Two U.S. senators are asking whether the U.S. Small Business Administration should forgive loans made to franchisees in systems that were later cited for unfair or deceptive practices in courting the operators.
U.S. Sen. Catherine Cortez Masto, a Nevada Democrat, and Elizabeth Warren, a Massachusetts Democrat, earlier this week asked SBA Administrator Isabel Guzman for detailed information on the SBA’s process for handling loans to operators of franchise brands.
Among the systems cited in their letter is Burgerim, the California-based fast-casual burger brand that has been fined $4 million by the state of California and ordered to refund fees and other costs borne by more than 1,500 people who signed up for a franchise. The U.S. Federal Trade Commission has also sued the franchisor, its first such action in more than a decade.
That follows a 2020 Restaurant Business investigation into the brand, whose founder Oren Loni abandoned the concept and apparently fled the country. More than 100 franchisees of the brand were approved for SBA loans before the agency stopped approving loans to operators in that system.
The actions, along with a 2021 report by Cortez Masto on strategies for preventing deceptive practices among franchisors, “continue to demonstrate the need for greater disclosure of the risks of investing in certain franchise brands and increased SBA oversight over its guaranteed loans to franchise businesses,” the senators wrote.
A representative for the SBA confirmed that the agency received the letter but did not provide additional comments.
The letter continues a mounting push at the federal level to take more aggressive steps to regulate franchises and prevent some of the broad-scale problems that have left numerous investors out of business.
The FTC, which regulates franchising, voiced a willingness to take more steps than it has traditionally taken to go after bad franchisors—and then filed its lawsuit against Burgerim.
But some of these efforts are targeting the SBA, which backs loans made to small businesses that otherwise couldn’t get loans through conventional channels. Some franchise advocates believe that the agency doesn’t go far enough to prevent loans in systems where a lot of franchisees have gone out of business.
Franchise industry experts, on the other hand, argue that there is plenty of information out there for franchisees to avoid such problems.
The U.S. senators are backing a pair of bills, introduced by Cortez Masto, that would require the SBA to increase the amount of information available on brands whose franchisees receive SBA loans. One would require the agency to publish SBA loan default rates for all franchise brands quarterly. Another would require franchises to disclose financial performance data for all SBA-guaranteed loans.
But the senators also note that such legislation “is not necessary” because the agency could implement the rules now. Indeed, it used to publish default data until it stopped nearly a decade ago.
Cortez Masto and Warren in their letter highlight the Burgerim problem as well as issues on a couple of other franchises, including Dental Fix, which settled misrepresentation charges with Virginia and Washington, and Curves, which just settled a lawsuit filed by 52 franchises in Texas.
Some advocates are pushing the SBA to forgive loans made to Burgerim franchisees in light of the FTC’s lawsuit and California’s action. They cite a move recently made by the U.S. Dept. of Education to forgive $71.7 million in loans to students of DeVry University, which the commission sued in 2016 for deceptive advertising.
Burgerim franchisees received an estimated $38 million in government-backed loans.
The senators ask the agency for detailed information on the SBA’s processes when franchisors are found to have engaged in wrongdoing—such as whether the agency reviews the loan process in such cases, forgives loans to franchisees or shares information with other agencies like the FTC.
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