April 4, 2016
Main Street Monday — Small Business Fin Tech Lenders Form Alliance Ahead of CFPB Ruling
By Bob Coleman
Editor, Main Street Monday
Welcome to Coleman’s Small Business Lending Podcast with your host Bob Coleman.
Today’s guest is Tom Sullivan, Executive Director for the Coalition for Responsible Business Finance.
The Coalition for Responsible Business Finance (CRBF) is a group of businesses and service providers that advocate for the value of nontraditional lending opportunities for small businesses.
Mr. Sullivan is an attorney in the government relations practice of Nelson Mullins Riley & Scarborough, LLP in Washington, DC.
Previously, upon confirmation by the Senate in 2002, Mr. Sullivan served as the highestranking government official charged with exclusively advocating the views and needs of small business before government agencies and Congress.
Bob Coleman: Non-traditional sources of capital provide small businesses with the ability to start, grow, and thrive in the economy. Small business owners expect and deserve choices for credit and we at the coalition believe that a better understanding of non-traditional small business lending will lead to greater acceptance by customers, regulators, and local state and federal elected officials says Tom Sullivan, Executive Director of the Coalition for Responsible Business Finance. Tom, welcome. By the way, another shut out. You were formerly with the SBA with the Office of Chief Advocacies, so welcome. What is that statement all about? Tell us what’s going on.
Tom Sullivan: Well, Bob, I couldn’t have said it better myself. I did say it, so –
Bob Coleman: You did, yes. It says Sullivan says right there, okay.
Tom Sullivan: Yeah, it’s really just – this is an answer to the curiosity that Washington has about non-traditional small business lending. The good news is that Washington, D.C. policymakers and Congress and in federal agencies are curious about non-bank lending, alternative lending, thin tech lending, all those different terms. So that’s the good news, the bad news is that Congress and federal agencies are curious about non-traditional lending.
Bob Coleman: You took the next question right out of my notes. Set this up for us. Why is Congress curious about this? What’s happening on the hill that the industry should know about? What future pressures are going to occur?
Tom Sullivan: Well, there’s a small business lending gap or there’s a small business cash gap that exists and some would argue that that gap has gotten bigger after Dodd-Frank. You have community banks that, unfortunately, are not able to make loans at a profit for under $150,000 or $100,000, but small businesses still need that capital. They need that capital from $10,000 up to $250,000 and anywhere in between and so Congress wants small business to be successful. They know that that success sometimes hinges on access to capital and so how to fill in that gap is a question that policymakers have.
The non-traditional small business lenders, the thin tech folks who were using innovation to get money to small business quicker and in a way that is less expensive they’re uniquely positioned to fill that gap. So Congress wants to know about them, they want to help them and so do federal agencies, but the curiosity and sometimes the misinformation on how they are basing their assumptions really has to be satisfied and that’s what this coalition is all about. The coalition is getting in front of Congress, getting in front of the alphabet of federal regulators and explaining the value of innovation in the financial marketplace.
Bob Coleman: Well, the huge criticism of the industry is interest rates, it’s the elephant in the room. Tom, how do you defend them? Are they defendable? I read when the OnDeck goes public that their rate’s over 50 percent. They said, okay, we’ll cap it at 50 percent. That’s a pretty hefty price for the Main Street entrepreneur, isn’t it?
Tom Sullivan: It depends who you ask and so I will try to defend OnDeck as best I can, but really I’d like to –
Bob Coleman: You’re not on here to be the OnDeck apologist and I’m not [unintelligible 28:09] on them. That’s what they said, that’s what they said.
Tom Sullivan: Well, what I will defend though are small business borrowers. So if you ask a small business borrower are you on a level playing field with your lender you may get a different response, but if you ask that small business owner do you want choices on how you get additional capital the uniform response across the board will be yes. And so what our coalition is really about is making sure that fairness and how you look at fairness certainly depends on what set of eyeglasses you wear, but fairness that allows a small business owner to be on a level playing field with their lender. And that means all the information in front of the small business that the small business owner needs to make a choice then it’s up to that small business owner to decide whether a high rate is not acceptable. It shouldn’t be necessarily up to a federal regulator to draw a line in the sand to say 32 percent is too high.
Bob Coleman: I understand.
Tom Sullivan: That’s where our coalition is going.
Bob Coleman: And I understand speed to market. I certainly understand if you’re strapped for cash. I have a friend of mine, he owns a restaurant, his air conditioning went out. If he didn’t get $10,000 to get it fixed within 48 hours he was out of business, so I understand that. But the flip side is, well, perhaps he should have been a little bit better steward to have those type of reserves. So how do you defend yourself, how does the industry move from this perception of payday lending for small business to say hey, we’re viable and this is an important product for Main Street.
