Garnet Capital Advisors Blog

July 17, 2015

Regulation and enforcement spreading across Internet lending

One of the biggest concerns with Internet lending has been the lack of regulation. That has changed recently, however, as more regulation is seeping into this sector.

Over the past few years, one of the more disruptive segments of the financial services industry has been Internet lending. Big names like Lending Club have found a niche market - and an interesting method - to offer up affordable loans and rapid service to consumers and small business owners.

It was hard for regulators and government organizations to oversee and protect consumer interests, and it was challenging to provide a level playing field for every lender in the game. That has been changing recently, however, as more regulatory focus is seeping into this sector.

Treasury asks for public comment
In the middle of July, the U.S. Treasury Department took a preliminary step toward regulating Internet lenders. The Treasury asked for public comment on various regulations, according to a press release from the department.

That release outlined the key components up for comment, which include:

  • Business models and products offered by Internet lenders
  • The future of increased credit access for underserved borrowers
  • How regulation can make this industry safer down the road

"Innovation in financial services is creating new ways for consumers and small businesses to secure credit," said Antonio Weiss, counselor to the Treasury Secretary. "By soliciting public comments on this relatively new industry, we hope to better understand the potential for online technology to expand access to safe and affordable credit for consumers and small businesses."

The comment period is slated to run for 45 days starting on July 20.

CFPB cracks down on PayPal
One business moving into Internet lending is PayPal. The payments firm also offers an online credit product, and this specific offering has PayPal in hot water due to the Consumer Financial Protection Bureau.

According to American Banker, the CFPB has called PayPal's credit product "abusive." The CFPB complaint outlined alleged deceptive marketing and illegal registration of consumers as two of the violations. The problems surround PayPal's credit option, when consumers can opt to take out a line of credit to make a payment while promising to reimburse PayPal at a later date.

"Financial services providers that enable [online payments] need to be careful to make sure that people are treated fairly and according to the law," CFPB director Richard Cordray said on a conference call, American Banker reported. "We will continue to be vigilant in protecting all consumers."

The problems with PayPal, as alleged by the CFPB, were that the payments firm automatically enrolled consumers in its credit offering and removed all other payment options for some users, so they had to use credit to make a transaction.

Amanda Christine Miller, spokesperson for PayPal, said that the company takes consumer protection seriously, reported American Banker. PayPal agreed to pay $15 million back to consumers and an additional $10 million penalty.

This action by the CFPB is one sign that increased scrutiny and regulation are coming for Internet lenders of all shapes and sizes. As Internet lenders continue to gain popularity across the country - and as regulation intensifies - members of the financial services industry should speak with Garnet Capital Advisors, a loan sale advisory firm, to learn more about this trend.