Small Business Owners and FinTechs Support the Truth in the Loan Bill

In the area of ​​loans, many basic protections that apply to consumers, such as disclosure of the annual percentage rate, are not required for small business loans. And given that they are in an underserved credit market, many end up paying much higher rates, often unwittingly.

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

“These rates are not disclosed to small business owners,” Louis Caditz-Peck, director of public policies at Loan Club, said PYMNTS. “In our experience, it is not uncommon for small businesses to make choices between different types of products, never knowing that a financing option they are considering would charge them a triple-digit rate and not being not able to compare this with other cheaper options.

Extension of coverage to small businesses

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

“This bill would also extend these protections to small businesses, so that they benefit from transparent disclosure – the price they will pay for credit – and are better able to make an informed decision about which option to take. suitable, ”said Caditz-Peck. .

This would be especially useful for mom-and-pop stores that don’t have a CFO or in-house legal counsel to review the fine print. They need funding – and they need that funding to be disclosed in a transparent manner.

Struggling in an underserved market

Small business loan products are expensive for several reasons, Caditz-Peck explained. Bank loans that fell during the Great Recession never returned, and the number of community banks – traditionally an important part of the small business lending system – has shrunk.

“Sometimes that gap in the market is filled by companies that don’t offer very good products – they can just have huge fees and they can be sold in a tricky way,” he said.

This created the need for legislation. Loan truth laws similar to those currently being considered by Congress were enacted in California in 2018 and in New York City earlier this year. In both states, they were passed by an overwhelming bipartisan majority.

Ensure basic price disclosure

“I think lawmakers have seen that the truth in lending is fairly modest intervention in the market,” Caditz-Peck said. “This is fundamentally the foundation of a free and fair market. This is not so much government intervention as it is basic price disclosure necessary for free and fair markets to function.

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

The bill has the backing of the chairs of all relevant committees in both chambers, as well as small business groups, civil rights groups and FinTech groups, Caditz-Peck said, adding that he had a broad consensus and little significant opposition. LendingClub is ready to work with all who support the bill to get it passed.

“I think this is just a simple and sensible way to help small businesses and innovation in the financial market,” he said.

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