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Fed’s Small Business Credit Survey shows Covid-19 challenges
Recently, the Federal Reserve Banks released the 2021 Report on Employer Firms covering findings from their small business credit survey (SBCS), which gathered insights from nearly 10,000 small businesses with fewer than 500 employees on challenges resulting from the Covid-19 pandemic, as well as on business performance and credit conditions. SBCS findings showed that few small businesses were able to avoid negative impacts as a result of the pandemic, and notably revealed disparities in experiences and outcomes across business and owner demographics, including race and ethnicity, industry, and firm size. Key findings include:
- Small businesses’ financial conditions sharply declined between 2019 and 2020, with firms owned by people of color reporting greater challenges. Statistics include: (i) 78 percent of firms reported decreases in revenue; (ii) 79 percent, 77 percent, and 66 percent of Asian-owned, Black-owned, and Latinx-owned firms, respectively, “characterized their financial condition as ‘fair’ or ‘poor’” (in contrast to 54 percent of Non-Hispanic White); and (iii) the share of firms carrying more than $100,000 in debt increased from 31 percent in 2019 to 44 percent in 2020.
- 91 percent of small businesses applied for some type of emergency funding. The Paycheck Protection Program (PPP) was the most commonly used program, with 77 percent of PPP applicants receiving all of the funding they requested. Applications were most frequently submitted through large and small banks, with 95 and 83 percent of applicants having an existing relationship with either a large bank or small bank, respectively, prior to applying for a PPP loan.
- 64 percent of small businesses would apply for additional government-provided assistance if it were available, with 39 percent reporting that “they would be unlikely to survive until sales return to ‘normal’ (that is, 2019 levels) without further government assistance.”
- Approval rates on loans, lines of credit, and cash advances decreased. Prior to the start of the pandemic, 81 percent of small businesses were at least partially approved for funding. After March 1, only 70 percent received partial approval.
- Use of online lenders decreased during 2020, with 42 percent of small businesses applying for loans, lines of credit, or cash advances through a large bank (43 percent turned to a small bank). In contrast, the number of small businesses that applied to online lenders fell from 33 percent in 2019 to 20 percent in 2020. Notably, small businesses with lower credit scores applied to online lenders and nonbank finance companies more often than their higher credit score counterparts. Moreover, small businesses that received financing from online lenders reported a decline in net satisfaction.
Biden administration to reinstate fair housing rules
On April 12, the Office of Management and Budget posted notices pending regulatory review related to two HUD fair housing rules rescinded under the Trump administration. The first notice announces a pending proposed rule to reinstate HUD’s Discriminatory Effects Standard related to a September 2020 final rule issued by the agency, which amended its interpretation of the Fair Housing Act’s 2013 disparate impact standard. As previously covered by a Buckley Special Alert, the final rule was intended to align HUD’s 2013 Rule with the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs et al. v. Inclusive Communities Project, Inc. The final rule included, among other things, a modification of the three-step burden-shifting framework in its 2013 Rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims. Earlier in January, President Biden directed HUD to examine the effects of the final rule, emphasizing that HUD has a “statutory duty to ensure compliance with the Fair Housing Act.” (Covered by InfoBytes here.)
The second notice relates to a pending interim final rule: Affirmatively Furthering Fair Housing; Restoring Statutory Definitions and Certifications. As previously covered by InfoBytes, last July HUD announced plans to terminate the 2015 version of the Affirmatively Furthering Fair Housing (AFFH) rule, and proposed a new final rule titled “Preserving Community and Neighborhood Choice.” At the time, HUD stated that the AFFH rule was, among other things, overly burdensome, costly, and ineffective.
CFPB delivers 2020 fair lending report to Congress
On April 14, the CFPB issued its annual fair lending report to Congress, which outlines the Bureau’s efforts in 2020 to fulfill its fair lending mandate, while protecting consumers against the resulting economic consequences of the Covid-19 pandemic. According to the report, the Bureau continued to focus on promoting fair, equitable, and nondiscriminatory access to credit, highlighting several fair lending priorities that continued from years past such as mortgage origination, small business lending, and student loan origination. The report also discusses new policy areas and programs for fair lending examinations or investigations, including (i) the Fair Lending Help Desks; (ii) amendments concerning Regulation C, which will increase the permanent threshold for collecting, recording, and reporting data about open-end lines of credit from 100 to 200; and (iii) two HMDA data point articles. Additionally, the report discusses the Bureau’s efforts in expanding access to credit for underserved or underbanked populations, including: (i) hosting the first “Tech Sprint” (covered by InfoBytes here) to encourage regulatory innovation and stakeholder collaboration; (ii) continuing to examine and investigate institutions for compliance with HMDA and ECOA; (iii) engaging with stakeholders to discuss fair lending compliance, issues related to credit access, and policy decisions; and (iv) issuing Supervisory Recommendations relating to weak or nonexistent fair lending policies and procedures, risk assessments, and fair lending training. The report also provides information related to regulation, supervision, enforcement, and education efforts.
