On Monday, April 18th, Senators Jeff Merkley, Sherrod Brown, and Jeanne Shaheen wrote a letter to the head of the U.S. Government Accountability Office (GAO), asking for an updated report on the rapidly-expanding financial technology, or “fintech,” marketplace. Their letter makes note of the fact that on-line and fintech lending has expanded beyond consumer loans to include small business lending. They note that “[I]t is possible that the current online marketplace for small business loans falls between the cracks for federal regulators. As we saw during the crisis, gaps in understanding and regulation of emerging financial products may result in predatory lending, consumer abuse, or systemic issues.” The letter continues to say “We are very interested in ensuring that fintech provides credit to small businesses and consumers in a way that prevents abusive practices while expanding economic opportunity. To that end, we are requesting that the GAO provide information.”
Readers of this blog know that Opportunity Fund has been raising the alarm about abusive and predatory small business lending for some time now, and we are pleased to see members of the U.S. Senate taking notice of the issue. We welcome greater scrutiny of the loan terms and disclosures of online lenders like OnDeck, Kabbage and CAN Capital. We’d like to see these companies become more transparent, and sign on to the Small Business Borrowers Bill of Rights. (See www.responsiblebusinesslending.org to see which lenders have signed on.) We do hope, however, that the GAO does not limit its investigation to online lending only.
The merits of fintech aside, what the GAO needs to understand is that much of the abusive lending is being done very much “off-line.” There are now literally hundreds of small finance companies teaming up with loan brokers and using boiler-room sales tactics to push expensive and short-term merchant cash and daily debit advances on unwitting small business owners. These low-tech lenders are taking advantage of the same regulatory vacuum that is allowing fintech companies to experiment with innovative new approaches to small business lending. The current federal and state regulatory landscape offers some protections and transparency requirements for lenders who products target consumers, which is a good thing. Unfortunately, owners of very small businesses benefit from no such protections when they engage in a “commercial” transaction, even if they are required to provide a personal guarantee. A lender to a small business does not need to quote an interest rate, nor calculate a monthly payment amount at the time a loan is made. Most of these alternative loan products do not allow borrowers to prepay early and save on total interest and fees, yet there is no requirement that this be disclosed to borrowers.
We therefore encourage the GAO to be sure to include all types of “alternative” small business financing in its investigation—not just fintech companies.