After a brutal year, American small businesses are poised to take advantage of the end of the pandemic and the associated pent-up consumer demand. Many small businesses are looking to scale up to leverage this opportunity by taking out loans to increase supply and capacity. Access to credit will allow small businesses to capitalize on this moment and help lubricate the broader economic recovery.
Yet Congressional Democrats threaten to significantly reduce credit availability by voting to overturn President Trump's "true lender" rule via the Congressional Review Act as soon as this week. (The CRA allows Congress to spike recent executive orders through a simple majority vote.) This attack on access to capital is part of Democrats' broader war on small businesses -- an assault that includes massive new tax increases and onerous regulations like a $15 federal minimum wage.
Last October, the Trump administration finalized its true lender rule, defining the regulatory requirements and compliance obligations between banks and third-party lenders. It clarifies that banks are generally the real lenders when they partner with intermediaries to offer loans. The order is needed to harness and provide regulatory certainty for the growing number of app-based lenders that make up the fintech revolution. In January, nearly 50 economists and financial scholars noted that reversing this rule would hurt secondary lending markets and reduce access to credit.
Community banks have been decimated over the last decade largely due to onerous Dodd-Frank financial regulations. In Wyoming, for instance, the number of FDIC-insured banks has fallen by nearly half since the year 2000. Fintech has stepped in to fill these banking deserts, helping small businesses access loans that big banks generally don't offer. These 21st-century lenders make loan origination easier and more consumer-friendly. They increase credit options for small businesses, especially those from underbanked communities.
The rule also helps community banks themselves, which often can't afford to acquire the personnel and infrastructure needed to offer the wide range of financing options required by consumers. According to a survey by the consultancy Cornerstone Advisors, two-thirds of banks and three-quarters of credit unions said fintech partnerships are important to their business strategies. Reversing the true lender rule would put further financial pressure on community banks across the country and further entrench big banks' power.
So why do Democrats oppose this rule? They claim it weakens consumer protections. Sen. Chris Van Hollen states that by issuing this rule, "The Trump Administration ripped consumer protections to shreds, leaving Americans vulnerable to unscrupulous predatory lenders who charge outrageous interest rates." Actually, the rule doesn't alter consumer protection laws; it allows lenders to extend credit to those limited to more expensive payday or title loan lenders. Fintech fills a vital gap between these non-bank lenders and major financial institutions.
Democrats' real opposition is likely more due to their paternalistic view that some people can't understand interest rates, their antipathy toward the needs of small businesses, and their hatred of any reform passed by the Trump Administration.
Over 200,000 small businesses permanently closed during the pandemic. Those that hung on are poised to reap the rewards as the vaccine stimulus begins to pay dividends. Curtailing access to credit for these businesses by using the CRA to eliminate the true lender rule would pull the rug out under them at the worst possible time and put the brakes on the fintech revolution. It would amount to another major escalation in Democrats' war on small businesses.
