Mortgages are becoming much tougher to get for those who are self-employed. Image: Flickr / Alan Cleaver / CC-BY-SA

In the United States, new regulations on mortgage lending are slowly coming into effect. The latest regulations are focused on limiting the risk of mortgages. The regulations, however, are hitting self-employed individuals the hardest.

New lending rules

As a way of limiting the amount of risk, mortgage loan officers are required to disclose the amount of money they will make off a mortgage deal. Banks will be required to maintain at least a portion of the mortgages and loans they underwrite. If a loan has a 20 percent or higher down payment (twice the current standard), banks would be able to avoid the risk-retention requirement. Finally, low-documentation or no-documentation loans would face even stronger underwriting standards. Industry experts estimate that, together, these standards could easily increase the standard down payment to 20 percent or more while making low-documentation loans very scarce.

A place for low-doc loans

Low-documentation or no-documentation loans got a very bad name after the mortgage crisis. These so-called “liar’s loans” were often used in combination with zero-down mortgages to help borrowers qualify for bad credit loans that they would not have otherwise been able to get. These zero-down loans were often the first loans to start going into foreclosure when the crisis hit. This was not the intention of low-doc loans, however. Low- or no-documentation loans were originally intended as a way for self-employed individuals or non-traditionally employed borrowers to qualify for mortgages. Self-employed individuals often have a difficult time meeting traditional underwriting standards. Without pay stubs and with full tax documents only filed once a year, proving income can be very tough.

New options for self-employed

Though the new limits on mortgage underwriting are making mortgages tougher for self-employed individuals to get, funding is available. New small small business lending programs are increasing the amount of funding available for entrepreneurs. Small business loan guarantees through the Small Business Jobs Act are helping increase lending to businesses. When these business owners want to purchase a home, however, they will likely end up having to put more on the down payment and pay a higher interest rate to compensate for the higher risk of lending.

Sources

LA Times
Market Watch
Financial Times

The SBA lending program is intended to help more small businesses open and hire. Image: Flickr / chrisweaverphotos / CC-BY

Three states have qualified to get big money from the Treasury Department. The Treasury Department has infused $53.4 million into lending programs in Connecticut, Vermont and Missouri. All three states have created programs that are intended to stimulate $10 worth of small business lending for every $1 invested.

The Small Business Jobs Act

Small businesses in the United States represent about 50 percent of all private-sector jobs in the United States, and 64 percent of new jobs created in the last 15 years have been created by small businesses. In order to encourage small business growth and hiring in the United States, Congress passed the Small Business Jobs Act in 2010. The Act authorized the Treasury to hand out $1.5 billion in loan guarantees to states with solid plans to increase small business investment through loan guarantees and other lending programs.

Connecticut’s $13.3 million plan

Connecticut’s plan, now funded and supported by the Treasury department, is to provide business insurance loans. The Connecticut Development Authority, a government-supported financial group, will be using the $13.3 million investment to insure investment portfolios. Nineteen financial institutions will be given access to the CDA funds in order to provide loans to small businesses.

Vermont’s plan for $13.2 million for small businesses

Vermont expects that the $13.2 million in small business credit from the Treasury will spur $132 million in new small business lending. Four programs will each get a share of the business loans, which are similar to bad credit personal loans not payday loans. And $3.3 million will go to the Small Business Loan Program, which provides loans that support purchase of fixed assets (such as equipment) for businesses. The Technology Loan Participation Program will get $3 million; that program aims to increase IT and Bioscience businesses in the state. Vermont will use $5.9 million to fund the Commercial Loan Participation Program, which helps build facilities, and the final $1 million will go the portfolio insurance for lending institutions.

How Missouri will spend $26.9 million

Missouri qualified for the largest loan guarantee of the three states, at close to $27 million. The money will be distributed to two separate funds. $10 million will go into the already-established Grow Missouri Loan Participation Fund, which is specifically focused on businesses that employ 499 or fewer people. The Loan Participation Fund provides loans of up to $3 million to help state businesses grow. The final $16.9 million will create a new venture capital fund that will focus on high-tech startup businesses.

