Written Testimony of Adam J. Levitin — Transparency in Small Business Lending (September 9, 2020)

Summary

The written testimony of Adam J. Levitin, Professor of Law at the Georgetown University Law Center, before the Committee on Small Businesses of the United States House of Representatives at the hearing "Transparency in Small Business Lending" on September 9, 2020. Levitin supports the Chairwoman's bill, the Small Business Lending Disclosure and Broker Regulation Act of 2020, H.R. 7889, arguing that small businesses often resemble consumers in information, sophistication and market power but lack the protections consumers have. He illustrates the point with Homes by DeRamo, a Sarasota, Florida home construction business offered a $400,000 loan by World Business Lenders, LLC through Bank of Lake Mills at a daily rate that was over 121% on an annualized basis. The testimony closes by urging further steps, among them applying the Electronic Fund Transfer Act to small businesses.

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Issuer: Congressional materials
Document type: Congressional Hearing
Case: Hearing Transparency In Small Business Lending Witness Bio And Testimony Added 09 09 2020 At 03 48 Pm

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“Written Testimony of Adam J. Levitin — Transparency in Small Business Lending (September 9, 2020).” Original at docs.house.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/hearing-transparency-in-small-business-lending-witness-bio-and-testimony-added-09-09-2020-at-03-48-pm/, SHA-256 65aecb65bef670d125109ed23e6c436d813fc258793c4381e6f31344d2963522.

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GEORGETOWN UNIVERSITY LAW CENTER
Adam J. Levitin
Agnes N. Williams Research Professor and
Professor of Law

Written Testimony of

Adam J. Levitin
Professor of Law
Georgetown University Law Center

Before the Committee on Small Businesses
United States House of Representatives

“Transparency in Small Business Lending”

September 9, 2020
1:00 pm
Witness Background Statement

Adam J. Levitin is an Agnes N. Williams Research Professor and a Professor of Law
at the Georgetown University Law Center, in Washington, D.C., where he teaches courses
in bankruptcy, commercial law, contracts, and finance regulation. He is the author of
Consumer Finance: Markets and Regulation (Wolters Kluwer 2018), Business Bankruptcy:
Financial Restructuring and Modern Commercial Markets (2nd ed. Wolters Kluwer 2018),
and, with Susan M. Wachter, The Great American Housing Bubble (Harvard University
Press, 2020).
Professor Levitin has previously served as the Bruce W. Nichols Visiting Professor of
Law at Harvard Law School, as the Robert Zinman Scholar in Residence at the American
Bankruptcy Institute, and as Special Counsel to the Congressional Oversight Panel
supervising the Troubled Asset Relief Program (TARP). Professor Levitin has also previously
served on Consumer Financial Protection Bureau’s Consumer Advisory Board.
Before joining the Georgetown faculty, Professor Levitin practiced in the Business
Finance & Restructuring Department of Weil, Gotshal & Manges, LLP in New York, and
served as law clerk to the Honorable Jane R. Roth on the United States Court of Appeals for
the Third Circuit.
Professor Levitin holds a J.D. from Harvard Law School, an M.Phil and an A.M. from
Columbia University, and an A.B. from Harvard College. In 2013 he was awarded the
American Law Institute’s Young Scholar’s Medal.
Professor Levitin has not received any Federal grants or any compensation in
connection with his testimony, and he is not testifying on behalf of any organization. The
views expressed in his testimony are solely his own.
3

Chairwoman Velázquez, Ranking Member Chabot, Members of the Committee:

