News Flash: Colorado versus Fintech Update — Magistrate remands Avant

The Grinch came a few days early in Colorado.  A U.S. magistrate judge made a recommendation to the District Court to remand back to state court the pending action filed by the state of Colorado against a marketplace lender based on true lender issues.  The crux of the decision is that, since no bank was a party to the action, there is no basis to exercise federal subject matter jurisdiction.  Objections may be filed with respect to the recommendation and the U.S. District Court is not bound to follow the recommendation or could choose to modify it.  Banks making marketplace loans have filed actions in federal court in Colorado that remain pending.

OLPI believes how the judge framed this issue may be misguided and will fuel inflated concerns about marketplace lending business models.  While the crux of the decision is that an FDIC insured bank was not named in the action, the magistrate judge makes broad factual and legal observations related to a true lender analysis that does not have any real legal precedential value but will no-doubt precipitate a flood of articles from law firms and otherwise rile investor sentiment.  OLPI has already observed that investors in marketplace loans have already grown wary of Colorado loans –as such, the “broad observations” and other actions in the state of Colorado appear to be limiting credit to Colorado citizens from marketplace lenders.  This fact may play into and strengthen the WebBank and Cross River Bank actions that are currently pending in federal courts and discussed here.

The Federal Reserve Bank of Cleveland’s recent study on P2P lending raises several serious issues concerning the use of proceeds for online loans and the result of marketplace lending. Specifically, the study highlights concerns related to use of proceeds for online loans, results of lending in terms of credit scores, and overall financial impact on borrowers.

The Online Lending Policy Institute (OLPI) looks forward to discussing this study with its authors, as well as reviewing the P2P lending study with the authors of a separate study by the Federal Reserve Bank of Philadelphia, which reached markedly different conclusions.

OLPI notes, however, that the Cleveland Fed’s study makes an unfortunate comparison between online lending and the subprime loans leading up to the Financial Crisis. There is no apt comparison between online lending and subprime lending preceding global financial crisis, and rhetorical flourishes such as this undermine serious research related to online lending that is both merited and necessary.

Similarly, the study’s concluding observation that “… there are no regulators that oversee the online lending marketplace and its players” is false and misleading. Online lending is subject to a wide array of federal and state consumer protection laws and regulations as detailed here.

Data Breach. Yesterday, Equifax revealed that it incurred a massive data breach – impacting at least 143 million consumers. Equifax is reaching out to all of its clients – including many online lenders – to let them know what it is doing to mitigate the effects of this massive breach. Equifax’s official statement is that they are ensuring a breach like this never happens again, none of their core credit databases were penetrated, and they plan to offer every U.S. consumer free credit monitoring for a specified period of time.

What’s Next? There are already news reports that Equifax may not be handling the influx of concerned consumers well – requiring consumers to enter their last name and last six digits of their Social Security number (which has irked more than a few consumers). Interestingly, this request for “last six digits” seems to indicate that the typical requirement for last four is not enough to verify consumers’ identities after this breach.

Equifax, however, is doing the right thing by actively reaching out to their clients and consumers.  They have assured their clients that the breach related only to their consumer facing site and not to their core credit database, so consumers’ credit reports (detailing tradelines, etc.) were not exposed.

Lender Implications. Today, online lenders will review their third-party risk management protocols to better understand the nature of the breach and to develop a response to their impacted clients. Tomorrow, online lenders will have to get some comfort that Equifax has sufficiently handled this problem and, as they are handling this problem, online lenders need to ensure that Equifax is still able to handle other aspects of its relationship with these clients. Namely, Equifax has a large suite of fraud prevention products that the online lending industry relies on, among other related services.

Also of note, the long term effects of this breach may impact the integrity of the data that online lenders use for a variety of reasons (target marketing and prescreened offers, underwriting and pricing for instance).  If that impact is negative, it could hurt the operations of the online lenders and could also result in more fraud due to the speed of the process – online lenders will need to show how their security accounts for these highlighted risks.

OLPI will continue to monitor this story as it develops.  OLPI will also ensure that this issue – cyber security risks—is fully briefed at its 2nd Annual OLPI Policy Summit this month on September 25 in Washington, DC. For more information, please visit

The 2015 decision by the Second Circuit Court of Appeals in Madden v. Midland Funding, LLC precipitated uncertainty among financial services providers and the secondary market.  Many legal experts believed the decision cast doubt on and generally ignored the longstanding legal principle of “valid-when-made.”  That is, a loan or contract that was non-usurious when it was made remain non-usurious when it is subsequently transferred to another person.  In Madden, however, the decision found that the sale and assignment of a loan to a non-bank by a national bank did not necessarily transfer to the loan purchaser the right to charge interest at the rate allowed by the national bank and specified in the loan contract.  Critics of the decision (including President Obama’s US Solicitor General) claim the court’s conclusion is wrong and violates contractual principles of assignment as well as the long standing legal precedent that loans are “valid-when-made.” Read More

States have taken their dislike over the OCC’s planned fintech charter a step further and sued the OCC in the US District Court for the District of Columbia.  The Conference of State Bank Supervisors sued the OCC and Comptroller Curry arguing, among other things, that the “business of banking” requires an institution to take deposits.  Strangely, this ignores existing national bank models: credit card banks, trust banks, and cash management banks.  All of this being said, CSBS also argues that the OCC violated the Administrative Procedure Act by publishing only a high-level white paper and supplement to the Comptroller’s Licensing Manual (which they did seek feedback on) — thereby avoiding publishing new rules that welcome the public vetting process.  This argument will likely have more teeth.

Read the Complaint here: 2017-04-26 – Complaint – CSBS v. OCC

LendIt USA 2017Cornelius Hurley Executive Director, OLPI, Thomas J. Curry of the OCC and Gilles Gade, CEO and President of Cross River Bank — LendIt USA 2017 (photo by Gabe Palacio)

On March 6, 2017, OLPI hosted a day of Policy & Regulation panels at LendIt USA 2017. The panels were the most popular of the day — standing room only. The popularity of the panels and the Q&A with Comptroller Curry shows the hunger for a robust dialogue about the policy and regulatory issues that face fintech (and the need for OLPI). Below are videos of the programming.

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LendIt USA 2017

The World’s Biggest Show in Lending & Fintech

March 6-7, Jacob Javits Center, New York

OLPI will host the Policy and Regulation track.

LendIt USA 2017 is the largest annual gathering of the Lending and Fintech industry. The LendIt USA community is comprised of thousands of lending and fintech companies, investors, banks, services providers, educators, government officials, and journalists from around the world. Read More

Last year, OLPI hosted the first annual MPL Policy Summit.  This Summit was the first of its kind for the marketplace lending industry.  It brought together policymakers, academics, regulators, consumer advocates, and industry participants, as well as media figures, to have a well-informed discussion about the best ways to grow this industry in a fair and compliant manner.

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