Category Archives: SBA


It’s Time for Online Lender Practices to be Reviewed by CFPB

By Ravinder Kapur

Small businesses are increasingly accessing funds from online lenders, who are subject to minimal regulatory oversight, which results in many cases of high APRs applied to the funding without previous disclosure of the cost of funds. A Huffington Post article points out that section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act empowers the Consumer Financial Protection Bureau (CFPB) to collect data from lenders on loans to small businesses, and although five years have elapsed since the passage of the Act, this process has yet to begin.

Although alternative, or “FinTech” lenders are still at the stage where their total lending Online-loansvolume to small businesses forms a minor portion of the amount outstanding provided to this segment, Morgan Stanley estimates that these funding volumes will grow at the rate of 50% per year till 2020. CFPB’s role assumes greater importance because many of the borrowers lack the financial understanding needed to determine the real cost they are incurring when they avail finance.

This misunderstanding is aggravated by less than transparent practices of many participants in the industry, and the diversion of a majority of them from quoting simple interest rates for funding, as is common in the traditional commercial lending industry. All these factors prevents small business owners from making informed decisions when choosing a lender or accepting a loan offer.

Currently, it’s common to find loan brokers who claim to be impartial middlemen who  recommend loans to small business borrowers and accept incentives from lenders. As the number of online lenders grow and their financing volume rises, CFPB would do well to initiate the data collection process and require disclosure of loan-product details, APRs, default rates and demographic and geographic characteristics of borrowers.

In fact, such a move would be welcomed not only by small businesses, who are being drawn to online lenders by their speed and flexibility, it would also greatly help responsible lenders in the FinTech sector operate with assurance that all participants are playing with the same fair standards.

Above all, CFPB action would result in greater transparency in the online lending segment, which would give small businesses access to much-needed funds in a manner with the understanding of the true cost they are incurring.

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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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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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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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Some Tailwinds Against the Economy

By Amaresh Gautam

There were a few indicators in the minutes from the Federal Reserve’s Open Market Committee meeting that tougher times may be ahead for American economy in the near future, or at least, the hangover from the Great Recession continues. Primary among their concerns is the decline in consumer spending. Healthy levels of consumer spending are critical, as much of the projected growth in 2016 and 2017 hinges on the assumptions of high level of consumer spending.

At the time of the April meeting, the annualized increase in consumer spending was hot airestimated to be unexpectedly weak in the first quarter following the strong gains in the second half of 2014. But revised statistics were released later that suggested that the consumer spending was better than earlier estimates.

On one hand, many fundamental factors determining consumer spending remain positive, such as low interest rates, modest gains in wage and salary income, and stronger household balance sheets. At the same time, there are concerns that consumers have not increased their spending as much as expected in response to the drop in energy prices; a rise in savings rates may induce more cautious behavior among households.

There are also concerns about developments in Greece and China. Concerns about Greece reaching a mutually beneficial agreement with their creditors, and the future rate of growth in emerging economies, particularly China, seem to be ominous prospects that are still not fully understood.

The Greek crisis may still derail the European economy, which will have spillover effects for Americans. Other concerns are related to the apparent weakness in productivity growth recently, and whether they would reverse or continue. On the one hand, a rebound in productivity growth in coming quarters might restrain hiring and slow the improvement in labor market conditions. On the other hand, if productivity growth remained weak, the labor market might tighten more quickly and inflation might rise more rapidly than anticipated.

Small business lenders have a vested interest in these developments, because Main Street businesses are generally on the front line of changing trends, and bear the brunt of changing economics from household purses first. Keep an eye on these developments in the near future.


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Banks Lose Ground to FinTechs in Small Business Financing

By Ravinder Kapur

Banks have severely restricted lending to small businesses since the Great Recession, with alternative lenders taking up the slack, although at much higher APRs. A recent Forbes article states that while only 22% of applications by small businesses to banks are approved, the comparable percentage for institutional investors is 60%. Even the approval rate of 22% is a great improvement over the time in June 2011, when the success rate of small businesses’ loan applications to banks hit an abysmal level of 8.9%.

Small business borrowers have moved away from banks for a variety of reasons, not least Uber financeof which is the aversion of banks to extend finance for lower amounts. The appraisal and processing costs incurred by a bank are the same whether a loan is for $50,000 or $1,000,000. On the other hand, many online lenders specialize in financing smaller businesses, and their speed and the convenience they offer make them extremely attractive for these borrowers.

But does this mean that small business borrowing will gradually move away from the banking system altogether and make it irrelevant? In an American Banker article titled, “Reports of Banking’s Death Are Greatly Exaggerated,” they point out that the fintech start-ups cannot function without the active support and infrastructure that is offered by the banking system.

A survey of 4,522 small business owners conducted by Barlow Research Associates (May, 2015) found 86% of respondents saying said that when choosing a new bank, branch convenience is the most important factor and not technology. But of the business people surveyed, 50% of those who were planning to change their primary bank cited “lack of personal attention” as the main reason.

As online lenders grow in size, the most successful ones will be those who can forge strong ties with traditional banks. While banks will provide the large scale resources and institutional clout, fintechs will be in the best position to cater to the changing needs of borrowers with their innovative credit decision techniques and speed.

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