Regulation

CFPB’s Reach May Extend to PPP Lending

February 16, 2021
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cfpbThe CFPB’s Winter 2021 Supervisory Highlights Report that was published late last month, covered a section on small business lending. And it’s not related to the Bureau’s work on Section 1071.

The foray into non-consumer finance was instead driven by PPP lending.

“Consistent with its authority to ensure compliance with the Equal Credit Opportunity Act (ECOA), the Bureau conducted [Prioritized Assessments] to assess potential fair lending risks attendant to the institutions’ participation in the [PPP] program,” the report said.

Accordingly, the CFPB determined that small business lenders that restricted or limited eligibility such as banks who only permitted applications from existing customers, for example, “may have a disproportionate negative impact on a prohibited basis and run a risk of violating the ECOA and Regulation B.”

The CFPB conceded that it had not actually investigated if violations occurred and noted that the majority of institutions had argued that such limitations were either in place to comply with Know Your Customer legal requirements, to prevent fraud, or both.

The CFPB did not say that it had supervisory authority over non-banks that participated in PPP, but it did signal that its purview was larger than just consumers when it came to the institutions it supervised.

The report can be viewed here.

The CFPB is expected to have more proactive involvement in small business finance under its new incoming director, Rohit Chopra. Chopra’s nomination was formally submitted on February 13th. Dave Uejio, the Bureau’s Chief Strategy Officer, has been serving as Acting Director since President Biden took office.

Biden SEC Pick: MIT fintech professor, helped create Dodd-Frank

January 21, 2021
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As President Biden’s executive appointments await senate approval, crypto and security holders will be waiting anxiously for one in particular: Gary Gensler. A seasoned financial expert in and out of the public and private sector, Gensler most recently taught blockchain finance classes at the MIT Sloan School of management. What will this crypto researcher bring to the SEC?

By looking at his past research topics, and class syllabi, there may be some foreshadowing. Much of his focus has been on emerging fintech in business. Gensler doesn't just support innovation in banking and finance; he has been actively teaching grad students how to build blockchain-based businesses for the past couple of years.

Last spring, he taught a course called "Fintech: Shaping the Financial World" focused on leveraging blockchain tech and AI.

"This technology has real potential as a catalyst for change in the world of finance and the broader economy," Gensler said in testimony before Congress. “Though there are many technical and commercial challenges yet to overcome, I’m an optimist and want to see this new technology succeed.”

When it comes to regulation, Gensler is light, explicitly stating in an interview with another MIT researcher, “we must preserve the freedom for firms to fail,” and that “it’s best to show some flexibility.” While it is true that activity of any significant size has to be contained within the current regulatory framework,” Gensler said, “the government should put smaller firms in “a regulatory sandbox.”

Before teaching about bitcoin, Gensler worked at Goldman Sachs, where he made partner by 30 years old, the youngest ever to make partner at the time. He went on to lead the team that advised the NFL in the most lucrative TV in history in 1990.

After leaving Goldman, Gensler worked in the US Treasury and eventually chairman of the Commodity Futures Trading Commission under Obama. Though he calls for easy regulation for smaller firms, His work at the CFTC following the 2008 financial crisis culminated in the 2010 Dodd-Frank act.

When it comes to cryptocurrencies, Gensler has said the regulatory framework would “guard against illicit activities, protect investors and their funds, and promote market integrity.”

He has said cryptocurrency, in general, is both a security and a commodity. Some coins like Ripple are more securities, while Bitcoin is not.

Official Who Wants to “Wipe Out” Merchant Cash Advance Will Be Next CFPB Head

January 18, 2021
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rohit chopra cfpbRohit Chopra, an FTC Commissioner, will take over as head of the Consumer Financial Protection Bureau under incoming President Joe Biden, sources say.

Chopra’s name made the rounds in 2020 when he told NBC News that he was looking for a “systemic solution” that can “wipe out” all merchant cash advance companies.

