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  • DFPI issues third round of draft regulations for commercial financing disclosures

    State Issues

    On October 12, the California Department of Financial Protection and Innovation (DFPI) issued a third 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, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released a second round of modifications in August (covered by InfoBytes here, here, and here). The third modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications:

    • Amend several terms including “approved advance limit,” “approved credit limit,” “at the time of extending a specific commercial financing offer,” “benchmark rate,” “broker,” “provider,” and “recipient funds.”
    • Define the term “specific commercial financing offer” to mean a written communication to a recipient related to specific payment amounts and costs of financing, but does not include a recipient’s name, address, or general interest in financing.
    • Amend certain disclosure requirements and thresholds, including specific circumstances that a provider can disregard when making calculations and disclosures.
    • Clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of financing used to pay down or pay off other amounts owed by a recipient.
    • Amend duties and requirements for financers and brokers.
    • Amend criteria for specifying the amount of funding a recipient will receive.

    Comments on the third modifications must be received by October 27.

    State Issues State Regulators DFPI California Disclosures Commercial Finance APR Consumer Finance

  • Massachusetts highlights UDAP risks of representment fees

    State Issues

    On September 23, the Massachusetts Office of Consumer Affairs and Business Regulation, Division of Banks, issued a supervisory alert reminding financial institutions to clearly disclose representment non-sufficient funds (NSF) fees connected to deposit accounts to avoid consumer confusion as well as potential legal and regulatory risks. The alert explains that a representment NSF fee may occur when a financial institution presents the same transaction again, in an attempt to obtain declined funds. According to the alert, a “repeated merchant payment transaction can trigger the assessment of multiple NSF fees by a depository institution if the transaction is presented more than once,” causing some financial institutions to charge the consumer an NSF fee for both the original presentment as well as for each subsequent representment. The alert discusses consumer protection risks associated with the representment of NSF fees, including recent class action lawsuits for breach of contract, some of which have resulted in customer reimbursements and legal fees. Additionally, the alert highlights issues with standard industry deposit account agreements and fee schedules supplied by payment processing software vendors to financial institutions, which may not adequately explain an institution’s actual NSF fee practices as disclosed to customers. While certain disclosures and account agreements may indicate that one NSF fee will be charged “per item” or “per transaction,” these forms may not sufficiently explain that the same processed transaction may trigger multiple NSF fees. The alert reminds financial institutions charging representment fees that they risk violating state and federal UDAP law if their relevant account disclosures and agreements are not in compliance, and urges financial institutions to review deposit disclosures and contract language to ensure NSF fees are clearly and consistently communicated to consumers.

    State Issues State Regulators Fees UDAP Massachusetts Disclosures

  • SEC letter illustrates climate-change disclosures

    Agency Rule-Making & Guidance

    Recently, the SEC’s Division of Corporation Finance issued guidance to companies that may be required to include information concerning climate change risks and opportunities in “disclosures related to a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.” Such disclosures, as discussed in the SEC’s 2010 Climate Change Guidance, address the following: (i) the effect of pending or existing legislation, regulations, and international agreements related to climate change; (ii) the indirect impact of regulations or the direction of business trends; and (iii) the physical effects of climate change. An illustrative letter provided by the Division outlines “sample comments that the Division may issue to companies regarding their climate-related disclosure or the absence of such disclosure.” The Division clarified that the letter does not provide an exhaustive list of issues that companies should consider, and that any comments issued “would be appropriately tailored to the specific company and industry, and would take into consideration the disclosure that a company has provided in Commission filings.”

    Agency Rule-Making & Guidance SEC Climate-Related Financial Risks Disclosures

  • NYDFS issues pre-proposed regulation to implement Commercial Finance Disclosure Law

    State Issues

    On September 21, NYDFS Acting Superintendent Adrienne A. Harris announced a pre-proposed regulation to implement New York’s Commercial Finance Disclosure Law (CFDL) (covered by InfoBytes here), which was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date to January 1, 2022. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which includes persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients at the time a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.

    The CFDL and the pre-proposed implementing regulation are applicable to persons or entities who (i) extend a specific offer of commercial financing to a recipient (i.e., a person who applies for commercial financing and is made a specific offer of commercial financing); (ii) solicit and present specific offers of commercial financing on behalf of a third party; or (iii) provide or will provide commercial financing to recipients and communicate a specific amount, rate or price, in connection with the commercial financing, either directly to a recipient, or to a broker with the expectation that the information will be shared with a recipient.

