Empowering Small Business Borrowers: Connecticut Legislators Pass Regulation to Improve Transparency for Alternative Lenders
In an effort to address the lack of transparency in small business lending, the Connecticut legislature recently passed new regulations aimed at improving transparency for small businesses seeking financing from certain alternative lenders. This piece will discuss the new regulations, national small business advocates’ reactions, and potential future developments in this area.
The Regulation
The new regulations require funder’s funds to small businesses in exchange for a percentage of future sales or revenue to take active steps towards more transparent lending. These steps include:
Providing a clear and concise description of the financing, including fees and charges.
Detailing the total cost of financing;
Setting out the annual percentage rate (APR) exclusive of any fees;
Notifying the borrower of their rights to cancel.
Small Business Advocates’ Frustration
While the bill received broad bipartisan support and was praised by several legislators, national small business advocates have expressed frustration with the final version of the bill. According to the advocates, the new legislation removed key elements they had lobbied for, including the requirement that alternative lenders disclose an estimated annual percentage rate (interest per annum) charged on any financing they offer small business customers. The group further argued that the essence of transparent lending must include APR and it must apply to all financial products, with models such as those adopted by California and New York preferred over others.
However, cash advance companies have pointed out that APR calculation could be inaccurate because the products they offer do not have a set term. This could lead to the APR calculation becoming misleading, which could harm the lending industry as a whole.
Future Developments
Beyond enacting the regulation, stakeholders and advocates are looking towards future legislative sessions to address both the current loophole in the legislation and the future of lending regulation in general.
Sen. Eric Berthel, R-Watertown, praised the current bill during a Senate debate on Tuesday, noting that it provides transparency that is similar to what is required in consumer lending, such as getting a car loan, buying a house, or financing a new appliance. He called it “a good bill to ensure that our small businesses and many consumers of these types of credit products are properly protected.”
But Rep. Jason Doucette, D. -Manchester, of the Banking Committee who co-chairs the legislature’s banking committee, called the legislation “a first step” and indicated that he hopes to review it during the 2024 legislative session. The new regulations only take effect in July of that year since the new staff will need to be trained and hired, and the agency will have to work through its implementation plan.
Still, several states such as California, New York, Virginia, and Utah have already acted similar regulations, but with some variations. While California and New York have established a method for approximating the APR on non-traditional financial products, Virginia and Utah do not require funders to disclose an estimated APR, but they have alternate requirements.
Conclusion
There exist several lenders in the small business space, with a blended mixture of resources, and requirements for accessing funds. These dynamics have made transparency challenging to implement in the industry. However, the Connecticut Senate has opted to provide a more fulfilling requirement for lenders which should make access to funds more open for small businesses. For small business owners who have limited access to traditional financial options, the hope is that this regulation will result in a more efficient, transparent, and better-regulated market in the future. Therefore, this new regulation should be seen as a significant development for an increasingly important sector of the economy.
Summary
The Connecticut legislature recently passed new regulations aimed at improving transparency for small businesses seeking financing from alternative lenders. The regulations require funders providing funds to small businesses in exchange for a percentage of future sales or revenue to take active steps towards more transparent lending. These steps include providing a clear and concise description of the financing, detailing the total cost of financing, setting out the annual percentage rate (APR) exclusive of any fees, and notifying the borrower of their rights to cancel. Although the bill received broad bipartisan support, small business advocates expressed frustration that the regulation removed key elements they had lobbied for, including the requirement that alternative lenders disclose an estimated APR charged on any financing they offer small business customers. Nonetheless, stakeholders and advocates are already looking towards future legislative sessions to address the current loophole in the legislation and the future of lending regulation. This regulation should be seen as a significant development for an increasingly important sector of the economy.
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This story has been updated.
The Connecticut legislature adopted new regulations Wednesday aimed at improving transparency for small businesses seeking financing from certain alternative lenders.
The bill received broad bipartisan support, with both houses voting unanimously to pass the measure.
“The banking committee has looked at this over the course of the last two sessions, and after lengthy discussions with stakeholders, we have come up with a bill that we believe is a good bill,” said Rep. Jason Doucette, D. -Manchester, who co-chairs the legislature’s Banking Committee, told other members of the House ahead of Wednesday’s vote.
But national small business advocates expressed frustration with the final version of the bill, which removed key elements they had lobbied for, namely the requirement that alternative lenders disclose an estimated annual percentage rate (the interest per annum) that is charged on any financing they offer. small business customers.
Commercial cash advance companies say that an APR calculation could be inaccurate because the products they offer do not have a set term.
The Banking Committee also reduced the bill to apply only to what is known as “sales-based financing” or “merchant cash advances.” These funders provide funds to small businesses in exchange for a percentage of future sales or revenue, withdrawn directly from a business’s accounts.
[RELATED: CT considers ‘truth in lending’ rules for some fintech companies]
“The essence of transparent lending must include APR and it must apply to all financial products,” said Awesta Sarkash, director of policy at Small Business Majority.
“In the next legislative session, we really want to work with legislators to make sure the law goes further and protects Connecticut small business owners,” Sarkash said. “But clearly there was a missed opportunity here.”
A handful of states, including California, New York, Virginia, and Utah, have adopted a similar regulation. Virginia and Utah law do not require funders to disclose an estimated APR, but do require several other disclosures. Proponents, including Sarkash’s group, prefer the models adopted by California and New York, which establish a method for approximating the APR on non-traditional financial products.
Sen. Eric Berthel, R-Watertown, signaled his support for the legislation during a Senate debate on Tuesday.
“Essentially, this provides some common-sense price transparency for small business financing,” he said, noting that the disclosures set out in the bill are similar to those required in consumer lending, such as getting a car loan. , buy a house or finance a new appliance.
He called it “a good bill to ensure that our small businesses and many consumers of these types of credit products are properly protected.”
Doucette called the legislation “a first step,” indicating that he hopes to review it during the 2024 legislative session.
The bill won’t even be in effect by then. The biennial budget, which was approved Tuesday, provides funds to hire Banking Department staff next year to enforce the new regulations, which take effect in July 2024.
“We need to talk to the agency about implementation,” Doucette said. “The agency may even prefer an APR, or they may have other things they want us to change once it’s implemented. This is a whole new arena.”
Correction
An earlier version of this story misrepresented the residence of Representative Jason Doucette. He lives in Manchester.
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