Misconceptions about online lending

For millions of middle-class wage-earning Americans, online borrowing has become an essential part of their financial lives.  Yet, there are growing misconceptions that threaten this lifeline.

Let’s start by understanding the need.

A recent survey by bankrate.com found that 63 percent of Americans did not have $1000 in savings for an unexpected or emergency expense.  Adding to this problem, around 50 percent of the population have FICO© Scores under 700, making it difficult or impossible to obtain a personal loan from a conventional banking loan program.  A majority of American wage earners are living paycheck to paycheck with no recourse when there is a sudden need for a large medical co-pay or new furnace.

{mosads}To address similar issues in 2008, the Federal Deposit Insurance Corporation (FDIC) launched a two-year pilot project to foster small-dollar consumer-friendly bank lending.  Nationwide only 28 banks took part and the program did not foster widespread adoption.

Today, however, Avant and companies like it have stepped in to offer access to this kind of service, within the FDIC guidelines: low fees, fast and streamlined underwriting and interest rates below 36 percent.  In addition to providing a way to pay for unexpected or emergency expenses, these loans offer consumers a way to consolidate high-interest, variable rate credit card debt – creating a definite path for paying off debt.  The goals envisioned for the FDIC’s pilot program have been ultimately met — by online lending platforms like Avant and its peers.

But misconceptions abound. 

One is that online lending is the Wild West: unregulated, not subject to oversight and risky for consumers and the country.

To the contrary, online lending platforms fall under the same lending regulations as their brick and mortar counterparts.  From a regulatory perspective, the origination of loans through an online platform does not break new ground.  Additionally, Avant takes the law, and its responsibilities and obligations under the law, very seriously, dedicating significant resources to its legal and compliance departments.

All unsecured loans offered through the Avant platform in the US are originated by WebBank, an FDIC insured and supervised state-chartered industrial bank in Utah.  WebBank is subject to the same array of Federal and state banking statues, rules and procedures, as its peers, whether online or brick and mortar.  WebBank accesses the Avant platform to make loans, by using Avant as its servicer, and therefore the FDIC’s guidance on and supervision of the bank’s third-party relationships applies.

Through this program, the credit needs of customers nationwide are met under a framework that ensures consistent and ongoing regulatory oversight.  The fact that loans are issued online does not eliminate or lessen the requirement to comply with all of the applicable regulations, including the Equal Credit Opportunity Act, Truth in Lending Act, Fair Credit Reporting Act, Fair and Accurate Credit Transactions Act, and many others.  In fact, in certain circumstances, online and computerized systems may make controls significantly easier to achieve.  For example, uniform automated underwriting and servicing processes help assure that unauthorized decisions are not being made by individuals, as is possible in brick and mortar environments.

Undeniably, online lending comes with new challenges, requiring modifications to procedures used by brick and mortar lenders which cannot be replicated through the internet.  One such area is fraud and identity verification.  Avant employs a team which uses proprietary techniques to detect fraud and suspicious activity and comply with government regulations on terror financing and money laundering.  We regularly assist in preparing Suspicious Activity Reports for the Treasury Department’s Financial Crimes Enforcement Network and Avant complies fully with all relevant aspects of the Bank Secrecy Act.

As in brick and mortar banks, applicants on the Avant platform are checked against the Treasury Department’s Office of Foreign Assets Control Specially Designated Nationals list.  These checks continue on a regular basis even after a consumer’s loan is funded.  Again, using the internet as a forum for loan applications does not modify or reduce a lending platform’s obligations under applicable law.

Another misconception is that online lending is somehow less advantageous for borrowers.

Online lending levels the playing field for customers and erases the hurdles of time, calendar and geography.  This is especially important in reaching underserved communities and rural areas. 

Borrowing online means customers don’t have to travel to a bank, stand in line, sit in a waiting area, or go hat in hand to meet a loan officer, a time consuming process which can be multiplied many times over if the customer is interested in obtaining quotes from a variety of potential lenders.  Like booking an airline ticket or hotel room, being able to easily compare loan offerings 24/7 via the internet gives consumers more choice and drives competition between online lenders.  Online lending through Avant helps lower the cost to the borrower and provides fast and efficient decisions in a transparent and fair manner.

Online lending platforms like Avant offer a service that many brick and mortar banks are not providing, in a competitive environment that fosters customer choice, all under consumer protection frameworks built over decades around credit, collections and communications. 

We welcome a dialogue: lenders, regulators, lawmakers and consumer advocates. The government has an abiding interest in protecting consumers and ensuring they are treated fairly, an interest which coincides with the interests of Avant and many other online lending platforms. 

Reality, and not misconception, is a good starting place for the conversation.

Goldstein is CEO and co-founder of Avant, an online marketplace lending platform that utilizes advanced analytics to quickly and responsibly lend to middle-class borrowers.