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Why small businesses need regulators' proposed 'Madden' fix

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Two regulatory proposals that circumvent a nearly 5-year-old court ruling which restricted lenders from certain loan sales will ultimately give small businesses access to a key component of financial stability: choice.

Just recently, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. proposed an important clarification to the “valid when made” doctrine, which provides that if a loan’s interest rate is valid in the state of origination, that loan continues to be valid when transferred to a party in another state. That long-standing doctrine was overturned by the so-called Madden case in 2015.

But now, there’s a chance to change the script.

If finalized, the regulatory proposals will reinforce more than 150 years of contracts case law that loans originated with legally permissible interest rates are valid for the life of the loan, regardless of if — and to whom — they are sold, transferred or assigned.

These proposals would ensure that banks have the ability to securitize loans in times of stress, for additional liquidity. And in doing so, it will result in far more options for small businesses.

For too long, small businesses have been limited in competitive credit options. The needs of a local plumber to an artisanal baker or general contractor vary greatly, and it is this variation that has traditionally challenged banks’ and credit unions’ ability to serve small-business borrowers.

Just like every major corporation, small businesses need to have access to credit to hire more employees, expand or simply maintain in times of hardship. Most entrepreneurs rely on the lending market to grow.

Offering them a choice comes through the stability and certainty that these proposals will provide to financial institutions, capital markets and innovative financial technology companies.

Most small businesses are looking for capital that meets their immediate need, and is tailored to the size and scope of their business. Yet since the Great Recession, access to small-business loans below $100,000, or even $250,000, has been significantly restricted.

For the continued success of the economy and nation, credit options for small businesses must be as diverse and competitive as the small businesses for whom they’re designed.

Fostering innovation has a powerful affect. The proposals will keep the door open for more partnerships, allowing collaborative minds to develop new and transformational ways to approve and fund small businesses. This will create better user experiences and more market competition.

Through this rulemaking, small businesses gain increased access to financing and over time, a decrease in customer cost.

Online lending also plays a key role in this process as the industry has transformed the way in which small businesses can access much-needed financing. According to the Federal Reserve, the proportion of small businesses turning to online lenders has doubled, from 19% in 2016 to 32% in 2018.

This is not only a testament to the technology being introduced into the market, but the willingness of banks to recognize the benefit these products provide to small businesses.

The OCC and FDIC deserve significant credit for their willingness to address this action head-on and protect such a vital part of the economy. This rulemaking will help ensure that a key driver of the American economy — small businesses — will be able to thrive and grow.

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Midland Funding v Madden Small business lending Credit Fintech Marketplace lending Law and regulation OCC FDIC
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