Sources

CNN Money
Small Business Administration

An NFIB survey found that plenty of small business credit is available, yet the economy is holding back demand. Image: CC quin.anya/Flickr

Lack of small business credit has been cited as a primary factor holding back economic recovery. The Obama administration has been implementing policies to increase the amount of money available to small businesses and encourage banks to lend to these companies. However, a recent survey shows that access to small business credit is high, while demand is low.

Demand for small business credit

Demand for small business credit dropped for the second year in a row, according to the National Federation of Independent Business. An NFIB survey found that fewer small companies sought to obtain credit because of weak consumer demand, a faltering housing market and an anemic economic recovery. Other small businesses assumed they would not be able to get credit, so they didn’t try. Those that did were successful more often. Small businesses applying for credit dropped from 55 percent in 2009 to 48 percent in 2010. Yet even though fewer businesses sought credit, about the same percentage were approved year-over-year, indicating that access to credit improved.

Small business lending growth

The Obama administration pressured Congress to pass a small-business lending measure last fall that included a $30 billion loan fund. To sell the package, economists projected that the money would result in about $300 billion in small business loans made by by community banks. Those projections have proven overly optimistic. Some businesses have been seeking credit, however, and of those that have, 41 percent were approved for the full amount. The survey also found that businesses persisting after initial rejections were successful on the second or third try, but the approved amount would decline with each attempt. Businesses were approved for credit cards 95 percent of the time on the first attempt.

Sound businesses avoiding debt

Ironically the best customers for banks sat on the sidelines, according to the NFIB survey. Small businesses that did not seek credit last year were stronger financially than businesses shopping for more debt. Most small business lending is tied to real estate, and the decline in U.S. property values was the single biggest obstacle of those businesses seeking credit.

Sources

The Street

The Hill

Indianapolis Business Journal

Yet another bank whose San Diego business installment loan offerings are microscopic. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

The San Diego Business Journal reports that the California Reinvestment Coalition has released a new report that fails to paint a rosy picture when it comes to California short term business loans. The report, entitled “Small Business Access to Credit,” points out that total number of small business loans issued in the state fell 63 percent from 2007 to 2009. Among those, the number of traditional bank loans for small businesses in California fell by a third, from 2.3 million in 2007 to 816,000 in 2009.

Short term loans for small business, $1 million or less

Data for the CRC study included filings for short term business loans less than $1 million each, granted to small businesses reporting less than $1 million in revenue. The three largest banks in California – Bank of America, Wells Fargo and Citibank – all showed a marked decline in the number and denomination of short term business loans issued. According to the CRC, this is because underwriting standards became more stringent in the wake of the housing crisis. The flow of credit to small businesses – from San Diego business installment loans to short term loans in any other city in California one can name – has yet to recover fully, although there have been small signs of a resurgence.

Wasn’t TARP supposed to cover that?

The $700 billion-plus U.S. taxpayers gave the banking industry as part of the Troubled Asset Relief Program was supposed to keep the flow of credit from drying up completely, but success for California small business has been minimal. The Small Business Administration claims two in five small businesses are still unable to obtain necessary financing. SBA-backed short term loans to California businesses fell by $1.2 billion over the course of the study.

The vicious demand cycle

Most financial institutions polled claim that small business lending has fallen nationwide due to lessened demand. Some small businesses will fail, thus reducing demand, but the report suggests that what is most likely happening is that banks simply aren’t issuing business installment loans at the same pace as before the recession.

And without credit for small businesses, fewer jobs are being created in California. Couple that with a steady 12.5 percent unemployment rate in California – where even small businesses in San Diego are scratching for installment loans – and the situation is clearly dire.

Sources

San Diego Business Journal

When the bubble burst, it hurt small business

After years of tightening their grip, banks are loosening credit card and small business lending standards. Think Stock photo.

Lending standards are showing signs of easing, according to a Federal Reserve bank survey. It’s getting easier to get a new credit card for the first time in three years. For the first time in four years, banks have loosened lending standards for small businesses. Lack of small business credit has been identified as a major problem as the U.S. economy struggles to recover from a lingering recession. But some analysts say that until small business loan demand returns, relaxing lending standards will have little or no effect.

