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27–255 2018

FINANCING THROUGH FINTECH: ONLINE 

LENDING’S ROLE IN IMPROVING SMALL 

BUSINESS CAPITAL ACCESS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, 

TAX, AND CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

OCTOBER 26, 2017 

Small Business Committee Document Number 115–044 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

TRENT KELLY, Mississippi 

ROD BLUM, Iowa 

JAMES COMER, Kentucky 

JENNIFFER GONZA ́ LEZ-COLO ́ N, Puerto Rico 

DON BACON, Nebraska 

BRIAN FITZPATRICK, Pennsylvania 

ROGER MARSHALL, Kansas 

RALPH NORMAN, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

DWIGHT EVANS, Pennsylvania 

STEPHANIE MURPHY, Florida 

AL LAWSON, JR., Florida 

YVETTE CLARK, New York 

JUDY CHU, California 

ALMA ADAMS, North Carolina 

ADRIANO ESPAILLAT, New York 

BRAD SCHNEIDER, Illinois 

VACANT 

KEVIN FITZPATRICK, Majority Staff Director 

JAN OLIVER, Majority Deputy Staff Director and Chief Counsel 

ADAM MINEHARDT, Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Dave Brat ........................................................................................................ 1 

Hon. Dwight Evans ................................................................................................. 2 

WITNESSES 

Mr. William Phelan, President and Co-Founder, PayNet, Inc., Skokie, IL ........ 3 

Ms. Katherine Fisher, Partner, Hudson Cook, Hanover, MD .............................. 4 

Mr. Trevor Dryer, CEO, Mirador, Portland, OR ................................................... 6 

APPENDIX 

Prepared Statements: 

Mr. William Phelan, President and Co-Founder, PayNet, Inc., Skokie, 

IL .................................................................................................................... 15 

Ms. Katherine Fisher, Partner, Hudson Cook, Hanover, MD ....................... 36 

Mr. Trevor Dryer, CEO, Mirador, Portland, OR ............................................ 42 

Questions and Responses for the Record: 

Questions and Responses from Hon. Steve Chabot and Hon. Nydia 

Vela ́zquez to Mr. Trevor Dryer .................................................................... 49 

Additional Material for the Record: 

ETA SB Lending Infographic 2017 ................................................................. 53 

ETA Joint SBL Survey ..................................................................................... 55 

Filling the Gap - Usman Ahmed, Thorsten Beck, Christine McDaniel, 

and Simon Schropp ....................................................................................... 56 

PayPal Government Relations ......................................................................... 70 

Responsible Business Lending Coalition ........................................................ 73 

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(1) 

FINANCING THROUGH FINTECH: ONLINE 

LENDING’S ROLE IN IMPROVING SMALLBUSINESS CAPITAL ACCESS 

THURSDAY, OCTOBER 26, 2017 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON ECONOMIC GROWTH, 

TAX, AND CAPITAL ACCESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:04 a.m., in Room 

2360, Rayburn House Office Building, Hon. Dave Brat [chairman 

of the Subcommittee] presiding. 

Present: Representatives Brat, Luetkemeyer, Evans, and Clarke. 

Chairman BRAT. Good morning. I would like to call this hearing 

to order. 

And I think we will get underway. I don’t know if you are all familiar with this place, but we have votes this morning at about 

10:30. So we will just go, and we may have to let out for a few minutes and reconvene after votes. We are not expecting a huge vote 

series, but it will probably be 20 or 30 minutes, just so you all 

know what is heading our way. 

Let’s just start off and dig in. I will try to get through some of 

this rapidly. 

Small-business access to capital has always been a top priority 

for this Committee. Access to capital gives small businesses the resources they need to keep the lights on, purchase inventory, pay 

their employees, and expand their business. For decades, smallbusiness owners typically went to their local community bank to receive this capital. These banks were the backbone of how Main 

Streets across this Nation were created. 

However, the amount of community banks in the United States 

has fallen dramatically in recent years, and regulations such as 

Dodd-Frank have made it more difficult for small businesses to acquire loans through traditional means. Therefore, many small businesses have had to resort to other means to acquire capital. 

One private-sector solution that has grown considerably in recent 

years to address this credit gap is online lending. While it is difficult to estimate the size of this industry, online lenders originated 

an estimated $5 billion to $7 billion in loans to small businesses 

in 2015, and it is expected to become a $50 billion industry by 

2020. 

While this is an emerging industry with several types of business 

models to assess risk, mitigate lender exposure, and obtain the capSBREP-219A with DISTILLER

2 

ital to lend to small businesses, online lenders typically offer smaller loans with rapid approval and funding times. 

This morning, we will hear from a distinguished panel of witnesses who will give their perspective on recent trends in the 

small-business online lending industry and how it fits into the 

overall small-business credit market. I appreciate the witnesses’ 

being here today. 

Thank you all very much for coming. I look forward to your testimony. 

I now yield to the ranking member for his opening remarks. 

Mr. EVANS. Thank you, Mr. Chairman. 

Access to capital is critical to the success of small business. However, obtaining conventional credit can be particularly difficult for 

many small firms. Lending requirements are much tighter now 

than they were before the financial crisis, and small businesses, especially startups, are still considered a risky bet by many lenders. 

Although FinTech provides significant advantages, there are 

some drawbacks. FinTech lending platforms reserve the right to reject small-business applications, just like traditional banks. In 

2014, the Federal Reserve found only 8 percent of business loan applications are accepted by the larger platform. Today’s hearing will 

provide members with an opportunity to learn about the online 

lending market and how it has helped increase access to capital for 

small businesses. 

Today, many firms are turning to alternative lending that operates on an online lending platform. These services have made hundreds of millions of dollars available to small firms by offering a 

number of benefits over traditional sources but do have some drawbacks. I look forward to hearing from our witnesses on ways to improve the marketplace and increase access to capital for the nation’s job creators and innovators. 

Thank you, Mr. Chairman. I yield back. 

Chairman BRAT. Thanks. 

If Committee members have an opening statement prepared, I 

ask they be submitted for the record. 

I would like to take a moment to explain the timing lights for 

our panel today. You will each have 5 minutes to deliver your testimony. The light will start out green. When you have 1 minute remaining, the light will turn to yellow. And, finally, at the end of 

your 5 minutes, it will turn red. I ask that you try to adhere to 

that time limit as best you can. 

And, with that, we will get off to our testimony. 

Our first witness today is Mr. William Phelan, the president and 

co-founder of PayNet, Incorporated, in Skokie, Illinois. PayNet provides small-business credit data analysis to a variety of clients. He 

also serves on the Advisory Council on Agriculture, Small Business, 

and Labor to the Federal Reserve Board of Chicago. 

Thank you for being here this morning. You are recognized for 

5 minutes. Thank you. 

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STATEMENTS OF WILLIAM PHELAN, PRESIDENT AND COFOUNDER, PAYNET, INC., SKOKIE, ILLINOIS; KATHERINE 

FISHER, PARTNER, HUDSON COOK, HANOVER, MARYLAND; 

AND TREVOR DRYER, CHIEF EXECUTIVE OFFICER, MIRADOR, PORTLAND, OREGON 

STATEMENT OF WILLIAM PHELAN 

Mr. PHELAN. Thank you, Mr. Chairman. Thank you for that introduction. 

The financial crisis, as you all state, disrupted the credit markets. Traditional banks, as you also mentioned, and even large 

banks were preoccupied and didn’t find lending to be as profitable. 

FinTechs jumped in, as you said, Chairman, to fill the credit gap, 

but they have their own challenges as well. 

Let me just briefly talk about the credit conditions for small businesses right now. There is less investment being taken by small 

businesses right now. From the period 2015 to 2017, small-business 

investment is actually down 1 percent, versus 2005 to 2007 where 

it was up 12 percent. Having said that, the financial health of 

small businesses is extremely strong right now. Their days-pastdue are actually better than they were before the recession. 

Very briefly, let me just mention the size of this market. It is important to understand the sheer scope of the small-business credit 

market. We estimate over $1 trillion in total credit. Banks make 

up the biggest portion of that, about $700 billion; commercial finance, about $250 billion. And alternative finance, or FinTech, is 

about $5 billion to $7 billion right now. 

Briefly, you mentioned the banks and the challenges they have 

had. They undergo a credit process. The credit process consists of 

28 different steps. It can cost a bank $5,000 to $7,000 to complete 

one credit application, so it is a very expensive process for a bank. 

And then they have to spend a lot of time actually reviewing those 

loans, and that is another $1,000 of cost per review. 

You mentioned the credit gap, as well, in your opening. I would 

like to point out that Harvard Business School conducted a research study called ‘‘The Decline of Big Bank Lending to Small 

Businesses: Dynamic Impacts on Local Credit and Labor Markets.’’ 

This was authored by Jeremy Stein, an ex-Fed Governor, and two 

of his colleagues. 

What they found was that fewer businesses expanded employment as the large big-four banks pulled back on providing capital. 

Unemployment rates rose; wages fell. The effects were concentrated in industries like manufacturing. As a result, small 

banks, nonbank finance companies, and FinTechs jumped in to fill 

that gap. And so there is evidence of this shown in this Harvard 

study. 

Wages are lower and that still persists, which means there is 

more work to be done. 

You mentioned in your memo the size of FinTech, at $5 billion 

to $7 billion, so I won’t dwell on that. They do make traditional 

loans. They make working capital loans. There are several coalitions that have banded together to make disclosure available, such 

as the Innovative Lending Platform Association, the Responsible 

Business Lending Coalition, and the Electronic Transaction AssoSBREP-219A with DISTILLER

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ciation. And they have all instituted disclosures to help understand 

the cost of this capital. 

Very briefly, I want to point out the credit quality of the type of 

businesses that uses FinTech. We have seen their credit quality 

improved from 2009 through 2016. The credit scores were about 

660 back in 2009; they were almost 670 in 2016. We have seen the 

FinTechs actually increase the balance of the loans that they are 

providing small businesses. They were in the $20,000 size; now 

they are at the $65,000 size. We have also seen them expand the 

length of the loans that they are providing. These were previously 

very short-term loans, 6-month-type loans. Now they are averaging 

of 15 months. 

We have seen that the businesses that they lend to are actually 

longer-established businesses. This was really interesting in some 

of the research, that showed they are lending to businesses that 

have been in business for 10 or more years to the tune of about 

70 percent of their borrowings going to those kinds of businesses, 

versus 77 percent for banks. And they are expanding into diverse 

industries. We are seeing lending into retail, health care, accommodation & food, construction, professional services, wholesale trade, 

transportation, administration, and manufacturing. 

Very briefly, we at PayNet conducted a study that looked at what 

happens to businesses that borrow from online, or FinTech, lenders. And we see that about 80 percent of them have actually 

climbed the credit ladder and have seen their credit and their financial health improve over that timeframe. So that was an important finding from the study. 

But we also note that there is a long way to go for FinTechs to 

be successful. They have done a good job developing the technology, 

but they still have work to do on acquiring accounts, and obtaining 

access to capital. And they are on the road towards making this 

disclosure, which I think is an important part of what they have 

to do to further bolster their business models. 

With that, I will wrap up my comments. Thank you. 

Chairman BRAT. All right. Thank you, Mr. Phelan. We appreciate your testimony. That was very good. 

Next is Katherine Fisher, partner with Hudson Cook, LLP, in the 

Hanover, Maryland, office, where she is primarily focused on the 

areas of consumer financial services and small-business financing. 

Thank you very much for being here this morning, and you may 

begin your comments. Thank you. 

STATEMENT OF KATHERINE FISHER 

Ms. FISHER. Thank you. Chairman Brat, Ranking Member 

Evans, and Committee members, thank you for the opportunity to 

present testimony today regarding financing through FinTech, online lending’s role in improving small-business capital access. 

I am here today on behalf of the Commercial Finance Coalition, 

a group of responsible finance companies that provide needed capital to small- and medium-size businesses through innovative 

methods. 

Small businesses face a gap credit in credit availability. Commercial Finance Coalition member companies are trying to close this 

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5 

gap and help spur entrepreneurship so more Americans can own 

and operate their own businesses. 

In my testimony today, I will provide an overview of the types 

of financing available to small businesses, with an emphasis on 

some of the more innovative financing options. I also will address 

existing regulation on small business, which is sufficient to protect 

small businesses. 

First, small businesses need choices. Small businesses benefit 

from having different types of financing available. A business 

owner who is planning for longer-term capital needs may choose to 

apply for a loan guaranteed by the Small Business Administration. 

These SBA loans are relatively low-cost. They range typically from 

$25,000 to $5 million. To apply for an SBA loan, the loan applicant 

must submit a business plan, and the business owner must often 

use her house as collateral for the loan. 

In contrast, a business owner who has short-term capital needs 

may choose to apply for a loan from a nonbank lender or to sell 

future receivables to a merchant cash-advance company. These 

types of transactions are typically higher-cost than traditional SBA 

loans and are in smaller dollar amounts. To apply for one of these 

loans, or MCAs, the applicant usually must submit bank statements showing several months’ worth of revenue, and the business 

can receive funds in a matter of days. 

MCA companies—these are merchant cash-advance companies— 

are primarily balance sheet funders who have an interest in the 

success of the business. MCAs are also unique because they allow 

the merchant to adjust the terms of the transaction to match their 

revenue. 

Whatever the type of financing a business owner chooses, banks 

alone are not addressing the needs of small business. Other financing sources are finding success because small businesses demand 

them. This demand shows that small businesses are being underserved by the traditional funding sources. 

The MCA and commercial lending spaces are sufficiently regulated by existing Federal and State laws and regulations. Both 

MCA companies and commercial lenders must comply with laws 

and regulations affecting nearly every aspect of their transactions, 

from marketing and underwriting through servicing and collections. 

Even when they comply with every applicable law and regulation, small-business lenders must also be wary of the Federal 

Trade Commission’s powerful authority to prevent unfair or deceptive acts or practices. Commercial lenders must comply with additional Federal regulation, and many States subject them to comprehensive licensing and regulatory schemes. 

For example, on the Federal level, commercial lenders must comply with the Equal Credit Opportunity Act and its implementing 

Regulation B, which prohibits discrimination against protected 

classes of people in the extension of credit. The Equal Credit Opportunity Act and Reg B apply to business credit and provide protection specifically for business borrowers. 

Another example is the Fair Credit Reporting Act, which requires a funder to have a permissible purpose to pull a consumer 

report for a sole proprietor or for an individual guarantor of a busiSBREP-219A with DISTILLER

6 

ness transaction. This is particularly relevant in the world of 

small-business finance, where the business is often organized as a 

sole proprietor or the individual owner will serve as a guarantor in 

the event that the business defaults. 

Finally, many States require a license to make a loan to a business, limit the interest rates lenders may charge to business borrowers, or both. And with State licensing programs comes regulatory oversight. States that regulate lending also typically limit 

the terms of loans, require disclosures and loan documents, and 

limit the fees that creditors may impose. Most State laws regulating lending apply to loans with smaller dollar values, and these 

are exactly the types of loans upon which small businesses rely. 

I am very optimistic that FinTech and alternative finance will fill 

the void for those underserved by traditional banks and financial 

institutions, providing much-needed access to capital for small 

businesses. 

Thank you. 

Chairman BRAT. Thank you, Ms. Fisher. We appreciate your 

testimony as well. Thank you very much. 

And I will now yield to our ranking member for the introduction 

of the final witness. 

Mr. EVANS. Thank you, Mr. Chairman. 

Our last witness is Mr. Dryer, CEO of—the company is Mirador? 

Did I get that right? 

Mr. DRYER. Mirador. 

Mr. EVANS.—Mirador Finance in Portland, Oregon. 

Mr. Dryer received his B.A. in history and literature from Harvard University before receiving his J.D. from Stanford University 

Law School. 

Thank you for being here this morning, and you may begin. 

Thank you, Mr. Dryer. 

STATEMENT OF TREVOR DRYER 

Mr. DRYER. All right. Chairman Brat and Ranking Member 

Evans, thank you for the opportunity to testify today. It is really 

an honor to be here. 

As mentioned, my name is Trevor Dryer. I am the CEO of Mirador, which is a small business headquartered in Portland, Oregon. 

Mirador is a white-label, third-party service provider working with 

regional, midsized, and community banks, credit unions, and nonprofit CDFIs. Mirador is dedicated to the proposition that regulated 

financial services companies want to serve small businesses in 

their communities. 

Mirador is not a lender. Our platform focuses on improving the 

engagement and experience between borrower and lender, supporting commercial term loans, SBA-backed loans, working capital 

lines of credit, commercial real estate loans, and small-dollar loans. 

When a borrower goes to one of our customers’ branches or to 

their website to apply for a business loan, they are routed onto the 

Mirador platform. However, they likely won’t even know they have 

left the bank site, and we want it that way. 

Borrowers can follow simple steps to fill out the application, and 

Mirador technology completes a credit memo by pulling additional 

data from public records, credit bureaus, accounting software, bank 

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accounts, and the IRS, which is returned to a bank’s loan officer 

with a simple indication of credit worthiness based on the lender’s 

credit criteria. 

We are paid for every credit memo we complete without regard 

to the final outcome of the application. 

The benefit to our bank customers is a vast reduction in the time 

and cost to process the loan. For the borrowers, they benefit from 

an equally steep reduction in the time it takes to go from the application to the funding of the loan. 

As we grow our client base, we are creating a network of partners, borrowers, and lenders passing along customers to ensure 

that any small business can gain access to credit from a regulated 

institution without having to go through the time and trouble of 

starting the application process over each time. This is also a 

unique way to increase awareness of low-cost lenders, such as leader CDFIs, that traditionally do not engage in marketing activities. 

Innovation in the area of small-business lending is improving 

acces to capital. However, a number of issues still negatively system impact this market and place the borrower at a disadvantage. 

To that end, I proffer a few recommendations to further remove 

pain points for small-business borrowers and lenders. 

First, I strongly encourage the IRS to automate the 4506-T process for a third party to obtain a tax transcript. Congressmen 

McHenry and Blumenauer, as well as the ranking member of this 

Committee, Congresswoman Vela ́zquez, introduced H.R. 3860, the 

IRS Data Verification Modernization Act of 2017, requiring the IRS 

to automate the Income Verification Express Service process by 

creating an API, or application programming interface, which 

would reduce the paperwork and the waiting period that currently 

burdens lenders and borrowers alike. 

Second, working with the New York Business Development Corporation, we have identified an opportunity to increase referrals of 

those borrowers unable to gain access to credit through traditional 

methods to a mission-based nonprofit lender by providing Community Reinvestment Act, or CRA, consideration for referrals. Currently, banks do not receive CRA credit from referring borrowers 

to CDFIs or other qualified institutions when these loans are too 

risky for the bank to underwrite. Given the economic development 

missions of CDFIs to support small businesses, a successful referral 

from a bank is something that regulators should incentivize. 

Third, the law should allow credit reports to travel with referred 

loan applications. When applying for a loan, numerous credit inquiries occur from the various lenders considering the borrower’s 

request even though the borrower is seeking a single loan. Currently, each lender has to pull a credit report even if the loan is 

a referral. The more inquiries, the greater the impact on a credit 

score. As a credit score gets lowered, the cost of capital increases 

and becomes more difficult to obtain. 

Finally, I encourage you to further incentivize the SBA to improve their technology in making the agency’s lending process more 

efficient and borrower-friendly. SBA-backed products remain a 

vital source of capital for small businesses, particularly newer businesses and startups. However, the process and technology used are 

cumbersome and can deter many lenders and borrowers from parSBREP-219A with DISTILLER

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ticipating. The private sector, including Mirador, has developed 

world-class matching technology, ensuring that borrowers end up 

approved by a lender under the most appropriate terms and conditions. The SBA should be encouraged to look to the private sector 

for technology solutions to improve the borrower experience in their 

flagship programs, SBA One and SBA Lender Match. 

Once again, thank you so much for this incredible opportunity, 

and I am happy to answer your questions. 

Chairman BRAT. Super. Thank you, Mr. Dryer. We appreciate 

your testimony as well. 

And I think for the questions I am first going to yield to my colleague Mr. Luetkemeyer. He has a special interest and expertise in 

this area, and we will lead off with some questions. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. I appreciate 

the opportunity to be here today in your Committee. 

Ms. Fisher, I am kind of curious, you are advocating, or represent anyway, the merchant cash advance folks. Is that correct? 

Ms. FISHER. Yes. 

Mr. LUETKEMEYER. Would you describe a cash advance as a 

loan or an investment? Or how would you classify that? 

Ms. FISHER. Sure. Thanks for asking that. 

A merchant cash advance is not a loan. It is a purchase of the 

right to receive future income from a business. So a small-business 

owner can enter into a transaction with a merchant cash advance 

funder under which the small-business owner sells a percentage of 

its future income. And the merchant cash advance company then 

will receive that portion of the small business’ revenue as the small 

business makes the revenue. 

It is a very helpful product for small businesses, in that payments are not unconditionally required. The payments to the merchant cash advance company are required only to the extent that 

the small business actually creates revenue. 

Mr. LUETKEMEYER. Okay. Fantastic. 

So I know that in Mr. Phalen’s testimony he talks about a 

SMART Box. And I am all for disclosures. I think the individual, 

the business needs to know what they are getting into. I think that 

is important. But I know in the SMART Box there is an APR disclosure. How do you disclose an APR with a merchant advance 

product? 

Ms. FISHER. That is a good question. A merchant cash advance 

product is not an appropriate—— 

Mr. LUETKEMEYER. It is not a loan, so, therefore, you don’t 

really have an APR, right? 

Ms. FISHER. And, also, there is no definite term. 

Mr. LUETKEMEYER. Okay. 

Ms. FISHER. So, because a small business is required to deliver 

a portion of their receipts as those receipts are created, we can’t 

know when those receipts will be created. And things can happen; 

like, there can be a tough winter in Minnesota and business slows 

down for businesses there and so receipts trickle in more slowly 

than expected. 

So putting an APR as a measurement on a transaction with no 

definite term is not the most helpful—— 

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Mr. LUETKEMEYER. We are trying to fit a square peg into a 

round hole, aren’t we? 

Ms. FISHER. Yeah. 

Mr. LUETKEMEYER. You know, I deal with a lot of small-dollar 

lending, and I chair the Financial Institutions Subcommittee in Financial Services, and so I deal with this stuff all the time. You 

know, for a long time, I—and I actually chaired the Financial Services Committee back in Missouri when I was back in the State 

house. And I have always dealt with the problem with APR disclosures for small-dollar lending anything less than a year. You know, 

APR, the letters stand for ‘‘annual percentage rate.’’ How do you 

have an annual percentage rate on something that is not done on 

an annual basis? It is done for 2 or 3 weeks or 6 months at a time. 

I really struggle with this. 

And I think, you know, quite often, the APR has been misrepresented. Because, at the end of the day, if I have a leaky faucet at 

home and I call my plumber up and he charges 50 bucks, you 

know, to stop by my doorstep—if goes in and says, ‘‘Oh, you have 

a tap I just have to fix,’’ so within 5 minutes, you know, 10 minutes 

there, he fixed my faucet, now, did he charge me 50 bucks to stop 

by and pay for his trip out and his experience and all his tools and 

all of that, or did he charge me $300 an hour? 

