Eight years ago, the financial world was bedeviled by subprime mortgages. Now predatory lenders are swooping into small business lending as banks leave the space, complain activists for low-income neighborhoods.
A coalition of these neighborhood organizations bemoaned the practice in a webinar on Wednesday.
According to these groups, banks have made fewer loans of $250,000 or less to small businesses. And alternative lenders are filling the gap, often demanding terms than can lead to the borrowers’ demise, claimed Joyce Klein, director of the FIELD economic opportunities program at the Aspen Institute.
In addition to annual interest rates that can exceed 70 percent, Klein said some online marketplace and peer-to-peer lenders are requiring daily payments of the loans. This can siphon away so much cash that entrepreneurs aren’t able to pay their other bills.
She said many of these abuses mimic the problems that led to the meltdown of the subprime mortgage market. At the time, brokers steered borrowers to the loans that got the brokers the largest fees, not to the loans that were best for customers.
Part of the problem is that there is no government oversight of loans at this level, Klein said. While the Consumer Financial Protection Bureau has been aggressive in going after predatory lending to the public, the agency sees its mission as primarily protecting individuals.
“The CFPB and the federal bank regulators don’t have clear jurisdiction,” said Harold Pettigrew, director of entrepreneurship at the Corporation for Enterprise Development.
The banks have themselves even steered small businesses to the predatory lenders when denying the loan applications, complained the activists.
Because the predatory lenders are profitable, they do not have any problem getting the capital they need from banks, the community groups noted.
A number of the groups and the National League of Cities are pushing a “Small Business Borrowers’ Bill of Rights” they hope to push through Congress.