Fed’s Brainard Examines Alternative Small Business Lending

Federal Reserve Governor Lael Brainard joined Janet Yellen at the Community Banking Research and Policy Conference with a speech on community bank lending to small businesses and the rise of online nonbank alternatives. “I remain confident that community bankers will continue to play a vital role in the small business lending landscape as the respective business models of online platforms and community banks evolve,” she said.

While emphasizing the lead role community banks play in providing small business credit. She also recounted the growth of online lenders, which business owners have reported using in part because credit decisions can come more quickly — even if the loans are costlier. Brainard pointed out that some community banks have partnered with alternative lenders via loan purchases and referral arrangements.

She cautioned banks to monitor strategic, third-party and compliance risk in these arrangements. “Banks should examine whether fair lending or unfair or deceptive acts or practices issues result from the origination and underwriting methods used by online alternative lenders,” she warned. “To the extent that the underlying algorithms used for credit decision-making use nontraditional data sources, it will be important to ensure that this does not lead to disparate treatment or have a disparate impact on a prohibited basis.”

In related news, ABA and the Consumer Bankers Association filed comments with the Treasury Department yesterday on online marketplace lending. Treasury sought input from the public as marketplace lending becomes more widespread.

ABA and CBA argued that online marketplace lending fundamentally resembles traditional banking, “just [in]a new delivery channel for a product that has existed for thousands of years.” As a result, the groups called for consistent consumer protections, a level playing field for banks and nonbanks and a regulatory approach that focuses on activities, not delivery channels.

“Technological innovation will continue to change the way banks interact with their customers,” the groups said. “As this innovation continues, we must ensure that consumers receive the same protections regardless of their financial service provider.” For more information, contact ABA’s Rob Morgan.