We’ve all heard about the businesses and enterprises that were started in garages. These pioneers, from Steve Jobs to Walt Disney, are an integral part of modern American folklore.
However, if these guys were around today, they might have found their startups literally out in the cold.
In government’s great pendulum swing in the wake of the Great Meltdown to protect us all, from borrowers to bankers, from our own foolishness, entrepreneurs, not surprisingly, are often being shut out.
It’s not uncommon for an entrepreneur to start his or her business in the home; after all, it’s shelter you’re already paying for.
Unfortunately, using that home as collateral for capital has become much more difficult in the new world of lending.
The problem lies with lenders classifying the loan to comply with current consumer laws and regs. For example, homes with certain kinds of business activity in them don’t qualify for the most favorable, highest loan to value ratio, conforming Fannie Mae and Freddie Mac loans.
So our startup star goes to a bank for financing, with no long-term available and at a higher rate. But the bank may say, “Sorry, but we don’t make 80 percent loans for portfolio, and besides, you’re self-employed, with no track record, so you don’t qualify anyway.”
And here’s where the real crunch comes: Most new businesses have never qualified for bank financing. Remember, Steve, Bill and Walt weren’t rich when they started out. Some form of private financing is the only alternative.
Sadly, it’s getting to the point where private capital is afraid to touch a loan in which the collateral is also used as a primary residence. In a recent instance, a couple was seeking to buy a bed and breakfast property. The private lender loved the profile of the deal, except for the fact that the borrowers would live in the property, which, of course, is essential in this particular enterprise.
But the lender declined the loan. The consumer protection regs mandated by the Dodd-Frank Act, as written by the Consumer Financial Protection Bureau, simply made the deal too risky for noninstitutional capital; no sale, no new business person entering the economy.
Gee, do you think if the CFPB had been around back in the day, the 21st century would be without Mickey Mouse and Microsoft?
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.