I love actuaries. So it is not really fair to blame them for supplying banks and federal regulators with the intellectual underpinning to create the biggest financial crisis in living American memory.
I am, of course, talking about how tens of thousands of small business owners with long and successful track records are going out of business because they cannot get a simple business loan from their neighborhood banker.
It is all about the credit score: The now four-year long Great Recession has not only hammered credit scores, it has caused banking regulators to raise lending standards and shot down our most important source of growth and new jobs.
As much as I love actuaries, we have to be careful how we use them. Their profession is great at supplying us with answers -- often to the wrong questions. Ask an actuary what the chances are of a particular borrower repaying a particular loan, and they give you a credit score. Today, depending on this one number, the borrower gets it. Or more likely, not.
But every loan has at least one other component the actuaries ignore: The lender.
In my hometown in Central New York, a small regional bank was acquired by a bigger bank, which in turn was acquired by an even bigger bank. Soon after, defaults on loans from the original bank rose by 40 percent.
We have seen AIG, Lehman Brothers and others collapse, seemingly without notice from the actuaries. They were not wrong. They just were not looking.
I'm not saying we should get rid of the actuaries and all their credit scoring tools. But we do have to recognize that credit scores are just that: tools. They were always meant to be just a part of the way banks lent -- and recovered -- their money.
Every day I see people with lousy credit scores that are far more credit worthy than someone with a credit score much higher.
At the company I co-founded, we write bonds and issue working capital for smaller contractors doing government work. A year ago, Joe, a painting contractor, applied for a bond.
A bond, of course, is how a government agency guarantees that if the contractor cannot finish a job, the bonding agency will. The bonding company then can turn around and recover the money from the contractor. So it is really a line of credit, not an insurance policy.
Joe's credit score was 432: A medical emergency depleted his family's $200,000 medical insurance, and creditors were calling his house every day.
But for the last ten years, Joe had paid on time every payment for his house, car, electricity, taxes, everything. We checked. We knew he could do the painting job on time and under budget so we issued him a bond and working capital.
Contrast that to someone with a credit score of 790 -- but who does not work and has their bills paid by another person. That person is one heart attack away from losing their ability to repay any loan.
After we issued Joe his bond and working capital, our job was just beginning: We received the checks from his client, we paid his vendors, his employees, his taxes. The biggest risk on any business loan of this kind is the contractor using the money from one job to pay expenses on another.
We manage that risk every day for government jobs around the country.
This is what bankers used to do before before federal regulators turned them into box-checkers with no discretion.
Federal bureaucrats imposed these credit-starving regulations. They can take them away. Today.
Just ask an actuary.
?
Follow Robert A. Berman on Twitter: www.twitter.com/OxBonding
Source: http://www.huffingtonpost.com/robert-a-berman/small-business-credit_b_1299529.html
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