Tom Sullivan: Well, I think there’s two ways and this is where my background as a small business policy official comes into play. One way is to simply raise the standards of doing business, so that every small business owner has in front of them before making a loan decision the information for them to make a choice, a fair choice. The other part of it though is really when you step back from an individual transaction no one wants a small business to fail whether it’s your friend, my friend, folks we interact with every day in our professional and personal lives, but the fact of the matter is that small businesses do fail. Or you create high-tech firms out of your garage and you make a mistake you fail and data show that that next venture that you start has a better chance of succeeding and growing and hiring more people. And so business owners never want to fail, but they want that success or failure to be based on their own shoulders, not necessarily on the shoulders of government requirements and mandates.
Bob Coleman: Yeah, all right, I beat you up well enough on interest rates, so let me give you the softball question. How does your group feel about transparency, disclosing rates? That seems to be a buzzword these days.
Tom Sullivan: My group is all about transparency. You know some of the members of my group.
Bob Coleman: Yeah, very impressive, sure.
Tom Sullivan: Jim Salters with The Business Backer has been an outspoken advocate against stacking, for instance. Carl Fairbank with Breakout Capital which is one of the newer entrants into the market is an outspoken critic of double-dipping. They believe the answer to some of these bad practices within the industry is greater transparency and really putting the burden both on the lender and the responsible borrower and that’s what sets our coalition apart from some of the other efforts that are out there. There are dozens of companies that have hired lobbyists in Washington, D.C. to really do a good job of educating. Our effort is unique because we have small business groups that are serving on our advisory board who honestly believe that it is the fairness of the transaction between a responsible business owner and a responsible lender that will allow this market to stay long-term and really to be a trusted and reliable source for capital for small businesses.
Bob Coleman: Well, and I agree with you. You certainly have a broad spectrum of participants on your board, your advisory board. NFIB, we all know what that is, National Small Business Association, good for you. But now I’ve got some bankers on the line who they understand those acronyms, but you threw out a couple of terms that they probably do not know. So keeping with the theme of transparency, Tom, give me a stacking, double-dipping 101. What exactly is that and why is that so insidious for Main Street?
Tom Sullivan: Well, the way that folks have described stacking to me is that when you have a cash advance and another finance company convinces the business owner to take another cash advance on top of it and another and another and another and then you end up, unfortunately, in a difficult position to pay anything back.
Bob Coleman: Right.
Tom Sullivan: And I think what is particularly bad about the practice and I’ll put on my lawyer hat is that the original contract between the small business and the merchant cash advance company generally says that you can’t enter into another contract for a similar debt obligation. And so the idea that you would have different parts of the supply chain encouraging that small business owner to break the contract, break the legal contract, is not something that our members want to be a part of. They believe that the way to really get rid of stacking and to encourage or to discourage stacking is to make the small business owner aware of their underlying legal obligations in a way that will prevent it from happening. Now the double-dipping has been described to me really by one of the better videos I’ve seen on it. It’s on the Business Backer’s web site.
Bob Coleman: Yeah, yeah, Jim’s, right.
Tom Sullivan: Yeah, and it describes someone buying a full tank of gas, driving to half a tank, going into a gas station, filling up that half of tank and getting charged for the underlying full tank plus a half tank. So it is the situation where you’re refinancing or restructuring a loan or a cash advance and you end up paying double from what you think you’re getting. And again the answer that we are trying to work through as we are committed to developing best practices for the industry, we are really trying to figure out a way that a small business owner through upfront information wouldn’t slip into a double-dipping situation.
Bob Coleman: Yeah.
Tom Sullivan: The idea of –
Bob Coleman: I was going to say I got involved with that with Hertz. I seem to always buy the full tank of gas and only use half of it, so go ahead.
Tom Sullivan: And this is a great example of how our coalition works because the solution to the Hertz problem is when someone’s helping you get a rent-a-car and says hey, Tom, don’t be fooled by that gas option and then you listen to a trusted advisor and the next time you rent a car from Hertz you don’t do it. Well, that’s really the way that our coalition believes we can solve some of these practices that are giving the overall industry a bad name is providing that [crosstalk].
Bob Coleman: Yeah, interesting analogy because there they’re going hey, Bob, you don’t have to get out of your car in the rain and fill it up and you’re not going to miss your flight, so there’s your benefits. But your trusted advisor says yeah, but there’s a big cost to that benefit.
Tom Sullivan: I remember several years ago when American Express sent out a notice saying you really don’t have to sign up for that additional insurance waiver when you rent a car. That was the first that I had heard that oh, I don’t have to pay for an extra thing every time I already rent a car and so relying on a trusted advisor – at the time I was working with some folks at American Express. I now can put a little bit money back in my wallet every time I rent a car.
