Compliance burdens on smaller lenders

On today's Consumer Finance Monitor podcast, we are releasing an episode about a timely and wide-ranging discussion on one of the most significant and fastest-evolving developments in commercial finance: the rapid "consumerization" of small business lending law.

In this episode, host Alan Kaplinsky welcomes Louis Caditz-Peck, Executive Director of the Responsible Business Lending Coalition (RBLC), for an in-depth conversation about the proliferation of state small business lending protection statutes, the policy debates driving them, and what they mean for lenders, fintechs, banks, and small business borrowers.

From Self-Regulation to State Law: How We Got Here

For decades, commercial lending operated under a fundamentally different regulatory framework than consumer credit. The prevailing assumption was that business borrowers were sophisticated, negotiated their transactions, and did not need standardized disclosures or suitability-type protections.

That assumption has eroded.

As Louis explains, since the financial crisis, and particularly with the growth of online and fintech lending, small business financing has changed dramatically. Community banks have pulled back. Non-bank online platforms have expanded. New products, including merchant cash advances and other revenue-based financing arrangements, have proliferated.

At the same time, concerns have grown about:

• Opaque pricing structures
• Misleading "interest rate" representations
• Broker incentives that steer borrowers into higher-cost products
• Repeated refinancing of unaffordable obligations

These concerns led to the development of the Small Business Borrower's Bill of Rights, a set of industry standards first launched in 2015 at the Aspen Institute by a coalition of lenders, small business groups, and nonprofit advocates. What began as a voluntary, self-regulatory effort quickly became a blueprint for legislation.

California's SB 1235 in 2018 marked the first major small business truth-in-lending law. Since then, according to Louis, 19 small business financial protection laws have been enacted across multiple states, with California and New York leading the way.

The "Consumerization" of Small Business Lending

A central theme of the episode is whether we are witnessing the "consumerization" of small business lending.

Many of the new state laws borrow heavily from consumer credit concepts, including:

• APR-style cost disclosures
• Total cost of financing disclosures
• Payment schedule requirements
• Prepayment and fee transparency
• Restrictions on certain contractual provisions

Some states have layered on licensing or registration requirements for small business finance providers. Others incorporate or supplement state UDAP (unfair and deceptive acts and practices) standards, which may apply to certain business-to-business transactions as well as consumer transactions.

The policy rationale is straightforward: many "Main Street" businesses are effectively sole proprietorships or closely-held operations without in-house finance or legal teams. Legislators increasingly view these borrowers as closer to consumers than to large corporations with treasury departments and inside or outside counsel.

As Alan and Louis discuss, the regulatory shift raises serious operational and compliance challenges, particularly given the state-by-state patchwork of requirements.

The Compliance Conundrum: Patchwork and Harmonization

A recurring concern is whether the proliferation of state laws imposes disproportionate burdens on smaller lenders and startups, especially compared to large institutions with robust legal and compliance infrastructures.

Louis emphasizes that RBLC has actively worked to promote interstate harmonization, particularly between California and New York. For example:

• Advocating for standardized disclosure forms that can be used in multiple states
• Aligning definitions and disclosure triggers
• Encouraging estimated APR calculations for revenue-based financing

However, not all states have followed a harmonized approach. Some laws, particularly those focused narrowly on merchant cash advances, have created divergent requirements, complicating multi-state compliance.

As Alan notes, the trend presents both risk and opportunity for lenders and their counsel. The regulatory environment is no longer static. Companies offering small business financing must assume that:

• Cost disclosures will likely be required in more states
• Registration or licensing may apply
• Enforcement risk—particularly under state UDAP statutes—will increase

Section 1071 and Federal Uncertainty

The episode also explores the role of the CFPB under Section 1071 of the Dodd-Frank Act, which requires data collection on small business lending to:

1. Identify potential discrimination, and

2. Assess whether certain markets are underserved.

The CFPB finalized its 1071 rule in 2023 under then Director Rohit Chopra. Multiple legal challenges followed. Under the current administration, a notice of proposed rulemaking has sought to scale back and slow implementation.

At the same time, the Federal Trade Commission has signaled an interest in using its enforcement authority to address unfair or deceptive acts or practices affecting small businesses—underscoring an intriguing tension within federal regulatory policy.

As Louis observes, the debate is not simply about reducing or expanding government. It is about how government authority will be used and whether transparency and enforcement will be advanced through rulemaking, litigation, or state initiatives.

Merchant Cash Advances and Revenue-Based Financing

A particularly nuanced part of the discussion focuses on merchant cash advances (MCAs) and other sales-based financing products.

These arrangements typically involve:

• An advance of funds in exchange for a fixed repayment amount
• Payments tied to a percentage of daily or periodic sales
• Variable duration depending on business performance

RBLC's position, as Louis explains, is product neutral. The coalition does not advocate banning product categories or imposing rate caps. Instead, it focuses on responsible practices, including transparent pricing and assessment of ability to repay.

Importantly, none of the major state lending protection laws impose interest rate caps. The emphasis is on disclosure and market transparency rather than price regulation.

Who Is Covered—and Who Is Not?

Most state small business truth-in-lending statutes apply to financing of $500,000 or less (with some variation, such as New York's $2.5 million threshold following gubernatorial revision).

Coverage often includes:

• Closed-end loans
• Open-end lines of credit
• Sales-based financing/MCAs
• Factoring (in some states)

Banks are generally exempt from these statutes, though non-bank "providers" presenting the offer of credit may still have disclosure obligations even in bank partnership models.

As Alan highlights, this raises interesting competitive and policy questions about level playing fields across banks and non-banks.

Looking Ahead to 2026

Both speakers agree: this trend is not going away.

With significant percentages of small business owners reporting difficulty accessing affordable capital—and a substantial minority reporting harm from predatory practices—state legislators remain motivated to act.

The key policy question is not whether regulation will expand, but how.

Well-designed transparency frameworks can:

• Promote price competition
• Reward responsible innovation
• Improve borrower decision-making

Poorly harmonized or overly rigid frameworks, however, risk increasing compliance costs and reducing credit availability.

As Alan notes in his closing remarks, small business finance regulation is becoming a core area of growth for law firms and compliance professionals historically focused on consumer financial services. The line between consumer and commercial finance continues to blur. Alan noted that the Consumer Financial Services Group which he founded and chaired for 25 years has counseled and represented small business lenders for decades.

For lenders, fintechs, banks, and their advisors, understanding these developments is no longer optional—it is essential.

Consumer Finance Monitor is hosted by Alan Kaplinsky, Senior Counsel at Ballard Spahr, and the founder and former chair of the firm's Consumer Financial Services Group. We encourage listeners to subscribe to the podcast on their preferred platform for weekly insights into developments in the consumer finance industry.