Commentary: How the Dodd-Frank Act hurts small businesses

Most economists and policymakers have traced the origins of our current economic downturn to the offering of high risk mortgages to millions of Americans. Congress responded to the public outcry over needed reform with a bill that would regulate the processes that broke down and got us into this bind — the Dodd-Frank Act.

Regrettably, Main Street America — home buyers, consumers and small businesses — is starting to feel some of the unintended consequences of this important legislation.

In speaking with Hispanic business owners whom the U.S. Hispanic Chamber of Commerce represents, I have learned that countless entrepreneurs believe that access to credit is their single largest challenge. While this tightening of the system lessens the risk of default, it also creates difficult burdens for individuals who are not high risk, but simply have low credit scores or a thin credit history. This process of eliminating options and/or access for creditworthy businesses and consumers is now hindering our country’s efforts to get our economy back on track.

Even more concerning is the plight of the small-business owner, the true driver of America’s economic future. For small businesses, being able to secure a $300 to $2,500 loan can make all the difference to their economic survival. For example, just a few hundred dollars can mean being able to purchase the supplies to paint a house or being able to hire extra employees to cater a wedding. Obtaining that small loan can help a small-business owner make it through another week, fulfill payroll obligations and still have something left to put food on the table.

It is the growth of small businesses that will help our economy rebound, but we need to create an environment that will facilitate that growth. According to the National Small Business Association, however, lending to small businesses declined in the past two years. And a recent survey reports that 60 percent of entrepreneurs say the terms on their credit cards have worsened.

Small businesses are essential to the well-being of many underserved and unbanked communities. Traditionally in this country, recent immigrants and others from diverse backgrounds are overwhelmingly employed by small businesses.

The banks, recently shaken by the housing bubble, are understandably reluctant about making low-dollar loans to small businesses because of the inherent risks associated with shelling out loans that yield low returns. The solution for many is non-bank lending and the new Consumer Financial Protection Bureau is tasked with regulating that market. We hope that they will look closely at the need for non-bank credit, bringing necessary regulation to level the playing field and ensure fair terms and adequate disclosure to this important industry.

It is critical that our leaders in Washington, and those in state capitols and city halls across the country, find ways to ensure that small businesses and consumers have access to credit.

Whether this means incentivizing banks to make loans or preserving or expanding access to other types of credit, it is essential that something is done soon. If not, any hope of progress will be thwarted, resulting in more job losses and a serious setback to the slowly improving economy.

Javier Palomarez is president and chief executive of the U.S. Hispanic Chamber of Commerce.

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