Category Archives: AdviceOnLoan

Call for a Higher Minimum Wage Gets Stronger

By Ravinder Kapur

Workers in Los Angeles County and Washington, D.C., and employees of fast-food chains in New York State recently learned that they may soon be earning a minimum wage of $15 per hour as compared to the federally mandated $7.25. These developments have brought into focus the sharp divide among the American working population, who largely favor higher wages, and business interests who oppose it. Both sides of the minimum wage debate claim that their position is the one that ultimately benefits low-paid workers the most.

New York Times article points out that restaurant owners and other small businesses Restaurantsargue that higher minimum wages would push up their costs too much and force them to either lay off workers, automate operations or provide work for fewer hours, all steps that would be detrimental to workers’ interests. On the other hand, a higher minimum wage would give more disposable income to the lowest wage-earners resulting in increased spending and demand, which is exactly what the economy needs. This argument was fully explored in an earlier AdviceOnLoan article on this site.

The Economist argues that raising minimum wages is not the correct way to fight poverty. While they concede that minor increases in the minimum wage may actually be good for both workers and the economy, they are of the view that greater increases would result in higher unemployment with low-skilled workers finding no one to pay for their services. Additionally, their case argues that with the rapid pace of technological advances, it’s much easier for business owners to automate tasks and replace workers.

As the list of cities grows adopting minimum wage standards greater than the federal minimum wage, labor leaders argue that large increases are needed at the bottom of the pay scale, especially in cities where the cost of living is high. Kendell Fells, organizing director of the Service Employee’s International Union’s “Fight for 15” campaign says that while he was not sure where the next increase would come, Atlanta, Las Vegas, and Tampa, Fla. are likely places.

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Economic Recovery is Being Hampered by Income Inequality

By Ravinder Kapur

Recovery from the Great Recession has been slow because the vast majority of Americans experienced low household income growth and therefore had restricted spending power. At the same time a small minority at the upper end of the income distribution scale, who spend a much lower portion of their earnings, experienced an accelerated growth in income.

A recently published article in Newsweek argues that total demand in the economy is at Minimum Wagesleast 10% below the level it would have been if the current income distribution was at the same level as it was in the early 1980’s. Income inequality has been building up since then but household demand remained strong till 2006 on the back of  buildup of debt. But after 2006 lending to households collapsed and led to a corresponding slowdown in demand.

The article was written by by Barry Z. Cynamon, visiting scholar at the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, and Steven Fazzari, professor of economics at Washington University in St. Louis, and was based on research they conducted on the subject of rising income inequality and U.S. household demand over several decades.

Their research demonstrated that, “…the annual growth rate of household income slowed markedly in 1980 for the bottom 95% of the income distribution, while income growth for the top 5% accelerated at the same time. The result was the widely discussed rise of income inequality.”

Despite the rising inequality of income levels between the top 5% and the bottom 95% of households, demand continued to rise up to 2006, fueled by debt. With the curtailment of household borrowing from 2007 onward, the growth in demand petered off and the researchers offer their findings on the net result: “Household demand in 2013 was a stunning 17.5% below its pre-recession trend, with no sign of recovering back toward the trend.”

According to Cynamon and Fazzari, the best way to boost demand is to give household spending a boost by raising the minimum wage and reducing the tax burden of low and middle income households. The U.S. economy’s production base is resilient and capable of meeting the increased demand. They conclude that, “…the need to address inequality is not just a matter of social justice; it also is important to get the economy back on the right track after more than seven years of stagnation.”

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SBA 7(a) Loan Authorization Increase Approved

By Charles H. Green

As reported here last week, the SBA 7(a) loan guaranty program has experienced record volumes this year and was suspended due to exhausting the program’s FY 2015 authorization of $18.75 billion. Even though the program operates with a zero subsidy, meaning that Congress does not appropriate funds to cover the cost of the loan guarantees, an authorization limit is imposed annually in the federal budget.

