This article first appeared on Forbes.com.
A year ago, prior to one of the most important industry gatherings in lending, I was fortunate to be invited to a private dinner (along with several other CEOs in the small business lending industry) with Congressman Patrick McHenry and his staff. Congressman McHenry was slated to give a keynote speech at the event and wanted to gather feedback on how he could help spur innovation in the lending space. Among other topics, one of the central themes was how important it is to gain real-time access to third-party data in order to make an accurate lending decision. It was a valuable meeting and I was grateful to Congressman McHenry for taking the time to truly listen.
Now, several quarters later, I’m excited about the possibility of how one of his proposed bills might impact the lending industry. I recently read an article by Sam Hodges, an associate and friend in the fintech industry, that outlined similar issues about our credit system, and his article has encouraged me to pile on.
The next target for innovation that could impact multiple sectors and the U.S. economy as a whole, is the IRS.
Time is money
The IRS has been a fixture in our lives for 155 years. But it operates without competition, is functioning on outdated technology and is now in a position to improve a long-standing process. You might be wondering, why does this concern the CEO of a small business loan marketplace?
Access to capital is an ongoing challenge for small business owners and entrepreneurs, and oftentimes the need for funds is immediate and sometimes even desperate. Life happens: equipment breaks, sales are slow, and sometimes something unforeseen, yet exciting happens like a huge unexpected order to fill (sidenote: if you want to be inspired, click on one of these links to see real entrepreneurship in action).
Prior to the innovation in online lending, it took a business owner on average about four to eight weeks to get a loan. That’s a long time when your machinery is broken, you can’t make money without it, and you can’t afford to fix it. Thanks to advancements in online lending, a business owner can now get offers in as little as two hours and have funds in-hand in as little as one to two business days. That’s a huge deal when your livelihood is at stake.
Why the IRS?
One of the biggest hang-ups in the loan process is paperwork, and part of the problem is the legacy systems we have in place in the current world of finance. If you have attempted to start a business, or get funding to expand a business, you are probably familiar with filing a 4506-T form with the IRS. This form gives the IRS permission to send summarized transcripts of your tax returns to a third party, like a lender or lending marketplace, and it is yet another step in the process prior to getting approved for a loan.
Last fall, Congressman McHenry and Senator Cory Booker introduced the IRS Data Verification Modernization Act of 2017. The bill would require the IRS to create an Application Programming Interface (API) that will allow small businesses and consumers to access accurate credit assessments more efficiently (READ: in real time!). This is an important step to streamline the application process for funding.
These lawmakers know that small business growth is critical to U.S. economic growth and that this bill could be a game changer. “The sad secret is that small businesses across America are delayed in getting loans because of a government fax machine. By automating the income verification process, we eliminate one of the most frustrating and fixable barriers that prevents government from fully supporting our small businesses,” Congressman McHenry told me.
Credit data reporting is incomplete
Because so much of underwriting is dependent upon third-party data, improving access to information from the IRS in this way will not only save time but also decrease credit fraud. Right now, business lenders have to rely heavily on credit and financial information coming directly from applicants—this leaves a lot of room for error and manipulation, and also makes it very difficult to expedite the loan approval process.
The IRS Data Verification Modernization Act would provide streamlined access to one of the most important pieces of third party data that cannot be doctored: tax returns. Rather than the three to four day processing period for form 4506-T, the IRS could make tax returns available to lenders in real time (with the applicant’s permission).
“Helping small businesses access capital is one of the best things we can do to support their development and grow the economy,” said Senator Booker. “Our commonsense bill simplifies the loan process for small businesses and entrepreneurs by providing lenders quicker access to financial records and data, while safeguarding private information. This bill will cut red tape and unreasonably lengthy waiting periods, making the process more efficient in getting much-needed capital into the hands of small businesses.”
What’s the economic impact?
This bill would also add a layer of accuracy that will benefit our economy. Right now, some applicants find ways to doctor financial documents or their bookkeeping isn’t as accurate as it could be. Lenders extend credit to those who aren’t truly prepared to pay it back, that capital goes into losses and makes for higher rates overall and that becomes costly to our economy. It affects everyone. Repairing this out-of-date process would make for less risk of default and better rates for all: a win-win for both lenders and borrowers.
When we first founded Lendio, we started with 6 Core Values. Number 4 is “No Road Blocks.” We like to say we take a creative approach to problem solving—over, under, around or through. We believe no problem is an obstacle too big to overcome, and we work together to solve problems and create solutions. I think these lawmakers have collaborated to propose a creative and much-needed alternative to an out-of-date process that if passed, will greatly benefit the national economy. I’m looking forward to watching this piece of legislation move forward on Capitol Hill.