That is the disproportionality of an APR and the misrepresentation of what is going on with this service charge for small-dollar 

lending, which, you know, in your situation here, quite frankly, 

isn’t going to apply because of the business model that you have. 

So that is my concern with APRs. I think for small-dollar lending 

or anything that is less than a year, I think it is an irrelevant 

thing. And I hope that that can be something that a SMART Box 

can be able to be fixed so it doesn’t do more harm than good, because I think it misrepresents what is actually going on there. 

Mr. Dryer, you made a comment a minute ago with regards to 

credit bureau inquiries. And I think this is a very, very important 

point, from the standpoint that the more inquiries that an individual has or business has, it sometimes can have a negative impact on that person or that business’ ability to get credit. Would 

you like to elaborate on that just a little bit? 

Mr. DRYER. Sure. 

Mr. LUETKEMEYER. It seems counterintuitive, because you are 

trying to find a way to help people, and actually hurt them by 

going through the credit bureau. 

Mr. DRYER. That is right. We see, typically, because of the rules 

that don’t allow one lender to share a credit report with another, 

that small businesses often have to apply to several lenders in 

order to find one that fits their credit parameters, their lending parameters. And so you will see sometimes, when they are looking for 

the same $50,000 loan, they had to apply to five or six lenders, 

and, as they go through the process, more credit inquiries, lowering 

their FICO score, which—— 

Mr. LUETKEMEYER. So how would you fix that for your small 

businesses? Because this is really important, because they are trying to get started, they are struggling, and yet if they actually try 

and go someplace and get some funds and that individual or comSBREP-219A with DISTILLER

10 

pany or entity goes to the credit bureau, it is actually a mark 

against them. How do you solve that problem? 

Mr. DRYER. I would solve it by allowing the credit report to be 

transferred from lender to lender. If you are applying for a single 

loan, even if it is with multiple lenders, that should be one credit 

inquiry, in my view. And if you can allow the borrower to kind of 

take that data with them, that would, I think, solve, largely, the 

problem. 

Mr. LUETKEMEYER. I appreciate that. 

Thank you, Mr. Chairman. My time has expired. 

Chairman BRAT. Thank you. 

I will now yield to the ranking member, Mr. Evans, for 5 minutes. 

Mr. EVANS. Thank you, Mr. Chairman. 

Ms. Fisher, I wanted to probe a little bit more on what my colleagues just talked about. When applying for finance, does your industry get personal guarantees that lenders and other industries 

receive? 

Ms. FISHER. Thank you for that question. 

In the merchant cash advance industry, there typically are personal guarantees, but they are of a different sort than with a loan. 

As I explained before, with a merchant cash advance transaction, 

the business is only obligated to deliver revenue to the extent the 

business creates that revenue. So the personal guarantee is not a 

personal guarantee of payment. 

The business owner also makes certain promises, such as they 

won’t divert revenue, you know, they won’t open multiple bank accounts and do funny things with their money. So the guarantee is 

a guarantee of those types of promises, not the guarantee of repayment. 

Mr. EVANS. So does that lack of collaboration affect your business model? 

Ms. FISHER. No. I think it affects it in a positive way, in that 

it helps only ensure that the business owner, who typically is the 

person who can control in a small business whether they are opening multiple bank accounts, is standing behind those promises. But 

it doesn’t change the nature of the product being not absolutely repayable. 

Mr. EVANS. Uh-huh. 

This is to the entire panel, and I will start with you. 

Are you aware of the Small Business Borrowing Bill of Rights? 

And do you think its tenets include commonsense tools to protect 

small businesses and provide transparency? 

Ms. FISHER. Thank you. 

I am aware of the Small Borrowers Bill of Rights. I haven’t read 

it in a while, so I am not familiar with exactly what it says. I think 

that, as I recall, there are certain things about it that are very 

good. There are certain things about it—I think it mentions APR, 

so that would be something that I would disagree with. 

The good news is there are many different industry groups who 

are working on best practices. And, although they don’t agree with 

every practice, they are working hard on coming together for best 

practices as a whole. So that is a positive thing. 

Mr. EVANS. Okay. 

SBREP-219A with DISTILLER

11 

Other people want to respond to that? 

Mr. PHELAN. Sure. Yes. Thank you, Congressman. 

We also are aware of all the different disclosures that are underway now in the industry, and I mentioned some of them in my 

opening remarks. And there are different tools for assessing the 

cost of these types of loans. We think that the more those tools are 

made available, the better for the businesses to assess the cost of 

credit. 

I think somebody here mentioned that businesses have all kinds 

of credit needs and financial needs, and it is hard to distill this 

down into any one kind of point of view that can encompass all 

these different capital needs or credit needs for businesses. And so, 

providing the disclosure and having the tools available make a lot 

of sense as a way to help clarify the cost for the business. 

Mr. EVANS. Mr. Dryer? 

Mr. DRYER. Yes, we applaud the efforts of the industry to create 

more transparency and disclosure. At the end of the day, that, to 

me, is what is important, is the small business understanding what 

they are getting into. 

I think the challenge is, when you have regulated entities that 

are subject to regulations requiring a certain disclosure and then 

you have industry groups that have taken a different approach, it 

can become very confusing for a small business if they are looking 

at multiple lenders to really understand the true costs and the 

terms of the loans. And we see that can be, you know, quite confusing. 

I don’t have a great solution for that, but I think the more that 

a small business can be allowed to, you know, compare proverbial 

apples to apples, the better it is for the borrower. 

Mr. EVANS. Thank you. 

Mr. Chairman, I yield back the balance of my time. 

Chairman BRAT. Thank you, Mr. Evans. 

I think we are actually doing all right on the voting clock. They 

are still talking on the floor, so we have done well today. 

I will ask a bit of a technical question, and then in the back of 

your minds—you are up here in D.C.; Federal Government, Federal 

law, et cetera, regulations. At the end, maybe just suggest how we 

can be helpful to you moving forward, what we can do better, and 

that. 

But I will just start off with more of a narrow question. We will 

start with Mr. Phelan and work down. 

Currently, the Consumer Financial Protection Bureau, CFPB, is 

in the process of implementing Section 1071 of Dodd-Frank, which 

would require financial institutions, including online lenders, to 

gather and submit demographic data of borrowers to the government. 

What concerns, if any, do you have with this provision? And how 

would it affect both small financial institutions and small businesses? 

Mr. PHELAN. Thank you for that question. 

Yes, we have worked a little bit with the CFPB to help them understand this data-collection requirement. It is complex, and what 

we find is that the data doesn’t exist today, so it is hard to say 

where exactly to go to obtain it right now. 

SBREP-219A with DISTILLER

12 

We think that the challenge is in creating this massive set of information and that, it is going to put a burden on the businesses, 

ultimately, to report this in the transaction. There will be some requirements to collect it directly from the business. The business is 

really the only source to get it, because no other sources exist right 

now. 

Then there is the challenge of being able to create this massive 

data warehouse. And there are different ways to do it. What we 

have discussed with the CFPB, is to utilize current technology that 

exists right now to collect this information. And once that is collected, it must then be crafted into a finished product that provides 

an understanding of what is going on in the lending markets and 

to understand fair credit, lending activity. 

So the concerns are that it is going to be a massive project, and 

it is going to be a very substantial change for both the business 

and, I think, even to the CFPB to thoroughly understand the information from this data set. 

Chairman BRAT. Great. Thank you much. I apologize for the 

alarm. I have never heard it go off like that before. 

But I think I am going to yield my time to Member Yvette Clarke 

from New York right now. She is with us, and I want to make sure 

we get her questions in, if she has any for you today. Thank you. 

Ms. CLARKE. Certainly. I thank you very much, Mr. Chairman, 

and I thank Ranking Member Evans. 

I thank our expert witnesses for appearing here today. 

We know that the world has changed dramatically over the past 

decade alone. We have seen rapid technological advances that have 

allowed us to access the world in the palm of our hands. However, 

we have also seen generations of family wealth wiped out due to 

the mortgage foreclosure crisis. 

At the center of all of this lies the financial technological industry. This crucial industry offers the promise of easier access to capital for people to open businesses, afford college, and launch new 

products. However, it also means that lenders could be exposed to 

new forms of fraud and borrowers could face new forms of soft discrimination/implicit bias by focusing on nontraditional lending factors that structurally disadvantage specific communities. 

Our goal as elected Representatives of the American people is to 

ensure that the government creates clear, fair, and effective rules 

to maximize access to capital while minimizing risk and discrimination that results from bias. 

So my first question is to Mr. Phelan. 

Can you please describe what nontraditional factors FinTech 

lenders may look toward in making investment decisions? For instance, is there some means of explaining the story behind late 

payments within the confines of your application process? 

Mr. PHELAN. Thank you. Thank you for that question. 

First, I will start with just the nature of a small business. A lot 

of times, small businesses lack the financial statements in an audited format. They don’t really have the need to present audited financial statements and undertake all that expense that a public 

company does. With that as a starting point, lenders are looking 

to do a credit assessment. They are looking to conduct an assessment about the ability to repay the loan. 

SBREP-219A with DISTILLER

13 

So, if you put those two together, first you have to go to various 

sources of data to assess the credit of the borrower. And these 

sources provide information mentioned in the credit memo, things 

like credit bureau information, both on the personal and the commercial side. There is commercial credit data that can be used very 

effectively. Secondly, there are very creative things done by the 

FinTechs around collecting financial cash-flow information through 

the bank statements. They can actually look at the cash flows of 

the business through the bank statements. 

There are other sources that I think have been more hyped than 

reality, things like social media, that are interesting from a credit 

assessment standpoint, but are unproven. And so I think those are 

challenges that have not really been fully vetted yet. 

And then there are other forms of payment records, like the 

short-term trade payable information, such as shipping bills, phone 

bills, light bills, things like that. 

What I think is interesting about online lending is that the online lenders really never see their applicant. They don’t meet them 

face-to-face, which is far different than the community bank structure. In the community bank, you walk into the branch, you meet 

the banker face-to-face. And with the online lenders, this is all 

done online. It is all done really through the information and data 

that doesn’t provide a view into the business itself and important 

characteristics, other than, you get name, address, phone number, 

and name of the business. You get the payment records and maybe 

some public filing information, too. And so that can be distilled 

down to create some very credible and reliable credit assessments. 

Ms. CLARKE. Very well. Thank you. 

Ms. Fisher, in your prepared testimony, you went into detail 

about the complexity of merchant cash advances, which allows for 

businesses to sell their future receipts for cash up front. Yet you 

also claim they are already sufficiently regulated at the Federal 

and State level. 

Are there any changes that you would like to see made to the 

way in which the government regulates MCAs? 

Ms. FISHER. Thank you for that question. 

My view is that Federal regulation of merchant cash advances is 

sufficient. There are Federal laws that touch the merchant cash advance transaction, as I mentioned, throughout the transaction, 

from marketing to underwriting to servicing and collection. So I 

don’t have any suggested changes. 

Thank you. 

Ms. CLARKE. Very well. 

Mr. Chairman, I yield back. Thank you. 

Chairman BRAT. Thank you very much. 

And sorry for the rushed feel today. I apologize. On fly-out days, 

we usually leave about noon, but, today, for some reason, it happened a little early. And so I just want to thank you all for your 

participation and good spirits today and the excellent testimony 

you all provided. 

I ask unanimous consent that members have 5 legislative days 

to submit statements and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. 

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[Whereupon, at 10:42 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

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Testimony of 

William Phelan 

President and Co-Founder, PayNet, Inc 

Before the 

United States House of Representatives 

House Committee on Small Business 

Hearing on 

Financing through Fintech: Online Lending's Role in 

Improving Small Business Capital Access 

October 26,2017 

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Overview 

Testimony of William Phelan 

President and Co-Founder, PayNet, Inc. 

Before the United States House of Representatives 

House Committee on Small Business 

October 26, 2017 

Post financial crisis of 2009 clearly resulted in disruptions in the credit market for small businesses as 

traditional sources of credit like community, regional and large banks could no longer profitably supply 

credit or they were preoccupied with other more pressing issues in their businesses. Partly due to the 

JOBS Act and partly due to new applications of technology, innovators in the form of fintechs invented 

new ways to provide credit to small businesses to fill this "credit gap". Fintechs have faced the challenge 

of building systems for sourcing borrowers, finding the capital to make loans and building the 

technology platforms to lower the cost of processing a credit application. They have excelled at building 

technology platforms to lower the cost of providing credit applications to small businesses but as a 

group, they still face high costs to find prospective borrowers and they face high costs of capital as a 

source for their loans. I note that since the dawn of fintech, several have decided to exit this market or 

they have gone out of business themselves. 

It is clear that fintechs have not fully realized the potential they held several years ago when many 

equity analysts predicted fintech would transplant banks as a primary source of credit to small 

businesses. But fintechs have provided three critical benefits to the supply of credit to small businesses: 

first, they have figured out technology platforms to lower the cost of processing a credit application; 

second, they have changed the expectations among small businesses for access to and speed for 

working capital credit, which traditional sources cannot afford to offer at a reasonable cost; third, they 

are filling the credit gap faced by small businesses across the credit spectrum and industry sectors. More 

work must be done by these innovators to improve their business models and I note that many fintechs 

are themselves small businesses. 

Improvements in fintech business models include cheaper sources of capital that can be the source for 

lower priced loans. Another major improvement necessary for fintechs to become a long term source of 

credit for small businesses is to lower the cost to acquire their customers who are the prospective 

business borrowers. Also, many fintechs are addressing the capital and customer acquisition business 

issues through partnerships with banks. Most importantly, they must continue to work on their business 

methods to provide transparency, such as that provided by the ILPA through its SMART Box, on the 

terms of loan contracts with small businesses. like any market of suppliers, lenders to small businesses 

provide varying degrees of information about their product to ensure their loan contracts are fit for the 

intended purpose. My concern is that fintech, in its early stage of development, could fail as an industry 

to fill the credit gap. This failure could result from lenders who do not fully inform borrowers on the 

terms of their loan contracts and in doing so, create the impression that all fintech lending is an 

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untrustworthy source of credit. This could drive away other lenders that are providing better disclosure 

about the terms of their contracts and seeking to lower the cost of delivering credit to small businesses. 

In this scenario of market failure, less supply of credit becomes available for small businesses and 

further enlarging the credit gap. 

Introduction and Purpose 

Members of the Committee, my name is William Phelan, President, and Co-Founder of PayNet, 

Inc. based in Skokie, Illinois, a suburb of Chicago. I appreciate the opportunity to speak today 

on behalf of PayNet, Inc. which provides small business credit information to banks, commercial 

finance, alternative lenders and corporate credit lenders throughout the nation. PayNet, Inc. is 

a member of the U.S. Chamber of Commerce and I am active on a number of boards in addition 

to my role operating PayNet on a day to day basis. My board participations include The 

Canadian Leasing and Finance Association (CFLA), The Innovator Lender's Platform Association 

(ILPA). I was formerly on one of the Advisory Boards for the Chicago Federal Reserve Bank and 

for the Equipment Leasing and Finance Association (ELFA). I speak regular at industry events 

and in the business community on the topic of access to credit for private companies in the U.S. 

and Canada. My role today is to provide a perspective and impact of fintech on credit and 

capital availability to the small business economy. 

Background 

Access to small business credit information increases access to capital, spurring economic 

growth and jobs, and significantly reduces the cost of doing business. PayNet collects and tracks 

this data on small business loans from hundreds of U.S. and Canadian lenders each month, 

turning it into actionable intelligence. 

PayNet, Inc. maintains a repository of historical payment information on small business loans; 

collecting real-time small business loan and lease information from more than 300 leading U.S. 

lenders. PayNet's data provides a unique window into the world of small business 

lending/credit trends compiled from our "real-time" proprietary database consisting of over 24 

million term debt contracts worth nearly $1.5 trillion in loan value. 

Key statistics about the PayNet Database are as follows: 

• Average number of months of history per lender is 117. 

• Database contains nearly $1.5 trillion in financial obligations. 

• Average transaction size per contract is $67,056. 

• Average term per contract is 3. 7 years. 

• Average monthly payment per contract is $1,524. 

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Small Business Credit 

Small businesses in America are a primary driver of economic growth and have become the 

centerpiece of the economic recovery. According to the U.S. Small Business Administration's 

Office of Advocacy's most recent estimate, 29.6 million businesses operated in the U.S. in 2014. 

The perplexing aspect of the small business economy is not its importance as the engine of U.S. 

growth, innovation, and competitive edge, but how little we know about this important 

economic engine. Limited knowledge hinders the ability of bodies such as this Committee to 

create policies that help small businesses. 

Much interest exists now to better understand the small business credit market. This interest is 

driven in part by research showing the credit gap exists in the form of disruptions of credit 

access to small businesses. Research shows this credit gap has been shown to restrict economic 

growth and wage growth. While difficult to predict with exact science, the impact of the credit 

gap has most likely contributed to what many consider to be sub-par growth of less than 3% in 

the U.S. GDP over the past several years. Disruptions in the market mechanism that operated 

and provided credit to small businesses pre-recession are one likely cause of this gap, as big 

banks pulled out of local markets and community banks consolidated their operations and 

focused on meeting compliance requirements. 

Small Business Credit Conditions 

The August 2017 Thomson Reuters/PayNet Small Business Lending Index (SBLI), which 

measures the volume of small business loans issued over the past 30 days, increased 8% to 

134.2 in August 2017 from 123.8 in July 2017. Compared to August 2016, the SBLI increased 1%. 

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Thomcon Reutero/PayNet Small Buolneoc Lending Index (SBLI) 

\ IJnoJrv 2fllV,. A\Klll'>l 20t ?1 

--- --- ------- Top growth sectors driving investment expansion by small businesses were found in the 

Construction (+6%), and Accommodation & Food Service (+6%) businesses which together 

represent over 13% of the small business economy. Arts, Entertainment & Recreation (+10%) 

remained the top growing sector among small businesses. In a big turnaround, Mining (+3%) 

and Wholesale trade (+3%) were both positive for the first time in the last several years. 

After many months of double-digit contractions, growth in the Health Care sector stabilized 

dramatically, and has been slightly positive in recent months with a 0.2% increase. 

Similar to last month, growth continued to be strongest in the Western Part of the South as well 

as the eastern part of the Midwest, likely reflecting in part the acceleration in global growth this 

year and the regions' exposure to globally-oriented industries such as mining and 

manufacturing, respectively. Additionally, the Pacific portion of the west coast is starting to 

show material signs of strength in the most recent couple of months. The mid-Atlantic is the 

one region of the country where contractions continue to persist with little signs of abatement, 

a It hough the most recent resu Its were somewhat positive. 

The Thomson Reuters/PayNet Small Business Delinquency Index (SBDI) 31-90 days past due, 

which measures the percentage of loans that are delinquent, decreased to 1.33% in August 

2017 from 1.35% in July 2017. Compared to one year ago, delinquency increased by 1 basis 

point (bp). Transportation showed a 10 bp decrease in delinquency. Increases in delinquency 

are shown in both Agriculture (2 bps) and Construction (1 bp). 

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I 

i 

" 

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... 

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... 

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Thomoon Reuterc/PayNet Small Buoineoo Delinquency Index (SBDI) 

CH • :JO Q,Jl("< f'ilSl Dtw1 

1 1,1mur'; ?nn:,. AU9t~'>f 71:11/1 

The PayNet Small Business Default Index (SBDFI), which measures the percentage of loans and 

leases to small businesses that have defaulted, at 1.84% is 35% below pre-crisis readings, and 

has been receding in recent months. 

I 

I 

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..... 

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PayNet Small Business Default Index (SBDFI) 

Uanuary 2005 ·August 2017! 

Much of the improvement in recent months has come from two formerly high-risk sectors 

experiencing lower default rates. Mining default rates have declined approximately 1%-point 

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over the last year, and Transportation default rates have been declining at a 0.6% annualized 

rate over the last three months. Conditions are in place for small businesses to drive GDP 

growth resulting from exceptional financial health. 

Most other sectors, with the exception of Agriculture, have current default rates that are 

around 25% to 75% below pre-crisis levels. Information Services continues to show a dramatic 

deterioration in default rates in recent months, but no other sector has seen its default rate rise 

at even a 0.4%-point annualized rate over the last three months. 

Similar to originations trends, default rates are currently declining rapidly in the Western part 

of the South. In fact, they have been declining at a nearly 1%-point annualized rate in that 

region over the last three months. Despite these recent improvements, however, the region's 

default rate stands 80 basis points above the next closest region. 

Many other regions with exposure to globally-oriented sectors, such as the Midwest and the 

Mountain portion of the West Coast, have also been experiencing stabilizing or declining 

default rates in recent months. By contrast, some deterioration in financial conditions is 

present in both the Northeast as well as the Pacific portion of the West Coast. Default rates 

remain lowest in the New England region and the Midwest generally. 

Credit conditions for small businesses in 2017 indicate less investment for growth but higher 

financial quality compared to pre-financial crisis. We see in the data that growth rates nearing 

12% for the period 2005-207 versus -1% for the period 2015-2017. While investment growth 

remains tepid, financial health stands stronger than the pre-financial crisis period. The net 

result shows that small businesses as a group remain reluctant to invest in growth projects at a 

time when their financial health has improved. 

Market Size Estimates 

The small business lending market is vast. According to the FDIC, there were $180 billion in 

business loan originations under $250,000 in the United States in the fourth quarter of 2014, 

across 22.1 million loans. Oliver Wyman estimates the potential for $80 to $120 billion in unmet 

demand for small business lines of credit, and we believe that there is also substantial unmet 

demand for other credit-related products, including term loans. We also believe that the 

application of technology to credit assessment can expand the total addressable market for 

small business credit. 

In 2013, the Federal Reserve estimated gross shadow banking liabilities in the U.S. (their 

measure of non-bank credit intermediation) at roughly $15 trillion, down 30% from a peak of 

$22 trillion in 2007 (vs. bank liabilities growing from $14 trillion to $16 trillion over the same 

period). The contraction of shadow banking liabilities is not surprising considering that the Fed's 

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broad definition includes all structured credit (including asset backed securities now 

consolidated on bank balances following accounting rule changes), as well as commercial paper, 

repo and money market mutual funds. Additionally, during the financial crisis, several of the 

largest non-banks (particularly the investment banks) converted to Fed-regulated bank holding 

companies, further reducing the shadow bank universe. ("The Future of Finance, The Rise of the 

New Shadow Bank", Ryan M. Nash and Eric Beardsley, Goldman Sachs, Equity Research, March 

3, 2015.) 

PayNet analysis offers another view of the small business credit market with estimates of the 

size of the credit markets in the commercial finance, commercial bank, and alternative lender 

segments. The analysis was conducted for two segments: facilities up to $1 million and up to 

$250,000. 

Segment 

c,.mmu:ial Finance 

C:lmmt!r::ial !lank • 

Alterrative Lending (1016) 

Total 

B<!h!tllC!< (9!il) Contrad:Ctn_nt{Th::lul 

$250k and Under Slmi I i!!ld Vn d"r Sl50k end Under $I mil ;rd Under 

$ 163 s 242 6,"/fJ) 7,070 

r 311 $ e35 ~6,550 ~7,71(.1 

S 6 S 7 JBO 18C 

$ 481 $ 944 3~ft90 34,960 

For the larger $1 million and under segment, the analysis shows an estimated $944 billion in 

outstanding loan amounts in these three segments of the market. Based on this market size this 

equates to over 35.0 million financial contracts. For the $250,000 and under segment, the 

analysis shows an estimated $481 billion in outstanding loan amounts. Based on this market 

size this equates to over 33 million financial contracts. 

