Category Archives: SBA


CFPB Confronts Payday Consumer Lending

By Charles H. Green

According to the NYTimes, the Consumer Financial Protection Bureau (CFPB), the agency created in the aftermath of the financial crisis, took an aggressive step by  proposing regulations to rein in short-term payday loans that often have interest rates of 400 percent or more.

The rules would cover a wide section of the $46 billion payday loan market that serves the Targetworking poor, many of whom have no savings and little access to traditional bank loans. The regulations would not ban high-interest, short-term loans, which are often used to cover basic expenses, but would require lenders to make sure that borrowers have the means to repay them.

The president himself weighed in on the issue last week, saying that it would sharply reduce the number of unaffordable loans that lenders can make each year to Americans desperate for cash. “If you lend out money, you have to first make sure that the borrower can afford to pay it back,” said Mr. Obama.

“Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps, is simply not responsible lending. It harms rather than helps consumers,” stated CFPB Director Richard Cordray.

Reportedly the proposals under consideration cover payday loans, vehicle title loans, high-cost installment loans, open-end lines of credit, and deposit advance products. It’s likely this list will affect a garden variety of high-risk lending companies, from title pawns to online consumer lenders.

Why should commercial lenders be watching?

Underpinning the proposals is the CFPB’s finding that many lenders are making loans based on the lender’s “ability to collect” as opposed to the consumer’s “ability to repay,” a lending model which it believes is putting consumers at risk.

According to the CFPB’s research, for about half of all initial payday loans, borrowers are not able to repay the loan without renewing it, and more than one in five initial loans turns into a repeating series of seven or more loans.

“The ability to collect is often fueled by modern technology that allows the lender to obtain electronic access to the consumer’s checking account or paycheck. By providing the lender with an easy means of collection or, in the case of vehicle title loans, with power over the consumer’s means of getting about, the lender can trump the consumer’s own discretionary choices about budgeting and spending, pushing the consumer further and further into a debt trap,” Cordray said.

On the surface, commercial lenders don’t have much ‘skin in the game’ for these sweatshop lending tactics, a world away from the business lending we provide–until your borrower gets in a tight fix and suddenly is augmenting their business cash flow with funds obtained personally from one of these predatory lenders. Suddenly the borrower’s situation can get much worse, with high costs and these harsh collection tactics taking a toll to increase the chances that borrower’s will default on your loan.

Already, merchant cash advance companies can provide your borrowing clients with funds that are repaid by a direct transfer from the borrower’s merchant account, meaning these monies do not pass through the borrower’s bank account. These funding sources can aggravate the risks conventional commercial lenders have to certain borrowers, due to their ability to move their repayment stream into a higher priority than any existing loans.

And most worrisome to commercial lenders, is the fact that both these ‘payday’ lenders and the online business lenders/merchant cash advance companies are making billions of dollars of loans based on that ‘ability to collect’ model, rather than a more sustainable ‘ability to repay’ model, which is the bedrock of commercial lending.

Short-Term Loan Proposals

CFPB’s proposed framework defines the short-term credit market as financing provided for 45 days or less, which typically includes payday loans and title pawn loans. But to be clear, these rules would also apply to any lender issuing similar short-term loans (both storefront and online lenders). According to research, in about half of all payday loans, the borrowers are not able to repay the loan on time without renewing it for an additional term. More than 20 percent of initial, first time loans turn into a spiraling series of seven or more loans, which exacerbates the cost to the consumer to eye-popping degrees.

Under the proposal, all lenders making these short-term loans would have to comply with either “debt trap” prevention or “debt trap” protection requirements.

Debt trap prevention would mean lenders were required to determine that borrowers  could actually repay proposed loans when due without defaulting or re-borrowing, at the beginning of the loan application. As with conventional lending, this means verifying income, reviewing other financial obligations, and the borrower’s credit history to determine whether there will be enough money left in their income to repay all of their loan and living expenses.

Lenders would also have to allow a 60-day period between loans and would be required to document the borrowers updated financial position in order to make a second or third loan within the two-month window afterwards.

