States take different paths when it comes to small business loan disclosure

Small businesses in Virginia and Utah will soon receive clearer information about the money they borrow from merchant lending companies.

But the disclosures will miss one number: the annual percentage rate they will pay for each loan. This will not be the case in New York and California, where lawmakers require non-bank commercial lenders to disclose APRs.

Diverging paths in states — and future fights in more state houses — are the result of opposing lobbying efforts by lenders and a debate over the appropriateness of APRs for certain types of business loans.

Lawmakers in various states have passed or are considering laws requiring the disclosure of small business loans. Here are the capitals of New York (top left), California (top right), Utah (bottom left), and Virginia (bottom right).

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On the one hand, small business groups say APR disclosures are key to ensuring business owners can make apples-to-apples comparisons on loan options — without accidentally accepting a triple-digit interest rate. due to unclear disclosures.

“Small businesses deserve to buy capital safely without worrying about exorbitant APRs and unfair or opaque loan terms,” said Awesta Sarkash, director of government affairs at the nonprofit group Small Business Majority.

The group is part of Responsible Business Lending Coalition, whose members include fintech companies LendingClub and Funding Circle, as well as a trade group representing community development financial institutions. The coalition lobbied for disclosure of the APR as part of its “Small Business Borrowers Bill of Rights”.

Opponents of APR disclosures include the Small Business Finance Association. The group represents non-bank commercial lenders whose products include merchant cash advances, where businesses receive cash upfront in exchange for a portion of their future sales.

The group has asked lawmakers in a handful of states to implement disclosures it deems “meaningful” to businesses, such as total fees, estimated number of payments and their amounts, and potential penalties for the early repayment of a loan.

But he pushed back on efforts to include APRs in disclosures, arguing they can be misleading by making short-term loans appear more expensive. The group says that since merchant cash advances often don’t have a specific duration — and instead are based on future sales — calculating an APR requires making estimates that can end up being wrong.

“You can do it roughly, but it can be extremely misleading for a company to disclose an APR based on an estimated term,” said Steve Denis, executive director of the Small Business Finance Association.

The debate is unfolding in several state legislatures, including North Carolina, Missouri, Maryland, Connecticut and New Jersey, where lawmakers have weighed different versions of commercial loan disclosure measures.

This has also happened in California and New York, two states that pioneered consumer-style disclosures for small businesses, and where APR disclosures will be required. After a longer-than-expected process in each state, state officials could finalize the regulations this year.

At the federal level, Representative Nydia Velázquez, D-New York, and Senator Robert Menendez, D-New Jersey, introduced a bill requiring APR disclosure on small business loans and essentially providing businesses with consumer-type loan protections.

Legislators in Utah and Virginia approved commercial loan disclosure bills this year, though they both did so without requiring APR disclosure.

Utah State Senator Curt Bramble, a Republican who drafted the state law, said lawmakers rejected APR disclosures because they “do not match” transactions such as merchant cash advances, where the timing of revenue-based transactions is unclear.

Utah lawmakers considered the New York and California models, but Bramble said they found “a better mousetrap” that protects against unscrupulous lenders cheating small businesses that don’t have a financial expert in their staff.

“We wanted to put in place a structure of transparency to help avoid the potential for malicious actors in our state,” said Bramble, whose bill requires affected non-bank commercial lenders to register with the Department of Institutions. financial institutions of Utah.

At a hearing last month, lobbyists from fintech firms LendingClub and Funding Circle called on Utah lawmakers to include APR disclosures in the bill, saying it was essential for companies to make apples to apples comparisons on loans.

“When transparent APRs are not disclosed in the marketplace, small business owners are unable to make comparisons,” a LendingClub spokesperson said in a statement. “Too many businesses are paying too much for credit because there is no effective price competition today.”

Virginia has also chosen not to require APR disclosures in its law, which specifically targets merchant cash advance companies rather than other nonbank lenders.

State Deputy Kathy Tran, a Democrat, introduced the measure after hearing about confusing loan terms and legal difficulties from Vietnamese American-owned businesses in northern Virginia and a restaurant owned by Americans. Blacks in the Richmond area.

Tran’s bill bans ‘judgment confessions’, which came under intense scrutiny in 2018 investigation from Bloomberg News on predatory commercial cash advance companies, and is taking other steps to curb out-of-state lenders.

In Washington, DC, Senate Banking Committee Chairman Sherrod Brown, D-Ohio, and Sen. Marco Rubio, R-Florida, propose similar measures following the Bloomberg report.

Tran, whose legislation originally proposed to require APR disclosure, said the provision did not have enough support to move forward. But the bill’s safeguards for merchant cash advance companies were “important initial protections for small business owners in Virginia that we need now and can’t wait.”

As for requiring APR in the future, Tran said she hopes the California and New York experiences will “help inform how we move forward in Virginia.”

“We didn’t have the votes in Virginia this year, but we may in another year,” Tran said. “I don’t think that door has closed in Virginia.”

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