FTC says Holder Rule does not depend on transaction amount
On April 14, the FTC issued a note correcting prior staff guidelines on the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, commonly known as the Holder Rule. The Holder Rule “protects consumers who enter into credit contracts by preserving their right to assert claims and defenses against any holder of the contract,” including those later assigned to a third party. The note corrects the statement in a 1976 pamphlet by FTC staff that the Holder Rule “did not apply to transactions larger than $25,000.” Those staff guidelines stated that “the Rule incorporates the transaction cap that was present in the Truth in Lending Act (TILA).” However, the recent note points out that the language of the Rule includes no such incorporation nor does it contain any exemption based on transaction amount. Additionally, the note clarifies that the previous “erroneous guidance contradicts a statement by the Commission that the application of the Rule does not depend on the amount of the transaction.”
CFPB action against debt settlement firm targets abusive acts
On April 13, the CFPB entered into a preliminary settlement with an online debt-settlement company for allegedly violating the CFPA’s prohibition on abusive acts or practices and failing to clearly and conspicuously disclose total cost under the Telemarketing Sales Rule. The complaint alleges that the company took “unreasonable advantage of consumers’ reasonable reliance that [it] would protect their interests in negotiating their debts” by failing to disclose its relationship to certain creditors and steering consumers into high-cost loans offered by affiliated lenders. The CFPB alleges that the company regularly prioritized creditors with which it had undisclosed relationships in settlements of consumers’ debts. Under the terms of the proposed stipulated final judgment and order, the CFPB is seeking restitution, damages, disgorgement, and civil money penalties.
In the Bureau’s announcement, acting Director David Uejio states that “[t]he CFPB will not tolerate companies that purport to represent consumers, but instead abuse their trust in a self-dealing scheme. This case provides a clear example of what Congress intended to prohibit when it created the CFPB and gave it authority to prevent abusive practices.”
FTC settles with sellers of antennas, signal amplifiers
On April 8, the U.S. District Court for the Southern District of New York issued a nearly $32 million judgment against the owners and operators of a New York-based enterprise that sells antennas and amplifiers (collectively, “defendants”) for allegedly misleading customers about the quality of their products. The agency alleges in its complaint that the defendants violated the FTC Act by “making deceptive performance claims for their over-the-air television antennas and related signal amplifiers, using deceptive consumer endorsements, and misrepresenting that some of their web pages were objective news reports about the antennas.” Under the terms of the order, the company is barred from making misleading claims about the products’ quality, the number of channels users can acquire, or any other claims about its ranking compared to other products. While the order imposes a $32 million judgment against the defendants, the full judgment will be suspended upon payment of $650,000, subject to certain conditions.
Fannie and Freddie update General QM Rule loan eligibility
On April 8, Fannie Mae issued Lender Letter LL-2021-09 announcing updates to eligibility for loans subject to the CFPB’s revised General Qualified Mortgage (QM) Rule (covered by InfoBytes here). Among other things, Fannie notes that because its preferred stock purchase agreement (PSPA) with the U.S. Department of Treasury requires that acquired loans meet the General QM Rule’s loan definition that became effective March 1, it will no longer, in accordance with the dates below, acquire GSE Patch loans that fail to meet to the revised General QM Rule. Specifically, in order to be eligible for purchase by Fannie (certain exceptions are provided for government loans), such loans “must have application dates on or before June 30, 2021” and must “be purchased as whole loans on or before August. 31, 2021, or in MBS pools with an issue date on or before August 1, 2021.” Fannie further notes that it continues to assess the impact of the revised General QM Rule and PSPA on its policies and operations and anticipates further eligibility and underwriting requirement changes. The same day Freddie Mac also issued Bulletin 2021-13, which provides similar updates for loans with application received dates on or after July 1, 2021, and all mortgages with settlement dates after August 31, 2021.