Debt trap protection would mean lenders were required to provide borrowers with affordable repayment options and limit the number of successive loans a borrower could obtain over the course of a year. Lenders could not keep consumers in debt on short-term loans for more than 90 days in a 12-month period. Renewals or rollovers would be capped at two times, followed by a mandatory 60-day period without credit.

Longer-Term, Higher Cost Loan Proposals

CFPB is also considering proposals for high-cost, longer-term credit products, with maturities of more than 45 days, where a lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle. “High cost” is defined as financing charges that amount to (all-in, including add-on costs) annual percentage rate of greater than 36 percent.

As with the short-term lending guidelines, CFPB’s proposal for long-term loans would require lenders to determine a borrower’s ability to repay the loan as well as adhere to the  debt trap prevention or debt trap protection requirements.

If the borrower is having difficulty affording the current loan, lenders would be prohibited from refinancing into another loan with similar terms without documentation that the consumer’s financial circumstances have improved enough to be able to repay the second loan.

For debt trap protection requirements for longer term loans, CFPB is considering either  requiring lenders to provide loans with a 28 percent interest rate cap and no more than a $20 application fee, or loans with a monthly payment that is no more than five percent of the consumer’s gross monthly income. Lenders would not be permitted to make more than two of these loans within a 12-month period.

Harmful Payment Collection Practices

In addition to these lending rules, CFPB is considering proposals to mitigate problems that result from lenders making unanticipated withdrawals or debits and other associated fees from borrower deposit accounts.

“When lenders attempt to get repayment through repeated, unsuccessful withdrawal attempts, consumers are charged insufficient funds fees by their depository institution and returned payment fees by the lender, and may even face account closure. These fees add to the spiraling costs of falling behind on these loan products and make it even harder for a consumer to climb out of debt,” the CFPB stated.

To address these conditions, CFPB is considering requiring lenders to provide consumers with a three day notice before submitting a withdrawal transaction to the borrower’s bank account for payment. Also in consideration is a limit to the fees on unsuccessful withdrawal attempts imposed by the bank or credit union. If two consecutive attempts by the lender to collect money from the borrower’s account are unsuccessful, the lender would not be allowed to make any further attempts to collect from the account unless the consumer provided a new authorization.

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SEC Adopts Final Rules Per JOBS ACT for Small Companies

By Charles H. Green

Late last week the Securities and Exchange Commission (SEC) announced the adoption of final rules to facilitate smaller companies’ access to capital that update and expand Regulation A, an existing exemption from registration for smaller issuers of securities.  These rules were mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act.

The updated exemption enables smaller companies to offer and sell up to $50 million of SECsecurities in a 12-month period, subject to eligibility, disclosure and reporting requirements.

“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White.  “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

The final rules, referred to as Regulation A+, provide for two tiers of new securities offerings:

  • Tier 1, for offerings of securities of up to $20 million in a 12-month period, are restricted with not more than $6 million of the security-holders to be existing affiliates of the issuer;
  • Tier 2, for offerings of securities of up to $50 million in a 12-month period, are restricted with not more than $15 million of the security-holders to be existing affiliates of the issuer.

Both Tiers are subject to certain basic requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements. The final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings.

Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).

The rules will be effective 60 days after publication in the Federal Register. Read more information at

Reaction by the the Equity Capital Formation (ECF) Task Force, a group comprised of individuals from across the country’s startup and small-capitalization company ecosystems, was swift and supportive.

Jeffrey M. Solomon, Co-Chair of the ECF Task Force and President of Cowen Group commented, “We applaud the SEC for its ongoing efforts to enable small company capital formation. The new rules, which include modifications to Regulation A, are an important step towards making Regulation A+ a viable alternative for small companies seeking access to public capital.”

Scott Kupor, Co-Chair of the ECF Task Force and Managing Partner of Andreessen Horowitz added, “Regulation A+ establishes a more useful and practical means for growth companies to raise capital, achieving the intended goals of Congress. Improved access to capital, while balancing investor protection concerns, will provide these companies the opportunity to grow and create jobs in the private sector.”

Read more about the Equity Capital Formation Task Force here.

