July 5, 2017
By Bob Coleman
C-Suite Wednesday — Congressman Investigates Fintech Small Business Lenders
I don’t know if the CFPB will eventually require small business lenders to prove they do not discriminate underserved markets by either declining loans or charging higher interest rates, but the drumbeat continues.
Democratic Congressman Emanuel Cleaver, II of Missouri is demanding five FinTech small business lenders share information about their company products, fees, and methods when it comes to disclosures and potentially discriminatory practices. The letters were sent to Lending Club, Biz2Credit, Fora Financial, Prosper and Lend Up.
The demand is a follow-up of a letter Cleaver sent to the CFPB urging investigation of FinTech lenders, “While the CFPB’s primary focus is on protecting consumers, the Congress also gave clear authority for the agency to protect borrowers of small business loans from discriminatory practices. I am deeply concerned that some FinTech companies may be using algorithms that shut out hardworking individuals from communities of color from accessing affordable small business credit. The CFPB must use its authorities under the Equal Credit Opportunity Act to combat these abuses.”
“According to a Harvard Business School study exploring the promise and challenges of alternative small business lending, there were some serious problems identified amongst these companies:
“High costs. Lenders commonly charge APRs above 50% and can easily reach over 300%.
“Double dipping. Repeat borrowers incur additional fees each time they renew their loans.
“Hidden prepayment charges. Unlike traditional loans, many alternative lenders require payment of the full interest even when loans are repaid early.
“Misaligned broker incentives. Small-business loan brokers often recommend the most expensive loans because they earn the highest fees on those loans.
“Stacking. Multiple lenders provide loans to the same borrower, resulting in additional and hidden fees.”
The House has passed legislation eliminating Dodd-Frank requirements to collect data in connection with credit applications made by women or minority-owned small businesses.
The Treasury department has also issued a report with similar recommendation to the House legislation.
The legislation faces an “uncertain” fate in the Senate.