Banks and other industry stakeholders should support policies to help small-business owners better understand the risks of certain kinds of credit and drive those owners to products that better serve them, Federal Reserve Governor Michael Barr said today.
In a speech on small-business lending, Barr said a significant challenge facing small businesses is the absence of policies providing essential tools and protection for small-business borrowers. He pointed to the Truth in Lending Act, which does not extend protection to small-business borrowers.
“This exclusion stems partly from the assumption that small business owners possess financial sophistication or can access professional assistance when needed,” Barr said, adding that such is not always the case. As one example, he shared Fed research finding that many small-business owners struggle with understanding the specialized terminology used by certain nonbank lenders.
Banks, small business advocates and other industry players should promote policies to overcome and not exacerbate the problem, Barr said.
“Potential policies would include enhancing transparency in loan terms, thus enabling business owners to make more informed financial decisions,” he said. “Additional borrower safeguards worth consideration include ensuring that loan products are sustainably repayable and don’t lead businesses into costly reborrowing cycles, as well as ensuring fair treatment both during the loan origination process and throughout any restructuring efforts or collection proceedings.”
