Change is inevitable. It will be so for the youthful industry of alternative lending. But those involved--from lenders to borrowers and the businesses in between--have been watching and waiting. It's like a collective breath is being held as lawmakers review the need for regulations.
American Banker predicts a bumpy regulatory road for the alternative lending industry, although no particular legislators, or even the Consumer Financial Protection Bureau, are championing stricter regulations at this point. In fact, high profile supporters of the nonbank industry, including Karen Mills, the SBAs former administrator from 2009 to 2013, credits nonbank lenders with funding small business when banks simply can't. She said, "It costs as much to underwrite a $150,000 loan as it does to write a $1 million loan." And many small businesses are looking for even less.
Financial policymakers have been favorable toward alternative lenders because of the support they give to the small business industry. Job creation is high on any platform, and small businesses employ over 50 percent of the working population.
Why Caution is Best
The federal government is taking a slow and cautious approach to regulating the industry because of two likely factors: it's a relatively small industry, currently $9 billion in loan volume. And borrowers are getting real benefits from online lenders.
Operating in the "better understanding" phase of regulator action gives lawmakers time to watch and gather data on the growth and practices of nonbank lenders as the industry strides toward its potential. Some say that potential is $800 billion in loan volume. And the benefits to small business will grow along with the lending industry.
Mills, who is also a senior fellow with the Harvard Business School and Harvard Kennedy School, also said in a recent working paper published on Forbes, "While the online market is in the earliest stages of transformation, it is clear that the traditional small business bank lending model has left gaps that, with the help of technology, challengers are finding promising and profitable. This should benefit small businesses who, despite having to deal with higher interest rates in some cases, could find more transparency in product and pricing options, lower search costs, and better speed and customer service."
What is most important to your small business borrowing needs? Speed, transparency or service?