Predatory Lending: The Cautionary Tale of a Montclair Business Owner

At Café Moso late last year, Sen. Robert Menendez, right, announced new legislation requiring more disclosures for small business loans. He was accompanied by Cafe Moso owner Zina Floyd, who said she was the victim of a predatory moneylender. (Courtesy of ZINA FLOYD)

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In 2019, Zina Floyd, owner of Café Moso, opened a preschool near her restaurant in the South End business district.

Floyd said she needed the extra money to keep the preschool afloat. She said she didn’t have the extra capital to invest in her new business.

“You are not an investor or a conglomerate,” said Floyd, who is also the chairman of the business district. “The same [money] you use to open your business is the same money you used to send your kids to college, to pay your mortgage and your livelihood because you’re still a family business. So every penny counts.

Floyd said several businesses started calling him about the loans. They would promise that she would receive $100,000 the next day, that the loans would not affect her credit report, that they would be based strictly on her business’s sales volume, she said.

Most of the time, Floyd politely declined calls. But the calls kept coming, sometimes daily.

“When I made the decision to do it, I was kind of between a rock and a hard place and said, ‘OK, let’s try’, because I needed a large sum of money. quickly,” Floyd said. “They explained the terms, but it was kind of general, you know?”

Floyd said she would rather not name the company she ultimately used for a loan, or the broker who helped arrange it; The Montclair local could not verify the specific details of his situation independent of his own description. But at an event at his cafe in November, Sen. Robert Menendez (D-New Jersey) cited her story as an example of why he said new legislation would be needed to help protect small companies from predatory lenders. He promoted a bill he co-authored with Rep. Nydia M. Velázquez of New York, seeking to ensure that small-business owners have clear and accurate information about lenders before seeking credit. loans.

Floyd, speaking to Montclair Local, said the company told him that for reimbursement, they would only withdraw funds from money they received daily. Floyd said she took the loan because, at the time, her business was generating enough revenue to make the payments.

But eventually, she said, those payments became too much to handle.

She also said that she had been misled into believing that the debt would be transferred to a US Small Business Administration – supported loan, with flexible terms and low interest rates.

“So we made these loans and I expected it to only last a few months. And then the person who helped me get the loans disappeared,” Floyd said. “They’re basically brokers for these predatory small business lending companies.”

Floyd said once the loan company started asking for payment, the installments came too quickly and with interest rates they couldn’t handle. She had agreed to the terms, she said, but she hadn’t anticipated how overwhelming the payments would be. And when she reached out to renegotiate different terms, she said, the company stopped taking her calls.

Floyd said it got to the point that she was no longer able to make ends meet.

“Large sums of money were withdrawn daily. And our [preschool] program was monthly, so the money we received at the beginning of the month had to last the whole month to pay for business expenses,” Floyd said. “It was just depriving me of our funds, without being able to pay anything else.”

When she called the broker to discuss switching to another loan, she said, her calls also went unanswered.

“When we closed the nursery school, it was not a debt in itself. It wasn’t like the income wasn’t coming in, but those loans just made it unbearable,” Floyd said. “And when there’s a fundraiser that starts happening and you lose a couple thousand dollars here and there, it’s just a whirlwind effect with everything. The decision to close wasn’t just on that, but it’s was a very important part of it.

The New Jersey Department of Community Affairs describes predatory lending as

“a variety of lending practices that may be disadvantageous to the borrower.”

For example, he says it could mean making an unaffordable loan based on the borrower’s assets, instead of the borrower’s ability to pay. This could mean convincing a borrower to refinance a loan multiple times only to charge high fees each time. A predatory lender could conceal the true nature of a loan to a ” or unsuspecting borrower,” he says.

The Truth in Lending Act requires the disclosure of terms such as annual percentage rates for consumer loans, but “no such disclosure requirement exists for small business loans,” wrote the Opportunity Finance Network in 2020, in an article warning of the risk of predatory lending to small businesses. The network is an association of community development financial institutions.

At the November event at Café Moso, Menendez said many loan companies have taken advantage of the desperation of business owners seeking financial assistance during the pandemic. He said they provide easy approvals “with little to no documentation requirements and funding in less than 24 hours.”

“They’re often not transparent about their lending and small businesses end up going into debt,” Menendez said at the event. “[The business owners] don’t understand, can’t afford and then has trouble playing again.

The Small Business Loan Disclosure Act 2021 was introduced in November. This would give the Consumer Financial Protection Bureau the same power for small business financing that it currently has for consumer financial products. It includes provisions requiring disclosure of interest rates, finance charges, payment amounts, collateral requirements and other loan terms.

“In recent years, online loans for entrepreneurs and small businesses have increased, while many of these financial products are fair and help meet the capital needs of entrepreneurs, some carry huge interest rates that can exceed 80% or even exceed triple digits without the rates being fully disclosed to borrowers,” Velázquez’s office said in an announcement of the legislation.

So far, the bill has not advanced in either chamber.

“I think the legislation is more about reducing the aggressiveness of these people thinking that nobody’s watching them,” Floyd said.

Floyd said she learned from her experience, which prompted her to start teaching small, informal entrepreneurial workshops for small business owners. Anyone interested can email him at [email protected].

During the workshops, she shares her experiences as a business owner. She said she hopes she helps other business owners, new and seasoned, avoid the mistakes she made.

Floyd said the experience she had with the loan company made her stronger because it made her pay closer attention to what’s going on with her finances.

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