Lynn Woosley is a Senior Director with Treliant. She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.
- Source: Federalreserve.gov
Treliant knows FinTech, fairness, and privacy. While recognizing FinTech’s potential to increase both competition and access to credit, Treliant understands that borrower confusion, especially when combined with inconsistent disclosures, leads to increased risks. If your business needs assistance with compliance risk management, Treliant can help.
- On December 19, 2019, the Federal Reserve released “Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites.” The study builds on prior work regarding small business lending, including two rounds of focus groups with small business owners to discuss challenges in understanding product terms and costs for small business loans.
- According to the study, there are two primary types of business credit offered online, merchant cash advances (MCA) and loans or lines of credit. Depending on the type of credit and the speed of repayment, these forms of credit may have costs equivalent to annual percentage rates (APR) of up to 80 percent or even higher.
- Business credit applicants report seeking online financing for two primary reasons. First, borrowers think online lenders will offer faster credit decisions and access to funds. Second, business owners believe online lenders are more likely to approve requests for credit. Although online lenders are substantially more likely to approve applications, however, borrowers are also more likely to be dissatisfied with online lenders.
- The authors conducted detailed reviews of the websites of ten online small business lenders, two payment processors that offer credit to their merchant customers, and five commercial banks offering online small business loan applications. These systemic reviews assess the marketing materials, application process, and product rates, fees, terms, and conditions. After reviewing the nonbank lenders’ websites and considering focus group discussions, the authors concluded:
- Online lenders varied significantly in the amount of information provided, especially regarding costs, but also for which product the borrowers applied, rates, terms, whether (and what type of) credit bureau reports were utilized, and other key data points desired by business borrowers.
- Lenders providing pricing information tended to show the lowest available rate, with ranges or typical rates provided in a less obvious fashion. Some lenders did not provide any information on costs of credit.
- The non-standard terminology used by online lenders to discuss rates and effects of prepayments confused potential borrowers.
- The authors noted that payment processors offering loans also used non-standard terminology, particularly in discussing repayment options. Borrowers were particularly prone to confuse the “repayment percentage,” which is the percentage of daily sales retained by the processor for repayment, and the interest rate.
- As with online lenders, commercial banks varied in how much information they provided to borrowers in advance of application. Not all commercial banks provided cost information in advance of application, but those providing information were more likely to use standard language to describe interest costs. As with online lenders, the banks providing cost information featured their “as low as” rates and some fees were only found in other places.
- Lenders of all types used third-party tracking technology on their websites. On average, nonbank lenders and payment processors used more trackers than commercial banks. The authors note that use of tracking technology permits use of digital footprints to identify borrowers before application, or in underwriting and pricing loans.
- The authors close with a discussion of policy questions raised by their report, including privacy, the merits of standardized disclosures, and the impact on small businesses.