The lending climate has changed considerably over the past seven years. When access to small business loans became nearly impossible in 2008, alternative options began to pop up. Answering a need were online lenders with new products and much quicker turnaround times, and this innovation has led to a new industry that is seeing growth.
The growth has been largely unregulated, as often happens with innovation at a fast rate. However, the Consumer Finance Protection Bureau has been keeping tabs on the alternative lending industry, participating in conferences and collecting data on borrowing habits and lending policies. And just recently the Department of Treasury launched an inquiry into online lending practices.
Rather than fearing regulation, online lenders are using this attention to build awareness and determine for themselves how the industry will both grow and protect the business borrowers who turn to alternative lending for funding.
A Voluntary Code of Conduct
Borrowing puts any business at the mercy of a lender, be it a bank, private investor or online lender. Alternative Lenders have banded together to come up with a Small Business Borrowers' Bill of Rights to outline to their consumers their commitment to fair business practices, and to be transparent to the CFBP and other regulators.
Consumers' rights include the rights to:
1. Transparent pricing and terms
No hidden fees, fully and openly disclosed rates, clear language to describe all terms of the lending agreement.
2. Non-abusive products
No traps into a damaging cycle of borrowing, no hidden penalties, prepayment assistance
3. Responsible underwriting
Loans that set a borrower up for success, proper application review and loan sizes, confidence in the lender/borrower agreement
4. Fair treatment from brokers
Transparent loan options, broker fees and disclosure of potential conflicts of interests
5. Inclusive credit access
Non-discriminatory practices, adhering to the Equal Credit Opportunity Act, giving equal protection to all who seek credit
6. Fair collection practices
Respect and fair treatment even in default, responsible oversight, and transmission of accurate information to third-party collectors and debt buyers
Ways to Protect Your Business
It's important, of course, to know your rights and choose lenders with upstanding reputations, who are transparent with lending agreements, and establish reasonable rates and fees. It's also important to be honest on your application, to know your limits when it comes to borrowing, and have a good feel for your ability to repay the loan amount. Be sure to read the fine print and ask questions before entering a lending relationship.
As the industry grows, government regulations are inevitable to equalize the playing field and protect borrowers. Proactive measures, like an industry-issued voluntary bill of rights show good faith and the promise of opportunity in the future.