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CFPB proposes collection of small business lending data
On September 1, the CFPB released a notice of proposed rulemaking (NPRM) and request for public comment on a proposed rule to implement Section 1071 of the Dodd-Frank Act, which requires the agency to collect and disclose data on lending to women and minority-owned small businesses. The NPRM would create a new subpart B to existing Regulation B, the implementing regulation for ECOA, in order to increase transparency in the lending marketplace. Covered financial institutions would be required to collect and report to the Bureau a broad set of data points relating to applications for several small business credit products with the stated goal of facilitating the enforcement of fair lending laws and enabling the identification of business and community development needs and opportunities for women-owned, minority-owned, and other small businesses.
The NPRM defines a covered “financial institution” as an entity that meets a specific origination threshold where at least 25 “covered credit transactions” are originated to small businesses in each of the two preceding calendar years. A “covered credit transaction” under the NPRM would include transactions that meet the definition of business credit under Regulation B, as well as loans, lines of credit, credit cards, merchant cash advances, credit transactions for agricultural purposes, and transactions covered by HMDA. The definition of a small business would be one that had less than $5 million in gross annual revenue for the preceding fiscal year. Additionally, the NPRM defines a “covered application” as “an oral or written request for a covered credit transaction that is made in accordance with procedures used by a financial institution for the type of credit requested.” Data points that covered financial institutions would be required to collect on a calendar-year basis to be reported by June 1 of the following year are also provided.
The Bureau proposes that an eventual final rule would become effective 90 days after publication in the Federal Register; however, compliance would not be required until approximately 18 months after publication. Additionally, the Bureau proposes certain transitional provisions that would allow covered financial institutions to begin collecting data prior to the compliance date and would permit covered financial institutions to “use either the two calendar years immediately preceding the effective date or the second and third years preceding the compliance date to determine coverage.” (See also the Bureau’s summary on the NPRM here.) Comments on the NPRM will be received for 90 days following publication in the Federal Register.
“This data will be used to support business and community development and foster fair lending,” acting Director Dave Uejio noted in a statement following the announcement of the NPRM. He added that the “rule is about providing greater transparency into which small businesses get credit and which ones do not.”
A Buckley Special Alert is forthcoming.
DFPI again modifies draft regulations for commercial financing disclosures
On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a second draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, and last September, California initiated the formal rulemaking process with the Office of Administrative Law (covered by InfoBytes here and here). The second modifications to the proposed regulations follow a consideration of public comments received on the initial proposed text, as well as additional comments received on modifications made to the proposed text in April. Among other things, the proposed modifications (i) amend several terms including “approved advance limit,” “approved credit limit,” and “amount financed”; (ii) clarify the definition of “at the time of extending a specific commercial financing offer”; (iii) replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate as one of the benchmark rate options; (iv) add several terms including “broker,” “recipient funds,” “average monthly cost,” “estimated monthly cost,” and “prepaid finance charge”; (v) provide that for disclosure purposes, “a provider shall assume that there are 30 days in every month and 360 days in a year” and specify that the annual percentage rate must be expressed to the nearest ten basis points; (vi) amend certain disclosure requirements and thresholds; (vii) clarify methods for estimating monthly sales, income, or receipt projections for sales-based financing; (viii) amend duties and requirements for financers and brokers; and (ix) clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of funding a recipient will receive.
Comments on the second modifications must be received by August 24.
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.”
House passes comprehensive debt collection measures
On May 13, the U.S. House passed, by a vote of 215-207, H.R. 2547, which would provide additional financial protections for consumers and place several restrictions on debt collection activities. Known as the “Comprehensive Debt Collection Improvement Act,” H.R. 2547 consolidates 10 separate proposed consumer protection bills into one comprehensive package.
Provisions under the package would cover:
- Confessions of Judgment (COJs). The bill would amend TILA and expand the ban on COJs to cover small business owners and merchant cash advance companies.
- Servicemembers. The bill would amend the FDCPA to prohibit debt collectors from threatening servicemembers, including by representing to servicemembers that failure to cooperate will result in a reduction of rank, revocation of their security clearance, or prosecution. Covered debtors would include active-duty service members, those released from duty in the past year, and certain dependents.
