1,334 Page CFPB Loan Rule Proposal Warns Business Lenders
Congress isn’t responsible for lending lawmaking anymore it seems, the CFPB is. That’s a bit chilling considering the federal agency is also tasked with enforcing the laws it creates. A new 1,334 page law proposal published by Richard Cordray at the CFPB to assert control over payday loans, vehicle title loans, and certain high-cost installment loans also mentions business loans in it.
“The Bureau intends to exclude loans that are made primarily for a business, commercial, or agricultural purpose,” the proposal states. However, since the proposal is not a bill that would be brought before Congress for a vote, the weakly and seemingly intentionally phrased statement of “intends to exclude” is not the most reassuring language. Cordray concedes in an earlier paragraph though that Dodd-Frank only empowered the Bureau to prescribe rules over consumer finance, which was defined primarily as personal, family, or household purposes.
Already the proposal explains how a business lender might violate that threshold:
“A lender would violate this part if it extended a loan ostensibly for a business purpose and failed to comply with the requirements of this part if the loan in fact is primarily for personal, family, or household purposes. See the section-by-section analysis of proposed § 1041.19 for further discussion of evasion issues.”
That referenced further analysis basically says that if the lender is really just pretending a personal loan is a business loan, then they’re just trying to evade the rules and that won’t work.
If a consumer claims they’re going to use the money for a personal purpose but then decides to use it to finance a small business, well then it’s still a consumer loan, Cordray argues:
“Proposed § 1041.3(b) specifies that the proposed rule would apply only to loans that are extended to consumers primarily for personal, family, or household purposes. Loans that are made primarily for a business, commercial, or agricultural purpose would not be subject to this part. The Bureau recognizes that some covered loans may be used in part or in whole to finance small businesses, both with and without the knowledge of the lender. The Bureau also recognizes that the proposed rules will impact the ability of some small entities to access business credit themselves. In developing the proposed rule, the Bureau has considered alternatives and believes that none of those alternatives considered would achieve the statutory objectives while minimizing the cost of credit for small entities.”
Business lenders and even merchant cash advance companies should make sure they ask every applicant what the intended use of the funds are. If it’s for a personal purpose, the CFPB could try to exercise jurisdiction in the future.June 2, 2016