Should We Be So Focused on Lending Regulations?
April 29, 2016
As an industry, we may be misconstruing lending regulations. Regulations have been the focus of conferences, industry news feeds, and blog posts. While we should keep an eye on regulations, they are just one indicator when trying to plan out the future of a lending company. What’s more important, regulations are a lagging indicator.
Regulations Are a Result of Previous Events
Regulations are notoriously reactive. Not always, but for the most part. For example, the Sarbanes Oxley Act of 2002 was the result of business practices of the 90s (thanks Enron!). Equally, the Dodd-Frank Act of 2010 was the result of business practices in 2004 through 2008 (derivatives of derivatives anyone?).
The point is that you can see regulations coming from years away. So they shouldn’t come as a surprise. We shouldn’t be surprised that the CFPB is aggressively trying to regulate the auto financing industry, or that Peer to Peer and other online lenders are next.
Regulations Are Reactive
In general, regulations in business are an after-thought rather than a coherent plan for the businesses and industries involved. They represent the result of perceived business practices and popular beliefs. The key here is that they are a response to something that already happened. This is the reason many are puzzled by the media's focus on regulations. We knew they were coming.
Regulations Take A Long Time to Go Live
The other point to consider about regulations is that you can usually spot them years before they happen. For example, with the Dodd-Frank Act, it took two years from the start of the Great Recession to the Act becoming law. The examination procedures that are affecting large non-bank auto lenders via the Consumer Finance Protection Bureau (CFPB) didn't get published until last year - five years after the creation of the CFPB.
No Regulation is the Best Regulation
Peer-to-Peer Lending (P2P for short) may be the next target for regulation. Some P2P lenders are proactively taking steps to guide the direction of regulation. Even more, P2P lenders are constantly evaluating their own practices regardless of future regulation. That's the beauty of leading in creating best practices for lending. You become the case study on which lawmakers base new regulations.
Still, the best regulation would be no regulation – a lending industry that holds itself to a higher standard. The ideal scenario is one where lenders proactively review their practices for the effect they have on the entire eco-system. It’s not that we need to be altruistic, but that we need to proactively think of the business environment we are creating.
So what are the leading indicators for the lending industry?
If regulations aren't a leading indicator for the lending industry, what are the indicators your business uses for direction in future lending trends - in terms of opportunities and threats? We would be interested in your thoughts in the comment section.