September 30, Re: Request for Information Regarding Expanding Access to Credit Through Online Marketplace Lending

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1 Ms. Laura Temel Attn: Marketplace Lending RFI U.S. Department of the Treasury 1500 Pennsylvania Avenue NW, Room 1325 Washington, DC Re: Request for Information Regarding Expanding Access to Credit Through Online Marketplace Lending Dear Ms. Temel: These comments are submitted on behalf of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness ( CCMC ). The U.S. Chamber of Commerce (the Chamber ) is the world s largest business federation, representing the interests of more than three million companies of every size, sector, and region. The Chamber created CCMC to promote a modern and effective regulatory structure for capital markets to fully function in a 21 st century economy. CCMC appreciates the opportunity to comment on the Request for Information ( RFI ) 1 issued by the Department of the Treasury ( Department ) regarding expanding access to credit through online marketplace lending. We are pleased that the Department recognizes the vital importance of ensuring that America s small businesses the backbone of our economy have access to affordable capital, and that the Department is committed to fostering a regulatory environment that facilitates job creation and economic growth; but, we are concerned that the Department s review is too narrowly scoped to create a realistic picture of the challenges and opportunities in this space. To that end, we write to emphasize three points: 1 See Notice and Request for Information, Public Input on Expanding Access to Credit Through Online Marketplace Lending, 80 Fed. Reg (July 20, 2015).

2 Page 2 The Department should recognize the importance of online small business lending, but consider it as part of a broader effort to expand small business access to credit; Small business access to credit has dried up in large part because new regulatory regimes have imposed new costs, and made banks more risk averse; and. The Department should recognize the need to fill the needs of small businesses access to credit by addressing the adverse impacts of these regulatory impacts and allowing for the market place to evolve through new innovative means of financing. The last five years has seen both an evolution, as well as significant headwinds in the small business lending market. The good news new entrants to the small business lending market have used technology and innovative funding arrangements to offer small businesses a wide range of product options and a new user experience. The bad news regulatory policies have fundamentally reshaped the traditional bank lending landscape, hurting those institutions ability to serve small businesses. The Department can help in both areas. Having a diverse ecosystem of sources of capital is a significant strength for the U.S. economy, and the Department has an opportunity to examine regulatory policy across the board to foster competition, innovation, and choice in this market without picking winners and losers. While oversight is needed to promote efficient capital markets, the Department should avoid erecting barriers that may slow or even prevent the development of technology in lending. Additionally, the Department should break down existing unnecessary barriers that are making it difficult for traditional banks to serve small businesses. 1. The Treasury Department Should Recognize The Importance Of Online Small Business Lending, but Consider It As Part Of A Broader Effort To Expand Small Business Access To Credit. The Department can and must help develop practical solutions to this significant drag on the present and long-term health of the American economy. The Department, it is true, does not itself control all of the regulatory levers that must be used to reinvigorate lending to small businesses. Nonetheless, the Department has a

3 Page 3 pivotal role in this area to coordinate and provide important leadership to the numerous agencies whose powers affect small businesses access to capital. With its broad mandate and long experience, the Department is particularly well situated to find common sense solutions that expand small business access to credit. Small businesses are the backbone of the American economy. 2 These 28 million main street institutions account for over half of all sales in the United States, 3 provide 55% of all the jobs in this country, and are responsible for 65% of all new job creation million microbusinesses categorized by the Small Business Administration as companies with one to nine employees alone provide 10.8% of all private-sector jobs. 5 The success of American small businesses and the success of the American economy thus go hand in hand. Small businesses in turn cannot succeed without access to the affordable capital necessary both to grow and to weather financial storms. Indeed, it is hard to overstate the importance to American small businesses of the credit that allows them to support their inventory, open additional locations, hire more employees, manage seasonal downturns, and otherwise push our economy and our nation forward. The growth of online lending to small businesses has been an important development in the last five years, increasing competition and giving companies new financing options. There are clear opportunities to reach and fund small businesses through innovative use of technology and data analytics. One study, commissioned by a small business marketplace lender, concluded that its first $1 billion in loans had generated $3.4 billion in economic activity and 22,000 new jobs. 6 We are sure that the Department joins us in welcoming this economic growth. 2 The Department extends its inquiry to cover online lending to consumers, but excludes loans that would be covered by proposals regarding payday loans and other consumer loan products that are contemplated by the Consumer Financial Protection Bureau. The lack of clarity regarding the scope of the Bureau s rulemaking makes it difficult to say with any certainty what consumer loans are properly within the scope of this RFI. We accordingly focus our comments on online lending to small businesses. 3 See, e.g., SBA, Small Business Trends: Small Business, Big Impact!, (providing small-business statistics). 4 See id. 5 See Brian Headd, SBA, The Role of Microbusinesses in the Economy (Feb. 2015), 6 Analysis Group, OnDeck Economic Impact Report (May 2014).

