Washington, D.C.— Today, the House Small Business Committee, led by Chairwoman Nydia M. Velázquez (D-NY), held a virtual hearing examining the current landscape of financial technology (Fintech) lending for small businesses. In recent years, online lending has become an increasingly popular avenue for small businesses looking for alternative financing options.
“It has become clear to us on this Committee, through examples we’ve seen in prior hearings, and in our interactions with business owners in our districts, that small business owners applying for loans online are just as vulnerable as anyone to deceptive practices and unfair terms, and have a right to a full and fair disclosure of all terms, just like consumers,” said Chairwoman Velázquez. “Just because they don’t have an army of financial and legal professionals like big businesses, does not mean they should be left to fend for themselves when seeking credit.”
Though online lending supplies small firms with additional ways to access capital and many fintech lenders conduct business fairly, online loans can come with higher costs and predatory tactics. Small businesses that secure online loans can end up paying exorbitant interest rates well over 100 percent compared to the average annual percentage rate of charge (APR) ranging from 4 to 13 percent that a traditional bank offers. Critics also point to the automation present in online lending as a barrier for small businesses, especially those owned by entrepreneurs from traditionally underserved communities. Algorithms and data used in automatic underwriting could make credit assessments that disadvantage groups that are protected by fair-lending laws, such as women and minorities.
The economic pain caused by COVID-19 has increased the need for credit for small businesses and made them even more susceptible to being taken advantage of by lenders. In July, Chairwoman Velázquez introduced the Small Business Lending Disclosure and Broker Regulation Act to protect small firms. The bill would protect small businesses from predatory lenders by extending many of the safeguards currently afforded to consumers to commercial loans. Small business lenders would be required to provide additional information to borrowers, including annual percentage rates, financing charges for loans, loan terms, and payment amounts and collateral requirements.
During the hearing, Members discussed this bill and other potential policies that could protect small businesses while ensuring that they have adequate capital access.
“We believe lending transparency is vital to the success of American small businesses, and thus to our besieged economy. Transparent and responsible financing is not only vital to small business borrowers, it also encourages fair pricing and innovation in the lending market,” said Luz Urruita, CEO of Opportunity Fund in San Jose, California. “Importantly, transparency in lending levels the playing field for the businesses that are most vulnerable—low-income, minority-, veteran-, or women-owned businesses that often cannot rely on traditional lenders for accessing capital.”
“Larger, more established businesses may be able to hire an attorney who can translate confusing term sheets into digestible language so the entrepreneur can truly understand what is being offered to them and make an informed decision,” said Yanki Tshering, Executive Director of Business Center for New Americans in New York, NY. “However, as members of the Committee know very well, the overwhelming majority of small businesses are quite small, having 20 or fewer employees.1 The businesses BCNA typically serves are family owned and operated micro and small businesses, and the majority of them come to us to get credit up to $50,000, as they cannot access this financing from banks.”
“The protections Congress has given consumers do not exist for businesses, which are often presumed to have greater financial sophistication and savvy,” said Adam Levitin, Professor of Law at Georgetown University Law Center. “But small businesses often resemble consumers in terms of limited information, sophistication, and market power in credit markets. Because of a lack of regulation, the nature of information small businesses receive about credit offers varies considerably. Moreover, many small businesses have owners who do not speak English as a native language, placing these businesses at a disadvantage when dealing with often technical credit documents.”
“We’ve heard from lenders who can sustainably make these loans, create the partnerships necessary to bring the mission-based lending model online, and help these small businesses grow and create jobs, without resorting to deceptive or abusive practices,” said Chairwoman Velázquez. “However, it also remains clear to me that much more needs to be done in this space to eliminate unfair and abusive practices by predatory lenders who have no interest in helping a small business grow or a community flourish – only to enrich themselves at the cost of the small business.”