I 

114TH CONGRESS 

1ST SESSION H. R. 3559 

To establish minimum standards of disclosure by franchises whose franchisees 

use loans guaranteed by the Small Business Administration. 

IN THE HOUSE OF REPRESENTATIVES 

SEPTEMBER 18, 2015 

Mr. ELLISON (for himself, Mr. CONYERS, and Mr. HUFFMAN) 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 2015’’. 

6 SEC. 2. FINDINGS AND PURPOSE. 

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

9 (1) Franchise businesses represent a large and 

10 growing segment of the retail and service businesses 


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1 of the United States and are rapidly replacing more 

2 traditional forms of small business ownership in the 

3 economy of the United States. 

4 (2) The Small Business Administration 

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

6 in franchising. 

7 (3) The SBA requires pro forma projections, in8 cluding projected revenue, for the first year of oper9 ations of a franchise as part of the standard oper10 ating requirements for a franchisee to qualify for fi11 nancing. 

12 (4) On July 13, 2011, the SBA Office of In13 spector General published an audit (Report No. 11– 

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

15 Business Act to Huntington Learning Center fran16 chises where first year revenue projections were all 

17 significantly inflated. 

18 (5) On July 2, 2013, the SBA Office of Inspec19 tor General published an audit evaluation (Report 

20 No. 13–17) showing that the SBA needed to im21 prove the management of its 7(a) loan portfolio risk, 

22 specifically with certain franchise brands that had 

23 exceptionally high default rates that continued to re24 ceive guaranteed loans from the SBA. 


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1 (6) In September 2013, The Government Ac2 countability Office published a study (GAO–13–759) 

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

4 2012, 28 percent of 7(a) loans to franchises required 

5 a guarantee payment. The study was based on 

6 32,323 loans totaling $10.6 billion, which required 

7 $1.5 billion in guarantee payments. The report spe8 cifically stated, ‘‘Potential franchisees should include 

9 first-year revenue estimates in their SBA loan appli10 cations. However, this information is not necessarily 

11 available to potential franchisees in the franchise or12 ganization’s disclosure document.’’. 

13 (7) Franchise companies most often collect roy14 alties based on gross revenue; therefore, revenue 

15 data on each franchise outlet are readily available. 

16 (8) While both the franchisor and the lender 

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

18 franchisee bears the total liability for the loan. 

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

20 (1) ensure transparency in the loan processes of 

21 the Small Business Administration, so that the 

22 franchisee borrower, the lender, and the Administra23 tion all have access to information that is key to the 

24 lending process; 


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1 (2) remove any hidden discussions between the 

2 franchisor and the lender on financial data critical 

3 to the loan approval process; 

4 (3) lower the fees and rates charged to 

5 franchisee borrowers; and 

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

7 make more money available for loans. 

8 SEC. 3. REQUIRED DISCLOSURES. 

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

10 franchisor of a franchise in the lodging industry, shall dis11 close in the required Federal Trade Commission disclosure 

12 document, the following: 

13 (1) The average first-year revenue for all fran14 chise locations for each of the preceding five years 

15 of operation. 

16 (2) The number of franchise locations that went 

17 out of business or were sold by the franchisee during 

18 the first year of operation for each of the preceding 

19 five years. 

20 (3) Average revenues for all locations of the 

21 franchise for each of the preceding five years of op22 eration, aggregated to show the top 25 percent, mid23 dle 50 percent, and the bottom 25 percent of rev24 enue. 


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1 (b) DISCLOSURE TO PROSPECTIVE FRANCHISEE.— 

2 Any financial information relating to the performance of 

3 any location of a franchise that is provided by the 

4 franchisor, or its representatives, to the lender for the pur5 pose of qualifying the loan, shall be disclosed to the pro6 spective franchisee borrower. 

7 SEC. 4. DEFINITIONS. 

8 For purposes of this Act, the following definitions 

9 apply: 

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

11 disclosure statement required by the Federal Trade 

12 Commission in Trade Regulation Rule 436 (16 Fed. 

13 Reg. 436). 

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

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

16 section 436.1 of title 16 of the Code of Federal Reg17 ulations as in effect on July 1, 2007. 

18 SEC. 5. SEVERABILITY. 

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

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

21 remainder of this Act and its application to any person 

22 or circumstance shall not be affected thereby. 

Æ 


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