In 2025, states will play a pivotal role in defending business and consumer protection policies as the federal government turns hostile to these kinds of policies. They will also have opportunities to go on offense as Washington’s attention veers. One such chance to add new tools is state-level Truth in Lending Act (TILA) policies. NCRC will lead small business financial protection efforts this year in several states, in collaboration with coalition partners. We urge NCRC members and partners located in Illinois, New Jersey, Maryland, North Carolina and California to join us in the effort.
The Issue: Predatory Small Business Lending
Many small business lenders are failing to perform responsible underwriting to determine if small business owners can actually pay back their loans, sometimes echoing the predatory mortgage practices that sparked the Wall Street crisis of the 2000s. Brokers steer small business borrowers into more expensive financing options to collect higher fees. These predatory lenders and brokers intentionally focus on ambitious and hopeful entrepreneurs and grant them expensive loans that they know they are unable to pay back. These unfair practices primarily affect people of color, as the racial wealth gap leaves would-be entrepreneurs of color more likely to need financing for a business idea.
Predatory small business credit is a longstanding problem that has alarmed senior financial regulators for years. “The problems that we’re starting to see in the small business lending market, to me, are extremely troubling,” Federal Reserve Board Governor Michael Barr said in 2015. “In some respects, [they are] reminiscent of some of the problems in the subprime mortgage sector that we saw in the leadup to 2008.”
Why It Matters: Successful Small Businesses Help Close the Wealth Gap
Business equity remains a vital component of wealth-building for Black families, as it represents 21% of wealth accumulation for Black households. However, for decades Black entrepreneurs have faced barriers in obtaining the necessary capital towards starting their own businesses. Presently, they are more likely to face predatory lending and be deceived into paying astronomical APRs as high as 350%.
More than 1 in 4 business owners said they were harmed by predatory lending within the last year, according to Goldman Sachs. ”Higher-cost less-transparent credit products” are twice as likely to affect business owners of color, according to Federal Reserve research, contributing to an ever-widening racial wealth gap.
What NCRC and Our Coalition Partners Are Doing About It
In 2025, NCRC will continue to tackle predatory small business lending. We have joined forces to help lead the Responsible Business Lending Coalition (RBLC) and are working with multiple state legislatures to pass laws giving small businesses much needed legal protections.
The federal Truth In Lending Act (TILA) has required lenders to tell consumers what APR rates they propose to charge since 1968. However, TILA’s federal protections do not apply if one is borrowing for one’s own business. State-level TILAs can close that unjust loophole for lenders, providing protection that small business owners want and deserve. Many small business owners favor increasing protections, as 78% of small business owners nationwide say that predatory lending is a problem and 80% favor regulations requiring price transparency for loans.
For the past several years, NCRC and the Responsible Business Lending Coalition, helped pass six state laws providing small businesses with Truth in Lending transparency standards and other legal protections. These protections help small business owners understand and compare financing options, which enables them to make the best choice for their business and protects them from predatory lending.
Two key wins were in California and New York, where 6.4 million business owners in those two states will save an estimated $2.8 billion per year by avoiding paying unnecessary interest and fees. That $2.8 billion now is in community businesses, which can enable small business owners to scale up their business, hire in their communities and build generational wealth.
How Can NCRC Members Get Involved?
If you are a NCRC member organization in Illinois, New Jersey, Maryland, North Carolina or California or are interested in building up small businesses, please email Lauren Wolters at lwolters@ncrc.org. To learn more about the Responsible Business Lending Coalition, please visit http://www.borrowersbillofrights.org/.
Lauren Wolters is a Government Affairs Associate at NCRC.
Photo by Microsoft 365 on Unsplash
