Small businesses have been having a hard time securing protected loans from banks because of a recent decision by the Second Circuit Court of Appeals in Madden vs. Midland Funding. The decision made it unsafe for FinTech companies to buy loans from banks. When there isn’t a healthy ecosystem between lenders and secondary lenders, banks are unwilling to take on more risky loans.
In fact, after the Madden decision, loans to borrowers with FICO® scores below 644 virtually disappeared. This spelled disaster for small businesses who hadn’t really had time to build credit. It meant that business owners with less-than-perfect credit were forced to look to unstable lenders for capital, putting borrowers at risk.
Industry leaders took note of the many issues arising out of this ruling and began to put serious pressure on legislators to draft laws that would bring small business lending back to the forefront of economic growth.
In response, Senators Toomey and Warner and Representatives McHenry and Meeks introduced a simple legislative fix. Their bill, Protecting Consumers’ Access to Credit Act of 2017, clarifies the Madden ruling to provide greater liquidity in commercial credit markets, close gaps in access to credit, and allow the markets to fairly price risk profiles. Most importantly, it also allows small businesses to access the capital they need to grow.
This bill is set to make its way through congress in the coming weeks. Its passage would be a victory for small business, enabling more and more scrappy entrepreneurs to grow their businesses.
While this bill is a huge step in the right direction, it will not solve all small business lending issues. Recent developments regarding Mick Mulvaney, the current head of the Consumer Financial Protection Bureau, have shown that he intends to side with predatory lenders. For example, he dropped a lawsuit with a group of payday lenders who tricked low-income consumers into taking on loans with interest rates around 950%.
Lawmakers need to recognize bureaucratic corruption and take steps to initiate change in all avenues affecting how businesses access capital. Only then will entrepreneurship flourish without unnecessary road blocks.