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FRANdata Weighs in to Improve SBA Affiliation Determination

By Charles H. Green

In late 2014, the U.S. Small Business Administration announced that it had launched a re-examination of the factors the agency considers relevant to the determination of ‘‘affiliation.’’ These standards evolved to screen small company loan requests that were affiliated with a franchise or other similar relationships (such as licensee, gasoline dealer, and oil jobber). The screening is required to determine whether business owner getting SBA financial assistance, in fact, has an adequate degree of control over their own business fate, and not merely an extension of a larger enterprise.

The SBA’s review was initiated in order to evaluate issues related to the use of “SBA’s FRANdataFranchise Findings List” and the use of external resources (such as the Franchise Registry) that are available to assist with the determination of affiliation. Published in the Federal Register, SBA requested that participating SBA lenders provide input as to suggestions on issues including the responsibility for choosing, approving and/or maintaining these particular resources and the process by which affiliation determinations are made available to the public.

SBA’s notice suggested several new ideas they are considering to expand the list of factors that create an affiliation, including:

  • The third parties’ rights to control the small business concern’s pricing (think Subway’s $4 Lunch Combo);
  • A third party’s ‘right of first refusal’ on partial assignment or change of ownership (limiting ownership transfer or expansion without the approval of franchiser; and
  • A third party’s option to purchase/lease real estate owned by the franchisee.

In addition, SBA asked lenders to suggest some new ideas about the existing process for reviewing these franchise agreements, and whether other kinds of loans need to be submitted for review under their business loan programs.

The original notice by SBA was issued on December 8th, but the franchise industry has apparently only weighed in lately with a call-to-action notice to their members to get into the discussion. FRANdata, manager of the Franchise Registry on behalf of the SBA, signaled concerns with several specific areas of the SBA’s proposal to reevaluate the current affiliation matrix.

Their priorities appear to range from a call for more specific definitions of certain agency intentions, the continuation of the Franchise Registry as the primary information exchange for approved franchise evaluation results, and some better efficiencies into the evaluation process that improve routine renewals and review.

FRANdata’s list of concerns included:

  1. The need to be able to rely on an SBA determination (Federal Register #1)
  2. The up-to-date information, ease of access, and support that the Franchise Registry provides does not need to change (Federal Register #9 & 10)
  3. The Franchise Registry service that connects FRANdata with the franchisor even though the franchisor is not a party to the loan (Federal Register $9 & #10)
  4. Affiliation review should not be required for a non-franchised business with a franchise affiliate (Federal Register #8)
  5. The SBA should clarify and fix standards
  6. The SBA should simplify reviews through a certification process (Federal Register #1 & 6 & 7)
  7. Stakeholders need clarity about what is ‘critical’ in a “Franchise” relationship.(Federal Register #2)

Has your bank been involved with SBA franchise lending? If so and you haven’t read or responded to the SBA’s request for comments, there’s still time. Read more about the SBA’s discussion of these issues in their Federal Register here.

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Lenders Should Confront Misleading FICO Myths

By Charles H. Green

If you’ve been following AdviceOnLoan for very long, you know I’m not a fan of the FICO score, and have expressed my views her more than once. But in the absence of another path to getting to at least a valid starting point for understanding the credit analytics of a business owner, FICO is going to be a part of the loan underwriting mix for the foreseeable future.

There are plenty of advisors in the market that do understand FICO–you can be a certified UmbrellaFICO expert, in fact–and have been trained to manage the inadvertent ratings that FICO can create. One of those experts is Ms.Tracy Becker, whose company, North Shore Advisory, helps individuals deal with the upside down FICO scores that do not accurately portray their own creditworthiness.

Tracy publishes a lot of good advice that can be as useful to lenders as it can be for the borrowing individuals. For lenders, when you’re confronted with a very low FICO score in an otherwise sterling loan application, it might be easy to simply ignore it and explain credit scores away in a loan memo. But if that application is closer to the dividing line in your loan decision matrix, a poor FICO score might be the tipping point leading to loan declination.

In our Excel@Sales column, I suggested gathering good advisory resources for your borrowers and loan prospects, and keep them handy for when you must say no in a situation that can definitely be turned around. My recommended lender tool box can be a quick answer to get your future borrower repaired and back on the road to capital.

