California’s small business owners have a new reason to celebrate! On September 30, Governor Jerry Brown signed the nation’s first small business “truth in lending act”—one of the most important new borrower protection laws in years. The new law requires lenders to tell small business loan applicants the annualized rate they would pay for financing. You may be surprised that this is not already required. But the Truth in Lending Act, which requires transparency for consumer loans, does not apply to small businesses. In fact, as many as 1 in 5 small business financing transactions today are made without the borrower being told the effective interest rate they will pay.
As a result, research by the Federal Reserve and Opportunity Fund indicates that today, many small businesses are often unknowingly paying effective interest rates of 50% – even as much as 350%! Without a transparently disclosed interest rate, small business borrowers are not always able to make informed comparisons between the credit offers they receive.
The bill was inspired by the Small Business Borrowers’ Bill of Rights, created by LendingClub in 2015 with a coalition of leading fintechs and nonprofits including Opportunity Fund, Funding Circle, and the Aspen Institute. To pass the new bill, LendingClub worked with this coalition and grew the support base to represent over 500 fintechs, consumer advocates, small business lenders, and nonprofits. This unusually broad coalition was able to overcome opposition from companies that preferred to continue not telling their small business customers the annualized rate they would be charged.
In the end, the bill received overwhelming bipartisan support and is expected to serve as a model for other states, and potentially even federal legislation. The law takes effect Jan. 1, 2019, and requirements for lenders to begin providing disclosures kick in once California’s financial regulatory agency adopts regulations about how the disclosures should be provided.
It is simply the right thing to do. LendingClub believes in providing credit in a fair, transparent, and easy way. This bill helps ensure all lenders do what is right for their borrowers.
Responsible standards help responsible companies. While LendingClub discloses the APRs of the loans we facilitate, some competitors do not. The lack of disclosure can make other loans inaccurately appear less expensive. This creates an unfair playing field for more transparent lenders. At LendingClub, we value transparency and fair competition. As early advocates for the bill, we even partnered with like-minded competitors to get it passed.
The bill supports regulatory stability for the fintech industry. When we speak with people who believe that fintech is unregulated we often find that their concerns are actually about small business lending, where many consumer protection laws do not apply. (Fintech consumer lending, on the other hand, is governed by the same consumer protection laws that apply to traditional brick-and-mortar banks.) By helping to clean up the parts of the market needing attention, we help alleviate those concerns.
“I’m proud that LendingClub is helping to steer the broader industry to do what’s right for customers,” says LendingClub’s Director of Public Policy, Louis Caditz-Peck. “This is an example of how good companies win when their customers win.”
For more on LendingClub’s support of this bill, check out our opinion piece in American Banker co-authored with like-minded advocates at the California Association for Micro Enterprise Opportunity and Small Business Majority.
To read the full text of the bill, click here.