- Student Loans. The bill would amend TILA to require the discharge of private student loans in the case of a borrower’s death or total and permanent disability.
- Medical Debt. The bill would amend the FDCPA by making it an unfair practice to “engag[e] in activities to collect or attempt[] to collect a medical debt before the end of the 2-year period beginning on the date that the first payment with respect to such medical debt is due.” The bill would also amend the FCRA to, among other things, bar entities from collecting medical debt or reporting it to a consumer reporting agency without providing a consumer notice about their rights.
- Electronic Communication. The bill would amend the FDCPA to limit a debt collector from contacting a consumer by email, text message, or direct message on social media without receiving the debtor’s permission to be contacted electronically. It would also prevent debt collectors from sending unlimited electronic communications to consumers.
- Other Debt Provisions. The bill would (i) expand the definition of debt covered under the FDCPA to include money owed to a federal agency, states, or local government; certain personal, family, or household transactions; and court debts; (ii) restrict federal agencies from transferring debt to a collector until at least 90 days after the obligation becomes delinquent or defaults; (iii) require agencies to notify consumers at least three times—with notifications spaced at least 30 days apart—before transferring their debt; and (iv) limit the fees debt collectors can charge.
- Penalties. The bill would require the CFPB to update monetary penalties under the FDCPA for inflation. It would also (i) clarify that courts can award injunctive relief; (ii) cap damages in class actions; and (iii) add protections for consumers affected by national disasters.
- Non-Judicial Foreclosures. The bill would amend the FDCPA to clarify that companies engaged in non-judicial foreclosure proceedings are covered by the statute.
- Legal Actions. The bill would amend the FDCPA to outline requirements for debt collectors taking legal action to collect or attempt to collect a debt, including providing a consumer with written notice, as well as documents showing the consumer agreed to the contract creating the debt, and a sworn affidavit stating the applicable statute of limitations has not expired.
FTC settles with MCA providers for $9.8 million
On April 22, the FTC announced a settlement with two New York-based merchant cash advance providers and two company executives (collectively, “defendants”) 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. As previously covered by InfoBytes, the FTC filed a complaint against the defendants last year claiming, among other things, that the defendants (i) falsely advertised that MCAs do not require collateral or personal guarantees, but when consumers defaulted on their financing agreements, the defendants frequently filed lawsuits against them, including against individual business owners who provided personal guarantees, to collect the unpaid amount; (ii) misrepresented the amount of total financing in the contract that consumers would receive by withholding fees that are deducted from the promised funds; and (iii) made unfair, unauthorized withdrawals from customers’ bank accounts in excess of consumers’ authorization without express informed consent, while continuing to debit customers’ bank accounts after the MCAs were fully repaid.
Under the terms of the stipulated order, which was approved by the court on May 5, the defendants are required to pay more than $9.8 million to the FTC to go towards redress to affected customers. The defendants are also permanently prohibited from making misleading statements to consumers about the terms of their financing or making withdrawals from consumers’ bank accounts without first receiving their express informed consent, and are required to clearly and conspicuously disclose any financing fees as well as the actual amount consumers will receive after the fees are assessed. Further, the defendants must establish a process to monitor any marketers or funding companies that work on their behalf to ensure, among other things, that such companies abide by the terms of the settlement.
FTC comments on application of ECOA, Regulation B in response to CFPB RFI
Recently, FTC staff submitted a comment letter in response to the CFPB’s request for information (RFI) seeking input on ways to provide additional clarity under the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. As previously covered by InfoBytes, the CFPB issued the RFI last July requesting comments on ways to create a regulatory environment that expands credit access and ensures consumers and communities are protected from discrimination with respect to any aspect of a credit transaction. Included in the RFI was a request for input on whether “the Bureau should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B.” Citing to legislative history, the FTC noted that Regulation B explicitly incorporates disparate impact, and stressed that “[a]rticulating a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination could be difficult and could risk being both over and under inclusive.” The FTC suggested that if the Bureau chooses to provide additional detail regarding its approach to disparate impact analysis, a disclaimer should be included that such information is not intended to “bless” any violations of ECOA and Regulation B, but is rather “intended to provide examples of how the agency might approach a fair lending matter.”
