The steady stream of bad news continues for online marketplace lenders.
State officials in California have asked top online lending firms a series of probing questions regarding their compliance with laws and regulations dealing with referral fees, bank partnerships, fair lending and other sensitive issues.
The California Department of Business Oversight sent letters Monday to 14 online lenders, both consumer and small-business lenders. The agency said that the letters represent the start of the second phase of its inquiry into the industry, following requests for data that were sent to same companies in December.
The most recent letters were not released publicly. But Tom Dresslar, a spokesman for the Department of Business Oversight, said in an email that they address five specific issues of regulatory interest. The letters also include follow-up questions that emerged from specific firms’ responses to questions posed during the first phase of the inquiry.
The firms that were sent the letters are: Lending Club, Prosper Marketplace, Social Finance, CircleBack Lending, Affirm, Avant, OnDeck Capital, CAN Capital, Kabbage, Funding Circle, Bond Street, Fundbox, PayPal and Square. Among the group, only CircleBack did not respond to California’s earlier letter.
The disclosure about California regulators' new probe comes after Lending Club's chief executive abruptly resigned on Monday, and Prosper announced the dismissal of about 170 employees.
Here are the five issues that were flagged Monday by California officials:
Fair lending. The letters asked the companies to provide data by ZIP code on financing and marketing activities in California. "How exactly do the companies’ financing and investor funding processes ensure compliance with federal fair lending laws and credit reporting laws?" Dresslar wrote.
Referral fees. The letters note that California law restricts referral payments to licensed entities. In light of those rules, state officials asked the 14 lenders to explain referral fees they pay to brokers and other entities.
Loan underwriting. The letters asked the firms to provide data on loans they funded last year without first verifying the applicant’s stated income, revenue, employment status and other information relevant to the borrower’s ability to repay the loan.
Partnerships with banks that originate the loans. The letters asked for specific details about this kind of bank partnership, which is common in the online lending industry. The partnerships allow online lenders to skirt state-level licensing and interest-rate rules, since banks are allowed to charge the same interest rates nationwide.
Investor protections. The letters sought four years of data on the firms’ sales of individual loans, as well as their sales of loans bundled together into bonds. "How exactly do the firms’ processes for selling loans to investors or securitizing loans work?" Dresslar wrote. "How do those processes comply with California securities laws?"