@CFED facebook.com/CFEDNews cfed.org/blog/inclusiveeconomy @CFED - - PowerPoint PPT Presentation

AL ALTER TERNA NATIVE TIVE SMALL BUSINESS LOAN =

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SMALL BUSINESS LENDING ANALYSIS

• Small business loans made
• number and amount by ranges
• no data on applications or applicants
• Business address data from HUD/USPS
• Demographic data from FFIEC
• median family income percentage
• percent minority
• Hispanic/Latino population
• total population

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CRA LOANS UNDER $100,000

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DISPARATE ACCESS TO LOANS

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ACCESS TO LOANS UNDER $100,000

• Number down 9.5%, amount up 5.0%,

2001-2014

• ~529,000 fewer businesses received loans
• Percent of businesses receiving loans

nationally, by tract income, 2012-2014

• low-income – 20.6% (~1 in 5)
• moderate-income – 27.9%
• middle-income – 41.1%
• upper-income – 61.1% (~ 3 in 5)

CDFI Model

Alternative Small Business Lending Webinar

Metta Smith

About Accion serving NM, AZ, CO, NV, TX

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As of April 2016:

• $35MM in assets
• $29MM in loans receivable
• 2,037 active clients
• 345 loans issued in 2016 for $6.2MM
• 11% of loans issued are for more than $50,000

Funding Sources

• CDFI Treasury Fund
• Loans/Lines of Credit
• LLC Investments
• SBIC Investments
• Grants/Donations

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Products

• The Presto Loan
• MicroLoans
• Small Business Loans
• Commercial Real Estate Loans
• SnapFund
• SBA Community Advantage Loans

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Underwriting Criteria

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• Minimum FICO score of 500
• Minimum Bankruptcy Index of 300
• In most cases require collateral
• Considered a “Cash Flow” based lender
• Will fund start ups, non profits, restaurants and business

acquisitions

• Will not fund businesses whose primary revenue stream is

related to Marijuana, Tobacco, Alcohol, Pornography, Predatory Lending, etc.

Loan Details

• Loans from $1,000 to $1,000,000
• Terms from 6 months to 84 months (up to 25 year amortization for

CRE)

• Rates range from 7% for our very largest loans to 22% for the loans

with the highest risk.

• No application fee; a Community Benefit Fee at closing ranging from

1.5% to 8.5% of loan balance

• No Prepayment Penalties

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Maxim Tires: An Accion Success Story

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Maxim Tires, in Denver, specializes in selling used tires, putting a necessity within reach

• f many families who cannot

afford new tires. Owner Mario Valdez understands the financial challenges many of his customers are working to

• vercome. A former Border

Patrol agent, Mario found himself in need of a new line of work following an injury. With previous experience in the tire industry, Mario bought his business from a family member three years ago and renamed it after his youngest son, Maximo.

www.Kiva.org/US jonny@kiva.org

Borrowers

1.2M 90

Countries

1.4M

Lenders Employees

110 7

Seconds between loans

450

Volunteers

$850M

Total lent through Kiva

2.0M

Total loans funded

Kiva U.S. since 2011…

2,163 63 small businesses nesses support ported ed Of w which h over half were minority ty-

• wned

d and half f women-ow

• wne

ned $11,517, ,517,875 875 loaned ned in 47 states tes $0 of interes est and fees charged ged 80,000 000 lenders ders have e made e a loan 354,325 ,325 connecti nnections

• ns made

e between een borrow

• wer

ers and lenders ders 89% repay ayment ent rate

Antisocial underwriting Social underwriting

Lending decisions are made based on financial data – the strength of a borrower’s credit score, collateral and cashflows. Lending decisions are made based on social data – the strength of a borrower’s character, or their standing in their community. Loans (and underwriting decisions) are made for the purpose of minimizing risk and maximizing profit. Loans (and underwriting decisions) are made for the purpose of having a positive social impact. Lending decisions are autocratically made by a single, centralized, objective and inflexible algorithm. Lending decisions are democratically made by a crowd of millions of people – each with their own subjective interests, passions and reasons for lending.

“I can't tell you how much I appreciate your help, and how much I am enjoying this process. Each time I receive an email saying someone donated I get some sort of excitement and happiness!! LOL! It is really rewarding and calming to see the numbers go down!! I very much appreciate being part of this family now, I know how much it helps because of my own experience to help someone with as low as 25 dollars, because it is not

• nly the money but the trust you give to that person that

gives it so much value, and the best part is that this help comes from people you possibly will never know!! Thanks to things like this I truly believe, that small and random acts of kindness at the time in remote places, can truly change the world. Thank you VERY MUCH for your TRUST that is something I would never be able to repay!!!”

www.Kiva.org/US jonny@kiva.org

LENDING CIRCLES: FUNDING THE DREAM

We are a nonprofit organization on a mission to create a fair financial marketplace for hardworking families.