Good afternoon. Thank you for inviting me to testify at this hearing. My name is
Adam Levitin. I am a Professor of Law at the Georgetown University, where I teach courses
in bankruptcy, commercial law, and consumer finance. I appear hear today as an academic
who studies consumer and small business lending, without any economic interest at issue.
I applaud the Chairwoman for her bill, the Small Business Lending Disclosure and
Broker Regulation Act of 2020, H.R. 7889, which would bring much needed protections to
small businesses in the credit market.
The US financial regulatory system treats loans made for personal, family, or
household purposes differently from loans made for business purposes. While an extensive
system of regulation exists to protect consumer borrowers, there is only scant regulation of
business loans.
The consumer protection system is premised on the idea that consumers often lack
the information, sophistication, and market power to protect their interests. Accordingly, the
consumer financial regulatory system forces the provision of information, often in
standardized forms, gives consumers certain minimum rights, prohibits certain terms and
transactions that are understood to be overreaching and abusive, and creates a non-judicial
dispute resolution system.
The protections Congress has given consumers do not exist for businesses, which are
often presumed to have greater financial sophistication and savvy. But small businesses often
resemble consumers in terms of limited information, sophistication, and market power in
credit markets.
Because of a lack of regulation, the nature of information small businesses receive
about credit offers varies considerably. Moreover, many small businesses have owners who
do not speak English as a native language, placing these businesses at a disadvantage when
dealing with often technical credit documents.
Financial and legal sophistication also varies substantially among small businesses. The
expertise of most small businesses is neither in finance nor law. Instead, it is in whatever their
business is. Most small businesses are not regularly engaged in financing transactions. They
rarely have a full time chief financial officer who specializes in financial matters, and when
they borrower they are often not represented by counsel.
And small businesses lack the market power to be able to readily negotiate favorable
credit terms. Small businesses are often poorly served by the financial system; many financial
institutions are uninterested in small business lending in part because of the difficulties in
underwriting small business borrowers. The nature of small businesses varies considerably,
such that they are not susceptible to automated underwriting, which means that the costs of
underwriting a small business loan relative to loan size are larger.
The reason that a borrower takes out a loan does not determine the sophistication of
the borrower or the borrower’s ability to otherwise protect his or her interests. Moreover,
small business borrowing is often tied up with the personal credit and property of the owner

because of personal guaranties.1 Small business lenders often want the owner’s credit score
for underwriting, and want the owner’s other property as collateral. Moreover, many small
businesses have commingled used of property with their owners. A small contractor might
use his truck for work, but also to get groceries and to take his kids to school. A computer
in a home office might be used for both business and personal work. Accordingly, it makes
sense to recognize that small businesses need many of the same sort of protections as
consumer borrowers to ensure that they can enjoy fair and efficient credit markets.
My testimony proceeds by using a small business loan at a disguised 121% annual
interest rate to illustrate some of the problematic issues in small business lending. I then turn
to a discussion of how the Chairwoman’s bill successfully addresses some of these problems.
A final section suggests some clarifications or extensions of the bill.

I. ABUSES IN SMALL BUSINESS LENDING: THE DERAMOS’ STORY
In 2015, Homes by DeRamo, a small, Sarasota, Florida, home construction business
owned by the DeRamo family, needed cash in 2015 for operating expenses.2 An outfit called
World Business Lenders, LLC,3 offered the business a $400,000 loan, due in 9 months, but
required the DeRamos to personally guaranty the loan and pledge their home as collateral.4
Only about $393,000 was actually disbursed after fees were deducted. Loan was formally
made by Bank of Lake Mills, a tiny two-branch community bank in Wisconsin with no
presence in Florida. It is unclear how the DeRamos connected with World Business Lenders
in the first place.
Within weeks of making the loans to the DeRamos’ business, Bank of Lake Mills
assigned the loans to World Business Lenders. 5 The assignment was signed by a Vice