In response to the Bureau’s request for information about ways it might support efforts to meet the credit needs of small businesses, the FTC highlighted recent enforcement actions involving small businesses, including actions involving deceptively advertised financial products and unfair billing and collection practices, particularly with respect to merchant cash advances. The FTC also urged the Bureau to remind entities offering credit to small businesses that ECOA and Regulation B apply and that entities cannot avoid application of these statutes based solely on how they characterize a transaction or the benefits they claim to provide. The FTC further stressed that collecting small business lending demographic data could aid in enforcement efforts, as would encouraging small businesses to report misconduct and refer complaints to the FTC and the states. In addition, the FTC highlighted the importance of educating small businesses about different products and terms, as well as potential law violations, which could assist small businesses in comparing products resulting in less expensive financing options.
New Jersey charges MCA provider with deceptive practices
On December 8, the New Jersey attorney general announced an action against a merchant cash advance provider, its parent company, and six other associated entities (collectively, “defendants”) alleging the defendants violated the New Jersey Consumer Fraud Act (CFA) and the General Advertising Regulations through the marketing and transacting of their merchant cash advance (MCA) product. (The defendants are currently facing similar allegations from the FTC, covered by InfoBytes here.) According to the complaint, the defendants engaged in “unconscionable business practices, deceived consumers, and/or made false or misleading statements” by marketing and advertising an MCA product, which was allegedly structured as a short-term, high-cost loan. New Jersey argues that the MCA contracts contain terms that “eliminate the distinctions between loans (with fixed regular payments over a defined term) and legitimate MCAs (with variable payments tied to actual receivables and an undefined term).” New Jersey asserts that traditionally, MCA’s do not have a finite repayment term and thus, the fixed repayment period was the equivalent of a loan to its customers. Moreover, the agreements’ “fixed daily payments extracted from Consumers’ accounts have little to no relation to the businesses’ receivables.” Additionally, New Jersey asserts that the defendants allegedly engaged in unconscionable collection practices, including requiring consumers to sign, in their individual capacity and on behalf of their business, an Affidavit of Confessions of Judgment to obtain the MCA, which would allow judgment against both the Consumer’s business assets and personal assets in the event of a purported default. New Jersey is seeking a permanent injunction, civil penalties, restitution, and disgorgement.
Notably, the New Jersey complaint follows a recent enforcement action against a merchant cash advance provider in California (covered by InfoBytes here), where the California Department of Financial Protection and Innovation (DFPI) found, in apparent contrast to the New Jersey action, that MCA agreements with an indefinite repayment period, among other things, operate as a loan equivalent by, placing the “risk of repayment on the merchant by leaving the repayment period open until fully repaid (with fees and interest).”
California DFPI issues MCA enforcement action covering future receivables
On November 12, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with a commercial financing company, resolving allegations that the company’s merchant cash advance (MCA) product was structured as a lending transaction and offered to California merchants without first obtaining a license as required by the California Financing Law (CFL). According to the DFPI, the MCA agreements in question provide the company with “broad authority to declare ‘default’ on its merchants and when doing so may use extensive recourse allowed under its [a]greement,” including in the event of insufficient funds requiring the full funding amount to be repaid, which DFPI argues, “does not put the risk of the ‘purchase’ of receivables on [the financing company]’s shoulders, but rather the risk of repayment on the merchant’s shoulders, just like a loan.” Moreover, the agreements provide for an indefinite repayment period, placing the “risk of repayment on the merchant by leaving the repayment period open until fully repaid (with fees and interest).” The consent order distinguishes between outstanding and future receivables, noting that under California law, commercial financiers purchasing a share of a merchant’s outstanding receivables without recourse (e.g., factoring), is generally not considered lending, but there is no similar recognition by the legislature or courts with respect to future receivables.
The consent order requires the company to (i) desist from lending in California unless and until licensed under the CFL; (ii) refund fees or payments collected from California merchants in excess of the 10 percent state interest rate cap for non-CFL licensees; and (iii) pay $20,000 to the DFPI to cover the cost of the investigation.
