IFA & Minority Franchisees

As one who has been critical of the IFA for working against the interests of franchisees, I must nevertheless commend the IFA for its involvement with BLX.

Yes, you heard that correctly and I have not even started on my first beer yet.

Terry Hill should be defending IFA's involvement with BLX, not running for the tall grass.

Purchasing a franchise has long been seen as a path to upward mobility. The recent influx of mid-level execs and retirees is not the historic norm. Rather, much of the demographic targeted by franchisors was immigrants who did not have a lot of options available to them. As a franchisee and now as an attorney, I have met many of those people myself. For many of them, language skills, discrimination, and credentialing problems foreclosed traditional pathways. So they bought a franchise, put the whole family to work, and in time many of them have purchased homes and put their kids thru school on the profits from their franchised businesses.

(Now, there has been and continues to be a lot of franchisor abuse of franchisees; and the issue of utilization of franchising to circumvent wage laws is one which is a real concern. But that is a different topic, and doesn't change the beneficial opportunities which franchising has provided.)

Having said all that, we turn to our own history. I am not going to get into the whole debate over root causes, but women and black franchisees are underrepresented. At least with respect to black franchisees, this may relate to availability of funding: for whatever reason, studies of automobile credit and mortgage applicants have indicated that blacks have a more difficult time obtaining financing, and are often charged higher rates.

Whether those studies are accurate is another matter, but there is at least a reasonable basis for believing that certain groups have more difficulty obtaining credit and that such difficulty may be a factor in the underrepresentation of those groups in purchasing franchises.

Given those facts, the IFA sought to increase the pool of lenders who would be sensitive to the minority community. They engaged in discussions with a subsidiary of a large, New York Stock Exchange-listed company in existence since 1958. They publicized the availability of this new resource for minorities to the IFA membership and in press releases.

In short, the IFA actually did a very good thing.

But in this $5 billion company (Allied Capital), there were a few loan officers who broke the law. Loan officers are customarily compensated (at least in part) on performance--i.e., closing loans. Whether in the residential mortgage market or business lending, loan officers are tempted to be a bit "creative" in getting the client's loan approved; that is why the bank must have strong internal controls including random audits of the paperwork. Of course, when the risk is shifted to a third party (either by securitization or guarantys) there is much less incentive for the bank to monitor the loan documents for accuracy; the results are seen in the pending shareholder suit against Allied Capital.

The matter of how widely-known the rogue employees activity was known within Allied Capital is a separate issue. But even I, cynical as I am about the IFA, cannot believe that the IFA would know that a finance company was putting through fake loan papers; it's not like Matt Shay gets a FedEx from GE Franchise Finance to check out who's applying for a loan, and I doubt Matt Shay gets a FedEx from Allied Capital either. Blame the IFA for many things, but not for Allied/BLX.

For the life of me, I don't understand why Terry Hill screwed this up so bad on the PR front. The IFA should have simply said that it acted with noble intentions, dealt with a multi-billion dollar lender who had a few bad employees, and that the IFA was and remains committed to enhancing opportunities for minorities to become business owners. Even if that's not objectively true, Mr. Hill is supposed to be a public relations professional.

A little less time griping about Janet Sparks and a little more professionalism would have served Mr. Hill (and his employer) a lot better.