Syndicated columnist Ellen James Martin covers the complicated financial and lifestyle issues facing anyone who buys, sells or finances a home.
By Gillian Parker
Johannesburg A consumer credit boom in South Africa has trapped millions in swirling debt. The countrys debt problem came to a head in August when the Central Bank and commercial lenders had to rescue African Bank from a flood of bad debts – mostly racked up on risky unsecured loans. The bailout placed a spotlight on the rapid growth of unsecured lending in South Africa.
Under apartheid, racial inequality left the majority of South Africans without access to banks. The 1994 transition to democracy set off a boom in consumer credit as many banks, most notably African Bank, offered loans to blacks for the first time.
But 20 years later African Bank was overcome by unsecured debt, loans obtained with little or no collateral, taken out by its core market of low-income borrowers, who defaulted due to chronic unemployment and rising fuel and food costs.
Ian Wason, CEO of Debtbusters, a debt management service, said that despite noble intentions the bank ultimately did a large amount of harm.
The premise that African Bank started out with was good. But what it turned into was very, very evil; and exploited unsophisticated, uneducated consumers – and far from socially uplifting the country they have actually caused huge damage, said Wason.
In October 2013, African Bank was fined $2 million by the National Credit Regulator for reckless lending to consumers with inadequate means to repay loans. The bank pressured uneducated customers to take on bigger loans than they asked for and in some cases gave additional debt to defaulters, a regulation source told VOA.
Debt counselors contend that irresponsible lending is rampant in South Africa.
South Africas total personal debt is $135 billion, an average of $6,356 for each of the countrys 20 million credit active people. Almost half struggle to meet repayments, according to South Africas credit regulator.
A glut of poor South Africans looking for a better life after living through oppressive white-minority rule has pushed up demand for credit, said Wason.
The New York Times is again on the warpath against what it calls predatory lending.
Just what is predatory lending?
It is lending that charges a higher interest rate than people like those at the New York Times approve of. According to such thinking — or lack of thinking — the answer is to have the government set an interest rate ceiling at a level that will be acceptable to third parties like the New York Times.
People who believe in government-set price controls — whether on interest rates charged for loans, rents charged for housing or wages paid under minimum wage laws — seem to think that this is the end of the story. Yet there is a vast literature on the economic repercussions of price controls.
Whole books have been written just on the repercussions of rent control laws in countries around the world.
These repercussions include the housing shortages that almost invariably follow, the deterioration of existing housing and the shift of economic resources — both construction materials and construction labor — from building ordinary housing for the general public to building luxury housing that only the affluent and the rich can afford, because that kind of housing is usually exempted from rent control.
There is at least an equally vast literature on the repercussions of minimum wage laws.
Unemployment rates over 20 percent for younger, less skilled and less experienced workers have been common, even in normal times — with much higher unemployment rates than that during recessions.
Against this background of negative repercussions from various forms of price control, in countries around the world, why would anybody imagine that price controls on interest rates would not have repercussions that need to be considered?
Yet there is remarkably little concern on the political left as to the actual consequences of the laws and policies they advocate. Once they have taken a stance on the side of the angels against the forces of evil, that is the end of the story, as far as they are concerned.
Low-income people often get short-term loans when they run out of money to meet some exigency of the moment. The interest rates charged on such unsecured loans to people with low credit scores are usually higher than on loans to people whose higher incomes and better credit histories make them less of a risk.
Crusaders against such loans often make the interest rate charged seem even higher by quoting these interest rates in annual terms, even when the loan is actually repayable in a matter of weeks. It is like saying that a $100 a night hotel room costs $36,500 a year, when virtually nobody rents a hotel room for a year.
Because those who make unsecured short-term loans are usually poor and often ill-educated, the political left can cast the high interest rates as unconscionably taking advantage of vulnerable people.
But similar economic principles apply to more upscale short-term lending to well-educated people who have valuable possessions to use as collateral.
