Rules for mortgage applications will be set to tighten, Finance Minister Bill Morneau announced Friday – including the establishment of longer term stress tests on the finances of prospective borrowers, designed to insulate against changing interest rates. The changes have triggered a secondary flurry of discussion about alternative lending and its role in the marketplace.
Many news outlets including CBC and the Huffington Post have leapt to offer warnings about the so called “shadow” lending space, and the potential for the creation of excessive debt that might bubble and burst as the American market did in the late 2000s. However, the kinds of criticisms that have led the commentary in the wake of Morneau’s announcement remain oblivious to the significant changes and evolutionary approaches taken by alternative lenders to improve their models since the turn of the 2010s.
Improvements in risk management, statistical population modelling, customer life cycle evaluation, and other tech-driven and cultural refinements to the alternative lending model have resulted in changes for the greater good of the marketplace, rather than in an expanded zone of consumer risk. The fear that alternative lenders are backed by “flighty” capital destined to evaporate from under their borrower base in the slightest market shift is becoming more and more antiquated, as alternative lending providers compete to secure stable funding from a variety of investor sources that are proliferating in Canada and abroad. Look, for example, to the increasing numbers of Canadian fintech and alternative lenders moving to Series A financing and attaining global recognition – gaining the trust and the backing of influential incubator and investor platforms whose goal is to democratize and improve conditions for borrowers challenged by the big-bank lending market.
Popular concern over the alternative lending space also stems from the relative lack of regulation at the government level applied to alternative lenders, when compared to their major market peers. However, alternative lending is a space in which some degree of self-regulation already exists and is incentivized to continue. Lenders, of course, strive to minimize the potential for issuing bad debt to their clients, both for the sake of the wider marketplace and their own sustainability.
Alternative lenders have grown from what the Globe and Mail called “Joe Schmo” outfits into technically proficient, forward-thinking providers of capital for small businesses and individuals alike, with models designed to facilitate access to lending without creating dangerous risk. Increasing transparency and legitimacy of alternative lenders has moved the sector out of the “shadows” and into place as a viable option for the average consumer.