In many ways, small fintech lenders look and behave more like consumers than corporations. But unlike consumers, they are not protected by disclosure requirements under the Truth in Lending Act.
While lenders are required to comply with anti-discrimination laws like the Equal Credit Opportunity Act, these lenders are not subjected to supervisory exams like those required for community banks and credit unions.
Small Business Compliance Shift for Lenders
Congress has taken aim at fintech lenders who specialize in the small business category. In March 2017 Congressman Emanuel Cleaver asked the CFPB (Consumer Financial Protection Bureau) to “vigorously investigate whether fintech companies are complying with all anti-discrimination laws.”
“FinTech lending companies, also known as alternative small-business lending, are a fast-growing industry offering a new wave of innovation—and also pose many new risks,” said Congressman Cleaver.
In June, Congressman asked the CEOs of several small fintech lenders to provide information on credit algorithms as well as their approach to protecting business borrowers from discrimination. The letters were sent to Lending Club, Biz2Credit, Fora Financial, Prosper, and Lend Up.
Differentiation in Fintech and Alternative Lending
As compliance experts, we agree with many of their points, especially the idea that small businesses deserve equal protection when it comes to lending practices. However, we don’t agree with this committee’s narrow definition, where they equate all “fintech” with “alternative lending” vehicles like payday loans. This is particularly troubling because payday lending is a niche service that has been known to target minority groups with predatory pricing.
InnReg is a team of over 30 Regulatory Compliance and Innovation Consulting experts helping fintechs succeed in highly regulated markets since 2013. InnReg specializes on mitigating regulatory risk while helping clients launch and grow innovative fintech products and services.