A small-time businessman who suddenly finds that he does not have enough cash on hand, or readily available from a bank, to pay his employees this week, knows that if he doesnt pay them this week he may not have any employees next week — and can face lawsuits the week after that.
There is an upscale lending market available to such people, where he can use his expensive personal possessions as collateral to get the money he needs immediately.
He can borrow more money than the poor can borrow, and at not as high an interest rate.
But his interest rate can still be 200 percent if figured on an annual basis — even though he may be able to pay off the loan next month when his customers pay him what they owe him, so he is paying only a small fraction of that hypothetical 200 percent, just as the poor are paying only a small fraction of the hypothetical 300 percent or 400 percent that they are charged.
Editorial demagoguery against predatory lending might well be called predatory journalism — taking advantage of other peoples ignorance of economics to score ideological points, and promote still more expansion of government powers that limit the options of poor people especially, who have few options already.
Thomas Sowells website is www.tsowell.com.
HOUSTON, Oct. 15, 2014 /PRNewswire/ –Nearly 150 high school juniors and seniors from six area high schools got a lesson in financial education and learned about careers in sports management during a Business of Sports event at BBVA Compass Stadium yesterday.
The Business of Sports program, sponsored by BBVA Compass, Junior Achievement, the Houston Dynamo and Dynamo Charities, educates students about workforce readiness and financial literacy. A team of bank and Dynamo executives, Dynamo goalkeeper and BBVA Compass brand ambassador Tally Hall and Dynamo midfielder Tony Cascio used their own experiences to demonstrate how students can pair a passion for sports with a career.
We are excited to be here for the third-consecutive year to provide insight into sports management careers and the role banking plays in sports, said BBVA Compass Houston City President Mark Montgomery. These students are bright and eager to learn, and its really a privilege for us to be able to help them reach their goals through answering questions and talking about our experiences.
The program also requires each student to complete Junior Achievements personal finance program at their school, taught by BBVA Compass employee volunteers. By participating in the program, students are eligible to apply for one of five $1,000 Junior Achievement scholarships, funded in part by proceeds from the annual BBVA Compass Dynamo Charities Cup.
It has been an honor and a pleasure to participate in todays Business of Sports event alongside BBVA Compass, said Dynamo president Chris Canetti. I hope the students who participated were inspired by what they heard from the members of our panel and can benefit from our thoughts and experiences.
The Business of Sports program is part of the Building a Better Houston campaign launched by BBVA Compass, the Houston Dynamo and the Dynamo Charities before the May 2012 opening of BBVA Compass Stadium.
About BBVA Group
BBVA Compass is a subsidiary of BBVA Compass Bancshares Inc., a wholly owned subsidiary of BBVA (NYSE: BBVA) (MAD: BBVA). BBVA is a customer-centric global financial services group founded in 1857. The Group has a solid position in Spain, is the largest financial institution in Mexico and has leading franchises in South America and the Sunbelt region of the United States. Its diversified business is geared toward high-growth markets and relies on technology as a key sustainable competitive advantage. Corporate responsibility is at the core of its business model. BBVA fosters financial education and inclusion, and supports scientific research and culture. It operates with the highest integrity, a long-term vision and applies the best practices. The Group is present in the main sustainability indexes. More information about the BBVA Group can be found at www.bbva.com.
About BBVA Compass
BBVA Compass is a Sunbelt-based financial institution that operates 673 branches, including 342 in Texas, 89 in Alabama, 77 in Arizona, 62 in California, 45 in Florida, 38 in Colorado and 20 in New Mexico. BBVA Compass ranks among the top 25 largest US commercial banks based on deposit market share and ranks among the largest banks in Alabama (2nd), Texas (4th) and Arizona (5th). BBVA Compass has been recognized as one of the leading small business lenders by the Small Business Administration and recently earned the top ranking with customers in American Bankers 2014 annual reputation survey of the top 25 largest US retail banks. Additional information about BBVA Compass can be found at www.bbvacompass.com, by following @BBVACompassNews on Twitter or visiting newsroom.bbvacompass.com.