1
See Bd. of Gov. of the Fed. Reserve Sys., SMALL BUSINESS CREDIT SURVEY: REPORT ON EMPLOYER
FIRMS 5 (2017), available at
https://www.fedsmallbusiness.org/mediaIibrary/fedsmallbusiness/files/2018/sbcs-employer-finns-
report.pdf (finding that 55% of small business employers personally guaranteed their business loans and 33%
pledged their personal assets as collateral); Bd. of Gov. of the Fed. Reserve Sys., SMALL BUSINESS CREDIT
SURVEY: REPORT ON EMPLOYER FIRMS 8 (2017), available at
https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/fiIes/20I8/sbcs-nonempIoyer-firms-
report.pdf (finding that 39% of non-employer small businesses issued personal guaranties, with 26% pledging
personal assets as collateral for business debts).
2
Complaint, DeRamo v. World Bus. Lenders, LLC, 2017-CA-2438-NC (Sarasota County, Fla.
Circuit Court, June 16, 2017) at ¶ 7 (hereinafter “DeRamo Complaint”). The facts related here are drawn
entirely from public filings in litigation. I have had no contact with the parties, have no interest in the case, and
take no position on its ultimate merits. I am aware of the case only because as part of a scholarly project I have
been tracking the trail of litigation left by the lender involved. To the extent that the facts alleged in the
pleadings were controverted, they were easily confirmed either from public records, the loan documents
themselves, or from the lender’s own filings in other court cases.
3
For background on World Business Lenders, see Zeke Faux, Wall Street Finds New Subprime With
125% Business Loans, BLOOMBERG, May 22, 2014.
4
DeRamo Complaint at ¶ 8.
5
DeRamo Complaint at pp. 152, 182. World Business Lenders, LLC subsequently assigned the loans
to a securitization vehicle called WBL SPE II, LLC. Id. at pp. 184, 187. WBL SPE II, LLC is a wholly owned
subsidiary of World Business Lenders, LLC, that World Business Lenders uses to obtain financing. Verified

President of World Business Lenders with a Power of Attorney for Bank of Lake Mills.6 The
documentation of the DeRamos’ loan bears indicia that World Business Lenders was the
intended assignee from the get-go: World Business Lenders’ address appears in numerous
places in the loan documentation,7 and the loan documentation even provides for venue and
enforcement in New York, where World Business Lenders was located at the time.8 The
DeRamo case follows a pattern of other transactions undertaken by World Business Lenders
with Bank of Lake Mills and pair of other banks, Axos Federal Savings Bank (formerly Bank
of the Internet (!)) and Liberty Bank.9 In all of these cases, the loans were made by the bank
and shortly thereafter transferred to World Business Lenders. In other words, Bank of Lake
Mills was little more than an origination agent for World Business Lenders.
The DeRamo loan had a daily interest rate of 0.331515959726%. It also had a 15%
prepayment penalty. The loan further gave the lender the right to automatically debit Home
by DeRamo’s bank account $3,047.42 every business day, starting four days after the date
of the loan.10 This meant that the loan amortized very rapidly, such that the DeRamos did
not have use of the full disbursement for more than a few days: every week they would have
over $15,000 less in working capital.
After four months of payment, the DeRamos refinanced their loan with Bank of Lake
Mills, extending the maturity date, and with virtually the same daily interest rate, suggesting
that the refinancing was for the purposes of extending the maturity date. They paid the 15%

