WEBINAR: THE IMPACT OF PREDATORY LENDING ON SMALL BUSINESSES. National Week of Action January 27, 2016

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1 WEBINAR: THE IMPACT OF PREDATORY LENDING ON SMALL BUSINESSES National Week of Action January 27, 2016

2 Introduction Joyce Klein Director Caitlin McShane, Director of Marketing and Communication Mary Fran Riley, Senior Vice President, External Affairs Harold Pettigrew, Director of Entrepreneurship #AOActionWeek 2

3 Poll Question: My organization is: - Small business development organization - Asset building organization (direct service) - Asset building organization (advocacy) - Funder - Other #AOActionWeek 3

4 Joyce Klein, Director Introducing the Small Business Borrowers Bill of Rights #AOActionWeek 4

5 Poll Question: Your Experience: Have you encountered predatory small business lending practices? Yes No Unsure #AOActionWeek 5

6 Total Balances, Nominal $, billions Recent trends in small business lending decline in bank lending Loan size: Bank lending by loan size $1M+ $250k-$1M $ k <$100k $1M+ Change % Significant increase in lending for loans $1M $250k-1M $100k-250k <$100k Q1 Reference: This slide is used with the permission of Lending Club. FDIC Call report Q1 2015, March 31 Call Dates, C&I Loans + Nonfarm Nonresidential loans -13% -22% -8% But no recovery < $1M #AOActionWeek 6

7 Trends: high-cost, short-term financing filling the gap $22,500,000,000 $18,000,000,000 $13,500,000,000 $9,000,000,000 $4,500,000,000 $0 Business Financing of $150k or Less SBA Loans High-Cost Short-Term Online Funding MCAs and short-term loans have surpassed small SBA loans Online short-term estimates based on Mills, Karen in The State of Small Business Lending, Harvard Business School, SBA data annualized: #AOActionWeek 7

8 Emergence of predatory practices This is the new predatory lending, said Mark Pinsky, president of Opportunity Finance Network, a group of lenders that help the poor. 1 1 Bloomberg. 8 #AOActionWeek 8

9 What abusive practices are we concerned about? 9 #AOActionWeek 9

10 Alternative Lending Landscape % APR $1Bn+ Marketplace Balance Sheet >70% MCA 55-70% CAN On Deck 40-55% 25-40% 10-25% Kabbage Square PayPal Amazon Lending Club Funding Circle Term Up to 6 months 6-12 months >18 months #AOActionWeek 10

11 There is a regulatory vacuum Many state and federal laws that apply to consumer loans do not apply to small business loans. The Borrowers Bill of Rights serves as a standard of industrywide responsible lending practices and is a critical step to address problems in the industry. 11 #AOActionWeek 11

12 Developing the Borrowers Bill of Rights The Responsible Business Lending Coalition: 12 #AOActionWeek 12

13 Overview 1. The Right to Transparent Pricing and Terms 2. The Right to Non-Abusive Products 3. The Right to Responsible Underwriting 4. The Right to Fair Treatment from Brokers 5. The Right to Fair Collections Practices 6. The Right to Inclusive Credit Access 13 #AOActionWeek 13

14 Caitlin McShane Director of Marketing and Communication Responding to the New Small Business Credit Landscape #AOActionWeek 14

15 Opportunity Fund Clients Small Business Landscape in California Dora (A) Tina (B) Santos (C) Warren (D) No or limited access to capital Need for affordable financing Looking for best alternative financing Bank loan or other low cost capital Cash-based microbusinesses or start-up Retail or restaurant business Trucking or Mobile food trucks All other businesses Option: Family or personal loan Option: Merchant Cash Advance >80% APR, >20% split Option: Dealer financing >18% rate Option: Chase Bank #AOActionWeek 15

16 Finance Options by Segment Dora (A) Tina (B) Santos (C) Warren (D) Segment No or limited access to capital Need for affordable financing Looking for best alternative financing Able to access bank or other low cost capital How does OF help? First real loan One-on-one lending Increase in HH income Rescue businesses already w/ MCA Alternative to MCA Lower cost of capital Retain $ in the pocket All other businesses Why we target But for microlenders, few options for building business and credit exist. High-cost alternatives can lead to business failure. Subsidize financing to segments A and B. #AOActionWeek 16

17 One Client s Landscape Bakery in Southern California, 5 years in in business, immigrant owners. Alt Lender # 1 Alt Lender # 2 Alt Lender # 3 Alt Lender #4: Merchant Cash Advance taking 20% of credit card sales not shown on bank statement. 4 Alt Lenders taking out $620 daily from a business with ~ $2,400 average daily sales not sustainable. None of the 4 advances /loans are reported to the credit bureaus #AOActionWeek 17

18 Prevent and Recover Refinance program From TV's Cupcake Wars to Borrower Battles Business with MCAs Opportunity Fund refinanced their debt $40,000 EasyPay loan "Opportunity Fund truly cares about the success of our business. It is a relief knowing that we are finally out of the shark-infested waters of cash advances. #AOActionWeek 18