BBVA Compass is a trade name of Compass Bank. Member FDIC.
Logo – http://photos.prnewswire.com/prnh/20140825/139263
SOURCE BBVA Compass
For years, the conventional wisdom on housing was simple: Never rent when you can buy.
Then came a little thing called the crash of 2008, when housing values plummeted, thousands of
homeowners faced foreclosure and a lot of credit was destroyed.
“It used to be a foregone conclusion that you buy a house at X, and it will be worth Y in five
or 10 years,” said Jeffrey Lichtenstein, executive vice president with Market Mortgage Co. in
Worthington. “That’s not the case anymore.”
The recession, in fact, scared many young people away from homebuying.
But now, with rents rapidly rising and mortgage rates remaining low, buying is starting to
look appealing again.
“You can own a home for less than it costs to rent, plus you get a tax deduction,” said
Marianne Collins, executive director of the Ohio Mortgage Bankers Association.
Yet the decision to buy (or not) isn’t strictly a financial calculation.
Those facing the choice, experts say, should consider five key questions.
Are you ready?
Before doing the math on the finances, renters first should address a lifestyle question.
No matter how new or well-maintained a home is, it requires more attention and time than a
rental. If you spend your Saturdays at the gym, the mall and the bar — or on the road — think twice
before buying, experts say.
You’ll quickly resent the duties, chores and expenses linked to owning a home.
“Homeownership isn’t for everyone,” Collins said. “A lot of young people don’t want to be
tied down with a home. They are very mobile, so it may not be the right decision.”
Likewise, consider the neighborhood.
If you can’t imagine living outside the Short North, Downtown, German Village or other
fashionable areas of town, you might want to keep renting to preserve such a lifestyle instead of
buying a home in a neighborhood where you don’t want to be.
On the other hand, if you’re weary of being told what you can and can’t do to your rental,
eager to make a place truly your own and want the privacy that typically comes with homeownership,
you might want to take the plunge.
“It’s as much an emotional decision as anything,” Lichtenstein said. “In a way, it’s a rite
of passage to own a home.”
How long will you live in your residence?
In calculating the finances of homeownership, this question is most important.
“The biggest issue is your time horizon,” said Luke Salcone, a financial adviser with Summit
Financial Strategies in Worthington. “Buying is not a short-term commitment.”
Your chances of making money on a home increase along with the time spent owning it.
When you don’t stay long, the home has no opportunity to appreciate in value. Plus, potential
profits will be chewed up by one-time expenses — including closing costs ($3,000 to $4,000); the
costs of moving and furnishing a new home (anywhere from a few hundred to several thousand
dollars); and the costs of selling (in central Ohio, typically 6 percent of the sales price).
Also, keep in mind that, for the first several years of a mortgage, the payment goes almost
exclusively to interest, not principle.
A rule of thumb: If you expect to be in the home fewer than four years, your odds of
recouping your investment aren’t good; if you plan to be there more than 10 years, the odds are
“In my mind, seven years is safe (and) 10 years is even a safer bet, just because the value
of your home will change over time,” Salcone said. “Ten years would give you more of a buffer if
you’re in a volatile housing market.”
So, if you think a marriage, a job change or another notable life event could prompt a move
within the next few years, renting might be a safer option.
Can you afford to buy?
The traditional rule of thumb is to spend no more than 31 percent of your gross monthly
income on housing.
In other words: If you earn $50,000 a year, you should allocate no more than $1,300 a month
for housing expenses. Keep in mind, though, that this amount — a maximum — must include all the
fixed expenses of housing: mortgage, taxes, insurance and any condominium or home-association dues.
If a buyer has other regular monthly expenses — such as student loans, car payments or other
debt — they should lower that 31 percent figure.
Buyers also need to have some cash in the bank. Traditionally, homebuyers needed to put 20
percent down on a home. That percentage is still ideal because putting down less typically forces
borrowers to pay a monthly mortgage-insurance fee.