CFPB settles with California-based company for debt collection violations
On April 6, the CFPB announced a consent order against a California-based debt collector and its former owner for allegedly harassing consumers and threatening to take legal action if they did not pay their debts. According to the CFPB, the respondents violated the FDCPA and the CFPA’s prohibition against deceptive acts or practices by mailing letters to consumers printed with “Litigation Notice” that threatened recipients with legal action if they did not repay their debts. However, the Bureau stated that the respondents did not file lawsuits against the consumers, nor did they hire law firms or lawyers to obtain any judgments or collect on any such judgments. Under the terms of the consent order, the respondents are permanently banned from the debt collection industry and are ordered to pay $860,000 in redress to its victims, which has been suspended due to an inability to pay, as well as a $2,200 civil money penalty. This is the CFPB’s latest action taken against debt collectors that have used false threats to collect debts. As previously covered in InfoBytes, in 2019 the CFPB and New York attorney general announced proposed settlements with a network of New York-based debt collectors to resolve allegations that the defendants engaged in improper debt collection tactics in violation of the CFPA, the FDCPA, and various New York laws. Also, in 2018, the CFPB announced a settlement with a Kansas-based company and its former CEO and part-owner that allegedly engaged in improper debt collection tactics in violation of the CFPB’s prohibitions on engaging in unfair, deceptive, or abusive acts or practices (covered by InfoBytes here).
CFPB settles with California-based company for debt collection violations
On April 6, the CFPB announced a consent order against a California-based debt collector and its former owner for allegedly harassing consumers and threatening to take legal action if they did not pay their debts. According to the CFPB, the respondents violated the FDCPA and the CFPA’s prohibition against deceptive acts or practices by mailing letters to consumers printed with “Litigation Notice” that threatened recipients with legal action if they did not repay their debts. However, the Bureau stated that the respondents did not file lawsuits against the consumers, nor did they hire law firms or lawyers to obtain any judgments or collect on any such judgments. Under the terms of the consent order, the respondents are permanently banned from the debt collection industry and are ordered to pay $860,000 in redress to its victims, which has been suspended due to an inability to pay, as well as a $2,200 civil money penalty. This is the CFPB’s latest action taken against debt collectors that have used false threats to collect debts. As previously covered in InfoBytes, in 2019 the CFPB and New York attorney general announced proposed settlements with a network of New York-based debt collectors to resolve allegations that the defendants engaged in improper debt collection tactics in violation of the CFPA, the FDCPA, and various New York laws. Also, in 2018, the CFPB announced a settlement with a Kansas-based company and its former CEO and part-owner that allegedly engaged in improper debt collection tactics in violation of the CFPB’s prohibitions on engaging in unfair, deceptive, or abusive acts or practices (covered by InfoBytes here).
SBA clarifies bankruptcy PPP eligibility
On April 6, the Small Business Administration (SBA) updated its Paycheck Protection Program (PPP) frequently asked questions to clarify when an applicant or owner is no longer considered to be “presently involved in any bankruptcy” for PPP loan eligibility purposes. In order to be eligible for a PPP loan, SBA requires all borrowers to certify on their applications that the applicant, as well as any owner of 20 percent or more of the applicant, is not “presently involved in any bankruptcy.” SBA’s FAQ provides that “[i]f an applicant or owner has filed a Chapter 7 bankruptcy petition, the applicant or owner is considered to be ‘presently involved in any bankruptcy’ for PPP eligibility purposes until the Bankruptcy Court has entered a discharge order in the case.” For Chapter 11, 12, or 13 bankruptcy petitions, the applicant or owner will be “considered to be ‘presently involved in any bankruptcy’ for PPP eligibility purposes until the Bankruptcy Court has entered an order confirming the plan in the case.” An applicant or owner will not be considered to be “presently involved in any bankruptcy” if the Bankruptcy Court has entered an order dismissing the case, regardless of the type of bankruptcy petition. SBA stipulates, however, that the order must be entered before the date of the PPP loan application.
The SBA also issued a procedural notice to lenders announcing it will shut down the PPP platform to new PPP loan guaranty applications at 12 a.m. EDT on June 1.