Predatory Lending To Small Business

So the destruction, begun in 1972, of somewhere between 5,000 and 25,000 years of small business finance provision, has hit small business hardest.

According to a February 2015 Federal Reserve study, a majority of businesses less than five years old and less than $1 million in annual revenues were unable to secure credit in the prior year.

With the destruction of benecredit, and the introduction of the internet, new predators emerged to feed on the now naked small businesses..

Marketplace lenders don’t hold deposits, but act as middlemen between lenders and borrowers. The loans are issued through a bank: Lending Club and Prosper issue loans through Web Bank, and Kabbage through Celtic Bank. Both banks are chartered in Utah, a state with a complicated system for establishing interest rates on loans that enable marketplace lenders to legally charge interest rates as high as 36%.

But the new predators are dying as fast as they showed up...

Pratt is referring to the May 2015 decision by the U.S. Court of Appeals for the Second Circuit in the case of Madden v. Midland Funding, LLC. The court ruled that non-banks could no longer rely on federal preemption under the National Bank Act to override state usury laws. In other words, online marketplaces would have to adhere to state usury laws. The state usury interest rate in Utah is 10%. About 12.5% of Lending Club’s loans exceed that interest rate cap, says Pratt.   

You have not heard about that case anywhere else, but I have commented on it several times. Sometimes the courts just completely screw up and do the right thing.  This case is one of those inexplicable examples of a judge getting it right (from a small business, free market point of view.) Maybe the Supreme Court will wrong the right.

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