And what better tool could you offer than to help someone navigate through FICO’s maze of factors, which can cause many deserving business owners to stumble, than credit score advice? Here’s an abbreviated sample of kinds of issues Tracy is tackling–some of the myths about FICO scores–in her LinkedIn posts, which can be a helpful start to resolution for your clients, and a good start for your own tool box.

Fewer credit cards are better for credit?

This is incorrect. In my 25 years of experience the highest credit scores I have seen are on credit that reflects many credit cards and varied types of active old credit. If you think about it logically it makes sense. If you were a lender would you rather lend money to an experienced borrower or someone whose experience is limited?

Checking your credit will reduce your credit scores?

If an individual checks their own credit it will not impact their scores at all. They could run their own reports 40 times in a day and nothing would change on their scores. These credit pulls are called “soft inquiries”.

Third part credit inquiries hurt credit scores

For some, one more third party inquiry (also called a “hard Inquiry”) will hurt scores dramatically and for others it will not. Since we are all scored differently there is no way to know exactly how much another third party inquiry will impact scores.

Authorized user accounts will not impact my credit.

If there are open active primary accounts on credit reports, authorized user accounts can impact credit in a positive or negative way. If the authorized account is older than current accounts, has a good payment history, and the balances are low the account can increase credit scores. On the other hand, if the account has a poor payment pattern, high balances, and it is brand new it will hurt credit scores.

There are many more articles offered by Tracy Becker that cover a broad range of issues some of your clients may face–send them to her LinkedIn page for more information.

Read more about her company at North Shore Advisory.

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Gov’t Lending Consolidation Proposal Exaggerated–Analysis

By Charles H. Green

Over the past three years, there’s been some broad suggestions in high places around the idea of consolidating some of the business financing functions of several federal government agencies into one organization. The idea stems from a common political goal used to win elections by promising to trim costs and add efficiencies to the delivery of government services, which in this case would be Main Street capital. Turns out most of that talk was long in the tooth and short on the money.

The Obama administration made overtures in 2012 and as recently as their 2016 budget blueprint about merging several agencies related to international trade, including the In-Depth AnalysisOffice of U.S. Trade Representative (USTR), Export-Import Bank (Ex-Im), Small Business Administration (SBA), Department  of Commerce (DOC) and Department of Agriculture (USDA). Speculation was rampant that there was a major roll up in the offing that would have the financial elements of these agencies all disappear into the mammoth Department of Commerce.

And while it turns out that the president’s suggestion was actually much smaller in scope than was reported, Senator Richard Burr (R-NC) did introduce legislation in early 2014 to merge the Commerce Department, Labor Department and Small Business Administration into one agency. But that bill has not been heard from since.

Nothing New

Turns out that the big idea really focuses on coordination rather than consolidation, and in this president’s iteration, is limited strictly to international trade financing. Further, it’s not an idea that originated in 2012, but rather in 1983.

Senator William V. Roth Jr. (R-DE) introduced legislation to establish a “Department of International Trade and Industry” in January, 1983 in response to rising international trade competition American companies faced from the Japanese, which was thought to have been greatly enhanced by their Ministry of International Trade and Industry.  The bill died in Congress the following year.

But many voices in the federal watchdog Government Accountability Office (GAO) and Congress perennially suggest that some of the international trade programs and related services provided by multiple agencies sometimes overlap and often not clearly coordinated in their delivery to the public. If you need convincing, visit the GAO site’s search page for government resources and type in “international trade promotion;” You get 6,152 results from Uncle Sam alone.

According to government and non-government sources who were involved, the more recent efforts of the Obama administration centered solely on international trade finance, and started in the president’s first term with a task group organized from several agencies. The group, which included political appointees and career staff levels, was convened to work out a roadmap of how to improve the federal government’s delivery of trade financing in an effort to boost American exports and support other stimulus efforts to get the economy humming again following the Great Recession.

One party in attendance reported that it was a friendly and very successful effort in developing a concept through which these various agencies would provide a single menu of well-defined trade financing products and services to different sectors of the domestic and business communities.