Petition, World Business Lenders, LLC v. Arena Limited SPV, LLC, No. 653229/2019 (N.Y. Sup. Ct. N.Y.
County, May 31, 2019), ¶¶ 2, 6.
6
DeRamo Complaint at ¶ 24.
7
See, e.g., id. at pp. 13, 31.
8
Id. at p. 17.
9
See, e.g., Class Action Complaint, Quantum-Mac Int’l, Inc. v. World Bus. Lenders, LLC, No 1:20-
cv-02353 (N.D. Ga. June 2, 2020) (Axos Bank, former BOFI Federal Bank, as rent-a-bank partner for World
Business Lenders); Kaur v. World Bus. Lenders, LLC, 440 F. Supp. 3d 111, 116 (D. Mass. 2020) (BOFI
Federal Bank as World Business Lenders’ rent-a-bank partner); World Bus. Lenders, LLC v. 526-528 North
Main St., LLC, 197 Conn. App. 269, 270-271 (2020) (120% interest rate loan made by Bank of Lake Mills
and assigned to World Business Lenders); Complaint, World Business Lenders, LLC v. Cloud & Willis, LLC,
No. 19-ev-007125 (Fulton County State Court, Ga., Dec. 27, 2019), ¶ 5 (noting that “Shortly after the Loan
documents were signed, the Loan [made by Bank of Lake Mills] was sold and assigned to World Business
Lenders.”); Complaint, B&S Medical Supply, Inc., N.Y. v. World Business Lenders, LLC, No. 17-cv-03234-
RMB (S.D.N.Y. 2017) (Liberty Bank, Utah, as rent-a-bank partner for World Business Lenders); Verified
Complaint, WBL SPE I, LLC as Assignee of World Bus. Lenders, LLC and of Bank of Lake Mills vs. Jo Juice
and Salad Bar, LLC, No. 32642/2017E (N.Y. Sup. Ct., Bronx Cnty, Oct. 26, 2017) (loan made by Bank of
Lake Mills on October 20, 2016, and sold to World Business Lenders on December 2, 2014); Verified
Complaint, World Bus. Lenders, LLC v. Queens Medical Services, P.C., No. 600802/2016 (N.Y. Sup. Ct.
Nassau Cnty, Feb. 5, 2016) (loan made by Bank of Lake Mills on March 10, 2015, sold to World Business
Lenders on March 16, 2015); Verified Complaint, World Bus. Lenders, LLC v. Michael’s Landscaping
Construction, LLC, No. 611675/2016 (N.Y. Sup. Ct. Suffolk Cnty, July 26, 2016) (loan made by Bank of
Lake Mills on December 9, 2015, and sold to World Business Lenders on December 14, 2015); Verified
Complaint, World Bus. Lenders, LLC v. ML Seafood Corp., No. 511151/2016 (N.Y Sup. Ct. Kings County,
June 30, 2016) (loan made by Bank of Lake Mills on April 30, 2015, and sold to World Business Lenders on
May 6, 2015)Verified Complaint, World Bus. Lenders, LLC v. PM Recycling LLC, No. 509595/2016 (N.Y.
Sup. Ct., Kings Cnty, June 6, 2016) (loan made by Bank of Lake Mills on November 26, 2014, and sold to
World Business Lenders on December 2, 2014).
10
DeRamo Complaint at p.11

prepayment penalty to refinance, 11 although a simple loan amendment would not have
required payment of any fee. They also took out an additional smaller loan from Bank of
Lake Mills.12 In both cases, the loans were quickly transferred to World Business Lenders.13
Seven months after the original loan, the DeRamos defaulted on the loans. Less than
a year after that, the DeRamos brought suit against World Business Lenders alleging that the
loans were usurious.14 The DeRamos claimed that they were told that the interest rates—not
the prepayment penalty—was 15%. While the interest rate was in fact disclosed in the
DeRamo’s actual loan agreement, it was in the form of what appeared to be a miniscule a
daily rate with twelve decimal places. In fact, on an annualized basis, the interest rate was
over 121%! On the “Business Loan Summary” the DeRamos received, no interest rate was
quoted. While the total interest charge was listed, the only number given as a percentage was
the prepayment penalty—15%. No annual percentage rate was ever given. In contrast, the
APR and finance charge are required to be the most prominent term in consumer credit
disclosures.15
Florida law caps interest charges at an 18% annual rate.16 So how was World Business
Lenders able to charge over 122% annually?17 Because World Business Lenders had “rented”
a bank.
Although state usury laws cover nonbank lenders, banks are effectively exempt.18 High
cost nonbank lenders engage in a range of transactional devices to evade state usury laws,19

