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Illinois, California and New York are all taking initial steps to try to crack down on borrower abuses in the fast-growing digital lending marketplace. The states are facing pressure to intervene because federal agencies have yet to take decisive action.
April 22 -
A new survey from seven regional Federal Reserve banks found that many small businesses are going online to access credit. But even when they are approved, applicants often end up dissatisfied because the loans carry high interest rates or have unfavorable repayment terms.
March 3 -
Antonio Weiss, a counselor to Treasury Secretary Jack Lew, called Thursday for greater transparency in the pricing of online small-business loans.
October 29
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That includes ensuring their access to credit by avoiding regulatory overreach in the rapidly growing online lending sphere.
I'm well aware of the challenges facing small-business owners. I used to be one. Starting an enterprise requires courage, dedication and hard work to be successful. Unfortunately, a quality product and sound business plan will not always guarantee success because in today's climate small-business owners are forced to comply with a complex, fragmented, unpredictable and costly regulatory structure.
Another key challenge for small businesses is access to capital. Credit availability has tightened, especially in rural areas like those that make up a majority of my district in Colorado, due to burdensome regulations that have inundated traditional lenders like community banks and credit unions. Without access to capital, many small businesses cannot pursue new opportunities or grow their businesses by purchasing equipment, expanding inventory and hiring employees. Consequently, 28 million American small businesses are at risk for stagnation or failure because of rising regulatory compliance costs for both lenders and borrowers.
Online small-business lending, which uses advanced underwriting techniques, can expand access to credit for our Main Street businesses. These lenders bring technology-based efficiencies to the small-business market, including tailoring the size of loans, repayment amounts and durations to help small businesses gain access to capital they can use to serve their unique business needs.
Online small-business loan applications also create an efficient method for capital distribution. Lenders are able to make a decision about a loan in a fraction of the time and the loan proceeds can be disbursed to the small business borrower's account in days or hours. The shorter time frame enables businesses to move quickly in order to capture opportunities suited to their day-to-day operating needs or short-term use cases. For example, a florist looking to increase inventory ahead of the busy Mother's Day weekend could get the needed funds in a matter of hours and meet the influx of customer demand. In addition, online lenders can offer small-business borrowers a shorter duration to repay the loan, structuring a borrower's repayments to match the increase of cash flow from the loan and reduce debt.
As with most innovations in the financial services market, there have been calls to regulate this sector of our economy more heavily. However, despite claims to the contrary, the online lending space is already regulated. Online small-business lenders, especially balance sheet lenders, are subjected to an existing rigorous regulatory framework, including the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Bank Secrecy Act, anti-money-laundering regulations, the prohibition on "unfair or deceptive acts or practices" and Office of Foreign Assets Control regulations. In addition to federal regulations, online small-business lenders are subject to state regulations and examination, and many are also subject to money transmitter laws and regulations.
It is imperative regulators as well as my colleagues in Congress approach the online small-business loan market with care and an understanding of the contribution these lenders have made in expanding access to credit. Regulation for the sake of regulation has already had a devastating impact on other sectors of the financial services industry. Using this mentality for online small-business lender will only have negative consequences.
Rep. Scott Tipton, R-Colo., is a member of the House Financial Services Committee.
