Here’s Why The DOJ Wants to Keep an Eye on Online Lenders

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Online lending has been getting a lot of attention, but not necessarily all good.

The U.S. Justice Department is among the latest authorities to be concerned about online lending, while it’s going through a rather choppy ride.

Assistant Attorney General at the DOJ, Leslie Caldwell voiced the regulator’s concern that the loans made online were backed by investors and are without “traditional” safeguards of deposits that banks rely on. Although alternative lending is still a small part of the lending industry, DOJ wants to keep an watchful eye to avoid another mortgage crisis-like situation.

“I’m not saying … that we’ve uncovered a massive fraud, but just that there’s a potential for things to go awry, like when underperforming loans were being sold in residential mortgage-backed securities,” Caldwell told Reuters.

And while the DOJ questions Lending Club, New York’s financial regulator is said to have sent letters to 28 online lenders seeking information on loans made in the state.

The New York Department of Financial Services first subpoenaed Lending Club on May 17th, seeking information about fees and interest on loans made to New Yorkers. Bloomberg reported that the regulator has sent letters to 28 firms including Funding Circle and Avant asking for similar disclosures. The full contents of those letters have not been made public yet, but Reuters seemed to characterize them as being perhaps more aggressive than the inquiry in California six months ago.

Most lenders, the NYDFS will likely learn, are relying on preemption granted under the National Bank Act or Federal Deposit Insurance Act. Chartered banks covered under these laws are typically the entities in question making the actual loans. The “online lenders” buy the loans from the banks and service them. But absent that structure, it is possible that New York could model future regulation on California’s system, where lenders must go through a vetting process and be licensed.

Online lenders dependent on chartered banks to enjoy preemption have slightly less reason to be worried after the US Solicitor General recently filed a response to the US Supreme Court’s request, that argued the Second Circuit’s ruling in Madden v Midland, a case that challenged preemption, was simply incorrect.

Last modified: April 20, 2019
Srividya KalyanaramanSrividya's work has appeared in publications like Money magazine, Advertising Age, FirstPost and The Economic Times. She has also dabbled in business intelligence solutions, and holds a Masters degree in Business and Economic Reporting from NYU.

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