A Federal Reserve governor has called for greater disclosure requirements on lending products that cater to small businesses.
In a Monday afternoon speech, Gov. Michael Barr said small-business owners often struggle to understand the terms on the loans and credit provisions offered by both banks and non-bank lenders.
Barr attributed this to the fact that under key consumer protection laws — like the Truth In Lending Act, or TILA, of 1968, which standardized the annual percentage rate as the go-to pricing model for consumer products — small businesses are treated like their larger counterparts.
"Despite the fact that many small businesses function more like households than Fortune 500 companies, they generally fall outside regulatory disclosure requirements intended to ensure transparency in pricing, facilitate comparison shopping and protect the financial interest of borrowers," he said.
In his remarks at an event hosted by the Aspen Institute, a Washington, D.C. nonprofit, Barr said many lenders market to small businesses using less familiar terms, such as factor rates or interest rates that, unlike APR, do not include fees.
Barr explained that the borrowers were carved out of TILA and similar protective statutes based on the assumption that they "possess financial sophistication or can access professional assistance when needed," but often that is not the case.
"Most small businesses ... can't invest all that they … should in the skills that are required to make these good financing choices. And so they need help," Barr said during a question and answer session following his prepared remarks. "We should make it easy, not hard, for small businesses to be able to thrive, so that if you're a cupcake maker in Detroit, you can focus on making cupcakes and not worrying about whether you have the right financing arrangements all locked in."
He called on "banks, small-business advocates and industry stakeholders" to support policies that seek to close this gap in protection, though he did not call for specific rule changes at the Fed or elsewhere. He did note that certain state regulatory regimes, including California and New York, already require small-business loans to be presented in APR terms and with clear monthly payments.
Appointed to the Board of Governors as vice chair for supervision, Barr previously had the ability to set the Fed's regulatory rulemaking agenda. He
During the conversation after his speech, Barr said that small-business creation has been booming since the COVID-19 pandemic, but the
"When you look at the credit access numbers, they've remained muted, even though there's much higher business activity. And that's true really across lots of different kinds of lenders," he said, adding that lending "became tight in the pandemic and they stayed pretty tight."
He said higher interest rates have also dampened demand among borrowers.
During the conversation, Barr acknowledged that non-bank lenders are playing a bigger role in financing small businesses than banks and credit unions. He said that dynamic has both pros and cons.
"That competition in general is very good," he said. "[But] you want to make sure that the lending that's being done is meeting the credit needs of the small-business community, and that means not just providing access to credit, but providing access to credit on terms that make sense for the kind of business that businesses are trying to run."