4 Page 4 Online lending, however, is only one of the various ways in which small businesses finance their launch, operations, and growth. And while we certainly do not believe that the Department should attempt to use this RFI to steer or shape innovation in this segment of the market, we would also encourage the Department and the various relevant regulatory agencies to widen their approach to this review, and pursue the larger goal of expanding small business access to credit. 2. Small Business Access To Credit Has Dried Up In Large Part Because New Regulatory Regimes Have Imposed New Costs and Made Banks More Risk Averse. Small business lending never has fully rebounded from the Great Recession. The history of the past five years has been sobering: Lack of access to capital has stifled growth: In 2013, the Federal Reserve Bank of New York reported that access to capital is a growth challenge for 36% of firms operating at a profit and 53% of firms breaking even. 7 New research shows that the country s rate of new business creation has dropped by more than 30 percent during the recession and has been excruciatingly slow to bounce back. The consensus among economists is that young businesses rather than small businesses in general represent the most reliable, consistent source of job creation. Small business historically creates about two-thirds of our nation s net new jobs. Small firms employ almost half of the private sector workforce, and they make up about half of our nonfarm gross domestic product. They are a major source of both innovation and economic stability, not to mention opportunity for upward mobility. Indeed, since the 2008 financial crisis, statistics have shown that for the first time, business destruction has outpaced business creation. 8 7 See Federal Reserve Bank of New York, Key Findings: Small Business Credit Survey (May 2013), 8 See U.S. Census Bureau, Business Dynamic Statistics; Kauffmann Index of Entrepreneurial Activity.

5 Page 5 Many small businesses cannot secure any credit: In 2014, a group of Federal Reserve Banks reported that a majority of small firms (under $1 million in annual revenues) and startups (under 5 years in business) were unable to secure any credit. 9 Regulatory changes have changed loan terms: A 2012 survey by the National Small Business Association found that: 10 o 57% of small businesses had been unable to find anyone to lend to them during the past four years. o Regulatory changes and changes in underwriting were the dominant causes of changes in loan terms offered to small businesses. Likewise, a 2012 survey of Florida banks reported that 72% of small business customers would see their products affected by the increased costs of compliance with Dodd-Frank. 11 Increased regulation has changed banks cost structures: A 2014 survey by the Mercatus Center reported that 90% of small banks had seen an increase in compliance costs since the passage of Dodd-Frank. 12 These statistics are borne out in the stories we hear every day from small businesses in every industry and market: auto repair shops that have given up on securing a line of credit, even though that means losing a chance to expand; or boutique retailers that find that their long-time lender no longer will extend them credit, even though business continues to thrive. These stories and yet others are far 9 See Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia, Joint Small Business Credit Survey Report 4 (2014), 10 National Small Business Association, Small Business Access to Capital Survey (July 2012), 11 See Hester Peirce et al., Mercatus Center, Working Paper: How Are Small Banks Faring Under Dodd-Frank? (Feb. 2014), /SESSION3_Peirce_Robinson_Stratmann.pdf. 12 See id.

6 Page 6 too familiar and each shares a common cause: the overregulation of financial institutions in the wake of the Great Recession. Three stories have been particularly common in the wake of the regulatory expansion over the past five years: First, banks have had to expend substantial funds to demonstrate compliance with counterproductive standards, whether imposed through formal rules, informal best practices, or expectations announced during supervisory examinations. Some smaller banks simply have been unable to afford these costs at their present scale and have stopped offering certain product lines or moved away from historic business practices. (For example, some banks have chosen to cease using alternative data, gathered during a long client relationship, in the underwriting process because of regulatory scrutiny of such nonstandardized practices.) And compliance costs have forced other banks to raise interest rates to make a product line financially viable, only to price themselves out of the market in the process. Second, banks that are subject to systemic regulation are required to reserve substantial funds to comply with capitalization requirements. As a result, affected banks have reported that they have less capital available for lending, including to small businesses. Third, banks have become risk adverse because of regulatory scrutiny. Of course, loans to small businesses are inherently risky just like every extension of credit. But that is not necessarily a bad thing in the larger context of our economy. Indeed, the ability of small businesses to shift their risk of failure to third parties is one of the foundational building blocks of entrepreneurial success. The bottom line of our members experience has been clear: regulatory barriers has harmed small business access to credit since the Great Recession, leaving countless deserving and prospering small businesses without access to the credit they need to succeed.

7 Page 7 3. The Department Should Expand Small Businesses Access To Credit By Addressing Unnecessary Regulatory Barriers. A broad consensus if not unanimity exists around the need to facilitate small business lending. Expanding small businesses access to affordable credit thus properly should be a core goal of the Department. Of course, the Department should not overstep the proper bounds of its role in undertaking this effort. The Department should not attempt to pick winners and losers in this lending market, nor should it presume to steer the course of innovation. The Department lacks both the necessary authority and expertise for such tasks. Instead, the Department should focus on the fundamental goal improved small business access to capital and advance policies that support all the various forms of lending that can help achieve economic growth and job creation. To meet this goal, the Department should seek, identify, and eliminate the unforeseen consequences of regulatory initiatives in order to foster competition among the variety of products in today s marketplace. In this manner, the Department will enable access to affordable capital while empowering small businesses to determine which products best fit their own needs. Furthermore, if the Department can make these changes, they will be fostering a regulatory environment that would allow for innovation and partnerships in the marketplace, thus creating a space for traditional and new actors to work together. The Department should facilitate efficient capital markets that can rationally make credit decisions and meet the demands of small businesses thereby ensuring long-term economic growth and job creation. Thank you for your consideration of these comments. We would be happy to meet with appropriate staff to discuss these matters further. Sincerely, Jess Sharp