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Small Business Lending Bill Looks to Improve Transparency in Fintech, Alternative Loans

  • Small Business Lending Disclosure Act of 2021 aims to improve disclosure and transparency protections for small business lending
  • Sponsors reference online and alternative lenders, which have grown in popularity but may mask unfavorable terms and fees
  • Legislation would require small business lenders to provide several pieces of information to borrowers to help them make an informed decision

Summary by Dirk Langeveld

A measure introduced in both the Senate and House of Representatives aims to counter predatory small business loans by online and alternative lenders, which sponsors say have become more common as entrepreneurs cope with the economic fallout of the COVID-19 pandemic.

The Small Business Lending Disclosure Act of 2021 was introduced in the Senate by Senator Bob Menendez of New Jersey, and in the House of Representatives by Rep. Nydia Valazquez of New York. The purpose of the bill is to expand the safeguards currently provided through the Truth in Lending Act to small business financing in order to combat predatory lenders and loan products whose terms and conditions are unclear.

“When we provide entrepreneurs and business owners with the knowledge they need to make informed decisions, we better position them to grow and succeed,” says Menendez. “If we want to build back better, we have to build a fairer and more accountable financial system that gives entrepreneurs of all backgrounds the tools they need to succeed.”

The legislation would apply to all providers of small business financing, defined as any line of credit, closed-end commercial credit, sales-based financing, or other non-equity obligation or alleged obligation made to a business entity of $2.5 million or less. The definition does not extend to any obligation or alleged obligation that is primarily for “personal, family, or household purposes.”

While the bill does not specifically name online or alternative lenders, Menendez referenced these entities in introducing the legislation. He said such financial technology options have grown as a way of meeting entrepreneurs’ capital needs and have proved attractive since they typically have a quick approval process and minimal documentation needs, with funds becoming available to borrowers quickly. However, they are also often accompanied by undisclosed fees or a lack of transparency on the interest rate or other terms, which can result in borrowers taking on more debt than they can afford.

Valezquez says predatory lending aimed at small businesses predates the pandemic, but that these lenders specifically targeted businesses struggling to survive during the COVID-19 pandemic. Senator Sherrod Brown of Ohio, a co-sponsor of the legislation and chair of the Senate Committee on Banking, Housing, and Urban Affairs, agreed that many small business owners became more vulnerable to predatory lending during the pandemic since they were “desperate” for funds to keep their business afloat.

The bill would extend existing disclosure and transparency protections in consumer lending to small business financing. Specifically, small business lenders would be required to provide:

  • The financing amount
  • The annual percentage rate, inclusive of any fees the borrower cannot avoid
  • The payment amount (including the payment amount and frequency of payments for a fixed loan, and a full payment schedule or method used to calculate the payment amounts and frequency for a variable loan)
  • Any expenses or fees included in the finance charge
  • Any costs or savings involved in paying off the loan early or refinancing
  • Any collateral requirements

The bill requires this information to be prominently displayed in writing. It also includes a restriction on double dipping, saying the lender many not charge a fee on the borrower’s outstanding principal when it refinances or modifies an existing loan with a fixed fee as the primary financing charge, unless there is a “tangible benefit to the small business.”

The legislation has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. Under the bill introduced by Valezquez in the House, the Consumer Financial Protection Bureau would be granted the same oversight authority on small business financing as it has for consumer financial products and services.

The Small Business Lending Disclosure Act has won the support of numerous small business groups and community investors.

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