We protect individuals against predatory lending practices – why not small businesses too?
Despite two extraordinarily difficult years for small businesses in our country, we see signs of resilience and optimism – with most businesses reopening after temporary closures and an unprecedented pace of new business creation. The latter, however, may be partly due to workers seeking alternatives to the lack of good options in salaried labor markets.
At some point, these new and recovering businesses will need new injections of funding. The question is whether they will be able to access this capital and whether the types of capital they can tap into will support or hinder their growth and recovery.
Commercial bank lending is down, which is not unusual after a recession or economic shock. Commercial lenders reviewing small business financial statements for 2020 and 2021 would struggle to determine if a business is ready and able to grow and thrive. But it’s not just a matter of the pandemic. Banks have always been reluctant to lend to companies that are less than two years old. And small business loans under $250,000 had been declining for decades, largely because these loans generate little or no profit for the banks.
The lenders who step into this credit vacuum are non-bank lenders. These take many forms — fintech companies; mission-driven community development financial institutions; large payment or e-commerce companies; and commercial lenders offering products such as factoring or cash advances to merchants. In assessing whether these lenders are helping small businesses as they seek to recover and grow, the most important factor is not the type of institution they are, but the products they offer and the practices they use.
Predatory small business lending has a long history in the United States, often under the guise of “helping” those on the margins (a motif in films like “It’s a Wonderful Life” and “The Godfather “). Predatory lenders, especially in the digital age, are not as easy to recognize as they are in the movies. Before the pandemic, there was a rapid growth of “new” lenders offering products with high double or triple digit annual percentage rates, with monthly payments often double what the business can affordand sometimes using high-pressure collection tactics when borrowers have fallen behind on their products. the Responsible Business Lending Coalition — of which the Aspen Institute is a founding member — has followed these practices and worked to identify and advocate for policies that help ensure small businesses access fair and responsible financing.
These lenders appear to have disproportionately targeted business owners of color — not surprising given that small businesses have historically had the hardest time accessing capital. Why are small businesses in general and entrepreneurs of color targeted by predatory lenders? Because currently, small businesses don’t have the protections against predatory lending that consumers have become accustomed to, such as the transparency and reporting requirements that inform Fair Lending.
Some simple steps could expand access to capital while protecting small businesses. This Thursday, the Subcommittee on Consumer Protection and Financial Institutions of the Financial Services Committee of the United States House of Representatives is organize a hearing on small businesses, big impact: securing the share of small businesses and minority-owned businesses in the economic recovery. The hearing will likely cover two policy efforts that could play a critical role in ensuring small businesses — including those owned by business owners of color — can access fair and responsible credit.
A policy involves the implementation of an existing law: Dodd-Frank Section 1071. Currently, there is no comprehensive information on how much small business loans are served, who is served, or on what terms. Section 1071 directs the CFPB to collect small business credit data, and the agency is about to formalize its rules and procedure for doing so. The RBLC strongly supports the CFPB’s approach to date, which we believe is conducive to innovation. But we strongly recommend that the agency include APR annual percentage rate data collection among the pricing metrics it requires, and that reporting requirements include all types of corporate finance, including factoring .
The second step is to pass the Small Business Loans Disclosure Act 2021introduced in November by House Small Business Committee Chairwoman Nydia Velázquez (DN.Y.) and the senator. Bob MendezRobert (Bob) MenendezSenators look to Plan B amid Russian sanctions impasse To counter Russian gas, look to the Eastern Mediterranean Why the SALT deduction debate matters MORE (DN.J.), senior member of the Senate Banking Committee. It is surprising to many that commercial (or small business) loans are not subject to the same lending truth requirements as consumer loans, mortgages and credit cards. The bill would require standard disclosure of rates, fees and annual percentage rates (APRs) for small business finance products, and provide the Consumer Financial Protection Bureau with expanded ability to oversee small business loans.
Some opponents of the bill claim that because they offer short-term products (eg, less than a year), disclosing the APR doesn’t make sense or isn’t feasible. But we already require disclosure of APRs on credit cards, which are often used for short-term financing (and credit card lending has increased dramatically since the CFPB introduced new disclosure requirements a decade ago). years). The bill would not prohibit lenders from sharing other pricing metrics that small businesses might find useful. But it would ensure that all financing offers include the only metric that allows small businesses to make apples-to-apples price comparisons. Ultimately, having this information will allow business owners to make the most informed choices among the credit offers they receive.
Our economy and our communities will recover stronger from the pandemic if new and small businesses are able to access the financing they need to adapt, rebuild and grow. But not all funding is the same – some can spur growth and help business owners manage volatility, while others can drain cash flow and strip away wealth. Small businesses are essential to local, state and national economies. They deserve the same basic standards of transparency and fairness, and protection from bad actors, that American consumers have now. Let’s put in place the policies small businesses need to access capital that will help them recover, not bury them deeper.
Joyce Klein is director of the Business Ownership Initiative at the Aspen Institute and chair of the executive committee of the Responsible Business Lending Coalition.