We’ve seen a flurry of positive activity in recent weeks in the ongoing discussion about responsible lending standards for business owners and consumers. Opportunity Fund is closely following these developments because we believe that, over time, they may have big implications for the entrepreneurs and low-income savers we serve. Below is a summary of some of the biggest news:
Yesterday, the U.S. Treasury released a seminal white paper on online marketplace lending. The white paper, called “Opportunities and Challenges in Online Marketplace Lending,” was published after Treasury reviewed over 100 public comments (including Opportunity Fund’s) on the issue, and conferred with seven relevant federal agencies. To our delight, Treasury’s top recommendation to the federal government and private sector is that they “support more robust small business borrower protections and effective oversight.” Given that this research covered both consumer and business lending, it is particularly noteworthy that business borrower protections are given first billing. The report mentions the Small Business Borrower’s Bill of Rights as a best practice that suggests responsible lending “can be done without adding undue burden or cost to this emerging industry.” In what we consider a major oversight, however, the report did not include any analysis or recommendations about merchant cash advance products–a particularly high cost business financing option that is widely used and rapidly growing.
In another development, Google announced this morning that starting in July they will stop posting ads for consumer loans with terms of less than 60 days or APRs of 36% or higher. This effort is focused primarily at limiting online payday loans (which bypass state interest rate caps), not business financing. However, it sets an important precedent for two reasons. First, perhaps the most important marketing platform in the world has chosen to prohibit the advertising of damaging financial products on their site, despite the fact that the products still remain legal. Second, they have chosen to prohibit not only ads for high-priced loans, but also to prohibit very short-term loans. This move supports the notion that it is critical to consider the combination of the cost and repayment term (not just the cost alone) in determining whether someone can successfully repay their debt. This is the position Opportunity Fund has long advanced in expressing our concern about the practices of short-term high-cost lenders.
And last week three of the largest online lenders announced a plan to develop “a model small business lending disclosure called SMART (Straightforward Metrics Around Rate and Total Cost) Box.” The three providers of short-term high-cost credit—OnDeck, CAN Capital and Kabbage—have not signed on to the Small Business Borrowers Bill of Rights, and would have to change a lot about their business practices to be able to do so. They are, however, saying that their SMART box will include the very-important APR disclosure—which they currently do not make easily available to loan applicants. Opportunity Fund believes that responsible business lending must go well beyond disclosing APR, and needs to include full disclosure of prepayment penalties, confirming actual ability to repay and reporting to credit bureaus. We are, however, cautiously optimistic that this effort could represent a positive step toward true price transparency for small business owners.