His candid comments aligned with an official statement he put out in August in which he opined that the structure of MCAs “may be a sham since many of these products require fixed daily payments…”

He further added that there were “serious questions as to whether these merchant cash advance products are actually closed-end installment loans, subject to federal and state protections including anti-discrimination laws, such as the Equal Credit Opportunity Act, and usury caps.”

His transfer to the CFPB could be viewed as unwelcome news for the MCA industry as the agency is currently in the process of finalizing the types of financial institutions it believes it should maintain some jurisdiction over. Originally, MCA companies were poised to be excluded from the data reporting requirement set forth by Section 1071 of Dodd-Frank but that could very well soon change.

Transcript and Recording of Major FTC Case Before the US Supreme Court

January 14, 2021
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Oral arguments took place yesterday in AMG Capital Management, LLC et al. v Federal Trade Commission before the United States Supreme Court. At issue is the debate over whether or not the FTC has the authority to force defendants to disgorge with “illegally obtained” funds when a lawsuit is brought under Section 13(b) of the FTC Act.

Transcript here
MP3 Recording Here

FTC Commissioner Rohit Chopra had reportedly told NBC News last April that he was looking for a systemic solution that would “wipe out” predatory lenders. If the Supreme Court rules against the FTC in this case, that plan could be stymied.

Failing Main Street NY

December 21, 2020
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During the election, we heard candidates on both sides to toss around the phrase “small businesses are the backbone of the American economy.” A staple of exhausted political rhetoric, made trite despite its truth because for many politicians it’s a talking point, not a platform. We must move from rhetoric to action. To do so, America’s political leaders need a real understanding of what small businesses need—and what they don’t.

The struggle between understanding and posturing is on display right now in Albany. While small business owners struggle to open their doors, the legislature passed a so-called “truth in lending for small business” bill that claims to provide more disclosure to business owners seeking financing. Led by Senator Kevin Thomas and Assemblyman Ken Zebrowski the bill is currently pending before Governor Cuomo. The legislators recently authored an op-ed that further demonstrates their failure to recognize that the innocuously named bill is rife with faults and lacks a competent grasp of small business issues. The critical blind spots in the bill’s design threatens billions of dollars in capital leaving New York—a failing small businesses owners can scarcely afford at such a difficult time.

Yet, rather than incentivizing finance providers to stay in New York, the legislature is focused on complex disclosures that lack real meaning or understanding to small business owners. Senator Thomas opined on the Senate floor “… the reason I introduced this bill is because people don’t use standard terminology.” Interestingly, this bill creates several new terms and metrics that would be required to be disclosed that have never been used before in finance. Terms like “double-dipping” and new confusing metrics that even the CFPB under President Obama labeled as “confusing and misleading” to consumers. This bill’s fatal flaw is that it has confused information volume with transparency, somethings a recent study proved would harm small business owners.

Even Senator Thomas acknowledged the legislation’s myriad of problems while still encouraging its passage. In his colloquy with Senator George Borrello on the Senate floor, right before he called New York small business owners “unsophisticated,” he mentioned how his bill had “many issues” that he “hoped” would be worked out before implementation. Hope is not a strategy and it won’t help small business owners obtain the financing they need to stay in businesses. Advancing legislation that would limit options for entrepreneurs working to stay in businesses during a pandemic that has crippled the New York economy represents a reprehensible failure of leadership.

Minority-owned businesses have faced a disproportionate economic impact from the pandemic. According to the Fed, Black-owned businesses have declined by 41% since February, compared to only 17% of white owned businesses. Further, the Paycheck Protection Program (PPP), the federal government’s signature relief program for small businesses, has left significant coverage gaps: these loans reached only 20% of eligible firms in states with the highest densities of minority-owned firms, and in counties with the densest minority-owned business activity, coverage rates were typically lower than 20%. Specific to New York, only 7% of firms in the Bronx and 11% in Queens received PPP loans. Moreover, less than 10% of minority-owned businesses have a traditional banking relationship—something that was initially required to have access to the PPP.

