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Let’s prevent a repeat of the mortgage meltdown for small business owners

Since the mortgage meltdown, banks have tightened their lending, including for small businesses and especially for small business owners of color. Indeed, access to capital is a serious problem for mom-and-pop stores. Non-bank financial technology (fintech) lenders have sprung up in the vacuum, promising convenient applications, fast decisions, and easy access to capital. However, the opaque (and often predatory) rates and terms and questionable underwriting by some of these lenders should give considerable pause to anybody concerned about the health of small businesses today.

When the U.S. Treasury Department last year asked for input about online marketplace lenders, a number ofstakeholders emphasized the importance of “responsible innovation,” but what does being responsible mean? This isn’t an academic question- the last time “innovation” entered the financial marketplace, we got toxic subprime mortgages, which had a tremendous and disproportionately negative impact on communities of color. Consumers and advocates are ringing the alarm again, this time about predatory small business lending. How will regulators respond? Hopefully they won’t wait until the damage is done and businesses and lives are wrecked.  

{mosads}Small businesses are often key drivers of wealth and job creation, especially in communities of color, but they can’t be if predatory loans threaten their viability. Lenders and policymakers alike too often forget that most small businesses are owned and run by everyday people, who need, deserve and benefit from consumer protection laws that safeguard their personal finances from predators. They should get no less when their business is at stake, especially since they are often required to personally guarantee small business loans. Families who weren’t protected against subprime mortgages were the primary victims of the mortgage meltdown. Currently, there is a patchwork of laws that cover some fintech lenders; however, even these limited laws largely exclude small business lending. To avoid a repeat of the mortgage meltdown, small business lenders need to be regulated in the same way other lenders are, and bad actors need to be stopped.

Consider the story of Jason Berry, a San Diego small business owner who needed capital for his auto repair chain. After being turned down by Wells Fargo, he turned to a business advance, a loan-like product that required payment via six percent of his daily credit card receipts.  Berry regretted the move within 30 days. While he knew six percent of his daily receipts would go to the loan payment, he couldn’t predict or control the amount of his daily receipts, so he couldn’t plan for or afford to pay other bills. Fortunately, he was able to refinance the debt with a Community Development Financial Institution (CDFI) that reduced his interest rate from about 39 percent APR to a far more responsible, safer, and sustainable small business loan at seven percent APR. Many small businesses struggling with predatory loans are not as fortunate as Berry, and are stuck in fintech loans at even higher interest rates.

In a new study, Opportunity Fund looked at 104 small business owners struggling with these types of loans. Borrowers were paying a shocking average of 94 percent APR; one small business owner was paying 358 percent.  A recent analysis of small business fintech loan terms by Woodstock Institute found that junk fees tacked onto fintech loans averaged $795, and all loans studied that were up to 200 days had effective interest rates of 100 to 367 percent. It seems the only innovation is the increasing convenience with which non-bank lenders are ignoring lending laws that banks currently have to follow.

The Consumer Financial Protection Bureau (CFPB)’s authority to prosecute Unfair, Deceptive, or Abusive Acts and Practices makes it an obvious choice as the designated regulator to level the playing field and provide oversight, supervision, and enforcement of rules for small business lenders.  Moreover, CFPB will be writing rules under which lenders will be required to collect and report information concerning credit applications made by women-owned, minority-owned, and other small businesses. In the same way that the Home Mortgage Disclosure Act created transparency into who was getting mortgages (and who wasn’t), these small business rules will help facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and other small businesses. This makes the CFPB uniquely well-positioned to identify concerning trends and take action against bad actors.   

Starting a small business and keeping it running is challenging enough. Small business owners shouldn’t also have to be on the lookout for modern day loan sharks disguised as “fintech innovators.”

Paulina Gonzalez is the Executive Director of the California Reinvestment Coalition. Amanda Ballantyne is the National Director at Main Street Alliance. 

The views expressed by authors are their own and not the views of The Hill.


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