States take different approaches to disclosing small business loans – Natural Self Esteem

Small businesses in Virginia and Utah will soon have clearer information about the money they borrow from Merchant Advance Companies.

But the disclosures will be missing one number: the APR they’ll pay on each loan. That will not be the case in New York and California, where law requires non-bank lenders to disclose the APR.

The diverging paths in the states — and future struggles in other state buildings — are the result of reluctant lobbying by lenders and a debate over whether APRs make sense for some types of business loans.

Legislators in various states have either enacted or are considering legislation that would require disclosure of small business loans. Shown here are the capitals in New York (top left), California (top right), Utah (bottom left), and Virginia (bottom right).

Bloomberg/Adobe Stock

On one side are small business groups, who say APR disclosures are critical to ensuring business owners can accurately compare loan options — without inadvertently agreeing to a triple-digit interest rate due to unclear disclosures.

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

The group is part of Responsible Lending Coalition, whose membership includes fintech firms LendingClub and Funding Circle, and a trade group representing financial institutions for community development. The Coalition has pushed for disclosure of the APR as part of its Bill of Rights for Small Business Borrowers.

Among those opposed to APR disclosures is the Small Business Finance Association. The group represents non-bank commercial lenders whose products include merchant cash advances, where companies receive money up front in exchange for a portion of their future sales.

The group has asked lawmakers in a handful of states to provide disclosures they think make “meaningful” for businesses, such as total fees, estimated number of payments and their amounts, and potential penalties for prepaying a loan.

However, it has resisted efforts to include APRs in disclosures, arguing that they can be misleading by making shorter-term loans appear more expensive. The group says that calculating an APR requires estimates that can end up being flawed, as merchant cash advance loans often have no specific term and are instead based on future sales.

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

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

This also happened in California and New York, two states that pioneered consumer-like 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, Rep. Nydia Velázquez, D-New York, and Senator Robert Menendez, D-New Jersey, introduced a bill that would require APR disclosures for small business loans, essentially providing businesses with consumer-like credit protections.

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

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

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

“We wanted to create a transparency structure to prevent bad actors from operating in our state,” said Bramble, whose bill requires relevant non-bank commercial lenders to register with the Utah Department of Financial Institutions.

At a hearing last month, lobbyists from fintech firms LendingClub and Funding Circle urged Utah lawmakers to include disclosure of APR in the bill, saying it’s critical for companies to accurately compare loans.

“Unless transparent APRs are disclosed market-wide, small business owners cannot compare,” a LendingClub spokesman said in a statement. “Too many companies pay too much for credit because there is no effective price competition today.”

Virginia also decided against requiring APR disclosures in its law, which specifically targets merchant cash advance companies rather than other non-bank lenders.

State Del. Kathy Tran, a Democrat, introduced the measure after hearing about confusing credit terms and legal troubles at Vietnamese-American-owned businesses in Northern Virginia and a black-owned restaurant in the Richmond area.

Trans bill bans “judgment confessions,” which came under scrutiny in 2018 detection by Bloomberg News on predatory merchant cash advance companies and taking other measures to rein in out-of-state lenders.

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

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

Regarding the future need for APRs, Tran said she hopes the experiences from California and New York “will help shed light on how we would move forward in Virginia.”

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

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