On Thursday, the Senate quickly passed a measure that would increase the authorization New SBAto guarantee up to $23.5 billion of loans for this fiscal years, which expires at the end of September. The same authorization level has already been included in the FY 2016 budget for the 7(a) program. The program, which provides small business owners with working capital up to $5 million, has approved its entire $18.75 billion to date.

The House of Representatives pass its version of the bill to lift the guarantee limit with bipartisan support, on Monday evening.

“The Committee has recognized the growth in the 7(a) program for a while, which is why we recommended a raise in the cap for the next fiscal year,” Steve Chabot (R, Ohio), chairman of the House Small Business Committee, said in an emailed statement. Turning the SBA’s spigot back on “means more firms will have resources to invest in their operations, expand and ultimately create good-paying jobs,” said Rep. Nydia Velazquez of New York, the committee’s ranking Democrat.

The increase in loan volumes is a testament to the strength of the economic recovery, the SBA says. “The amount of lending is way up,” says Miguel Ayala, a SBA spokesman. “There is a positive economic sentiment, and small business owners are taking more risk and want to expand their businesses.”

For this authorization to be used up entirely without a non-controversial increase that has plenty of bipartisan support on the Hill is another embarrassment for Congress. The Senate Small Business and Entrepreneurship Committee had unanimously voted to raise the current 7(a) authorization limit to $20.5 billion in April, but the full Senate never acted on it. Likewise, the House Small Business Committee was apparently caught flat-footed when the authorization cap was reached.

Small business lending remains suppressed following the financial crisis, despite several improvements over the last 24 months, leading many banks to turn to SBA lending.

What do you think? Comment on this page or write me at



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Regulators: Oil Company Loans Are Substandard

By Ravinder Kapur

The preliminary results of a joint national examination by U.S. regulators of the portfolios of major banks indicates that a large number of loans issued to oil and gas companies are substandard. The Shared National Credit review process in earlier years was in agreement with the banks’ own ratings, but this year regulators have taken a divergent view and downgraded these companies.

The Wall Street Journal reported that the substandard tag indicates a borrower’s doubtful Oil Industrycapacity to repay and restricts banks’ from granting enhanced facilities. This will result in a new set of problems for these beleaguered companies as they will find it difficult to access funds from banks and would need to turn to more expensive sources, such as equity or bonds.

The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have warned that the continued slump in oil prices could result in large losses for banks. Banks lend based on the value of the oil and gas deposits that companies hold and low energy prices over an extended period have resulted in the reduction of this collateral.

Banks with large exposures to the oil and gas sector include Wells Fargo & Co., J.P. Morgan Chase & Co. and Bank of America Corp. Wells Fargo Securities analysts have informed clients in a note, that among the companies they track, only 30% of the expected 2016 oil output has been presold at above-market prices, as compared to 56% of crude production that was hedged in the current year.

While the warning by regulators is justified, it may result in an increased level of defaults by oil and gas companies, which would create more problems for the banks.

The fall in oil prices has helped bring down the American industry’s cost of production, especially for energy-intensive companies. But it has put oil and gas companies in a difficult position and the extent of defaults in this sector will become more apparent over time.

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Sales in Private Stores Show Steady Increase

By Ravinder Kapur

In the last 12 months sales by private retailers have increased by 6.6%, with smaller retailers (whose sales average less than $10 million per year) growing between 5% and 8%, and larger retailers with sales exceeding $50 million averaging an even greater growth of 9.5%.

Retailers have also seen average increases in net profit margins from 2.6% to 3% in the Moving targetsame period, with those retailers who have less than $10 million in annual sales growing their margins from 2.7% to 3.2% while larger retailers have maintained their margins at 2% for the last five 12 month periods.

A recent article in Forbes, based on an analysis of financial statements by Sageworks, a financial information company, states that bigger retailers reported higher sales growth rates than the smaller companies over the last five 12-month periods. The survey was limited to users of Sageworks products.

