A growing number of financial products and services are becoming available online. From mortgages to student loans to small business loans, consumers and business owners are able to borrow with a few strokes of the keyboard. While the increased accessibility of products and services may have some benefits for consumers, a number of unregulated financial products may actually do more harm than good. In order to further assess the situation, the United States Department of the Treasury has sent out a request for information about online lending, specifically focusing on small business lending and consumer lending. The data that the Treasury Department receives will help it determine what kind of regulation may be needed to protect borrowers in the online marketplace.
Online lending has grown incredibly fast and is turning into a multi-billion dollar market. According to a 2014 report by the Harvard Business School, the outstanding portfolio balance of online lenders has been doubling every year. Online loans have become increasingly popular with small business owners who are frequently unable to obtain loans from traditional financial institutions. The Harvard report notes that, in the aftermath of the recession, small businesses struggled to obtain credit; the economy was recovering slowly, and banks were hesitant to take any risks with loans to small businesses. In the absence of the ability to access traditional credit sources, small business owners are increasingly turning to online lenders.
Woodstock Institute’s own research in the Chicago region found marked disparities in access to business loans that correlated with the race in income of the community in which a business was located. The report found that businesses in lower-income or majority-minority communities in the Chicago region were less likely to receive small business loans than businesses in higher-income or majority white communities. This report documents businesses’ lack of access to small loans from mainstream financial institutions, which may be a major reason why small business owners are turning to the internet for credit.
Some lenders have taken action to begin self-regulating the online lending marketplace. Woodstock Institute President Dory Rand recently participated with lenders such as Accion, the Aspen Institute, and Fundera at a press conference where they released a “Bill of Rights” for small business borrowers that included:
- The Right to Transparent Pricing and Terms
- The Right to Non-Abusive Products
- The Right to Responsible Underwriting
- The Right to Fair Treatment from Brokers
- The Right to Inclusive Credit Access
- The Right to Fair Collection Practices
These voluntary standards can help establish a foundation for safe online lending for small businesses, but they need to be reinforced by strong regulations that protect small business owners from unfair, deceptive, and abusive practices. The Treasury Department’s request for information can be a first step towards establishing essential protections for online borrowers. The deadline to submit information to the Treasury Department is September 30, 2015. Woodstock Institute strongly encourages individuals and organizations to participate, submit comments, and help the Treasury Department develop strong and comprehensive regulations in this rapidly growing field. We will be developing our own comments and encourage groups who are unable to submit their own comments to sign on.