    The term “commercial financing” is defined broadly to include:

    • Open-End Financing
    • Closed-End Financing
    • Sales-Based Financing (i.e., merchant cash advance)
      • Defined to mean any transaction repaid over time as a percentage of sales or revenue, in which the payment amount may vary by sales or revenue volume, including any financing with a sales or revenue based true-up mechanism.
    • Accounts Receivable Purchase Transactions, including Factoring
      • Factoring is defined to mean any accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods or services that have been supplied or rendered, but for which payment has not yet been made.
    • Asset-Based Lending
      • Defined to mean a transaction in which advances are made from time to time contingent upon a recipient forwarding payments received from one or more third parties for goods or services the recipient has supplied or rendered to such third party.
    • Lease Financing
      • Defined to mean providing a lease for goods that includes a purchase option that creates a security interest in the goods leased, including a “finance lease” as defined in the UCC.
    • Any other form of financing for which proceeds are not primarily intended for consumer-purpose.

    Notwithstanding, the pre-proposed regulation provides that commercial financing does not encompass any transaction in which a financer provides a disclosure required by the Truth in Lending Act. The following entities and transactions are exempt from the CFDL: (i) financial institutions (defined as a chartered or licensed bank, trust company, industrial loan company, savings and loan association, or federal credit union, authorized to do business in New York); (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) technology service providers; (v) certain lease transactions under the New York Uniform Commercial Code; (vi) lenders who make no more than five applicable transactions in New York in a 12-month period; (vii) individual commercial financing transactions in an amount over $2.5 million; and (viii) commercial financing transactions involving certain vehicle dealers.

    Among other things, the pre-proposed regulation:

    • Includes definitions for terms used in the CFDL and the pre-proposed regulation, including definitions of “finance charge” under the different covered transactions (e.g., commercial financing transactions generally, account receivable purchase transactions that are not factoring transactions, factoring transactions, lease financing transactions).  
    • Explains how providers should calculate the annual percentage rate and outlines allowed tolerances. 
    • Outlines formatting requirements for disclosures for the following types of financing: (i) sales-based financing (including merchant cash advances); (ii) closed-end financing; (iii) open-end financing; (iv) factoring transaction financing; (v) lease financing; (vi) general asset-based financing; and (vii) all other commercial financing transactions.
    • Provides disclosure requirements for instances where the amount financed is greater than the recipient funds, which includes a disclosure entitled “Funding You Will Receive.”
    • Provides that, consistent with the CFDL, a provider must give the required disclosures to a recipient at the time of extending a specific offer for commercial financing. The pre-proposed regulation defines “at the time of extending a specific offer” to mean (i) any time a specific periodic or irregular payment amount, rate or price in connection with commercial financing is quoted in writing to a recipient, based upon information from, or about, the recipient; and (ii) any subsequent time when the terms of an existing consummated commercial financing contract are changed, prior to the recipient agreeing to the changes, if the resulting changes would increase the finance charge (certain alternative parameters apply with respect to open-end credit plans). The pre-proposed regulation also notes that where a provider allows a recipient to select from multiple offer options or customize a financing offer, the provider need only provide the disclosure(s) for the specific offer that the recipient elects to pursue.
    • Provides disclosure signature requirements, which may be electronic (prior to consummating a commercial financing, a financer must obtain a copy of the disclosures made pursuant to the CFDL that are signed by the recipient).
    • Describes how the CFDL’s $2.5 million disclosure threshold is calculated.  
    • Outlines requirements for commercial financings that offer multiple payment options.
    • Specifies certain duties of financers and brokers involved in commercial financing, including record retention requirements (four years).  
    • Details the reporting process for which certain providers calculating estimated annual percentage rates will report data to the superintendent relating to “the estimated annual percentage rates disclosed to the recipient and actual retrospective annual percentage rates of completed transactions” in order to facilitate accurate estimates for future transactions.  

    Outreach comments on the pre-proposed regulation are due by October 1. After NYDFS completes this preliminary phase, NYDFS will make a formal proposed regulation. Comments on the formal proposed regulation will be due within 60 days of publication in the State Register. NYDFS expects to have a final regulation in place by January 1, 2022, which is the effective date set forth in the underlying law. 

