By Michael Ciaburri
Ciaburri is CEO Worth Avenue Capital an alternative small business lender that helps small businesses obtain financing from private investors and banks when appropriate. Ciaburri was the founder and CEO of The Bank of Southern Connecticut from 2001 to 2008
In 2010, when Dodd-Frank was signed into law by then President Barack Obama, banks and lending institutions across the Northeast faced a level of regulatory oversight unlike ever before. That regulatory oversight brought significant consequences to commercial real estate investors and small businesses that frequently availed themselves of loans from both national and community banks. Suddenly, even borrowers with strong balance sheets or strong credit were being turned away from lenders as their profitability was not adequate in the face of costlier regulatory compliance costs.
However, the election of Donald Trump signaled that Dodd-Frank was likely to be repealed or at the very least substantially reformed during his administration. Now, as the of 2017 nears, there is concrete effort in the United States Congress to mitigate some of the consequences of Dodd-Frank.
In early December 2017, the United States Senate’s Senate Banking Committee voted 16 to 7 to raise the threshold at which banks are subjected to the most stringent regulations of Dodd-Frank from $50 billion to $250 billion. These actions pave the way for further alleviation of much of the pain felt in the banking industry because of Dodd-Frank, but its impact on credit availability for small and medium businesses and real estate developers/investors may not be as significant as one might hope.
First, the raising the asset threshold for Dodd-Frank’s strictest regulations will have minimal impact on banks headquartered in the Northeast. Connecticut, for example, has no local banks affected by the increase. Massachusetts, by comparison, has only one, an international custodian bank that is not in the lending business.
Second, the Senate’s proposals do nothing to change guidance on how bank’s account for loans made for Commercial Real Estate or CRE. Many small businesses manage credit by pledging CRE as collateral. Absent regulation, CRE is an attractive form of collateral. It can be traded and assessing its value is straightforward. However, Dodd-Frank and other banking regulations have, over the years, imposed such strict requirements of banks with CRE exposure that their willingness to make such loans is significantly impaired. For small and medium business as well as real estate developers/investors, that means obtaining financing is harder, takes longer, and is unreliable when time is of the essence.
Finally, even though a relaxing of Dodd-Frank will be welcomed by the banking industry, it represents only one set of regulatory hurdles banks must overcome. Banks must still comply with oversight from the Federal Reserve, the FDIC, the Office of Thrift Supervision, the Comptroller of the Currency, State Banking Regulators, and sometimes even the CFTC! With the alphabet soup of regulators looking over banks’ lending standards, portfolio metrics, and risk management, the business of lending is often overwhelmed by the business of compliance. Existing borrowers are hurt because their bankers are simply unable to be responsive when their assistance or guidance is needed. Potential borrowers are hurt as banks simply cannot spend the resources learning their business and how they can help them with their financing needs.
Clearly, even with a push toward relaxing Dodd-Frank, it will be a long time before small businesses find the relief they need when seeking credit from banks. Private lenders, on the other hand, are free from the burdensome regulatory regime that limits the banking industry. Instead of spending time on compliance, private lenders and other sources of alternative credit can focus learning a business and tailoring a financing solution.
Worth Avenue Capital, LLC has been in the private lending business throughout the Northeast and Florida since 2008. The company helps clients faced with a loss of their community banking relationships with its emphasis on customer focused alternative financing.