Given that the SBA has estimated that other sources of capital such as mezzanine and buyout, 

angel capital, and venture capital have comprised approximately 13% of the total small 

business financing in recent years, the total small business financing market could equal 

approximately $1.1 trillion. 

While credit unions do not have readily accessible breakouts of their business loans by deal 

size, business loans represent approximately $74 billion in outstanding value as of June 2017, 

presumably a material share of which fits into the small business category. Small business 

lending grew by 130% between mid-2007 and the end of 2015 according to CUNA Vice 

President Mike Schenk. 

As data on small business lending remains elusive, we used various methods to size this market, 

which are detailed in the appendix at the end of this testimony. Regardless of the assumptions 

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used, however, it is clear that the small business credit market represents a sizeable proportion 

of the US economy and one that is integral in driving growth and prosperity. 

The Small Business Credit Market Mechanism 

The market mechanism by which small businesses access credit consists of commercial lenders 

and businesses that finance the purchase of their goods and services. Commercial lenders and 

businesses employ various methods to provide credit to small businesses. Small business 

lending has historically been expensive because of its diversity and loan size. Corporate credit 

underwriting requires 28 separate tasks to arrive at a decision. These 28 tasks involve collecting 

information for the credit application, reviewing the financial information, data entry and 

calculations, industry analysis, evaluation of borrower capability, capacity and valuation of 

collateral. A time series analysis of these steps reveals a 2-3 week process at best and in some 

cases as much as eight weeks to arrive at a single credit decision. Three major departments of 

the bank play a role in the process relationship manager, credit analyst, and credit committee. 

Costing out this process shows a cost of $4,000 to $6,000 to underwrite each credit application. 

With these costs, banks are unable to turn a profit on this business unless the loan size exceeds 

$500,000. The following chart shows these costs in detail: 

Table 1: Corporate Credit Underwriting Cost per Application 

MANUAL PROCESS 

I 

1 

k I Time I Total Cost 

Pcop c 1 ; Tas (hrs) ($) 

loan Officer Credit Application 

Credit Analyst Reviews 

Credit Analyst Data Entry and Calculations 

Credit Analyst Industry Risk Analysis 

Credit Analyst Borrower capability 

Credit Analyst Valuation and liquidity of collateral 

'rota! 

5.8 $414.66 

19.0 .. $1,196.15 

46.0 .. $2,003.85 

16.0 .. $1,323.08 

2.0 • $115.38 

10.0 $726.92 

98.8 ·. $6,9$4.71 

There is nothing wrong with this corporate credit underwriting process for large middle-market 

and corporate lending, but when it is applied to smaller commercial credit, it clearly works as a 

disincentive to the bank and to the loan officer. 

Loan review is another process that has made commercial lending unattractive because it adds 

a significant scope of work to credit administration. An effective loan review program provides 

senior management and the board of directors with a timely and objective assessment of the 

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overall credit quality of the portfolio. Appropriately grading loans enables the bank to take 

timely steps to minimize credit losses. Similarly, it is important to Identify trends that affect the 

collectability of loans in the portfolio and recognizing segments of the portfolio that are or have 

the potential to become problem areas. 

The key to an effective loan review system is accurate loan classification or credit grading. Here 

again, the typical corporate credit process makes accurate risk ratings a major challenge for 

banks because of the sheer number of credits in a robust commercial lending business. Analysis 

shows that one loan review involves 1S separate steps, from collecting and spreading financial 

statements to conducting cash flow analysis and adjusting risk ratings. Three major 

departments are involved in this process, including the lending group, credit and audit groups. 

A single loan review can take a bank up to two days of work to complete at a cost of over 

$1,000 as shown below: 

Table 2: loan Review Cost per Customer 

I 

I Time ]Internal I External I $ People Tas.k 1 Co5t ( ) I (hours) Costs($) I Costs($) J 

I loan Officer ioepartment Total $/ App 7.7S Is 372.60 1 s 2SO.oo 1 s 622.601 

!credit Analyst loepartment Total $/ App 4.00 Is ts3.ss 1 s100.001 s 253.851 

!Administration ioepartment Total $/ App 4.00 Is 1S3.8S I$ Is 153.851 

This means that a bank with 1,000 commercial customers will incur over $1 million in costs to 

conduct annual loan reviews. In some cases, regulators are requiring more frequent reviews 

which can double the cost, even as banks are trying to cut costs to boost profitability. 

The Credit Gap 

One key feature of the market mechanism has been community banks that operate in local 

markets through a high touch business model. The consolidation of community banks has most 

likely stood as one cause of the credit gap. The number of community banks has shrunk by 

more than a third since 2007. Anecdotally we find that community banks are concentrating on 

loans with a minimum value of $500,000 or more because smaller balance loans are not 

profitable. 

A recent study quantifies how a sharp downturn in small business lending activity from the four 

largest banks in the US (Citi, Wells, JP, B of A) affected economic outcomes as well as how other 

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nonbank lenders responded to this sharp pullback in small business lending activity from the Big 

4 Banks. ("The Decline of Big-Bank Lending to Small Business: Dynamic Impacts on local Credit 

and Labor Markets", Brian S. Chen, Harvard University; Samuel G. Hanson Harvard Business 

School and NBER; Jeremy C. Stein Harvard University and NBER in March 2017). 

The motivating statistic for this study was the fact that small business originations (Jess than 

$1mil) for the Big 4 banks were just SO% of their 2006 level as late as 2014, which was only a 

small tick-up from the nadir in 2006 based on Community Reinvestment Act data. This was a far 

more severe decline than other banks' pullback in the data set, which saw originations reach 

80% of 2006 levels as of 2014. On average, small business lending fell 30% more at the Top 4 

Banks than at other banks in the CRA database 

The authors found Small business lending by the four largest U.S. banks fell sharply relative to 

other banks beginning in 2008 and remained depressed through 2014. They explored the 

consequences of this credit supply shock, with a particular focus on the resulting dynamic 

adjustment process. Using a difference-in-difference approach that compares counties where 

the Top 4 banks had a higher initial market share to counties where they had a smaller share, 

they found that the aggregate flow of small business credit fell and interest rates rose from 

2006 to 2010 in high Top 4 counties. Economic activity also contracted in these affected 

counties: fewer businesses expanded employment, the unemployment rate rose, and wages 

fell. Moreover, the employment effects were concentrated in industries that are most reliant 

on external finance, such as manufacturing. They further explored how high Top 4 counties 

adjusted to this shock from 2010 to 2014. While the flow of small business credit has slowly 

recovered in affected counties-as smaller banks, non-bank finance companies, and online 

lenders have filled the void left by the Top 4 banks-loan interest rates remain elevated, 

suggesting that credit conditions are still tighter in these areas. Moreover, although the 

unemployment rate returns to normal by 2014 in high Top 4 counties, the effects on wages 

persist, suggesting that more expensive credit may have led small businesses to become less 

capital intensive which in turn suppressed productivity. 

With the consolidation of community banks since 2007, the number of traditional loan sources 

for small businesses shrank 35%, contributing substantially to the small business credit gap. The 

community banks that are still in operation are going up-market to more profitable loans, with 

a minimum size of $500,000, in response to increased capital requirements for higher risk loans 

and greater regulatory scrutiny. The time, paperwork and cost of more than $5000 for a bank to 

even process a loan are factors causing a barrier between small businesses and their bankers. 

Fintechs that use software, data, and analytics to deliver credit faster and with less paperwork 

are part of the emerging small business credit market providing new sources of capital. 

Fintech Lender Business Overview 

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Marketplace lending is a new source and method for providing capital to businesses and 

consumers. It rose from the JOBS Act which authorized new methods to provide capital after 

the Great Recession. Providers of credit latched onto some of the concepts outlined in the JOBS 

Act as ways to access funding and to provide loans at low cost. The term marketplace refers to 

a broad category of companies that provide direct lending, peer to peer lending and referrals. 

Credit providers use a combination of technology, data and analytics and traditional credit 

systems, thus are often associated with the term "fintech," to process loan applications at 

lower costs than a traditional underwriting process generally favored by banks. Size estimates 

for the credit market vary by source, but the general consensus among all is that marketplace 

lending will grow to become a substantial and established provider of credit for consumers and 

businesses over the next 5 years. 

Fintech's share of the small business lending market are generally estimated to be $5B to $7B 

of small business loans ("Alternative lending- Commoditizing loan applications through 

technology while paving the way for big data investing", Ernst & Young, 2016}. Fintech's share 

of small business originations is estimated to grow to $SOB by 2020 (Business Insider- One area 

of US alt lending is recovering, Feb. 2017}. 

Morgan Stanley estimates the size of global marketplace lending can reach $290 billion by 

2020. They estimate a 51% CAGR through 2020 after growing at a 123% CAGR 2010-14. Most of 

this growth is estimated to occur in the U.S. and China. Morgan Stanley estimates marketplace 

lending will approach $150 billion by 2020. Morgan Stanley estimates TAM of 184 Billion in 

outstanding loans with 100 Billion in unmet demand, SME marketplace lending represented 

$4.6 Billion on 2014 and is expected to reach $47 Billion or 16% of total US SME issuance in 

2020, primarily on new credit expansion. This is a significant impact on addressing unmet credit 

demand for the SME segment. 

TOTAl MARKET 2014 EST. GROWTH 

lOAN TYPE ($billions} ($billions) % 2020 

Small Business 

sttiden~~~n~ 

Mortgages 

Aut()s 

Products and Terms 

280 

. 400, ·.· 

1,000 14.0 na 

Products are traditional loans with non-traditional repayment. loans are used by businesses to 

fund working capital and to buy equipment. loan amounts are offered up to $2 million but we 

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see the average around $60,000 with the balance increasing. We see loan terms offered up to 

5 years but the actual maturities average less than 1 year but term is increasing. 

Most lenders offer fixed term loans. The principal amount of each term loan ranges from 

$5,000 to $2 million. The principal amount of the term loan is a function of the requested 

borrowing amount and credit risk assessment of the customer's ability to repay the loan. The 

typical term loan ranges from 3 to 24 months. Some lenders provide highly tailored loan terms 

to differentiate their product and meet the specific nature of many customers' borrowing 

needs. Term loans are repaid through fixed automatic ACH collections from their business bank 

account on either a daily or weekly basis. Term loans are originated directly or through issuing 

partners such as banks and loans that are purchased from the issuing banks have similar 

performance to internally originated loans. 

Another major loan product is a revolving line of credit with fixed six-month level-yield 

amortization on amounts outstanding and automated weekly payments. These credit lines 

range from $10,000 to $25,000. A customer may be offered a line of credit based on the credit 

risk assessment of the customer's ability to repay the line of credit. Line of credit products are 

typically issued directly to borrowers, rather than through bank partners. 

Several coalitions of fintech lenders have arisen to provide increased disclosure of their loan 

products to prospective small business borrowers. The Innovative lenders Platform Association 

(llPA) offers the SMART BoxTM (Straightforward Metrics Around Rate and Total cost) to compare 

loan pricing and enhance disclosure standards. The SMART Box offers pricing metrics, 

calculators, and explanations to help small businesses understand and assess the costs of their 

small business finance options. Responsible Business lending Coalition (RBLC), a network of forprofit and non-profit lenders, brokers and small business advocates offers The Small Business 

Borrowers' Bill of Rights. The Small Business Borrowers' Bill of Rights identifies 6 rights for small 

business owners along with the specific practices that lenders and brokers must abide by in 

order to uphold and protect those rights. It is important to note that these enhanced disclosure 

such as the SMART Box and The Small Business Borrowers' Bill of Rights are not intended to 

replace a lender's existing disclosures rather they are supplemental disclosures. 

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lender loan Type Amount Tenn Repayment Other Orgination fee Personal Credit 

On Deck Term loiln,lOC $S,OOO · $SOO.OOO 3-36months Daily or Weekly $20/mo 2.5%to 4% SOO• 

Term loan $1,000. $300,000 12 • 60 Months Monthly Draw fee 1% to 0.99· S.99% fair person<JI Lending Club 2% credit 

IOU Central Term loan SS,OOO • $300,000 6or 18 month Daily or Weekly Small guaranty 8.80% No specific 

fee minimum 

Busiuss Tenn loan, MCA Financial services $5,000 to $2M 3.5 · 36 Months Daily or Weekly Small fee 2% to 6% above475 

CAN Capital Term loan, MCA $2.500to $150,000 4 to 24 months Dailv Applicaton fees 3.00% Better than 

average credit 

Fundation Term loan up to $500,000 12 • 48 Months Twice a month Application fees 5.00% Good credit 

Fundation Working Capital 

loan up to $100,000 IS Months Monthly 2% per draw ssoo Good credit 

Funding Circle Term loan $25,000to 12 • 60 Months Weekly Applicaton fee .99'% to 6.99% Good credit ssoo.ooo Merchant Capital Term loan, ss.ooo . ssoo.ooo 6-14Months Source Daily Small fee 4%to6% S75 

Merchant Capital Merch<Jnt Cash $5,000. $300,000 5,12 Months Daily Ofaw fee 15% to Small fee 500 Source Advance 3% 

Note that several fintechs such as DealS truck and Raiseworks, which were founded around 

2010-12 period have exited this market. Others such as CAN Capital have cut back on lending 

operations. 

Credit Models and Process 

While products are traditional, alternative lenders use non-traditional methods and data 

sources to grant credit. Data sources include credit bureaus, bank account statements, financial 

statements, tax returns, borrower demographics, borrower internal data and social media. The 

non-traditional metrics used by alternative lenders has partially obsoleted the traditional 

relationship-building process that used to take years to form between small businesses and 

community banks. Previously, a community banker would spend years forming a relationship 

with a local small business and understanding what the community thought of that small 

business. Now, alternative lenders can approximate that process in minutes by looking up the 

businesses' Yelp review, among other metrics that did not exist even a decade ago. This 

information is aggregated and run through proprietary credit models to arrive at a decision. 

This process runs on proprietary software developed by the lender to fit their business process. 

Many alternative lenders have invested considerable amounts of money to create the software 

and the credit models. The credit models use empirically derived and statistically sound model 

development methods to create a rank order of credit risk. Credit approval rates range from the 

mid 11% to 79% for lenders depending on the security and market segment. 

Fintech lenders seek to control the financial data to ensure they are controlling access to their 

customer. Tech exists to deliver this now. Collection, data entry and spreading of financials are 

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a low value high cost step. Financial statement spreads are likely not done at the loan 

officer/senior credit officer level but they are required by bank policy and probably expected by 

the regulators. Banks often have a flood of renewals/restructures and annual reviews that 

requires prioritization. 

Automated Credit Process 

Credit Bureau Scores 

Personal: FICO 

Business: PayNet 

Experian 

Equifax 

SBFE 

Bank Account 

Information 

Balances 

Deposits 

Cash Flow 

Proprietary credit scoring model 

Predictive Modeling 

Financial 

Statements 

Revenue 

Profit 

Data Sources 

Borrower Access to Borrower 

Demographics Internal Systems Social Media 

Size Accounting Software Face book 

Age - QuickBooks Twitter 

Industry Inventory Management Software Yelp 

Geography UPS/Fedex transactions 

One example of the unique use of data is the bank account information. Lenders link into the 

borrower's bank account to track cash balance at will. This allows the lender to gain an early 

warning of inability to pay and to take more aggressive steps earlier. Lenders track credit on a 

daily basis. Another example of non-traditional data use is Google site visit. This is an online 

photo of the business. It enables the lender to see the business and gain an understanding of 

the location and property. 

Another non-traditional aspect of marketplace lending is the daily repayment of the loan. In 

many cases the repayment is debited each day directly from the borrower's checking account 

via ACH. Daily payment results in a different definition of default. For many lenders, 7 days or 

more past due becomes severely delinquent and default occurs after 60 days past due. In some 

cases payment schedules can vary from weekly to more traditional monthly term. 

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Loan Repayment 

I Automated Collection Platform I 

I Electronic Pay;ent Technology I 

I Working Capital loans I Merchant Cash Advances (MCA) I 

'"', 

I Monthly ~ayments II Daily P~yments I I Daily P;yments I 

Credit Card Receivables (CCR) 

30% and declining 

Fintechs have found ways to lower the cost of processing a credit application compared to 

banks. Some fintechs have lowered this operating cost to under $500 per application versus 

banks which incur cost per application as noted above. 

Borrower Credit Quality 

PayNet analyzed the portfolios of marketplace lenders to determine the absolute level of credit 

risk and to determine differentiation by lender type. We found the following key insights into 

marketplace finance: 

1. In 2016, 84% of Online lenders' portfolio quality stands at a score of 640 or higher. In 

comparison, 96% of banks' portfolio is the same credit quality. 

2. Overall credit quality has improved for Online lenders from 663 in 2009 to 669 in 2016. 

3. Credit migration shows that in 2009, 25% of Online lender's portfolio stood at 680 or 

higher; by 2016, the portion of these higher quality borrowers had increased to 38%. 

4. Online/direct lenders show an average score of 669 in 2016, which equates to a default 

rate of approximately 10.5%. In contrast, new Bank originations had an average credit 

score over 700, which equates to a default rate of approximately 1.1%. 

5. Average facility size for online lenders totals approximately $65,000. 

6. Average transaction term of an online loan is approximately 15 months in length. 34% of 

online loans are in excess of 18 months term which is a large increase from 0% in 2009. 

7. 70% of borrowers that use online loans have been in business 10+ years. This compares 

to 77% for banks. 

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.,A 

loB 680-719 

540-679 

• D 600-639 

Olf 

Marketplace lenders appear to overlap with a majority of banks' customers as measured by 

credit quality. Band C quality borrowers make up 74% of bank's customers and 80% of On-line 

lender's customers. Note that calibration of credit models differs by lender type with the result 

that default rates can differ at the same credit score. 

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Online lenders are expanding their lending operations to provide credit to small businesses 

engaged in diverse industry sectors. As the chart Share of Originations by Borrower Industry 

shows, online loans are used by small businesses in retail, healthcare, accommodation & food, 

other, construction, professional services, wholesale, transportation, administration, and 

manufacturing industries. 

Share of Originations by Borrower Industry 

2009 vs. 2016 

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Impact of Online Lending on Small Businesses 

Question: Does access to credit from online lenders result in improving credit quality for 

borrowers or do all borrowers deteriorate? 

Findings: 

Of 100% of borrowers in 2015, 

69% migrated to higher quality. 

24% of borrowers migrated to a lower credit quality. 

10% were unchanged. 

Summary 

Post financial crisis of 2009 clearly resulted in disruptions in the credit market for small businesses as 

traditional sources of credit like community, regional and large banks could no longer profitably supply 

credit or they were preoccupied with other more pressing issues in their businesses. Partly due to the 

JOBS Act and partly due to new applications of technology, innovators in the form of fintechs invented 

new ways to provide credit to small businesses to fill this "credit gap". Fintechs have faced the challenge 

of building systems for sourcing borrowers, finding the capital to make loans and building the 

technology platforms to lower the cost of processing a credit application. Fintechs have excelled at 

building technology platforms to lower the cost of providing credit applications to small businesses. 

They still face high costs to find prospective borrowers and they face high costs of capital as a source for 

their loans. I note that since the dawn of fintech, several have decided to exit this market or they have 

gone out of business themselves. 

It is clear that fintechs have not fully realized the potential they held several years ago when many 

equity analysts predicted fintech would transplant banks as a primary source of credit to consumers and 

small businesses. But fintechs have provided three critical benefits to the supply of credit to small 

businesses: first, they have figured out technology platforms to lower the cost of a credit application; 

second, they have changed the expectations among small businesses for access to credit working 

capital, which traditional sources cannot afford to offer at a reasonable cost; third, they are filling the 

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credit gap faced by small businesses across the credit spectrum and industry sectors. More work must 

be done by these innovators to improve their business models and I note that many fintechs are 

themselves small businesses. 

Improvements in fintech business models include cheaper sources of capital that can be the source for 

lower priced loans. Another major improvement necessary for fintechs to become a long term source of 

credit for small businesses is to lower the cost to acquire their customers who are the prospective 

business borrowers. Also, many fintechs are addressing the capital and customer acquisition business 

issues through partnerships with banks. Most importantly, they must continue to work on their business 

methods to provide transparency, for example the ILPA provides with its SMART Box, on the terms of 

loan contracts with small businesses. like any market of suppliers, lenders to small businesses provide 

varying degrees of information about their product to ensure their loan contracts are fit for the intended 

purpose. My concern is that fintech, in its early stage of development, could fail as an industry to fill the 

credit gap. This failure could result from lenders who do not fully inform borrowers on the terms of their 

loan contracts and in doing so, create the impression that all fintech lending is an untrustworthy source 

of credit. This could drive away other lenders that are providing better disclosure about the terms of 

their contracts and seeking to lower the cost of delivering credit to small businesses. In this scenario of 

market failure, less supply of credit becomes available for small businesses and the credit gap becomes a 

bigger issue. 

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APPENDIX: Methods and Sources 

*Contract Count rounded to 10,000 increment 

Assumptions Made 

1. For commercial finance data, the Federal Reserve's Finance Companies estimate of the 

value of total loan and lease as a given, and then assume that the $250k and below and 

$1 million and below share of loans and leases balance outstanding contract count in 

the PayNet database-respectively-is representative of national data in each of the 

loan and lease segments for business lending. 

2. For Alternative lenders, we use the 2016 estimate of balance outstanding from the 

Ernst and Young report, and then assume that the $250k and below and $1 million and 

below balance outstanding contract count in the PayNet database-respectively-is 

representative of national data. 

3. For Commercial Bank data, the assumption is that the data provided from the FDIC in 

the latest Quarterly Banking Profile is accurate. 

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HUDSON 

COOK Hudson Cook, llP • Attorneys at law • www.hudco.com 

7037 Ridge Road I Suite 300 I Hanover, Maryland 21076 

Direct: 410.782.2356 • Main: 410.6843200 • Toll Free: 888.422.7529 

Email: kfisher@hudco.com 

Testimony Submitted by 

Katherine C. Fisher, Partner, Hudson Cook, llP 

On behalf of the 

Commercial Finance Coalition 

before the 

House Committee on Small Business 

Subcommittee on Economic Growth, Tax, and Capital Access 

October 25, 2017 

Thank you for the opportunity to present testimony on behalf of the Commercial Finance Coalition 

("CFC"). The CFC is comprised of responsible finance companies that provide needed capital to small 

businesses through innovative methods. Our members also include select vendors that provide 

technology services to the small business finance industry. 

CFC member companies offer fair and innovative alternatives to bank term loans and have stepped in to 

provide capital to small businesses when larger, traditional banks stopped providing such financing. CFC 

member companies primarily offer Merchant Cash Advance ("MCA") factoring products. An MCA allows 

small businesses to access funds for, as an example, a seasonal inventory surge or to replace an 

unexpected major equipment failure. CFC members provide financing between $10,000 and $500,000 to 

qualified small businesses. 

