31.08.2016, 18:47
Moody's: New Efforts to Bolster Lender Protections Won't Eliminate Legal Risks for Marketplace Lenders
OREANDA-NEWS. Two recent developments in the marketplace lending space will be credit positive for some asset-backed securities (ABS) backed by marketplace loans, Moody's Investors Service says in a new report. The moves, which reflect efforts to strengthen protections for holders of marketplace loans against legal actions by consumers, won't eliminate this risk entirely, however.
"Some marketplace lenders have recently changed their origination model to address legal risks that could impair consumer loans whose interest rates exceed state usury limits," says Moody's analyst, Jody Shenn. "Meanwhile, newly proposed legislation, if passed, would create more explicit protections from state usury laws for bank-originated loans that are sold."
Prosper Marketplace Inc. is the latest marketplace lender to adjust its origination model in the wake of the Madden v. Midland Funding LLC decision and other rulings, Shenn says. The changes strengthen loan holders' ability to protect themselves against legal actions by consumers whose loans have high interest rates, but don't completely remove this risk. Madden-like challenges, for example, could be heard by judges who are sympathetic to plaintiffs' arguments.
Separately, US Representative Patrick McHenry has introduced a bill in Congress that would more explicitly protect bank-originated loans from state usury laws. If passed, the legislation would state that if a loan is valid when made due to the federal preemption of state usury laws, it would remain valid if it is then sold, assigned, or otherwise transferred.
"Such legislation would be credit positive for marketplace lending ABS because it directly addresses the Madden ruling and would prevent legal challenges based on the same theory," Shenn says. "The bill is very narrow, however. It doesn't resolve the issue of whether the bank or marketplace lender is the true lender of a loan, for example, which therefore is a separate legal risk for securitization transactions."
"Some marketplace lenders have recently changed their origination model to address legal risks that could impair consumer loans whose interest rates exceed state usury limits," says Moody's analyst, Jody Shenn. "Meanwhile, newly proposed legislation, if passed, would create more explicit protections from state usury laws for bank-originated loans that are sold."
Prosper Marketplace Inc. is the latest marketplace lender to adjust its origination model in the wake of the Madden v. Midland Funding LLC decision and other rulings, Shenn says. The changes strengthen loan holders' ability to protect themselves against legal actions by consumers whose loans have high interest rates, but don't completely remove this risk. Madden-like challenges, for example, could be heard by judges who are sympathetic to plaintiffs' arguments.
Separately, US Representative Patrick McHenry has introduced a bill in Congress that would more explicitly protect bank-originated loans from state usury laws. If passed, the legislation would state that if a loan is valid when made due to the federal preemption of state usury laws, it would remain valid if it is then sold, assigned, or otherwise transferred.
"Such legislation would be credit positive for marketplace lending ABS because it directly addresses the Madden ruling and would prevent legal challenges based on the same theory," Shenn says. "The bill is very narrow, however. It doesn't resolve the issue of whether the bank or marketplace lender is the true lender of a loan, for example, which therefore is a separate legal risk for securitization transactions."
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