Commenting about this trend, Sageworks’ analyst Libby Bierman said, “While we don’t know definitely why that’s the case, it would make sense that the larger private retailers have more marketing dollars and more marketing resources to be able to grow revenue quickly and more effectively. Some examples may be a bigger web presence or more advertising compared to some of the mom-and-pop shops that may be included in the smaller retail averages.”

Interestingly, the buoyancy shown by smaller retailers in the Sageworks’ survey, where these firms have reported increased sales and net margins, contrasts with a recent National Federation of Independent Business (NFIB) survey, which reported a sharp fall in its Small Business Optimism Index in June.

This index, which monitors the opinion of small businesses on various issues including “earnings trends” and “now a good time to expand” had registered declines in practically all its components. Bill Dunkelberg, NFIB’s chief economist said, “June terminated a promising string of improvements in owner optimism during the first months of the year. While it is not a disaster or signal of a looming recession, it is a disappointing sign that economic growth on Main Street is not set for a strong second half of growth.”

While retailers across the board are doing well at present, the smaller players do not seem to be confident that the trend will continue for the rest of the year.

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Alternative Financier Merges Companies Across Four Countries

By Ravinder Kapur

Four alternative lenders catering to small and medium businesses in America, the United Kingdom, Australia and Canada have merged under a common brand, Capify, to offer business loans and additional working capital products through the company’s technology platform. All the four companies have a common founder, David Goldin, and have been in existence for periods ranging from seven to thirteen years in their respective markets.

AmeriMerchant (founded in 2002) operates throughout the United States, United Kapital Capify(2008) is based in the United Kingdom, AUSvance (2008) is headquartered in Sydney and operates throughout Australia and True North Capital (2007) is based in Toronto and operates throughout Canada. Capify was amongst the earliest alternative lenders in each of the markets that it operates in and was the first company in Australia to offer a merchant cash advance facility.

Capify is headquartered in New York and has 200 employees worldwide. In the 13 years since it was founded, the company has extended finance to small businesses across these four countries totaling more than $500 million. Funding has been distributed in 24,000 transactions for borrowers belonging to 550 different industries, including retail, bars, restaurants, health services, manufacturers, distributors and service businesses.

When operations started in 2002, business was focused on the purchase of credit card/ debit card-based receivables for an upfront cash payment from SME merchants in the hospitality, leisure and retail sectors. David Goldin created the business with no outside capital or funding.

Commenting on the merger of these companies David Goldin said, “We’re proud to finally announce ourselves as one global conglomerate that is one of the first international movers in the alternative finance space, and the only alternative finance provider who can help small businesses with working capital solutions in the USA, UK, Australia and Canada.”

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SBA Suspends Flagship 7(a) Loan Guaranty Program

By Charles H. Green

Yesterday Ann Marie Mehlum, SBA’s Associate Administrator for Capital Access issued an Information Notice advising staff that the SBA will begin processing 7(a) loan guaranty applications without final approval due to the nearing expiration of sufficient loan volume authorization. Read the notice here.

The 7(a) program has experienced record volumes this year, which with sufficient funding SBA 7(a) Loan Guarantee Programauthorization, will break all previous records for the loan guarantee product. At the end of June, we reported that the program approval volume was rising at the level of almost $2 billion monthly and had reached about $16.25 billion. Without additional authorization to the $18.75 billion provided, the program would top out early.

What’s the problem?

That crest is now in range and the SBA is taking steps to put all lenders on notice that loans submitted beginning today will be held in queue until sufficient loan authorization is approved by Congress, or the next fiscal year begins October 1. While the SBA stated there is sufficient authorization for the loan applications currently on hand, all future applications will be routed into this queue. Funding for the SBA 504/CDC program is uninterrupted and available for eligible projects.