But it was clear to all parties involved that this would be conducted without separating any of the specific programs from their respective agencies, and without combining these agencies under one roof.

Mixed Signals on Complicated Goals

“We all thought that delivering a joint product line would be much more efficient and take much less time than trying to create a new agency,” said one source on the condition of anonymity, since he has not been separated from the government for two years and is subject to a non-communication requirement. “At the end of 2013, the work was moving ahead nicely with marketing to some banks already in process under a pilot program.”

Still, there are mixed signals that tend to aggrandize what’s really taking place, or at least that leads to a misunderstanding as to what is the intended outcome. According to news reports in February, the revamp would put the USTR, Ex-Im Bank, Overseas Private Investment Corporation, US Trade and Development Agency, SBA, parts of the DOC and rural business programs at several agencies under the same roof.

“By bringing together the core tools to expand trade and investment, grow small businesses, and support innovation, the new department would coordinate these resources to maximize the benefits for businesses and the economy,” said Commerce Deputy Secretary Bruce Andrews at the time.

But according to parties with direct knowledge of the task force, merging agencies is not in the cards. This effort has long since been trimmed to adding efficiencies to a much narrower set of programs related to trade finance.

“One way of looking at the proposal is that businesses should be able to go to one government agency for their business solutions throughout their life cycle,” said one federal agency employee not authorized to speak on behalf of the government.

Increasingly, businesses are being encouraged to sell in global markets, if only for their own survival.  The opportunities are significant.  In 2013, 35% of all U.S. exports were made by small firms—over $700 billion, which is significantly larger that the U.S. government procurement market, which receives much more attention.

To facilitate this proposition, the inter-agency planning group would ideally eliminate programs that overlap and reduce redundancies, and therefore the number of agencies that a business needs to touch in order to get their needs met. It sounds like a great idea on paper, but effecting that into policy is more of a challenge.

The problem is delivering on that promise means changing budgets, encroaching on turf and the raw ‘takeaways’ that many vested interests don’t really favor. Plus, there’s plenty of room for mismatched interests and missions, where the popular notion of “overlap” is actually quite small, or by design due to the different constituencies served.

Competing Priorities and Managing Headaches

Consider the USTR, which is essentially the government’s political arm for international business. Connecting them to this proposed inter-agency mishmash faced push back early on: they don’t provide direct services to U.S. citizens.

Where does the DOC fit into this mix? They don’t lend capital or guarantee financing for Main Street companies. But they do provide an enormous volume of research, market intelligence and other valuable information that can help U.S. companies fast track their entry into new markets.

The magic for the DOC courtship was trying to help get more of their marketing resources into the hands of the same business owners getting financial assistance from SBA, Ex-Im or USDA’s B&I program. But that goal was largely accomplished–twenty years ago–with the establishment of the 20-odd U.S. Export Assistance Centers, which are scattered across the county.

Still, there is plenty of interest in working out ways to streamline service delivery and work together more effectively, as the political side of the table urgently needs more exporting for the American economy. The agency side has their own headaches to manage and are searching for ways to deal with them among the working group.

Consider the Ex-Im Bank’s mandate for providing 20% of their credit guarantees to small businesses, a requirement adopted by Congress a few years ago. The agency was really developed to finance railroad locomotives, jet airplanes, hydroelectric dams and other major transportation and energy projects. But the small business requirement means that for every Boeing 747 (cost $357 million) they write credit insurance on, they must find $72 million in small business projects to back.

The SBA entered international finance only in 1980, but has been fairly adapt at that line of financing, with which they realize the lowest level of loan losses. Their underwriting and centralized servicing centers make them more efficient at dealing with smaller transactions, and after all, their mandate is small business.

Whether SBA could be given authority to manage Ex-Im’s small business transactions or not is a question well beyond this working group (not to mention that Ex-Im is presently in a fight for their existence with conservative Republicans). But it illustrates the kinds of problems that need tackling as the federal government is moving toward approval of two new trade pacts that could open up plenty of new opportunities in trade expansion for smaller American companies.