Credit card lending standards loosen

Every three months, the Federal Reserve bank survey asks banking executives about changes in the supply and demand for loans to businesses and households over the previous quarter. Creditcards.com reports that the Fed survey shows about 8 percent of banks said they eased their credit card lending standards for approving applications. No banks said their credit card lending standards had tightened further. The numbers put an end, temporarily at least, to an 11-quarter run of credit tightening that dates back to 2007. At the same time, the Fed survey shows that credit remains limited and costly for most existing cardholders.

Small business credit vs. demand

The new Fed survey marked the first indication since shortly before the recession that small business credit was beginning to ease. NPR reports that the Fed said it was the first time it had found relaxed lending standards for small business since late 2006. The Fed held a conference on the lack of small business credit last month. Federal Reserve Chairman Ben Bernanke noted a serious gap between large corporations building up cash and reporting strong earnings and thousands of small businesses struggling to get credit. However, in the survey most banks were still reporting lackluster small business loan demand

Small business outlook remains dim

Since the recession hit it has been noted that many small business owners have complained that they were having more trouble borrowing money to stay open. But now with credit standards thawing, Seeking Alpha reports that if small business outlook matters, commercial loan demand will continue to be weak. Data from the NIFB Small Business Economic Trends Report shows small businesses owners are less optimistic than at nearly any point in the past five years. Only 6 percent feel it is a good time to expand. Only 19 percent plan to make a capital purchase in the next one to two quarters. Also, plans to expand inventory, hiring and sales expectations remain at low levels. A net of 5 percent expect lower sales, 3 percent plan to lower inventory and only a net 1 percent expect to increase hiring.

Microlending is on the rise as banks refuse to allow small business credit and small business lending bills go nowhere in Congress. Mt. T in D.C./Flickr photo.

Microloans are emerging as an answer to the small business credit crisis. Microloans are more commonly associated with  developing countries. But microlending is on the rise in the U.S. as more small businesses are taking out microloans when the bank says no. Microlending could increase even more as a small business lending bill that would cut taxes and ease credit for small businesses stalled amid partisan feuding in the Senate.

Microlending: welcome to the third world, America

Microlending — making small loans, usually to the poor — has been one of the most effective means of financing growth in third world countries. But then the U.S. economy fell and can’t seem to get up. The New York Times reports that tight credit and the recession have increased the demand for smaller loans in the United States. Microlending is getting noticed and microloans are increasing in popularity. Kiva, which has lent more than $150 million in 53 countries, has started pilot program lending to business owners in the U.S. Grameen Bank — a microfinance group based in Bangladesh that was started by Muhammad Yunus, who won the Nobel Peace Prize for his groundbreaking work in microlending — has also widened its lending to Americans.

Small business lending bill fails

As microlenders take action to help small businesses, the U.S. Senate is sitting on its hands. Bloomberg reports that a bill addressing the lack of small business credit died July 29 when senate Democrats failed to get enough votes to consider the legislation. The bill would have provided $30 billion to banks with less than $10 billion in assets to encourage small businesses lenders. The cost of paying back those billions would decline for small business lenders as their level of lending rose. It was estimated that the small business lender package could prime $300 billion in lending. But Republicans wanted to tack extending the Bush tax cuts to the bill and said it would encourage more risky lending.

Microlending success stories

While the Senate dithers, microlending is scoring success stories. The New York Times article tells the story of a restaurant owner in Silicon Valley who saved her business with a $6,500 loan that she has three years to pay back and that carries a 6 percent interest rate. The Miami Herald reports that OUR MicroLending, a Miami-based lender, has made 764 microloans totaling $4.5 million. Its customers typically have fewer than five employees, with sales of $100,000 or less. OUR microloans range from $1,500 to $12,000 and average about $5,000. The average term is a year.

The SBA offers emergency loans to victims of emergencies and disasters. Image: Flickr/U.S. Geological Survey

In some areas of the country, low interest Small Business Administration loans that have been heavily pushed are not proving to help. This cash advance product has been promised to homeowners and business owners to help rebuild after emergencies. Offered at 4 to 6 percent interest, the SBA offers this supposedly quick loan solution to victims of floods, fires and the Gulf oil spill.

