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A Lending Marketplace’s Take on Consumer Protection and Regulatory Reform

Jun 07, 2017 • 5 min read
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      Regulators are once again taking a deeper look into small business lending as they seek to understand how to encourage transparency and best practices in the small business sector of financing.

      The Consumer Financial Protection Bureau (CFPB) recently launched an inquiry into the small business financing market, calling for comments from interested parties including various consumer groups, bank and non-bank lenders, small businesses, regulators and other community development organizations. The inquiry is intended to identify the types of credit products being offered to small businesses by financial institutions, the sources that small businesses typically contact for credit and how lenders define and quantify small businesses.

      The request for information is also the CFPB’s first step in forming rules about the collection and reporting of lending data. For the most part, there are no data available on the race, ethnicity or sex of commercial borrowers, and gathering such data is against the law because it cannot be used in making lending decisions.

      Thus far, the overall response to the inquiry has been mixed. Banks have advised the bureau to proceed with caution while credit unions are asking for exemption to any further rulemaking that could increase the regulatory burdens and compliance costs on small business lending. Lawmakers have called into question the privacy impact of publicly releasing lending data.

      So where do lending marketplaces stand on these issues?

      Lending Marketplaces Believe in Protecting Business Owners and the Industry

      We believe in protection for business owners as well as the industry. Lending marketplaces and online lenders are focused on serving the small business borrower; our number one goal should always be to protect these entrepreneurs who are not only the backbone of the U.S. economy, but the lifeblood of the online lending industry. Their success is our success and we champion that. We agree that coming together in the name of creating standards for transparency and best practices in lending is the best way for us to protect both the customer and the industry. We want to safeguard the borrower while at the same time leave the door open for continued innovation and growth in online lending.

      Ultimately as online lenders and marketplaces, we should be laser focused on providing a good experience for our customers, the small business borrowers. If we’re doing that, as an industry we can sort out the bad actors that don’t have the borrowers’ best interests in mind without relying solely on the government to do so. As a marketplace for small business loans, Lendio works with over 75 different lenders to provide borrowers access to capital. Because of our unique platform we are perfectly positioned to weed lenders out of our deals and leads if they aren’t up to par. Lenders alone can’t do that.

      Lending Marketplaces Believe in Educating Lawmakers to Cut Down Red Tape

      In December, the U.S. Office of the Comptroller of the Currency announced it would offer special-purpose charters that allow online lenders and marketplaces to do business nationwide, circumventing state regulations that require firms to be licensed in each state they do business.

      The debate over these charters is still heating up. Recently the New York Department of Financial Services filed a lawsuit challenging the OCC’s fintech charter, calling it “lawless, ill-conceived and destabilizing of financial markets.” The Conference of State Banking Supervisors has also filed a similar lawsuit.

      Lending marketplaces and online lenders believe in helping to educate lawmakers in order to avoid regulatory overload. As an industry, it’s our goal to avoid layers of red tape that increase compliance costs and ultimately limit the loan options available to small business borrowers. We can do a lot to avoid regulatory overload. If we work together as lenders and marketplaces to educate and properly inform our legislators, they’ll be better able to put in place fair regulations that protect both borrowers and lenders. Education should be the key objective of both groups, lenders and legislators. This will help eliminate certain knee-jerk reactions to hot-topic, sensationalized stories that are a two-percent issue versus a majority issue most of the time.

      Lending Marketplaces Believe in Working with Regulatory Groups

      In the name of establishing guidelines to avoid practices like double dipping, stacking and other predatory forms of lending, many working regulatory groups have formed in the industry, and many of them are made up of online lenders and marketplaces.

      • The Innovative Lending Platform Association (ILPA) represents a group of online lending and service companies that serve small businesses. All are united in their commitment to small business success through establishing a set of best practices and standards for small business lending. One of the ILPA’s biggest initiatives is SMART Box (Straightforward Metrics Around Rate and Total Cost). A model for small business loan pricing disclosure, SMART Box helps small business owners to better compare and assess their finance options, and if widely-adopted, it could become a unifying tool in the industry.
      • The Electronic Transactions Association (ETA) is a working advocacy group for the payments industry, including online small business lending. The ETA influences, monitors and shapes the industry through education and policy advocacy. Lendio is one of the ETA’s 500 members. The ETA’s Office of Government Affairs works with policymakers and industry groups in Washington D.C. to help influence legislative and regulatory decisions.
      • The Marketplace Lending Association (MLA) seeks to promote transparent and customer-focused marketplace lending practices through the Small Business Borrowers Bill of Rights. The bill calls for online lenders to uphold small business borrowers rights to transparent pricing and terms, non-abusive products, responsible underwriting, fair treatment from brokers, inclusive credit access and fair collection.

      As regulators dive further into the small business lending market, we as lending marketplaces seek to add our influence to their policy-making. Through our commitment to protecting business owners, educating lawmakers and working with regulatory groups to do so, we believe we can help incentivize small business owners, promote growth in the online lending industry and continue to add fuel to the U.S. economy.

      About the author
      Ethan Hanson

      Ethan Hanson is VP, Corporate Counsel at Lendio

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