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Atlanta Fed’s President Lockhart Predicts Rising Rates

By Charles H. Green

An interview with Atlanta Federal Reserve President Dennis Lockhart appeared in the New York Times’ Upshot column this week, and provides plenty of fodder to read through from one of the ‘centralist’ on the Fed’s Board of Governors. His expectation: interest rates are likely to be raised by the September meeting of the Fed’s Open Market Committee (FOMC).

Lockhart has been at the helm of the Atlanta Fed for nine years, and from personal

Photo: Courtesy of

Photo: Courtesy of

observation, he seems to have settled into a comfortable seat firmly in the middle of the Board, sliding there from a more perceivably hawkish position at the beginning of his tenure.

He’s a very smart banker: admittedly, while asking him questions at a couple of public events in the early days of his administration, I tried to get his current views on interest rates at the time (a Fed president no-no) with a seemingly clever, indirect line of inquiry. In front of a probably less-sophisticated financial audience, he demonstrated to me why he’s sits as a Fed president and I’m just writing about him.

Here are the highlights of the NYT interview, edited for brevity, with my own interpretive “Fed speak” meaning suggested in brackets following each answer:

Q. Signs appear to indicate a slower growth rate at the beginning of 2015, despite your predictions to the contrary. Are you reconsidering?

A. My base case view is that we’ll see a rebound in the second and third quarter and beyond and that we’ll stay on the basic track. And that is a 2.5 percent to 3 percent growth rate with continuing improvement on the employment front, and gradual rise in inflation toward the 2 percent target.

[CHG-Fed Speak: Just wait.]

Q. Does the current confusion seem greater than normal?

A. When you combine the decision that I genuinely believe that we will make with the ambiguity, it is not as comfortable a decision-making environment as one would prefer. Maybe you never have a totally comfortable decision-making environment. I’m sure that’s the case. We’ve had ambiguity in periods before — quite a bit of it over the last several years — but we were also not facing what I would call a historic decision to go from one era to another era.

[CHG-Fed Speak: We’ve always made decisions in real time on data that’s not absolute for several months afterwards, but I admit, this time it’s really important.]

Q. You describe the first rate hike as historic, but you’ve argued that people are overly focused on it?

A. Too much can be made of the liftoff decision itself because the really important factor is what’s going to be the interest rate environment for the foreseeable future and to what extent is it going to remain accommodative, which I believe it will. That’s more important to the real economy than the exact date of liftoff.

[CHG-Fed Speak: Raising rates is not the key here–what happens after rates rise is what we are focused on.]

Q. You mentioned the possibility of rates rising at one of next three meetings; are you confident rates will rise by September?

A. I wouldn’t say I’m 100 percent confident. I noted that Stan Fischer said, “This year.” So for me to say June-July-September full confidence is probably overstating it, but I think it’s quite likely. And if we were to go beyond September, it would be because we were really disappointed in the stream of data that come in.

[CHG-Fed Speak: It’s they don’t rise by September, the economy has taken a bypass that we didn’t anticipate.]

Q. Does that mean you’re confident that rates will rise by end of year?

A. I think it’s highly likely this year. If we reverted to a decision point after the end of the year, it would probably reflect either a shock to the economy that really changed the trajectory of the economy or we would have been misreading something pretty seriously.

[CHG-Fed Speak: Like I said, it will mean our analytics are upside down and the economy’s drooping gain.]

There’s plenty more to read at

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Present & Past SBA Administrators Endorse Trade Pacts

By Charles H. Green

In an advocacy action I’ve never witnessed–that being a bipartisan effort on behalf of small Main Street businesses–the U.S. Small Business Administration’s sitting Administrator joined former Administrators Karen Mills (2009-2013), Steve Preston (2006-2008), Hector Barreto (2001-2006) and Aida Alvarez (1997-2000) to press the public case for Congressional approval of Trade Promotion Authority (TPA) and completing the Trans Pacific Partnership (TPP) sought by President Obama.

In their words, offered through a co-authored opinion published by Huffington Post, these approvals would constitute a significant victory for America’s small Export Financebusinesses. How? By expanding domestic jobs and economic activity to meet the demand for superior American goods abroad.

