Lawmaker Investigates Small-Business Fintech Lending

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

Expressing concern about potential discrimination, one federal lawmaker has decided to take a closer look at small-business financial technology lending, sending letters to several fintechs with a series of questions.

What happened

Are fintech lenders discriminating against small businesses? Worried they may be, Rep. Emanuel Cleaver II (D-Missouri) sent letters to five companies, asking a series of questions about their company profile, how they protect borrowers from discrimination, and their approach to transparency and sunshine in lending.

“While FinTech lending can create the opportunity for more small business credit, I’m concerned that some FinTech lenders may be trapping small business owners in cycles of debt or charging higher rates to entrepreneurs of color,” he wrote. Rep. Cleaver expressed particular interest in payday loans for small businesses, a product known as “merchant cash advance,” where loans are provided to small businesses in exchange for a percentage of their future credit card sales receivables.

“The payday loan industry has often targeted communities of color with high rates and fees, and Congress needs further information that small business payday lending is operating with transparency and free of discrimination,” the legislator wrote. “Current law does not provide certain protections for small business loans, compared to other consumer laws.”

Unlike consumers who use credit products, small business borrowers are typically not protected by the disclosure requirements of the Truth in Lending Act (TILA), for example, or subject to supervisory exams like those required for community banks and credit unions to evaluate a fintech’s compliance with the Equal Credit Opportunity Act.

To alleviate his concerns, Rep. Cleaver asked for details about each company’s profile, such as the products offered to small businesses, the overall origination on products marketed to small businesses and the median annual percentage rate (including fees), and whether the company offers a product that is repaid based on future credit card receivables.

Each recipient was asked to discuss its “typical approach to ensuring that people of color, women, and other protected classes are not subject to higher interest rates or denial rates, compared to similarly-situated borrowers,” as well as whether publicly available data is used to help proxy for race and ethnicity. What percentage of loans and advances are originated to borrowers and women of color, Rep. Cleaver wondered, and for 2016 originations, what was the typical rate charged to borrowers of color compared with the overall borrower population?

The lawmaker also queried the companies’ approach to transparency, with questions about whether disclosures similar to those mandated by TILA are provided to small business borrowers, if lending agreements require borrowers to resolve disputes through arbitration, and what the typical fee schedule is for small-business lending products. Finally, the letters asked if the fintech company typically pulls a consumer credit report when originating small-business loans and whether it furnishes credit information to credit reporting agencies upon loan repayment.

Rep. Cleaver requested a response no later than Aug. 10.

To read one of Rep. Cleaver’s letters, click here.

Why it matters

As fintech lending continues to expand with an assortment of different products and services, one can expect federal and state legislatures, lawmakers and government agencies to increase their focus on and oversight over these businesses. While Rep. Cleaver acknowledged the opportunities created by fintech for small businesses, he expressed concern that because small businesses do not have the same protections as consumers, they may be facing discrimination in the lending process. The lawmaker—who wrote to the Consumer Financial Protection Bureau (CFPB) earlier this year asking that it undertake its own examination of the industry—wondered if additional supervision and oversight may be necessary. “FinTech companies geared toward lending to small businesses by using certain biased algorithms for creditworthiness have the potential of charging disproportionately higher rates to minority-owned businesses,” Rep. Cleaver said in a statement about his letters. “It is therefore important to determine if minority-owned small businesses are being charged higher rates, or if they have been subject to predatory fees by these FinTech firms.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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