Federal legislation would apply TILA to small business financing

Federal Issues TILA Small Business Financing Broker CFPB Disclosures State Issues Licensing Federal Legislation FTC Merchant Cash Advance

On July 30, Congresswoman Nydia Velázquez (D-NY), the Chairwoman of the House Small Business Committee, announced new legislation titled, “Small Business Lending Disclosure and Broker Regulation Act,” which would amend TILA and subject small business financing transactions to APR disclosures. The federal legislation would track similar state legislation enacted in California and currently pending the governor’s signature in New York, covered by InfoBytes here and here. However, unlike both California and New York, the federal legislation does not exempt depository institutions from coverage. Highlights of the TILA amendments include:

• CFPB Oversight. The legislation provides the CFPB with the same authority with respect to small business financing as the Bureau has with respect to consumer financial products and services.
• Coverage. The legislation defines small business financing as, “[a]ny line of credit, closed-end commercial credit, sales-based financing, or other non-equity obligation or alleged obligation of a partnership, corporation, cooperative, association, or other entity that is [$2.5 million] or less,” that is not intended for personal, family, or household purposes.
• Disclosure. The legislation would require disclosure of the following information at the time an offer of credit is made: (i) financing amount; (ii) annual percentage rate (APR); (iii) payment amount; (iv) term; (v) financing charge; (vi) prepayment cost or savings; and (vii) collateral requirements.
• Fee Restriction. The legislation prohibits charging a fee on the outstanding principal balance when refinancing or modifying an existing loan, unless there is a tangible benefit to the small business.

Additionally, the legislation would amend the Consumer Financial Protection Act to create the Office of Broker Registration, which would be responsible for oversight of brokers who “solicit[] and present[] offers of commercial financing on behalf of a third party.” The legislation would, among other things: (i) require commercial brokers to register with the CFPB; (ii) require commercial brokers to provide certain disclosures to small business borrowers; (iii) prohibit the charging of fees if financing is not available or not accepted; and (iv) require the CFPB to collect and publicly publish broker complaints from small businesses. Lastly, the legislation would require each state to establish a small business broker licensing law that includes examinations and enforcement mechanisms.

Relatedly, the FTC recently took action against New York-based merchant cash advance providers and two company executives for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. See detailed InfoBytes coverage on the complaint here.