RESPECT BUILD MEET

LENDING CIRCLES

MEET ALICIA

Alicia started her tamale business going door-to-door, selling 100 tamales per week. Lending Circles helped her buy a food cart, expand her team & increase sales to over 4,000 tamales per week. With an improved credit score, she secured a loan to lease a factory & become a tamale wholesaler.

PARTNER SPOTLIGHT

Lending Circ ircle les fo form rmed parti rticip ipants enro nrolle led in in ze zero ro-in interest t loans ave verage loan amount

4 25 $7,800 $315

NETWORK APPROACH

PROVIDERS STATES + DC 50 17

LENDINGCIRCLES.ORG

EXPANDING FINANCIAL INCLUSION

bi bilingual fi financial ed education modules language op

• ptions for

for loa

• an doc
• cuments

20 9

MOHAN KANUNGO,

Director of

• f Pro

rograms

Website: LendingCircles.org Email: mohan@missionassetfund.org Twitter: @MAFpajarito Office: 3269 Mission St. San Francisco, CA 94110

STAY IN TOUCH

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Who is Lending Club?

• The leading lending technology platform
• Founded 2006. Based in San Francisco, CA
• $18 Billion in loans funded
• 4th largest Internet IPO in US history

Goal: Create a more Efficient, Transparent, and Customer- Friendly alternative to traditional banking.

Louis Caditz-Peck, Small Business Lending

What’s Driving Online Small Business Lending

• Banks are not meeting business’ demand for credit.
• Commerce overall is moving online.
• Digital data is widely available, and used in underwriting.
• Technology is enabling lending at lower operating

costs—making smaller loans cost effective.

Annual Community Banking Research and Policy Conference. Available at http://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm

What’s Driving Online Small Business Lending

• Banks are not meeting business’ demand for credit.
• Commerce overall is moving online.
• Digital data is widely available, and used in underwriting.
• Technology is enabling lending at lower operating

costs—making smaller loans cost effective.

Annual Community Banking Research and Policy Conference. Available at http://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm

Federal Reserve Governor Lael Brainard: “Much of the growth in online alternative lending has been supported by innovative uses of technology that allow lending platforms to:

• Streamline and automate loan applications,
• Expedite underwriting and quickly price risk, and
• Provide… quick loan decisions and access to funds.” 1

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Small Business Lending Is Changing Fast…

• Bank lending is down
• Nonbank lending, some of it high-cost, is targeting the gap

Sources: Online short-term estimates based on “The State of Small Business Lending” by former SBA Administrator Karen Mills, published Harvard Business School 2014. SBA data annualized: https://www.sba.gov/sites/default/files/aboutsbaarticle/WebsiteReport_asof_06_20_2015.pdf

$0 $2 $4 $6 $8 $10 $12 $14 2010 2011 2012 2013 2014 2015

Billions

Business Financing of $150k or Less

SBA Loans Estimated High-Cost Online Funding

MCAs and short-term loans have surpassed small SBA loans

Online Alternative Lenders Banks

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Lending Club Can Be The Best of Both Worlds

<1 week with light documentation

50% Typical time to fund 10% 20% 30% 40% Interest Rate & Fees - APR

>1 month with substantial documentation

100%+

1 day with light documentation

Sources: Internal Data, bank websites, alternative lenders websites

Online Alternative Lenders Banks

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Lending Club Can Be The Best of Both Worlds

<1 week with light documentation

50% Typical time to fund 10% 20% 30% 40% Interest Rate & Fees - APR

>1 month with substantial documentation

100%+

1 day with light documentation

Sources: Internal Data, bank websites, alternative lenders websites

For ‘bankable’ SMBs, LC provides same rates as banks with a much faster process

Online Alternative Lenders Banks

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Lending Club Can Be The Best of Both Worlds

<1 week with light documentation

50% Typical time to fund 10% 20% 30% 40% Interest Rate & Fees - APR

>1 month with substantial documentation

100%+

1 day with light documentation

For SMBs without access to credit from banks, LC provides a fast process like alternative lenders, but much lower rates

Sources: Internal Data, bank websites, alternative lenders websites

For ‘bankable’ SMBs, LC provides same rates as banks with a much faster process

Online Lenders Differ – It’s a technology, not a loan term

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Leadership - Small Business Borrowers’ Bill of Rights

You Have A Right To… 1. Transparent Pricing and Terms 2. Non-Abusive Products 3. Responsible Underwriting 4. Fair Treatment from Brokers 5. Inclusive Credit Access 6. Fair Collection Practices

“ ”

55 Loan Amount

$5k - $300k

Rates

5.9% - 25.9%

Term

1, 2, 3, or 5 years

Fees

0.99% - 5.99% origination fee No prepayment penalty

Collateral

Personal guaranty. Unsecured <$100k. UCC filing required for loans >$100k.

