Several years ago, Woodstock joined with other consumer advocates to pass legislation to protect consumers from short-term predatory loans. The Payday Loan Reform Act became law in 2005, and reforms to the Consumer Installment Loan Act became law in 2011. Among other positive changes, those laws placed caps on the amount of interest that lenders can charge. But now, predatory lenders are creeping into the area of lending to small businesses. A report published by Woodstock in August 2014 entitled Discredited: Disparate Access to Credit for Businesses in the Chicago Six County Region reveals that lending by traditional banks is insufficient to meet the demand for small business loans, particularly for businesses in lower-income areas and for businesses in communities of color. Non-bank, “alternative” lenders, which are largely unregulated, are striving to meet this unmet demand. These alternative lenders, which provide high-cost loans with interest rates as high as 200 percent are not even required to disclose the Annual Percentage Rate (APR) on their loans, which makes it difficult for borrowers to know how much their loan costs, which, in turn, makes it difficult to engage in comparison shopping.
Last year, Woodstock worked closely with the Responsible Business Lending Coalition to develop a Small Business Borrower Bill of Rights (BBOR). The BBOR was intended to establish best practices for the industry, including, for example, the responsibility to disclose an APR. The BBOR is, however, completely voluntary. There is no mechanism to enforce the BBOR against lenders who sign on to it, and some major lenders have simply refused to sign on to the BBOR.
Predatory loans can throw a wrench into small business’s success. Accion Chicago, a Community Development Financial Institution (CDFI) that makes small business loans, reports that more than 20 percent of the people coming through its doors are seeking relief from a non-bank predatory loan and that many businesses are within 60-90 days of having to close their doors. Accion further reports that it has seen businesses paying more than 50 percent of their revenues to service these debts.
Small businesses, especially in lower-income areas and in communities of color, need access to credit to grow their businesses. The growth of small business stimulates economic activity in the community and creates jobs. According to the Small Business Administration, small businesses created nearly 2 million of the roughly 3 million private-sector jobs generated in 2014. But obtaining credit from a predatory lender can result in a business scaling back or closing. This fact underscores the need for regulation in this area. At a minimum, these regulations should require better disclosures, including the disclosure of an APR. Ideally, future regulations would also place a cap on fees and interest and require lenders to determine whether a borrower has the ability to repay the loan. These reforms would enable small businesses to focus primarily on their business and not on their debts.