Consumers with complaints about firms offering person-to-person loans can now register their displeasure with the Consumer Financial Protection Bureau, the federal regulator announced this week. The watchdog also published a consumer bulletin with general information about the “P2P” lending industry, also known as “marketplace lending.”
“When consumers shop for a loan online we want them to be informed and to understand what they are signing up for,” said CFPB Director Richard Cordray in a press release. “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.”
There’s no reason to believe complaints are swirling around P2P lending at a higher rate than traditional lending. The CFPB has merely updated its systems to account for this new segment of the financial industry. But the announcement comes as the marketplace lending industry has hit a few bumps in the road.
What Is P2P Lending?
P2P lending is mostly what it sounds like: market makers like Prosper.com match people who want to borrow money — in Prosper’s case, up to $35,000 — with people who want to lend and get decent returns. Interest rates are high, averaging around 15%, but can be substantially lower than bank personal loan rates or credit card rates.
Lenders must follow consumer protections like the Truth in Lending Act and the Fair Debt Collection Practices Act, so the marketplace is fairly heavily regulated. Still, growth has been explosive. From 2010 to 2014, the national online lending market grew from $1 billion in loans to $12 billion, and Morgan Stanley estimates that by 2020 the volume will grow to $122 billion.
But there have been bumps in the road recently. In December, the California Department of Business Oversight announced it had opened an inquiry into the industry.
“These online lenders are filling a need in today’s economy, and we have no desire to squelch the industry or innovation,” CDBO Commissioner Jan Lynn Owen said in a press release. “We have a duty, however, to protect California consumers and businesses, and they have more and more at stake as this industry grows. We want to assess the effectiveness and proper scope of our licensing and regulatory structure as it relates to these lenders.”
Prosper told Credit.com it’s cooperating with the CDBO.
In February, citing a “turbulent market environment,” Prosper announced it was raising interest rates by an average of 1.4% to 14.9%. (Lending Club announced it was raising its rates back in December.)
At nearly the same time, Moody’s said it placed bonds linked to Prosper loans “on review for downgrade,” warning of higher default rates.
“Moody’s original estimates of loss were well below Prosper’s internal forecasts as well as those set by rating agency Fitch,” said Sarah Cain, Prosper spokeswoman. “Most importantly, our portfolio of unsecured consumer loans continues to deliver net returns between 6-8%.”
Vetting P2P Loans
Of course, plenty of other loans — like car loans — are also facing higher default rates. And an “inquiry” should not be considered an investigation. Still, the activity has spooked investors; Lending Club, which is publicly traded, has seen its share price cut by more than half in the past year. (Lending Club did not respond to request for comment regarding the CDBO investigation and the recent Moody’s downgrade.)
Consumers, however, should maintain a critical eye when considering marketplace loans, as the CFPB suggests. The traditional advice about obtaining any kind of loan applies – shop around, know your credit score before you apply, borrow as little as possible. (You can check your credit by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your credit scores for free each month on Credit.com.) The CFPB also makes a critical point to potential P2P borrowers: When using a new loan to repay an old one, make sure you are not losing any important protections.
“While some marketplace lenders may advertise lower interest rates, in some cases consumers could lose important loan-specific protections by refinancing an existing debt,” the CFPB warns. “Specifically, consumers should know that they may sign away certain federal benefits, such as income-driven repayment for federal student loans or servicemember benefits related to debt incurred prior to entering active duty.”
The CFPB marketplace lending brochure is available here.
Have you tried P2P lending? What did you think?
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