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Regulation and Compliance > Federal Regulation

Online Lenders Face Increased Scrutiny

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It’s an interesting time for fintech providers, said Russell Walraven, particularly those that provide lending for consumers and small businesses.

Walraven is vice president of marketing for Funding Stream, which provides small businesses with loans between $5,000 and $100,000 through Marlin Business Bank. It launched in July 2015 and has issued about $20 million in loans, he said.

Technology has created new opportunities to connect consumers with service providers, but those new providers sometimes encounter growing pains. Non-bank companies saw an opportunity after the financial downturn for small businesses looking for capital they weren’t getting from traditional banks, Walraven told ThinkAdvisor Friday.

Those new entrants have “done very well. They’ve grown, they’ve originated a lot of loans, but what we’re seeing now is they have not gone through credit cycles, so when a little bit of a downturn hits—which it really hasn’t yet, but if it does—a lot of these loans are going to start defaulting.”

That risk is converging with non-bank lenders’ high costs of customer acquisition, as they try to find new ways to build a base of customers while balancing growing regulations meant to protect consumers.

Over the last five or six years, Walraven said, “especially on the small-business side, it was essentially the Wild West. There wasn’t a lot of regulation.”

He added, “There’s a lot more regulatory scrutiny on small-business lending as compared to the last few years, so these companies that haven’t had to focus on regulation are [now] under the thumb of regulators to some extent,” he said.

Walraven believes that will drive consolidation of non-bank lenders, where they will partner with or be acquired by traditional banks.

Traditional financial firms like Wells Fargo and JPMorgan can use their built-in customer base to lower the cost of customer acquisition, he said.

Regulation has already turned some of the new non-bank lenders away from consumer lending. For example, Kabbage, where Walraven spent three years prior to joining Marlin and Funding Stream, launched a consumer lending business in 2014 and “already has kind of backed off that. I think what they saw is the regulation’s a lot different, it’s a lot tougher and it’s not something they want to really get into while their small-business product is growing extremely well.”

Regulators are particularly interested in how new lending companies present their fees to consumers, Walraven said. “I think that’s going to get a lot more structured and there’s going to be a lot more regulation around that.”

He doesn’t believe the presidential election will have a direct impact on lending. Uncertainty will drive up interest rates for consumer and commercial loans, he said, but from a small business standpoint, “I don’t think you’ll be able to directly point to [the election] as the key driver of the changes that are coming to this industry simply because the changes are already coming.”

By the beginning of next year, he said, there will probably already be more regulation in place regarding commercial lending. “I do think the election will affect it in some cases, but I don’t think anyone’s going to be able to say, ‘Okay, the election happened, this person won, and small businesses or commercial lending was affected as a result.’”

— Read Clinton vs. Trump: 2 Wildly Different Tax, Economic Plans on ThinkAdvisor. 


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