CFC member companies help meet the needs of American small business entrepreneurs. CFC member 

companies provide financial flexibility for small business owners who lack the daily capital to expand their 

businesses or weather difficult financial circumstances. By selling future receivables to MCA companies, 

these business owners can meet their capital needs, hire new employees, and create jobs in today's 

economy. 

The CFC believes that small businesses should have choices in the financial marketplace. The CFC works 

to unite responsible finance companies in our efforts to educate Congress, federal and state regulators, 

and state elected officials about the non-bank commercial finance industry. Small businesses face a gap 

in credit availability. CFC member companies are trying to close the gap and help spur entrepreneurship 

so more Americans can own and operate their own businesses. 

Small Businesses Need Choices. 

Small businesses benefit from having different types of financing available. A business owner who is 

planning for long-term capital needs may choose to apply for a loan guaranteed by the Small Business 
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October 25, 2017 

Page 2 

Administration ("SBA"). These SBA loans are relatively low-cost and typically range from $25,000 to $5 

million. The applicant typically must submit a business plan' and the business owner often must use her 

house as collateral for the loan. 2 A business owner who has short-term capital needs may choose to apply 

for a loan from a non-bank lender or apply to sell future receivables to an MCA company. These types of 

transactions are typically higher-cost and are in smaller dollar amounts. The applicant typically must 

submit bank statements showing several months of revenue, and the business can receive funds in a 

matter of days. 

Whatever the type of financing a business owner chooses, banks alone are not addressing the needs of 

small businesses. Other financing sources are finding success because small businesses demand them. 

This demand shows that they are being underserved by the "traditional" funding sources. 

The Landscape of Financing Options Available to Small Businesses 

Traditional Lending- Despite their decline in issuance, traditional bank loans remain the primary source 

of financing for small businesses, in part due to familiarity. 3 Banks often form relationships with their 

small business customers and have been willing to underwrite loans.• The structure of traditional lending 

tools also has its advantages. Small businesses can carefully compare readily available loan terms against 

other loans, and the loans involve a defined maximum cost to the business. Traditional loans often involve 

flexible repayment terms (e.g., 3-10 years), can be obtained for higher-dollar amounts than other 

financing tools, and are not always secured by collateral. Moreover, guarantees from the SBA provide 

additional security for banks, enabling more small businesses to access traditional lending. 

Nevertheless, traditional lending suffers from certain deficiencies, making it inaccessible or impractical to 

some small businesses. As a threshold issue, qualifying for a traditional bank loan can be an onerous task 

for many small businesses. Small businesses often do not have the required audited financial statements 

or assets that can be pledged as collateral. 5 The ideal loan applicant would have a lengthy history of 

1 The SBA provides a 37-page guide to help loan applicants prepare a business plan. How to Write a Business Plan, 

U.S. Small Business Administration, available at 

https://www.sba.gov/sites/default/files/How%20to%20Write%20a%20Business%20Pian.pdf. 

2 See Loan Fact Sheet, U.S. Small Business Administration, available at 

https://www.sba.gov/sites/default/files/SBA%20loan%20Fact%20Sheet%20(San%20Diego%20District).pdf. 

3 2015 Small Business Credit Survey, Federal Reserve Banks of New York, Atlanta, Cleveland, Philadelphia, St. louis, 

Boston, and Richmond, March 2016, available at 

https://www.newyorkfed.org/medialibrary/media/smallbusiness/2015/Report-SBCS-2015.pdf. 

4 Karen Mills & Brayden McCarthy, The State of Small Business Lending: Innovation and Technology and the 

lmplicatians for Regulation (November 29, 2016), Harvard Business School Entrepreneurial Management Working 

Paper No. 17-042; Harvard Business School General Management Unit Working Paper No. 17-042, available at 

SSRN: https://ssrn.com/abstract=2877201 or http:/ /dx.doi.org/10.2139/ssrn.2877201. 5 Brainard, lael, Community Bonks, Small Business Credit, and Online Lending, Board of Governors of the Federal 

Reserve System. September 30, 2015, available at 

https://www. federalreserve.gov I newsevents/speech/brainard20150930a.htm. 
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profitable performance, but the reality is that many small businesses have short histories or a mixed track 

record of profitability.• 

The risks associated with traditional lending make it impractical for some small businesses as well. 

Because loans are absolutely repayable, the assets of the business-and sometimes the business owner's 

home-are at risk, and default can force a small business into bankruptcy. 

Lenders are equally concerned about risk. In an environment where regulators heavily scrutinize banks, 

lenders are increasingly cautious about extending debt. As a result, banks have increased collateral 

requirements, reduced the amount available for borrowing, and reduced the pool of small business 

borrowers deemed creditworthy. Ninety percent of loans under $100,000 were secured by collateral in 

2013, up from 84 percent in 2007. 7 In addition to the regulatory risks, banks may be less willing to issue 

smaller business loans, because the underwriting costs for banks to scrutinize a potential borrower's 

financial records and business plan are about the same regardless of whether the loan application is for 

$2 million or $20,0008 

Even qualified borrowers have difficulty finding willing lenders in a reasonable timeframe. According to a 

survey conducted by seven Federal Reserve banks, the average small business owner spends 24 to 72 

hours talking to lenders, filling out loan applications, and submitting documentation. 9 This survey further 

suggests that some borrowers were willing to pay a higher price in exchange for an easy application 

process, a quick decision, and rapid availability of funds. 10 

"Fintech" Lending - Fintech lending includes non-traditional lending that directly addresses some 

concerns of small businesses by providing faster access to capital than traditional lending. Compared to 

the lengthy process of finding a traditional loan, business owners can quickly shop lenders on the internet, 

apply for a loan, and receive a decision in as little as an hour." Technology has allowed lenders to 

automate the lending process, leading to a less burdensome application process. Algorithms allow fintech 

lenders to render rapid decisions on applications, often considering information from a wide range of 

sources that are not typically involved in bank underwriting of loans (e.g., data on online banking, 

accounting, bookkeeping, credit cards, and social media). 12 The existence of fintech lenders provides 

small businesses with the ability to quickly obtain capital needed for immediate operations. 

Non-traditional loans are not without their disadvantages. For instance, some borrowers may not be as 

familiar with the lending products. Additionally, although some small businesses reported a willingness 

6 /d. 

7 Wiersch, Ann Marie & Scott Shane, Why Small Business Lending Isn't What it Used to Be (August 14, 2013), 

Economic Commentary (Research Department of the Federal Reserve Bank of Cleveland). 8 Stacy Crowley, Online Lenders Offer a Faster Lifeline for Small Businesses, N.Y. Times, April 8, 2015. 9 Supra note 1. 

10 /d. 

11 Cowley, supra note 6. 12 Brainard, supra note 3. 
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to pay a higher price in exchange for the convenience of alternative products, one report suggests that 

the average annual cost of borrowing tends to be higher than the costs associated with traditional bank 

products." Small business borrowers may not fully understand the terms of the loan, and much like 

traditional loans, default can place the entire business at risk. 14 

Factoring- Factoring is the purchase of invoices at a discount. Factoring has been used by businesses to 

obtain financing for hundreds (perhaps thousands) of years. 15 In a factoring transaction, a small business 

that sells goods and services to a customer can then sell the invoice from the sale to a finance company 

called a "factor." The invoice is typically payable within 30 to 60 days. The factor pays upfront and buys 

the invoice at a discount, allowing the small business to obtain the cash quickly. The factor takes the 

credit risk that the small business's customer cannot or will not pay the invoice. 

Merchant Cash Advance- MCA is a specific form of factoring. It involves a business selling a fixed portion 

of its future receipts to an MCA company in exchange for money upfront. 16 Under these agreements, the 

business does not promise-and is not required-to repay the MCA companyY Instead the business 

delivers the receipts that it sold to the MCA company as the business earns those receipts. 18 The receipts 

are purchased by the MCA company at a discount to cover the MCA company's expenses and to 

compensate the MCA company for assuming risk. The risks taken by the MCA company are significant. If 

the business fails to earn revenue, the MCA company is not owed anything under the agreement, so long 

as the business has not breached the agreement. 19 

For example, if an MCA company purchases $10,000 of a small business's future revenue and agrees to 

receive 10% of the small business's future revenue until the $10,000 is received, the transaction would be 

completed whenever the small business succeeded in getting $100,000 of cumulative revenue. This 

milestone could be achieved in a month, a year, or never. 

The Advantages of MCA- MCA has many advantages for small businesses. MCA injects funds into a 

business without the business incurring debt, as the agreements do not contain an obligation of 

repayment. 20 MCA has transparent costs for the small business: the MCA company will receive the 

amount of revenue that it purchased from the business. The incentives of the MCA company and the 

business are aligned because the MCA company's compensation is contingent on the continued success 

131d. 

141d. 

15 David B. Tatge, eta/., American Factoring Law 4-8 (2009). 16 See, e.g., K9 Bytes, Inc. v. Arch Capital Funding, LLC, 57 N.Y.S.3d 625 (Sup. Ct. N.Y., Westchester County, May 4, 

2017). 

17 See IBIS Capital Group, LLC v. Four Paws Orlando LLC, 2017 NY Slip Op 30477(U) (Sup. Ct. N.Y., Nassau County, 

March 10, 2017) (discussing factors used to distinguish between loans and merchant cash advance agreements). 

"See K9 Bytes, Inc., 57 N.Y.S.3d at 632-34. 19 See id. 

20 See id. 
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of the business. 21 Addressing a key concern with traditional financing, MCA companies quickly fund 

businesses by offering efficient and timely underwriting." Additionally, in MCA, the business owner 

does not enter into a partnership or give up control of the business. 

MCA, however, is not suitable for businesses at every stage of development. MCA depends on the future 

revenue of the business and is generally provided to companies that already have a proven source of 

revenue. Startups that do not expect substantial revenue for an extended time would not be ideal 

candidates for MCA. 

Equity and Partnership- The Subcommittee focuses on fintech financing and online lending, but equity 

financing provides small businesses another avenue for funding. Small businesses can receive funding by 

entering into partnership agreements or by selling a portion of the company to investors. These 

agreements have the advantage of providing funding for the business without the business incurring debt. 

Equity funding, however, is not readily available for all businesses, with venture and angel capital making 

up less than 2% of small business financing in 201623 Also, even when equity funding is available, the 

business owner must limit potential gains by relinquishing a share of the business. Moreover, depending 

on the agreement between the parties, the business owner may risk giving up control of the business 

itself. 

Existing Regulation is Sufficient to Protect Small Businesses 

The MCA and commercial lending spaces are sufficiently regulated by existing federal and state laws and 

regulations. Both MCA companies and commercial lenders must comply with laws and regulations 

affecting nearly every aspect of their transactions, from marketing and underwriting through servicing 

and collection. Even if they comply with every applicable law and regulation, small business financers 

must also be wary of the Federal Trade Commission's ("FTC's") powerful authority to prevent unfair or 

deceptive acts or practices. 

For example, at the federal level, the Fair Credit Reporting Act ("FCRA") and its implementing Regulation 

V, which govern entities in the consumer reporting industry, including consumer reporting agencies, 

users of consumer reports, and furnishers of consumer information, apply to business-purpose 

transactions. The FCRA generally protects individuals, regardless of the purpose ofthe transaction, 

including by requiring a financer to have a permissible purpose to pull a consumer report for a sole 

proprietor or for an individual guarantor of a business's transaction. 24 This is particularly relevant in the 

21 Seeid. 

22 Opportunities and Challenges in Online Marketplace Lending, p. 13, United States Department of the Treasury 

(May 10, 2016), available at 

https:/ /www. treasury .gov I connect/blog/Documents/Opportu n ities _and_ Challenges _in_ Online_ Marketplace_ Len 

ding_white_paper.pdf. 

23 Frequently Asked Questions About Small Business Finance, U.S. Small Business Administration (July 2016), 

available at https:/ /www.sba.gov/sites/default/files/Finance-FAQ-2016 _WEB. pdf. 24 See 15 U.S.C. § 1681a(c) (defining "consumer" as an individual). 
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world of small business finance, where the business is often organized as a sole proprietorship, or an 

individual owner will serve as guarantor in the event of default by the business. Additionally, the FCRA 

requires a user to provide notice to an individual if it takes adverse action on the basis of information 

contained in a consumer report on the individual. 25 

Additionally, the Telephone Consumer Protection Act 26 and the CAN-SPAM Act 27 restrict certain 

telephone and email communications and apply to business-purpose transactions. 

Moreover, Section S(a) of the Federal Trade Commission Act gives the FTC broad enforcement authority 

to prevent unfair or deceptive acts or practices ("UDAPs") over a wide range of entities, including MCA 

companies and commercial lenders. 28 The FTC wielded its authority to protect small businesses as 

recently as 2014, when it entered into a consent order with a company that leased payment processing 

devices to small businesses." The authority to prevent UDAPs is an extremely powerful tool in the FTC's 

arsenal, giving it the ability to target entities that may be technically complying with the law but are 

engaged in otherwise harmful practices. 

Commercial lenders also must comply with the Equal Credit Opportunity Act ("ECOA") and its 

implementing Regulation B. ECOA and Regulation B prohibit discrimination against protected classes of 

people in the extension of credit, apply to business credit, and provide protections specifically for 

business borrowers. 30 

Finally, many states require a license to make a loan to a business, limit the interest rates lenders may 

charge to business borrowers, or both. 31 With a licensing scheme comes state regulator supervision. 

States that regulate lending also typically limit the terms of loans, require disclosures in loan documents, 

and limit the fees that creditors may impose. Most state laws regulating lending apply to loans with 

smaller dollar values, exactly the types of loans upon which small businesses rely. 

25 15 U.S.C. § 1681m(a). 26 47 u.s. c. § 227. 27 15 U.S.C. §§ 7701 et seq. 

28 15 U.S.C. § 45(a). 29 Federal Trade Commission v. Merchant Services Direct, LLC, Case#: 2:13-cv-00279-TOR (E. D. Wa. 2014), available 

at https://www.ftc.gov/system/files/documents/cases/141125merchantstip.pdf; see also, "Press Release: FTC 

Charges Marketers with Deceiving Small Businesses into Buying Credit/Debit Card Processing Services and 

Equipment" (July 30, 2013), available ot https://www.ftc.gov/news-events/press·releases/2013/07 /ftc-chargesmarketers-deceiving-small-businesses-buying. 

30 12 C.F.R. § 1002.9(a)(3). Protected classes include: Race, color, religion, national origin, sex, marital status, age, 

exercising rights under the Consumer Financial Protection Act, and deriving income (some or all) from a public 

assistance program. See 12 C.F.R. § 1002.1(b). 31 See, e.g., Or. Rev. Stat.§ 82.010(3)(a) (imposing a specific interest rate limit on business-purpose loans); Cal. Fin. 

Code§§ 22009(a), 22100(a) (requiring a license to make business-purpose loans); Ala. Code§§ 5-18-4(a), 5-19-3(a), 

5-18-lS[a) (requiring a license to make loans of any purpose, and limiting the interest rates that a licensee may 

charge for loans of any purpose). 
42 

House Small Business Committee 

Subcommittee on Economic Growth, Tax and Capital Access 

‘‘Financing Through Fintech: Online Lending’s Role in Improving Small 

Business Capital Access.’’ 

October 26, 2017 

Testimony by Trevor Dryer 

CEO, Mirador Financial 

Introduction 

Chairman Brat and Ranking Member Evans, thank you for the 

opportunity to testify today on the role fintech plays in helping 

small business access capital. It is an honor to be here sharing the 

insights and experience we have accumulated working in this important space. 

My name is Trevor Dryer and I am the CEO of Mirador, a small 

business of 24 employees, headquartered in Portland, Oregon. In 

the regulated banking space, Mirador is a 3rd party service provider and is treated as such by bank examiners. The cloud-based 

Mirador platform is a ‘‘white label’’ technology solution marketed 

under a bank, credit union or CDFI’s brand, enabling them to profitably originate small business loans as low as $2,500, and offer 

competitive rates by using technology to facilitate some of the more 

labor-intensive parts of the loan-making process, creating a fast 

and easy experience for the small business borrower. 

Mirador is not a lender. Our technology supports each of the following services for customers who are lending: customer acquisition, application (both online and in branch), loan origination, underwriting, pre-screening or ‘‘decisioning,’’ and decline referrals. As 

a front-end solution with extensive back-end functionality, all aspects of our platform focus on improving the engagement and experience between borrower and lender. Our technology supports: commercial term loans, SBA backed loans, working capital/lines of 

credit, commercial real estate loans, and small dollar loans. 

Our platform is highly-customizable and reflects the existing 

credit criteria established by our customers. Our role in the loanmaking process provides us with unfettered sightlines into current 

small business lending trends including types of businesses looking 

for capital, geographic distribution of a sample size of small business loans, credit availability, and the risk appetite for different 

types of institutions. I can you from my professional work and my 

personal experience, access to affordable capital remains a major 

hurdle for small businesses around the United States. 

Our customers are regional, mid-sized and community banks, 

credit unions, CDFI’s and other mission-based lenders. Their customers are the small businessmen and women in the communities 

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they service who are seeking loans for as little as a couple thousand dollars, up to several hundred thousand dollars or more. 

Mirador is dedicated to the proposition that regulated financial 

services companies want to serve small businesses in their communities, and are equipped to do so at competitive rates with robust 

consumer protections. Due to a number of factors including regulatory costs, small business loans below a certain dollar amount are 

unprofitable for regulated financial services entities. However, with 

the help of Mirador’s technology, our customers make smaller loans 

profitable once again, increase the profitability for larger loans, improve the customer experience for borrowers, and utilize supplemental underwriting, techniques and data sources helping more 

lenders ‘‘get to yes’’ for qualified small businesses. 

Borrower Experience 

When a lender partners with Mirador, they license our platform. 

Again, the platform is highly customizable. We import the lender’s 

credit criteria and integrate the platform into the bank’s preferred 

origination channels, whether in-branch, online or mobile. 

Once integrated, applicants seeking a business loan apply 

through the bank portal either directly on the bank’s website, or 

working with an employee who takes the application information 

in-branch. Though routed onto the Mirador rails, the borrower’s experience remains on the bank’s website with the ‘‘Powered By Mirador’’ phrase and logo at the bottom of the screen. All of the branding, marketing and compliance disclosures are determined by the 

bank and bank regulators. 

Applicants will follow simple steps to fill-in their information 

and, witht heir affirmative consent, Mirador technology completes 

a credit memo by pulling additional data from public records, credit 

bureaus, accounting software, bank accounts and the IRS. The 

credit memo is transmitted to a bank’s loan officer with an indication of credit-worthiness—again, based on the credit tolerances the 

bank has provided. The indication is communicated through a 

GREEN-YELLOW-RED system—green essentially indicating an 

approval, red a denial, and yellow a conditional approval pending 

the acquisition of more applicant information. 

The value to the bank is that, up to this point in the lending 

process, a bank employee has not spent time compiling documents, 

calling the applicant and calling them again to get more information to compile a complete credit memo. Our lenders report as 

much as a 69% reduction in time spent per application, and a savings of roughly $1550 per loan origination. Additionally, our lenders see roughly a 60% application completion rate, due to the significantly easier, less labor-intensive application process. Several 

lenders have reported seeing a 40-50% increase in loan applications 

after implementing Mirador’s technology due to this higher application completion rate, and also being able to attract borrowers disinclined to go through a cumbersome application process. 

The value for the borrower is spending less than 10 minutes compiling an application, as opposed to the average time of 30 hours. 

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1https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-ReportEmployerFirms-2016.pdf 

According to the Joint Small Business Credit Survey Report of 

2016 1, borrowers overwhelmingly state ‘‘difficulty with the application process’’ and ‘‘long wait for credit decision’’ as the principle 

reasons for dissatisfaction with a borrowing experience, far outweighing rates or repayment terms. Mirador works hard to efficiently use the borrower’s time. 

Our adaptive application experience changes and presents questions based on the borrower’s risk. For example, as we collect information we may seamlessly route a borrower into a SBA process if 

too risky for a conventional term loan. We also use a unique algorithm in compiling the underwriting information for our lenders 

and to match a borrower with the lender most likely to approve a 

loan. If the borrower is generally too risky for our partner banks 

or credit unions, our technology seamlessly routes, with the borrower’s consent, the application to a non-profit CDFI. Thanks to 

this routing ability, the borrower does not need to start the application process over with the new lender, thus saving significant time. 

This is also a unique way to increase awareness of low-cost lenders, 

such as CDFIs, that traditionally do not engage in marketing activities. 

Mirador also provides the bank with deeper analytics about their 

application traffic, loan performance and customer mix. But the 

real value is getting more small business loans into the hands of 

creditworthy applicants. Aside from the licensing fee, we are paid 

for every completed credit memo regardless of the lending decision. 

In our mission to provide more small businesses access to capital 

through traditional, regulated entities, we are working with various groups having a small business customer base. By growing our 

client base, we envision a neural network of partners, borrowers 

and lenders passing along customers to ensure that any small business can seamlessly access affordable credit from a traditional, regulated institution without going through the time and trouble of 

starting the application process over again from the start. As our 

network continues to grow and the number of small business customers increases, the technology provided by Mirador will only improve. 

What We’re Seeing 

Often the owner of a small business is the CEO, CFO, CIO, CTO 

and likely the person handling all of the day-to-day work required 

to keep the business running. In other words, handling the business’ finances is just one more task for the business owner and 

often is the task left to the end of the day during non-business 

hours. In fact, we have heard reports that less than 10% of small 

businesses have a CFO or someone looking after their finances fulltime. 

A study in 2015 by the Cleveland Fed found that the #1 complaint of small business borrowers was that the application process 

was too cumbersome, and the #2 complaint was that the process 

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2https://www.clevelandfed.org/community-development/small-business/about-the-joint-smallbusiness-credit-survey/2015-joint-small-business-credit-survey.aspx 3https://www.newyorkfed.org/medialibrary/media/smallbusiness/SBCS-2014-Report.pdf 

4https://qedinvestors.com/wp-content/uploads/2015/10/The-Brave-100-The-Battle-for-Supremacy-in-Small-Business-Lending—vf.pdf 5https://www.newyorkfed.org/smallbusiness/small-business-credit-survey-employer-firms-2016 

too long 2. Also, the typical hours of operation for a bank branch 

overlap with the hours the business owner is usually trying to run 

their business. As such, a time consuming application process becomes extremely difficult. 

A 2014 Federal Reserve study calculated the amount of time the 

average small business owner commits to applying for a small business loan. Whether the loan is $1000 or $1 million dollars, on average it will take over 24 hours to research, fill out the applications, 

gather documents and submit the necessary information needed by 

the bank for underwriting 3. That’s 24 hours just to get the process 

moving forward. There is still the approval process, underwriting 

and information verification handled by the bank. 

It can take weeks for the small business owner to see capital, if 

approved. I emphasize ‘‘if’’ because underwriting for small businesses is tricky, time consuming and expensive. In fact, it will cost 

a bank just as much to underwrite a $100,000 small business loan 

as it does a $1 million loan, a cost which the Oliver Wyman consulting firm found to be between $1600 and $3200 per loan application, regardless of loan size 4. This leaves very little incentive for 

the banks to offer small-dollar loans. 