This interruption of funding comes at a critical time when small business growth is an important contributor to the still lethargic economic recovery following the Great Recession. And maddening, is that this train wreck was entirely avoidable except for an uninspiring legislative branch of government.

At the root of the problem is inaction on the part of Congress. The Senate Small Business and Entrepreneurship Committee unanimously voted to raise the current 7(a) authorization limit to $20.5 billion in April, but the full Senate has yet to act on it. The House Small Business Committee has been hapless as well, and not even forwarded a recommendation to the floor.

Small business lending remains suppressed following the financial crisis, despite several improvements over the last 24 months, leading many banks to turn to SBA lending. A recent article in the American Banker by former SBA Deputy Chief of State Patrick Kelly and Brandon McCarthy, head of Policy and Advocacy of Fundera, cited five reasons for SBA lending’s surge.

These include: 1) Non-SBA bank lending is broken; 2) Technology has made SBA lending more efficient; 3) Higher capital requirements have pushed banks toward the SBA guarantee; 4) Secondary markets for small-business loans are heating up; and 5) The SBA’s 504/CDC lending program is underutilized.

What to do? Call your Congressional Representative daily and demand action. And as importantly, get all of your loan applicants who are being directly affected by the program suspension to call. It’s likely that this problem will be rectified in short order, but you might think about poor governance affects you the next time you decide to cast a ballot.

What do you think? Comment on this page or write me at

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More Attention Needed On Productivity Growth

By Amaresh Gautam

The subprime crisis that unfolded during 2007-08 caught most people by surprise. Very few people saw it coming, as it ended a long bull run in American economy. As investor Warren Buffett is said to have summarized it at the time–a fantastic athlete (the American economy) suddenly had a a cardiac arrest in the middle of the field. The athlete needed stretcher, medicines, injections and electric shock treatment. But the regulators of the economy responded promptly by lowering market interest rates and buying lots of troubled assets (in other words both monetary and fiscal stimulus was applied).

The economy has not fully recovered yet, and although most economic indicators have been Productivity Gainsmoving upward, wage growth is stuck in the 1990s. But still, many economic pundits are demanding the withdrawal of most stimulus measures. Their argument is that US economy can’t keep running on steroids injected during the recession. And all the debate on whether and when stimulus measures should be withdrawn ends up shifting attention from the bigger question.

Monetary policy is a useful tool in achieving goals like price stability/inflation and maximum employment. However the ultimate success of the economy is measured by achieving long term productivity growth.

Productivity growth is defined as the rate of increase in how much a worker can produce in an hour of work. Over time, sustained increases in productivity are necessary to support rising household incomes. The recent data on productivity growth has been disappointing. Productivity depends on many factors most important among them being knowledge and skills of the workforce and the quality and quantity of capital, technology and equipment given to them.

The American economy would be better served if the focus of the policy makers shifted towards supporting long term productivity growth.

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Honda Finance Arm to Pay $24 Million to Settle Charges

By Ravinder Kapur

In a settlement with the Department of Justice (DOJ), Honda’s auto finance arm agreed to repay $24 million to minority borrowers for overcharging them by allowing their dealers to mark-up interest rates. The sum will be refunded to individual minority borrowers by American Honda Finance Corp. on the basis of a list that  will be provided by the DOJ  and the Consumer Financial Protection Bureau (CFPB).

While Honda did not directly overcharge minority borrowers, its normal procedures Hondapermit dealers to mark-up finance rates by 2.25%. The Washington Post reported that the Justice Department had filed a complaint through federal court in Los Angeles alleging that thousands of minority borrowers had paid higher interest rates as compared to white borrowers on Honda auto loans.

As per terms of the settlement, Honda will also pay the sum of $1 million to DOJ to fund an auto consumer financial education program. Honda has said that it does not discriminate against borrowers and that they expect their dealers to uphold this principle as well. It will now restrict mark-ups to 1.25% if the loan is for five years or less.

