Fed's Interest Rate Decisions Impacting Lending and Tax Compliance

The recent government shutdown has created significant challenges for lenders and small businesses, particularly in relation to the Federal Reserve's interest rate decisions. According to Terry Gerton from Federal News Network, the shutdown lasted over a month, disrupting critical functions across federal agencies, which has led to a latency in understanding its full impact.

Dave Bohrman, co-founder and vice president at Tax Guard, explained that the shutdown froze government-guaranteed lending programs such as the SBA's 7(a) and 504 loans. This had a direct effect on small businesses seeking loans, as no new applications could be processed while the SBA was effectively closed.

Furthermore, the IRS experienced significant operational disruptions, reducing its workforce from over 100,000 employees to about 25,000 during the shutdown, which obstructed access to essential tax data needed for lending decisions.

Bohrman highlighted that tax data is critical for lenders to assess the creditworthiness of small businesses, as it helps verify income and cash flow and can reveal potential fraud. He emphasized that lenders rely on accurate tax records to make informed decisions, and the lack of access to IRS data during the shutdown complicated these processes.

As the SBA resumes operations, there is an expected backlog of loan applications which could lead to delays in funding for small businesses. Bohrman noted that lenders had been preparing applications during the shutdown, but the resumption of SBA operations means they now face a rush of pending cases.

He also pointed out that the prolonged uncertainty in the economy, exacerbated by the shutdown, has reduced the demand for loans, as small businesses are hesitant to borrow amid fluctuating interest rates and ongoing supply chain issues.

Additionally, Bohrman foresees tighter credit standards as lenders become more cautious, with many adopting stricter underwriting requirements since the Biden administration took office. This tightening comes at a time when businesses are already feeling the effects of an uncertain economic environment, and the cumulative impact of these factors may hinder the overall recovery in lending practices.

Bohrman concluded by suggesting that lenders are likely to seek alternative data sources to make credit decisions in light of the unpredictable availability of government data, which has been an ongoing trend since the financial crises.

This situation reflects a complex interplay between federal policy, economic uncertainty, and the operational capabilities of financial institutions that will shape the landscape of lending and tax compliance moving forward.