II 

116TH CONGRESS 

1ST SESSION S. 2383 

To establish minimum standards of disclosure by franchises whose franchisees 

use loans guaranteed by the Small Business Administration. 

IN THE SENATE OF THE UNITED STATES 

JULY 31, 2019 

Ms. CORTEZ MASTO introduced the following bill; which was read twice and 

referred to the Committee on Small Business and Entrepreneurship 

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 2019’’. 

6 SEC. 2. FINDINGS; PURPOSE. 

7 (a) FINDINGS.—Congress finds that— 

8 (1) franchise businesses represent a large and 

9 growing segment of the retail and service businesses 

10 of the United States and are rapidly replacing more 


kjohnson on DSK79L0C42 with BILLS
2 

•S 2383 IS

1 traditional forms of small business ownership in the 

2 economy of the United States; 

3 (2) the Small Business Administration guaran4 tees much of the financing available in franchising; 

5 (3) the Small Business Administration requires 

6 pro forma projections, including projected revenue, 

7 for the first year of operations of a franchise as part 

8 of the standard operating requirements for a 

9 franchisee to qualify for financing; 

10 (4) on July 13, 2011, the Office of Inspector 

11 General of the Small Business Administration pub12 lished an audit (Report No. 11–16) on loans made 

13 under section 7(a) of the Small Business Act (15 

14 U.S.C. 636(a)) (in this section referred to as ‘‘7(a) 

15 loans’’) to Huntington Learning Center franchises 

16 where first year revenue projections were all signifi17 cantly inflated; 

18 (5) on July 2, 2013, the Office of Inspector 

19 General of the Small Business Administration pub20 lished an audit evaluation (Report No. 13–17) show21 ing that the Administration needed to improve the 

22 management of the 7(a) loan portfolio risk, specifi23 cally with certain franchise brands that had excep24 tionally high default rates that continued to receive 

25 guaranteed loans from the Administration; 


kjohnson on DSK79L0C42 with BILLS
3 

•S 2383 IS

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 provided to fran5 chises required a guarantee payment; 

6 (7) the study described in paragraph (6) was 

7 based on 32,323 loans totaling $10,600,000,000, 

8 which required $1,500,000,000 in guarantee pay9 ments; 

10 (8) the report for the study described in para11 graph (6) stated, ‘‘Potential franchisees should in12 clude first-year revenue estimates in their SBA loan 

13 applications. However, this information is not nec14 essarily available to potential franchisees in the fran15 chise organization’s disclosure document.’’; 

16 (9) franchise companies most often collect roy17 alties based on gross revenue, therefore revenue data 

18 on each franchise outlet are readily available; and 

19 (10) while both the franchisor and the lender 

20 profit as a result of financing from the Small Busi21 ness Administration, the total liability for the loan 

22 is born by the franchisee. 

23 (b) PURPOSE.—The purposes of this Act are to— 

24 (1) ensure transparency in the loan processes of 

25 the Small Business Administration so that the 


kjohnson on DSK79L0C42 with BILLS
4 

•S 2383 IS

1 franchisee borrower, the lender, and the Administra2 tion all have access to information that is key to the 

3 lending process; 

4 (2) lower the fees and rates charged to 

5 franchisee borrowers; and 

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

7 make more money available for loans to viable fran8 chise brands. 

9 SEC. 3. DEFINITIONS. 

10 In this Act— 

11 (1) the term ‘‘disclosure document’’ means the 

12 disclosure document required to be furnished by a 

13 franchisor to a prospective franchisee under section 

14 436.2 of title 16, Code of Federal Regulations, as in 

15 effect on July 1, 2007; 

16 (2) the term ‘‘Financial Performance Represen17 tation Commentary’’ means the Financial Perform18 ance Representation Commentary adopted by the 

19 North American Securities Administrators Associa20 tion on May 8, 2017; and 

21 (3) the terms ‘‘franchise’’, ‘‘franchisee’’, and 

22 ‘‘franchisor’’ have the meanings given those terms in 

23 section 436.1 of title 16, Code of Federal Regula24 tions, as in effect on July 1, 2007. 


kjohnson on DSK79L0C42 with BILLS
5 

•S 2383 IS

1 SEC. 4. REQUIRED DISCLOSURES. 

2 (a) IN GENERAL.—Subject to subsection (b), a 

3 franchisor, except for a franchisor of a franchise in the 

4 lodging industry, that qualifies for guaranteed lending 

5 from the Small Business Administration for the franchises 

6 of the franchisor shall, at a minimum, disclose in the dis7 closure document required to be furnished by the 

8 franchisor to any prospective franchisee the following in9 formation for each of the 3 years preceding the date of 

10 the disclosure document: 

11 (1) The average and median first-year revenues 

12 for all businesses operated under franchises granted 

13 by the franchisor, in accordance with the Financial 

14 Performance Representation Commentary. 

15 (2) The total number of businesses operated 

16 under franchises granted by the franchisor that, 

17 during the first year of operation, either— 

18 (A) ceased operations; or 

19 (B) were transferred to a new franchisee. 

20 (3) The average and median revenues for all 

21 businesses operated under franchises granted by the 

22 franchisor, in accordance with the Financial Per23 formance Representation Commentary. 

24 (b) LIMITATION.—A franchisor may not disclose to 

25 a prospective or current franchisee, directly or through a 

26 third party, any information relating to revenue that conVerDate Sep 11 2014 04:50 Aug 08, 2019 Jkt 089200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S2383.IS S2383

kjohnson on DSK79L0C42 with BILLS
6 

•S 2383 IS

1 flicts with the information relating to revenue provided 

2 under subsection (a) in a disclosure document unless the 

3 relevant franchise purchase includes 1 or more businesses 

4 under the relevant franchise that are in existence on the 

5 date on which the disclosure is made, in which case the 

6 franchisor shall disclose to the prospective or current 

7 franchisee the relevant information relating to revenue as 

8 of the date on which the disclosure is made with respect 

9 to those businesses. 

10 SEC. 5. ENFORCEMENT. 

11 The Administrator of the Small Business Administra12 tion— 

13 (1) shall enforce the requirements under this 

14 Act; and 

15 (2) may hold a franchisor liable for the balance 

16 of any loan obtained through a violation of this Act. 

17 SEC. 6. NO PREEMPTION. 

18 Nothing contained in this Act shall prohibit an au19 thorized State official from proceeding in State court on 

20 the basis of an alleged violation of any civil or criminal 

21 statute of that State. 

22 SEC. 7. SEVERABILITY. 

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

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


kjohnson on DSK79L0C42 with BILLS
7 

•S 2383 IS

1 remainder of this Act and its application to any person 

2 or circumstance shall not be affected thereby. 

Æ 


kjohnson on DSK79L0C42 with BILLS