Small businesses push for transparency in online lending

For a small business owner looking to grow in today’s tight credit market, many say their best chance of getting a loan is through a non-bank lender like an online lending company. But many find that the clean websites and seemingly simple terms that some lenders promote hide the true cost of doing business.

Recent work by the Federal Reserve Bank of Cleveland and the Federal Reserve Board on alternative online lenders found that a focus group of small business owners generally appreciated the easier access to capital offered by online lenders. compared to banks. But many have been confused by the terms of the loan offers, which can make it nearly impossible to determine if the loan is actually affordable.

The findings could contribute to a growing national effort to regulate alternative lenders and expose predatory lenders. Federal Reserve data shows that just over half of small businesses (those earning up to $1 million in annual revenue) are denied a loan when approaching a bank. Many turn to alternative lenders.

The drive to regulate the industry, which observers say totals between $5 billion and $10 billion in annual lending, is being driven by small business owners, industry lenders and nonprofit lenders. This summer, a coalition of these groups along with brokers and think tanks launched the Small Business Borrowers Bill of Rights. The groups want to offer potential borrowers the right to see an annualized interest rate and all fees. They also say borrowers are entitled to responsible underwriting so they don’t take out loans they are unable to repay.

Cleveland Fed focus group participants said they found lenders’ websites attractive, but had privacy concerns. A New Jersey car dealership owner noted that lenders present their loans “in the most confusing way possible.” The websites are full of bright colors and testimonials from nice people, the owner added, but they don’t give candidates all the information they need.

When small businesses are looking for loans, they sometimes find, for example, that an alternative lender may offer an interest rate of 10%, but it may actually be a monthly rate, which means that the real annual rate is 120%. This is a tactic often used by predatory lenders in the personal loan and cash advance markets. Sometimes the lender will require a certain percentage of a business’s daily sales until the loan is paid off, which can make it difficult for a business owner to make other necessary payments.

“Many want information such as interest rates, late fees and repayment penalties clearly explained,” said Ann Marie Wiersch, senior policy analyst at the Cleveland Fed. “They don’t want to feel taken advantage of.”

Participants also found product comparisons difficult due to the different ways lenders present information. at each loan term. They said they wanted clearly stated product features and costs and an easier way to compare. Yet they all liked the apparent simplicity of the application process. Banks typically require several years of tax returns and other data to be filed in person, require the homeowner to fill out lengthy forms, and take months to respond to a loan application. Participants like that online lenders make money available within days, often extract borrower tax data electronically, and include non-traditional creditworthiness metrics like customer ratings on social media.

Jonathan Brereton, CEO of nonprofit lender Accion Chicago, said the focus group study highlighted issues he sees “on a daily basis” with small businesses in the Midwest. “What usually happens is that they think the [loan] is one thing and I realize later that it’s something else,” he said. Accion regularly deals with new clients who have taken out multiple loans and cannot keep up. “Then comes the embarrassment and a whole series of emotional reactions,” Brereton added. “Trying to step in and help someone in the middle of this can be difficult.”

In addition to the Borrower’s Bill of Rights, which Wiersch suggests could be a rallying point for developing regulations, there has been other support at the federal level to expand access for small capital enterprises. The U.S. Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund) recently announced nine additional bond loans, totaling $327 million, that it is guaranteeing this year, bringing the total guaranteed to date to $852 million. . CDFIs lend to low-wealth, low-income communities.

The Opportunity Finance Network, which is a coalition of CDFIs across the country, is issuing a $127 million bond to be split among seven CDFIs targeting loans in Appalachia, metro Chicago, Native American tribal lands, areas of New Jersey hit by Super Storm Sandy and parts of western Pennsylvania hit by a manufacturing slump. The OFN is issuing an additional $100 million on behalf of a CDFI that focuses on the rental housing and commercial real estate market in the West. The final $100 million will go to a development fund in Arizona focused on seniors’ residences and long-term care facilities, daycares, health care facilities, rental housing, nonprofit organizations and charter schools.

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David A. Albanese