Velazquez Bill Would Halt Predatory Loans to Small Businesses
Measure Would Extend Disclosure, Transparency Requirements to Many Commercial Loans
Washington, DC – Congresswoman Nydia M. Velázquez (D-NY), the Chairwoman of the House Small Business Committee, has introduced new legislation aimed at protecting small business borrowers from predatory lenders and loans carrying unfair terms and conditions. Her bill, the “Small Business Lending Disclosure and Broker Regulation Act”, would ensure many safeguards already required in consumer lending, through the Truth in Lending Act, would also apply to small business credit markets. The bill would bolster the role of the Consumer Financial Protection Bureau in policing small business lending and bring enhanced transparency to small commercial loans.
“With the COVID-19 pandemic, our entrepreneurs are facing some of the most difficult economic conditions ever and it is vital we ensure unscrupulous lenders don’t exploit this situation by enticing small businesses into unfair and unsustainable loans,” Velázquez said. “Unfortunately, even prior to the coronavirus, there were inadequate protections for small business borrowers. This legislation extends many of the protections in consumer lending law to small firms, bringing needed transparency to small business credit markets and ensuring entrepreneurs understand their obligations and rights when they sign up for a loan.”
In recent years, online lending for small businesses has mushroomed and, while many of these financial products are fair and help meet entrepreneurs’ capital needs, some carry enormous interest rates of 50% or even higher without the rates being fully disclosed to borrowers. Many experts predict that, as the U.S. continues facing a historic economic downswing stemming from the pandemic, demand for small business credit will rise, potentially putting small business owners desperate for help in peril of unknowingly signing up for unfair loan terms.
Under Velázquez’s bill, the Consumer Financial Protection Bureau (CFPB) would be granted the same oversight authority with respect to small business financing as the agency has with respect to consumer financial products and services. Moreover, small business lenders would need to make additional information readily available to borrowers including: the annual percentage rate; financing charges for loans; loan terms; payment amounts and collateral requirements.
“Since the 2008 financial crisis and the passage of Dodd-Frank, the CFPB has been instrumental in recovering billions of dollars for consumers and holding dishonest banks and other financial institutions to account,” Velázquez noted. “Our nation’s small businesses deserve to have this same watchdog on their side and under this bill they would be afforded the same protections.”
In addition to bringing the CFPB’s spotlight to small business lenders, the legislation would also create a new office at CFPB responsible for regulating small business loan “brokers.” These middlemen institutions do not extend actual credit to small firms, but instead market financial products to small businesses seeking loans or lines of credit. Under Velazquez’s bill, these brokers would be required to register with the CFPB for monitoring to prevent dishonest behavior.
“Small business loan brokering has become a thriving cottage industry in recent years,” Velázquez noted. “It is important small businesses know that when they are working with a broker they are hearing the full range of options and their best interests are not being sacrificed to deliver the broker with larger fees. These brokers can fulfill an important role as ‘matchmakers,’ helping small companies determine the best financial product available to them, but there needs to be full transparency and confidence in the process.”
The Small Business Lending Disclosure and Broker Regulation Act earned praise and support from a wide range of small business, financing, microenterprise and other advocacy groups.
“Unregulated, predatory lenders come with the promise of fast cash for small businesses; however, these lenders often use bait and switch tactics that can send a business into financial ruin. For years predatory lenders have been able to skirt transparency and trick small business owners into repaying a loan at exorbitant rates—sometimes as high as 350% APR. Now, as our nation grapples with one of the worst financial crises in history, we cannot allow small businesses to be taken advantage of any longer. Having access to clear and accurate lending terms will be critical to aiding small business recovery in the months and years ahead. We commend Chairwoman Velázquez for leading this charge in Congress and urge all Members to join her in providing America’s entrepreneurs with the financial transparency they rightly deserve,” said John Arensmeyer, Founder and CEO of Small Business Majority.
“3.3 million - 10% - of the nation’s small businesses went out of business in the first wave of COVID19. Black and Latino-owned businesses bore the brunt of the pain, with more than 40% of Black- and 32% of Latino-owned businesses going under. Without common-sense protections, unprincipled lenders will continue harming family-run businesses, especially those owned by minorities, in towns and communities across the nation. This bill is a much-needed approach to transparency, giving small business owners a fair chance to make informed decisions and protecting those who are often left underserved and vulnerable,” said Luz Urrutia, CEO of Accion Opportunity Fund and Opportunity Fund.
