As a panelist at the Consumer Financial Protection Bureau (CFPB)’s symposium earlier this month in Washington, I came to deliver a message on behalf of millions of American business owners who find themselves in one of the least-protected and opaque corners of the financial services’ landscape: small business lending.
Nearly 30 million businesses in the United States are small or one-person operations. Economically, they account for 99.7 percent of all employer firms, create 64 percent of net new private-sector jobs; employ 49 percent of the workforce; and deliver 46 percent of private-sector output.
It is well established that these celebrated entrepreneurs — whether new, emerging or well established — have longstanding difficulties accessing responsible and affordable capital. Indeed, when the bipartisan Senate Entrepreneurship Caucus recently introduced the Enhancing Entrepreneurship in the 21st Century Act, the bill’s authors pointed to acquiring capital as a persistent roadblock to a thriving small-business sector. And — not surprisingly, this is particularly true for minorities, women, veterans and other underserved populations.
While speaking at the CFPB, I wanted regulators to recognize the harsh realities of what happens to many of these entrepreneurs when they finally do acquire capital in this lopsided market. Unfortunately, banks and conventional lenders tend to ignore the $10,000 to $50,000 loans the majority of small businesses seek. As a result, the poorly regulated and very high-cost lenders step in to occupy the vacuum conventional lenders leave behind.
As the CEO of a Silicon Valley Community Development Financial Institution (CDFI) specializing in small business loans for underserved populations, and as a former Consumer Advisory Board member of the CFPB, I’ve seen firsthand the effects that too-tight conventional credit and too-loose unconventional lending can have on small businesses. With unregulated lenders offering fast-and-easy money at rates averaging 94 percent APR, and an army of loan brokers sitting in boiler rooms a la “The Wolf of Wall Street,” I’ve seen credit scores ruined, homes lost and businesses fold. Individual consumers have greater protections than the nation’s small-business owners — yet they are run by the very same households.
One family losing its third-generation donut shop or shoe repair business is too many. I implore the nation’s top cop on financial protection to take action on the ways our nation’s small businesses — America’s moms and pops — are suffering at the hands of too few good actors and too many predators among the country’s small business lenders.
And I offer a remedy: Implement consumer data collection, to include pricing, for all types of commercial loans — from conventional banks, to merchant cash advances and online lenders — even from CDFIs like the one I lead.
This is hardly a radical notion. It’s already required by Section 1071 of the Dodd-Frank Act in certain circumstances involving credit applications made by women- or minority-owned businesses and small businesses. And although the CFPB’s charter already stipulates that it collect data on small-business lending, in the nine years since its original charter, it has yet to begin the process of writing regulations to do so.
There will always be some who will argue that requiring lenders to collect additional data will constrict lending, increase costs and reduce the flow of money. What about the existing costs to small businesses that can’t access affordable capital? They bear a disproportionate burden. It makes sense to quantify the cost to the industry but costs of doing nothing should be quantified, as well.
The mortgage industry has already managed to collect this type of data and recovered from the meltdown of the Great Recession. Surely, the commercial lending sector can also manage to report data on their activities. Section 1071 would help encourage the market to address the lack of access to affordable capital and the rise in irresponsible lending. Properly implemented, Section 1071 could also be a model for a market-based, pro-innovation approach to regulation.
We cannot be a nation that purports to venerate small businesses, while at the same time ignoring the inequities they face accessing affordable capital. In addition, we cannot be a nation that touts the insights of data if we’ve essentially put small business lending in a category that says “nothing to see here.”
There is plenty to see here. As we all know, we cannot manage what we cannot measure. And sunlight is the best of disinfectants.