Industries

Imagine for a moment a young parent who has been laid off from their job. After months of looking for work they still have not found a job. To make ends meet they start doing landscape work for neighbors in the area, eventually jump-starting a landscaping business to provide for their family. With some hard work, they start to build up a clientele in the local neighborhood. While they are starting to get back on their feet slowly, they realize at the current rate, the business will not completely meet the needs of their young family. If they could borrow just $3,000 to buy some more mowers and trimmers, however, they could hire two friends and double the size of the business. With that in mind, let’s assume that they have a mediocre credit score, their credit card has a credit limit of $1,000 and they are maxed out. Furthermore, they don’t own a home to borrow against, and the loan size they are seeking is too small for a bank to even consider. However, if they could get a $3,000 loan, they could expand their business, create two new jobs and better provide for their family. There are folks just like the person described above all across the country looking for help. But where do they turn? Alternative financing options provide an avenue for entrepreneurs and other small business owners looking for commercial funding, who are otherwise turned down from more traditional financial institutions, such as banks and credit unions. By leveraging business credit data from credit bureaus, such as Experian, as well as other data sources, alternative financers are able to make lending decisions and extend credit to this segment of small business owners, enabling them to finance their company’s growth, ultimately stimulating the economy. One example of an alternative financer using such data to help open opportunity for small businesses is Opportunity Fund, a non-profit micro lender in California. Otherwise known as Community Development Financial Institutions, these micro lenders aim to create economic opportunity for underprivileged businesses in the U.S. And the need for these alternative financial institutions in California is critical. Despite recent upticks in our economy nationwide, things are still very tough in the Golden State. New data released by the Corporation for Enterprise Development (CFED) show many Californians are still struggling to gain a foothold in the economic recovery. CFED’s 2015 Assets & Opportunity Scorecard ranked California 50th among all states and the District of Columbia, for its large number (15.8 percent) of underemployed workers, 49th for both its home ownership and housing affordability rates, and dead last (51st) for high school degree attainment. Source: Corporation for Enterprise Development (CFED) Needless to say, there are a number of small business owners in California looking for financing to help grow their business. Organizations like Opportunity Fund help these business owners find affordable funding, and educate them on what they need to know about expanding. How alternative financers are helping? Opportunity Fund CEO, Eric Weaver & Rosa Funes A prime example of how alternative finance options are helping small businesses is the story of Paradise Flowers and Gifts. In Opportunity Fund’s most recent video, CEO Eric Weaver describes first meeting Rosa Funes, and how she described her longtime love of flowers. As a loan officer at the time, Eric described going to Rosa’s home and knocking on her door. She needed $500 to start a flower business. The amount was smaller than they had ever considered, but Eric was so moved by her story and her drive that he looked at her and said “Yes”, and told her “Rosa, you have a dream, don’t stop.” Alternative finance options, like Opportunity Fund are working hard every day to help small business owners and entrepreneurs gain the financial footing they need to succeed. After all, they are the backbone of our economy. The work that Opportunity Fund and other alternative financers have done will create a powerful ripple effect to drive economic opportunity across California, and the rest of the country. It’s the perfect example of how data can be used for the betterment of society and helps these smaller entrepreneurs grow.

In many cases, business lenders often rely on the commercial credit of the enterprise coupled with the personal credit of the business’s owner when making lending decisions. This is especially true for sole proprietorships and partnerships. To that end, regulatory action and public policy initiatives aimed at consumer credit often times can have a direct impact on commercial lenders. This blog takes a look at some of the top regulatory priorities for business lenders within the credit ecosystem. Ensuring the accuracy of credit data Over the past two years, the Consumer Financial Protection Bureau (CFPB) has taken several actions to make clear that it believes data furnishers — including lenders — are responsible for ensuring the accuracy of the credit data that they report to credit reporting agencies (CRAs). The CFPB issued two bulletins — in September 2013 and February 2014 — reminding data furnishers of their responsibilities under the Fair Credit Reporting Act (FCRA) and the need to properly conduct investigations when a consumer disputes an inaccuracy. The CFPB backed up these bulletins with an August 2014 enforcement action against a lender that it said failed to fix flaws in its software system that were causing it to report inaccurate credit data to the CRAs. Debt collection practices remain in the spotlight Another top focus of regulators that may overlap with small business lending is increased scrutiny of the debt collection market. Within the collections industry, the CFPB has focused on problems related to how information about a debt is transferred from a first party to an outside agency or debt buyer, as well as the standards and timing of when a collections item goes onto a consumer’s credit report. To that end, in December 2014 the CFPB announced that it was requesting the national credit bureaus to provide regular accuracy reports that highlight key risk areas, including disputes, for consumers. The CFPB will use these reports to help prioritize their work on accuracy metrics, including: furnishers and industries with the most overall disputes; and furnishers with high disputes relative to their industry peers. The CFPB also released an Advanced Notice of Proposed Rulemaking (ANPR) in November 2013, covering a wide array of complex issues within the debt collection market. It’s expected that they will release the first version of its proposed rule for the collection market in late 2015 – early 2016. Policies boosting financial inclusion are also critical for business lending Commercial lenders should also pay attention to efforts by policymakers to improve financial access for the more than 60 million American consumers that either have a thin credit history or no credit data at all. In the case of an entrepreneur, a thin or no hit credit file would make it much more difficult to access affordable capital. One way to improve the ability for unbanked individuals to access affordable credit is through the reporting of on-time payments made to utility, telecommunication and rental companies by consumers — often referred to as “alternative credit data.” While they have long made pricing decisions based upon the full-file credit data furnished by creditors, historically telecom and utility companies have only provided negative data — i.e. late payments or if an account is in collection. Including both positive and negative data from these sources will enable tens of millions of thin-file consumers — and small business owners — with a proven record of meeting financial obligations to access fair and affordable credit. The CFPB weighed in on the importance of including alternative data in a 2013 report on financial empowerment. Bipartisan legislation has been introduced the past two sessions of Congress that would clarify federal law to encourage utilities and telecom providers to report positive credit data to the nation’s credit bureaus. Coming soon: CFPB data collection on women and minority owned businesses Small business lenders are also keeping a close eye on the development of the new data collection requirements under the Dodd-Frank Act. Despite the CFPB being primarily focused on consumer lending, the agency was tasked with implementing a provision of the Dodd-Frank Act that required lenders to ask small business applicants if the business was women or minority-owned. The problem is that this question is currently prohibited under Equal Credit Opportunity Act (ECOA), as a creditor cannot inquire about the race, color, religion, ethnicity or sex of an applicant. The CFPB will ultimately have to provide guidance to help resolve the conflict between these two laws. While this new sweeping data collection mandate will not become effective until the CFPB adopts the necessary regulations, it’s easy to see how this could ultimately impact small business lenders. As many have said before, small businesses are the lifeblood of our economy, but they need funds to grow. We’ll want to keep a close eye on each of these initiatives, as the regulatory impact can be huge for small business lenders, and the ability for small businesses to access capital.