.”  Whether this move is a response to the risks exposed by the San Bernardino attacks, expected scrutiny from regulators, or other turbulence remains to be seen.  Still, this development may just be one more sign that this maturing industry will experience increased costs as it grows in a heavily-regulated compliance environment.

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