Pressure on the alternative lending industry to become more transparent continues to mount.
On Monday, U.S. Senators Jeff Merkley (D., Oregon), Sherrod Brown (D., Ohio), and Jeanne Shaheen (D., New Hampshire) sent a letter to the U.S. Government Accountability Office, asking it to look more closely at so-called peer-to-peer lenders, as well as other alternative lenders that have cropped up in recent years.
The number of non-bank lenders offering financing options to small businesses has grown explosively since the financial crisis. As their numbers have increased, so too have concerns about their lending practices, including questions about transparency, fees, interest rates and other repayment terms. In a 2011 report on the alternative lending industry, the senators write, the GAO focused almost exclusively on peer-to-peer companies. But such lenders, which include well-known names such as Prosper and Lending Club, represent only part of the picture, the senators say.
In the last five years, as the alternative lending industry has grown, the business models for offering loans has also become much more varied. Peer-to-peer lenders, for example, offer loans in a marketplace format, where individuals and institutions bid to provide financing to business owners. Others, such as CAN Capital and OnDeck, provide financing directly and require weekly or daily repayment. Yet others provide financing in the form of merchant cash advances, where repayment is made based on a percentage of future sales.
With all of those differences, the senators say, there's a growing potential for "gaps in understanding," lack of appropriate regulatory oversight, increases in predatory lending practices and other instances of consumer abuse. There are also risks to the larger banking system that could lead to another financial crisis.
As such, the senators have asked the GAO to reassess the industry in a new report. What they want examined: the size and structure of current lending portfolios, the risks related to institutional investors who have recently taken a more active role in funding small business loans, and the new relationships that alternative lenders have inked with traditional bank lenders to make their loans. The GAO should also look at new credit underwriting standards, to see if they are in line with fair lending laws, the letter says.
"Observers have questioned what the appropriate role of federal regulators should be in supervising fintech companies that provide small business capital and consumer lending," the senators write. "It is possible that the current online marketplace for small business loans falls between the cracks for federal regulators."
A recent report from Balboa Capital suggests there are now as many as 1,300 alternative lenders, with their number increasing about 100 percent in 2015 alone.
And in a hat tip to the changing tone in Washington, Lending Club, Prosper and Funding Circle last week announced the formation of a group called the Marketplace Lending Association. Its goals are to promote better policies around alternative lending, including transparency, corporate governance, and sound risk practices. The move comes as Securities and Exchange Commission Chair Mary Jo White, in a recent speech at Stanford University, said her agency as well other federal regulators and watchdog agencies would be examining the alternative lending industry more closely in the coming months
The association will be open to any marketplace lender that meets a set of standards, which generally means being in existence for at least one year, having at least $1 million in revenue, and possessing the ability to match at least 75 percent of loan dollar values with commitments from investors prior to making the loans.
Alternative lenders also formed another organization in 2015 called the Responsible Business Lending Coalition, which produced a Small Business Borrowers Bill of Rights. That document identifies many of the same things that MLA has committed to, including not pressuring small business clients to borrow, and not signing them up for loans that the lender knows they will have a difficult time repaying. More than two dozen online lenders, including Funding Circle and Lending Club, are signatories.