Regulation
CFPB Rule Would Likely Impact Sale of Business Loan Applicant Data
December 3, 2024
A proposed rule by the CFPB aims to “Stop Data Brokers from Selling Sensitive Personal Data to Scammers, Stalkers, and Spies” by limiting “the sale of personal identifiers like Social Security Numbers and phone numbers collected by certain companies and make sure that people’s financial data such as income is only shared for legitimate purposes, like facilitating a mortgage approval, and not sold to scammers targeting those in financial distress.” Presented as a consumer-facing protection that would make parties selling data subject to the Fair Credit Reporting Act while prohibiting the sale of such data to third parties for “marketing,” the full 206-page proposal suggests that it would apply equally when individual information is used in the course of applying for business loans.
“The CFPB expects that the proposal may have a limited impact on the cost of credit for small entities. One small entity representative stated during the SBREFA process that the proposed rule may affect the cost and ease of accessing credit for small entities. In particular, the written instructions provision may slow down the application process for small business loans because creditors lending to small businesses check the personal credit of the small business owner and may need to rely on the small business owner’s written authorization to do so. In theory, the proposed rule could increase the cost of credit for small businesses if the compliance costs discussed above are passed on to small businesses in the form of higher on loans from lenders.”
“Data brokers sell lists of financially vulnerable individuals to predatory lenders for targeted marketing campaigns,” the CFPB wrote in a summary of the propsal. “This practice is compounded by the widespread sale of personal identifiers collected by consumer reporting agencies, also known as ‘credit header’ data—including names, addresses, and Social Security numbers—which has created a thriving market for sensitive personal information that puts Americans’ privacy and financial security at risk.”
Anyone can officially comment on this proposal until March 3, 2025.
Undercover Agents Working for Federal Regulators Posed as Merchants, Inquired About Business Loans
November 13, 2024
If you want to get a sense of what CFPB oversight of small business financing is going to look like when it goes into effect in 2025, then consider the federal regulator just revealed that it hired undercover agents last year to pose as business owners, had them inquire about business loans, and recorded it all. All with the assistance of the DOJ.
Focused entirely on Nassau County, NY and Fairfax, VA, the fake merchants pretended to do $100k – $400k in annual revenue and be open for less than 5 years with 700+ FICO. With what amounted to more than 100 total in-person visits across 23 financial institutions (all of which were bank branches) for the duration of the operation, the CFPB allegedly hoped to gauge potential racial discrimination with the lenders they spoke with.
The undercover agents, described as testers, were instructed to tell representatives at banks that they were “looking to expand their business and to inquire about financing through business loans and business lines of credit.”
“All calls and visits with the lenders were audio recorded,” states the official report issued by the CFPB. The CFPB paid close attention to whether or not bank representatives suggested alternative financing products and whether or not they encouraged or discouraged to do one thing versus another.
While anyone is free to opine on what the findings actually were and the context of which they were found (FULL REPORT HERE), readers are reminded that the CFPB will be tasked with reviewing these very demographic metrics, like the ones they inquired about during this investigation, for almost all small business finance companies starting in July 2025 (even if you’re a broker). These regulations apply to revenue based financing providers just the same as lenders unless the incoming administration intervenes.
The CFPB’s role in small business finance was dictated in 2010 during the passage of Dodd-Frank, but it has taken nearly 15 years for the rules to finally go into effect. While the statute empowering the regulator to collect demographic data from small business finance companies does not specifically state that it has been granted any authority to bring enforcement actions based upon that data, the revelation that the regulator conducted an undercover operation that included them pretending to be business owners looking for loans across two states with the assistance of the Department of Justice should be a good indication of where things were at least planning to go. The current head of the CFPB, for example, Rohit Chopra, had expressed publicly that his plan was to wipe out all companies engaged in merchant cash advance. It is not known at this time who, if anyone, might replace Chopra under Trump. The last time Trump became president, the CFPB head that had been installed by Obama, famously claimed at the time that the President of the United States did not possess the authority to remove him. He was later removed.
Trump, Republicans To Take Over in 2025
November 6, 2024
With the 2024 election results in, the regulatory and legislative environment for the small business finance industry could shift significantly at the federal level in the coming years. In particular, it will be worth paying specific attention to what happens with the Consumer Financial Protection Bureau (CFPB). As many readers are aware, the largest regulations ever imposed on the small business finance industry, promulgated by the CFPB, are slated to go in effect in July 2025. That date comes after fifteen literal years (Since Dodd-Frank was passed in 2010!) of delays caused by confusion, debates, and disputes over the CFPB’s right to exist, the meaning of the law’s statute, and court orders pushing it forward or temporarily delaying it. Feelings about the CFPB were so contentious under Trump’s last presidency that the agency temporarily rebranded itself as the BCFP (Bureau of Consumer Financial Protection) as a symbolic gesture of statutory defiance.
The CFPB’s looming oversight of small business finance starting next year had particularly alarmed those in the merchant cash advance space. Its current head, Rohit Chopra, had previously disclosed that his mission was to “wipe out” merchant cash advance companies. He had also said that the structure of their products “may be a sham.” In response, one trade group representing such companies filed a lawsuit against the CFPB earlier this year. That case has not been decided yet. Other segments of the small business finance industry will be watching the CFPB closely in 2025 as well.
Another outcome is that it could mean that individual states that lean the other way politically become more aggressive. As readers are aware, the stream of disclosure legislation over the last few years all came from the state level. It’s possible that environment starts to accelerate even faster.