11
The prepayment penalty appears to have been rolled into the refinancing. The balance at the time of
refinancing was approximately $375,000, see id. at ¶ 12 ($640,000 principal plus finance charges minus
$265,000 in payments). 15% of $375,000 is approximately $56,000. With other fees, the refinancing was for
$457,000. Id. at ¶ 15.
12
Id. at ¶ 22.
13
Id. at ¶¶ 20, 24.
14
The DeRamos allege that they were also told that their refinancing of the loan and a subsequent
additional loan would be at 15%. DeRamo Complaint at ¶¶ 14, 22. The only 15% figure in the loan documents
is for the prepayment premium. Id. at Exhibit 1 (p.13).
15
15 U.S.C. § 1632(a).
16
39 FLA. STAT. § 687.02.
17
The loan documents, included as attachments the complaint, all provide for a daily interest rate of
between 0.331513939726% and 0.335945205479%. DeRamo Complaint at pp. 13, 55, 158. On an annualized
simple interest basis with a 365-day year, this is between 121% and 122.6%. The DeRamos’ loans were only for
300 days, however, so in their pleadings they annualized the ratio of finance charges to principal, which resulted
in rates between 72% and 74% interest. DeRamo Complaint at ¶ 26.
18
Technically, federal law does not exempt banks from state usury laws so much as provide a choice of
law rule that enables banks to “export” the usury cap from their home state to other states. See 12 U.S.C. §§
85, 1463(g), 1831d. This means that a bank based in a state with no usury cap is not subject to other states’
usury caps when it does business in those states.
19
Examples of other devices include high cost lenders basing themselves offshore and claiming that
foreign usury limits apply, see First Amended Complaint, Consumer Fin. Protection Bur. v. NDG Financial
Corp., No. 15-cv-5211 (S.D.N.Y., Dec. 11, 2015), or partnering with native American tribes or tribal members
and sheltering in tribal immunity, see, e.g., Complaint, FTC v. AMG Services, Inc., No. 2:12-cv-00536 (D.
Nev. Apr. 2, 2012); First Amended Complaint, CFPB v. CashCall, Inc., No. 1:13-cv-13167 (D. Mass. Mar.
21, 2014).

but their preferred mechanism is to partner with a bank in a “rent-a-bank” arrangement.20
That is precisely what World Business Lenders did.
In a rent-a-bank arrangement, a nonbank contracts for a bank to make loans according
to the its specifications and then sell it the loans. The nonbank then claims to shelter in the
bank’s exemption from state usury laws and other consumer protection laws, as well as the
benefit of the choice-of-law provisions applicable to the bank. And because the loan is not
directly made by the nonbank, the nonbank claims that it is exempt from state licensure
requirements for nonbank lenders. In exchange for renting out its regulatory privileges, the
bank collects a fee.
Because of the involvement of the Bank of Lake Mills, World Business Lenders was
able to respond to the DeRamo’s suit that (1) the loan documentation provided that they
would be governed by Wisconsin law, which has no usury rate for business loans, not Florida
law, and (2) as the bank’s assignee it could shelter in the bank’s exemption from state usury
laws. 21 What’s more, because the DeRamos had defaulted on the loan, World Business
Lenders sought a judgment against them (a precondition of allowing it to foreclose) in a
counterclaim.22
The DeRamos’ case ultimately settled privately, but it is illustrative of a larger
phenomenon in subprime lending. Rent-a-bank arrangements are common in on-line payday
lending, consumer installment lending, “marketplace lending,” and subprime small business
lending. Moreover, rent-a-bank lending appears likely to expand in response to the
tightening of state usury laws,23 and a set of new rulemakings by the Office of Comptroller