Still, several programs allow buyers to get in with far less than 20 percent. Federal Housing
Administration (FHA) loans traditionally require 3.5 percent down, although they come with a large
monthly insurance fee. Some conventional loans require as little as 5 percent down.
Young buyers should ask lenders or counselors about programs designed to help first-time
buyers, recent college graduates, or teachers and police officers buy a home.
If you struggled to pay your bills, renting is the best choice.
You need to have good credit to buy a house, but it needn’t be perfect.
Most banks will loan to borrowers with credit scores as low as 640, with some going as low as
580 under certain circumstances.
Can you afford to live in your own home?
The monthly mortgage payment is only a portion of expenses that buyers need to consider.
Taxes. This is the huge hidden expense of homeownership. Tax rates vary by municipality and
school district, but, as a rule of thumb, expect to spend an extra $400 a month if your home is
worth $200,000 in central Ohio.
Insurance. Homeowners must also carry insurance. Again, rates vary by the value and location
of the house, but plan on spending about $1,000 a year.
Routine maintenance. There is no way to precisely predict maintenance costs, but buyers
should expect to spend $150 or $200 a month for the odds and ends of homeownership, such as
replacing a refrigerator gasket, fixing a broken kitchen cabinet, spreading lawn fertilizer or
putting in a new furnace filter.
Miscellaneous expenses. Even aside from maintenance and renovation expenses, homebuying often
carries unexpected costs.
“We see a lot of people move from a small apartment into a larger house,” said Daniel
Ruggiero, a program director and housing counselor with Homes on the Hill. “They end up buying a
lot of furniture using credit cards. Or they buy far out in the suburbs and don’t realize how much
they’ll spend in gas.”
Utilities. While renters often pay many of their utilities, they will almost certainly pay
more while living in a home of their own. In addition to gas and electric bills, homeowners must
pay for water, cable television and sometimes special assessments or dues.
Once these extra expenses are accounted for, the $900-a-month mortgage payment on a $180,000
loan climbs to more than $1,600 — a total that doesn’t include:
Big-ticket items. Aside from regular expenses, homebuyers need to consider bigger expenses
that eventually come with ownership — such as replacing a roof, furnace or windows, each of which
costs thousands of dollars. The longer you’re in the home, the more such expenses you’ll face.
“Where a lot of borrowers make a mistake and get themselves in trouble is, they don’t plan
for maintenance problems,” Collins said.
“They’re one furnace failure away from getting into trouble. You don’t have a landlord you
can call anymore when something goes wrong.”
Being able to maintain an emergency fund for such expenses is crucial. Salcone suggests a
nest egg equivalent to three to six months of mortgage payments.
Tax break. The federal government rewards homeowners by allowing them to deduct mortgage
interest and property taxes from their taxes. The deductions can save buyers thousands of dollars a
Are you disciplined?
Homebuying is often billed as a sort of a mandatory savings account. It forces owners to
build equity over time.
Renters can equalize some of the advantages of buying if they are disciplined enough.
If a renter, for example, invests $20,000 in the market instead of using it as a down payment
and closing costs on a house, after 10 years, they would have almost $40,000 if they get a 7
percent return each year.
Likewise, renters can make up some gains by investing the difference between rent and the
cost of ownership, assuming that owning costs more.
In truth, though, very few renters are that disciplined.
Either way, potential buyers need to understand all the ramifications of their decision.
“Do your research, get educated, take a class like we offer, meet with real-estate
professionals,” Ruggiero advised.
“We have quite a few people who come through our first-time homebuyer class who determine
they aren’t ready, which for us is a successful outcome. It beats getting foreclosed on.”
Guide to Life storieslt;lt;
Housing counselors: For a list of federally approved housing counselors in central Ohio,
www.hud.gov. Under “Resources,”
click on “HUD Approved Housing Counseling Agencies.”
