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Congressional testimony on Small Business Lending regulation

posted by Adam Levitin

I am testifying later today (virtually) before the House Small Business Committee on "Transparency in Small Business Lending."  My written testimony is here.

Here's the background: consumer credit is governed by an extensive regulatory regime, starting with disclosure regulation, but extending to some substantive term regulation, and regular supervision (inspections) of lenders. There is no equivalent system for business lending.

The lack of protections for businesses is because they are presumed to be more sophisticated entities, but the range of financial and legal sophistication among businesses varies considerably. In particular, small businesses are often much more similar to consumers, and in fact their borrowing is often based on the owner's personal credit and guarantied by the owner and collateralized by the owner's personal property.

This leaves small businesses vulnerable to abusive practices that were prohibited in the consumer credit markets in the 1960s, 70s, and 80s:  disclosure of credit costs in non-standardized and misleading terms (e.g., quoting daily interest rates, rather than annual percentage rates, as required for consumer credit by the Truth in Lending Act), and confessions of judgment (prohibited for consumers by the FTC Credit Practices Rule). 

The Committee's chairwoman, Rep. Nydia Velázquez, has proposed a bill that would extend some consumer credit protections to loans for under $2.5 million made to small businesses, as well as create a system for regulating brokers of small business loans. The bill is an important step forward. While there are some tweaks I'd like to see to it, I very much hope it advances and becomes law. 

 

Comments

Thanks, Adam.

Here's the California law from last year, Senate Bill 1235, that put some truth-in-lending measures in place for loans to small businesses: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235

And here's the pending New York bill from this year (which is awaiting action by the Governor): https://legislation.nysenate.gov/pdf/bills/2019/S5470B

As a result of legislation this year, California's newly renamed Department of Financial Protection and Innovation also will have some authority over lending to small businesses.

Yes, important to mention that the state legislation was the model for the federal bill. Laboratories of Democracy in action!

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