The federal Truth in Lending Act (TILA) does not provide enough protection to all borrowers. While individual consumers are protected by TILA’s disclosure requirements for loan costs and terms, these do not generally apply to small business owners or entrepreneurs obtaining credit for commercial purposes. This leaves commercial borrowers at risk. Given that Black and Latino entrepreneurs are far less likely to secure funding through traditional capital markets, they are particularly vulnerable to deceptive or predatory lending practices and credit products. In fact, businesses owned by people of color are more likely to seek out alternative financing providers, such as merchant cash advances, than White-owned firms are. To ensure entrepreneurs and small business owners are adequately protected and able to make fully informed decisions, policymakers should:
- Apply relevant consumer truth-in-lending rules to new and small business borrowers so there is greater transparency in lending terms, rates, and other conditions, including for all nonbank commercial financing products.
- Analysis of small business loan applications found some alternative lenders charging APRs of 90% or higher, with one study finding Black business owners were charged an average APR of 128%.
- A survey indicated that a majority of small business owners believe predatory lending is a problem and support stiffer regulations for alternative lenders.
States Enact Small Business Truth-in-Lending Protections
In 2018, California’s governor signed into law the first-ever Truth in Lending Act for small businesses. Under this new law, at the time financing is offered, lenders must disclose the total amount of financing, total cost of financing, term length, frequency and amount of payments, prepayment policies, and an annualized interest rate. Analysis from the Responsible Business Lending Coalition, using data from the Federal Reserve, estimated that California’s Truth in Lending Act would save small businesses in the state between $617 million to $2.9 billion annually. In December 2020, New York followed suit when the state’s governor signed the Small Business Truth in Lending Act, which requires disclosure of APR or estimated APR.