The Future of Regulations in the Alternative Lending Industry

The proliferation of online commercial lending has lead to a debate as to how this new and vital industry should be regulated.

Arizona-Home-Loan-Team-Matt-and-Judy-Callahan-300x199The online alternative lending industry, known collectively as Fin-Tech, has exploded since the end of the great recession. According to a report by Harvard Business School there is a noticeable decline in loans by traditional lending institutions for less than 250,000. FinTech lenders have emerged to meet the ever-growing demand for small business financing.T hese groups leverage technological advances to make the lending process more convenient for small businesses. Many use algorithms to speed up the approval process and can approve loans within a few days. This is in stark contrast to traditional banks, who often only approve commercial loans after many months. The convenience and speed of FinTech lenders means that this industry is only likely to grow. PriceWaterhouseCooper projects that FinTech lenders could capture up to 25 percent of the revenue earned by traditional banks within a few years. But there is a stark regulatory void when it comes to online small business lending.

There is no standard for what online lenders need to disclose to small business borrowers. The Truth in Lending Act, which protects many consumers from predatory loans, simply doesn’t apply to commercial borrowers. This lack of transparency enables some predatory online lenders to conceal high interest rates. These lenders can offer loans with 300 percent interest rates, which the borrower may not be aware of. Online lenders can conceal hidden fees throughout the process, by charging borrowers exorbitant pre-payment penalties and charging full interest even if the loan is paid off early. There is also no standard of reporting by alternative lenders to regulatory agencies, potentially allowing borrowers to take out many loans from a variety of sources. When it comes to commercial loans, brokers don’t have to disclose any potential conflict of interest. This leaves room for bad actors to promote the most expensive loans in order to earn the highest fees. The potentially devastating combination of expensive loans, loan stacking and a lack of transparency on the part of lenders and brokers, puts the entire Fintech industry at risk.

What would a successful regulatory framework look like for the Fintech Industry?

What is needed in the Fintech industry is a regulatory framework that is coherent, consistent and supports innovation. The Harvard Business School Report, mentioned above, makes many suggestions but it touches on a few broad themes. There needs to be a legally enforceable standard of disclosure in the commercial lending industry. Small business borrowers should be aware of the APR, default rates and overall borrower satisfaction for any loan they may take out. There needs to be a national regulatory framework to replace the patch work of agencies that exist now. As it stands consistent monitoring and reporting within the Fintech industry is difficult considering the many regulatory agencies that exist. There needs to be a standard of conduct for both lenders and brokers. Brokers and lending organizations should be obliged to disclose any conflict of interest they may have to potential borrowers.

These basic regulatory standards are vital for protecting the Fintech industry

Encouraging innovation is crucial and online alternative lenders are a vital source of credit for small businesses. But encouraging innovation shouldn’t come at the expense of basic protections for both borrowers and lenders. If the FinTech is to serve small businesses in the future these ideas should be implemented so that the industry remains viable in the years to come.

Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177 NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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