Understanding the ins and outs of financial management is important for every consumer. Being educated on managing their credit, understanding the impact of a credit score, or grasping simple bookkeeping can be intimidating without the proper training. When it comes to business owners, it is even more important, because improper management of their finances can be detrimental to their bottom line. However, with current regulations in place, it makes it difficult for consumers and small business owners to know where to turn to seek out advice without having to pay a steep price for assistance.
Currently, Congress is reviewing legislation that would remove some of these challenges to further the development and delivery of personalized credit education. While the legislation would have an obvious benefit for consumers, it could also help improve the financial standing of entrepreneurs and small businesses owners.
The fact is that many business lenders often rely on the commercial credit of the enterprise and the personal credit of the business owner when extending lines of credit. This is especially true for sole proprietorships and partnerships.
Small business owners want, and need access to personalized credit education
It’s estimated that more than 120 million credit score disclosures (key factors that may adversely affect a consumer’s credit score) are delivered to consumers each year when they apply for a mortgage, are denied for credit or are offered less than favorable terms on a loan. The number of score disclosures is likely to increase with the growing number of lenders providing credit scores to consumers on their monthly billing statements.
Transparency of credit scores is a good thing, but a score disclosure simply cannot help consumers answer the question, “How can I improve my credit score?” For this advice, they often turn to the credit bureaus that generate the score.
However, credit bureaus are only permitted to provide general information regarding a consumer’s score. They are unable to provide personalized steps to help consumers understand what they need to do to improve their score. This is primarily due to a little known federal law — the Credit Repair Organizations Act (CROA) — being misinterpreted.
CROA stands in the way
While CROA has been effective at shutting down credit clinic scams, it has recently been misapplied by the courts in a way that has had a negative effect on innovation and competition in the credit education marketplace. For example, CROA requires consumers to wait at least three days before they can receive the requested services. In today’s interconnected world, requiring small business owners, let alone a consumer to wait three days for timely and personalized credit education simply doesn’t work.
A recent joint study from the Policy and Economic Research Council (PERC) and Take Charge America Institute (TCAI) at the University of Arizona, entitled “Is CROA Choking Credit Report Literacy?” sheds new light on the barriers that consumers and small business owners face when accessing the innovative tools that provide individualized credit education to help improve their credit score. The study finds that even after accounting for different price points, including free access, CROA’s requirements may be deterring the people who need such services from taking advantage.
- Even when it was free, just 31 percent of consumers hit the registration page after exposure to disclaimers on the landing page, and just 6 percent completed the process after the three-business day mandatory wait.
- Furthermore, 46 percent of consumers indicated that they would have used the credit education product for free if they could do so without having to wait three days.
Reform holds potential for small business owners, especially women and minority-owned businesses
Changing this law to enable the CFPB-supervised credit bureaus— those best positioned to help consumers in this area — to provide credit advice would have tangible benefits for consumers and small business owners alike. The PERC/TAIC report found that innovative credit education can lead directly to positive financial behaviors. Of those that successfully completed the personalized credit education service experienced positive material impacts (moving to a better risk tier) at nearly twice the rate of those receiving educational materials only.
Reform can also be vital to helping women and minority-owned small businesses get on level footing as small businesses owned by men. A recent analysis released by Experian found that a gender gap exists in both commercial and consumer credit files:
- The average commercial credit score for a woman-owned business is 34, while the average score for a male-owned business is 35;
- The average consumer credit score for women business owners is 689, compared to 699 for male business owners;
- More than 22 percent of male-owned businesses have at least one open commercial trade line, while the same can be said for only 18.5 percent of women-owned businesses;
- In the last 24 months, female business owners had an average of 1.3 personal accounts become 90-plus days past due, while male business owners had an average of 0.9 go delinquent.
It is possible that the lack of parity in access to credit has had a direct and quantifiable impact on the bottom lines for women-owned businesses. For example, Experian’s analysis found that more than 24 percent of male-owned businesses have sales that exceeded $500,000, while only 14.5 percent of women-owned businesses see sales of that size. In addition, 21.2 percent of male business owners have a personal income of $125,000 or greater, compared to just 17.4 percent of women business owners.
Similarly, in a July 2014 report entitled “21st Century Barriers to Women’s Entrepreneurship,” former-Senate Small Business Committee Chair Maria Cantwell (D-Wash.) found i that $1 of every $23 in conventional small business loans goes to a woman-owned business.
While improving access to innovative credit education is not a cure all, small business owners still need to develop solid business plans. However, personalized credit education could go a long way towards helping entrepreneurs improve their personal credit standing so they can access the affordable rates and terms needed for operating capital or a startup loan.
Congress must pass legislation to remove regulatory barriers standing in the way of innovative credit education
To help remedy the situation, Congress should pass H.R. 347, the Facilitating Access to Credit Act of 2014. The bipartisan legislation introduced by Reps. Ed Royce, R-Calif., and Ruben Hinojosa, D-Texas, would exempt reputable nationwide Consumer Financial Protection Bureau –supervised and examined credit bureaus, such as Experian, from CROA’s requirements. The legislation also would ensure that the statute’s critical consumer protections still could be enforced against unscrupulous credit clinics.
Recognizing the positive impact of CROA reform on financial literacy in the communities that they represent, several national organizations have signed on to get behind this important effort. Policy resolutions supporting reform of CROA have been adopted by the National Black Caucus of State Legislators, the National Hispanic Caucus of State Legislators, the National Bankers Association and the United States Hispanic Chamber of Commerce.
The bottom line is that financial education is extremely important. What is even more critical is the ability to have organizations that are qualified to provide the tools to improve credit standing and advice on how to utilize them. In the end, this will not only help consumers enhance their own financial experience, it will help small business owners be better prepared for potential growth opportunities and stimulate the economy.