DOJ and  CFPB initiated their investigation into Honda’s lending practices in 2013. Assistant Attorney General Vanita Gupta said, “The hope really is that Honda’s leadership is going to trigger the rest of industry to constrain dealer mark-ups and discriminatory pricing.”

However, the National Automobile Dealer Association’s Chairman, Bill Fox, was of the view that a rate ceiling could harm consumers. He said, “Today’s government-imposed order will hamstring the ability of thousands of consumers to negotiate lower rates with their local auto dealership. This enforcement action artificially constrains the right of consumers to benefit from interest rate reductions.”

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Big Banks, Small Banks & the Law

By Charles H. Green

If you’ve followed this column for long, you’ve undoubtedly read my bellyaching about a personal sore subject, namely the mind-numbing inequality in the application of the “law” as it relates to large banks and their employees, versus small banks and theirs. As baffling as that sounds, trust me as a seasoned industry observer to assure you that it’s very different.

Since the financial crisis, this long-suspected condition has only become more clear due to Bankseveral factors. Namely, the buying public has been largely up in arms about the financial bailouts, and wanted some blood in exchange. Part of the rulemaking assembled to deal with the crisis also armed the government with new and improved rules to combat genuine fraud and corruption. One example was by expanding the “False Claims Act” to cover federal loan guarantees, targeting those lenders filing claims for reimbursement, not the underlying borrowers who defaulted on loans.

And, for all the chorus of jeers around the Troubled-Asset Relief Program (TARP), the program landed its own Special Inspector General as a watchdog for the government’s interests over the thousands of Main Street banks that were bailed out under the program.

Hang ‘em high

The results? A field-day for prosecutors of all stripes. Thousands of bankers–community bankers, that is–have been indicted, prosecuted and imprisoned for a variety of financial sins. Some, in fact, were guilty of blatant theft, collusion, or misappropriation, borne of a fraudulent intention to personally enrich outlier bankers and their compatriots.

Others were guilty of the pitiful sin of lying about the true strength of the bank’s financial condition in a genuine effort to save it from insolvency, without the motivation of personal gain. But many of the bankers in that latter case ran out of luck before the bank’s money did, and discovery of their actions led to criminal indictment.

No one disputes that community bankers have gotten the overwhelming brunt of the personal effects of this prosecutorial muscle flexing. Big bank regulatory violations, fraud and overt criminal acts have largely been resolved with eye-popping fines paid out as the cost of doing business.  And make no mistake that record-breaking profits since this crisis have easily covered these costs without even the bank’s board reprimanding management. But community bankers wind up in the slammer.

No where is this divide more evident than in two wildly contrasting stories that emerged last week that make this point crystal clear:

The first was that British regulators dropped their investigation and declared they would take no further action against Bruno Iksil, the storied “London Whale,” whose high-flying derivative contract speculation cost JPMorgan $6.2 billion in losses. In addition, the bank paid out another $920 million in fines for misrepresenting their financial position related to these losses and not having adequate controls in place to prevent their staff from overvaluing assets.

The second was about the acquittal of a Brooklyn community bank, which had been charged with 184 counts of mortgage fraud by New York City’s District Attorney, Cyrus Vance, Jr.,  after self-reporting suspected improper lending among its staff related to 31 loans sold to Fannie-Mae.

Big fish, little fish

Beyond the irony of how these two banks were treated in the eyes of the law, the individual bankers at the heart of the “crime” were both apparently white-hats trying to do the right thing.

According to the NYTimes, Iksil was far from being the “rogue trader,” portrayed in early news coverage, and emerges in government documents and people familiar with the evidence as a conflicted figure on the trading floor. While troubled by conscience, he tried to please the bosses who pushed him to undertake the risky derivatives trading that proved his undoing and caused the great losses. Then, as the losses mounted, he repeatedly warned his colleagues that they should be more forthcoming about their extent, to no avail.

