Application of the Truth in Lending to small business financing

(a)

In general

The Truth in Lending Act (15 U.S.C. 1601 et seq.) is amended by adding at the end the following:

Small Business Financing

191. Definitions.

192. Application of this title to small business financing.

193. Additional disclosures.

194. Restrictions on double-dipping.

195. Additional provisions.

191.

Definitions

In this chapter: (1)

Closed-end commercial credit

The term closed-end commercial credit— (A)means a closed-end extension of credit, secured or unsecured, including financing with an established principal amount and including equipment financing that does not meet the definition of a lease under the Uniform Commercial Code (U.C.C.—§ 2A–103(j)) the proceeds of which the recipient does not intend to use primarily for personal, family or household purposes; and (B)includes financing with an established principal amount and duration. (2)

Consumer financial product or service

The term consumer financial product or service has the meaning given that term under section 1002 of the Consumer Financial Protection Act of 2010. (3)

Director

The term Director means the Director of the Bureau. (4)

Factoring

The term factoring means a transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered but for which payment has not yet been made. (5)

Finance charge

(A)

In general

The term finance charge means the cost of financing as a dollar amount, and includes any charge payable directly or indirectly by the recipient of the financing and imposed directly or indirectly by the provider of the financing as an incident to or a condition of the extension of financing. (B)

Calculation in open-end commercial credit plans

In any open-end commercial credit plan, the finance charge shall be computed assuming the maximum amount of credit available to the recipient, in each case, is drawn and repaid at the minimum rate. (C)

Calculation in factoring transactions

In any factoring transaction, the finance charge shall include the discount taken on the face value of the accounts receivable. (D)

Calculation in lease financing transactions

In any lease financing transaction, the finance charge shall include the sum of the lease payments and, if there is a fixed-price purchase option or a purchase option with a price that can be calculated at the time of disclosure, the purchase price listed in the contract that the lessee may pay to acquire the leased goods at the end of the lease, minus— (i)if the finance company selects, manufactures, or supplies the goods to be leased, the price that the finance company would sell the goods in a cash transaction; or (ii)if the finance company does not select, manufacture, or supply the goods to be leased, the price the finance company will pay to acquire the property to be leased. (E)

Inclusion of certain prepayment charges

(i)

In general

If, as a condition of obtaining the offered commercial financing the provider requires the recipient to pay off the balance of an existing loan or advance from the same provider, any prepayment charge or penalty required to be paid on the existing financing shall be included as a financing charge. (ii)

Treatment when repayment amount is calculated as a fixed amount

For purposes of clause (i), for financing for which the total repayment amount is calculated as a fixed amount, the prepayment charge is equal to the original finance charge multiplied by the required prepayment amount as a percentage of the total repayment amount, minus any portion of the total repayment amount forgiven by the provider at the time of prepayment. (6)

Open-end commercial credit plan

The term open-end commercial credit plan means any small business financing provided by a person under a plan in which the person reasonably contemplates repeat transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance. (7)

Provider

The term provider mean a person who offers or provides small business financing. (8)

Recipient

The term recipient means a person who is presented an offer of small business financing. (9)

Sales-based financing

The term sales-based financing— (A)means a transaction where there is an extension of financing to a recipient that is repaid by the recipient, over time, as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient; and (B)includes transactions with a true-up mechanism. (10)

Small business

The term small business has the meaning given the term small-business concern under section 3 of the Small Business Act (15 U.S.C. 632). (11)

Small business financing

The term small business financing— (A)means any line of credit, closed-end commercial credit, sales-based financing, or other non-equity obligation or alleged obligation of a partnership, corporation, cooperative, association, sole proprietorship, or other entity that is $2,500,000 or less; and (B)does not include any obligation or alleged obligation of an individual that is primarily for personal, family, or household purposes. (12)

Specific offer

The term specific offer means the specific terms of small business financing, including price or amount, that is quoted to a recipient, based on information obtained from, or about the recipient, which, if accepted by a recipient, shall be binding on the provider, as applicable, subject to any specific requirements stated in such terms.

192.

Application of this title to small business financing

(a)

In general

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. (b)

Rulemaking

The Director shall issue such rules as may be required to carry out this chapter. (c)

Bureau authority

For purposes of carrying out this chapter and other Federal laws, including the Consumer Financial Protection Act of 2010, the Bureau shall have the same authority with respect to small business financing as the Bureau has with respect to consumer financial products and services.

193.