The purpose of SBA loans

In “everyday use,” SBA loans are intended to help small businesses build and develop. The SBA is actually a loan guarantee entity. It does not offer loans online but instead works with banks to provide loans. Disaster loans, also administered through the SBA, are given to both individuals and businesses who have been affected by disasters. Like all loans, SBA loans consider the credit of borrowers and their ability to repay. Unlike other loans, SBA loans are intended only for individuals who “are having difficulty accessing other credit.”

Denial rates for emergency loans

SBA emergency loans are often initiated or offered very soon after an emergency hits. In Massachusetts, for example, the SBA has announced that loans of up to $200,000 are available to homeowners to rebuild after floods. Businesses will be able to take out loans of up to $2 million, with interest rates as low as 2.75 percent. However, in Louisiana as many as 70 percent of SBA loan applications are being denied until BP pays out damage payments. In Tennessee, about 66 percent of flood emergency loans are being denied.

Appealing loan denial decisions

The incredibly high rate of denials for emergency victims who need a loan is causing a lot of frustration among disaster victims. SBA loan programs are intended to help, but they cannot help if most people cannot access the credit. The SBA does have an appeal process that allows applicants to provide new information, show proof of altered circumstances or correct information in the original applications. In the end, though, these loans usually end up going to individuals who show proof they can repay them — and that can be very tough to show after a disaster and in the tough economy.

Sources

The Tennessean
Boston.com

More and more small businesses are shuttering their doors -- but not for lack of credit. Image: Flickr/alancleaver_2000

A bill designed to help smaller banks make more loans to small businesses is about to be voted on by the U.S. Senate. This bill will help create $300 billion in available capital to help small businesses. Banks in the lending business, though, are saying the extra quick cash advance won’t actually create more small business loans. The concern is that it doesn’t matter how many short term loans are available, there simply are not enough credit-worthy small businesses.

Small business loan program

The U.S. Senate is set to vote this week on a bill that will send $30 billion to community banks. That money is intended to create $300 billion in small business loans. This emergency loan is intended to increase the available credit for small businesses and create jobs. The money would be available for banks with assets of less than $10 billion. The National Federation of Independent Business and American Bankers Association both support the bill.

Lack of creditworthy small businesses

Many of the banks that are a target for this small business lending bill are saying it will not help. Banks do not want to let people with bad credit borrow money — that is what caused the problem in the first place. The highest demand for loans, especially for small businesses, is from borrowers who have bad credit. Without sales and profitability, businesses are very reluctant to take out loans.

High small business defaults

There are several indicators that say that small businesses are in need of more than just loans. The Small Business Administration reports a default rate of almost 7 percent already this year. Bank of America has reported that 14 percent of small business loans were charged off already this year. A credit card firm that specializes in small businesses ended up going into bankruptcy after more than 50 percent of its cards went into default in 2009.

Small business lending is adapting to the credit crisis at Sam's' Club, which announced a program for easy small business loans online to Sam's Club members. Flickr photo.

Small business lending is adapting to survive. Small business loans have been an endangered species during the credit crisis, a stubborn legacy of the financial meltdown, housing crisis and Great Recession. But small business credit is making a comeback in unconventional ways, even as a miserly banking industry holds back the U.S. economy as it tries to fight its way out of the recession. The latest innovator is Sam’s Club, which announced a pilot program to offer small business loans to its members.

Innovative small business lending

The credit crisis is holding back the growth, hiring and spending of businesses that Sam’s Club wants as customers. MarketWatch reports that Sam’s Club, a unit of Wal-Mart Stores Inc., is testing a program to offer qualified members small-business loans from $5,000 to $25,000 backed by the Small Business Administration. Small business loans will be offered online to Sam’s Club membership through a partnership with Superior Financial Group. Members who apply for a small business loan online from Sam’s Club get $100 off the application fee, a 20 percent discount and a 7.5 APR. Terms are locked in for 10 years.

Small business consumer spending stimulus

Sam’s Club decided to start offering small business loans online after a company survey of small business customers indicated that tight credit was cutting into Sam’s Club retail sales. The New York Times reports that just less than half of Sam’s Club membership is small business customers, accounting for just more than half of its revenue. So far about 200 people have applied for the SBA loans and about 45 percent have been approved. The company says it does not expect small business loans online to be a big moneymaker, though it earns $50 for each financed loan. The payoff is to get consumers spending more freely — Sam’s Club hopes.