From this narrative, it is also easy to see why so many small 

businesses turn to online lending for their capital needs. In fact, 

21% of small business loans are currently going to higher-priced, 

non-bank lenders, and this number is growing 5. The online lending 

community provides 24 hours access, near-instant approvals, and 

quick turnaround on capital available in smaller cash amounts. For 

so many small businesses, this is the only logical and available— 

albiet often expensive—option to meet their capital needs. 

Mirador Financial was created with these small business pain 

points in mind, but also with the understanding that capital offered 

by traditional lenders is often less expensive and carries better 

terms for the borrowers. 

Mirador currently works with 20 banks and credit union partners and 4 CDFIs and our network continues to grow. We believe 

our technology brings the necessary conveniences of online lending 

to the traditional financial institution space, offering one more option for the small business owner struggling to keep up with their 

work and make ends meet. To date, we have helped offer over $600 

million in loans to over 4,200 customers. These loans range from 

$1000 to $9.75 million dollars (a SBA 504 loan in a high-priced real 

estate market) with an average loan size of $123,000, both non-traditional products like merchant cash advance to SBA 7(a) loans. 

We are crossing the gap between small business, small dollar lending and traditional commercial lending. 

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While innovation is clearly improving access to capital for small 

businesses, a number of issues still negatively impact this market 

and place the borrower at a disadvantage. 

To that end, I proffer three policy recommendations which can 

unlock additional capital for small businesses by further removing 

pain points for borrowers (and lenders). 

Encourage the IRS to automate the 4506T process for a third 

party to obtain a tax transcript. 

Congressman Patrick McHenry (R-NC) and Earl Blumenauer (DOR), as well as the ranking member of this committee Congresswoman Nydia Vela ́zquez (D-NY), introduced H.R. 3860, the IRS 

Data Verification Modernization Act of 2017 requiring the IRS to 

automate the Income Verification Express Services Process by creating an Application Programming Interface (API), which would reduce paperwork and the waiting period that currently burdens 

lenders and borrowers alike. 

The current process requires a lender to submit (often via fax 

machine) a 4506-T form to the IRS, requesting a tax transcript 

which is then used to satisfy income verification requirements in 

the underwriting process. According to the IRS, the lender will receive a response to the request in 2 days or less. However, the typical experience for the lending community is far longer than 2 days. 

Forms are faxed back and forth and with some routinely returned 

for corrections based on clerical errors. In our experience, the 4506- 

T process averages around a week per request, and longer if the 

form is returned due to an error. In terms of the overall application 

process for the small business borrower, this delay is a significant 

factor in the decision to abandon the loan process and instead seek 

credit through an alternative source. 

The McHenry bill would simply require the IRS to move from a 

paper-based, fax system to a secure API. Only those third parties 

authorized by the IRS to pull transcripts under the current vetting 

process would be able to take advantage of the API. In addition, 

since a fee is charged ‘‘per pull’’, the IRS could simply increase this 

fee to cover the cost of converting to an API. 

Provide Community Reinvestment Act (CRA) consideration for 

referrals to Community Development Financial Institutions 

(CDFIs) and other covered lenders. 

Regulated banks frequently partner with CDFIs in order to satisfy CRA obligations with their regulators. Currently, banks obtain 

CRA consideration for providing capital investments, offering technical assistance and through collaboration with a CDFI on lending. 

However, banks do not receive CRA consideration from referring 

borrowers to these same CDFIs when these loans are too risky for 

the bank to underwrite. 

Our CDFI partners are seeing a rise in refinancing in the small 

business lending space. When the small business faces an immediate need for capital, and the traditional, regulated bank’s process 

is too slow, those businesses frequently turn to alternative lenders 

where terms and interest rates are unfavorable. Oftentimes speed 

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portunities to expand our just keeping the lights on and the doors 

open. When the urgency is gone, these businesses are left with high 

interest debt and payments that cut deeply into revenue. In one of 

many a recent examples provided by a partner CDFI, a refinanced 

loan saved a small business over $6300 per month in payments. 

That $6300 a month is another employee or a lease payment on 

new space for the business. On average, one of our CDFI partners 

reports saving small business borrowers an average of $3900 per 

month on the non-bank loans they refinance by extending the repayment term and lending at a much lower APR (typically no higher than 13%). 

Given the economic development mission of CDFIs to support 

small businesses, a successful referral from a bank is something 

the regulators should incentivize. In collaboration with the 

NYBDC, we identified an easy and cost effective way to encourage 

these referrals is through providing CRA consideration. The more 

options provided to the small business borrower with minimal additional work, the better those businesses are served and the greater 

impact on the overall economy. 

Allow credit reports to transfer with referral loan applications 

and prohibit credit bureaus from requiring a new inquiry for each 

new lender. 

Most individuals know that credit inquiries affect their credit 

score. Unfortunately, when applying for a loan, numerous inquiries 

occur from the various lenders considering the borrower’s request, 

even though the borrower is seeking a single loan. The more inquiries, the greater impact on a credit score and, as credit scores 

lower the cost of capital increases and becomes more difficult to obtain. 

When a small business applies for a loan, they expect the lender 

to pull a credit report. However, if the lender is unable to approve 

the loan but can provide a referral to another lender, it is reasonable to expect the credit report to transfer with the application. 

Unfortunately, the credit bureaus do not allow the reports to transfer and the small business experiences another inquiry on their 

credit for the same information already obtained for the application 

that was denied. This is an unnecessary added cost to the application and an unreasonable penalty to the small business. 

Unless the credit bureaus willingly change this practice of requiring a new credit report when a loan application is transferred 

from one institution to another, a statutory requirement should be 

considered. 

Finally, I encourage this committee to continue efforts directed 

at modernizing and simplifying the loan process through the SBA. 

The SBA remains a vital source of capital for small businesses, 

particularly newer businesses and startups. However, the process 

and technology are cumbersome and keep the SBA from realizing 

its full potential as a guarantor. Upgrades to their systems must 

continue or the SBA risks losing its pipeline to online lenders and 

other fintech players. 

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SBAOne and SBALine are the flagship programs offered by SBA 

to improve the borrower experience and previous SBA Administrator Contreras-Sweet and current Administrator McMahon deserve credit for prioritizing modernization in these areas. SBA staff 

are working incredibly hard—we know them and we speak to them 

often—but need to overcome imbedded constraints to really modernize these services. 

The private sector, including Mirador, has developed world-class 

matching technology ensuring that borrowers can be considered by 

a lender under the most appropriate terms and conditions. If the 

SBA employed this technology, I am confident that it would enable 

SBA products to reach more borrowers. SBA should be encouraged 

to look to the private sector for technology solutions, and to apply 

such solutions to improve efficiently and the overall borrower and 

lender experience in SBAOne and Linc. Speaking purely on behalf 

of my company and our customers, it is in our best interest for the 

SBA to obtain the best available technology. 

Once again, thank you so much for this incredible opportunity. 

As I am sure everyone on this committee knows, small business is 

the backbone of our economy. These job creators serve the greater 

good in their local communities and the entire US economy. We 

must do everything possible to ensure they continue to grow and 

thrive, creating jobs and opportunity for Americans. 

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MIRADOR 

Mirador Financial, Inc 

317 SW Alder Suite 200 Portland, OR 97204 

November 15, 2017 

The Honorable Steve Chabot, Chairman 

The Honorable Nydia Velazquez, Ranking Member 

2361 Rayburn House Office Building 

House Small Business Committee 

US House of Representatives 

Washington, DC 20515 

Dear Chairman Chabot and Ranking Member Velazquez: 

Thank you for your interest in my testimony at a recent House Small 

Business Subcommittee on Economic Growth, Tax and Capital Access 

hearing entitled "Financing Through Fintech: Online Lending's Role in 

Improving Small Business Capital Access". I am happy to provide additional 

information in response to your questions submitted for the record. 

1. Mr. Dryer, you recommend that Congress and the regulators take 

action to facilitate referrals. I'm curious, what are some of the reasons 

why referrals don't happen currently, en masse? Is it safe to assume it 

is not due to limitations of technology? 

Technology is not a limitation in facilitating referrals. In fact, technology 

provides a seamless process for a small business loan application to 

transfer, upon denial, from a regulated institution to another entity able 

to make the loan. However, while technology makes the process 

seemingly simple, without an incentive for the banks to make these 

referrals, the existing industry practice of simply "moving on" to the next 

application once their application is denied will continue. While CDFis 

and mission-based lenders can and do go out of their way to encourage 

referrals, the underwriters making the decisions are not the same 

individuals who are coordinating with the non-profit community lenders. 

Regulated banks value their relationships with CDFis and other missionbased lenders because these partnerships bring value to the banks in 

the form of Community Reinvestment Act (CRA) credit Currently, 
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federal regulators provide CRA credit to the banks for direct 

Investments to CDFI loan funds as well as for technical assistance 

offered by the bank to the CDFI. Providing an additional option for 

banks to obtain CRA credit through their CDFI partnerships by 

acknowledging the value of a referral can provide the incentive 

necessary to further facilitate referrals using technology to seamlessly 

transfer the small business' application from one institution to another 

with the ultimate goal of funding the loan at a reasonable rate with fair 

terms. 

I recommend that Congress enact legislation which would require that 

banks update their CRA approach to facilitate referrals. I believe this 

could be eas1ly accomplished by directing the functional regulators to 

give qualified referring entities credit under either the lending test or 

investment test if they make a referral to another qualified institution 

and that loan is then funded. 

2. Is there any prohibition against referrals or is the basis of your recommendation simply to find a way to incentivize lenders to refer 

their declines? 

As long as the small business provides affirmative consent to transfer 

their application from one lender to another. nothing prohibits that 

referral from taking place. However. we have heard anecdotally that 

banks have, traditionally, been unenthusiastic about refemng because of 

the fear that a small business will take their entire relationship away from 

the bank who denies and move it to the bank that approves If the 

deny1ng bank can play a positive role in finding access to credit for a 

customer, even if the customer is directed outside of the denying bank, 

this concern may be mitigated Providing CRA credit incentives a 

denying bank to play this role. Conversely, without providing incentives, 

most banks w1ll cont1nue operating under the status quo. 

3. Mr. Dryer, can you identify factors that have contributed to making small(er) dollar business loans unprofitable? 

Setting aside all of the arguments surrounding the level of regulation on 

commun1ty banks and f1nancial inst1tut1ons. the simple fact is that small 

dollar. small business loans costs more to process than a regulated 

financial institution can recoup from repayment Hence. small dollar 

loans have become a net loss for many banks. Underwriting is an 

expensive and t1me consum1ng process, and for most loans it is a 

process that helps m1tigate the nsk in the lending. However, the man 

hours needed to underwrite a $5000 small business loan should not be 

the same as the time to compile a loan f1le for a $1 million real estate 

loan. Without embracing new technologies to streamline and shorten 
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the process for these smaller loans, regulated institutions cannot 

compete 1n the existing small dollar, sma!i business loan market, which is 

unfortunate given their ability to offer lower rates and 

better terms. Other factors involve reaching the customer, effectuating 

application completions and providing the necessary speed in the time 

from applicatron to funding to keep up with other non-bank lenders. 

I hope my responses to your- questions provide useful information in your 

efforts to examine small business access to capital and the use of online 

lending Please feel free to contact me should you need addrtional 

information. I am happy to be a resource to the committee as you continue 

evaluating this important market 

Sincerely, 

Trevor Dryer 

CEO and Co-Founder 
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www.rnicadortech corn I (866) 62/-.S070 sma 1: into@mirador·:ec'! com 
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0 Innovative Lending Platform .Association 

Online Lending Can Address the Small Business Credit Gap 

While big corporations and public stock offerings get the media headlines, it's small and medium 

sized businesses that serve as the engines powering a healthy global economy. Although small 

business owners in different markets around the world have varying challenges to overcome, 

they often face the exact same problem: challenges accessing the capital they need to grow. 

This challenge has resulted in a global small business financing gap, estimated by the 

International Finance Corporation at $2.1-$2.6 trillion. That's trillion with aT. Even more 

striking, there are an estimated 200 to 245 million formal and informal businesses globally that 

either have never taken out a loan or have a loan but consider it insufficient to meet their 

financing needs. That's both a massive problem and market opportunity for new innovative 

technologies to help address. 

In developed markets like the U.S., accessing capital can be a challenge for many small 

businesses. While this challenge cannot be solved overnight, the online small business lending 

platforms that we represent are working hard to step in to fill the void, seamlessly delivering 

credit options to a range of small business owners who arc seeking the capital they need to 

succeed. 

For many small business owners, opportunities may arise and they need to secure capital quickly 

to take advantage of that fleeting opportunity. Frequently, they need to place an order for 

equipment today or hire a worker tomorrow. And our economy can't afford to have these new 

and small businesses waiting for capital and missing out on the chance to grow and 

thrive. Online small business lenders meet small business borrowers' need for speed and 

convenience. Applications can be made online and credit decisions completed in one or two days 

or even in a matter of hours. Disbursement of the funds to the borrower is frequently made in 

similar time frames. Moving from an application to disbursement of funds quickly grants small 

businesses the flexibility to take advantage of important opportunities. 

It should come as no surprise that small business owners are thrilled to have these new online 

borrowing options. Four leading trades Electronic Transactions Association, Innovative 

Lending Platform Association, the Marketplace Lending Association, and the Small Business 

Finance Association- commissioned a comprehensive survey of U.S. small business owners 

from Edelman Intelligence. The survey found that a large majority (70%) of small business 

owners believe there are more credit options today when compared to five years ago, and 97% of 

those feel that the growing number of financing options is a good thing. The survey found that 

the top reasons small business owners are seeking out loans from online small business lending 
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platforms are to expand their location, manage cash flow and purchase equipment. All three of 

those uses are directly linked to economic growth. 

When a small business owner borrows to expand to a new location or purchase new inventory, 

the economy grows, workers are hired, and our communities flourish. The Kauffman foundation 

has found that even in the depths of the U.S. financial crisis, between 2006 to 2009, young and 

small firms (fewer than five years old and with less than twenty employees) remained a positive 

source of net employment growth (8.6 percent), whereas older and larger firms shed many more 

jobs than they created. 

In short, online small business lending is working for the borrower and for the broader economy. 

The Edelman survey also found that levels of satisfaction among small business owners who 

borrow from online small business lenders are very high; those who previously used online small 

business lenders are significantly more likely to take out another loan with an online lender than 

those who used traditional lenders (98% vs. 60%). 

As policy-makers in Washington and around the globe consider the profound shifts in our 

economy and the migration to digital financing options, there are a number of policy choices that 

can help promote the health of small businesses and new business formation. Federal and state 

regulatory structures should strive to be flexible and dynamic to promote the healthy competition 

in financial services that is only possible when online small business lending models like ours 

are welcomed. 

With the right policies in place, online small business lending platforms- at times operating in 

partnership with traditional financial institutions can start to narrow the global small business 

credit gap. 

Presented by: 

Electronic Transactions Association 

Innovative Lending Platform Association 

Marketplace Lending Association 

Small Business Finance Association 
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to 5 years ago 
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Usman Ahmed, Thorsten Beck, 

Christine McDaniel, and Simon Schro£.P 

Filling the Gap 

How Technology Enables Access to Finance 

for Small- and Medium-Sized Enterprises 

Small- and medium-sized enterprises (SMEs) account for more than one-half of 

the world's GDP and employ two-thirds of the global workforce.! The number one 

barrier to growth faced by SMEs around the globe is access to financing.2 This is 

not a new issue, as the onerous information, administration, and collateral 

requirements associated with traditional loans have inhibited SMEs from seeking 

or securing financing. 

The 2008 financial crisis only exacerbated the problem, as many local retail 

banks (often the primary providers of SME financing) closed their doors and the 

appetite for taking on high-risk SME loans was quelled. The International Finance 

Corporation estimated that SMEs faced a $2 trillion global credit gap in 2010.3 

Online business lending may be stepping in to fill this gap by resolving many 

of the barriers associated with traditional SME financing. It does so by leveraging 

new business methods and targeted data analysis generated from past transactions, social interaction data, and back-end financial data (taxes, receivables, etc.). 

Big data analysis enables modern lenders to better understand the credit risk of an 

individual SME and provide it with targeted funding in a timely manner with a 

flexible repayment schedule, and it often can do so without requiring collateral. 

Online business lending comprises a number of different models. This paper 

analyzes data from PayPal Inc., a company best known for its global online payment system, and from Kiva, a crowdsourcing platform. Our objective is to understand how technology is impacting SMEs' ability to access financing. PayPal 

Working Capital (PPWC) launched in late 2013; it is a product that enables SMEs 

to apply for and obtain short-term credit. PayPal Working Capital loans are fundUsman Ahmed is the Head of Global Public Policy at Pay Pal Inc. and an adjunct 

professor of law at Georgetown University. 

Thorsten Beck is professor of banking and finance at Cass Business School in 

London. 

Christine McDaniel is a Senior Economist at Sidley Austin LLP. 

Simon Schropp is a Managing Economist at Sidley Austin LLP. 

© 2016 Usman Ahmed, Thorsten Beck, Christine McDaniel, and Simon Schropp 

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ed by a state-chartered industrial bank. In October 2015, PayPal announced that 

the product had reached $1 billion in funding to entrepreneurs in the U.S., UK, 

and EU.4 The dataset we analyze here consists of 60,000 PPWC loans disbursed to 

more than 18,000 SME owners in the United States between October 2014 and 

March 2015. Kiva, which was launched in 2005, enables people to lend money to 

entrepreneurs through an easy-to-use Internet platform. A marketplace that connects lenders and borrowers, Kiva has loaned nearly $800 million since it was 

launched, and the company boasts a community of more than 1 million lenders 

and nearly 1.8 million borrowers.s One of Kiva's cofounders is a former PayPal 

employee, and Kiva maintains a close partnership with PayPal. The Kiva dataset 

we analyze comes from Kiva Zip, a program through which lenders make loans 

with zero-percent interest directly to borrowers in the U.S.6 

Key findings from our analysis of these two online business lending services 

include the following: 

• Online business loans seem to have stepped in to fill the SME funding gap left in 

the wake of the 2008 financial crisis. A high proportion of PPWC loans are disbursed in zip codes that have experienced a relatively steep decline in the number of traditional retail banks, nearly 25 percent of PPWC loans were disbursed 

in the 3 percent of counties that have lost ten or more banks since the 2008 

financial crisis. 

• Young and minority-owned businesses with low and moderate income benefit 

particularly from online business loans. Nearly 35 percent ofPPWC loans go to 

low- and moderate-income businesses, compared to 21 percent of retail bank 

loans, while 61 percent ofPPWC loans go to entrepreneurs and young firms that 

have been in business for less than five years. More than half (53 percent) of 

Kiva Zip's loans go to women-owned businesses and 63 percent to minorityowned businesses; this compares to 36 percent and 14.6 percent, respectively, of 

traditional retail bank loans. 

• Online business loans can boost the growth of SMEs in underserved counties. 

PPWC recipients in counties that have lost ten or more bank branches since the 

2008 financial crisis saw their Pay Pal sales soar by 22.4 percent from one year to 

the next, while comparable retail businesses in the U.S. grew by only 1.72 percent over the same period.? 

• Online loan products have potentially significant economic benefits. Based on 

increased sales of businesses that have received PPWC loans, we estimate that 

programs like this have the potential to boost economic activity in the U.S. by 

$697.95 billion, or 3.98 percent of the country's 2015 GDP. 

This paper will begin by describing the challenges SMEs have traditionally 

faced in securing access to financing. It will then provide an analysis of the data 

that have led us to our conclusion about online business lending stepping in to fill 

the gap. The paper will then analyze the demography of the businesses securing 

online business loans and the economic opportunity online business lending pres36 innovations I Financial Inclusion II 
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ents. The paper concludes with a discussion of the policy issues associated with 

online lending products. 

ASSESSING THE SME FINANCING GAP 

Financial institutions have traditionally been the primary source ofSME financing 

around the world. In the U.S., for example, the overwhelming majority of SMEs 

report that commercial retail banks (regional or community) are their primary 

financial institutions. 8 SMEs in Europe obtain 85 percent of their loans from retail 

banks.9 

In 2014, SME lending by the ten largest U.S. banks was down 38 percent from 

its peak in 2006.10 The number of bank branches in the U.S. decreased from 97,274 

in 2007 to 94,725 in 2014, and some regions were disproportionately affected by 

this shake-out.l 1 The global market for SME financing has yet to fully recover 

from the crisis; in 2013, outstanding SME loans and the number of new loans 

issued remained low in much of the developed world.l 2 

SMEs have far more difficulty with access to finance than larger firms. They 

often face higher interest rates, shorter maturity, and more stringent collateral 

requirements. 13 The smaller a firm, the more difficulty it has obtaining financing.J4 A survey of European businesses found that large SMEs (50+ employees) are 

more likely than micro-SMEs (1-9 employees) to apply for bank loans and less 

likely to be concerned about rejection. IS A Federal Reserve Bank study confirmed 

this trend in the U.S., noting that financial institutions have traditionally viewed 

micro-SMEs as high-risk and expensive to do business with (i.e., high transaction 

costs and low returns).J6 The study also found that 20 percent of all SMEs are discouraged from applying for loans in the first place, due to prohibitive application 

costs and low loan prospects. Therefore, it is not surprising that SMEs no longer 

look to traditional bank loans as a likely credit sourceP 

Research has provided a number of explanations for why SMEs have traditionally struggled to obtain capital, including: 

• Poor record-keeping 

• High risk and turnover in the sector 

• Overreliance on internal financing 

• Weak management 

• Lack of assets to use for collateral 

• Lack of a track record 

• Lack of connections in the financial system 

• Poor knowledge of financing options 

• The high cost of finding a loan product that fits their needs IS 

Furthermore, lenders often lack access to third-party information regarding 

SME borrowers' credit profiles and histories. SME financing was further constrained in the wake of the financial crisis, as brick-and-mortar financial institutions were increasingly reluctant to engage in high-risk and relatively low-yield 

SME loans. 19 Many workers who lost their jobs in the course of the crisis launched 

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Usman Ahmed, Thorsten Beck, Christine McDaniel, and Simon Schropp 

businesses to make ends meet, and they faced tremendous credit constraints 

because they lacked the track record required to secure financing.20 Existing SMEs 

were left vulnerable during the credit crisis, as shocks to their companies could not 

be absorbed due to the lack of access to short-term financing.2I 

ONLINE LENDING MAY FILL THE FINANCIAL GAP 

The Internet is an interconnected global network that enables a seamless transfer 

of information among its more than three billion global users. In the last few years, 

this global communications network, combined with advanced analytics, has been 

leveraged to resolve some common barriers associated with SME lending. As we 

demonstrate below, technological developments in data capture, data analysis, 

and reporting have unleashed the potential for online lending to fill the SME 

financing gap.22 

New technologies can be applied to SME lending in a number of ways: SMEs 

can be assessed using new sources of first- and third-party financial information; 

forms can be simplified and accessed online; credit assessments can be conducted 

in short order, using objective criteria; funding can be disbursed in real time; and 

repayment schemes can be adjusted to the individual SME borrower's situation. 

