In recent months, policymakers at the federal and state level have made strides to provide greater transparency and oversight of the small business lending market. The federal Truth in Lending Act (TILA) requires most lenders to disclose the Annual Percentage Rate (APR) and terms for mortgage and consumer lending, but no such disclosure requirements exist for small business lending.
The risk of predatory small business lending is a growing concern as business owners navigate the impacts of COVID-19. As federal aid to small businesses ends and banks tighten credit or pull back from small business lending, struggling business owners looking for capital are more vulnerable to high-cost products that might negatively impact the businesses’ long-term chances of survival.
OFN is pleased that efforts to ensure small business borrowers have access to fair and transparent information about financial products and services have gained momentum:
Federal Policy Developments
- Federal Small Business Truth in Lending Legislation Introduced
On September 9, House Small Business Committee Chair Rep. Nydia Velazquez (D-NY) held a hearing on H.R. 7889, the Small Business Lending Disclosure and Broker Regulation Act of 2020. This legislation, which would expand disclosure requirements under the Truth in Lending Act to small business lending, marks the first time such legislation has been introduced in Congress.
Chairwoman Velazquez noted in her opening statement the need for more accountability and oversight in small business lending, especially online lending. Two OFN members testified at the hearing: Luz Urrutia of Accion Opportunity Fund highlighted the importance of partnerships with responsible fintech lenders and the need for a federal regulatory framework. Yanki Tshering of Business Center for New Americans (BCNA) focused her remarks on requiring lenders to disclose pricing and terms in clear, concise language.
Members of the Committee asked what Congress should focus on to provide support for small businesses and how underserved small businesses are impacted by high-cost lending. Both CDFI leaders highlighted the role they play in helping small business borrowers refinance high-cost debt into more affordable financial products. They also noted the importance of Congress' providing additional resources to the CDFI Fund to strengthen CDFIs that are working to combat predatory lending.
As part of the Responsible Business Lending Coalition, OFN is working to build congressional support for H.R. 7889 to ensure small business owners have access to the affordable, responsible capital needed to sustain and grow their businesses.
- CDFI Fund Requires Info on Responsible Lending Practices in New Certification Application
The CDFI Fund’s new proposed certification application asks a series of questions about responsible financing practices of applicants, including interest rates on products, ability to repay standards, and default rates.
The proposed changes to the application come more than three years after the Fund released a Request for Information on CDFI certification policies. The CDFI Fund has shared resources to explain the changes on its website, including summary documents and webinars.
Learn more in this recent blog post.
- CFPB Moves Forward on Small Business Lending Data Collection Rule
More than a decade after the passage of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) is moving towards a rulemaking process to implement Section 1071 of the financial reform legislation that governs small business lending data collection and reporting.
Section 1071, which amended the Equal Credit Opportunity Act, requires financial institutions to collect certain data regarding applications for credit for women-owned, minority-owned, and small businesses, and to report that data annually to the CFPB. It is a key component in helping policymakers, researchers, and lenders develop a full understanding of the small business lending market, including what gaps might exist in access to capital as well as identify discriminatory lending practices.
Learn more in this recent blog post.
State Policy Developments
State governments have also stepped up to expand protections for small business borrowers. In 2018, California passed SB 1235, the first-in-the-nation small business Truth in Lending legislation. Although the law passed two years ago, the regulations to implement the legislation are still being finalized by the California Department of Business Oversight.
In July 2020, the New York State legislature passed the New York State Small Business Truth in Lending Act. This legislation represents the nation's strongest commercial lending disclosure requirements. Under the legislation, non-bank lenders must disclose fees and terms including estimated annual percentage rate, total repayment amount, and other financing costs. The bill passed both the Assembly and Senate at the very end of the legislative session but still awaits signature by Governor Cuomo (D-NY).
Both state legislative efforts passed with strong bipartisan support and were the result of advocacy from coalitions of CDFIs, small business advocates, responsible fintech lenders, consumer groups, and more. For more information on OFN’s small business lending advocacy, contact Dafina Williams, SVP, Public Policy.