July 19, 2022
SBA Hot Topic Tuesday – More Transparency is Necessary with Fintech Small Business Lending
“Massive developments in financial technology, have shown real promise for expanding access to credit for small firms. New technology can expand access to timely credit for underserved entrepreneurs, increase financing options, and improve day-to-day operations for small businesses,” says House Committee on Small Business Chairman Phillips. “As the FinTech sector evolves, Congress must keep pace and ensure industry practices aren’t unfairly taking advantage entrepreneurs, especially those who may be vulnerable to abusive practices.”
The House Committee on Small Business discussed the transparency of Fintech lenders’ small business lending practices. While research shows that fintech lenders might be better able to make small-dollar loans to small businesses when compared to traditional banks, their different ways of disclosing information to borrowers can cause more harm to the small business.
Online loans tend to exceed traditional banks’ costs, and “some online products combine extremely high daily repayments with confessions of judgment, which can lock borrowers into an unsustainable cycle of debt and ultimately force the shutdown of the business.” With a lack of transparency in fintech’s loan underwriting process, there are complications in determining whether the underwriting methods have a discriminatory impact. Research found that many online small business loans have average monthly payments nearly double the borrowers’ net income.
With fintech’s growing influence in the small business lending marketplace, there must be better controls in place to protect borrowers from harmful and sometimes predatory lending practices. These are the four current issues that need to be addressed with fintech small business lending:
- Disclosures in online small business lending: Crucial information such as rates, fees, and repayment details are often absent, instead focusing on ease of applying and qualifying for funding and speed of approval.
- Costs associated with online small business loans and financing products: APRs for online loans or financing products can range from 7% to over 100%.
- Merchant cash advances (MCA) and confessions of judgment: There are extremely high APRs and high daily payments leaving small businesses in an unsustainable cycle of debt.
- Transparency in underwriting: Algorithms and data used in automated underwriting could make credit assessments correlated to borrower characteristics protected by fair lending laws. Online lenders should adopt disclosure and transparency policies similar to those of traditional banks.