Treasury Department Considering More Oversight of Online Small Business Loans | 2016

The U.S. Treasury Department is exploring options for more oversight of small business marketplace loans (also called “online loans” or “alternative lending”), according to a report in the Wall Street Journal

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“Marketplace lending firms generally connect potential borrowers with loan funders or investors. Marketplace lenders have expanded in part by offering credit to startup firms that may have trouble getting loans from banks. They maintain further regulation could slow or derail the lending process for underserved borrowers. The leading marketplace lenders originated about $1.9 billion in small-business loans last year, up nearly 60% from 2014, according to a Treasury Department study. The trend is concerning regulators, whose jurisdiction over small-business, versus consumer, lending isn’t as clear.”

As we’ve shared previously, several leaders in this growing niche have formed a trade association and are working on self-regulatory options to bring more transparency to online lending. Such transparency is needed as the Treasury did a sampling of the types of rates offered by three marketplace lenders for small-business loans and found effective annual percentage rates (APRs) spanning from about 7% to more than 98%.

By comparison, small-business loans offered by banks through the U.S. Small Business Administration have rates ranging from 4% to 10%. But those loans have stricter underwriting requirements, so not many online lenders offer SBA loans.

Regulators are exploring the possibility of applying fair-lending rules largely meant to protect minorities and women, to small business loans. The fair-lending rules are the same ones applied to consumer loans and require stricter disclosure than business loans.

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