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. MCCOL-
LUM) 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. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Small Business Admin-
istration Franchise Loan Transparency Act of 2017’’. 
SEC. 2. FINDINGS AND PURPOSE. 
(a) FINDINGS.—Congress makes the following find-
ings: 
VerDate Sep 11 2014 
04:34 Jan 25, 2017
Jkt 069200
PO 00000
Frm 00001
Fmt 6652
Sfmt 6201
E:\BILLS\H471.IH
H471
SSpencer on DSK4SPTVN1PROD with BILLS
(1) Franchise businesses represent a large and 
growing segment of the retail and service businesses 
of the United States and are rapidly replacing more 
traditional forms of small business ownership in the 
economy of the United States. 
(2) 
The 
Small 
Business 
Administration 
(‘‘SBA’’) guarantees much of the financing available 
in franchising. 
(3) The SBA requires pro forma projections, in-
cluding projected revenue, for the first year of oper-
ations of a franchise as part of the standard oper-
ating requirements for a franchisee to qualify for fi-
nancing. 
(4) On July 13, 2011, the SBA Office of In-
spector General published an audit (Report No. 11– 
16) on loans made under section 7(a) of the Small 
Business Act to Huntington Learning Center fran-
chises where first year revenue projections were all 
significantly inflated. 
(5) On July 2, 2013, the SBA Office of Inspec-
tor General published an audit evaluation (Report 
No. 13–17) showing that the SBA needed to im-
prove the management of its 7(a) loan portfolio risk, 
specifically with certain franchise brands that had 
VerDate Sep 11 2014 
04:34 Jan 25, 2017
Jkt 069200
PO 00000
Frm 00002
Fmt 6652
Sfmt 6201
E:\BILLS\H471.IH
H471
SSpencer on DSK4SPTVN1PROD with BILLS
exceptionally high default rates that continued to re-
ceive guaranteed loans from the SBA. 
(6) In September 2013, the Government Ac-
countability Office published a study (GAO–13–759) 
showing that over the 10-year period from 2003 to 
2012, 28 percent of 7(a) loans to franchises required 
a guarantee payment. The study was based on 
32,323 loans totaling $10.6 billion, which required 
$1.5 billion in guarantee payments. The report spe-
cifically stated, ‘‘Potential franchisees should include 
first-year revenue estimates in their SBA loan appli-
cations. However, this information is not necessarily 
available to potential franchisees in the franchise or-
ganization’s disclosure document.’’. 
(7) Franchise companies most often collect roy-
alties based on gross revenue; therefore, revenue 
data on each franchise outlet are readily available. 
(8) While both the franchisor and the lender 
profit as a result of the SBA financing, only the 
franchisee bears the total liability for the loan. 
(b) PURPOSE.—It is the purpose of this Act to— 
(1) ensure transparency in the loan processes of 
the Small Business Administration, so that the 
franchisee borrower, the lender, and the Administra-
VerDate Sep 11 2014 
04:34 Jan 25, 2017
Jkt 069200
PO 00000
Frm 00003
Fmt 6652
Sfmt 6201
E:\BILLS\H471.IH
H471
SSpencer on DSK4SPTVN1PROD with BILLS
tion all have access to information that is key to the 
lending process; 
(2) remove any hidden discussions between the 
franchisor and the lender on financial data critical 
to the loan approval process; 
(3) lower the fees and rates charged to 
franchisee borrowers; and 
(4) help ensure lower default rates in order to 
make more money available for loans. 
SEC. 3. REQUIRED DISCLOSURES. 
(a) IN
GENERAL.—A franchisor, except for a 
franchisor of a franchise in the lodging industry, shall dis-
close in the required Federal Trade Commission disclosure 
document, the following: 
(1) The average first-year revenue for all fran-
chise locations for each of the preceding five years 
of operation. 
(2) The number of franchise locations that went 
out of business or were sold by the franchisee during 
the first year of operation for each of the preceding 
five years. 
(3) Average revenues for all locations of the 
franchise for each of the preceding five years of op-
eration, aggregated to show the top 25 percent, mid-
VerDate Sep 11 2014 
04:34 Jan 25, 2017
Jkt 069200
PO 00000
Frm 00004
Fmt 6652
Sfmt 6201
E:\BILLS\H471.IH
H471
SSpencer on DSK4SPTVN1PROD with BILLS
dle 50 percent, and the bottom 25 percent of rev-
enue. 
(b) DISCLOSURE TO PROSPECTIVE FRANCHISEE.— 
Any financial information relating to the performance of 
any location of a franchise that is provided by the 
franchisor, or its representatives, to the lender for the pur-
pose of qualifying the loan, shall be disclosed to the pro-
spective franchisee borrower. 
SEC. 4. DEFINITIONS. 
For purposes of this Act, the following definitions 
apply: 
(1) The term ‘‘disclosure document’’ means the 
disclosure statement required by the Federal Trade 
Commission in Trade Regulation Rule 436 (16 Fed. 
Reg. 436). 
(2) The terms ‘‘franchise’’, ‘‘franchisee’’ and 
‘‘franchisor’’ have the meanings given such terms in 
section 436.1 of title 16 of the Code of Federal Reg-
ulations as in effect on July 1, 2007. 
SEC. 5. SEVERABILITY. 
If any provision of this Act or any application of this 
Act to any person or circumstances is held invalid, the 
remainder of this Act and its application to any person 
or circumstance shall not be affected thereby. 
Æ 
VerDate Sep 11 2014 
04:34 Jan 25, 2017
Jkt 069200
PO 00000
Frm 00005
Fmt 6652
Sfmt 6301
E:\BILLS\H471.IH
H471
SSpencer on DSK4SPTVN1PROD with BILLS