Online lending industry resists regulation
A bill to regulate online lenders that target small businesses with loans that can carry more than 100-percent annual interest rates is moving, albeit slowly, through the Illinois General Assembly.
While not capping interest rates, the bill would require lenders to disclose interest rates upfront and bar giving loans to businesses with repayment schedules that exceed 50 percent of a business’s net income. The bill designed to curb predatory lending would also require lenders to be licensed by the state and restrict the sale of loans in a nascent industry that often operates by matching borrowers with lenders seeking investment opportunities.
Just a decade old, the online lending industry in the United States is nearly devoid of regulation, and both states and the federal government are pondering what, if any, rules should be enacted. Faced with opposition from more than a dozen companies and interest groups, including the Illinois Chamber of Commerce, the Illinois Retail Merchants Association, PayPal and the Community Bankers Association of Illinois, supporters in the Senate say they won’t move the bill forward, even though it passed out of the Senate Financial Institutions Committee after a hearing last week. During the hearing, Sen. Jacqueline Collins, D-Chicago, the bill’s sponsor, said that the bill should be refined to ease concerns.
Critics say that regulation as proposed could reduce access to capital for small businesses if rules are so onerous that lenders won’t do business in Illinois. As written, the bill would not allow loans to be pledged, sold or otherwise transferred except between lenders licensed by the state Department of Financial and Professional Regulation or traditional financial institutions such as banks or credit unions that are already licensed and regulated.
Drew Beres, general counsel for Chicago city treasurer Kurt Summer, who is pushing the proposal, said that the bill will likely be clarified to make clear that individual investors can still provide capital to borrowers in so-called peer-topeer lending that has been a business model in the online lending industry. The primary goal, he said, is to require transparency in loan terms.
“We don’t want to cut off access to capital,” Beres said. “We just want to make sure people know what kind of loans they’re getting into.”
The bill would also bar online lenders from requiring that borrowers pre-authorize electronic withdrawals from bank accounts, which is common in the industry. If a loan is personally guaranteed by a borrower, the bill would require lenders to obtain credit reports and consider those reports in making loan decisions. Lenders would have to obtain $500,000 surety bonds that would be used to help consumers harmed by lenders who violate the law. Lenders would also have to disclose upfront the annual interest rate, including all fees, and the total repayment amount. Lenders would also have to disclose default rates to potential borrowers. Violators could be sued or found guilty of a misdemeanor.
The online lending industry has mushroomed as traditional financial institutions have cut back on small business loans. The nation’s 10 largest banks in 2014 made $44.7 billion in small business loans, a fraction of the $72.5 billion loaned in 2006, according to a recent report in the Wall Street Journal.
Sometimes called the Wild West of financing due to lack of regulation, the online lending industry has begun forming alliances with more traditional businesses. J.P. Morgan Chase and Co. last year announced a partnership with OnDeck Capital, an online lender, in which OnDeck will process applications for loans of up to $250,000. J.P. Morgan will provide the capital and will not allow OnDeck to pitch loans to potential borrowers rejected by the bank, according to a December story in the Wall Street Journal. In Springfield, the State Journal-Register this spring announced a partnership with Herio Capital, an online lender founded last year by a former OnDeck executive. The newspaper says that potential borrowers should contact the paper.
Online lenders say that business owners aren’t necessarily concerned about high interest rates if they can get access to money quickly to address short-term issues and aren’t saddled with long-term debt. Asked by Sen. Emil Jones III, D-Chicago, the amount of OnDeck’s highest interest rate, Martha Dreiling, OnDeck’s vice president of operations, answered 99 percent during last week’s hearing.
Brent Adams, a lobbyist for the Woodstock Institute in Chicago that does research on fair lending practices, said that he’s not surprised by opposition to the bill.
“We have observed that some of these alternative lenders offer loans on terms that we would consider predatory,” Adams said. “Whenever you take a financial system and seek to implement major reforms, you’re going to get some objections.
Kim Maisch, lobbyist for the National Federation of Independent Business, said that the bill goes too far. Small businesses, she said, need access to capital that banks sometimes won’t provide.
“Our concern is, in typical Illinois fashion, we dive into the pool without testing its temperature,” Maisch said. “We certainly don’t want Illinois to be the first with so many burdensome regulations. There may be one or two bad actors, and we have folks rush in and try to regulate, and they go overboard.”