First-time homebuyer programs: For a list of incentives available for first-time homebuyers
in Ohio, visit
www.OhioHome.organd click on ”
Rent-vs.-buy calculators: The Internet is full of calculators designed to help renters decide
whether the time is right to buy. One of the better ones can be found on the site of the
Worthington mortgage firm Market Mortgage Co.:
YOU get into your car, turn the ignition key and nothing happens. Cursing the unpredictability of your Chrysler minivan, you suddenly remember you have neglected to pay your car loan for the past month. Somewhere, your lender has just flipped a switch to remotely cut off your ability to turn on the engine and, unless you pay soon, they will be coming for your car. The repo man dispatched to knock loudly at your door will be a heartless robot.
This is the nightmare scenario outlined in a recent New York Times article on the use of new technology to repossess the cars of delinquent borrowers. Using global positioning systems (GPS) to track your vehicle, lenders are now able to deactivate it remotely should payments be missed (hopefully not while it is being driven, although there is debate about this).
Coupled with the obvious privacy and safety issues is another, equally pernicious element â?? not only is the repo man a dispassionate mechanoid, the removal of your means of transport is ultimately in service of greedy bankers and investors. The article suggests a feedback loop between Wall Street and the use of so-called starter interrupt technology.
Profit-hungry investors are clamouring for subprime vehicle asset-backed securities (ABS), or bonds that bundle together car loans made to riskier borrowers, as they seek out higher-yielding assets. This demand has helped spark a lending boom and sales of subprime vehicle ABS total $17.4bn so far this year â?? on track for the highest annual issuance since 2006.
New subprime car lenders such as Skopos and Pelican Auto Finance now offer car loans alongside more established players Ally Financial and Santander Consumer USA.
The use of new technology that allows lenders to repossess cars should be, in theory, a game changer for the resulting assets. Investors still get juicy yields â?? they are buying slices of loans made to risky borrowers â?? but if the worst happens lenders have a nifty and hassle-free tool to collect collateral and minimise losses.
In theory, recovery levels for investors in ABS should increase. The boom in sales of subprime vehicle securities has been notable, but it is unlikely this explosive sales growth has much to do with the adoption of new car-disabling technology.
Research published this month by Deutsche Bank found that, of the relevant subprime auto ABS deals that have come to market this year, only two mentioned GPS usage in their deal documentation and none talked of starter interrupt technology. If the US vehicle lenders are employing this technology, Wall Streetâ??s bankers and investors are certainly not talking about it.
It is an odd omission. Somewhere between dealers selling starter interrupt technology-equipped cars, lenders agreeing to finance the purchases and the subsequent loans being bundled into bonds and then sold, disclosures and discussions about the use of this new technology are being lost. Wall Street has often had a love-hate relationship with technology; unless a shiny new gadget will boost profits there is little incentive to spend money forcing technological change. Bond trading is a case in point â?? for years Wall Streetâ??s biggest banks have resisted a shift to electronic trading in the corporate debt market. Big corporate bond trades are still largely made by phone, where there is little pretrade price transparency for investors but plenty of moneymaking opportunities for the banks that arrange trades. In other words, there is sometimes profit to be made from Wall Streetâ??s technophobia.
Â 2014 The Financial Times Limited
ALBANY, NY (AP) — New York regulators have begun investigating short-term, high-interest loans secured by borrowers homes or other real estate to determine if they violate state laws against predatory lending.
The Department of Financial Services says Tuesday it has issued subpoenas for information from nine companies involved in so-called hard money lending.
Under the deals, a borrowers ability to repay typically is unexamined and loans may be structured with an expectation of foreclosing on property.
Superintendent Ben Lawsky says such loan to own schemes are unconscionable.
Regulators are investigating whether the companies intentionally set onerous terms with high interest rates, large upfront fees and big balloon payments.
They are also examining complaints some borrowers are required to sign deeds when obtaining loans, permitting lenders to take property when one payment is missed.
FARMINGTON, CT, United States, via ETELIGIS INC., 10/08/2014 – –
Horizon Technology Finance Corporation (NASDAQ:
HRZN) (Horizon), a leading specialty finance company that provides capital in the form of secured loans to venture capital backed companies in the technology, life science, healthcare information and services, and
industries, today provided a portfolio update for the third quarter of 2014.