Did you know that only about 300,000 American companies (out of 28 million) account for the nation’s exports. But even with that seemingly low count, exports are tied to one out of every five American jobs, which generally pay about 20 percent better than others by the way.

The Administrators argue that passing new trade agreements is critical to smaller exporters without offshore affiliates to help them overcome trade barriers and develop market access. Trade promotion opens doors for small businesses that otherwise usually remain closed. And in the TPP, for the first time there is a specific chapter dedicated to growing small business exports.

Why does this matter to commercial lenders?

According to the National Small Business Association’s 2013 Exporting Survey, more than 85 percent of respondents said their company benefited from free trade agreements. But more to the point, nearly one-half of all American exports go to the 20 nation partners with whom there is a negotiated trade agreement. In 2014, businesses in 28 states scored record-high export volumes to these 20 countries.

Since 2009, American exports have grown more rapidly to U.S.  trade agreement partners (64 percent) than countries with which there are no such agreements (45 percent).

Commercial lenders finance business and export growth increases business. And it’s that kind of new market growth that creates a corresponding need for more buildings, equipment, vehicles and working capital, which in turn will have to be financed by a commercial lender.

It’s simple: all domestic boats are lifted by the rising tide of export growth.


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Lendio Raises Additional Capital Financing

By Charles H. Green

Lendio, a small business lending marketplace, announced that the company raised a new $20.5 million round of funding led by Napier Park’s Financial Partners Group. Other investors included Blumberg Capital, North Hill Ventures, Pivot Investment Partners and earlier investors Tribeca Venture Partners, Runa Capital and Highway 12 Ventures. The company will use the funding to continue building out new features on its website and hiring more staff.

Lendio’s technology helps small business owner search for and qualify financing by Lendiogathering critical demographic and financial information about the business and its owners, and then linking their  application profiles with appropriate lenders seeking to find borrowers meeting target parameters. In February, the company announced a partnership with Staples to give Lendio access to Staples’ customers who need financing products.

As part of the latest financing deal, Lendio elected Dan Kittredge, managing director at Napier Park, and Chris Gottschalk, principal at Blumberg Capital, to their board of directors.

‘Marketplace’ lending refers to online service providers who offer application screening, financing advisement, or loans to small companies through technology platforms that serve to connect borrowing applications to lenders in search of new loan applications. It has become a particularly attractive sector for investors as traditional lending to small businesses continues to decline.

According to Accenture, global investment in financial technology more than tripled between 2008 and 2013. Lendio’s funding news follows the recent IPOs of marketplace lending platforms Lending Club and OnDeck Capital.

“Lendio has become the go-to hub for small business owners to obtain the financing they need to grow and thrive. Our focus is to provide three essential benefits to the business owner — offer a wide variety of loan options, speed up the process and reduce the time and effort it requires to get funded and provide a white-glove trusted experience,” says Brock Blake, Lendio’s founder and CEO. “Because we have served hundreds of thousands of business owners, we’ve been able to scale our business and improve the lending experience through an easy-to-use online matching platform, advanced machine learning and lender integrations. ”

Read more information at

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Lenders Weighing Whether 504 Loans Are HVCRE

By Charles H. Green

The bewitching hour has passed and according to Basel III regulations, new rules have gone into effect to govern ‘high volatility’ commercial real estate loans (HVCRE). These HVCRE rules will require real estate lenders to assign a higher risk weighting to loans that are used for the acquisition, development or construction (ADC) of commercial real estate which exceed certain regulatory leverage guidelines.

These rules represent the collective global regulatory efforts to manage risks and hedge for SBA CDC-504 Programhigher losses in defense against another real estate bubble, such as the one experienced in the last decade that concluded with a global financial crisis.

Higher risk weighting will mean that lenders must provide for a 150% level of normal loan loss reserves, reportedly for the life of the loan. However, this rating may be avoided if:

  • The loan-to-value ratio (LTV) is equal to or less than 80%;
  • The borrower contributes capital to the project in the form of cash or unencumbered readily marketable assets (or has paid for the development costs out of pocket) totaling at least 15% of the real estate project’s “as completed” appraised value; and
  • The borrower’s 15% contribution to the project is made before the lender advances any funds under the loan and remains in the project until the loan is converted to a permanent loan or paid off.