19 Policy Advocacy: SB197 Referral Fees are Effective: Alternative lenders and banks commonly use brokers to reach potential customers. For alternative lenders brokers account for upwards of 45% of the financing they do. Reaching Underserved: Word-of-mouth is an important strategy for reaching underbanked immigrant and minority communities. Referrers may be local tax preparers/bookkeepers, licensed or unlicensed loan brokers, nonprofits or other business owners who have received a loan. Removed a competitive disadvantage (partially): CA State Lender s Law prohibited licensed lenders from paying referral fees to individuals or small businesses that do not have a broker s license from the State. Now, we can to individual clients, nonprofits and SBDCs (but not other unlicensed brokers). Responsible business lending now in law: APR limit and underwriting. Also makes it harder for alternative lenders to get referrals they used to without breaking the law (took them from grey area into the light of regulators). #AOActionWeek 19

20 Regulators Attention California Regulator Launches Inquiry Into Marketplace Lenders Toughen online lending rules: Banks #AOActionWeek 20

21 Mary Fran Riley Senior Vice President for External Affairs, Accion Chicago Response to Emerging Predatory Small Business Lending #AOActionWeek 21

22 Accion Chicago: Who We Are Accion Chicago is a CDFI focused on community development through entrepreneurship. We support entrepreneurs with coaching and debt capital. We are Illinois leading CDFI small business lender, making loans from $500 to $100,000 to businesses across the state. We have made nearly 4,500 business loans totaling $36 million in Illinois and Northwest Indiana since Our clients are primarily low-to-moderate income individuals and minorities that are unable to access traditional bank products as a result of poor credit, lack of collateral, etc. We provide customized capital solutions and one-on-one coaching to aspiring entrepreneurs in Illinois and Northwest Indiana We are supported by a diverse array of organizations including local government, federal government, banks, other corporations, foundations, and individuals. #AOActionWeek 22

23 Predatory Practices Lenders are making loans that have all of the characteristics of predatory lending practices: No documented interest rates (but when calculated are regularly over 100%) Enormous prepayment penalties Hidden fees Aggressive sales tactics (our borrowers get 5-10 calls a day) Structured to create a dependency and get borrowers stuck in payday loan like debt traps It costs as much to make a $10,000 loan as it does a $500,000 loan. Underwriting a loan properly, to ensure that it is in the best interests of both the borrower and the lender is expensive. Regardless of the size of the loan. Accion charges 13% interest on average and covers only 30% of its expenses from that revenue. To break even the organization. #AOActionWeek 23

24 What Accion is Seeing: Landscape Accion first started to see business owners in trouble about 18 months ago. The volume has steadily grown to the point that we now estimate that more than 20% of the people coming through our doors are seeking relief from a problem loan. Many are within days of having to close their doors. #AOActionWeek 24

25 What Accion is Seeing: Terms Loans are typically very short term (less than 6 months) regardless of the use of proceeds. Loans seem to be underwritten based on GROSS revenues as opposed to NET revenues. They can do this because loans are so short term, and payments are typically made on a daily basis. The customer might be paying 10% of their revenues on one loan. With operating margins often lower than what they are paying to the lender, it creates a cycle of more and more borrowing. We have seen businesses paying more than 50% of their revenues in debt service. #AOActionWeek 25

26 What Accion is Seeing: Practices Often when the business contacts the lender for an adjusted payment schedule due to inability to pay due to strains on cash flow, they are sold another loan. We have seen clients with several of these loans stacked on top of each other due in part to aggressive marketing by brokers and the strain that the original loan placed on the client s business. Clients report getting several s daily, visits to their place of business, mail and phone calls from a variety of companies. We have seen good companies partnering with bad actors, i.e. a national office supply company with Rapid Advance. #AOActionWeek 26

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30 Poll Question: You borrow $100k, and repay $120k over 6 months. What s the approximate interest rate? 10% 20% 40% 80% #AOActionWeek 30

31 Poll Question: I am planning to: - Sign on (lenders and brokers) - Endorse - Learn more - Not participate #AOActionWeek 31

32 For more information: Website: Joyce Klein, Aspen FIELD Caitlin McShane, Opportunity Fund Mary Fran Riley, Accion Chicago #AOActionWeek 32

33 QUESTIONS? #AOActionWeek 33

34 Is That Really an Interest Rate? Many business lenders quote rates that are not interest rates. Instead, they are something often called a factor rate. What kind of rate are you getting? There is no required transparency standard, so you ll need to figure it out. A 24% factor rate may appear as: 24% of the total loan amount 24 cents on the dollar 1.24,.24, or 24% factor rate 1.24x payment multiplier 24% rate 24% fixed rate or fixed fee All of these 24%s are equivalent to an 89% interest rate on a 6-month daily-payment loan. #AOActionWeek 34

35 APRs using factor pricing #AOActionWeek 35