    State Issues State Regulators NYDFS Small Business Lending Merchant Cash Advance Disclosures Commercial Finance Bank Regulatory

  • Fed extends TILA disclosure requirements

    Agency Rule-Making & Guidance

    On September 1, the Federal Reserve Board adopted a proposal to extend the recordkeeping and disclosure requirements associated with the TILA, implemented by Regulation Z for three years, with revision. While Dodd-Frank transferred rule-writing authority for Fed-supervision institutions under Regulation Z to the CFPB, the Fed is taking action to “minimize burden on small entities through tailored supervision, including through a risk-focused consumer compliance supervision program and an examination frequency policy that provides for lengthened time between examinations for institutions with a lower risk profile.” As previously covered by InfoBytes, the Board proposed in April to revise FR Z (OMB No. 7100-0199) to: (i) include burden connected to disclosure requirements in “rules issued by the Bureau since the Board’s last Paperwork Reduction Act (PRA) submission, as well as for one information collection for which the Bureau estimates burden” but the Board formerly did not; (ii) break out and clarify “burden estimates” that were formerly consolidated; and (iii) eliminate burden associated with some requirements due to the Bureau accounting for burden for the entire industry, or because the burden is now deemed a part of an institution’s usual and customary business practices. The revisions will be implemented as proposed and are effective immediately.

    Agency Rule-Making & Guidance Federal Reserve TILA Regulation Z Disclosures Bank Regulatory

  • District Court denies bank’s motion to dismiss class action regarding overdrafts

    Courts

    On August 23, the U.S. District Court for the District of Connecticut denied a motion to dismiss a putative class action case, in which the plaintiff alleged that a national bank’s (defendant) overdraft opt-in notice failed to satisfy Regulation E of the Electronic Funds Transfer Act (EFTA), and that the bank’s assessment of overdraft fees in light of such failure violated the Connecticut Unfair Trade Practices Act (CUFTA). The plaintiff alleged that she and other members of the putative class “opted into [the defendant’s] overdraft program for debit card and ATM transactions,” and were charged overdraft fees on an “available” balance policy multiple times. However, the defendant’s opt-in disclosure agreement states that an overdraft only happens “when you do not have enough money in your account to cover a transaction, but we pay it anyway,” which is a description of the “actual” balance of an account. Accordingly, the defendant “charge[d] overdraft fees even at times when there [was] a sufficient amount of money in a consumer’s account.” The plaintiff alleged that the defendant continued this system with knowledge of EFTA’s requirements and “that its opt-in agreement did not provide an accurate, clear, and easily understandable definition of an overdraft.”

    In its motion to dismiss, the defendant argued that the plaintiff failed to state a claim alleging violations of the EFTA because, among other things: (i) when the opt-in agreement is considered together with other documents provided to the customer upon opening an account, the policies are clearly explained; and (ii) the defendant is shielded from liability under the safe harbor provisions of the EFTA, because the opt-in language utilized is identical to the CFPB’s model form. The defendant also argued that it complied with Regulation E, “because the opt-in notice it used, when read together with an ‘Account Agreement’ and ‘Overdraft Disclosure’ it says were provided to [the plaintiff] when she opened her account, made clear that it would charge overdraft fees when her ‘available balance’ fell below zero.”

    The court found that the defendant’s argument regarding compliance with Regulation E “relies on documents that are not attached to, incorporated in, or otherwise ‘integral’ to the complaint” and that Regulation E requires that the notice itself be a “segregated” document, which utilizes “clear and readily understandable” language. The court also ruled that though the defendant utilized language from the CFPB model form, the plaintiff plausibly alleges that use of the form was not “an appropriate model” since the language did not disclose the defendants overdraft program in a “clear and readily understandable” manner.

    Courts Class Action Overdraft Regulation E EFTA State Issues Disclosures CFPB

  • District Court: "Least sophisticated consumer" would not be misled by collection letter disclosures

    Courts

    On August 23, a magistrate judge of the U.S. District Court for the District of Colorado granted a defendant’s motion for summary judgment, ruling pursuant to the “least sophisticated consumer standard” that the debt collection letter accurately conveyed the subject FDCPA rights. The plaintiff alleged the defendant debt collector’s letter violated several sections of the FDCPA by, among other things, making false and misleading representations in violation of Section 1682e by informing the plaintiff that “calling for further information or making a payment is not a substitute for disputing the debt” because it implied that disputing the debt was mandatory instead of optional. Additionally, the plaintiff contended that this language overshadowed and contradicted the required disclosure on the second page of the letter by “suggest[ing] that disputing the debt was mutually exclusive to making a payment”—an alleged violation of Section 1692g. The defendant moved for summary judgment, arguing that the plaintiff lacked standing to sue, or in the alternative, that he lacked sufficient evidence to prove his FDCPA claims.

