California is on the verge of implementing the most significant financial protection bill in the nation for small business owners, something Opportunity Fund has been advocating for many years. We are proud to be part of a broad coalition of lenders, nonprofit groups and small businesses urging state regulators to strengthen proposed regulations so they are structured in a way to best support small businesses.
The proposed regulations recognize that small business financing has changed. Many small businesses now commonly pay effective APRs of higher than 90%—sometimes as high as 350%—without these rates ever being disclosed to them. While the federal Truth in Lending Act requires consumer creditors to disclose key information about transactions in a clear and comparable way, no such national standard exists to protect the millions of small business owners seeking financing to grow their businesses.
We were very pleased to see the following included in the first round of proposed regulations:
- APR or Estimated APR disclosed for all small business financing products
- Total Payments Per Month or Projected Payments Per Month disclosed in dollars
- Prepayment language included to prevent hidden prepayment penalties
We also identified ways to strengthen the proposed regulations, including:
- Clarify that disclosures must be presented as soon as possible and in time for comparison shopping, not at a "final loan offer" after it is too late.
- Modify the proposed method for calculating Estimated APR for sales-based transactions to ensure that providers’ flexibility in required estimations is paired with sufficient accountability.
- Clarify the disclosure responsibilities of brokers.
- Clarify the method of APR calculation for lines of credit.
- Clarify required and prohibited language in disclosure form.
- Clarify flexibility in disclosure formatting.
- Require disclosures of both APR and amount of funds provided in order to include all costs associated with financing renewals.
- Offer online APR calculation aids to ensure greater transparency.
- Establish a public complaint portal to support monitoring.
Other state and federal policy makers will look to California as a model, so it is particularly important that we get it right here in the Golden State.