CFPB, along with the state regulators, are cracking the whip on FinTech companies. California has advanced a lot of enforcement actions and investigatory measures. The Telephone Consumer Protection Act (TCPA) is one such regulation under which a lot of companies have come under scrutiny.
Regulators have tightened the screws and the ripple effect has been felt by all players, big and small. To cope with the chaos, marketplace lenders (MPL) are hiring law firms to manage regulatory actions and ensure compliance. One such law firm is Ballard Spahr, one of the biggest law firms dealing with banking regulations.
What’s Going On With Marketplace Lending?
MPL have witnessed some crucial developments of great interest to Ballard Spahr.
- The industry has witnessed a substantial upsurge in regulations. The respected financial newspaper American Banker has hit hard at the lack of regulation in marketplace lending. Most importantly, MPLs were themselves pointing fingers at each other. This has solidified the perception that the industry is not regulated.
- The case of Madden v. Midland Funding, and the Lending Club fiasco, made matters worse. These events triggered an overreaction from regulators, and the market as a whole. This led to investors abandoning MPL-generated loans, which caused further operational disruptions.
TCPA restricts telephonic solicitations and the use of automated telephonic equipment. If someone is telemarketing without permission, there is a $500 per call statutory penalty. But companies have found a loophole by leveraging offshore call centers who impersonate hotel chains for extracting personal client information. This is then further sold as a lead to the lending industry. Pearson and his team ensure their clients are approved for telemarketing and are operating within the boundaries of the law.
How Ballard Spahr Helps MPLs Stay Compliant
Ballard Spahr’s list of clientele ranges from high profile commercial banks like Chase, Goldman, and BofA, PE and hedge funds, payday lenders, auto title lenders, and others who primarily focus on finance and debt collection.
Based in Philadelphia, Ballard Spahr has more than 500 lawyers across the United States specializing in litigation, business, finance, intellectual property, public finance, and real estate law. Scott Pearson heads the division concentrated on marketplace lending.
Pearson is widely regarded as an expert on the unique issues faced by this industry. He specializes in defending clients against the regulatory actions from Consumer Financial Protection Bureau (CFPB) and state authorities. Since the inception of CFPB, the regulatory compliance burden has increased manifold. Coupled with credit crisis of 2008, the workload for Pearson and his law firm has increased drastically. His clients not only seek his representation and legal advice, but they also want his firm to make sure their companies comply with CFPB regulations. Over the years, Pearson’s face off with regulatory authorities has helped him to understand what is required by regulators and on what points the prosecutors/class action lawyers are going to attack. This insight is extremely valuable for his clients.
What tilted Pearson’s interest in MPL were two major litigations in which he defended merchant cash advance (MCA). One was for Rewards Network and another was for AdvanceMe, which later became Capital Access Network (CAN). As a result of these two path-breaking cases, he gained a lot of insight into key compliance issues.
There’s also a lot of confusion surrounding the scope and definition MCA. According to Pearson, MCA is not a loan if structured properly, and if the originator complies with regulations, there’s no reason to face scrutiny. A prime example is AdvanceMe. It started as an MCA but now is a leading SME lender; Pearson and the General Council did all the consumer agreements for the company to provide an extra layer of security.
With so much happening, it’s hard for Pearson to predict how the MCA space will shape up in the future. He believes the current trend of companies entering and exiting the space will continue.
There’s a lot of demand for capital by the SME segment. But regulations and compliance issues have made some companies afraid to take the plunge. Therefore, being able to structure the product properly, and per the highest legal standards, is extremely important for survival. With the FinTech industry and the attendant regulations evolving, having a competent law firm is a necessity. Ballard Spahr have the expertise and the experience to be a valuable partner for MPLs.
Written with Heena Dhir.