Bob Coleman: Very good. I see that PayNet is part of your group. We’ve had Bill on this show and he’s the data guru and his stats say hey, we are at an all time low or high, I don’t know what the right term is, but in terms of loan performance it’s as good as it’s ever been for Main Street borrowers. How does your group feel about that? We’re always worried about financing, we go into cycles. Do you have an opinion of how Main Street is performing on their obligations these days and is that a risk in the future?
Tom Sullivan: Well, we certainly rely very heavily on Bill Phelan and his reputation as a data guru. He not only is a master of small business lending data, he also is pushing our coalition really to spread the message of how important access to capital is for small business and how uniquely positioned non-traditional small business lenders are to fill that gap. So when it comes to the direction of our coalition I think it would be a safe bet to say that if Bill Phelan says something we’re probably going to be pushing the same agenda. He’s a great part of the leadership of our coalition.
As far as where’s the risk in small business lending, Bill’s company puts out really interesting data on default rates and tries to give a crystal ball view of where the risk is going and we are set up to try to push that information out to an even broader audience of policymakers and stakeholders. So I can’t answer if small business is risky or not risky, but what I can tell you is through Bill’s leadership the information that PayNet is so proud of will be pushed to an even broader policy audience because of his leadership on our coalition.
Bob Coleman: Yeah, and he has a lot of good data that if you’re not familiar with his company go to PayNet.com and see what they do. It’s pretty cool stuff. I want to go back to the stacking thing and you’re the attorney and we have a lot of SBA lenders that listen to this podcast. We had an interesting conversation, one of them said I understand the stacking thing, but I have a ten-year loan, I have a UCC – now we’re getting into the weeds because there are bankers on the line, so we have to get into the weed stuff. I have a UCC against all assets, AR and inventory, and I have a ten-year loan. Then a thin tech lender will come in and give him a nine-month loan, but it’s not a loan, it’s an advance and he argued hey, I’m being stacked. How do you respond to that?
Tom Sullivan: Well, what does a small business owner say? I’m being a typical lawyer, we answer all our questions with a question.
Bob Coleman: I need the money, I need the money. I need the money tomorrow. The same analogy, it’s speed to market.
Tom Sullivan: I think the answer in short is what does the small business say when presented with the information, what’s the relationship between the small business owner and the original lender? And how does that relationship either break the law by him taking additional debt on or allow for that small business owner to take on additional debt with the acquiescence of all parties involved.
Bob Coleman: Right, and it goes to the level of sophistication. He is saying is in today’s environment I am now losing the historical relationship that a lender would have with the borrower that if there was an issue that person would come and sit down across my desk and say I need ‘x’ amount of money and together as partners we’d work it out, but today they lose that control. And so I would assume you would argue that, you know what, that’s probably okay, correct?
Tom Sullivan: Well, Bob, we’re in a situation in Washington, D.C. where folks use different terms for different reasons. What’s that famous line? It depends what the definition of is is, so I don’t think stacking is really much different. People throw around the term, but mean different things. And if stacking means you’re breaking the law and that you are violating or encouraging a small business owner to violate the contractual obligation that that small business owner has with the original lender then our coalition is going to oppose that and try to raise industry standards to make sure that small business owners don’t get into that situation.
On the other hand is there any small business owner that doesn’t have more than one debt obligation? We all do. Whether you have a mortgage and a car loan or you have two car loans and you take out a home equity line and so the idea that folks would throw all of those things into the definition of stacking would be very dangerous because that would mean that everyone would be stacking in both their personal and professional lives. So I think if you get really into the definition of it and you realize that our coalition does not want to encourage small business owners to break their underlying contractual obligations with lenders then that’s a much more accurate way to show how we are trying to be leaders and raise industry above the practice that that would be defined as stacking.
Bob Coleman: Well, let’s move off that topic. I think I’ve beat you up on that enough, the seesaw. I got you on interest rates, I got you on stacking, okay. Let’s talk about something that is an unknown, the Consumer Finance Protection Board. If I’m a banker, let’s start from that. I’m a community banker and I know it’s out there and Coleman writes about it from time to time and they’re going to go after these thin tech lenders, but why should I be aware of what may happen or what will happen?
Tom Sullivan: Well, the Consumer Financial Protection Bureau has incredible power over all aspects of the financial sector and so the idea that –
Bob Coleman: All right, I’m going to interject you because the most common thing is and I’ll telegraph, this is a softball.
Tom Sullivan: Sure.
Bob Coleman: But it’s consumer, it says consumer finance protection. I’m a small business lender, so how does this affect me? Go ahead, Tom.
Tom Sullivan: Oh, don’t be fooled by the label. Good for people having that reaction. The reality if you look past the label is that after the mortgage crisis when Dodd-Frank created a new agency to try to prevent the mortgage crisis from happening again they extended incredible authority to this new agency called the Consumer Financial Protection Bureau. Those authorities extend well beyond just consumers and so, for instance, the Equal Credit Opportunity Act. The authority for overseeing and enforcing that act was given wholesale to this new agency and so that extends well beyond consumer finance.
