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Discussions Continue for Proposed Alternative Lending Regulations

As of last summer (2015), the Treasury Department has come to the realization that alternative lending is here to stay. Over those summer months, the Department requested comments concerning the online marketplace lenders that offer alternative solutions to bank loans. Because banks are focused on their larger customers, this is a good thing for the small business. Since small businesses typically need financing of less than $250,000, alternative lenders’ funding options can really benefit them.

That being said, there has been a downside. With the rapid emergence of this largely unregulated industry, small business borrowers have quickly found themselves in over their heads. Some are pressured into signing up for expensive financing that they simply don’t fully understand; their situation quickly spirals out of control. More debt is taken out to pay for the earlier financings because they were unaware of the initial rates and terms.

So, the question is: how should this marketplace be regulated? Furthermore, how can it be regulated without cutting off the new sources of much-need capital and innovation. According to, the following list details just some of the areas regulators should consider:

Disclosure – At the moment, not all lenders disclose their annualized interest rates and APRs. In order for small business borrowers to effectively compare, cash advances and invoice financing needs to be broken down so they can understand their pricing and terms.

According to Forbes, “Fees, also, need to be broken out so that borrowers can see clearly who’s being paid what, and whether those numbers are out of line.”

Predatory Lending – States do have usury caps intended to control predatory lending – which is a good thing, with good reason. However, these rules vary state-by-state. This, coupled with the fact that many non-bank products are not necessarily set up as loans, means the lender can easily get around the rules. The main concern is putting safeguards in place for borrowers to protect them from abusive products.

In response to a request for comment, Lenwood V. Long Sr., chief executive of The Support Center, argued for the federal government to set “caps on pricing so that the annualized interest rates are not predatory.”

Broker Fees – It is true that brokers earn their living off of fees. That being said, there are moderate fees, and then there are ridiculous, double digit fees. Even more problematic, most borrowers completely miss the magnitude of the fees they’re paying because they are rolled into the total financing cost. The call to action here is for regulations to be put into place that enforce fair treatment.

DefaultsThe New York Times recently brought attention to another issue. After reviewing several cases, it was revealed that some borrowers, that had declared bankruptcy, still had loan payments automatically withdrawn from their accounts by their lender, completely going against the bankruptcy design to offer the borrower reprieve.

According to Forbes contributor, Amy Feldman, “It’s unclear how common such collections are, but with defaults on alternative financing far higher than on bank loans, ensuring fair collection practices is a particular concern.”

As discussions continue on the issue of alternative lending regulations, the best course of action for borrowers is to research. Take your time and make sure you understand every fee, and compare what you find with other alternative lenders; this is even more important for the high risk merchant, since they already struggle to secure reasonable funding solutions. If you are considered a “high risk” merchant, start with companies that are high risk experts – like First American loans. Before you take advantage of the solutions alternative lenders provide, just make sure you fully understand what you are getting yourself into.