    The court disagreed, ruling that the plaintiff’s alleged injuries (that the FDCPA violation caused him to not pay his debt and that he lost out on the ability to make payments or to, among other things, negotiate a separate payment plan) did not rise to the level of tangible harm necessary to satisfy Article III standing. The court then reviewed the letter’s disclosures under the least sophisticated consumer standard and determined that “it is one thing to say that making a payment and disputing a debt are different, and another entirely to suggest that they are mutually exclusive. The phrase, ‘IS NOT A SUBSTITUTE FOR,’ does not carry any reasonable implication of exclusivity, and in fact demonstrates, when read in full context, that Defendant is informing Plaintiff that making a payment does not take the place of disputing the debt. In other words, both can be pursued without exclusivity.” Moreover, because the language is not misleading or contradictory, the court ruled that it did not overshadow the second-page disclosure, which informed him of his right (but not obligation) to dispute the debt.

    Courts Debt Collection FDCPA Disclosures

  • DFPI again modifies draft regulations for commercial financing disclosures

    State Issues

    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.

    State Issues State Regulators DFPI Disclosures Commercial Finance Small Business Lending APR Merchant Cash Advance

  • CFPB appeals decision on Prepaid Accounts Rule

    Courts

    On August 16, the CFPB filed its opening brief in the agency’s appeal of a district court’s December 2020 decision, which granted a payment company’s motion for summary judgment and vacated two provisions of the Bureau’s Prepaid Account Rule: (i) the short-form disclosure requirement “to the extent it provides mandatory disclosure clauses”; and (ii) the 30-day credit linking restriction. As previously covered by InfoBytes, the Bureau claimed that it had authority to enforce the mandates under federal regulations, including the EFTA, TILA, and Dodd-Frank, but the district court disagreed, concluding, among other things, that the Bureau acted outside of its statutory authority with respect to the mandatory disclosure clauses of the short-form requirement in 12 CFR section 1005.18(b) by presuming that “Congress delegated power to the Bureau to issue mandatory disclosure clauses just because Congress did not specifically prohibit them from doing so.” In striking the mandatory 30-day credit linking restriction under 12 CFR section 1026.61(c)(1)(iii), the district court determined that “the Bureau once again reads too much into its general rulemaking authority,” and that neither TILA nor Dodd-Frank vest the Bureau with the authority to promulgate substantive regulations on when consumers can access and use credit linked to prepaid accounts. Moreover, the court deemed the regulatory provision to be a “substantive regulation banning a consumer’s access to and use of credit” under the disguise of a disclosure, and thus invalid. 

    In its appeal, the Bureau urged the U.S. Court of Appeals for the D.C. Circuit to overturn the district court’s ruling, arguing that both the EFTA and Dodd-Frank authorize the Bureau to promulgate rules governing disclosures for prepaid accounts. “The model-clause provision simply ensures that institutions will always have a surefire way of complying with the statute, even when the Bureau’s regulations do not specify how information should be disclosed,” the CFPB said, stressing that “[n]either that provision nor anything else forecloses—let alone unambiguously forecloses—rules requiring disclosures to present specified content in a specified format so that consumers are better able to find, understand, and compare products’ terms.” The decision to adopt such rules, the Bureau added, is entitled to deference. According to the Bureau, the Prepaid Account Rule “does not make any specific disclosure clauses mandatory,” and companies are permitted to use the provided sample disclosure wording or use their own “substantially similar” wording. Additionally, the Bureau argued, among other things, that “[b]y mandating optional model clauses while remaining silent about content and formatting requirements, Congress did not ‘circumscribe[] the [agency’s] discretion’ to adopt such requirements.” Instead, the Bureau contended, “whether to adopt content and formatting requirements is left ‘to agency discretion.’” Moreover, the disputed requirements “fit comfortably” within its power to regulate disclosure standards under EFTA and Dodd-Frank, the Bureau argued, adding that the law “authorizes the Bureau to ‘prescribe rules to ensure that the features of any consumer financial product or service … are fully, accurately, and effectively disclosed to consumers.’”

    Courts CFPB Appellate Prepaid Rule D.C. Circuit Fees Disclosures Prepaid Cards EFTA TILA Dodd-Frank

  • CFPB seeks comment on mobile-device disclosures

    Agency Rule-Making & Guidance

    On August 11, the CFPB issued a notice and request in the Federal Register for comments on a Generic Information Collection titled, “Electronic Disclosure on Mobile Devices.” According to the notice, the CFPB is planning “to conduct several studies using methodologies rooted in psychology and behavioral economics to understand electronic disclosure on mobile devices.” Through these studies, the CFPB intends to collect information about demographics, reading electronic disclosures, and how consumers engage with their finances on different devices. Comments are due by September 10.

    Agency Rule-Making & Guidance CFPB Disclosures Federal Register

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