Congressman Cleaver Announces Initial Findings of Small Business Fintech Investigation

Press Release

Congressman Emanuel Cleaver, II announced the initial findings of his Small Business Fintech investigation launched in June. The initial findings underscore the need to safeguard against discriminatory pricing on loan products for minority-owned small businesses.

According to a Federal Reserve survey, roughly one-fifth of small businesses seek opportunities to raise capital from online lenders. Initial findings suggest that online small business loans are more likely to be utilized by minority-owned businesses. Many so-called "FinTech" lenders target these entrepreneurs with various products, including multi-year installment loans, as well as small business payday loans secured by credit card receivables. While small business loans are exempt from many of the protections afforded to consumers, these lenders are required to comply with anti-discrimination laws, such as the Equal Credit Opportunity Act.

"The initial findings are clear as day, and my investigation suggests that minority entrepreneurs are more likely to borrow from online fintech lenders," said Congressman Cleaver. "However, we need to further understand whether lenders are aggressively targeting or offering higher interest rates relative to borrower credit risk."

"Here is the nugget of truth: Creating jobs and wealth in our country, while also reducing inequality, is impossible without fair and transparent small business lending," he added. Congressman Cleaver launched the investigation by issuing information requests to a range of online lenders. See the announcement and the letters sent to Fintech companies here.

The initial findings include:

Fintech loans are more likely to be used by minority-owned businesses: Data from the information requests suggest that online small business loans are more likely to be utilized by minority-owned businesses, compared to the small business lending market more broadly. While respondents noted that data on race was not specifically collected in the application process, some firms conducted backwards-looking economic analysis to estimate the racial makeup of their borrowers.

Consumer credit reports used for small business loan underwriting: The investigation determined that the industry is utilizing a borrower's consumer credit report, even though the product is a small business loan. The information requests suggest that the consumer's credit report can help to verify the borrower's identity, as well as offering additional information about their ability to repay.

Limited adoption of safeguards against discriminatory pricing: While some respondents engage in fair lending analysis to guard against algorithmic bias against minorities and other protected classes, some respondents did not offer any detail on how they guard against discriminatory pricing.

Rely on forced arbitration provisions: Respondents noted that they include provisions in loan contracts that forbid borrowers from taking the lender to court in cases where the lender may have broken the law.

Third-Party Verification: Some respondents reported the utilization of third-party assessment firms to determine if their lending or underwriting practices were fair and transparent.

Congressman Cleaver will continue to seek further information from respondents that withheld key information from the investigation. Additionally, he will seek to better understand how borrowers are treated in times of distress, to include whether lenders offer loan modification or simply pursue borrowers in litigation.

Congressman Cleaver will continue to advocate for the Consumer Financial Protection Bureau's oversight of this industry, including the completion of the small business data collection rulemaking, that will help law enforcement deter and detect small business lending discrimination.

"I will also urge the U.S. Department of Treasury to provide guidance to Fintech firms on how they can use better practices to promote investment in lending to diverse communities," said Congressman Cleaver.

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