Moreover, online loans can be tailored to the needs of SMEs. These businesses 

typically do not have large cash reserves, so small working-capital loans can 

address the cash-flow problems they commonly experience.23 Jesse Hagen, a former vice president of the U.S. Bank Small Business Division, stated that 82 percent 

of businesses fail due to poor cash-flow practices.24 In the United States, 

micro loans ($100,000 and under) account for 90 percent of SME loans.25 Indeed, 

the need for small working-capital loans, which a traditional retail bank often considers too risky or low profit, can be filled by an online lender that can leverage 

technology and scale to overcome these difficulties.26 

Many firms that obtain financing online report having faced borrowing constraints that precluded them from obtaining traditional bank loan financing.27 A 

survey by the National Endowment for Science, Technology and the Arts found 

that 33 percent of online borrowers said they likely would not have gotten funds 

through traditional bank loans.28 

Traditional loans often require the potential borrowers to provide secure collateral before obtaining financing, which can be difficult for smaller businesses, 

particularly those engaged in intangible products.29 Thirty percent of businesses 

that responded to a recent survey by the Federal Reserve Bank of New York 

reported having insufficient collateral as the reason they were unable to obtain 

funding.30 Lifting collateral requirements has been shown to increase access to 

credit, which has led to increased hiring and aggregate fixed assets for the businesses that receive financing. 31 Traditional brick-and-mortar financial institutions 

continue to be extremely reluctant to lift collateral requirements, but not so online 

products. A significant percentage of online business loans are unsecured, meaning they do not require collateral. 

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Figure I. Online borrowing and bank departures 

Source: Pay Pal data, Federal Deposit Insurance Corporation 

ill 

••• • •••• • Ill 

• Ill Ill ••• 

.. 

Lifting the traditional barriers associated with SME financing may lead to positive developments in lending. Figure 1 plots two sets of data: the change in the 

number of U.S. bank branches between 2007 and 2014, by county (horizontal 

axis), and the number ofPPWC loans made in the U.S. in 2014, by county (vertical 

axis). The red line reveals the relationship between the two data series, which is 

negative, with a correlation coefficient of -0.23. This relationship indicates that a 

higher proportion of PPWC loans are being disbursed in counties that lost the 

highest percentage of their traditional retail banks. The data also reveal that nearly 

25 percent of PPWC loans were disbursed in the 3 percent of the counties that 

have lost ten or more banks since the 2008 financial crisis. 

Technology companies and startups are not the only firms innovating in an 

effort to fill the SME financing gap. Wells Fargo, a retail bank with more than 

6,000 retail branches in the U.S., for example, revamped its previously miniscule 

SME lending product to become the second largest SME lender in the country. As 

a result, 70 percent of Wells Fargo's revised data-enabled loan product went to 

businesses that employ five or fewer people, with an average loan size of just 

$15,000.32 Moreover, collaborations between banks and technology companies are 

rapidly developing, which could lead to tremendous efficiencies in reaching 

underserved SMEs.33 

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Usman Ahmed, Thorsten Beck, Christine McDaniel, and Simon Schropp 

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40 innovations I Financial Inclusion II 
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Figure 3. Lending to young firms 

Source: PayPal, Kiva Zip 

PPWCFirms 

Kiva Firms 

THE DEMOGRAPHY OF ONLINE BORROWERS 

• < 5 years 

• > 5 years 

< S years 

> 5 years 

SME borrowers that use online channels to access financing come from nearly 

every sector and experience level. There are, however, some interesting characteristics unique to the SMEs that use online lending services. Online business loans 

disproportionately serve low-income, young, women-owned, and minorityowned firms. 

Data from the Federal Deposit Insurance Commission indicate that approximately 21 percent of the retail bank loans under $100,000 are taken out by lowand moderate-income businesses in the United States, compared to 33.7 percent 

of PPWC loans of the comparable amount. Low- and moderate-income businesses are rarely eligible for traditional loan products, due to the collateral and administrative requirements of traditional bank loans. A recent working paper by the 

National Bureau of Economic Research demonstrates that the credit expansion 

created by governments and financial institutions in the wake of the 2008 financial 

crisis did not serve borrowers with low-FICO scores (often low-income borrowers) effectively, but they did benefit those with high FICO scores (often highincome borrowers).34 Figure 2 compares the U.S. loan activity by county between 

low-income businesses and traditional brick-and-mortar banks, and between 

these businesses and the PPWC product. The darker areas indicates that more 

loans were made to low-income borrowers. 

Over the last decade, traditional bank financing has been more available for 

large established firms than small young firms, which has left the latter harder hit 

by the credit gap. 35 A recent survey by the Federal Reserve shows that the majority 

of small firms (less than $1 million in revenues) and startups (fewer than five years 

in operation) in the U.S. are unable to secure credit.36 Newer and younger firms 

were three times more likely than established firms to be fully or partially denied 

funding, and this discrepancy is not unique to the United States.37 As a result, 

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6l'Y% S3% 

SO% 

40% 36% 

30% 

20% 

10% 

0% 

KIVA SME ownen~ 

Figure 4. Women-owned businesses 

Source: Kiva Zip data (2014) and Small Business Administration (2012) 

younger firms that have struggled to secure financing now prefer to pursue the 

online alternatives. Figure 3 presents official U.S. data demonstrating the difficulty 

young firms face when trying to secure financing-only 38 percent are approved 

for loans. It also shows that 61 percent ofPPWC loans and 84 percent of Kiva Zip 

loans go to young firms. 

Women around the globe consistently have less access to financial resources 

than men.38 Using U.S. Census Bureau data, the Economics and Statistics 

Administration reports that women are half as likely to start or acquire a firm 

using a business loan acquired from a traditional financial institution. 39 

Meanwhile, women entrepreneurs are disproportionately represented among 

Kiva Zip borrowers: 36 percent of SMEs are female-owned, whereas 53 percent of 

Kiva Zip borrowers are women (see figure 4). 

In the United States, women-owned firms grow at more than double the rate 

of other firms, and they are expected to create more than half of the new jobs in 

the U.S. in 2018.40 If the financing issues of women-owned businesses are 

resolved, these numbers could be even greater. 

Firms operated and/or owned by minorities have traditionally struggled to 

secure financing, and they tend to be younger and smaller than the average business. This puts them at an immediate disadvantage when accessing financing.41 

Census Bureau data indicate that minorities are denied loans at 2.5 times the rate 

of non-minorities.42 Black, Asian, and Hispanic businesses have also struggled to 

secure loans since the 2008 financial crisis, particularly loans backed by the Small 

Business Administration, which has traditionally catered to minority-owned 

firms.43 The Small Business Administration reports that only 14.6 percent of 

SMEs are minority owned, whereas 63 percent of the Kiva Zip loans go to minority-owned businesses (see figure 5). 

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1('YH:, 63% 

G<m 

~>('YH:, 

d('YH:, 

30'}(, 

l{)'JIIl 

H)'JIIl 

0% 

KIVA SME owners 

Figure 5. Minority-owned firms 

Source: Kiva Zip data (2014) and Small Business Administration (2012) 

THE ECONOMIC IMP ACT 

The World Economic Forum's 2015 Inclusive Growth and Development Report 

finds that access to financing is a key link between economic opportunity and outcomes.44 Financing provided by the private sector can be powerful. A doubling of 

the amount of private-sector credit is associated with a two percentage point 

increase in the rate ofGDP growth.45 

SMEs' access to online lending has resulted in strong growth trends for the 

participating companies. Research demonstrates that the most favorable growth 

rates result from having access to financing. One study finds that a 10 percent 

increase in funds is associated with a 14.68 percent increase in firm growth for a 

financially constrained firm, but only 3.82 percent for a financially unconstrained 

firm.46 We analyzed the growth of firms receiving PPWC loans, which originated 

in the 3 percent of U.S. counties that have lost ten or more banks since the 2008 

financial crisis. We found that sales by these businesses grew 22.4 percent between 

2014 and 2015. The U.S. Census Bureau reports that similarly situated retail businesses across the U.S. only grew 1.72 percent in that same timeframe.47 If the jump 

in sales spurred by an online business loan were extended to every underserved 

SME in the U.S., the nation's economic activity could increase by as much as 

$697.95 billion, or 3.98 percent of2015 GDP. We arrive at that number by taking 

a jump in sales following receipt of an online loan (20.68 percent) and multiplying 

it by the total sales generated by U.S. SMEs in 2015 ($11.38 trillion). We only 

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looked at SMEs the Federal Reserve Bank found were too discouraged to apply for 

traditional funding or had already been rejected (29.6 percent). To arrive at that 

last percentage, we consulted a recent Federal Reserve survey, which shows that 22 

percent of SMEs applied for credit and 44 percent of them were not able to secure 

funding.48 Moreover, 20 percent of SMEs are too discouraged to even apply. 

Together this suggests that 29.7 percent ofSMEs (22% of 44% = 9.7%, plus the 20% 

just mentioned) are either rejected for a loan or too discouraged to apply for one. 

We note further that online lending not only results in economic growth for 

SMEs, it benefits consumers through, for example, increased product selection 

and lower costs. 

Online lending also provides economic value to SMEs by bringing competition to the market for corporate lending, a sector that was sorely in need of new 

entrants, particularly in the wake of the financial crisis. Through consolidation 

and closings, the number of community banks in the United States has declined 

from 14,000 in the mid-1980s to just 7,000 today, and only three new commercial 

banks have opened in the United States since 2010.49 Before the financial crisis, 

SMEs traditionally secured financing from community banks and thus have been 

disproportionately affected by these changes. SO 

Information asymmetry has traditionally plagued SME financing. The lack of 

public information about the performance of SMEs can make it difficult to assess 

their creditworthiness. Increased competition among lenders could help to promote innovative solutions to information asymmetry, as well as to alleviate financial constraints for the SME sector. 51 Because the lending market has traditionally 

failed to meet demand, governments around the world have stepped in to provide 

SME financing, particularly during financial crises, when constraints on borrowing are exacerbated. 52 The benefits of increased competition brought on by online 

financing might obviate the need for these government programs, which tend to 

operate at less than optimal efficiency. 53 

Finally, competition from online lending may reduce systemic risk. The 

Organization for Economic Cooperation and Development has found that firms 

that solely have access to capital through traditional bank loans are more vulnerable during crises.54 SMEs have largely been tied financially to a select group of 

institutions-namely, community banks-and when these banks started to disappear, SMEs were greatly affected. Online lending provides more diversified lending options, which can reduce borrowers' exposure while also spreading the risk 

across a broader ecosystem. 

Online business lending is still in its infancy; most providers started within the 

past decade. Nevertheless, recent Federal Reserve Bank studies have found that 20 

percent of SMEs have attempted to secure credit from an online lender.ss A 

Greenwich Associates survey of218 SMEs found that nearly 25 percent of respondents had obtained credit from an online provider in the past 18 months. The economic impact of online business lending is likely to grow in the future. 

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POLICY ISSUES 

Policymakers must recognize that a multitude of business models are being 

employed in the online business lending space, some of which warrant more 

scrutiny than others. If the interests of a lender and a borrowing business are 

aligned and the lender is invested in a borrower's success, then there may be less 

need for government scrutiny. 56 Moreover, risk assessment and collection practices differ across the online business lending industry. Models that assess risk 

without sound data and collection practices should be scrutinized, since they contain inefficiencies and hence result in higher fees. Many of the new types of fin ancia! services have links with existing regulated financial institutions. Therefore, to 

the extent that regulators look to propose additional rules for new financial services, it is essential to understand the existing landscape and avoid redundant and 

inefficient regulations. 

It is also worth noting that a host of regulations already govern the online 

business space. In the U.S., for example, online lenders are subject to Section 5 of 

the Federal Trade Commission Act (prohibiting unfair or deceptive practices) and 

the Equal Credit Opportunity Act (prohibiting lenders from issuing credit based 

on race, sex, age, religion, etc.). 57 Moreover, a significant portion of online business loans are originated by traditional financial institutions, which are already 

subject to a host of regulations. 

Policymakers must understand the difference between online business lending 

products and traditional lending products. Online SME loans are often short-term 

financial products, and the total cost of the loan can be calculated using an annualized percentage rate (APR) or a fee-based model (the loan amount includes 

additional fixed costs). Policies regulating traditional loan products often center 

around APRs, but this annualized measure often makes no sense for a product 

that might have a term of three months. Therefore, an SME may understand the 

actual costs of the fixed-fee better than an APR. Policymakers should analyze the 

differences between online loan offerings to determine which may be harmful to 

SMEs. 

Finally, although this paper focuses largely on the U.S., the global nature of the 

Internet means that online business loans can be made across international borders. However, the differing regulations between countries, and even within countries, temper the wide reach of these online platforms. In the U.S., divergent state 

banking rules on licensing, interest rates, consumer protection, and due diligence 

threaten the ability of online business lenders to provide a uniform experience.ss 

Policymakers should work to harmonize online business lending rules across 

intra- and inter-country boundaries. 

CONCLUSION 

Traditional financial services are rapidly being reformed by technology. An estimated $20 billion in venture capital was expected to be invested in financial technology businesses in 2015, a 66 percent increase over the previous year. 59 Startups, 

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large financial institutions, and technology companies are adapting to these 

changes and creating new financial services solutions that have the potential to fill 

the gap in SME financing that developed in the wake of the 2008 financial crisis. 

Moreover, the impact these new products could have for the broader economy, in 

particular for financially underserved firms, is noteworthy. Policy interventions 

that affect new SME financing products must be carefully considered. 

Acknowledgments 

The authors wish to thank Olim Latipov, Kornel Mahlstein and Pierre-Louis 

Vezina for their valuable input, and Jegan VelappanPillai for his data expertise. All 

opinions expressed in this paper are the authors' and should not be attributed to 

the institutions they are affiliated with, nor with the clients they represent. As 

usual, any errors, flaws, or lapses remain solely the authors' responsibility. 

I World Economic Forum, The Future ofFintech: A Paradigm Shift in Small Business Finance, 

2015; Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia, Joint Small 

Business Credit Survey Report 2014. 

2 International Labour Office, Small and Medium-Sized Enterprises and Decent and Productive 

Employment Creation, Report IV, 2015; WEF, What Companies Want from the World 

Trading System, 2015. 

3 Peer Stein, Tony Goland, and Robert Schiff, Two Trillion and Counting, 2010. 

4 Harriet Taylor, Pay Pal Has Lent More Than $1 Billion to Small Biz, CNBC, October 27, 2015. 

5 See www.kiva.org/about/stats. 

6 See http://www.kiva.org/zip. 

7 U.S. Census, advance monthly sales for retail and food service, not seasonally adjusted, 2013-

2015. 

8 Kennickell et al., Small Businesses. 

9 European Commission, 2013 SMEs Access to Finance Survey; Mills and McCarthy, The State 

of Small Business Lending. 

10 Ruth Simon, "Big Banks Cut Back on Loans to Small Business", Wall Street journal, 

November, 26 2015. 

11 Summary of Deposits Database, Federal Deposit Insurance Corporation. 

12 Financing SMEs and Entrepreneurs 2015, OECD, 2015. 

13 Financing SMEs and Entrepreneurs 2015, OECD, 2015; Bataa Ganbold, Improving Access to 

Finance for SME: International Good Experiences and Lessons for Mongolia, 2008; Thorsten 

Beck and Asli Demirguc-Kunt, Small and Medium-Size Enterprises: Access to Finance as a 

Growth Constraint, journal of Banking & Finance, 2006. 

14 Veselin Kuntchev, Rita Ramalho, Jorge Rodriguez-Meza, and Judy S. Yang, What Have We 

Learned from the Enterprise Surveys Regarding Access to Credit by SMEs? 2013. 

15 European Commission, 2013 SMEs Access to Finance Survey. 

16 Federal Reserve Banks, joint Small Business Credit Survey; Malhotra eta!., Expanding Access 

to Finance: Good Practices and Policies for Micro, Small and Medium Enterprises, 2007. 

17 Barbara J, Lipman and Ann Marie Wiersch, Alternative Lending Through the Eyes of"Mom 

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& Pop" Small-Business Owners: Findings from Online Focus Groups, 2015. 

18 The Economic Impact of OnDeck's Lending, prepared by Analysis Group, November 17, 

2015; WEF, What Companies Want; Karen Gordon Mills and Brayden McCarthy, The State 

of Small Business Lending: Credit Access during the Recovery and How Technology May 

Change the Game, Harvard Business School working paper 15-004, 2014; What Works 

Centre for Local Economic Growth, Evidence Review, Access to Finance 4, 2014; Malhotra 

et al., Expanding Access to Finance; John Rigby and Ronnie Ramlogan, Access to Finance: 

Impacts of Publicly Supported Venture Capital and Loan Guarantees, Nesta working paper 

13/02, 2013; Ernst and Young, Funding the Future, produced for the G20 Young 

Entrepreneur Summit, June 2012; Stijn Claessens, Access to Financial Services: A Review of 

the Issues and Public Policy Objectives, Oxford University Press, 2006. 

19 Governor Lael Brainard, At the Community Banking in the 21st Century, Third Annual 

Community Banking Research and Policy Conference, St. Louis, Missouri, September 30, 

2015; Community Banks, Small Business Credit, and Online Lending. 

20 Arthur B. Kennickell, Myron L. Kwast, and Jonathan Pogach, Small Businesses and Small 

Business Finance during the Financial Crisis and the Great Recession: New Evidence from the 

Survey of Consumer Finances, 20 IS. 

21 Wehinger, SMEs and the Credit Crunch. 

22 Accountants for Businesses, Innovations in Access to Finance for SMEs, 2014. 

23 Federal Reserve Bank of Cleveland, Alternative Lending; Lipman and Wiersch, Alternative 

Lending; Kuntchev eta!., What Have We Learned? 

24 Bryan Bodhaine, The Importance of Cash Flow Management for Small and Mid-Size 

Businesses, Signature Analytics, February 5, 2015. 

25 Federal Reserve Banks, Joint Small Business Credit Survey; European Commission, 2013 

SMEs Access to Finance Survey. 

26 Lipman and Wiersch, Alternative Lending. 

27 The Economic Impact of OnDeck's Lending. 

28 World Economic Forum, The Future of Fintech: A Paradigm Shift in Small Business 

Finance, 2015. 

29 Fleisig eta!., Reforming Collateral Laws to Expand Access to Finance, 2006. 

30 Federal Reserve Banks, Joint Small Business Credit Survey. 

31 Mauricio Larrain and Murillo Campello, Enlarging the Contracting Space: Collateral 

Menus, Access to Credit, and Economic Activity, Review of Financial Studies, November 

2015. 

32 Malhotra et a!., Expanding Access to Finance. 

33 Brainard, At the Community Banking. 

34 Sumit Agrawal, Souphala Chomsisengphet, Neale Mahoney, and Johannes Stroebel, Do 

Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending 

During the Great Recession, NBER working paper, August 30,2015. 

35 Leon, Bank Competition and Credit Constraints; Ruth Simon, Big Banks Cut Back on Loans 

to Small Business, Wall Street Journal, November 26, 2015. 

36 Federal Reserve Banks, Joint Small Business Credit Survey. 

37 Kennickell et al., Small Businesses; Ernst and Young, Funding the Future; Mirjam Schiffer 

and Beatrice Weder, Firm Size and the Business Environment: Worldwide Survey Results, 

IFC, 2001. 

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38 International Finance Corporation and Global Partnership for Financial Inclusion, 

Strengthening Access to Finance for Women-Owned SMEs in Developing Countries, October 

2011. 

39 Women-Owned Businesses in the 21st Century, U.S. Department of Commerce, Economics 

and Statistics Administration, October 2010, p. 18. 

40 International Finance Corporation & Global Partnership, Strengthening Access to Finance. 

4l David G. Blanchflower, Phillip B. Levine, and David J. Zimmerman, Discrimination in the 

Small-Business Credit Market, The Review of Economics and Statistics, 85(4) 2003: pp. 930-

943. 

42 Access to Capital for Women- and Minority-Owned Businesses: Revisiting Key Variables, 

Small Business Administration, issue brief number 3, January 2014, p. 2. 

43 Ruth Simon and Tom McGinty, Loan Rebound Misses Black Businesses, Wall Street 

Journal, March 14, 2014. 

44 World Economic Forum, Inclusive Growth and Development Report, 2015. 

45 Stijn Calessens, Access to Financial Services: A Review of the Issues and Public Policy 

Objectives, Oxford University Press, 2006. 

46 Rahaman, Access to Financing and Firm Growth. 

47 U.S. Census, Monthly and Annual Retail Trade, non-seasonally adjusted; these calculations 

are based on the 12-month period November 2013-0ctober 2014 and November 2014-

0ctober 2015. 

48 See Board of Governors of the Federal Reserve System, Availability of Credit to Small 

Businesses, September 2012, Table 7, Overall credit application experience, 2009-2011. 

49 Heather Long, Weird: Only 3 New US Banks Opened Since 2010, CNN, July 29, 2015; Mills 

and McCarthy, The State of Small Business Lending. 

50 Kuntchev et a!., What Have We Learned?; Federal Reserve Bank of Cleveland, Alternative 

Lending. 

5l Leon, Bank Competition; R. M. Ryan eta!., Does Bank market power affect SME financing 

constraints?, Journal of Banking & Finance 49, 2014; I d.; Terence Tai-Leung Chong, Liping 

Lu, and Steven Ongena, Does Banking Competition Alleviate or Worsen Credit Constraints 

Faced by Small and Medium Sized Enterprises? Evidence from China; Beck and DemirgucKunt, Small and Medium-Size Enterprises Across the Globe, Small Business Economics, 

2007. 

52 Wehinger, SMEs and the Credit Crunch. 

53 What Works, Centre for Local Economic Growth, Evidence Review, Access to Finance 4, 

2014. 

54 Wehinger, SMEs and the Credit Crunch. 

55 Lipman and Wiersch, Alternative Lending; Federal Reserve Banks, Joint Small Business 

Credit Survey. 

56 Joe Valenti, Sarah Edelman, and Julia Gordon, Lending for Success, Center for American 

Progress, 2015. 

57 Chapman and Chapman, The Regulation of Marketplace Lending: A Summary of the 

Principle Issues, 2015. 

58 Id. 

59 KPMG and H2 Ventures, Fintech 100: Leading Global Fintech Innovators Report 2015. 

48 innovations I Financial Inclusion II 
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Pay Pal 

House Small Business Committee Hearing 

Financing through Fintech: Online Lending's Role in Improving Small Business 

Capital Access 

October 26, 2018 

Chairman Brat, Ranking Member Evans, and distinguished Members of the Committee: 

PayPallnc. appreciates the opportunity to provide this written statement for the record of the October 26, 2017 

hearing titled, "Financing Through Fintech: Online Lending's Role in Improving Small Business Capital Access." In 

this statement, we will share with the Committee PayPal's experience as a financial technology, or "fintech," 

platform providing access to much-needed capital to small businesses and the gap we see that these loans are 

filling. In addition to this statement, we would like to submit a report published in MIT's Innovations publication 

entitled "Filling the Gap: How Technology Enables Access to Finance for Small- and Medium-Sized Enterprises." 

PayPal, Small Businesses, and PayPal Working Capital 

As you know, small businesses play a critical role in the global economy. They hire neighbors and strengthen 

communities. They drive economic impact. Small businesses consistently report access to capital as being one of 

the most important factors in being successful. However, while lending to large firms has largely rebounded since 

the Great Recession, lending to small businesses has down approximately 20% over the same period1

• This gap in 

access to capital can disproportionately hit businesses that are young, women, or minority-owned'. At PayPal, we 

see it as a privilege to empower small businesses by providing financial services and tools that help them compete 

in the marketplace. 

