A group of nonbank small-business lenders unveiled a self-regulatory pledge Thursday designed to bring greater clarity and consistency to their industry's pricing.
The document, called the Small Business Borrowers' Bill of Rights, represents the first attempt to standardize best practices in the fast-growing business of making business loans online.
The sector has at times been described as the "Wild West" due to the low level of regulation. State usury laws and federal laws mandating uniform disclosures to borrowers generally don't apply to small-business loans as they do to consumer loans.
Some of the largest firms in the industry, including Lending Club and Funding Circle, were among the document's initial signatories.
The lenders' pledge contains six points. They deal with transparency of terms and rates, prevention of debt traps for businesses, and marketing, underwriting and collection practices.
During a panel discussion Thursday in Washington, Funding Circle co-founder and U.S. managing director Sam Hodges indicated that borrowers who don't understand the loans they're taking out may risk becoming overleveraged and going out of business.
"If you're taking a pound of flesh up front," he said, "that leads to the same problems as the last financial crisis."
Funding Circle and Lending Club both sell their small-business loans to investors through online marketplaces. Hodges argued that those investors, who are seeking high-yield business loans in today's low interest rate environment, will stand to make more money from a sustainable marketplace in which borrowers are treated fairly.
"What we are proposing as part of the bill of rights," said Lending Club CEO Renaud Laplanche, "is really to disclose interest rates and be up front about it and not assume that small business owners who are busy people with other things on their mind would spend the time to do the math."
Laplanche cited factoring, in which a company sells accounts receivable or invoices, as an example of a less than transparent lending.
The six-point pledge has a small list of backers, but some of them are prominent, including former Small Business Administration head Karen Mills and former Treasury Assistant Secretary Michael Barr. It's unclear, though, how much traction the document, which was not widely circulated prior to Thursday's event, will pick up.
Other online small-business lenders expressed enthusiasm for greater transparency, if not a full endorsement of the principles espoused in the so-called bill of rights.
"We ultimately believe there are many responsible lenders providing small businesses a range of credit products that serve important business needs and help businesses grow," OnDeck Capital CEO Noah Breslow wrote in an email to American Banker.
"When it comes to transparency, we believe the key consideration is whether a small-business owner can clearly understand the credit product and assess if it is a proper fit for the business need or use-case."
Breslow added that "we and the broader industry would need to have the opportunity to review the Bill of Rights document in detail before making specific comments" and "we are generally supportive of efforts to advance industry standards."
Sergio Rodriguera, chief strategy officer of The Credit Junction, a small-business manufacturing lender, attended Thursday's panel discussion as an audience member. He said that while his company needs to review the document fully, it is likely to sign on.
"We want to make sure small-business owners are educated and aware," Rodriguera said. "We're fully for that."
The pledge is the brainchild of former Small Business Administration and National Economic Council aide Brayden McCarthy, who is now the head of policy and advocacy at Fundera, a website that aggregates small business loan offers.
In an interview earlier this week, McCarthy and his former boss, Mills, argued that self-regulation should not supplant oversight by state and federal governments.
Not everyone in the industry wants the government to step in, of course. But at Thursday's event, there was a consensus that the industry should take its steps to introduce better practices.
"I don't think it's too late to get the market going in the right direction," Funding Circle's Hodges said. "But I do think it's important that we take that stand."