Heightening efforts among policymakers across the globe to expand customer protections in the financial services (FinServ) space have largely left small business (SMB) banking and lending untouched.
While small business lending has become a platform for some high-profile FinServ scandals in several markets, opponents of expanding borrower protection legislation to small businesses have argued that such regulations would actually hamper financial institutions’ ability to expand credit access for the small business community.
However, lawmakers in California are getting closer to making legislation that would protect small business borrowers using alternative lending platforms, with industry players working with policymakers to make the new rules palatable for everyone.
Markets Bypass SMB Borrower Protections
Historically, regulators have shied away from introducing small business borrower protections in both the traditional and alternative SMB lending spheres.
In Australia, efforts to expand borrower protections hit a snag last month after the industry debated whether to adjust the definition of a “small business” under the industry’s code of practice, with the Australian Banking Association warning that doing so “may have a material impact on access to credit for small business borrowers.”
Earlier this year, the U.K. rejected the Treasury Select Committee‘s regulations to introduce stricter small business borrower protections for the banking industry.
“The government has flat out — and wrongly — refused to bring commercial lending into regulation,” said the Committee’s Chair Nicky Morgan in response to the decision by the Financial Conduct Authority (FCA).
Some industry players have argued that SMB borrower protections are necessary to avoid more scandals like the ongoing RBS Global Restructuring Group case (last year, RBS CEO Ross McEwan noted that a lack of industry regulation was what allowed for such small business mistreatment to occur). However, the FCA said it “does not believe there is a clear case” to include SMBs in the fold of borrower protections due to the high costs that lenders will face, likely resulting in higher costs for small businesses themselves.
Instead, voluntary industry codes of conduct seem to have been the preferred method among bankers to support better treatment of small business customers, with similar initiatives emerging in the alternative finance space, too.
The Australian FinTech market, for instance, received significant backlash last year after small business lending platform Prospa pulled its IPO plans amid criticism over its rates and fees. As a result, six alternative lenders signed a “code of lending practice,” vowing to provide fairness and transparency to small business borrowers — an effort that garnered praise from the nation’s small business ombudsman.
Yet, a lack of regulation on what can sometimes be sky-high interest rates and unexpected fees means small businesses have few regulatory protections in the FinTech arena.
U.S. Lawmakers Take A Look
U.S. Representative Emanuel Cleaver II (D-MO) published findings last year of his investigation into the alternative small business lending market, pointing to several concerns, including forced arbitration, the use of consumer credit scores to assess small business borrower creditworthiness, the use of alternative data in that assessment, and an overall lack of transparency.
As the federal government begins to examine the market, state-level policymakers in California are taking action to include small businesses in their borrower protection efforts.
The state’s Department of Business Oversight has been working for several months on introducing requirements for non-bank lenders to standardize the way they help small business borrowers calculate the total cost of a loan, an effort that reports in Bloomberg Law said have been met with resistance by the FinTech community. Now, however, the industry is “softening” to the legislative efforts — so long as policymakers use Annual Percentage Rates (APRs) in the legislation.
The publication reported last August that California’s legislation would force alt lenders to use a different metric, instead of APRs, to disclose total small business financing costs, in an effort by the state to fill in SMB borrower protection gaps left by federal law.
California’s Assembly Appropriations Committee and the California Senate both approved the bill last year. California Governor Jerry Brown signed the bill into law late September.
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