Online lenders seek to shape the industry before regulators

WASHINGTON — Online lenders are taking a cue from a familiar playbook in Washington as corporate scrutiny heats up.

A central part of their strategy is to prove that the industry can tame itself without the need for additional government intervention. By distancing themselves from payday lenders and other companies whose predatory tactics have drawn regulatory attention, online lenders hope to avoid a similar crackdown.

The rising industry, which provides quick access to loans for consumers and small businesses, is trying to recover from a tough summer. Renaud Laplanche, the founder of Lending Club, one of the largest online lenders connecting potential borrowers with potential investors, resigned in May over the mismanagement of certain loans. Soon after, several companies, including Lending Club, Prosper Marketplace and Avant, announced they were cutting jobs due to falling investor demand.

At the same time, consumer advocates have ramped up warnings that a lack of federal oversight of lenders could leave some borrowers with unduly high fees or shut them out of the market altogether.

But lenders are starting to regroup. They’ve hired lobbyists, mingled in a series of fintech conferences, and seemed eager to tell their story before lawmakers and regulators start drafting new rules.

“At a minimum, you want policymakers to understand the workings of your business, so they give you a fair shake,” said Brandon R. Barford, partner at Beacon Policy Advisors, a research firm in Washington.

Last year, a group of businesses and small business experts called the Responsible Business Lending Coalition issued a “bill of rights” for borrowers of small business loans and other credit products. Dozens of lenders representing community development financial institutions and online businesses signed the agreement, which calls for clear information, no hidden penalty fees and high confidence in the borrower’s ability to repay the loan, among other provisions.

More recently, Fundera, a small business-focused online lending marketplace and founding member of the Bill of Rights initiative, issued a special disclosure statement to inform potential borrowers of the terms of its services, including a estimated loan repayment cost per day, annual percentage rate and total loan cost.

From now on, two professional groups created this spring are preparing their own initiatives. Lending Club, Prosper and Funding Circle organized the Marketplace Lending Association in April and appointed Nat Hoopes as executive director last month. Mr. Hoopes was previously executive director of the Financial Services Forum, a trade group representing some of the largest financial institutions in the country.

The goal is “to create an association in Washington that represents online lenders that are consumer-friendly and adhere to the highest possible standards of disclosure, transparency and fair pricing,” Hoopes said.

Lenders wishing to join must agree to a set of standards, which the council is prepared to supplement, which could influence the direction of the online lending industry.

The proposals draw a line that says members can offer loans with an annual percentage rate of up to 36% to consumers and businesses, but they must clearly disclose material loan terms to borrowers, and they cannot. offer merchant payday loans or cash advances, a type of business loan where the business pays back the money as a percentage of future sales. Consumer advocates have criticized merchant cash advance offers for their high rates and structure. The group also plans to open membership to technology providers and investors.

The standards can help members differentiate themselves from other types of short-term lenders feeling the heat of federal regulators. The Consumer Financial Protection Bureau has taken action against a number of payday lenders and auto titles in recent months, often for providing inadequate or misleading information to borrowers.

Online lenders closely monitor regulatory activity. The consumer protection agency published a proposal in June that would make major changes to the payday loan market and impose tougher restrictions on installment lenders offering loans above an annual rate of 36% – the same rate expected in the new membership standards. This 36% figure is also consistent with the legal limit on loans to active duty military personnel and some state usury laws.

Additionally, three of the largest small business lenders, OnDeck, Kabbage and CAN Capital, launched their own organization, the Innovative Lending Platform Association, in May.

The group is focused on “online education, advocacy and best practices,” said Daniel Gorfine, vice president of external affairs and associate general counsel at OnDeck, speaking on behalf of the association.

The trade group’s first initiative, with the Association for Enterprise Opportunity, was the development of a standardized form to display the annual percentage rate and the total cost of a loan. The form is expected to be introduced this fall and will be open for adoption by others in the industry.

Mr. Gorfine said the association would explore the possibility of expanding its membership in the coming months.

“The industry is still in its infancy, and much of what you see is a gradual merging of platforms, ones that focus on responsible innovation and the articulation of clear standards and best practices” , did he declare.

Critics argue that industry standards aren’t enough to stop bad actors. For example, before the financial crisis, the mortgage securitization industry largely controlled its own behavior.

“Before the most predatory and usurious period in mortgage history occurred, what we had was the standard of best practice,” said John Taylor, president and CEO of the National Community Reinvestment Coalition. “And the second somebody started operating outside of those best practices and didn’t have a legal obligation not to, that’s the second everybody followed those mortgage companies, these predatory subprime lenders, in this abyss, because nothing was stopping them. ”

The challenge for lenders will be to find common ground in what has become a diverse market. Debates over how loans should be structured and disclosed are just beginning and tensions are likely to arise.

“Each of these business models will ultimately push for what’s best for them,” said Edward Mills, policy analyst at FBR Capital Markets. “If another part of the industry has to suffer, that’s okay”

Still, representatives from the two new lending groups said they were optimistic about their efforts to educate Congress and regulators.

OnDeck’s Mr Gorfine said traditional banks had cut lending to small businesses, particularly after the financial crisis, and new lenders had stepped in to help fill the void. Small business loans have generally been subject to less federal oversight than consumer loans.

“When policymakers hear how we are able to solve the policy challenge while giving small businesses really efficient access to capital so they can hire and grow their businesses and run their businesses day-to-day – that’s a a very powerful story and a very bipartisan story,” he said.

Representing Lending Club and others, Mr. Hoopes highlighted the potential savings for borrowers. Lending Club reports on its site, for example, that borrowers can reduce their rates by an average of one-third if they pay down their credit balance or consolidate debt using the service.

“What I think has been missing in some of the negative news this summer is the value proposition that these companies bring,” he said. “They save borrowers a lot of money, they help people pay off their debts, and they provide opportunities to expand access to credit.”

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