SBA lenders are rightly concerned about what this new rule means for CDC/504 loans, since by program design these loans are eligible to be extended for as much as 90% leverage. CDC/504 loans are structured with a minimum of 50% of the project funded by senior financing provided by a private, regulated lender, and up to 40% of the project funded by SBA-issued debentures facilitated by a community development company (CDC). Borrowers must provide a minimum of 10% equity toward project costs.

The SBA CDC/504 program is mission specific, with loans provided to promote economic development and create and retain jobs. While there is no specific exemption provided for CDC/504 loans under the Basel III accords, most industry observers believe that these loans should be exempt from HVCRE rules, which specifically makes an exception for funded ADC loans that qualify as community development investments.

Accordingly, 504 loans are authorized by Title V of the Small Business Investment Act (15 U.S.C. § 695 – § 697g) to provide companies with long term financing to acquire, construct, develop or improve fixed assets such as owner-occupied commercial real estate and heavy machinery.

And, so far as CDC/504 loans used for the “acquisition, construction, conversion or expansion” of a building or structure, program rules require that borrowers contribute a minimum of 15% equity to these projects, which appears to meet the standard to be exempt, as described in the new regulations.

Rather than worry about fully-funded 504 construction loans being subjected to these new rules, lenders probably have a more likely concern regarding the interim loans used to cover the construction costs ahead of the debenture proceeds being funded.

CDCs cannot fund their portion of the project financing until the construction is completed, meaning that the senior lender must hold a higher leveraged loan for a significantly longer period of time or use a third-party interim lender. These situations are likely to produce more headaches for participating 504 lenders.

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Goldman Sachs Reports on Innovative Marketplace Lending

By Charles H. Green

A recent report issued by Goldman Sachs Equity Research, titled ‘The Future of Finance: The Rise of the New Shadow Bank,’ written by analysts Ryan Nash and Eric Beardsley describes their impressions of the ongoing changes in the banking industry.

The report points out that in the aftermath of the financial crisis, several new financial Goldman Sachsregulations have led contributed to an evolving competitive landscape in commercial finance. While stricter capital requirements have meant a reduction in credit availability in some sectors, scrutiny of high-risk lending has resulted in many banks lowering their commercial activities.

Loans to non-investment grade firms and new rules regarding the consumer market have led to higher credit costs for many borrowers, opening the rise and opportunity for alternative lenders to emerge. According to GS, these regulatory changes are a major reason that new shadow banks are being created and why many traditional borrowers and private equity firms are now becoming lenders.

The report highlights that the combination of rising big data analytics and new, inventive distribution channels are permitting technology startups to introduce new business finance models that are disruptive to traditional banks, especially in the consumer lending sector.

These new lending firms have lower cost bases than most regulated banks, meaning they can offer loans at lower interest rates.

Although still relatively small, these new lenders command a large marketshare and represents the evolution of the “shadow banking” market that stumbled following the financial crisis, but presently is growing rapidly. They note that these new technology platforms are also “growing the market” in some market areas that were historically underserved by traditional banks, i.e. those businesses that banks refused to serve.

The report identifies six areas where this shadow banking sector might divert profits of traditional banks. “We see the largest risk of disintermediation by non-traditional players in: 1) consumer lending, 2) small business lending, 3) leveraged lending (i.e., loans to non-investment grade businesses), 4) mortgage banking (both origination and servicing), 5) commercial real estate and 6) student lending.

Shadow banks are typically not subject to the same regulatory oversight as traditional banks. Though large portions of the broader shadow banking sector (especially mortgage-related) have been winnowed out since the Great Recession, several new types of shadow banking have emerged and some existing shadow lenders have seen major growth due to a slew of regulatory changes for banks.

The GS analysts highlight two major regulatory reforms: the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 after the financial crisis, and the continually evolving bank capital standards (Basel III). These regulatory changes have lowered margins on some bank products, which obviously creates an opportunity for new entrants.

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