As Banks Partner with Lending Marketplaces, Both Seek Regulatory Reform

As Banks Partner with Lending Marketplaces, Both Seek Regulatory Reform

Lending marketplaces and their emerging technologies have simplified the loan application and approval process for small business owners seeking capital, and banks are taking notice. According to a recent Lendio infographic, loan origination through lending marketplaces has increased 700% since the Great Recession, while banks have been turning away applicants due to tightened regulations.

Once competitors, banks and nonbank lenders are combining forces and resources through increasing partnerships, acquisitions and integration. Because banks are subject to far more stringent regulations than non-bank lenders, historically they have been careful about dealing with outside firms.

“As a heavily regulated industry, banks are particularly careful and perform the appropriate due diligence to ensure the companies they’re partnering with are adhering to financial regulations,” said Rob Morgan, vice president of emerging payments at the American Bankers Association.

To make such partnerships more viable and beneficial, small business borrowers, online lenders and incumbent banks alike have called for regulatory reform. Recently the Consumer Financial Protection Bureau (CFPB) announced an inquiry into the small business finance market, aimed at identifying the financing needs of small businesses. The consumer watchdog called for comments from small business owners, consumer groups, bank and non-bank lenders, regulators and other community development organizations. Groups have been chiming in with mixed responses, advising the bureau to proceed with caution as well as calling for exemption to any further rulemaking that could increase regulatory burdens on the small business lending sector.

Republicans on Capitol Hill have said the post-financial crisis Dodd-Frank Act, which created the CFPB, has made credit access more expensive and more difficult to obtain for small businesses.

“It has been almost seven years since the passage of the Dodd-Frank Act. We were told it would lift our economy, but instead we are stuck in the slowest, weakest, most tepid recovery in the history of the Republic,” said House Financial Services Committee Chairman, Jeb Hensarling (R-TX) during a meeting to to examine the Financial CHOICE Act, the Republican alternative to the Dodd-Frank Act.

The Financial CHOICE Act would reverse many of the Dodd-Frank consumer protection laws advanced by the CFPB and prevent the agency from regulating small dollar loans or initiating enforcement actions against lenders. The act passed through the full House on a party-line vote this week. Senate Majority Leader Mitch McConnell said Tuesday he is skeptical that Senate Democrats will support the measure. Republicans hold just 52 seats in the Senate, where major bills require 60 votes for approval.