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DFPI seeks to regulate commercial financial products and services under the CCFPL
Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to adopt regulations to implement certain sections of the California Consumer Financial Protection Law (CCFPL) related to commercial financial products and services. (See also text of the proposed regulations here.) As previously covered by a Buckley Special Alert, the CCFPL became law in 2020 and, among other things, (i) establishes UDAAP authority for the DFPI; (ii) authorizes the DFPI to impose penalties of $2,500 for “each act or omission” in violation of the law without a showing that the violation was willful (thus going beyond both Dodd-Frank and existing California law); (iii) provides the DFPI with broad discretion to determine what constitutes a “financial product or service” within the law’s coverage; and (iv) provides that enforcement of the CCFPL will be funded through the fees generated by the new registration process as well as fines, penalties, settlements, or judgments. While the CCFPL exempts certain entities (e.g., banks, credit unions, certain licensees), the law expands the DFPI’s oversight authority to include debt collection, debt settlement, credit repair, check cashing, rent-to-own contracts, retail sales financing, consumer credit reporting, and lead generation.
The NPRM proposes new rules to implement sections 22159, 22800, 22804, 90005, 90009, 90012, and 90015 of the CCFPL related to the offering and provision of commercial financing and other financial products and services to small businesses, nonprofits, and family farms. According to DFPI’s notice, section 22800 subdivision (d) authorizes the Department to define unfair, deceptive, and abusive acts and practices in connection with the offering or provision of commercial financing. Section 90009, subdivision (e), among other things, authorizes the Department’s rulemaking to include data collection and reporting on the provision of commercial financing or other financial products and services.
Among other things, the NPRM:
- Clarifies that the CCFPL makes it unlawful for covered providers, as defined, to engage in unfair, deceptive, or abusive acts or practices;
- Provides standards for determining whether an act or practice is unfair, deceptive, or abusive;
- Defines small business, nonprofit, and family farm, among other terms;
- Clarifies DFPI's ability to enforce the regulation’s provisions;
- Requires covered providers to submit annual reports containing information about their provision of commercial financing or other financial products and services to small businesses, nonprofits, and family farms;
- Identifies persons excluded from the reporting requirement;
- Specifies the information required in the reports, as well as provide guidance on calculating or determining certain information;
- Clarifies the obligations of those also submitting annual reports to DFPI as licensees under the California Financing Law.
Written comments on the NPRM are due by August 8.
FTC adds charges against small-business financer
On June 14, the FTC announced additional charges against two New York-based small-business financing companies and a related entity and individuals (collectively, “defendants”). Last June, the FTC filed a complaint against the defendants for allegedly violating the FTC Act and engaging in deceptive and unfair practices by, among other things, misrepresenting the terms of their merchant cash advances, using unfair collection practices, and making unauthorized withdrawals from consumers’ accounts (covered by InfoBytes here). The amended complaint alleges that the defendants also violated the Gramm-Leach-Bliley Act’s prohibition on using false statements to obtain consumers’ financial information, including bank account numbers, log-in credentials, and the identity of authorized signers, in order “to withdraw more than the specified amount from consumers’ bank accounts.” Additionally, the FTC’s press release states that the defendants “engaged in wanton and egregious behavior, including laughing at consumer requests for refunds from [the defendants’] unauthorized withdrawals from customer bank accounts; abusing the legal system to seize the business and personal assets of their customers; and threatening to break their customers’ jaws or falsely accusing them of child molestation during collection calls.” The amended complaint seeks a permanent injunction against the defendants, along with civil money penalties and monetary relief including “rescission or reformation of contracts, the refund of monies paid, and other equitable relief.”
Federal legislation would apply TILA to small business financing
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.
FTC charges small-business financing operation with deceptive and unfair practices
On June 10, the FTC filed a complaint against two New York-based small-business financing companies and a related entity and individuals (collectively, “defendants”) for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, and making unauthorized withdrawals from consumers’ accounts. The FTC’s complaint alleges that the defendants purported “to provide immediate funds in a specific amount in exchange for consumers’ agreement to repay a higher amount from future business revenues” to be “remitted over time through daily debits from consumers’ bank accounts.” However, the defendants allegedly, among other things, (i) made false claims on their websites that their MCAs require “no personal guaranty of collateral from business owners,” when in fact, the contracts included such provisions; (ii) withheld various upfront fees ranging from hundreds to tens of thousands of dollars prior to disbursing funds to consumers (according to the complaint, these fees were either poorly disclosed in the contracts or not disclosed at all); (iii) directed agents to charge higher fees to consumers than permitted by the contracts; (iv) required businesses and their owners to sign confessions of judgment (COJs) as part of their contracts, and unlawfully and unfairly used the COJs to seize consumers’ personal and business assets, including in circumstances where consumers could not make payments due to technical issues outside their control, or in instances not permitted by the defendants’ financing contracts; (v) made threatening calls to borrowers, including threats of physical violence or reputational harm, to compel consumers to make payments; and (vi) made unauthorized withdrawals from consumers’ accounts. The FTC seeks a permanent injunction against the defendants, along with monetary relief including “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.”
The same day, the FTC published a blog post highlighting the Commission’s ongoing efforts to combat questionable financing practices targeting small businesses. The FTC also held a forum in 2019 on marketplace lending to small businesses, which analyzed the potential for unfair and deceptive marketing, sales, and collection practices in the industry, and released a follow-up staff perspective paper earlier this year (see InfoBytes coverage here and here). In addition, over the past few years, several states have introduced legislation and advisories on MCAs and small business financing (see prior InfoBytes coverage here).