There’s an interesting, if inconclusive, set of questions presented in Bloomberg Businessweek as to whether the innovative lenders should be more closely regulated. These questions have been swirling since a national discussion was kicked off at the New York Federal Reserve Small Business Summit in May.
At that time, Coleman Report publisher Bob Coleman confronted a few innovative lenders to justify borrowing rates that can climb well above 100%, if measured on an APR basis, as banks must disclose consumer credit.
Bloomberg notes that the Main Street credit gap has become such a well-accepted fact that whole waves of startups have launched to improve small business owners’ access to capital. Many of those new firms, including OnDeck Capital, which has loaned small businesses more than $1 billion since 2007, and Kabbage, which loaned more than $200 million last year, are largely unregulated.
Critics calling for regulation of alternative lenders have pointed to high borrowing costs, which often top 50 percent on an annualized basis, and lack of transparency, especially among the brokers many lenders rely on to bring in business.
1. After extensive research on the topic for my forthcoming book, I feel strongly that innovators don’t need any further regulation. From consulting to a couple of them, I observed that they’re already lawyered up, and probably more compliant with state and federal financial laws better than most non-bank lenders (and many banks).
2. What they could use is a good self-dose of transparency, so that borrowers can understand the real cost of capital they’re paying for the funding. That said, I believe that more disclosure will come as the market gets even more competitive, and rates begin to fall. In fact, it’s already happening.
3. As to the reference about loan brokers, that’s a problem that will only be addressed when lenders decide it will (or be faced with threatened regulations that will cut of loan production).