The CFPB's Innovation Lab Is a Bet on Online Lenders

The government regulator wants to work hand in hand with fintech companies with the hope of fostering innovation while protecting consumers from unsavory practices.

From its tumultuous origins in the wake of the financial crisis of 2008 to the uneasy stewardship of a skeptical Trump administration, the Consumer Financial Protection Bureau (CFPB) has stood upon the shakiest of foundations. Even the name of the agency has become a point of contention, with acting Director Mick Mulvaney changing its name to the Bureau of Consumer Financial Protection.

But one arena where the regulatory body has remained more or less consistent is in its championing of online lenders, with its recent establishment of an Office of Innovation as the latest bid to leave its mark on a growing segment of the financial industry. Although its name sounds lifted from a rough draft of "1984," the Office of Innovation serves as a digital sandbox where fintech companies can run new products and services aimed at consumers by the regulators first. In theory, this allows fintech companies to gain regulatory approval without having to jump through quite as many hoops, meaning everyone ends up a winner—again, in theory.

Last week, Mulvaney tapped Paul Watkins, who headed up the nation's first fintech sandbox as part of the office of the attorney general in Arizona, to head the national Office of Innovation. "I am delighted that Paul Watkins is bringing his deep expertise, track record of protecting consumers, and commitment to innovation to the Bureau," Mulvaney said in a press release. "I am confident that, under his leadership, the Office of Innovation will make significant progress in creating an environment where companies can advance new products and services without being unduly restricted by red tape that belongs in the 20th century."

The focus on fintech illustrates how much of a player these companies have become in the personal finance marketplace over the years, and how important it is for consumers to take the responsibility of knowing how to spot an obvious scam. If your next online lender shows any of the red flags below, you need to seriously reconsider your decision before passing the point of no return with a personal loan.

Sky-High APRs

Paying interest is part of the deal of taking out a loan, but one of the most significant advantages of going to an online lender is that the fintech company employs a streamlined approval system that cuts down on cost and the interest it needs to charge borrows in order to stay in business. These lenders have sprouted on the internet like mushrooms in the forest after a rainstorm, and just as certain fungi will leave you deathly ill, so too will certain lenders cause you a whole heap of financial pain.

One of the most basic measures of whether a loan will cause more harm than good is the APR that comes with it. This will normally fluctuate based on how much of a credit risk the lender judges you to be, but you shouldn't touch anything above 36%. Otherwise, you're going to be spending all of your time, energy and dwindling money on paying back interest, which defeats the purpose of taking out a loan in the first place.

Instant Approval

Taking a personal loan means both you and the lender have entered into a serious financial relationship, which deserves serious consideration from both parties. You would feel weird and uneasy if the guy you grabbed one drink with immediately started posting about his "new girlfriend" on social media. Take the same skeptical attitude toward any lender that instantly approves you for a loan as soon as you finish entering your information. There's a good chance the business model is based on attracting the biggest number of borrowers possible—regardless of credit risk—and bilking them with unreasonable interest rates, hidden fees and more.

Unreasonable Urgency

In what could be considered a corollary to the point above, no lender should be burning up the phone lines or assaulting your inbox with demands that you either pull the trigger on a loan you started applying for, or to take out another loan entirely. Above-board lenders have enough confidence in their products and the creditworthiness of the borrowers they've approved to let the process play out without harassment or hectoring.

James Ellis

James Ellis is a Staff Writer for ValuePenguin, covering credit, banking, travel and other personal finance topics. He previously wrote for Newsweek, Men's Health, and other nationally-published magazines.

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