Unlike in the subprime mortgage crisis, the most predatory brokers aren’t peddling bank loans

Unlike in the subprime mortgage crisis, the most predatory brokers aren’t peddling bank loans

We need common sense regulations to keep the most predatory brokers in check, and here are a few steps that Washingtoncan take right now:First, let’s strengthen federal oversight

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.

That’s partly because banks are increasingly less focused on small businesses as 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.

Second, let’s cap the percentage points that brokers can surreptitiously add to small business loans

About half of loans originated at some of the most prominent online small business lenders come from brokers, many of whom cut car title loans Delaware law their teeth in the run-up to the subprime mortgage crisis. Continue reading “Unlike in the subprime mortgage crisis, the most predatory brokers aren’t peddling bank loans”