During the third quarter, we capitalized on strong and consistent demand for our growth capital as we funded nine venture loans to new and existing portfolio companies, said Gerald A. Michaud, President of Horizon. In addition, we experienced five liquidity events, which included realizing gains from the exercise and sale of warrants. The strong demand for our growth capital loan products is further evidenced by our committed backlog more than doubling in size from the end of the second quarter. With the positive liquidity events of the third quarter, Horizon is positioned to take advantage of its liquidity and grow its portfolio.
New Loans Funded
New loans funded during the third quarter of 2014 totaled $22.8 million. During the third quarter of 2014, Horizon provided funding to the following portfolio companies:
$5.0 million to a new portfolio co
mpany, Argos Therapeutics, Inc.,
a biopharmaceutical company focused on the development of fully personalized immunotherapies for the treatment of cancer and infectious diseases.
$3.75 million to a new portfolio company,
Inc., a developer of Rapid Human DNA identification technology.
$3.0 million to an existing portfolio company,
, Inc., a developer of precision manufacturing solutions enabled by femtosecond laser technology.
$2.55 million to a new portfolio company, an advanced materials amp; imaging platform developer.
$2.1 million to an existing portfolio company,
Solutions, Inc., the leading data management
platform for publishers, ad networks and marketers.
$2.0 million to an existing portfolio company,
Corporation, a fabless semiconductor company offering breakthrough ASIC devices that reduce the overall fabrication cost and time-to-production of customized semiconductor devices.
$2.0 million to an existing portfolio company,
Bee, Inc., an online, subscription-based retailer of womens apparel.
$1.5 million to a new portfolio company, a medical device manufacturer developing an ultrasound pain therapy device.
$0.9 million to an existing portfolio company, Sample6 Technologies, Inc., a developer of microbial monitoring technology for global food, healthcare and other industries.
During the quarter ended September 30, 2014, Horizon experienced liquidity events from five portfolio companies, increasing the total number of portfolio companies with liquidity events to 13 for the year. Liquidity events for Horizon may consist of the sale of warrants and equity in portfolio companies, loan prepayments,
of owned assets or receipt of success fees.
In July, N30 Pharmaceuticals, Inc. (N30) prepaid the outstanding principal balance of $2.1 million on its venture loan, plus interest and final payment. Horizon continues to hold warrants
in N30. With the loan prepayment, Horizons current realized internal rate of return on this investment is 12.7%, with the potential for additional returns from warrant gains.
In August, Newport Media, Inc. (Newport Media) wa
s acquired by Atmel Corporation.
In connection with the acquisition, Newport Media prepaid the outstanding principal balance of $7.0 million on its venture loan, plus interest, final payment, success fee and prepayment fee.
fully realized internal rate of return on this investment is 17.7%.
, Inc. (
) prepaid the outstanding principal balance of $10.0 million on its venture loan, plus interest, final payment and prepayment fee. Horizon continues to hold warrants in
. With the loan prepayment, Horizons current realized internal rate of return on this investment is 19.1%, with the potential for additional returns from warrant gains.
In September, Horizon received proceeds of approximately $1.3 million pursuant to its exercise and sale of warrants in
). Horizon received the warrants in connection with a venture loan facility totaling $10.0 million, which was originally made to
in 2011 and was repaid in full in 2013.
fully realized internal rate of return on this investment is 20.7%.
In September, Horizon sold substantially all of the remaining assets of HPO Assets LLC, a wholly own subsidiary of Horizon.
Refinanced Principal Balances, Early Principal Payoffs, and Principal Payments Received
Horizon experienced early pay-offs during the third quarter totaling $19.1 million, compared to early pay-offs totaling $34.1 million during the second quarter of 2014. During the quarter ended September 30, 2014, Horizon received regularly scheduled principal payments on investments totaling $10.5 million compared to the quarter ended June 30, 2014, wherein Horizon received regularly scheduled principal payments on investments totaling $10.0 million.
