Nov. 3 — Three top Democrats raised concerns the rapid expansion of online lending may pose risks to consumers and small business in a letter to Treasury Secretary Jack Lew and Small Business Administration Administrator Maria Contreras-Sweet.
“It is possible that the current online marketplace for small business loans falls between the cracks for Federal regulators,” wrote Sens. Sherrod Brown (D-Ohio), ranking member of the Senate Banking Committee, Jeanne Shaheen (D-N.H), the Senate Small Business Committee ranking member, and Jeff Merkley (D-Ore.).
The letter comes as banking regulators are sifting through more than 100 comments submitted in response to a Treasury Department request for information regarding how to deal with the rise in marketplace lenders.
The senators said the emergence of online loans and other alternative types of financing has the potential “to fill critical credit gaps experienced in communities across the United States,” including small businesses who have had trouble getting loans from traditional banks.
However, the letter also reflected concerns raised by consumer groups and community banks about lax underwriting associated with some online loan products and whether the lenders are being transparent about fees, interest rates and other credit terms.
The letter asked Lew and Contreras-Sweet to provide details on the authorities that federal agencies currently have to supervise and examine companies offering online small business loans, the underwriting criteria being used by online lenders and how consumer protections for online loans differ from traditional products, such as home equity loans and credit cards.
“As we saw during the [home mortgage] crisis, financial markets that fall between the cracks may result in predatory lending, consumer abuse, or systemic issues,” the senators wrote. “We are very interested in ensuring that this market provides credit to small businesses and consumers in a way that prevents abusive practices while expanding economic opportunity.”
The senators' query comes the same day that Amazon, Apple, Google, PayPal and Intuit announced the formation of an advocacy group, Financial Innovation Now. In a Nov. 3 statement, the group said it intends to lobby for a regulatory environment that supports innovations in financial services, including online lending for small businesses.
PayPal in 2008 acquired Bill Me Later, Inc., which offers an online line of credit to consumers, and began offering small business loans through another program in 2013, according to the company's response to the Treasury request for information.
In addition to Treasury's query into marketplace lending, Financial Innovation Now is concerned about the potential impact the Consumer Financial Protection Bureau's pending rule on prepaid products could have on mobile payments, Brian Peters, the group's executive director, said in a Nov. 3 interview.
In a subsequent e-mail, Peters said the senators' letter recognized that “technology is empowering small businesses to access capital in ways previously unavailable.” He called on policymakers to promote “industry best practices that protect consumers and small businesses while maximizing the diversity and innovation in these new services.”
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