There’s also an argument that in America one of the greatest things about small business is that you can have no employees, file a Schedule C with your tax returns, and be a small business owner. You’ve probably seen the same data I have, Bob. Over two-thirds of all of the millions of small businesses in America file their taxes as individuals and so at that point you start getting a very blurred line between what is a commercial loan and what is a personal loan. Our friends with NAGGL and the SBA lenders on the line know that this is an issue that SBA has struggled with for decades on whether or not the proceeds of a government-backed loan are being used for personal or commercial reasons. And we rely on the small business owner to say in legal documents that they’re using it for commercial purposes and that’s just part of the cool small business and entrepreneur world and in particular the American small business experience.
So that is a long way of saying that just because CFPB starts with the word consumer does not mean that it doesn’t have the authority or interest in small business lending. Director Cordray who will be the Director of CFPB for an additional two years regardless of who wins the election in November because his term is by law, it is not subject to political change in the White House and in his setup of the agency he now is hiring a head of small business lending. The idea that CFPB is creating an entire office with a very senior official heading it whose entire focus is on small business lending, I think, is a pretty good indication that we should be talking with CFPB about how thin tech works, how it is providing value to the small business community and working with that agency to make sure that their curiosity does not lead to things that would be destructive to the industry and just crush it before it has a chance to blossom.
Bob Coleman: You’ve obviously put these companies together, companies that I respect, as I mentioned before NFIB and SBA. So obviously you feel that there’s a need for a coalition to get together to speak with one voice. How optimistic are you that you will be successful?
Tom Sullivan: I’m an optimistic person. Anyone who works with small businesses whether it’s you or the NAGGL small business lenders, one of the blessings we have is that small businesses are eternally optimistic and so I just feed off of that optimism myself. And I think our coalition will be tremendously successful and I think that our coalition is going to be successful also because there are a lot of other efforts going on. You mentioned OnDeck, I know they’re in Washington, D.C. From time to time CAN Capital, Kabbage, others, they fly into Washington, D.C. and just their presence here meeting with OCC, SCC, SBA, FDC, CFPB and 550 members of Congress, that provides a benefit not just for my coalition, but the sector at large.
Really the uniqueness of my coalition is what happens before the fly in and after the fly in because all of these CEOs they have companies to run and good for them for making a concerted effort to have the pre-meeting and the follow-up from the meeting really guaranty their voice in the policymaking that goes on in Washington, D.C. So I think that our coalition will be successful and I’m certainly hopeful that other efforts will be successful, too, because we do not want this sector to go the way of the dodo. We want agencies and Congress to embrace it. We see a thin tech agenda already announced by Congressman McHenry from North Carolina and I think we’ll deal with this sector in a very positive way and so we’ve just got to keep the drumbeat going.
Bob Coleman: Yeah, and obviously I know the thin tech lenders are concerned about what may happen, but as I’ve been reporting as well traditional community bankers and traditional Wall Street bankers and traditional – any type of non-bank lender. I don’t want to use the word concerned, but I would say they need to be aware of the changes that will be happening because there will be changes absolutely.
Tom Sullivan: And, Bob, you mentioned the depositories and I certainly represent the alternatives. What I find so fascinating is the combination. A foundation out of New York had a fantastic partnership with Regions Bank and then more recently entered into a partnership with BancAlliance, partners with community banks all across the country. I think the thin tech and community bank mergers where you both have the Main Street brick and mortar community bank and then many times behind the scenes in a backroom you have an alternative finance partner, I think that that is going to be the phenomenon of 2017.
Bob Coleman: Oh, I agree. Yeah, I agree. Tom, I’ve got one last question for you. A Bipartisan Policy Center out of Washington, D.C., what does the Bipartisan Policy Center do? You were the community service chair, tell us about that organization.
Tom Sullivan: Well, I was over at the general counsel for two years at the Bipartisan Policy Center and they do great work. They firmly believe that you can be highly partisan on specific issues like Dodd-Frank and finance and housing and healthcare, but still agree with the other party on the end goal. Their whole equation at the Bipartisan Policy Center is you force these highly partisan individuals to talk about meeting goals like affordable housing, like access to capital, like a reliable banking system and out comes these areas of commonality that Republicans and Democrats can agree on without sacrificing their hardcore partisan beliefs. It’s a great equation and no one does it better than the Bipartisan Policy Center.
Bob Coleman: Well, good for you, good for you. Tom Sullivan, Executive Director, Coalition for Responsible Business Finance. Thanks for the conversation, Tom.
Tom Sullivan: Thank you, Bob.
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Episode 6 — Bill Phelan, CEO and Co-Founder, PayNet Inc.
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Episode 5 — Mike Rozman, CEO and Co-founder, Boefly.com
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