During the quarter ended September 30, 2014, Horizon closed new loan commitments totaling $33.5 million to eight companies, compared to the quarter ended June 30, 2014, wherein Horizon closed new loan commitments totaling $27.5 million to six companies.
As of September 30, 2014, Horizons unfunded loan approvals and commitments (Committed Backlog) were $19.7 million to seven companies, compared to a Committed Backlog of $9.0 million to four companies as of June 30, 2014. While Horizons portfolio companies have discretion whether to draw down such commitments, in some cases, the right of a company to draw down its commitment is subject to the portfolio company achieving specific milestones.
About Horizon Technology Finance
Horizon Technology Finance Corporation is a leading specialty finance company that provides capital in the form of secured loans to companies backed by venture capital firms within the technology, life science, healthcare information and services, and
industries. The investment objective of Horizon is to maximize total returns by generating current income from a
portfolio of directly originated secured loans as well as capital appreciation from warrants that it receives when making such loans. Headquartered in Farmington, Connecticut, Horizon has regional offices in Walnut Creek, California and Reston, Virginia. Horizons common stock trades on the NASDAQ Global Select Market under the ticker symbol HRZN. To learn more, please visit
Statements included herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts included in this press release may constitute forward-looking statements and are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in our filings with the Securities and Exchange Commission. Horizon undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as of the date of this press release.
Horizon Technology Finance Corporation
Christopher M. Mathieu
Chief Financial Officer
r Relations and Media Contacts:
The IGB Group
SOURCE: Horizon Technology Finance Corporation
By Andrew Westney
Law360, New York (October 24, 2014, 4:22 PM ET) — Starwood Capital Group and Sankaty Advisors LLC, the credit arm of private equity firm Bain Capital LLC, have acquired a portfolio of Spanish hotel and corporate loans with a par value of euro;800 million ($1 billion) from BFA-Bankia Group, they said Friday.
The portfolio of secured and unsecured loans, acquired by Sankaty and Starwood through a controlled affiliate, is comprised of two types of loans, the companies said. One group is secured against hotel collateral in Spain, particularly resort properties, and the other is a pool…
Ask any small business owner about finding a loan, and it won’t take long for them to tell you: it’s hard work. Applying for a loan is needlessly time-consuming, from navigating the labyrinth of lenders to the three-inch thick paperwork. The process is often so complex thatdata from the Federal Reserve suggests small business borrowers spend over four full days of man hours searching for a loan. To make matters worse, most lenders market themselves in exactly the same way. JustGoogle “small business loan,” and you’ll see advertisements from lenders that all pretty much say the same thing: “fastest underwriting time!”, “most competitive interest rates!”, and “best customer service!”.
There’s no doubt that small business borrowers could use help navigating this complex and confusing thicket. Loan brokers purport to do just that, promising to check with lots of lenders so that the small business owner get the best loan. Brokers’ promise of comparison-shopping would sound good to any careful shopper, and especially busy entrepreneurs who want to focus more time on building their business than on searching for a loan.
The truth is that some brokers actually do help, offering sage counsel to small business owners to help them find the loan that best suits their needs. These respectable brokers typically earn modest fees of 1% to 3%, and that fee is paid by lenders without having any impact on the cost of the loans to borrowers.
But, small business owners are increasingly likely to encounter brokers who are out for themselves. In fact, unscrupulous players have emerged like wolves in sheep’s clothing, and are deliberately building tricks and traps into the loan process to pad their pockets and ensnare borrowers in a cycle of high-cost debt. For example, just last week a small business owner applied for a loan on the Fundera platform and was quoted an interest rate of under 30%. A few days prior that borrower had applied for the same loan product, but had gone through a broker who quoted a rate of 45%. The 15 percentage point difference is what the broker was pocketing for himself as his “finder’s fee”, and would have been passed onto to the unsuspecting borrower entirely unbeknownst to them.
