Michael S. Barr: Consumer Protection for Small Businesses

Hi I'm Michael Barr under dean of the Gerald R.
Ford School of Public Policy at the University of Michigan and 
I'm here today to talk about small businesses and the American 
economy small businesses are essential to economic growth in the 
United States as you can see from this figure there are 30000000 
U.S. small businesses and they account for the employment of 
47.5 percent of U.S. employees 2 thirds of net new jobs in the 
past 25 years have come from the small business sector so they're
really essential for the U.S. economy it's really hard to succeed 
as a small business and one of the biggest reasons for small business 
failure is lack of adequate access to capital this economy even a 
bigger problem since the Great Recession was so badly hurt us small 
businesses commercial loans are hard to come by and you can see from 
this chart the commercial lending has been declining as a share of 
all the big ones for 20 years and now it's only a 21 percent this 
drop in traditional commercial lenders has created some interesting 
opportunities for the synthetic sector these lenders utilize 
technology new credit models and alternative data to reshape the 
small business lending market they can often provide access to credit 
to a wide range of businesses they can help get loans delivered more 
quickly there are all kinds of advantages that might help increase 
efficiency in the economy and improve outcomes for small businesses 
at the same time these new lenders sometimes create opportunities 
for abuse there are far too often situations in which small businesses 
are paying extremely high interest rates for example one study found 
that on average small businesses in the study were paying 94 percent 
interest and in some cases size 350 percent it's also the case that 
small businesses are often exposed to hidden terms and features that are.
Not easy to understand and it's very difficult to compare across different 
kinds of lung products because there's no Truth in Lending Act 1st of all 
this is that these problems can be even more acute for minority borrowers 
who are often more exposed to these kinds of abusive terms so what can we 
do well we can start by understanding that small businesses like 
households need some financial protections most small businesses finances 
are more like households that major corporations the average revenue of a 
business with 5 or fewer employees is only $95512.00 that's pretty close 
to the median household income and a lot different than the median 
revenue of the top 10 Fortune 500 companies with 230000000000 in revenue 
and most small businesses do not have the same access to financial their 
accounting skills or consulting available to larger firms even though most 
small businesses are more like people that like General Motors they get no 
federal protection or uniform disclosure laws but there's no truth in 
lending after other federal consumer protection and personal businesses 
that's one of the things that really has to change in the face of many of 
these bad practices in the market and recognizing there tonight yet federal 
protection there is growing support for something like the small business 
borrower Bill of Rights the small business part of rights which set up by 
the responsible business lending college has a group of nonprofits and for 
profit lenders small business advocates and foundations designed to improve 
protections in this market.
For example that there are a bill of rights calls for the right to 
transparent pricing in terms there's not a significant growth in the 
attention paid at the state level in California for example the legislature 
recently passed a law to provide important disclosures 1st of all business 
owners in that. That and we're seeing this trend growing in other states 
as well and finally there's a growing interest in taking on these challenges 
at the federal level we really need several policy to step in and provide 
important consumer protections for small business owners and continue to 
provide ways to innovate in the market and increase access to capital 
that's so essential for small businesses to us.