[Congressional Bills 114th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3559 Introduced in House (IH)]

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114th CONGRESS
  1st Session
                                H. R. 3559

   To establish minimum standards of disclosure by franchises whose 
 franchisees use loans guaranteed by the Small Business Administration.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                           September 18, 2015

Mr. Ellison (for himself, Mr. Conyers, and Mr. Huffman) introduced the 
   following bill; which was referred to the Committee on Energy and 
                                Commerce

_______________________________________________________________________

                                 A BILL


 
   To establish minimum standards of disclosure by franchises whose 
 franchisees use loans guaranteed by the Small Business Administration.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Administration 
Franchise Loan Transparency Act of 2015''.

SEC. 2. FINDINGS AND PURPOSE.

    (a) Findings.--Congress makes the following findings:
            (1) Franchise businesses represent a large and growing 
        segment of the retail and service businesses of the United 
        States and are rapidly replacing more traditional forms of 
        small business ownership in the economy of the United States.
            (2) The Small Business Administration (``SBA'') guarantees 
        much of the financing available in franchising.
            (3) The SBA requires pro forma projections, including 
        projected revenue, for the first year of operations of a 
        franchise as part of the standard operating requirements for a 
        franchisee to qualify for financing.
            (4) On July 13, 2011, the SBA Office of Inspector General 
        published an audit (Report No. 11-16) on loans made under 
        section 7(a) of the Small Business Act to Huntington Learning 
        Center franchises where first year revenue projections were all 
        significantly inflated.
            (5) On July 2, 2013, the SBA Office of Inspector General 
        published an audit evaluation (Report No. 13-17) showing that 
        the SBA needed to improve the management of its 7(a) loan 
        portfolio risk, specifically with certain franchise brands that 
        had exceptionally high default rates that continued to receive 
        guaranteed loans from the SBA.
            (6) In September 2013, The Government Accountability Office 
        published a study (GAO-13-759) showing that over the 10-year 
        period from 2003 to 2012, 28 percent of 7(a) loans to 
        franchises required a guarantee payment. The study was based on 
        32,323 loans totaling $10.6 billion, which required $1.5 
        billion in guarantee payments. The report specifically stated, 
        ``Potential franchisees should include first-year revenue 
        estimates in their SBA loan applications. However, this 
        information is not necessarily available to potential 
        franchisees in the franchise organization's disclosure 
        document.''.
            (7) Franchise companies most often collect royalties based 
        on gross revenue; therefore, revenue data on each franchise 
        outlet are readily available.
            (8) While both the franchisor and the lender profit as a 
        result of the SBA financing, only the franchisee bears the 
        total liability for the loan.
    (b) Purpose.--It is the purpose of this Act to--
            (1) ensure transparency in the loan processes of the Small 
        Business Administration, so that the franchisee borrower, the 
        lender, and the Administration all have access to information 
        that is key to the lending process;
            (2) remove any hidden discussions between the franchisor 
        and the lender on financial data critical to the loan approval 
        process;
            (3) lower the fees and rates charged to franchisee 
        borrowers; and
            (4) help ensure lower default rates in order to make more 
        money available for loans.

SEC. 3. REQUIRED DISCLOSURES.

    (a) In General.--A franchisor, except for a franchisor of a 
franchise in the lodging industry, shall disclose in the required 
Federal Trade Commission disclosure document, the following:
            (1) The average first-year revenue for all franchise 
        locations for each of the preceding five years of operation.
            (2) The number of franchise locations that went out of 
        business or were sold by the franchisee during the first year 
        of operation for each of the preceding five years.
            (3) Average revenues for all locations of the franchise for 
        each of the preceding five years of operation, aggregated to 
        show the top 25 percent, middle 50 percent, and the bottom 25 
        percent of revenue.
    (b) Disclosure to Prospective Franchisee.--Any financial 
information relating to the performance of any location of a franchise 
that is provided by the franchisor, or its representatives, to the 
lender for the purpose of qualifying the loan, shall be disclosed to 
the prospective franchisee borrower.

SEC. 4. DEFINITIONS.

    For purposes of this Act, the following definitions apply:
            (1) The term ``disclosure document'' means the disclosure 
        statement required by the Federal Trade Commission in Trade 
        Regulation Rule 436 (16 Fed. Reg. 436).
            (2) The terms ``franchise'', ``franchisee'' and 
        ``franchisor'' have the meanings given such terms in section 
        436.1 of title 16 of the Code of Federal Regulations as in 
        effect on July 1, 2007.

SEC. 5. SEVERABILITY.

    If any provision of this Act or any application of this Act to any 
person or circumstances is held invalid, the remainder of this Act and 
its application to any person or circumstance shall not be affected 
thereby.
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