On Monday in Montclair, several days ahead of Small Business Saturday, U.S. Senator Bob Menendez (D-N.J.) announced the introduction of legislation to protect small business borrowers from predatory lenders and loans carrying unclear terms and conditions and would secure safeguards already required in consumer lending, through the Truth in Lending Act. The bicameral Small Business Lending Disclosure Act of 2021 would bring enhanced transparency to small commercial loans.
“As we prepare to go out into our communities on this next Small Business Saturday and support our favorite local shops and stores, we should also stand up for their right to safe and transparent financing,” said Sen. Menendez. “When we provide entrepreneurs and business owners with the knowledge they need to make informed decisions, we better position them to grow and succeed. 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.”
Small businesses make-up almost half of private sector jobs in the United States and play a key role in local communities. In recent years, online lending for entrepreneurs and small businesses has grown to help meet the demands of the small business credit market, and while many of these financial products help meet entrepreneurs’ capital needs, some carry undisclosed fees and interest rates that are not transparent, leaving small business unaware of the true costs of the loan.
Under the bill, disclosure and transparency protections already in place in consumer lending will be extended to small business financing. Small business lenders would be required to make additional information readily available to borrowers including: the annual percentage rate; financing charges for loans; loan terms; payment amounts and collateral requirements, so small business owners can understand the costs and terms of the loan and are equipped with the information they need to make the best financial decision for their business. The bill was led in the U.S. House of Representatives by Congresswoman Nydia Velazquez (D-N.Y.-07).
“Prior to the COVID-19 pandemic immoral lenders sought to prey on small businesses with unfair and unsustainable loans, said Rep. Velázquez. “Once we were in the midst of the worst public health crisis in over a century these predatory lenders would take aim at business and entrepreneurs trying to stay afloat. This legislation is a critical step in extending many of the protections in consumer lending law to small firms, bringing needed transparency to small business credit markets and ensuring entrepreneurs understand their obligations and rights when they sign up for a loan.”
Sen. Menendez announced the introduction of his bill at Café MoSo in Montclair. The bistro, like many other small, minority-owned businesses, thrived before COVID-19 hit our state. Without the frequent foot traffic, business at the restaurant was greatly impacted.
Zina Floyd, the owner of Café MoSo and owner of a local pre-school, received funding from the Paycheck Protection Program, which helped keep the doors to both of her businesses open during the pandemic. In 2019, Floyd received loans from a predatory lender for her preschool and is still feeling the negative effects today.
Many small businesses struggling to recoup losses due to the pandemic have sought alternative financial lifelines. Many financial companies promise easy approvals, with little to no documentation requirements and funding in under a day. But far too often these products have little transparency in their loan terms, and small businesses can end up taking on unnecessary debt that they cannot afford.
“Unregulated, predatory lenders come with the promise of fast cash for small businesses; however, these lenders often use bait and switch tactics that can send a business into financial ruin. For years predatory lenders have been able to skirt transparency and trick small business owners into repaying a loan at exorbitant rates—sometimes as high as 350% APR. As small businesses face a long road to recovery from COVID-19, we cannot allow them to be taken advantage of any longer. Having access to clear and accurate lending terms will be critical to aiding small business recovery in the months and years ahead. We commend Senator Menendez and Congresswoman Velázquez for leading this charge in Congress and urge all Members to join them in providing America’s entrepreneurs with the financial transparency they rightly deserve,” said John Arensmeyer, Founder and CEO of Small Business Majority.
“Access to capital is a critical component of success to a business owner, however, this has even greater significance when it comes to Black business owners. Historically, black business owners have disproportionately been subjected to predatory lending practices. We applaud the efforts of Senator Menendez to ensure that rates, terms and covenants relating to financing for Small Businesses are properly disclosed and with clarity”, said John E. Harmon, Sr., IOM- Founder, President and CEO, African American Chamber of Commerce of New Jersey (AACCNJ).
The Small Business Lending Disclosure Act of 2021 has earned praise and support from a wide range of small business, financing, microenterprise and other advocacy groups including the African American Alliance of CDFI CEOs, Latino Economic Development Center (LEDC), Main Street Alliance, National Alliance of Community, Economic Development Associations (NACEDA), National Association for Latino Community Asset Builders (NALCAB), United States Hispanic Chamber of Commerce, Woodstock Institute, Responsible Business Lending Coalition (RBLC), Accion Opportunity Fund, The Aspen Institute, Community Investment Management, Funding Circle, LendingClub, Opportunity Finance Network (OFN), and the Small Business Majority.
“Fair and honest lenders have nothing to fear regarding transparency and the adoption of standard terms to describe the cost of business loans. Our legislature passed the NYS Small Business Truth in Lending Act with overwhelming bipartisan support last year. We thank Rep. Velázquez and Senator Menendez for their commitment to deliver similar protections at the federal level through universal disclosure standards,” said Linda MacFarlane, Chair of the New York State CDFI Coalition.
“While immigrant and Latino entrepreneurs are drivers of US innovation their economic contributions can be stifled by predatory financial practices and a lack in access to capital. NALCAB applauds the introduction of the Small Business Lending Disclosure Act, legislation that will help guard against unsafe lending products and ensure these entrepreneurs have the responsible capital needed to help them spur economic growth and great jobs,” said Marla Bilonick, President and CEO of NALCAB, the National Association for Latino Community Asset Builders.
Joining Sen. Menendez in cosponsoring the legislation are Sens. Sherrod Brown (D-Ohio), Chairman of the Senate Banking Committee Ben Cardin (D-Md.), Chairman of the Senate Committee on Small Business and Entrepreneurship. The House bill is cosponsored by Reps. Perlmutter (D-Colo.-7) and Maxine Waters (D-Calif.-43).