Another small business loan innovator

Small business credit also is loosening at some banks. Last week JPMorgan Chase announced a program to stimulate small business growth and hiring. The JPMorgan Chase small business loan program isn’t as accessible as the pilot for Sam’s Club members, but it represents another oasis in the credit crisis desert. The offer includes lowering the interest rate by 0.5 percent on a new business line of credit for each new employee hired, for up to three employees, for the life of the loan. The offer is available for businesses that qualify for lines of credit up to $250,000.

Small business lending motives

The Sam’s Club small business loans online pilot is looked upon as an unusual move for parent company Wal-Mart. MarketWatch reports that Wal-Mart has been accused of harming small businesses with its aggressive pricing, scale and business methods. And a report at bnet said Wal-Mart chose Superior Financial, which is not a bank, as a partner because ongoing efforts to add banking to its resume makes the financial industry nervous.

Small business loan success story

But Sam’s Club small business loan customers like Michael Golata don’t care about the politics behind the program. Golata, a contractor in Louisville, Ky., for United Parcel Service, told the New York Times that he applied online for a $10,000 small business loan  at 7.5 APR and got the money in 24 hours. He bought a new truck, hired three drivers and went from billing UPS $3,000 a week to $8,000.

J.P. Morgan Chase is cutting small business loan interest rates for companies that hire new employees as part of an effort to lower the unemployment rate. Flickr photo.

Small business loans may start getting more affordable, and the U.S. unemployment rate could be affected. The nation’s second-largest bank announced Wednesday that it will lower the interest rate on small business lines of credit for companies that hire new employees. Small business lending has been a hot button issue as credit dried up while banks were bailed out by the government. Banks have resumed raking in billions while small business continues to struggle and unemployment remains high. Public pressure may be finally starting to have an affect on loosening credit.

Small business loan hiring incentive

Small business hiring incentives from J.P. Morgan Chase & Co. include lowering its interest rate by 0.5 percent on a new business line of credit for each new employee hired, for up to three employees, for the life of the loan. Zacks.com reports that J.P. Morgan will also provide discounts to small businesses for opening checking accounts. In addition, J.P. Morgan plans to hold conferences in 11 cities across the country to assist local and small business owners to improve their sales figures and fund their businesses.

Banks ready to loan, are small businesses ready to hire?

During the economic downturn, politicians and the public at large have scorned banks that received government assistance, yet refused to make small business loans to help reduce unemployment. The Wall Street Journal reports that bankers have offered the excuse that there’s not enough demand from credit-worthy borrowers. And its true that losses from small-business loans have been severe at major small-business lenders. But Kevin Watters of J.P. Morgan Chase told the Journal that the economic outlook among small business owners has improved and small businesses are ready to expand and hire.

Other banks offer small business help

Several banks have started to  make more small business loans. J.P. Morgan said first-quarter loans to small businesses rose 31 percent from a year earlier, to $2.1 billion. The nation’s largest bank, Bank of America, reported that small business loans rose 18 percent from a year earlier to $19.4 billion. Many banks, including J.P. Morgan, U.S. Bancorp, PNC Financial Services Group Inc. and Capital One Financial Corp. have been giving rejected small-business loans a second look. Two years ago U.S. Bankcorp started training about 3,000 bank managers about small business lending.

Chase keeps its word on small business loans

The J.P. Morgan Chase offer to cut its interest rate for companies that hire new employees is available for business lines of credit up to $250,000. MarketWatch reports that the offer is also available for existing customers who hire new employees to increase their lines of credit by $10,000 or more. Chase business checking customers will receive an additional half percent discount on their loan rates for hiring new employees. The offer makes good on a promise J.P. Morgan Chase made late last year. The bank announced it planned to increase its lending to small businesses by $4 billion in 2010 to a total of $10 billion through access to working capital, term loans for expansion, commercial mortgages, lines of credit and business credit cards. It also pledged to hire 325 additional business bankers.