Merchant cash advance providers move to dismiss FTC allegations of deceptive and unfair conduct
On October 23, defendants in an FTC lawsuit filed a reply brief in support of their motion to dismiss allegations claiming they misrepresented the terms of their merchant cash advances (MCA), used unfair collection practices, made unauthorized withdrawals from consumer accounts, and misrepresented collateral and personal guarantee requirements in advertisements. As previously covered by InfoBytes, the FTC filed a complaint in August against the defendants—two New York-based merchant cash advance providers and two company executives—alleging deceptive and unfair conduct in violation of Section 5 of the FTC Act. Earlier in October, the defendants filed a motion to dismiss, arguing, among other things, that the FTC “lack[ed] the statutory authority to bring its claims in federal court” under Section 13(b) of the FTC Act because “none of the challenged conduct, to the extent it even occurred or was actionable, is plausibly alleged to be ongoing or ‘about to’ occur.” The FTC countered that it “need only allege” that it had “reason to believe Defendants are violating or are about to violate” Section 5 in order to file suit in federal district court. The FTC further contended that it had also alleged facts sufficient for individual liability.
The defendants responded to the FTC’s opposition to dismissal, arguing, among other things, that even if the FTC invoked the statutory authority under Section 13(b) to have the court hear its claims, the claims fail for other reasons, including that the complaint fails to state a claim under Section 5 by (i) only providing “fragments of advertisements without necessary context”; (ii) ignoring “the express fee disclosures in the MCA agreement” that outline the fees to be paid by a merchant; and (iii) ignoring the fact that “so-called ‘unauthorized’ ACH withdrawals were “explicitly authorized under the MCA agreement.” The defendants further argued that the individual liability claims should also be dismissed because the FTC failed to sufficiently allege that the individual defendants directly participated in or had authority over the alleged conduct.
CFPB outlines plan to disclose data on small-business lending
On September 15, the CFPB released its “Outline of Proposals Under Consideration and Alternatives Considered” (Outline) for implementing the requirements of Section 1071 of the Dodd-Frank Act, which instructs the Bureau to collect and disclose data on lending to women and minority-owned small businesses. The detailed Outline describes the proposals under consideration and discusses other relevant laws, the regulatory process, and potential economic impacts. The Bureau also released a high-level summary of the Outline. Highlights of the proposals include:
- Scope. The Bureau is considering proposing that the data collection and reporting requirements would apply only to applications for credit by a small business. Financial institutions would not be required to collect and report data for women- and minority-owned businesses that are not considered “small,” as defined by the Small Business Act and the Small Business Administration’s (SBA) implementing regulations.
- Covered Lenders. The Bureau is considering proposing a broad definition of “financial institution” that would apply to a variety of entities engaged in small business lending, but is also considering proposing exemptions based on either a size-based (examples include $100 million or $200 million in assets), or activity-based threshold (examples range from 25 loans or $2.5 million to 100 loans or $10 million), or both.
- Covered Products. The Bureau is considering proposing exemptions from the definition of “credit” to include consumer-designated credit, leases, factoring, trade credit, and merchant cash advances.
- Application. Because an “application” would trigger requirements under Section 1071, the Bureau is considering proposing a definition that is largely consistent with Regulation B; however, the Bureau is also considering “clarifying circumstances,” such as inquiries/prequalifications, that would not be reportable.
- Data Points. The Bureau is considering a range of data points for collection, including, in addition to the mandatory data points required by Section 1071, “discretionary data points” to aid in fulfilling the purposes of Section 1071: “pricing, time in business, North American Industry Classification System (NAICS) code, and number of employees.”
- Privacy. The Bureau is considering using a “balancing test” for public disclosure of the data. Specifically, data “would be modified or deleted if its disclosure in unmodified form would pose risks to privacy interests that are not justified by the benefits of public disclosure.”
Additionally, the Bureau will convene a panel, as required by the Small Business Regulatory Enforcement Fairness Act (SBREFA), in October 2020 to “consult small entities regarding the potential impact of the proposals under consideration.” Feedback on the proposals is due no later than December 14.