Now is the time to protect small businesses from predatory lending practices as they navigate the economic challenges posed by COVID-19. Small business owners are not afforded the same crucial protections as consumers under the federal Truth in Lending Act (TILA), which leaves them vulnerable to deceptive and misleading loan disclosures. As more businesses seek access to capital amid the pandemic, we are on the cusp of securing much-needed transparency in commercial financing, which will be essential in helping our New York small businesses weather the storm.
For years, a lack of transparency has left business owners in the dark on the true costs of loan products and what the fine print means to them. Currently, each lender discloses only what they want the borrower to see, leaving business owners confused and unable to compare products. A 2018 study by the NYS Department of Financial Services found that there is “not a uniform practice … to disclose in a clear, simple and transparent manner the full price of a loan.”
Additionally, unscrupulous practices have emerged in the small business lending market within the past decade. Some commercial financing companies have been known to use misleading, “non-standard” terms to describe their interest rates and repayment terms, luring unsuspecting business owners into fee-laden, unsustainable debt traps. These practices have been shown to have a disproportionate impact on minority-owned businesses — a 2019 Small Business Credit Survey by the Federal Reserve found that minority-owned firms more frequently applied for potentially higher-cost and less-transparent credit products.
Our NY Small Business Truth in Lending Act (A10118A/S5470B) will end these practices by requiring a simple, easy to understand disclosure for offers of commercial financing. The disclosure will provide borrowers with the terms of the contract in a clear and concise manner, including disclosure of the finance charge, Annual Percentage Rate (APR), total repayment, and prepayment policy. This bill creates uniform disclosures for all types of financing and requires providers to present the cost of a product as an Annual Percentage Rate (APR). APR, defined as “the total cost of borrowing money for one year, expressed as a percentage of the total amount owed,” is a uniform cost of credit that takes into account the timing of financing received and payments. APR has become a critical way consumers make decisions on financial products as it provides a uniform and easily-understood way to communicate cost — it is a central part of the federal TILA and a common cost metric in consumer products. A 2019 study by the Federal Reserve Bank of Cleveland that studied a focus group of 80 small business owners found that APR was a helpful metric in determining which commercial lending product to choose because it was familiar to business owners who had experience with APR in consumer products. The NY Small Business Truth in Lending Act extends the use of APR to commercial financing for small businesses so that they can easily understand the costs and be able to compare other offers they receive.
As small businesses seek access to capital to stay afloat during the pandemic, we need to ensure that they are empowered to make informed choices. They need to be able to compare options between lenders and choose the one that best fits their needs — not one that will drive them toward bankruptcy. Far too many New York businesses have been financially harmed by deceptive commercial financing practices. When a small business is forced to close, the negative impact can be felt across entire communities. The reality is that these small business owners are our family, friends, and neighbors who often don’t have access to a high-priced attorney to review complex lending offers. We should protect them the same way we protect consumers when they take out a personal loan.
The NY Small Business Truth in Lending Act passed both houses in July with bi-partisan support and is currently before Gov. Andrew Cuomo awaiting signature.
State Sen. Kevin Thomas represents 6th Senate District in Nassau County.
Assemblyman Ken Zebrowski represents the 96th Assembly District in Rockland County.