WASHINGTON, D.C. – Today, Oregon’s Senator Jeff Merkley, Senator Sherrod Brown (D-OH) and Senator Jeanne Shaheen (D-NH) pressed for information on the emerging financial technology market and how it is affecting small businesses and consumers who use this market to access credit.
The Senators serve, respectively, as the Ranking Member of the Senate Subcommittee on Financial Institutions and Consumer Protection, the Ranking Member of the Senate Banking Committee, and the Ranking Member of the Senate Small Business Committee.
In recent years, more and more Americans are turning to online companies to access credit. The letter seeks more information about this emerging trend, including potential risks and benefits for consumers as well as potential to fill gaps in small business financing that are not met by traditional lenders. As more companies offer credit or capital advance products, it is important to ensure that the terms of the products are clear to consumers and small businesses. The letter also seeks to obtain more information about impact of these companies on traditional financial institutions, particularly community banks or credit unions.
In a letter to Treasury Secretary Jack Lew and the head of the U.S. Small Business Administration, Maria Contreras-Sweet, the Senators wrote, “Over the past several years, financial technology firms (often collectively called “fintech”) have expanded their marketplace presence and lending to consumers and small businesses. This emerging trend has the potential to fill critical credit gaps experienced in communities across the United States. As growth in this area continues, we believe it is critical for federal regulators and Congress to understand the marketplace and ensure that consumers and small businesses have access to clear, transparent information about credit products offered online.”
“It is possible that ‘the current online marketplace for small business loans falls between the cracks for Federal regulators,’” they continued. “As we saw during the crisis, financial markets that fall between the cracks may result in predatory lending, consumer abuse, or systemic issues. 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 full text of the letter follows below.
Dear Secretary Lew and Administrator Contreras-Sweet:
Over the past several years, financial technology firms (often collectively called “fintech”) have expanded their marketplace presence and lending to consumers and small businesses. This emerging trend has the potential to fill critical credit gaps experienced in communities across the United States. As growth in this area continues, we believe it is critical for federal regulators and Congress to understand the marketplace and ensure that consumers and small businesses have access to clear, transparent information about credit products offered online.
We were pleased that earlier this summer the Treasury Department asked the public for input on fintech expanding access to credit through online marketplace lending. This process will help provide a better understanding of this marketplace. A number of new companies are offering a diverse range of products and services, from alternative payment services, mobile payments, marketplace loans or cash advance products, and are also structured very differently in terms of holding risk on their own balance sheet, partnering with financial institutions, or connecting capital from institutional investors to borrowers.
Small and medium-sized businesses were hit harder than larger businesses during the financial crisis, and have been slower to recover. Small business loans are down about 20% since the financial crisis. Small business lending can be difficult for both lenders and borrowers, as creditworthiness may be difficult to assess and costs of underwriting are high. Historically, community banks are a primary source of credit for small businesses, but recent data indicates that community banks are facing increased competition by larger banks and alternative lenders.
A recent survey by the Federal Reserve showed that one in five small business owners are turning to an online lender. Some have suggested that small businesses are increasingly turning to online lenders due to difficulty securing traditional bank financing. The Treasury Department noted recently that small businesses rely heavily on community bank lending but that “a majority of small firms…and startups…were unable to secure any credit in the prior year.” 
Online marketplace lending is only one source of small business capital; many other non-banks, such as alternative payments companies, are providing sources of capital to small businesses. For example, some fintech companies offer merchant cash advances (MCAs), a product that offers businesses a lump sum payment in exchange for a share of future sales (often through a fixed percentage of daily credit card sales receipts).
Observers have questioned what the appropriate role of federal regulators should be in supervising non-bank companies providing small business capital. Government agencies such as the federal financial regulators, Small Business Administration (SBA), or the Federal Trade Commission may have a role to play, as well as state regulators. However, it is possible that “the current online marketplace for small business loans falls between the cracks for Federal regulators.” As we saw during the crisis, financial markets that fall between the cracks may result in predatory lending, consumer abuse, or systemic issues.
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. To that end, we request more information on the following questions:
- Please describe the size and characteristics of online small business lending, including underwriting criteria and differences between underwriting of SBA loans and those of non-SBA loans. What are the most significant risks in this market?
- What is the authority of your agency and other federal agencies to supervise and examine companies offering online small business loans?
- Some fintech lenders have relationships with financial institutions, which are regulated by the federal and state financial regulators. Community banks have traditionally been the primary providers of small business credit. What is the impact of online small business lenders on community banks, and what outreach will you undertake to ensure that community banks are aware of the risks and benefits of partnering with fintech lenders? How do you view online small business lenders in the broader financial regulatory framework?
- The majority of small businesses are owned by sole proprietors who may have otherwise turned to home equity lines of credit or credit cards, which would come with protections applicable to consumer loans. These protections may not apply to small business loans. The Cleveland Federal Reserve Bank recently published a survey noting that many small business owners find it difficult to compare online small business loans due to lack of standardization in terms. What are the requirements for disclosing terms to small business owners and ensuring that they are presented transparent fees and interest rates?
- Many fintech lenders use non-traditional data to underwrite loans, such as social media information or search engine history. What recommendations do you have for these companies relating to data security and privacy? How does your agency ensure that SBA loans and non-SBA loans are made in compliance with fair lending laws?
As Ranking Member of the Senate Banking Committee, Ranking Member of the Senate Small Business Committee, and Ranking Member of the Subcommittee on Financial Institutions and Consumer Protection, we are especially interested in understanding the opportunities, challenges, and risks in these emerging trends in small business capital. We would appreciate a response no later than November 30, 2015.
 Karen Gordon Mills and Brayden McCarthy, The State of Small Business Lending: Credit Access during the Recovery and How Technology may Change the Game (Jul. 2014), at http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf.
2 Speech by Lael Brainard, Board of Governors of the Federal Reserve System, Community Banking in the 21st Century (Sept. 30, 2015) at http://www.bis.org/review/r151001b.pdf.
3 Federal Reserve Bank of Cleveland, Alternative Lending through the Eyes of “Mom and Pop” Small-Business Owners: Findings from Online Focus Groups (Aug. 25, 2015), at https://www.clevelandfed.org/en/Newsroom%20and%20Events/Publications/Special%20Reports/sr%2020150825%20alternative%20lending%20through%20the%20eyes%20of%20mom%20and%20pop%20small%20business%20owners.aspx.
4 Department of the Treasury, Public Input on Expanding Access to Credit through Online Marketplace Lending (July 20, 2015, comment period closed September 30, 2015), at http://www.treasury.gov/connect/blog/Documents/RFI%20Online%20Marketplace%20Lending.pdf.
5 Former Small Business Administrator Karen Gordon Mills, http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf.