Truth-in-lending law needed now

A photo illustration using stacks of quarters to show rising interest rates. (Photo: Doubletree Studio)

Would you take out a loan for a new home if you didn’t know the interest rate? How about for a car? Or even for a credit card?

More than likely, not.

Understanding the financing terms, including the annualized interest rate, is crucial information when you’re considering a loan. And it makes perfect sense that whoever is offering you that loan would also be required to provide that information.

SB 1225 would make California the first state in the country to require alternative lenders to disclose the terms of their financing.

It is incredibly difficult to understand why any lender is not required to disclose the annual rate to a small business owner who takes a loan to help buy a new piece of equipment, finance an expansion, or to simply provide cash flow to pay the bills. Small business owners don’t get the same information from their lenders that consumers do when taking out a home mortgage, buying a new car or using a credit card. Too often this means that unless they possess an advanced understanding of finance, they are unable to compare rates or make informed decisions about the cost of their financing.

Until now.

SB 1235, authored by state Sen. Stave Glazer, D-Orinda, passed by the California Legislature and now sitting on the governor’s desk awaiting his signature, would make California the first state in the country to require alternative lenders to disclose the terms of their financing.

The bill provides the Department of Business Oversight the flexibility to set disclosure standards that provide small business owners the transparency they deserve, without restricting responsible business practices.

While some of the new alternative (i.e., non-bank) small business lenders are responsible companies that use new technologies to lower costs and deliver affordable and fair credit, the majority of this growing marketplace—which sprang up to fill a void when banks dramatically cut back on small business lending during the Great Recession—operates largely outside of government regulation. Many are offering short-term and high-cost products that subject borrowers to unclear terms, steep repayment obligations, and astonishingly high annual interest rates.

Opportunity Fund’s research has revealed that some California businesses are paying average annual percentage rates of 94 percent—with some topping out at 350 percent—and average monthly loan payments that are nearly twice what the owners could afford.

At Opportunity Fund, we see a lot of these loans when desperate business owners come to us seeking help. We are able to help about half of them with longer-term loans at lower rates, but there are many whose businesses have been so negatively impacted that we cannot help.

For example, one frightening situation we found came from a wholesale clothing business that had a strong monthly net profit of $7,000. The owner—a middle-income, minority woman—borrowed $70,000 from three alternative lenders. Her payments on these loans wound up exceeding $42,000 per month—six times her available monthly take home pay. It wasn’t long before she was out of business. Should she have taken out those loans? No. Should she have been provided with full, easy-to-understand information about the terms and cost of the loans? Yes.

The result of these predatory practices is that a growing number of small business owners, like the wholesale clothing business owner, are accruing debt they can never repay and are falling into debt traps that bear a striking resemblance to the destructive cycle of payday lending. The financial stress this creates has severe consequences for the business owners and their families, as well as for their ability to create jobs and drive California’s economy.

That is why SB 1235 is supported by a coalition of more than 60 private sector and nonprofit organizations seeking to rein in these practices. The bill provides a common-sense solution to the problem of alternative lenders hiding the true costs of their high-priced financing.

There are more than 3.8 million small businesses operating in California.  They employ nearly half of our state’s private sector workforce, provide valuable services and create economic vitality in our communities. They deserve to be supported.

SB 1235 will help ensure the capital that is the lifeblood of any small business will be delivered in a transparent fashion, so entrepreneurs can succeed—and bolster our communities as they grow.

We urge Gov. Brown to sign this bill, giving California’s small businesses the common-sense protections they deserve and leading the nation in responsible lending to support our entrepreneurs.

Ed’s Note: Luz Urrutia is the CEO of Opportunity Fund, a leading Community Development Financial Institution with the largest portfolio of micro-business loans under management among non-profit lenders in the nation.

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