20
Financial services firms refer to these relationships solely as “bank partnership” relationships. Critics
use the term “rent-a-bank” to describe the relationship. Neither is a neutral term. “Rent-a-bank” may seem
inflammatory, but the anodyne “bank partnership” terminology masks the true nature of the relationship and
effectively accedes to these arrangements’ legitimacy as a policy matter. Moreover, the contractual documents
for these relationships often explicitly disclaim the existence of a partnership. See, e.g., Participation agreement,
dated July 1, 2015, by and between Elastic SPV, Ltd. and Republic Bank & Trust Company
https://content.edgar-online.com/ExternalLink/EDGAR/0001193125-15-
371673.html?hash=949bb7318f6e6488cfa47b9c53666278efec432bfad757d790662bd149ebeb48&dest=D8
3122DEX991_HTM#D83122DEX991_HTM § 18 (“This Agreement is not intended to constitute, and shall
not be construed to establish, a partnership or joint venture among any of the Parties.”), § 19.a (“This
Agreement will not create a joint venture, partnership or other formal business relationship or entity of any
kind, or an obligation to form any such relationship or entity.”); Participation Interest Purchase and Sale
Agreement, dated August 1, 2019, by and between EF SPV, LTD, and FinWise Bank, at
http://d18rn0p25nwr6d.cloudfront.net/CIK-0001651094/c55a048e-f8bb-41b8-ad10-bafd47e130f9.pdf
(“§ 4.02 Intent of the Parties. This Agreement will not create a joint venture, partnership or other formal
business relationship or entity of any kind, or an obligation to form any such relationship or entity.”).
21
Defendants, World Business Lenders, LLC’s and WBL SPE II, LLC’s Answer, Defenses, and
Counterclaims, DeRamo v. World Bus. Lenders, LLC, 2017-CA-2438-NC (Sarasota County, Fla. Circuit
Court, June 16, 2017) at pp. 6-7. Florida law specifically exempts banks from its usury laws. 39 FLA. STAT. §
687.12.
22
Id. at pp. 9-14.
23
On October 10, 2019, California enacted the Fair Access to Credit Act (A.B. 539), which created a
rate cap of 36% on loans between $2500 and $10,000. Previously no rate cap had applied. In response, three
nonbank fintech lenders, CURO, Elevate, and ENOVA, each indicated in an investor call that it were
considering moving to the bank partnership model to avoid the usury cap. Elevate Credit, Inc., Q3 2019
Earnings Call, Nov. 4, 2019, https://finance.yahoo.com/news/edited-transcript-elvt-n-earnings-

of the Currency and Federal Deposit Insurance Corporation that provide legal protection to
rent-a-bank arrangements against usury law challenges.24
I recognize that the rent-a-bank problem generally lies outside of the purview of this
committee (and is not an issue limited to small businesses). Nonetheless, the regulatory
vacuum created by rent-a-bank relationships—where neither state nor federal law governs
the nonbank that is the true lender—makes it all the more important to strengthen and
generally applicable federal regulations and expand them to small businesses.

II. THE SMALL BUSINESS LENDING DISCLOSURE AND BROKER REGULATION ACT OF 2020
The Small Business Lending Disclosure and Broker Regulation Act of 2020 is an
important step toward ensuring fair treatment of small businesses in the lending market.
The core provision of the Act is to require for small business loans the disclosure of
the total amount of the financing, the finance charges, the finance charges expressed as annual
percentage rate (APR), payment amounts, term, prepayment cost or savings, and collateral
requirements.25 Clear disclosure of these terms is essential for borrowers to understand the
nature of the obligation they are assuming. In particular, it is critical to require disclosure of
finance charges in the standardized annual form of the APR. Disclosure of finance charges in
a standardized form enables borrowers to more readily understand and compare various
credit terms available on an apples-to-apples basis, so the borrowers can make an informed
decision about using credit. Informed use of credit is essential for ensuring robust price
competition, which is the first line of borrower protection.26 The Act would also prohibit
certain non-standardized used of terms. 27 And recognizing the variety of forms of small