“We believe a free and fair market operates most efficiently when there is transparency in pricing, terms and conditions. When a small business has all of the necessary information up front including the annual percentage rate (APR), they can comparison shop and make informed decisions that are best for their business. Funding Circle supports this bill because it is in the best interests of small businesses and they need our support more than ever,” said Ryan Metcalf, Head of Regulatory Affairs of Funding Circle U.S.
“Small businesses deserve common sense transparency in evaluating financing options so they can make well-informed financial decisions and play a key role in rebuilding our economy--and this bill delivers that. In the face of our current economic crisis, entrepreneurs desperate to keep their doors open are vulnerable to predatory lenders at the worst possible time. We all have a stake in the financial health of our small business community and should rally around national legislation to protect their basic rights to responsible and transparent financing,” noted Jacob Haar, Managing Partner of Community Investment Management.
“Commonsense transparency standards promote innovation. This groundbreaking bill will create healthy competition, lowering prices for small businesses and encouraging responsible lending,” said Richard Neiman, Head of Public Policy at LendingClub and former New York State Superintendent of Banks.
Opportunity Finance Network’s President and CEO Lisa Mensah stated, “At a time when many small business owners need capital to stabilize their businesses, this legislation is critical to helping small businesses access affordable, responsible financing and avoid high-cost predatory loan products. Requiring lenders to disclose key information including the annual percentage rate (APR) ensures entrepreneurs have the knowledge they need to make financial decisions that grow and strengthen their business.
“The Business Center for New Americans frequently encounters entrepreneurs who have become trapped in cycles of payday-like, expensive debt that can quickly drain all of the business’ resources. Too many of New York’s small businesses are at risk for taking out predatory financing unknowingly, because finance companies are not required to clearly disclose the price and terms to borrowers. Small businesses need the annual percentage rate (APR) and other key terms in order to compare different financing options available to them and make informed decisions. We applaud Congresswoman Velazquez’s leadership to give our small businesses the transparency they deserve,” said Yanki Tshering, Executive Director of the Business Center for New Americans.
“Businesses often come to Community Development Financial Institutions seeking to refinance high-cost debt that was presented to them without an APR, repayment terms or other key metrics – and proved to be unaffordable,” said Linda MacFarlane, Chair of the NYS CDFI Coalition. “Sometimes we can help the business refinance the debt, but sometimes it’s too late. The lack of disclosure standards makes it nearly impossible for New York business owners to compare different offers and choose the best option for their business, potentially leading them into a debt trap. Businesses deserve the transparency that universal disclosure standards would bring and will need these common-sense protections even more as they seek to rebuild from the COVID-19 crisis.”
“New York’s Black-owned small businesses are too often locked out of traditional financing options,” said Anthony Gaddy, Co-Founder/President and CEO of the UpState New York Black Chamber of Commerce. “This unacceptable reality leaves us targeted by predatory lenders that intentionally obfuscate high rates and fees. As it stands now, our small businesses cannot trust that financing offers are honest and straightforward. Many small businesses have experienced undue hardship or closed their doors simply because a lender used smoke and mirrors to conceal the true cost of financing and entrapped them in a costly product. Congresswoman Nydia Velazquez’s legislation will ensure that small businesses have access to the clear information they need to avoid high-cost products and choose financing that will set them up for long-term success.”
“As our nation’s neighborhood restaurants, bars, dance studios and other small businesses in every sector struggle to recover from the current crisis and create badly needed jobs, it’ll be more critical than ever that small business credit markets operate with fairness and transparency,” Velázquez concluded. “This legislation would make important strides in that direction and I look forward to building support toward its passage.”
The state of California has previously passed a Truth in Lending Act for small business borrowers in that state. Similar state-level legislation passed in New York in late July. However, Velázquez’s measure marks the first attempt to institute such reforms federally.
Velázquez’s bill has been referred to the House Financial Services Committee of which she is a senior member.
Text of the legislation is available online here.
A section-by-section summary is available here.