New Jersey Tries Commercial Financing Disclosure Bill Again
October 17, 2024For the 7th year in a row the legislature in New Jersey is trying to pass a commercial financing disclosure bill. While a notable component is an APR requirement it also applies a broad warning to brokers.
A broker shall not make or use:
(1) any false or misleading representations or omit any material fact in the offer or sale of the services of a broker or engage, directly or indirectly, in any act that operates or would operate as fraud or deception upon any person in connection with the offer or sale of the services of a broker, notwithstanding the absence of reliance by the buyer; or
(2) any false or deceptive representation in its business dealings.1
The full language can be found here.
California Bill Aims to Add Consumer Debt Collection Protections to Commercial Debts
August 20, 2024Among several commercial finance bills currently making their way through the legislature in California is SB1286, which would apply consumer debt collection protections to commercial debts.
If this bill were to eventually pass commercial debt collectors would need to obtain the same license currently required under existing law for consumer collectors. In addition, it would be a crime for a collector of a commercial debt “to send a communication that simulates legal or judicial process or that gives the appearance of being authorized, issued, or approved by a governmental agency or attorney if it is not.”
There are still more components that would require compliance as well. Like the fact that under current law a debt collector is required to stop collecting a consumer debt when an alleged debtor provides the debt collector with certain information, including information relating to the debtor’s status as an alleged victim of identity theft. This would also apply to commercial debts. The full language of the bill can be read here.
Another bill moving along right now is SB1482, which would “would impose various duties on commercial financing providers and brokers, including, among other things, prohibiting the taking of a confession of judgment or power of attorney at any time before a default.”
Although both bills were introduced all the way back in February, they are currently being passed through committees.
The Status of the Legal Situation in New York
April 8, 2024| A lot has transpired on the legal front in New York State over the last month. If you’re a broker, funder, or lender that does business in New York, you cannot afford to miss this session at Broker Fair on May 20 in NYC. Come and learn about the current status and future outlook of the industry from this panel of knowledgeable attorneys. Your success is dependent on being informed. Take advantage of this opportunity!
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Federal Regulator Tasked With Small Business Finance Oversight is Now Protesting Itself?
April 5, 2024If you saw a protest outside the office of the CFPB in Washington DC lately, you’d be forgiven for assuming it was a group of aggrieved consumers. Alas, it’s something much more bizarre, the CFPB protesting itself. That’s because the regulator is currently engaged in a labor union dispute with its own employees over fair pay. Mind you this is the same regulator that is tasked with adjudging fairness in the private sector. CFPB employees are members of Chapter 335 of the National Treasury Employees Union (NTEU) and this union is currently engaged in heavy mobilization and protest efforts against the CFPB.
The campaign slogan is Pay Up, CFPB, which has been printed on banners that are being paraded by CFPB enforcement attorneys outside the CFPB office on 1700 G St NW. The NTEU actually has a formal online signup sheet for CFPB employees to pick their time to picket outside. On April 3rd, the union even took a page out of the New York City playbook when it apparently wheeled in a Scabby the Rat inflatable.
Apparently this guy was in front of CFPB headquarters yesterday. pic.twitter.com/5mq7R2h1Tf
— Evan Weinberger (@reporterev) April 3, 2024
As recent as March 27, the National President of the NTEU scolded CFPB Director Rohit Chopra in a letter that accused him of being uncooperative in negotations.
“I believed you when you said you valued CFPB employees and that you respected NTEU as CFPB’s exclusive representative. However, your actions have not supported your words. I have reached out to your office multiple times, both by letter and by phone without receiving a proper response. To build a strong relationship, we must prioritize communications to work through issues, especially when we disagree. Instead, you have avoided all communication. I have even offered to meet with you on the weekend to let you know my commitment to this relationship and to stress to you how important having ongoing discussions is to help resolve this dispute. Your lack of response is unacceptable.”
– NTEU President Doreen P. Greenwald to CFPB Director Rohit Chopra
The irony of this all cannot be overstated. While the CFPB is literally preparing to enforce 888 pages of regulations in small business lending to assess fairness in the marketplace, the union representing the CFPB’s employees has declared that the CFPB’s leadership does not believe in fairness.
Meanwhile, the CFPB just settled a separate lawsuit with its own employees over previous claims that it had discriminated on the basis of race.
The CFPB Now Wants to Work With Loan Marketplaces?
March 27, 2024
Things are getting weird in government land. The CFPB, the regulator in charge of collecting data from small business finance companies starting this Fall, has just revealed what one of its long term goals of that might be, incorporating the data into loan marketplaces.
That’s because on Wednesday, CFPB Director Rohit Chopra said that he plans to do exactly that with another industry the agency collects data on, the credit card industry.
…reliable information about interest rates is also just hard to come by. So, we instead see people comparing cards by annual fee, or rewards, or perhaps just signing up for a card from the same bank where they have a checking account, assuming the interest rate they’re charged will be competitive. To help make this process easier, we are assembling a pricing data set for third-party comparison websites and others to use to help consumers find the best deal for them. This will rely on data submitted under existing requirements of the 1988 law. I hope to share more about those plans in the coming months.
While it may be a leap at this stage to say that this will happen in the small business finance industry any time soon, virtually none of the speculation surrounding what the CFPB will actually do with the data it collects, if anything at all, has been that it would be integrated into loan marketplaces for merchants to compare options. Given current trends across all levels of government this is not so preposterous. For example, the City of New York just introduced its own business loan marketplace and the SBA just upgraded theirs. Couple this with a slew of recent regulatory enforcement activity in the private sector and the idea that there is a plan for government-run business loan marketplaces that are powered by federal agency loan data for comparison shopping is not incomprehensible.