063934139.html (“...California passed a law that caps interest rates on personal loans between $2,500 and
$10,000. …As a result, we will stop originating loans through a direct lending channel in California once the
law goes into effect. However, we do not believe that it'll have a material impact on our business due to our
diversified operating model and additional opportunities. One of those opportunities is to expand our
underwriting and technology licensing to our 3 existing FDIC-regulated bank partners in new geographies. In
addition, we are continuously looking for additional banks that share our commitment to providing innovative
consumer-focused products.”); Enova International (ENVA) Q3 2019 Earnings Call, Oct. 24, 2019,
https://www.fool.com/earnings/call-transcripts/2019/10/26/enova-international-enva-q3-2019-earnings-
call-tra.aspx (“And instead of originating near-prime loans, we plan to market and provide underwriting services
for national banks originating in California.”); CURO Group Holdings Corp. (CURO) Q3 2019 Earnings Call
Transcript, Oct. 25, 2019, https://www.fool.com/earnings/call-transcripts/2019/10/25/curo-group-
holdings-corp-curo-q3-2019-earnings-cal.aspx (“Hugh Miller -- Buckingham – Analyst: …So I guess assuming
that you are successful at some point in potentially creating a substitute product with the bank in California,
can you just give us a sense of kind of how we should think about the start-up process for that type of initiative?...
Don Gayhardt -- President & Chief Executive Officer: …we do have a signed agreement….”).
24
85 Fed. Reg. 33530, 33532 (June 2, 2020) (OCC final “valid-when-made” rule); 85 Fed. Reg.
44146 (July 22, 2020) (FDIC final “valid-when-made” rule); 85 Fed. Reg. 44223 (July 22, 2020) (OCC
proposed “true lender” rule).
25
H.R. 7889, Small Business Lending Disclosure and Broker Regulation Act of 2020, §§ 192, 193.
26
See 15 U.S.C. § 1601(a).
27
H.R. 7889, Small Business Lending Disclosure and Broker Regulation Act of 2020, § 195(b).

business financing, it would expand the definition of “finance charge” in the Truth in
Lending Act to cover factoring discounts, prepayment penalties, and certain leasing charges.28
To see how important these disclosures are, consider the DeRamo’s loan. The pricing
of the DeRamo’s loan was never disclosed as an annual percentage rate of 121%. Instead, it
was disclosed in terms of daily percentage rate, which makes it look infinitesimally small:
0.331515959726%. Moreover, even the daily percentage rate was not prominently disclosed
in the DeRamo’s loan. It was buried in the midst of legalese. No interest rate whatsoever
appeared on the summary terms sheet for the loan, and instead, the only percentage rate
disclosed on that term sheet was for the prepayment penalty.
The Small Business Lending Disclosure and Broker Regulation Act of 2020 would fix
this problem. It would require clear disclosure of the rate being 121% annually. Such clear
disclosure would benefit both borrowers and lenders. Borrowers would know exactly what
deal they were getting into, and lenders would not have to worry about borrowers claiming
that they were snookered into loan terms they didn’t understand. Honest lenders should
embrace the proposed regulation because it creates greater clarity about loan terms that will
drive the bad actors from the market.
Similarly, section 194 would require waiver of prepayment penalties when a lender
refinances a loan from its existing borrower unless there is a tangible benefit to the small
business from the refinancing. That provision would likely have prevented the DeRamos from
being charged a 15% prepayment penalty for the privilege of refinancing their loan with the
same lender for a 5-month extension at the same interest rate. To be sure, nothing would
have prevent World Business Lenders from charging a fee of equal amount on the new loan,
but such new fee would be a finance charge under the Truth in Lending Act and would
therefore have to be disclosed as part of the APR on the new loan.
The Small Business Lending Disclosure and Broker Regulation Act of 2020 also
would mandate regulation of small business loan brokers. This too is important for as we
have seen repeatedly in other markets—mortgages, auto loans, and online payday and
installment loans—loan brokers or auto dealers or lead generators are not incentivized to get
the borrower the best deal possible, but are often incentivized to steer the borrower to the
highest cost loan.29 Moreover, brokers rarely present borrowers with all financing options in
the market, but only the offers from a limited stable of lenders with whom they contract.
Borrowers are frequently unaware that the broker is not working for them, may have
adverse financial interests, and may only present offers from a limited number of lenders.
Requiring disclosures of loan brokers about their compensation and number of lenders they
deal with as well as licensing the brokers to ensure that only reputable parties engage in loan

28
H.R. 7889, Small Business Lending Disclosure and Broker Regulation Act of 2020, § 193.
29
See, e.g., Laurie Burlingame & Howell E. Jackson, Kickbacks or Compensation: The Case of Yield
Spread Premiums, 12 STAN. J. L. BUS. & FIN. 289 (2007) (mortgage broker yield spread premiums); Adam J.
Levitin, The Fast and Usurious: Putting the Brakes on Auto Lending Abuses, 108 GEO. L.J. 1257 (2020)
(indirect auto lending). Lead generators for on-line loans also sell the lead to the high bidder, which will need
to recover its costs, which likely means a higher loan price.

