There is a lot of work to be done with regards to online lending laws. Not only do we need to find ways to get laws already in existence functioning, but we need to enact new laws that will help protect borrowers from predatory and inequitable loans.
Earlier this month a group of Democratic lawmakers in the Senate and House sent letters to the Director of the Consumer Financial Protection Bureau (“CFPB”), urging the agency to begin collecting data from creditors on small-business lending and fulfill part of its duties under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The provision specifically at issue is known as Section 1071. This little-known rule empowers CFPB to collect data from lenders on loans to small businesses, including rejections, type and purpose of credit sought, and demographic and geographic breakdowns of loans made. Most importantly, CFPB is authorized to collect “any additional data” necessary to fulfill 1071's intent.
The problem, you ask?
The Dodd-Frank law was enacted over 5 years ago and collection has yet to begin.
Let’s reiterate that, 5 years ago!
Section 1071 could play a critical role in publicly differentiating good players from bad players, and offer some transparency in his rapidly emerging market.
Despite the immense growth in the online lending sector, the laws surrounding it actually remain quite scant. There is little oversight by states and virtually none by federal regulators.
Morgan Stanley estimated that online lending to small businesses will grow roughly 50% annually until 2020. The way people are borrowing money is changing because many people have lost trust in big banks, or simply cannot qualify for traditional bank loans.
Online lending is truly in the wild-west of its time, where shady practices run rampant, alongside massive exploration and new development. Though there are good lenders out there, it shouldn’t be this difficult for borrowers to find good and trustworthy lenders.
It’s time to do away with the triple-digit interest rates, and inadequate or nonexistent disclosure of loan costs to borrowers, many of whom lack the financial savvy to understand the weight of such financial decisions.
Logic would dictate that borrowers and responsible lenders would be better served if there were rules and laws that could be properly enforced. Something that could be done immediately is that CFPB could use 1071 to expose predatory practices by mandating that online lenders publicly disclose product outcomes including: Annual Percentage Rates (APRs), default rates, as well as demographic and geographic characteristics.
Such public disclosure of such data would help name and shame the worst offenders. It may also force lawmakers to take action. One such measure that Congress could and should enact is S. 673, which amends the Truth in Lending Act to cap APRs at 36% for credit transactions.
States that have enacted a 36% cap have already netted total savings of $1.5 billion. A few states are already taking the lead by using various restrictions, such as limits on loan amounts, interest rates, loan terms, and the number of loans.
The use of 1071 will also incentivize lenders to improve product quality and more vigorously compete on customer service, while also helping borrowers make informed borrowing decisions.
Don’t fall victim to wide array of online predatory lenders. We know we at Borrowize can help, by only offering some of most responsible lenders in the business. Please check out our personal loans and small business loans pages for a better idea of the lender options we provide.