Predatory and misleading? Absolutely. But, perfectly legal.
Unlike in the subprime mortgage crisis, the most predatory brokers aren’t peddling bank loans. That’s partly because banks are increasingly less focused on small businessesas a Harvard Business School working paper that I recently co-authored underscores. In the past two decades, small business loans have fallen from half of all banks loans to just about 30%. But, a new crop of online lenders have stepped in to fill part of this void, originating $3 billion in loan capital in 2013 and growing at high double-digit rates.
About half of loans originated at some of the most prominent online small business lenders come from brokers, many of whom cut their teeth in the run-up to the subprime mortgage crisis. The prevalence of brokers in online lending is a big reason why interest rates at some of the most prominent online lenders can reach as high as 130%. Luckily many of the best online lenders are trying to distance themselves from brokers, and have made progress in pushing their share of the market down from as high as 70% just a few years ago.
But, as finding creditworthy borrowers isn’t easy, brokers are likely to remain a feature of the burgeoning alternative lending industry for the foreseeable future. That’s going to be a dangerous dynamic because there isn’t much that small business borrowers can do to protect themselves. We need common sense regulations to keep the most predatory brokers in check, and here are a few steps that Washington can take right now:
- First, let’s strengthen federal oversight. Right now, brokers operate in a veritable Wild Wild West, governed merely by a tattered patchwork of state-based rules. In most states nearly anyone can be a broker to businesses: there’s no test to pass, no code of ethics to follow. Most states don’t even have a cap on interest rates that can be charged to businesses. The Consumer Financial Protection Bureau (CFPB) should consider taking action at the federal level. The agency, while originally conceived as a consumer-oriented body, was given authority to oversee data collection on small business loans under the Dodd-Frank Act. And, fresh off hard-won disputes that have increased transparency for consumers in the student loan, credit card and mortgage industries, the agency may be best equipped to be the cop on the beat in online small business lending, too.In a letter sent to CFPB in May, Senator Sherrod Brown of Ohio rung the alarm that protections are needed from predatory tactics in online lending.
- Second, let’s cap the percentage points that brokers can surreptitiously add to small business loans. The Dodd-Frank Act made it more difficult for mortgage brokers to charge usurious rates in the aftermath of the subprime crisis, and it deserves consideration in the small business lending industry as well. A lighter approach could be a measured first step down this path, namely requiring that every loan broker has to be open and honest with a business borrower if they added points to their loan as part of the cost of doing business with them and how much those points cost the borrower. Both approaches could work, and either would be better than the current system.
- Third, let’s introduce greater transparency in the loan process. Today, when a broker calls a small business owner, they never have to disclose the full range of loan options that a borrower qualifies for. That means that a borrower has no idea that they are being pushed into a loan where the broker can reap the highest fees. Let’s open up the kimono by requiring brokers to present business owners with a full range of options they qualify for. Let’s also make sure that loan terms are written in plain English and shown in plain sight, and push brokers to disclose tools for making apples-to-apples comparisons with other loan products. For example, we could stipulate that every loan must come with an APR. This makes it a heck of a lot easier for small business owners to understand the true cost of a loan and makes it simpler for them to compare that loan to SBA loans or business credit cards.
- Fourth, we should require that any broker has to disclose what they will do with a business owner’s information. Oftentimes, in addition to connecting a business owner to a lender, brokers sell that information to other third parties, meaning that an entrepreneur who was just looking for a loan could also start getting phone calls from folks selling anything and everything under the sun.
Nearly every other consumer product sold in America has passed basic safety regulations well in advance of reaching store shelves, so why don’t business owners deserve the same protection when looking for a loan? Until action is taken to bring transparency to the small business loan process, business owners–and, indeed, many good lenders–will remain at the mercy of unscrupulous brokers. Better oversight could keep small business owners safe from some of the most egregious traps, and make sure that as the alternative lending industry matures, predatory brokers don’t lead us down the wrong path.