“Four regulators in two countries investigated this thoroughly and came to the same conclusion, which is that it wasn’t appropriate to pursue any charges against Mr. Iksil,” said Jonathan B. New, his lawyer, a partner at BakerHostetler. “He cooperated fully with every investigation, and the actual facts speak volumes. The facts are often lost in the initial publicity.”

Added Jonathan R. Barr, another BakerHostetler partner, “He was never a rogue trader. The trading strategy was approved and directed by higher-ups. Making him the face of this scandal was very unfair.”

Which begs the question as to why some of JPMorgan’s higher-ups were never investigated or charged with directing such risky trading or trying to conceal the results?

Tiny bank’s surreal trip through fraud prosecution

Contrast that story with a small bank. In the heart of New York’s Chinatown, the Vera Sung, Director of Abacus Federal Savings Bank, had questions about a residential mortgage loan closing mid-December 2009, around the extra checks that were requested to be distributed to the borrower. The bank’s loan officer was witnessed outside the closing room talking furtively with the borrower, and based on Ms. Sung’s suspicions, the deal was called off.

What soon became apparent was that she had stumbled on a fraudulent scheme involving false borrower income verification and documentation. The bank’s investigation quickly determined that there were many questionable loans already booked, and the loan officer was fired shortly afterward. The discovery put an end to the scheme at the bank, but was the beginning of a five-and-a-half-year odyssey through the New York State criminal justice system

Bank officials uncovered the fraud, fired the mastermind, investigated and reported it to regulators and provided New York prosecutors with over 900,000 pages of documents. Yet by May 2012, this 31-year old bank was under indictment by a grand jury.  As reported in the NYTimes, the 184-count indictment against the bank and 11 former employees, the Manhattan district attorney said Abacus participated in “a systematic and pervasive mortgage fraud scheme” that resulted in the sale of hundreds of millions of dollars of fraudulent loans to Fannie Mae, the national mortgage security packager.

Prosecutors cited 31 loans issued from May, 2005 through February, 2010. Among the charges were conspiracy, grand larceny and falsifying business records. Facing indictment and the threat of long prison sentences, eight Abacus loan department employees entered guilty pleas and agreed to cooperate with the district attorney’s investigation.

But in June, after a 19-week trial, a Manhattan jury exonerated the bank and its top two officials, Yiu Wah Wong, its former chief credit officer, and Raymond Tam, former supervisor of loan origination. The jury threw out every one of the charges.

The bank spent more than  $10 million to defend itself and had to post $10 million in collateral to Fannie Mae after the indictment. While Abacus continued servicing the loans Fannie Mae had already bought, its lending capacity was vastly diminished because Fannie Mae would no longer buy any new loans.

Kevin R. Puvalowski, the bank’s lawyer (Sheppard Mullin Richter & Hampton) characterized the prosecution as a trip through Bizarro World, a comic strip universe where everything is turned on its head. “When I was listening to this trial, I couldn’t help but thinking how backwards this prosecution has been from the very beginning,”

Who, for example, was the government’s star witness against the bank? It was the loan officer fired by Abacus when the fraud was discovered. As part of a plea agreement he struck with the Manhattan D.A., he provided testimony in the case and at trial, but the jury seemed unwilling to believe a man who had been terminated for being dishonest.

Even more perplexing, was that Fannie Mae, which had bought the 31 purportedly fraudulent Abacus loans, did not lose any money on them. Rather, trial transcripts show, by early May 2015 Fannie Mae and the investors who bought securities containing the loans had earned $2.5 million in interest. Nineteen of the 31 loans have been paid off and the rest are current, court documents show.

The victim in this case was Abacus itself. The bank’s Fannie Mae contract already required it to repurchase any loans that didn’t meet Fannie Mae’s quality requirements.

The prosecutors’ claim that the bank was driven by “greed” resulted in a modest $123,000 in servicing fees on the loans.

What do you think? Comment on this page or write me at

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