The Illinois Senate Financial Institutions Committee recently approved a measure, Senate Bill 2865, that seeks to license and regulate business-purpose lenders. While the bill may be delayed as the bill's sponsor, Senator Jacqueline Collins, seeks feedback from affected industries, SB 2865 has the potential to significantly affect both the primary and secondary small business loan market in the state.
SB 2865 states that its purpose is to protect small businesses from abusive lending practices and help those borrowers avoid defaults. Most significantly, it would impose a licensing obligation on lending activities related to closed- or open-end business-purpose loans or merchant cash advances of $250,000 or less, regardless of the interest rate. The bill appears to require licensing for persons engaged in making or taking assignment of those loans, but it also could be read to require licensing of persons arranging, investing in, or acting as the agent of a person making the loans. The bill exempts certain banks, savings banks, and credit unions, and also exempts certain nonprofits and SBA business assistance organizations from the licensing provisions.
In addition to licensing, SB 2865 would, if enacted, impose significant compliance obligations on small business lenders in Illinois, including:
- Ability-to-Repay Underwriting. SB 2865 would prohibit a lender from making a small business loan if the total monthly loan payments exceed 50% of the borrower's monthly net revenue, and would require a lender to obtain official documentation to determine a borrower's monthly net revenue. If a loan is secured by a personal guarantee, the lender would have to obtain and consider a credit report from one of the major credit bureaus, and report repayment information to one major credit bureau.
- Advertising Restrictions. SB 2865 would ban false, misleading, or deceptive advertising for small business loans.
- No Mandatory ACH Repayment. SB 2865 would prohibit lenders from conditioning small business loans on the borrower repaying the loan by preauthorized electronic fund transfers.
- Fee Limitations. SB 2865 would impose a $25 limit on insufficient funds fees, and impose a late fee limitation of the lesser of $100 or 5% of the late payment. The bill also would restrict charges that a lender can impose upon refinancing or default.
- Required Disclosures. The bill would require lenders to provide certain disclosures prior to consummation, including the loan term, APR, total payments, fees, and all loan options that the borrower qualifies for.
A lender violating those obligations would be subject to a civil action brought by a borrower, as well as administrative action brought by state regulators.
If SB 2865 is enacted in its current form, Illinois will join a handful of states (like California) that currently license business-purpose lenders. We expect more states will follow, as they become increasingly concerned about small business lending, particularly in the marketplace lending space. Certainly small business lenders will face increased data collection and reporting obligations, as the Consumer Financial Protection Bureau begins its "outreach and research" process later this year, which will result in HMDA-like reporting on small and women/minority-owned business lending.
Originally published April 30, 2016
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2016. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.