Even before the Treasury Department released its policy recommendations for the marketplace lending sector, an industry-backed campaign opposing new rules for small-business credit was underway.
Financial services industry lobbyists anticipated — correctly, as it turned out — that the Treasury would express concern about the rapid proliferation of small-business lenders online while their better-regulated counterparts in the consumer realm appeared less worried.
So it was not a surprise that the Treasury declared its willingness Tuesday to work with Congress on legislation to develop new protections for small-business borrowers. The department's 45-page white paper argues that business loans under $100,000 have much in common with consumer loans but do not come with the same protections.
"Focusing on these common characteristics below this size threshold, combined with effective oversight, would protect self-employed and microbusiness owners while minimizing the compliance burden on larger small business loans," the paper states.
But industry representatives swiftly rejected the idea that new legislation is needed to protect small-business owners.
"There are numerous laws today that ensure small business loans are made responsibly. What is needed is proactive oversight to ensure that rules are followed and borrowers are treated fairly regardless of the provider," Rob Nichols, president of the American Bankers Association, said in an email. "Adding more regulations and restrictions on all lenders — bank and non-bank — will only make it harder and more costly for the smallest loans to be made."
National Association of Federal Credit Unions General Counsel and EVP of Government Affairs Carrie Hunt said in a statement: "NAFCU and our members welcome Treasury's study of this growing market sector in an effort to protect consumers while promoting a competitive marketplace for all financial institutions, including credit unions. Treasury's report largely confirms our concern that there exists an uneven playing field for overregulated credit unions as compared to online marketplace lenders, which are not subject to the same disclosure rules and underwriting standards that apply to traditional lenders.
Going forward, Hunt added that NAFCU strongly urges "Treasury and other financial regulators to promulgate rules that require online market lenders to meet regulatory requirements such as the protections of Truth in Lending Act and underwriting standards for loans."
The Coalition for Responsible Business Finance, one of several new trade groups that have emerged to represent online small-business lenders, argued that the Treasury did not do enough outreach to small-business owners to support its conclusions.
"That raises a red flag," said Tom Sullivan, the group's executive director. "I'm hopeful that this is a midpoint in the dialogue and not a set of conclusions that they've reached."
Another trade group that represents large technology firms also seemed less than thrilled about the idea of new legislation. Financial Innovation Now was co-founded by Amazon, PayPal and Intuit, all of which have dabbled in small-business lending, as well as Apple and Google.
"It is our hope that regulators and congressional leaders will work to support an environment in which innovative technologies can continue to enable small businesses to access credit," said Brian Peters, the group's executive director.
Online small-business lenders have been bracing for a fight in Washington. Part of that effort involves taking steps to develop self-regulatory standards and industry best practices.
Last week, OnDeck Capital, Kabbage and CAN Capital announced the formation of the Innovative Lending Platform Association. That group is developing a pricing disclosure box reminiscent of the government-mandated disclosures on credit card statements that lay out key information for borrowers.
In 2015, another group of lenders, including some nonprofit firms, developed the Small Business Borrowers Bill of Rights. That self-regulatory document requires signatories to meet certain standards regarding the transparency of loan terms and interest rates, as well as marketing, underwriting and collection practices. It now has more than 50 signatories.
In its white paper, the Treasury cited the Small Business Borrowers' Bill of Rights as evidence that borrower protections can be added "without adding undue burden or cost" to the industry.
But it remains to be seen whether the Treasury will push hard for new legislation on what are sometimes called micro business loans. As on many issues, the outcome of this fall's presidential election will likely have a big impact.
And overall, the Treasury did not take a confrontational approach with the online lending industry. The agency pointed to numerous benefits associated with the new wave of lending, including improvements in access to credit.
Industry groups generally couched any criticisms of the paper's specific recommendations with praise for the Treasury's broad approach.
But at the same time, the paper made it clear that more oversight was necessary, including calling for regulators across different agencies to form a working group.
"The call for a coordinated government approach to marketplace lending is also a cause for concern for these companies," Jaret Seiberg, an analyst with Guggenheim Securities, said in a note to clients. "We believe these firms started in a gray area between state and federal oversight. Over the past year, we have seen federal oversight pick up with the [Consumer Financial Protection Bureau] taking consumer complaints and the [Federal Deposit Insurance Corp.] warning banks that facilitate the marketplace lenders. This should accelerate with an even stronger and better coordinated federal effort."
On Capitol Hill, several prominent Democrats have been pushing the Treasury and other agencies to take a closer look at online small-business lending.
In a November letter to Treasury Secretary Jack Lew, Democratic Sens. Sherrod Brown, Jeanne Shaheen and Jeff Merkley argued that online small-business lending needs more oversight.
"As we saw during the crisis, financial markets that fall between the cracks may result in predatory lending, consumer abuse, or systemic issues," the letter said.
Congressional Republicans have been more supportive of the online lending industry. And last week brought a sign that some of their Democratic colleagues will also oppose any effort to impose new rules. Twenty House members, including Democratic Reps. William Lacy Clay, David Scott and Juan Vargas, asked the Treasury to exercise caution.
"Given the impact online marketplace lenders have had on small business lending, and given that the industry is still in early stages of development, we urge the Department to encourage the evolution of this market without dampening or delaying innovation," they wrote.
