As small businesses struggle to survive, let’s make sure loans help, not harm them
If you’ve taken out a loan—a mortgage, an auto loan, a new credit card, a student loan, a home equity line, even a payday loan—in the last decade, you’re used to getting some basic facts about the loan, presented clearly: the interest rate, any fees, penalties, and estimated monthly payment. You might wonder how anyone could take out a loan without that information, and assume that every lender is required to disclose that information before someone signs on the dotted line.
When it comes to consumer loans, you’d be right—there are state and federal laws that require it. But those laws don’t apply to business loans where’s it’s still the Wild West, and predatory lenders are free to hide true interest rates, punitive fees and coercive collection practices. That’s a problem in the best of times as tens of thousands of small businesses fall prey every year to harmful loans that lock them into a cycle of nearly inescapable debt without any recourse. But these are far from the best of times.
The pandemic, the lockdowns, the loss of jobs, the slowdown in spending, recession—it’s obvious that many small businesses in the U.S. are in a world of hurt. Federal and state governments, even the Fed, quickly recognized how deep a crisis the present circumstances are for small businesses—especially the ones that rely on foot traffic for most or all of their revenue—and created programs to provide emergency support, most notably the Paycheck Protection Program.
The PPP was a lifeline for many small businesses—and you can see its effects in the rebound in employment. But it has many limitations, including that it’s a limited time program. Those funds have to be spent quickly. And it’s now obvious that the economic challenges for small businesses are going to last a lot longer than eight weeks.
Many of those businesses that can’t access loans from a bank are going to turn to other commercial lenders. For some, these loans will be a lifeline, allowing them to stay above water despite the drop in commerce.
Unfortunately, not all those who offer financing will share the same spirit of graciousness that so many have displayed during this exceptional time. Instead, some less-scrupulous lenders will do what they’ve always done—hiding key information from customers. By the time these details become apparent, it’s usually too late. Although it might seem like accessing some credit – even at less-than-ideal terms – is better than not getting any, the reality is that small businesses that are struggling to get by with lower revenues and fewer cash reserves may find themselves in even deeper holes if they don’t or can’t understand how the financing they receive will affect their cash flow.
It’s unlikely that unscrupulous lenders will choose this moment to have an epiphany. Instead, we should expect their products and practices will be just as harmful as they were before, perhaps more so. It’s moments like these when we need truth-in-lending laws the most.
Last year, California passed the nation’s first law requiring the same disclosure protections for small business borrowers as for consumers. The bill, SB 1235, was modeled off the Responsible Business Lending Coalition’s Small Business Borrowers’ Bill of Rights, which advocates for the rights to transparent pricing and terms, non-abusive products, responsible underwriting, fair treatment from brokers, inclusive credit access, and fair collection practices.
Building on the effort in California, the New York State legislature last week passed the New York State Small Business Truth in Lending Act, which essentially requires lenders to provide the same basic degree of transparency regarding items such as the annual percentage rate and prepayment costs that the average individual consumer might expect when taking out a loan. Basic protections like these should serve as a floor for lending laws across the country, and New York’s effort represents a key step forward in the fight for fair lending. The Responsible Business Lending Coalition, of which the Aspen Institute is a founding member, was proud to applaud its passage.
These two bills are important progress. But ultimately we need these protections for every small business in the country, not just those in California or New York. Applying these efforts in her home state at a national level, U.S. Rep. Rep. Nydia M. Velázquez of New York recently introduced H.R. H.R. 7889, the Small Business Lending Disclosure and Broker Regulation Act, to extend some of the safeguards available to consumer borrowers to those seeking business credit.
The new bill complements bipartisan legislation introduced last year, H.R. 3490, the Small Business Lending Fairness Act, which prohibits lenders from including confessions of judgment, which allow lenders to seize small businesses’ assets without a lawsuit, in loan agreements. These are vital protections against abusive small business lending.
Borrowing is a routine part of a business’s life cycle, but harmful loans doesn’t have to be. In moments like these, it’s easy to suggest that financial laws can wait—that we need to focus on our public health crisis first. But now is precisely the time to take action to protect small businesses that are facing desperate times. Otherwise the devastation of the pandemic is going to extend to ever more small businesses, the businesses we need to drive recovery and revitalize our communities when all of this is over. Truth-in-lending laws won’t save every small business during this era of turbulence, but we need to make sure that no small business fails because of preventable predatory lending in the midst of a national crisis.
Joyce Klein is Director of Business Ownership Initiative at The Aspen Institute.
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