Small Business Owners, FinTechs Back Federal Truth in Lending Bill

In lending, many basic protections that apply to consumers, such as disclosure of the annual percentage rate, aren’t required when lending to small businesses. And given that they’re in an underserved credit market, many end up paying much higher rates, often unwittingly.

During the pandemic, many businesses took out Paycheck Protection Program (PPP) loans at 0%, and Small Business Association (SBA) loans are on offer below 10%. But look beyond those, and you’ll often find products that charge 50%, 80% or even 300% or 400%.

“Those rates aren’t disclosed to small business owners,” Louis Caditz-Peck, director of public policy at LendingClub, told PYMNTS. “In our experience, it’s not uncommon for small businesses to be making choices between different kinds of products, never knowing that a financing option they’re looking at would charge them a triple-digit rate and not being in a position to compare that with other, lower-cost options.”

Extending Protections to Small Businesses 

This is one reason that LendingClub supports bills that would create the Small Business Lending Disclosure Act of 2021, versions of which were introduced in the House and Senate on Nov. 19.

“This bill would extend those protections to small businesses too, so they are given transparent disclosure — the price they’ll pay for credit — and are better able to make an informed decision about what option is right for them,” Caditz-Peck said.

This would be especially helpful for those mom-and-pop shops that don’t have a chief financial officer or in-house legal counsel to go through the fine print. They need financing — and they need that financing to be disclosed transparently.

Struggling in an Underserved Market 

Lending products for small businesses are expensive for several reasons, Caditz-Peck explained. Bank lending that dropped away during the Great Recession never came back, and the number of community banks — traditionally an important part of the small business credit system — has been dropping.

“Sometimes that gap in the market is filled by companies that aren’t offering very good products — they might just have humungous fees and they might be sold in kind of tricky ways,” he said.

That has created the need for legislation. Truth-in-lending laws similar to the ones Congress is now considering were enacted in California in 2018 and in New York earlier this year. In both states, they passed with overwhelming bipartisan majorities.

Assuring Basic Price Disclosure 

“I think lawmakers saw that truth in lending is a pretty modest market intervention,” Caditz-Peck said. “It’s basically the foundation of a free and fair market. It’s not really a government intervention so much as basic price disclosure needed for free and fair markets to work.”

He noted that other legislation in the works would impose restrictions on practices and pricing, but the Small Business Lending Disclosure Act would just give small business owners the information they need to make informed decisions.

The bill has the support of the chairs of all relevant committees in both houses, as well as small business groups, civil rights groups and FinTech groups, Caditz-Peck said, adding that it has broad consensus and little meaningful opposition. LendingClub is ready to work with anyone who supports the bill in order to get it passed.

“I think this is just a no-brainer, common-sense way to help small businesses and innovation in the finance market,” he said.