Statement of the Hon. Nydia M. Velazquez on Transparency in Small Business Lending
Washington, September 9, 2020
Affordable capital fuels new startups and helps existing businesses expand into new markets and grow their customer bases. And we know that when capital is accessible on fair terms, small businesses can do what they do best---strengthen our communities and fuel our economy. However, predatory lending practices and lack of oversight can put many small businesses out of business.
Last summer, our Committee examined the use of confessions of judgment by predatory online lenders. That hearing highlighted how merchant cash advance companies and online lenders have been able to skirt state and federal laws and include predatory loan terms on small business owners. That hearing crystalized my belief that there needs to be more transparency, accountability, and oversight in the small business lending arena.
And we all know that the Internet and technology have changed our lives for the better—allowing consumers and businesses to buy virtually any product online, access health care, and even educate our children. That also is true for how we manage our finances. I’m sure that everyone participating today has recently gone online to pay a bill, get a home mortgage quote, or send money to a friend or family member. Small businesses, many of whom the large traditional money center banks don’t serve, have turned to the Internet for capital to start a business or operate an existing one.
Today’s discussion is also extremely timely as economic uncertainty due to COVID-19 remains high, and access to credit for small firms may be even more challenging than usual. In this unique environment, online or “Fintech” lending has continued to grow, and remains an attractive option for many small businesses seeking capital.
For small business borrowers, the biggest advantage of Fintech is the ability to access capital after being denied a loan by a traditional lender. In many cases, Fintech lenders are able to meet the immediate payroll, inventory, or overhead needs of a small business and in some cases disburse funds in as little as 48 hours. Fintech lenders are also likelier to make small-dollar loans, generally considered too small to be profitable by most banks, but which predominantly go to women- and minority-owned small businesses.
And with minority-owned firms being almost twice as likely to apply for a loan online versus a traditional lender, it is critical for them to be able to seek capital online and be assured the terms are fair, transparent, and affordable.
However, as this Committee has explored, there are also potential risks for small firms seeking capital online. Aside from confessions of judgment abuses, observers have noted a considerable lack of transparency in the underwriting process for many Fintech small business loans, and it remains unclear whether lenders or other actors in this space are using certain information about applicants to discriminate.
Furthermore, not all Fintech lenders disclose the cost of capital in a way that is clearly presented and easy to understand for all small business borrowers. An economy where many small businesses are sometimes paying 200 or 300 percent interest rates to keep their business running is not an economy that is working for all. It’s a result of a patchwork of state laws, a lack of a federal regulator, and no federal law preventing exorbitant interest rates.
It has become clear to us on this Committee, through examples we’ve seen in prior hearings, and in our interactions with business owners in our districts, that small business owners applying for loans online are just as vulnerable as anyone to deceptive practices and unfair terms, and have a right to a full and fair disclosure of all terms, just like consumers.
Just because they don’t have an army of financial and legal professionals like big businesses, DOES NOT mean they should be left to fend for themselves when seeking credit.
We all know that in order to maximize competition in a marketplace, all actors need to have as much and as accurate information as possible.
The same applies in the market for small business loans if you’re the borrower – you need as much and as accurate information about your loan options as possible in order to make the best decision for your business.
That’s why earlier this summer, I introduced the Small Business Lending Disclosure and Broker Regulation Act, which would expand the Truth In Lending Act protections and disclosures, or “TILA,” that currently apply for consumers to also apply for small business loans.
My bill will bring needed transparency to small business credit markets ensuring entrepreneurs understand their obligations and rights when they sign up for a loan.
I should point out that these efforts are already underway at the state level, with California enacting a similar bill into law two years ago, and another version recently passed the New York legislature and is awaiting approval by Governor Cuomo.
It is long overdue that we take this fight for fairness on behalf of small businesses to the federal level.
In this pandemic, entrepreneurs have faced and will continue facing some of the most difficult and uncertain economic conditions ever, and it is vital we ensure predatory lenders don’t exploit this situation by enticing small businesses into unfair and unsustainable loans.
Fortunately, some lenders already conduct the business of online lending in a responsible way, and are able to do it sustainably while making a positive impact on their communities – we’ll hear from one of those lenders soon.
We will also hear from legal experts and advocates who will illustrate the impact of applying TILA to small business loans will have on minority communities, since small businesses usually represent one of the few wealth-building opportunities for communities of color, and in many cases, can serve as an unofficial “community center” for a neighborhood.
I greatly look forward to today’s discussion.