The consumer lending industry will soon see marketplace lenders change their origination models, in the wake of the the Supreme Court decision to uphold Madden v. Midland Funding LLC, according to Scott Pearson, a partner at Ballard Spahr and leader of the firm’s Marketplace Lending Task Force. The case requires non-bank companies to adhere to state usury laws when capping interest rates on loans. “We’re working with a number of lenders that are evaluating or making changes to their models,” he said.
The case, which did not involve a marketplace lender, had implications for online lenders that use bank partners to originate loans, and take advantage of the bank’s exemption from interest caps. LendingClub, for one, altered its model in March, so that partner WebBank mantains a small interest in all loans booked.
“Whether you’re focused on what’s good for consumers, or you’re focused on the industry, it’s really disappointing that the court didn’t see the importance of the case — from an economic standpoint,” Pearson said. “There’s no question that the states of New York, Vermont, and Connecticut [which are covered by the Madden ruling] have been adversely affected, because a lot of loans are not being made in those states,” nor are investors buying, he added.
The auto finance industry has seen a number of new entrants that use a marketplace lending model, such as AutoFi, which uses a bank partner model to originate loans, and Avant Inc., which uses a hybrid model where half its loans are originated through a bank partner.