Additional disclosures

(a)

In general

Any provider offering small business financing to a small business shall disclose the following pieces of information to a recipient at the time of extending a specific offer for small business financing: (1)

Financing amount

The total amount to be paid to the small business, taking into account all fees and charges to be withheld at disbursement. (2)

Annual percentage rate

(A)

Closed-end commercial credit

With respect to closed-end commercial credit, the annual percentage rate, using only the words annual percentage rate or the abbreviation APR, expressed as a yearly rate, inclusive of any fees and finance charges that cannot be avoided by a recipient. (B)

Open-end commercial credit plans

With respect to open-end commercial credit plans, the annual percentage rate, using only the words annual percentage rate or the abbreviation APR, expressed as a nominal yearly rate, inclusive of any fees and finance charges that cannot be avoided by a recipient, based on the maximum amount of credit available to the recipient and the term resulting from making the minimum required payments term as disclosed. (C)

Sales-based financing

(i)

In general

With respect to sales-based financing, the estimated annual percentage rate, using the words annual percentage rate or the abbreviation APR, expressed as a yearly rate, inclusive of any fees and finance charges, based on the estimated term of repayment and the projected periodic payment amounts. (ii)

Calculation of certain payment amounts

The estimated term of repayment and the projected periodic payment amounts shall be calculated based on the projection of the recipient’s sales, called the projected sales volume. (iii)

Calculation of projected sales volumes

For purposes of clause (ii), the projected sales volume may be calculated— (I)according to a method defined by the Director based on the recipient’s historical sales volume over a defined period of time that is used for all sales-based financing transactions by that provider; or (II)by another method defined by the provider and approved by the Director, with ongoing monitoring by the Director for accuracy based on a comparison of the annual percentage rate as disclosed to the recipient and as calculated retrospectively upon repayment of the financing. (D)

Factoring

(i)

In general

With respect to factoring, the estimated annual percentage rate, using that term. (ii)

Calculation

To calculate the estimated annual percentage rate under clause (i)— (I)the purchase amount shall be considered the financing amount; (II)the purchase amount minus the total cost of financing shall be considered the payment amount; and (III)the term is established by the payment due date of the receivables. (iii)

Alternate method to estimate term

Notwithstanding clause (ii)(III), a provider may estimate the term for a factoring transaction as the average payment period, its historical data over a period not to exceed the previous twelve months, concerning payment invoices paid by the party owing the accounts receivable in question. (3)

Payment amount

With respect to small business financing other than factoring— (A)for payment amounts that are fixed— (i)the payment amounts and frequency (e.g., daily, weekly, monthly); and (ii)if the term is longer than one month and payment frequency is other than monthly, the average total monthly payment amount; or (B)for payment amounts that are variable— (i)a full payment schedule or a description of the method used to calculate the amounts and frequency of payments; and (ii)if the term is longer than one month, the estimated average total monthly payment amount. (4)

Term

For financing other than factoring, the term of the small business financing, either in months or in years, or, if the term is not fixed, the estimated term, calculated using the same assumptions used to calculate the estimated annual percentage rate. (5)

Finance charge

The finance charge of the small business financing, broken down to show what expenses and fees are included in the finance charge. (6)

Prepayment cost or savings

In the event that a recipient elects to pay off or refinance the small business financing prior to full repayment, the provider must disclose— (A)whether the recipient would be required to pay any finance charges other than interest accrued since the recipient’s last payment; (B)if the recipient is required to pay the finance charges described under subparagraph (A), the percentage of any unpaid portion of the finance charge and maximum dollar amount the recipient could be required to pay; and (C)whether the recipient would be required to pay any additional fees not already included in the finance charge. (7)

Collateral requirements

Any collateral requirement that will be imposed on the small business in connection with the small business financing. (b)

Form of disclosures

(1)

In general

Disclosures made pursuant to this section shall be in writing, at the time a specific offer is made, and in a manner that is clear, conspicuous, complete, and allows the small business to compare the range of small business financing options that the small business may be considering. (2)

Prominence of disclosures

In making any disclosure pursuant to this section, the disclosures required under paragraphs (1), (2), and (3) of subsection (a) shall be displayed most prominently.

194.

Restrictions on double-dipping

When a lender of small business financing refinances or modifies an existing loan with a fixed fee as the primary financing charge, the lender may not charge a fee on the small business’s outstanding principal unless there is a tangible benefit to the small business.

195.

Additional provisions

(a)

Rule of construction

Nothing in this chapter may be construed to prevent a provider from providing or disclosing additional information on a small business financing being offered to a recipient, provided however, that such additional information may not be disclosed as part of the disclosure required by this chapter. (b)

Use of terms

(1)

Rate

If other metrics of financing cost are disclosed or used in the application process of a small business financing, these metrics shall not be presented as a rate if they are not the annual interest rate or the annual percentage rate. (2)

Interest

The term interest, when used to describe a percentage rate to a recipient or potential recipient, shall only be used to describe annualized percentage rates, such as the annual interest rate. (c)

Requirement To state APR

When a provider states in writing a rate of finance charge or a financing amount to a recipient during an application process for small business financing, the provider shall also state the annual percentage rate or, in the case of sales-based financing or factoring, the estimated annual percentage rate, with equal or greater prominence, using the term annual percentage rate or the abbreviation APR.

(b)

Clerical amendment

The table of chapters for the Truth in Lending Act is amended by adding at the end the following:

6. Small Business Financing ... 191

(c)

Rulemaking deadline

Not later than the end of the 24-month period beginning on the date of enactment of this Act, the Director of the Bureau of Consumer Financial Protection shall issue final rules to carry out the amendments made by this section. (d)

Effective date

Chapter 6 of the Truth in Lending Act, as added by subsection (a), shall take effect after the end of the 36-month period beginning on the date of enactment of this Act.