Fintech and Transparency in Small Business Lending: Testimony of Lenwood V. Long, Sr., to the House Small Business Subcommittee on Oversight, Investigations, and Regulations

President / CEO of the Alliance, Lenwood V. Long, Sr., submitted the testimony below delivered to the House Small Business Subcommittee on Oversight, Investigations, and Regulations:


Chairman Phillips, Ranking Member Van Duyne and distinguished members of House Small Business Subcommittee on Oversight, Investigations, and Regulations Subcommittee, my name is Lenwood V. Long, Sr., President and CEO of the African American Alliance of CDFI CEOs ( “the Alliance”). The Alliance is a membership-driven intermediary organization of over 60 Black-led CDFIs that aims to: build the capacity of member organizations; build bridges to economic stability, well-being, and wealth for Black individuals, families, and communities; and build power in Black communities by challenging and influencing financial sectors to operate more equitably. As advocates for public policy and support for underserved communities, we are uniquely positioned to understand and engage the communities we serve.

Mr. Chairman and Ranking Member, I would like to thank you and the subcommittee for your commitment to ensuring fair and transparent fintech industry practices that protect our entrepreneurs as they pursue critical capital for their small businesses.

As we all know, minority-owned businesses are critical to job creation and preservation in chronically underserved communities. In fact, more than 2.2 million jobs are held by persons who find themselves either directly or indirectly employed by National Minority Supplier Development Council-certified Minority Business Enterprises (MBEs).  It is often difficult for many minority-owned businesses to expand and grow due to lack of financing. The 2021 Small Business Credit Survey found that Black-owned firms that applied for traditional forms of financing were least likely to receive all the financing they sought – 40 percent of white-owned firms received all the financing they sought, compared to 31 percent of Asian-owned firms, 20 percent of Hispanic-owned, and only 13 percent of Black-owned firms. This trend persists even amongst firms with comparable good credit scores. Often, Black businesses will rely on financing from alternative institutions such as minority-led CDFIs or MDIs. These institutions, which lend to Black communities at a greater rate than that of white-led and traditional financial institutions, specialize in lending to individuals, organization, and businesses in under-resourced communities. As evidence, research conducted by the Association Enterprise Opportunity showed that the wealth gap between Black and white business owners (3:1) is significantly lower than the overall Black/white wealth gap (13:1), a testament to the effectiveness of these minority-led institutions in reaching undercapitalized communities of color.

A more recent development has been the rise of financial technology (fintech) lending in the minority-owned small business space. A major reason for fintech’s late success is that they, relative to traditional banks, CDFIs and MDIs, are arguably better equipped to make quick decisions regarding customer creditworthiness and offer a more seamless and efficient customer experience. Despite fintech’s role in expanding access to credit for small business, these firms present unique challenges for prospective borrowers. For instance, many fintech lenders provide borrowers with scant information about promoted loan products, often omitting critical information regarding rates, fees, and repayment schedules. Ambiguous or opaque product descriptions makes it extremely difficult for borrowers to accurately access the cost of a particular fintech product offering, thus leaving borrowers vulnerable to irresponsible lenders. Further, some fintech lenders promote predatory repayment methods, such as Merchant Cash Advances (MCA). MCAs allow the fintech lender to receive a fixed percentage of future sales until the loan is repaid; however, MCAs are often accompanied by high APRs and daily repayments, resulting in an unmanageable debt cycle for the small business owner. In the most unfortunate cases, these repayment mechanisms can result in the closure of the small business. To that end, the Alliance would support efforts to extend the federal Truth in Lending Act (TILA) APR disclosure requirement to small business owners who apply for loans and financial credit products. Finally, fintech underwriting lacks the level of transparency exercised by traditional banks, CDFIs and MDIs. Specifically, information collected by fintech lenders in underwriting small business loans could be based on race or gender, characteristics protected by fair lending laws. In turn, this could lead to small business applicants being unfairly denied or offered products at a higher APR.

Mr. Chairman and Ranking Member, I thank you for this opportunity to provide written testimony on this important topic. The Alliance believes that small businesses are America’s backbone, employing nearly half of all employees and accounting for 44 percent of economic activity in the U.S. The Alliance believes that fintech can be a positive force in expanding access to capital to small business owners who have long been excluded from or marginalized in our capital markets. However, it is imperative that the continued growth of this promising, yet nascent, industry is not stymied by a few bad actors that utilize exploitative methods to take advantage of unsuspecting entrepreneurs. Rather, there should be a commitment to making fintech a safe, predictable, and cost-effective means of finance for our nation’s entrepreneurs. We look forward to working with you in meeting that goal.