Time to funding

Application takes 5 minutes. Get loan offers instantly. Funding received as fast as 2 days. Average 5 days.

Minimum Requirements

2+ year in business Revenues $75k+ for previous year

Lending Club Business Loan Terms

56 Line Amount

$5k - $300k

Rates

6.25% - 21.85%

Term

Lines re-underwritten every 6 months Each draw repaid in up to 25 months

Fees

Free to open. 1% - 2% draw fee. No prepayment penalty

Collateral

Personal guaranty. Unsecured <$100k. UCC filing required for lines>$100k.

Time to funding

Application takes 5 minutes. Get offers instantly. Funding received as fast as 2 days. Average 5 days.

Minimum Requirements

2+ year in business Revenues $75k+ for previous year

Lending Club Business Line of Credit Terms

Applying takes 5 minutes, and does NOT affect your credit score. Before spending weeks applying to a bank, or settling for a high-cost short-term loan, in 5 minutes you can see if Lending Club can help. You can try it at the web address at the top of the screen.

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Opportunity Fund/Lending Club Partnership

Combines the strengths of tech-based and CDFI lending.

Key Points

• Online SB lending focuses on the gap in access to capital
• Technology can enable faster and easier applications, data-

driven underwriting, and cost-effective smaller loans

• Online lenders differ—online is a technology, not a loan term
• Irresponsible practices have grown—get familiar with them
• The Small Business Borrowers’ Bill of Rights is a tool

borrowers can use to assess lending practices

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OVERVIEW OF RESEARCH

• Analysis of actual alternative business loan

documents

• from ACCION Chicago
• Policy implications and recommendations

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ALTERNATIVE ONLINE SMALL BUSINESS LOANS

• Filling the vacuum left by large financial

institutions

• Variety of platforms, business models
• fast, simple, and convenient
• available
• Virtually unregulated
• potentially harmful
• lack basic consumer protections

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ALTERNATIVE ONLINE LOAN TERMS

• Analysis of 15 loans from 14 lenders
• different business models
• Common elements
• 14 under $100,000, 12 under $40,000
• automatic ACH payment every business day

(except one paid weekly)

• neither interest rate nor APR disclosed
• effective interest rate of between 109% and

367% for loans under 200 days

• high prepayment penalty

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INTEREST RATE AND LOAN TERM

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FEES

• Range from 0 to 14.1% of stated gross

loan amount

• Average $756 per loan
• about 2.1% of the average loan disbursed
• Fees include
• origination fee
• ACH fee
• risk assessment fee
• UCC termination fee

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POLICY RESPONSES

• Small Business Borrowers Bill of Rights
• good starting point, but does not require all-in

APR disclosure

• Transparency and comparability
• Ability to repay standards
• Fiduciary duty for loan brokers
• Consumer loan protections for loans

underwritten with personal credit

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NATIONAL POLICY RESPONSES

• CFPB data collection under §1071 –

required elements

• all applications
• applicant race, ethnicity, and gender
• location and gross revenue of business
• type and purpose of loan
• amount requested and approved

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NATIONAL POLICY RESPONSES (2)

• CFPB data collection under §1071 –
• ptional elements
• loan pricing
• industry classification
• number of employees
• creditworthiness of applicant
• collateral
• years the applicant has been in business

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NATIONAL POLICY RESPONSES (3)

• Prudential Regulators
• third-party vendor risk management
• higher CRA performance standards
• enforceable CRA plans with community input

for all proposed M&A

• including small business lending measures
• more proactive approach to supervision
• OCC White Paper

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STATE POLICY RESPONSES

• Small Business Lending Act (IL)
• license unregulated lenders
• require disclosure of all-in APR
• impose ability to repay standard
• real-time loan registry to prevent stacking
• Department of Business Oversight (CA)
• survey of 14 alternative lenders

FOR MORE INFORMATION, FIND US AT :

WWW.WOODSTOCKINST.ORG

FACEBOOK.COM/WOODSTOCKINSTITUTE @woodstockinst

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