Are financial regulations killing jobs?

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There is increasing concern across America that Dodd-Frank, last year’s banking regulatory reform, is having harmful, unintended consequences on small business–and jobs.

With the economy showing no signs of a return to pre-recession unemployment numbers, policymakers are beginning to become aware of the issue of access to credit for small businesses, due to its direct correlation to job creation, but more is needed to truly accelerate the economic recovery. 

Surveys of franchise businesses by the IFA indicate that financial regulatory reform is having a crippling effect on the lending environment to small businesses. In fact, the commercial lending market to small business is almost frozen. This is extremely harmful to franchising. Study results say the credit gap for franchised small businesses is at least 20%, but the evidence suggests the number may be much higher. This credit gap is a root cause of unemployment and continued economic stagnation in our country.

Last week, leaders of the IFA including President & CEO Steve Caldeira, Credit Access Task Force Chairman Bill Hall, multi-unit franchisee Aziz Hashim and The UPS Store’s VP of Domestic Development Kevin Pignone met with Martin Gruenberg, the Vice Chairman of the Federal Deposit Insurance Corporation. They were joined by Tony Wilkinson, President & CEO, and Greg Clarkson, Chairman, respectively, of the National Association of Government Guaranteed Lenders.

For the first time in IFA history, the organization met with one of the top financial regulators in the nation to offer the franchise industry’s perspective on the business climate as well as our members’ experience that escalating capital reserve requirements set by regulators and the current financial regulatory environment in general have essentially halted small business lending.
The IFA estimates that the credit gap this year will be over $2 billion – the equivalent of 332,000 jobs by the end of 2011 in our industry. Franchised small businesses can’t create jobs if they don’t have access to credit.

 The Treasury Department’s $30 billion approved in the Small Business Jobs Act has not succeeded in its goal of providing capital where it is needed in the U.S. economy.

  
From left, FDIC Vice Chairman Martin Gruenberg and FDIC Chair Sheila Bair (Bloomberg News)

On Wednesday, June 22nd, House Small Business Committee Chairman Sam Graves (R-MO) will hold a full committee hearing entitled, The State of Small Business Access to Capital and Credit: The View from Secretary Geithner.

The only witness at the hearing will be U.S. Treasury Secretary Timothy Geithner, the administration’s top financial policy maker.

The hearing will review the current state of small business access to equity capital and debt financing. The hearing will focus on the Department of Treasury’s current and future efforts to assist the private sector in providing the needed funds for small businesses to expand and grow.

We urge IFA members to contact their representatives and urge Congress to ask Secretary Geithner and others to examine and, where necessary, reverse financial regulations that are strangling small business credit. Also, the Small Business Lending Fund, a whopping $30 billion that has been completely ineffective, should be redirected to efforts that work – such as SBA’s loan guarantee programs.

Click here to find out how to contact your representative.

Small Businesses, Lenders Tell Congressional Panel Credit Gaps Remain

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Witnesses from the IFA and other organizations testifying at a House Small Business Committee hearing Wednesday told lawmakers that a harsh regulatory environment continues to restrict access to credit for small businesses.

“What we found is that the FDIC regulators are inconsistently applying regulations throughout the banking community,” said Lynn Ozer, executive vice president of Susquehanna Bank in Pottstown, Pa., representing the National Association of Government Guaranteed Lenders. “That is what has been reported to the trade association.”

IFA’s Credit Access Task Force Chairman Bill Hall, CFE, a five-unit Dairy Queen franchisee, said that without additional access to  credit, he will lose customers in the highly-competitive quick service restaurant industry. “I need to borrow money to renovate my stores just to keep up with the competition,” he said. “Otherwise I’ll go out of business.” For the first time in his life, he said, he will seek an SBA loan, because commercial credit is so tight.

Hall was invited to testify on behalf of IFA’s 825,000 franchise establishments across the United States that  account for nearly 18 million jobs.

Rep. Allen West (R-Fla.), who arrived at the hearing from a meeting at the White House with President Obama and Treasury Secretary Timothy Geithner, pressed the panelists about what Congress can do about the gaps in the credit market.

“I want to know if banking regulators are causing this hang-up and what we can do about it. Are borrowers and bankers being inconsistently treated by regulators?” West asked.

“With nearly 14% unemployment in my district, I’m concerned about the small guys getting credit,” said Rep. Jaime Herrera Beutler (R-Wash.). “It’s the quickest way to get job growth in our economy. We have to support small business.”

Government and industry statistics indicate that SBA loans have provided a lifeline to small-business growth over the past year. But lenders say those loans may be discouraged by regulators.

“There is a bias against SBA loans by regulators,” said Ozer. “They [SBA loans] are sometimes put in a high-risk category, which affects how reserves are calculated.”

IFA, NAGGL and the Consumer Bankers Association, which also testified at the hearing, are ramping up efforts to call attention to the problem. The message resonated with some lawmakers.

“Banks in my district had nothing to do with the financial crisis,” said Rep. Mike Coffman (R-Colo.). “They think there was an overreaction by regulators.”
Some Committee members echoed the IFA’s call for increased credit flow to franchising.

Rep. Mick Mulvaney (R-S.C.), a former franchisor and franchisee in the restaurant industry, said, “There is pent-up demand out there for growth,” Mulvaney said. “This is the way to create jobs. If financial regulators are impeding that credit flow, we need to do something about it.”

Full video of the hearing is available on the Committee’s YouTube page

Posted by Matt Haller, IFA Director of Communications