I 

115TH CONGRESS 

1ST SESSION H. R. 471 

To establish minimum standards of disclosure by franchises whose franchisees 

use loans guaranteed by the Small Business Administration. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 12, 2017 

Mr. ELLISON (for himself, Mr. HUFFMAN, Mr. CONYERS, and Ms. MCCOLLUM) introduced the following bill; which was referred to the Committee 

on Energy and Commerce 

A BILL 

To establish minimum standards of disclosure by franchises 

whose franchisees use loans guaranteed by the Small 

Business Administration. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Admin5 istration Franchise Loan Transparency Act of 2017’’. 

6 SEC. 2. FINDINGS AND PURPOSE. 

7 (a) FINDINGS.—Congress makes the following find8 ings: 


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1 (1) Franchise businesses represent a large and 

2 growing segment of the retail and service businesses 

3 of the United States and are rapidly replacing more 

4 traditional forms of small business ownership in the 

5 economy of the United States. 

6 (2) The Small Business Administration 

7 (‘‘SBA’’) guarantees much of the financing available 

8 in franchising. 

9 (3) The SBA requires pro forma projections, in10 cluding projected revenue, for the first year of oper11 ations of a franchise as part of the standard oper12 ating requirements for a franchisee to qualify for fi13 nancing. 

14 (4) On July 13, 2011, the SBA Office of In15 spector General published an audit (Report No. 11– 

16 16) on loans made under section 7(a) of the Small 

17 Business Act to Huntington Learning Center fran18 chises where first year revenue projections were all 

19 significantly inflated. 

20 (5) On July 2, 2013, the SBA Office of Inspec21 tor General published an audit evaluation (Report 

22 No. 13–17) showing that the SBA needed to im23 prove the management of its 7(a) loan portfolio risk, 

24 specifically with certain franchise brands that had 


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1 exceptionally high default rates that continued to re2 ceive guaranteed loans from the SBA. 

3 (6) In September 2013, the Government Ac4 countability Office published a study (GAO–13–759) 

5 showing that over the 10-year period from 2003 to 

6 2012, 28 percent of 7(a) loans to franchises required 

7 a guarantee payment. The study was based on 

8 32,323 loans totaling $10.6 billion, which required 

9 $1.5 billion in guarantee payments. The report spe10 cifically stated, ‘‘Potential franchisees should include 

11 first-year revenue estimates in their SBA loan appli12 cations. However, this information is not necessarily 

13 available to potential franchisees in the franchise or14 ganization’s disclosure document.’’. 

15 (7) Franchise companies most often collect roy16 alties based on gross revenue; therefore, revenue 

17 data on each franchise outlet are readily available. 

18 (8) While both the franchisor and the lender 

19 profit as a result of the SBA financing, only the 

20 franchisee bears the total liability for the loan. 

21 (b) PURPOSE.—It is the purpose of this Act to— 

22 (1) ensure transparency in the loan processes of 

23 the Small Business Administration, so that the 

24 franchisee borrower, the lender, and the AdministraVerDate Sep 11 2014 04:34 Jan 25, 2017 Jkt 069200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H471.IH H471

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1 tion all have access to information that is key to the 

2 lending process; 

3 (2) remove any hidden discussions between the 

4 franchisor and the lender on financial data critical 

5 to the loan approval process; 

6 (3) lower the fees and rates charged to 

7 franchisee borrowers; and 

8 (4) help ensure lower default rates in order to 

9 make more money available for loans. 

10 SEC. 3. REQUIRED DISCLOSURES. 

11 (a) IN GENERAL.—A franchisor, except for a 

12 franchisor of a franchise in the lodging industry, shall dis13 close in the required Federal Trade Commission disclosure 

14 document, the following: 

15 (1) The average first-year revenue for all fran16 chise locations for each of the preceding five years 

17 of operation. 

18 (2) The number of franchise locations that went 

19 out of business or were sold by the franchisee during 

20 the first year of operation for each of the preceding 

21 five years. 

22 (3) Average revenues for all locations of the 

23 franchise for each of the preceding five years of op24 eration, aggregated to show the top 25 percent, midVerDate Sep 11 2014 04:34 Jan 25, 2017 Jkt 069200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H471.IH H471

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1 dle 50 percent, and the bottom 25 percent of rev2 enue. 

3 (b) DISCLOSURE TO PROSPECTIVE FRANCHISEE.— 

4 Any financial information relating to the performance of 

5 any location of a franchise that is provided by the 

6 franchisor, or its representatives, to the lender for the pur7 pose of qualifying the loan, shall be disclosed to the pro8 spective franchisee borrower. 

9 SEC. 4. DEFINITIONS. 

10 For purposes of this Act, the following definitions 

11 apply: 

12 (1) The term ‘‘disclosure document’’ means the 

13 disclosure statement required by the Federal Trade 

14 Commission in Trade Regulation Rule 436 (16 Fed. 

15 Reg. 436). 

16 (2) The terms ‘‘franchise’’, ‘‘franchisee’’ and 

17 ‘‘franchisor’’ have the meanings given such terms in 

18 section 436.1 of title 16 of the Code of Federal Reg19 ulations as in effect on July 1, 2007. 

20 SEC. 5. SEVERABILITY. 

21 If any provision of this Act or any application of this 

22 Act to any person or circumstances is held invalid, the 

23 remainder of this Act and its application to any person 

24 or circumstance shall not be affected thereby. 

Æ 


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