PayPal introduced PayPal Working Capital in 2013, a unique business financing product that has provided access 

to more than $3 billion in funding to over 115,000 small businesses globally. PayPal Working Capital aims to help 

fill the gap in access to financing, using innovative and relevant data to enable informed and quicker decisions 

about a small business. 

PayPal Working Capital is a business loan of a fixed amount with a single fixed fee for merchants who have been 

doing business using PayPal for at least three months. Additional eligibility is based on PayPal history and 

processing volume, not a business or personal credit score like traditional sources. Small business owners select a 

loan amount (up to maximum of 30% of their annual PayPal sales) and if approved, the loan amount is deposited 

to the business owner's PayPal account within minutes. Payments are applied automatically as a fixed percentage 

of sales between 10-30% at a level the merchant chooses until the balance is paid in full- meaning merchants pay 

more when business is strong and less during slower times.' There are no periodic interest charges, late fees, or 

1 Mills, Karen Gordon, McCarthy, Braden. (2014)The State of Small Business Lending: Credit Access during the Recovery and 

How Technology May Change the Game. Harvard Business School 2 Kymn, Christine. (2014) Access to Capital for Women-and Minority-Owned Businesses: Revisiting Key Variables. SBA 

Office of Advocacy. Issue Brief Number 3 3 Subject to a minimum payment requirement due every 90 days. 
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Pay Pal 

penalty fees, and loans must be paid in full before a merchant can apply for another loan. The average fixed fee is 

less than 10% of the amount borrowed. 

Filling the Gap 

From 2013·2014, we found that 25% of PayPal Working Capital loans in the United States were disbursed 

to the 3% of counties that have lost 10 or more bank branches since the 2008 financial crisis4

• 

The recipients in these counties saw sales increase by 22.4% from one year to the next, while comparable 

retail businesses in the U.S. grew by 1.72% over the same period. 

In the period when the study was conducted, 61% of PayPal Working Capital loans went to entrepreneurs 

and young firms that have been in business less than 5 years. 

During the time period studied, approximately 90% of businesses that paid off their initial loan reapplied 

for funding, and 85-90% of respondents asked to rate the program on a scale of 1·10 answered with a 9 or 

10. 

More than half of businesses used PayPal Working Capital funds for inventory while others used it for 

seasonal hiring, marketing and promotion, expansion and cash flow management. 

PPWC Case Studies 

Nikki Gentry is from O'Fallon, MO, and started her company My Dream lines after graduating from college with a 

degree in marketing. She jumped between a couple of marketing jobs but then decided to start her own business 

utilizing artists around the country to draw sketches of wedding photographs the clients provide. Since the 

beginning in 2014, Nikki has been using PayPal to process payments on her website. Later she turned to PayPal 

Working Capital to help with cash flow during the slower months. Using PayPal Working Capital has allowed Nikki 

to hire more artists and expand choices for her customers. 

Says Nikki: 

"It is really a huge weight off my mind knowing that I have that extra little bit of financing when I 

need it to take advantage of a marketing opportunity, or buy some much needed supplies. It 

helps me breath and not panic." 

Zeke Freeman, Owner and Founder of Bee Raw in Brooklyn, NY, discovered a fledging artisanal honey company 

after years in kitchens as a chef around the world. He helped create an elegant brand and image around the 

product, and ten years later, after taking ownership of the company, Bee Raw is flourishing in the finest shops 

around the country. To Zeke, Bee Raw is a more than a business; it is a way of life. He makes it a priority to 

promote American family-owned apiaries and artisans who have struggled in the commoditized environment of 

the honey industry. 

4 "Filling the Gap: How Technology Enables Access to Finance for Small and Meduim Sized Enterprizes" Paper authored by 

Usman Ahmed, Head of Global Public Policy at Pay Pal Inc. and an adjunct professor of law at Georgetown University, 

Thorsten Beck, professor of banking and finance at Cass Business School in London, Christine McDaniel, Senior Economist at 

Sidley Austin LLP, and Simon Schropp, Managing Economist at Sidley Austin LLP. Published in innovations: technology I governance I globalization, Volume I 0, Issue 3-4- Summer-Fall 2015- Financiallnclusion (Part II), pages 35-48 
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Pay Pal 

Says Zeke: 

Closing 

"We have a very capital intense business because farmers produce ond sell their honey once a 

year in the summer months. That means that we have to buy all of our inventory for the year in 

those months, which can make cash flow tight. Pay Pal Working Capital is so convenient and 

easy. It really helps us." 

PayPal has a proud history of helping our merchants grow and thrive. We are pleased the Committee shares our 

goal to enable America's small businesses to access the funds they need to succeed in a transparent, responsible, 

and fair way. We look forward to working with Committee members to ensure innovative tools such as PayPal 

Working Capital remain as the dream fuel for our merchants well into the future. 

Thank you for allowing us to contribute and submit this statement today. 
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Testimony for the Record 

Submitted to the 

House Committee on Small Business 

Subcommittee on Economic Growth, Tax, and Capital Access 

For the Hearing 

"Financing through Fin tech: Online Lending's Role in 

Improving Small Business Capital Access" 

October 25,2017 

Submitted by Alison Feighan on behalf of the Responsible Business Leudiug Coalition 

Chainnan Brat and Ranking Member Evans, on behalf of the Responsible Business Lending 

Coalition (RBLC) I thank you for convening this important hearing. We hope that today's discussion 

will launch an ongoing dialogue to encourage much needed innovation in small business lending, 

while also empowering and protecting small businesses borrowers from irresponsible lending 

practices and products. We appreciate the opportunity to contribute to this dialogue by submitting 

testimony related to the Small Business Borrowers' Bill of Rights and RBLC's efforts to drive 

responsible practice in the small business lending space. 

The RBLC is a diverse network of experienced for-profit and nonprofit lenders, brokers, and small 

business advocates organized to promote responsible innovation in small business lending and 

combat the rise of predatory and irresponsible lending practices and products in the market. The 

RBLC's members are the Aspen Institute, a nonpartisan policy forum; Funding Circle and Lending 

Club, two leading Fintech innovators in marketplace lending; Accion and Opportunity Fund, two of 

the largest nonprofit CDFl small business lenders; Fundera, a leading small business loan broker; 

Community Investing Management, an impact-driven investor in small business financing; and the 

Small Business Majority, a nonprofit trade association and advocate for small businesses. 

Members of the RBLC recognize that the way small businesses borrow money is changing and 

innovation is providing faster and easier access to capital, particularly in communities historically 

underserved by traditional lenders. The RBLC believes that in order to effectively empower small 

businesses, these innovations must place transparency, fairness, and borrowers' rights at the center 

of the lending process. To that end, the RBLC created the Small Business Borrowers' Bill of Rights, 

a cross-sector consensus on the responsible lending practices that all small business owners seeking 

financing deserve. More than simply a statement of principles, the Small Business Borrowers' Bill of 

Rights is a set of specific practices that lenders, marketplaces, and brokers should abide by to uphold 

the rights of their small business customers. The six rights are: 

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I. The Right to Transparent Pricing and Terms: A borrower has the right to have the cost and 

terms of any financing being offered presented to them in writing and in a form, that is clear, 

complete, and easy to compare with other financing options, so they can make the best decision 

for their business. 

2. The Right to Non-Abusive Products: A borrower has the right to expect that the financing 

products offered by a lender will not trap his/her business in an expensive cycle of re-borrowing. 

3. The Right to Responsible Underwriting: A borrower has the right to expect a lender is offering 

financing based on underwriting practices that assess the ability of the borrower's business to 

succeed and repay. 

4. The Right to Fair Treatment from Brokers: A borrower has the right to honest, transparent, 

and impartial communications with a broker regarding loan options, conflicts of interest, fees, 

and the financing options available. 

5. The Right to Inclusive Credit Access: A borrower has the right to fair and equal treatment 

when seeking a loan including protections guaranteed under the Equal Credit Opportunity Act. 

6. The Right to Fair Collections Practices: A borrower has the right to be treated fairly and 

respectfully throughout a collections process and the right to protections like those guaranteed 

under the Fair Debt Collection Practices Act. 

Since released two years ago, some 90 organizations including for-profit fintech innovators, 

nonprofit CDFI lenders, advocacy and community groups, investors, brokers, and marketplaces have 

signed on to the Small Business Borrowers' Bill of Rights as Signatories or Endorsers. To become a 

"Signatory," the CEO or chief executive of a lender, marketplace, or broker must sign an attestation form 

affirming that the organization abides by each and every relevant practice set forth in the Small Business 

Borrowers' Bill of Rights. There is no option to abide by certain requirements and ignore others. A 

Signatory's CEO is required to sign a standard Attestation Form designed for either a lender or 

marketplace, or a broker. Organizations that do not provide lending or brokering services, such as 

think tanks and advocates, can sign on as "Endorsers." 

At the end of this statement we have attached a copy of the Small Business Borrowers' Bill of 

Rights, lender and the broker Attestation Forms, and a current list of signatories and endorsers. 

Why a Small Business Borrowers' Bill of Rights? 

The small business financing landscape continues to change at a rapid pace, with new technologies, 

new lenders, and new products coming on line daily- some good and some not so good. While the 

RBLC supports efforts to make capital more accessible, particularly to entrepreneurs in underserved 

communities, we would like to see as much attention given to the quality of that capital and ensuring 

that in the long run, capital is helping and not harming small businesses. We continue to see 

evidence of the abusive and deceptive lending practices that led the formation of the RBLC and the 

launch of the Small Business Borrowers' Bill of Rights, including: 

a) Obfuscation of very high financing costs 

b) Misaligned incentives between lenders and borrowers 

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c) Double-charging borrowers when loans are renewed by "double dipping" 

d) Mismatch between financial products' purported use and behavior encouraged by the provider 

e) Hidden prepayment charges 

l) Misaligned broker incentives steering small businesses into expensive products 

g) "Stacking" of too much debt 

h) Lack of legal protections in collections, and 

i) Need for financial inclusion 

The Rights were developed as industry-driven standards of accountability and transparency, in the 

absence of small business lending regulation. The majority of state and federal laws that apply to 

consumer loans do not apply to small business loans and there is no federal regulator overseeing small 

business lending. 

The Rights apply to all types of lending institutions that serve small businesses, including traditional 

financial institutions, CDF!s and other mission-driven lenders, as well as fintech lenders, marketplaces, 

and brokers. Similarly, the Rights apply to the full range of small business financing products 

available. In the Small Business Borrowers' Bill of Rights and Attestation Forms, the term "loan" and 

related terms such as "lending" are intended to include loans, lines of credit, merchant cash advances, 

and similar products that extend credit to U.S. small businesses, but may or may not be advertised as 

"loans." Similarly, the terms "lender" and ''borrower" are intended to be interpreted in the broadest 

sense possible to include credit marketplaces that facilitate loans on behalf of lenders, cash advance 

providers, and all manner of persons providing loans to a small business or evaluating the 

creditworthiness of a small business seeking a loan. In the case of borrowers, the Rights apply to all 

U.S. small businesses who seek or obtain financing. 

Advancing Transparency 

As the text of the Small Business Borrowers' Bill of Rights indicates, the RBLC believes that 

transparency is critical to enabling small business owners to access capital that wi 11 benefit their 

businesses. Standardized disclosure elements that apply to all loans, lines of credit, merchant cash 

advances, and similar products are an important means to achieve greater transparency. To that end, we 

have engaged with colleagues in the industry including those that have become signatories of the 

Small Business Borrowers' Bill of Rights, and those that have not- to discuss standardized disclosure, 

and we will continue that dialogue. 

The RBLC believes the purpose of standardized disclosure is to enable borrowers to understand the 

cost, terms, and ajfordability of the financing being offered, to effectively compare financing options 

and make an informed decision. Disclosures that offer only partial information, or that use terminology 

that is not well understood by borrowers make it more challenging for business owners to make 

choices that are in their best interest. With that goal in mind, the RBLC supports standardized 

disclosure that includes the following six elements: 

1. Amount: The total amount paid to a borrower (with fees deducted) must be disclosed. 

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2. Annualized Percentage Rate (APR): The APR, as the all-in annualized price of the financing, is 

the best metric to help borrowers effectively evaluate and compare the price of financing products 

and therefore must be disclosed. In the case of a merchant cash advance (MCA) a lender would 

disclose an "estimated APR." 

3. Total Monthly Payments: The total monthly payment is the best metric to help a borrower 

evaluate affordability and therefore must be disclosed. If payment frequency is not monthly, a 

lender must calculate the estimated monthly payment and disclose the frequency and amounts of 

each payment (e.g. $xx each weekday) and in the case of a MCA, a lender must disclose how 

payments are calculated and with what frequency payments are due (e.g. X% of every dollar in 

sales to be deducted daily until $xx is repaid). 

4. Term: The term of the financing must be disclosed- either in months or years- and if the term is 

not fixed then the lender must disclose the "estimated term." 

5. Total Cost: The total cost of the financing must be disclosed and broken down, so a borrower can 

understand what expenses and/or fees are included in the total cost (e.g. Interest Expense= $xx, 

Origination Fee= $xx). 

6. Prepayment Cost/Savings: To assess the cost of financing, a borrower must be able to account for 

any cost or savings associated with prepayment. Therefore, a lender must disclose if there is a cost 

(or a benefit) to the borrower associated with prepayment (e.g. Prepayment Cost/Savings Up to 

$xx). 

In addition, the RBLC believes the following elements must not be included in standardized 

disclosure: 

a) Standardized disclosure should not reference metrics or percentage rates other than interest 

rate or APR. Metrics such as "Simple Interest" or "Factor Rate" or references to "payment 

multipliers" or other terms can too easily be confused with an interest rate and using such term 

undermines an applicant's ability to effectively compare financing options. 

b) Standardized disclosure should not emphasize any element above the Amount, APR and Total 

Monthly Payment. These three elements should be emphasized above other elements disclosed, 

as they are most critical to an applicant's understanding of a loan's benefits, price, and 

affordability. 

c) Standardized disclosure should not disclose information unless it contributes directly to an 

applicant's ability to understand the cost, terms, and affordability of the financing available to 

them. A summary section should be limited to key factors that help an applicant understand and 

compare the cost and affordability of financing in the simplest way possible. 

Again, on behalf of the RBLC, I thank you for the opportunity to contribute to the subcommittee's 

hearing. Please know we are available to answer any follow up questions about the Small Business 

Borrowers' Bill of Rights or any of the information provided in our testimony. We look forward to 

working with the committee as you continue to explore how fintech innovations can encourage and 

facilitate responsible small business lending. 

The Responsible Business lending Coalition 

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SMALL BUSINESS BORROWERS' 

BILL OF RIGHTS 

The way small businesses borrow money is being transformed. Innovators are providing faster and easier ways 

to borrow and increasing access to credit in communities that have historically been underserved. This 

transformation will achieve its potential only if it is built on transparency, fairness, and putting the rights of 

borrowers at the center of the lending process.' To that end, we have identified the fundamental financing rights 

that we believe all small businesses deserve. These rights are not yet protected by law, in most cases. We 

encourage the entire small business financing industry to join us in upholding these rights. 

1. The Right to Transparent Pricing and Terms 

You have a right to see the cost and terms of any financing being offered in writing and in a form that is 

clear, complete, and easy to compare with other options, so that you can make the best decision for 

your business. In order to protect your Right to Transparent Pricing and Terms, lenders and brokers must: 

Transparent Rate- Disclose the Annual Percentage Rate (APR)," as the all-in annualized price of 

the financing, and the annualized interest rate if one is used. 

No Hidden Fees- Disclose all upfront and scheduled charges. 

Plain-English Terms- Describe all key terms in an easy-to-understand manner, including the loan 

amount, total amount provided after deducting fees or charges, payment amount and frequency, 

total monthly payment amount if payment frequency is other than monthly, collateral requirements, 

and any prepayment charges. 

Clear Comparison - Present all of these pricing and other key terms clearly and prominently, in 

writing, to the borrower when the loan offer is summarized for the borrower and whenever a term 

sheet, offer summary, or equivalent is provided. 

2. The Right to Non-Abusive Products 

You have a right to loan products that will not trap you in an expensive cycle of re-borrowing. Lenders' 

profitability should come from your success not from your failure to repay the loan according to its original 

terms. In order to protect your Right to Non-Abusive Products, lenders must: 

No Debt Traps -If the borrower is unable to repay an existing loan, extend new credit only if due 

diligence indicates that the borrower's situation has changed, enabling them to repay the new loan. 

No "Double Dipping"- Do not double-charge the borrower. When refinancing or modifying a 

loan with a fixed-fee as the primary financing charge, do not charge fees on the borrower's 

outstanding principal unless there is a tangible cost benefit to the borrower.'" 

No Hidden Prepayment Charges -If the borrower receives no savings, or limited savings, in early 

payoff, disclose this in the original loan term sheet or offer summary, and again at the time of payoff. 

For financing with a fixed term, if a prepaying borrower owes a fixed repayment amount or a certain 

percentage of that amount regardless of when they pay off the financing, disclose this as prepayment 

charge. This charge is equal to the remaining financing charge owed at payoff; which is the cost the 

borrower is paying for the unused portion of the loan. 

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Appropriate Product- Match loan product design and loan product use. If presenting a loan 

product as designed for one use, do not encourage borrowing behavior contrary to that use. For 

example, short-term products may be well suited for short term use, but not for long-term 

recurring use. Long-term products with prepayment penalties may be well suited for long-term 

use, but not for short-term needs. 

Pressure Free- Allow borrowers a reasonable time to consider their loan options free from 

pressure or artificial timelines. 

Prompt Prepayment Assistance- If a borrower seeks to prepay a loan, provide any information 

required for prepayment within two business days of the borrower's request. 

Responsive Complaint Management- If a complaint is submitted, provide a confirmation of 

receipt within five days and in writing, when possible, and research and resolve the complaint in a 

timely manner. lv 

Clear Notice Regarding Referrals - If referring a small business to another lender or broker, 

provide clear notice that a referral is being made. lfthe lender or broker is not already a signatory 

of the Small Business Borrowers· Bill of Rights and thus has agreed to clear disclosure and 

responsible lending practices, inform borrowers that as they move forward they should consider key 

aspects of any financing offered the APR, the total payment amount owed monthly (even if 

payments are made daily or weekly), their ability to pay off any financing they take, and whether 

they may owe financing charges even if they pay off early. 

3. The Right to Responsible Underwriting 

You have a right to work with lenders who will set you up for success, not failure. High loss rates should not 

be accepted by lenders simply as a cost of business to be passed on to you in the form of high rates or fees. 

In order to protect your Right to Responsible Underwriting, lenders must: 

Believe in the Borrower- Offer financing only with high confidence that the borrower can repay its 

entire debt burden without defaulting or re-borrowing. 

Alignment of Interests Lenders who receive repayment directly from the borrower's gross sales 

must also verify, through documents, data from third parties, and/or due diligence, that the borrower 

can repay all debt and remain profitable, or that it has a credible path to 

profitability. Lenders should not make loans that the borrower cannot truly afford, even ifthc 

lender can find a way to be repaid. 

Right-sized Financing- Size loans to meet the borrower's need, rather than to maximize the 

lender's or broker's revenue. Seek to offer the borrower the size of loan that they need, rather than 

offering the largest amount they could qualify for. 

Responsible Credit Reporting- Report loan repayment information to major credit bureaus and 

consult credit data when underwriting a loan. Such reporting enables other lenders to responsibly 

underwrite the borrower and helps the borrower build a credit profile that may facilitate access to 

more affordable loans in the future. Lenders must inform the borrower and any guarantors if they 

intend to report loan repayment performance to guarantors' credit bureaus only in certain 

circumstances, such as after a default. 

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4. The Right to Fair Treatment from Brokers 

You have a right to transparency, honesty, and impartiality in all of your interactions with brokers. In 

order to protect your Right to Fair Treatment from Brokers, brokers must offer: 

Transparent Loan Options- Disclose all loan options for which the borrower qualifies through the 

broker's services, emphasizing the lowest APR option, and disclose all lenders to which the broker 

sends loan applications on the borrower's behalf. 

Transparent Broker Fees -Disclose all compensation paid to the broker, and all charges that will 

be paid directly or indirectly by the borrower, whether paid up front or financed in the loan. 

Transparent Results- Post clearly and prominently on the broker's website the anonymous and 

aggregated results of borrowers who obtain financing through the brokers' services, in terms of APR 

and financing product. 

Empower Borrowers to Make Informed Financing Decisions- Educate the borrower on each 

loan option and ensure that the borrower reasonably understands the cost and terms as well as the 

pros and cons of financing decisions before they sign a loan document. Brokers should use tools that 

help the potential borrower comparison shop, including APRs and loan calculators. 

Disclosnre of Conflicts oflntercst- Disclose any conflicts of interest, the broker's fee structure, and 

any financial incentives they have, including whether the broker receives higher fees for brokering 

certain loans. Brokers who are paid higher fees with certain lenders, loan types, or terms other than 

the size of the loan, may not state they are acting in the best interest of the potential borrower. 

No Fees for Failnre- No fees can be charged to the potential borrower if the broker is unable to 

find them a loan and if the borrower does not accept a loan secured through the broker's services. 

Responsive Complaint Management- If a complaint is submitted, provide a confirmation of 

receipt within five days and in writing, when possible, and research and resolve the complaint in a 

timely manner. 

5. The Right to Inclusive Credit Access 

You have a right to fair and equal treatment when seeking a loan. In order to protect your Right 

to Inclusive Credit Access, lenders and brokers must: 

Non-Discrimination- Respect the letter and intent of fair lending laws, including the Equal 

Credit Opportunity Act. Do not discriminate against small business owners on the basis of race, 

color, religion, national origin, sex, marital status, age, sexual orientation or identity, or any 

other protected class. Lesbian, Gay, Bisexual and Transgender (LGBT) small business owners 

deserve the same protection when seeking or obtaining credit. 

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6. The Right to Fair Collection Practices 

You have a right to be treated fairly and respectfully throughout a collections process. 

Collections on defaulted loans should not be used by lenders as a primary source of 

repayment. In order to protect your Right to Fair Collections Practices, lenders must: 

Fair Treatment- Abide by the spirit of the Fair Debt Collection Practices 

Act and provide borrowers similar protections as described in that Act. 

Responsible Oversight- Diligently vet and oversee the collections practices of 

third-party collectors and debt buyers. Do not work with collectors or debt 

buyers who fail to treat borrowers fairly. 

Accurate Information -Transmit accurate, current, and complete information 

about the loan to third-party collectors and debt buyers. 

