I am attending the 2017 LendIt conference in New York along with some 5,000 other attendees made up of consumer and small business lenders, traditional banks that are partnering with or are considering partnering with FinTech lenders, marketplace investors and others.
This online FinTech lending world has grown exponentially as has the attendance at this still reasonably young conference which is presented annually in each of the US, Europe and Asia.
Last year there was a good deal of banter in the halls of the conference with concerns of how a new administration in Washington would treat online lending and what regulation would come along with the new regime. This year, however, many of the lenders are even giddy over what they envision to be a laissez faire Trump Administration, at least as far as regulation of small business and online consumer lending goes.
Where state and federal regulators have long been the watchdog when it came to consumer lending in general they were hands off when it came to commercial lending, including most small business lending. Since last year we have seen states accelerate their regulatory arms into the small business lending world as online practices have gained the attention of states’ attorneys general and legislatures.
Typically small business loans are supported by personal guaranties, not only by the business owner, but often by his or her spouse who may have little or no knowledge of the business and who may not have the sophistication assumed to be had by business operators. As guarantors and their spouses have fallen victim to predatory lending practices where interest rates might exceed one hundred percent per year, and guarantors and their families have lost their homes and their life savings, there has been an outcry from state agencies to step into roles that the Feds might otherwise have assumed. That is not to say that interest rates will reflect the lender’s risk in making the loan, however, at some point an interest rate may just be too much.
We are seeing more and more situations where new players in the lending world have gotten so aggressive in their lending practices that regulation, whether by the Consumer Financial Protection Bureau or other Federal or state regulators, is likely to change the landscape of commercial lending. California, New York, Illinois and other states are moving ahead at least with closer scrutiny of online small business lenders and it must be expected that more and more states will be stepping up their roles as well.
Bad facts engender bad law. The egregious facts that are bringing about this change may be justified for the conduct of bad lenders. Unfortunately the end result will be that the good lenders will be subject to the same regulation, and the costs inherent with such regulation will result in higher costs to the borrower who will have less access to responsible lenders.
I hope to hear these issues addressed at LendIt. If not, it is time they make these issues a priority for future conferences.