RELEASE: Treasurer Summers Calls for New Legislation to Protect Small Business Owners Against Predatory Lenders

Testifies at Subject Matter Hearing of the Illinois State Senate Financial Institutions Committee

Chicago City Treasurer Kurt Summers today called for new legislation to protect small business owners from misleading and dishonest predatory lenders. The Treasurer’s call to action occurred while testifying at a subject-matter hearing for the State of Illinois Senate Financial Institutions Committee. Chairwoman Senator Jacqueline Collins (D-Chicago 16th) convened the committee to hear from business owners, advocates and elected officials on predatory lending, lack of access to capital and the effect on small businesses, particularly those owned by minorities.

“Chicago’s small business community deserves protection from the unchecked greed of predatory lenders,” Treasurer Summers said. “While access to capital is the number one concern of small business owners across the state, bank and commercial loans continue to decline, steering them to underhanded lenders. As we continue to urge banking partners to increase their local investment, this new, common-sense legislation would ensure transparency in lending that so often puts our entrepreneurs at risk.”

According to the FDIC, bank commercial loans of $1 million or less have declined each year since the financial crisis and are still 20% below pre-recession levels. The Federal Reserve recently reported that as much as 44% of small business credit applicants were unable to receive the funding they were seeking.

“Small businesses are the economic growth engine of Illinois, and improving access to credit so that entrepreneurs can expand their enterprises and create jobs should be a critical public policy priority,” said State Senator Jacqueline Y. Collins (D-Chicago 16th), chair of the Senate Financial Institutions Committee. “Traditionally, minorities and women have been excluded from many established business and credit networks, and so it is important that we listen to their experiences and level the playing field for anyone motivated to build a business in Illinois.”

Because banks are making fewer loans to small businesses, a cottage industry of predatory lenders has filled this gap. With nowhere else to go, many small businesses are turning to these lenders for funding and suffering disastrous consequences as a result. All too often, these loans contain hidden fees, exploding interest rates and the lenders exhibit an overall lack of transparency. These lenders can require as much as 10% of a borrower’s income receipts in addition to charging exorbitant interest rates that can exceed 50 or 100%.

The Treasurer recommends the following measures be included in draft legislation to protect small business owners:

• Require loan terms to be clear and unequivocal. Loan terms should be clearly stated using straightforward language and the interest rate should be clearly disclosed as an annualized interest rate or an annual percentage rate (APR).
• Loans should be free from traps. Borrowers should not be hit with new fees on existing principal if they refinance or modify a loan. Borrowers should not be charged interest or periodic costs for the remaining period of the loan if they pay it off early.
• Lenders should be required to display information about the results of their previous loans. This information could be anonymous and in the aggregate, but would give borrowers important data points as they determine whether or not to use a particular lender. If borrowers are able to see that a lender has a pattern of providing loans that are not paid back or have caused businesses to fail, they will be more likely to choose a more reputable lender.
• Conflicts of interest should be disclosed to borrowers. Borrowers should know what types of incentives are driving the lender and whether the broker will receive higher fees for using certain lenders or types of loans.
• Because many of these loans are made online, lenders must take substantial steps to protect the data privacy of loan applicants. Borrower data should not be allowed to be sent to third parties without the written consent of the borrower and lenders should be required to take steps to ensure that the data is encrypted and protected from breaches.

“We hear from many entrepreneurs that predatory lenders have become a real problem threatening the future of their businesses and we need to take immediate action on their behalf,” said Omar Duque, President and CEO of the Illinois Hispanic Chamber of Commerce. “The discussion sparked by Senator Collins and Treasurer Summers underscores the seriousness of this issue and our Chamber is grateful for the support and for bringing this problem to light.”

“Small businesses need access to safe and affordable credit,” said Dory Rand, president of Woodstock Institute, a leading research and policy nonprofit focused on equitable lending, wealth creation, and access to safe and affordable financial services. “Our research shows that businesses in lower-income areas and communities of color received significantly fewer bank loans than businesses in higher-income and whiter areas in the Chicago region from 2008 through 2014. Banks need to step up their small business lending to meet community needs, and these businesses need protection from alternative online lenders that do not clearly disclose interest rates and terms or ensure that borrowers have the ability to repay the loans.”

The Chicago City Treasurer’s Office is taking additional steps to provide Chicago business owners with the tools they need to access capital from reputable lenders. Currently, the Treasurer is working with dozens of banks throughout Chicago to publish an access to capital grid that shows the volume and types of small business loans each bank makes. This grid will make it easier for small business owners to target the types of banks that are most likely to lend them the money they need to grow and sustain their enterprises while preventing the use of predatory lending.

Treasurer Summers serves as the City’s banker, investor and advocate, overseeing Chicago’s $7 billion investment portfolio. He also serves as a trustee or fiduciary on five of the City’s public employee pension boards with $25 million under management. Since taking office in December of 2014, the Treasurer has worked to provide taxpayers with greater transparency and efficiency ensure a responsible investment approach and drive value for residents in each of Chicago’s 77 neighborhoods.