brokering (using the SAFE Mortgage Licensing Act as a model) is an important step toward
ensuring a fairer and more efficient small business lending market.
Perhaps most importantly, the Small Business Lending Disclosure and Broker
Regulation Act of 2020 would give the Consumer Financial Protection Bureau the same
plenary authority to regulate small business loans as it does for a “consumer financial product
or service.” This would enable the Consumer Financial Protection Bureau to use its power
to prohibit unfair, deceptive, and abusive acts and practices to regulate small business loans,
as well as to enact a “larger participant” rulemaking allowing it to supervise the major players
in the small business lending market. UDAAP authority and supervisory are critical gap-filling
regulatory tools that enable the CFPB to address problems that legislation cannot readily
anticipate, 30 and the establishment of an Office of Broker Regulation within the Bureau
would ensure a clear locus of responsibility for broker regulation.

III. IMPROVEMENTS AND EXTENSIONS
While I believe that the Small Business Lending Disclosure and Broker Regulation
Act of 2020 is an important move in the right direction, I would urge consideration of a few
alterations or extensions of the bill.
• In section 191, the definition of “close-end commercial credit” references UCC § 2A-
103(j). I would suggest amending to merely reference the UCC. UCC § 1-203, for
example, addresses whether a transaction that has the form of a lease is really a disguised
security interest. It is important to incorporate that provision into the definition if the
UCC is to be referenced in the first instance.
• In section 191, the definition of “Director”—should indicate that the “Bureau” is the
Consumer Financial Protection Bureau.
• In section 191, I would suggest considering a narrower definition of small business
financing, based not on loan size, but based on the existence of a personal guaranty or
some combination of the two.
• Section 192 would amend the Truth in Lending Act to state “This title shall apply to
small business financing made to a small business to the same extent as this title applies
to extensions of credit made to a consumer.” The term“this title,” refers to the Truth in
Lending Act, but problem is that the Truth in Lending Act is not a title of the United
States Code. Instead, it is subchapter I of Chapter 41 (the Consumer Credit Protection
Act) of title 15 of the United States Code. I do not believe that section 192 of the bill
means to apply all of title 15 to small business loans. If the bill is only applying subchapter
I of Chapter 41 of title 15, this should be clarified, including whether the Truth in
Lending Act’s mortgage provisions would apply to personal guaranties secured by real
property.

30
I note that the FTC already has power to prohibit “unfair and deceptive” acts and practices in small
business lending under section 5 of the FTC Act, 15 U.S.C. § 45, but has done little with this power.

• I would urge some additional disclosures if a personal guaranty is involved, with the
additional disclosures highlighting the fact that a default by the business could result in a
loss of personal property by the owner.
• I would urge extending another basic consumer credit protection, the FTC’s Credit
Practices Rule, 16 C.F.R. Part 444, to small businesses. Doing so would, among other
things, prohibit the use of confessions of judgment for small business loans.
• I would also urge a disclosure of any intended transfer of a loan by a lender at the time
of origination. If a lender like Bank of Lake Mills has pre-committed to sell loans to a
third party like World Business Lenders, that is important information that should be
disclosed to the borrower. Borrowers should know who they are going to be dealing with
on a loan, not merely the theoretical possibility that a loan can be transferred by a lender.
• I would strongly urge also applying the Electronic Fund Transfer Act to small businesses.
In particular, the EFTA prohibits compulsory use of preauthorized electronic fund
transfers as a condition of extending credit, 31 and gives a consumer a right to stop
preauthorized electric fund transfers.32 Without such a right, a small business that finds
itself in a problematic loan has limited ability to stop paying other than by closing its bank
account.
Again, while I think the Chairwoman’s bill can be strengthened in places, it is an excellent
starting point for bringing much needed protections to small business borrowers.

31
15 U.S.C. § 1693k.
32
15 U.S.C. § 1693e.

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