A top Treasury Department official expressed concern Thursday that small-business owners don't have adequate protections when borrowing from online lenders.
"For small businesses, transparency requires standardized all-in pricing metrics, so that a business understands a loan's true cost and can make like-to-like comparisons across different loan products," said Antonio Weiss, counselor to the Treasury secretary, during a speech in New York.
Under federal law, consumer lenders are required to disclose annual percentage rates. And they are subject to a slew of other consumer-protection rules. But many of those rules do come into play in the small-business sphere.
As more and more online lenders offer credit to small-business owners, often at extremely high interest rates, the absence of borrower-protection rules has emerged as a point of contention within the industry. Some online lenders worry about losing business to higher-priced competitors because the borrower does not fully understand the terms of the loan.
Weiss' call for more protections in small-business lending seemed to be influenced by public comments Treasury received earlier this year in response to a request for information about the burgeoning marketplace lending industry.
"Many commenters highlighted the need to establish a level playing field," Weiss said. "All borrowers — businesses as well as consumers — should have the same protections. Small businesses are run by people. Those people receive protection as individual consumers, but when they are called 'small businesses' they get no protection."
In his speech, Weiss also commended a self-regulatory initiative led by some of the industry's larger participants, including Lending Club and Funding Circle, which is aimed at reducing borrower confusion. That document — known as the Small Business Borrowers Bill of Rights — includes a pledge to disclose APRs and a ban on hidden fees.
At the same time, Weiss raised the specter of government regulation of online small-business lending if self-regulation proves ineffective.
"Policymakers will need to assess whether these efforts are successful in creating high standards across the industry," he said.
Elsewhere in the speech, Weiss called for a balanced approach by the government, which takes into account both the positives and negatives that have accompanied the rise of online lending platforms.
"At Treasury, we will seek to foster, not impede, innovation that increases competition and broadens access to affordable credit for creditworthy borrowers and businesses," Weiss said.