Product of the Responsible Business Lending Coalition 

Copyright© 2015 Privacy Policy I Terms of Use 

i The tenn "loan" and related tenns used here such as ··tending'' are intended to be interpreted in the broadest sense possible so as to include loans, lines of credit, merchant cash advances, and similar products offered and provided to U.S. small businesses, 

whether or not such credit products are characterized legally or otherwise as loans. Similarly. the tem1s ''lender" and 

"borrower" are intended to be interpreted in the broadest sense possible so as to include, in the case of lenders. credit 

marketplaces that facilitate loans on behalf of lenders, cash advance providers, and all manner of persons providing loans to 

U.S. small businesses or evaluating the creditworthiness of such small businesses in connection with providing a loan. and, in 

the case of borrowers, all U.S. small businesses who seek or obtain a loan. 

ii APR (annual percentage rate) is the annual rate that is charged for borrowing, expressed as a single percentage number. It 

includes fees as well as interest rate, and represents the actual yearly cost of funds. 

iii While it may be appropriate to charge a reasonable service fee for loan modifications that clearly help the borrower, it is not 

acceptable to effectively doubleKcharge the borrower while refinancing or renewing by assessing the predominant financing 

charge, such as a 20% factor rate. on a borrower's outstanding principal, which they have already paid for. 

iv While recognizing that some situations may require more time to resolve, a lender will be expected to research and resolve a 

complaint in less than three weeks. 

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SMALL BUSINESS BORROWERS' 

ILLO Rl 

Small Business Borrowers' Bill of Rights (2.0 Update) 

Attestation Form and Attestation 

Worksheet for Lenders and Marketplaces 

In order for a lender or marketplace to become a signatory of the Small Business Borrower's 

Bill of Rights 2.0, its chief executive must attest that it abides by all practices described in the 

Small Business Borrowers' Bill of Rights by completing both the Attestation Form and the 

Attestation Worksheet below. Once completed, the documents should be emailed to 

Business Lending Coalition 

resp<>nsiblehu,;ines:;lending.<Jrg info@responsib!ehusincsslending.org 
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Small Business Borrowers' Bill of Rights (2.0 Update) 

Attestation Form for Lenders and Credit Marketplaces 

Summary of Attestation 

By checking the boxes below, I affirm that my organization actively supports and adheres to the Small Business 

Borrowers' Bill of Rights (2.0 Update) and abides by all of the practices described in the attached Attestation 

Worksheet: 

0 The Right to Transparent Pricing and Terms 

0 The Right to Non-Abusive Products 

0 The Right to Responsible Underwriting 

0 The Right to Inclusive Credit Access 

0 The Right to Fair Collections Practices 

Note: You must be able to truthfully check all five boxes to be deemed a Signatory of the Small Business 

Borrowers' Bill of Rights and thereby eligible to have your organization's logo appear on the Small 

Business Borrowers' Bill of Rights website, www.ResponsibleBusinessLending.org. 

Terms of this Attestation 

a. I have read and understand the Small Business Borrowers' Bill of Rights (2. 0 Update). 

b. I have completed the attached Attestation Worksheet, indicating in writing that my organization abides by all 

of the enumerated practices. 

c. By completing this Attestation Form and attesting that my organization abides by all of the enumerated 

practices in the attached Attestation Worksheet, I consent to having this Attestation Form and my organization's 

logo posted on the Small Business Borrowers' Bill of Rights Website. 

d. I understand that this Attestation Form and my organization's logo may be removed from the Small Business 

Borrowers' Bill of Rights website if my organization does not complete and submit a satisfactory updated 

Attestation Form within one calendar year from the date of my signature below, and each successive year 

thereafter, or if my organization ceases to abide by this Attestation. 

e. I agree, on behalf of my organization, that my organization assents to and will be bound by the Terms of Use 

for the Small Business Borrowers' Bill of Rights website. 

f. Anyone with questions for my organization regarding this Attestation Form completed by my organization 

can contact the following individual (include name, title, email address, and phone number): 

g. I attest that the information above is accurate and represents the standard practices for all tinancing products and 

services offered through my organization to small businesses. Furthermore, I hereby certify that I am authorized 

to sign this Attestation Form on behalf of my organization. 

Organization Name 

Chief Executive Signature 

Chief Executive Name 

Date 

The Responsible Business Lending Coalition 

v.'\vw.responsfb!ebusmesslendmg org · info@responsiblebusinesslending org 
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Small Business Borrowers' Bill of Rights (2.0 Update) 

Attestation Worksheet for Lenders and Marketplaces 

In order for an organization to become a signatory it must attest that it abides by the Small Business 

Borrowers' Bill of Rights (2.0 Update) by having its chief executive complete this worksheet by 

checking each box below indicating that his or her organization abides by each of the practices set 

forth below. 1 Questions regarding the form can be directed to info@rcsponsiblcbusincsslcnding.onl. 

The Right to Transparent Pricing and Terms 

D Transparent Rate 

• Disclose the Annual Percentage Rate (APR) and the annualized interest rate if one is used. 

D The disclosure of APR is an addition of this 2.0 Update. The previous version of the Small 

Business Borrowers Bill of Rights required disclosure of annualized interest rates. An 

organization that is not already disclosing APRs may nonetheless complete this Attestation 

by checking this box, but must begin disclosing APRs as described here within 180 days 

of signing this Attestation. The organization agrees to provide evidence of disclosure of 

APRs within that time to into@responsiblebusinesslending.org. 

• Interest rate is defined as the scheduled or periodic financing cost, other than an upfront 

cost, expressed as a percentage of the outstanding principal and annualized. 

• APR is the annual rate that is charged for borrowing, expressed as a single percentage 

number. It includes fees as well as interest rate, and represents the actual yearly cost of 

funds. 

• Interest rates and APR are a percentage of outstanding principal balance, not of the original 

financing amount. 

• For lines of credit or other open-ended types of financing, rates must be calculated with 

reasonable assumptions about use, including assuming that the borrower draws the full amount on 

the origination date, and makes tbe minimum payments required. 

• If a rate is promotional or introductory, the term sheet or its equivalent should clearly state this, 

and how the rate could change in the future. 

D No Hidden Fees 

• Disclose all up front and scheduled charges. 

D Plain-English Terms 

• Describe all key terms in an easy-to-understand manner, including the Joan amount, total amount 

provided after deducting fees or charges, payment amount and frequency, total monthly payment 

amount if payment frequency is other than monthly, collateral requirements, and any prepayment 

1 The term "loan" and related terms used here such as "lending" are intended to be interpreted in the broadest sense possible so as to include loans, lines of credit, merchant cash advances, and similar products offered and provided to U.S. small businesses, whether or not such credit 

products are characterized legally or othenvise as loans. Similarly, the terms "lender" and ''borrower" are intended to be interpreted in the 

broadest sense possible so as to include, in the case of lenders, credit marketplaces that facilitate loans on behalf of !enders, cash advance 

providers, and a!! manner of persons providing loans to U.S. small businesses or evaluating the creditworthiness of such small businesses in 

connection with providing a loan, and, in the case of borrowers, all U.S. small businesses who seck or obtain a loan. 

The Responsible Business Lending Coalition 

v.ww responsiblebusinesslending org · info@responsiblebusmesslending_org 
84 

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0 Clear Comparison 

• Present all of these pricing and other key terms clearly and prominently, in writing, to the 

borrower when the loan offer is summarized for the borrower and whenever a term sheet, 

offer summary, or equivalent is provided. 

The Right to Non-AbusiveProducts 

0 No Debt Traps 

• If a borrower is unable to repay an existing loan, extend new credit only if due 

diligence indicates that the borrower's situation has changed, enabling them to repay a 

new loan. 

0 No "Double Dipping" 

Do not double-charge the borrower. When refinancing or modifying a loan with a fixed-fee as the 

primary financing charge, no fees are charged on the borrower's outstanding principal unless there 

is a tangible cost benefit to the borrower. 

0 No Hidden Prepayment Charges 

• If a borrower receives no savings, or limited savings, in early payoff, this information is 

disclosed in the original loan term sheet or offer summary, and again at the time of payoff. For 

financing with a fixed term, if a prepaying borrower owes a fixed repayment amount or a 

certain percentage of that amount regardless of when they pay off the financing, this 

information is disclosed as a prepayment charge. This charge is equal to the remaining 

financing charge owed at payoff, which is the cost the borrower is paying for the unused 

portion of the loan. 

0 Appropriate Product 

• Match loan product design and loan product use. If presenting a loan product as designed for one 

use, do not encourage borrowing behavior contrary to that use. For example, short-term products 

may be well suited for short term use, but not for long-term recurring use. Long-term products 

with prepayment penalties may be well suited for long-term use, but not for short-termneeds. 

0 Pressure Free 

• Allow potential borrowers to consider their credit options free from pressure or artificial 

time lines. 

0 Prompt Prepayment Assistance 

• If a borrower seeks to prepay a loan, provide any information required for the prepayment within 

two business days of the borrower's request. 

0 Responsive Complaint Management 

• If a borrower complaint is submitted, provide a confirmation of receipt in writing within five 

days when possible, and research and resolve the issue in a timely manner. 

The Responsible Busmess Lending Coalttion 

wvlw rcsponsib!ebusinesslending org · info@responsiblebusinesslendmg.org 
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0 Clear Notice Regarding Referrals 

• If referring a small business to another lender or broker, provide clear notice that a referral is 

being made. If the lender or broker is not already a signatory of the Small Business Borrowers' 

Bill of Rights and thus has agreed to clear disclosure and responsible lending practices, inform 

borrowers that as they move forward they should consider key aspects of any financing offered 

-the APR, the total payment amount owed monthly (even if payments are made daily or 

weekly), their ability to pay off any financing they take, and whether they may owe financing 

charges even if they pay off early. 

0 The provision of this "clear notice" statement is an addition of this 2.0 Update. An organization 

that is not already abiding by this requirement may nonetheless complete this Attestation by 

checking this box, but must begin abiding by this requirement within 180 days of signing this 

Attestation. The organization agrees to provide evidence of abiding by this requirement within that 

time to info@responsiblebusinesslending.org. 

The Right to Responsible Underwriting 

0 Believe in the Borrower 

• Offer financing only with high confidence that the borrower can repay its entire debt burden 

without defaulting orre-borrowing. 

0 Alignment ofinterests 

• Lenders who receive repayment directly the borrower's gross sales must also verify, through 

documents, data from third parties, and/or due diligence, that the borrower can repay all debt and 

remain profitable, or that it has a credible path to profitability. Lenders should not make loans that 

the borrower cannot truly afford, even if the lender can find a way to be repaid 

0 Right-sized Financing 

• Size loans to meet the borrower's need, rather than to maximize the lender's or broker's revenue. 

Seek to offer the borrower the size of loan that they need, rather than offering the maximum 

amount they qualify for. 

0 Responsible Credit Reporting 

• Report loan repayment information to major credit bureaus and consult credit data when 

underwriting a loan. Such reporting enables other lenders to responsibly underwrite the borrower 

and helps the borrower build a credit profile that may facilitate access to more affordable loans 

in the future. Lenders must inform the borrower and any guarantors if they intend to report loan 

repayment performance to guarantors' credit bureaus only in certain circumstances, such as after 

a default. 

The Responsible Business Lending Coalition 

\VW'.v.responsiblebusiness!ending org · info@responsib!ebusinesslending org 
86 

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The Right to Inclusive Credit Access 

0 Non-Discrimination 

• Respect the letter and intent of fair lending laws, including the Equal Credit Opportunity Act. 

Do not discriminate against small business owners on the basis of race, color, religion, national 

origin, sex, marital status, age, sexual orientation or identity, or any other protected class. 

Lesbian, Gay, Bisexual and Transgender (LGBT) small business owners deserve the same 

protection when seeking or obtaining credit. 

The Right to Fair Collection Practices 

0 Fair Treatment 

• Abide by the spirit of the Fair Debt Collection Practices Act and provide borrowers 

similar protections as described in that Act. 

0 Responsible Oversight 

• Diligently vet and oversee the collections practices of third-party collectors and debt buyers. 

• Do not work with collectors or debt buyers who fail to treat borrowers fairly. 

0 Accurate Information 

• Transmit accurate, current, and complete information about the loan to third-party collectors 

and debt buyers. 

The Responsible Business Lending Coalition 

www.responsiblebusinesslending.org · mfo@responsiblebusinesslending.org 
87 

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SMAll BUSINESS BORROWERS' 

BILL OF RIGHTS 

Small Business Borrowers' Bill of Rights (2.0 Update) 

Attestation Form and 

Attestation Worksheet for Brokers 

In order for a broker to become a signatory of the Small Business Borrower's Bill of Rights 

2.0, its chief executive must attest that it abides by all practices described in the Small 

Business Borrowers' Bill of Rights by completing both the Attestation Form and the 

Attestation Worksheet below. Once completed, the documents should be emailed to 

The Responsible Business Lending Coalition 

www.responsiblebusinesslending.org info@responsiblebusinesslending.org 
88 

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Summary of Attestation 

Small Business Borrowers' Bill of Rights (2.0) 

Attestation Form for Brokers 

By checking the boxes below, I affirm that my organization actively supports and adheres to the Small Business 

Borrowers' Bill of Rights (2.0 Update) and abides by all of the practices described in the attached Attestation 

Worksheet: 

0 The Right to Transparent Pricing and Terms 

0 The Right to Fair Treatment for Brokers 

0 The Right to Inclusive Credit Access 

Note: You must be able to truthfully check all three boxes to be deemed a Signatory of the Small Business 

Borrowers' Bill of Rights and thereby eligible to have your organization's logo appear on the Small 

Business Borrowers' Bill of Rights website, www.ResponsibleBusinessLending.org. 

Terms of this Attestation 

a. I have read and understand the Small Business Borrowers ·Bill of Rights (2. 0 Update). 

b. I have completed the attached Attestation Worksheet, indicating in writing that my organization abides by all 

of the enumerated practices. 

c. By completing this Attestation Form and attesting that my organization abides by all of the enumerated 

practices in the attached Attestation Worksheet, I consent to having this Attestation Form and my organization's 

logo posted on the Small Business Borrowers' Bill of Rights Website. 

d. I understand that this Attestation Form and my organization's logo may be removed from the Small Business 

Borrowers' Bill of Rights website if my organization does not complete and submit a satisfactory updated 

Attestation Form within one calendar year from the date of my signature below, and each successive year 

thereafter, or if my organization ceases to abide by this Attestation. 

e. I agree, on behalf of my organization, that my organization assents to and will be bound by the Terms of Use 

for the Small Business Borrowers' Bill of Rights website. 

f. Anyone with questions for my organization regarding this Attestation Form completed by my organization 

can contact the following individual (include name, title, email address, and phone number): 

g. I attest that the information above is accurate and represents the standard practices for all financing products and 

services offered through my organization to small businesses. Furthermore, 1 hereby certify that I am authorized 

to sign this Attestation Form on behalf of my organization. 

Organization Name 

Chief Executive Signature 

Chief Executive Name 

Date 

The Responsible Business Lending Coalition 

www rcsponsib!ebusinesslending,org · info@responsiblebusinesslending.org 
89 

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Insert offset folio 89 here 27254.198

Small Business Borrowers' Bill of Rights (2.0 Update) 

Attestation Worksheet for Brokers 

In order for an organization to become a signatory it must attest that it abides by the Small Business 

Borrowers' Bill of Rights (2.0 Update) by having its chief executive complete this worksheet by 

checking each box below indicating that his or her organization abides by each of the practices set 

forth below. 1 Questions regarding the form can be directed to infoi(Drcsponsihlcbusincss!cnding.org. 

The Right to Transparent Pricing and Terms 

0 Transparent Rate 

• Disclose the Annual Percentage Rate (APR) and the annualized interest rate if one is used. 

0 The disclosure of APR is an addition of this 2.0 Update. The previous version of the Small 

Business Borrowers Bill of Rights required disclosure of annualized interest rates. An 

organization that is not already disclosing APRs may nonetheless complete this Attestation 

by checking this box, but must begin disclosing APRs as described here within 180 days 

of signing this Attestation. The organization agrees to provide evidence of disclosure of 

APRs within that time to inf0@rcsponsiblcbusincsslcnding.org. 

• Interest rate is defined as the scheduled or periodic financing cost, other than an up front 

cost, expressed as a percentage of the outstanding principal and annualized. 

• APR is the annual rate that is charged for borrowing, expressed as a single percentage 

number. It includes fees as well as interest rate, and represents the actual yearly cost of 

funds. 

• Interest rates and APR are a percentage of outstanding principal balance, not of the original 

financing amount. 

• For lines of credit or other open-ended types of financing, rates must be calculated with 

reasonable assumptions about use, including assuming that the borrower draws the full amount on 

the origination date, and makes the minimum payments required. 

• If a rate is promotional or introductory, the term sheet or its equivalent should clearly state this, 

and how the rate could change in the future. 

D No Hidden Fees 

• Disclose all up front and scheduled charges. 

0 Plain-English Terms 

• Describe all key terms in an easy-to-understand manner, including the loan amount, total amount 

provided after deducting fees or charges, payment amount and frequency, total monthly payment 

amount if payment frequency is other than monthly, collateral requirements, and any prepayment 

charges. 

0 Clear Comparison 

• Present all of these pricing and other key terms clearly and prominently, in writing, to the 

borrower when the loan offer is summarized for the borrower and whenever a term sheet, offer 

summary, or equivalent is provided. 

The RespDns1b!e Business Lending Coalition 

W\"w.responsiblebusinesslendmg.org info@responsiblebusinesslending.org 
90 

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The Right to Fair Treatment from Brokers 

0 Transparent loan Options 

• Disclose all loan options for which the borrower qualifies through the broker's services, 

emphasizing the lowest APR option, and disclose all lenders to which the broker sends 

loan applications on the borrower's behalf. 

0 Transparent Broker Fees 

• Disclose all compensation paid to the broker, and all charges that will be paid directly or 

indirectly by the borrower, whether paid up front or financed in the loan. 

0 Transparent Results 

• Post clearly and prominently on the broker's website the anonymous and aggregated results 

of borrowers who obtain financing through the brokers' services, in terms of APR and 

financing product. 

0 Please write here a URL for where this information can currently be found on your website, as of 

the date of signature: 

An organization that is not already disclosing anonymous and aggregated results of borrowers who 

obtain financing through their services may nonetheless check this box, but must present evidence of 

this disclosure on its site along with the URL to info!alresponsiblebusinesslending.org within 180 

days of signing this Attestation. 

0 Empower Borrowers to Make Informed Financing Decision 

• Educate the borrower on each loan option and ensure that the borrower 

reasonably understands the cost and terms as well as the pros and cons of 

financing decisions before they sign a loan document. Brokers should use tools that 

help the potential borrower comparison shop, including A PRs and loan calculators. 

0 Disclosure of Conflicts of Interest 

• Disclose any conflicts of interest, the broker's fee structure, and any financial incentives they 

have, including whether the broker receives higher fees for brokering certain loans. Brokers who 

are paid higher fees with certain lenders, loan types, or terms other than the size of the loan, may 

not state they are acting in the best interest of the potential borrower. 

0 No Fee for Failure 

• No fees can be charged to the potential borrower if the broker is unable to find them a loan and 

if the borrower does not accept a loan secured through the broker's services. 

0 Responsive Complaint Management 

• If a complaint is submitted, provide a confirmation of receipt within five days and in writing, 

when possible, and research and resolve the complaint in a timely manner. 

The Responsible Business Lendmg Coalition 

www.responsiblebusinesslending.org · info@responsib!ebusiness!ending.org 
91 

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The Right to Inclusive Credit Access 

0 Non-Discrimination 

• Respect the letter and intent of fair lending laws, including the Equal Credit Opportunity Act. Do 

not discriminate against small business owners on the basis of race, color, religion, national 

origin, sex, marital status, age, sexual orientation or identity, or any other protected class. 

Lesbian, Gay, Bisexual and Transgender (LGBT) small business owners deserve the same 

protection when seeking or obtaining credit. 

1 The term "loan'' and related terms used here such as "tending'' are intended to be interpreted in the broadest sense possible so as to include loans, lines of credit, merchant cash advances, and similar products oftCred and provide(! to U.S. small businesses, whether or not such credit 

products are characterized legally or otherwise as loans. Similarly, the terms ''lender" and ''borrower" are intended to be interpreted in the 

broadest sense possible so as to include, in the case of lenders, credit marketplaces that facilitate loans on behalf of lenders, cash advance 

providers, and all manner of persons providing loans to U.S. small businesses or evaluating the creditworthiness of such small businesses in 

connection with providing a loan, and, in the case of borrowers, all U.S. small businesses who seek or obtain a loan. 

The Responsible Business Lending Coalition 

W\.VW.responsiblebusincsslending.org · info@responsiblebusinesslending.org 
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Signatories 

The following lenders, brokers, and marketplaces have taken a stand for small 

businesses by attesting that they abide by the Small Business Borrowers' Bifl of Rights. 

I 

Small Business Borrowers' Bill of Rights- Signatories 

November 2017 
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BOND STREET 

• 

• 

BUSINFSS CENTER 

FOR NEW AMJ:RICANS 

Small Busin~ Finance 

Capital j(Jr Opportunity and Change 

C 

'

,<,;'' D s COMMUNITY ~ ENTERPRISE ,_. DEVElOPMENT 

-- St::RVICES 

CITYFIRST 

ENTERPRISES 

Small Business Borrowers' Bill of Rights - Signatories 

November 2017 
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Common)( Capital l.OCAL INV£STMENT SMA.R£0 FUTI.HH£ 

Community 

Capital 

New York 

Lyle 

Group 

£2efa!e!lin~f 

The ,J 

Credit ~\Junction~ 

Small Business Borrowers' Bill of Rights- Signatories 

November 2017 
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finvoi 

@ Funding Circle 

funding societies l modolku 

··Cf1>ITAL 

{;"'' H../ 

Halo Business Finance 

THE INTERSECT • FUND 

Small Business Borrowers' Bill of Rights- Signatories 

November 2017 
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LendingCiub 

len \ h ~ 

ter 

MarketStreet 

mission driven 

finance 

Small Business Borrowers' Bill of Rights - Signatories 

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Business Lending & learning 

MULTIFUNDING 

OBDC SMALL BUSINESS FINANCE 

investor 

PACifiC~ COMMUNITY•VENTURES 

Small Business Borrowers' Bill of Rights- Signatories 

November 2017 
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OUOTE·2·FUN[) 

SUPPORT CENTER 

Wacif 

~" WOMEN'S 

ECONOMIC 

VENTURES 

Working 

Solutions 

Small Business Borrowers' Bill of Rights- Signatories 

November 2017 
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November 2017 
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Endorsers 

These organizations do not provide financing services to small businesses but care 

deeply about responsible business lending and actively support the Small Business 

Borrowers' Bill of Rights as endorsers. 

American Independent 

Business Alliance 

California 

Association for 

Micro 

Enterprise 

Opportunity 

Calvert 

Foundation· 

Small Business Borrowers' Bill of Rights- Endorsers 

November 2017 
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I 

CNHED 

CREDIT 

BUILDERS 

ALLIANCE 

EVOLUTION, 

CAPITAL MANAGEMENT 

HUMAN BUSINESS 

]EDf 

Small Business Borrowers' Bill of Rights - Endorsers 

November 2017 
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lp 

THE 

LAW 

PRCJ.JECT 

LENDING f\lf 

MARKETPLACE 

LENDING ASSOCIATION 

NATIONAL 

LEAGUE 

ofCITIES ._ 

Small Business Borrowers' Bill of Rights- Endorsers 

November 2017 
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Small Business Borrowers' Bill of Rights- Endorsers 

November 2017 
104 

Æ 

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