The lack of cogency and lazy approach to this legislation is a disservice to the hard-working entrepreneurs who continue to open their businesses while facing daily economic uncertainty. Governor Cuomo has worked tirelessly to continue to provide economic relief to both businesses and consumers—removing billions in financing for small businesses will only hinder this effort. New York can do better.

Steve Denis
Executive Director
Small Business Finance Association

CFPB Initially Proposed to Exclude MCAs, Factoring, and Equipment Leasing From Section 1071

December 17, 2020
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cfpbAfter ten years of debate over when and how to roll out the CFPB’s mandate to collect data from small business lenders, the Bureau has initially proposed to exclude merchant cash advance providers, factors, and equipment leasing companies from the requirement, according to a recently published report.

The decision is not final. A panel of Small Entity Representatives (SERS) that consulted with the CFPB on the proposed rollout recommended that the “Bureau continue to explore the extent to which covering MCAs or other products, such as factoring, would further the statutory purposes of Section 1071, along with the benefits and costs of covering such products.”

The SERS included individuals from:

  • AP Equipment Financing
  • Artisans’ Bank
  • Bippus State Bank
  • CDC Small Business Finance
  • City First Bank
  • Floorplan Xpress LLC
  • Fundation Group LLC
  • Funding Circle
  • Greenbox Capital
  • Hope Credit Union
  • InRoads Credit Union
  • Kore Capital Corporation
  • Lakota Funds
  • MariSol Federal Credit Union
  • Opportunity Fund
  • Reading Co-Operative bank
  • River City Federal Credit Union
  • Security First Bank of North Dakota
  • UT Federal Credit Union
  • Virginia Community Capital

The panel discussed many issues including how elements of Section 1071 could inadvertently embarrass or deter borrowers from applying for business loans. That would run counter to the spirit of the law which aims to measure if there are disparities in the small business loan market for both women-owned and minority-owned businesses.

One potential snag that could complicate this endeavor is that the concept of gender has evolved since Dodd-Frank was passed in 2010. “One SER stated that the Bureau should consider revisiting the use of male and female as categories for sex because gender is not binary,” the CFPB report says.

But in any case, there was broad support for the applicants to self-report their own sex, race, and ethnicity, rather than to force loan underwriters to try and make those determinations on their own. The ironic twist, however, according to one SER, is that when applicants are asked to self-report this information on a business loan application, a high percentage refuse to answer the questions at all.

The CFPB will eventually roll the law out in some final fashion regardless. The full report can be viewed here.

New York Commercial Finance Disclosure Bill Update

November 10, 2020
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Albany, NY - Capitol BuildingThe controversial commercial finance disclosure bill that passed in New York in July, has still not been signed by Governor Cuomo.

Technically, the governor only had 10 days to sign it while the legislature was in session and only 30 days to sign it when the legislature closed out its session for the year, which it did in July. Both deadlines have passed. But as deBanked learned in the case of the COJ bill, the clock does not actually begin to tick until the legislature has formally “delivered” the bill to the governor.

That puts the disclosure bill and other bills not yet signed in a state of suspended animation that can carry them through until December 31st. Doing this “is done to ensure that legislation is thoroughly vetted, with extra checks to guarantee that bills are not unconstitutional and that they’ll lead to no previously unforeseen consequences.”

It’s that latter part of that, that has created concern. Even dueling small business lending trade associations disagree on what the consequences will be. The Innovative Lending Platform Association (ILPA), for example, say the bill is almost exactly what they wanted, while the Small Business Finance Association (SBFA) suggests that advocates do not even understand the bill, much less the implications.

ILPA’s CEO, Scott Stewart, told deBanked in July that “the implications are that small businesses, certainly in New York to begin with, but we think throughout the country, will have the opportunity to really see, understand, and compare various different sources and products for financing their small businesses in terms of their expansion and success.”

SBFA’s Executive Director, Steve Denis, meanwhile, responded very soon after by saying that they don’t realize that it will subject them to massive liability and hefty fines.

“We’re for disclosure, we think there should be standard disclosure,” Denis said. “Our message to the Governor’s office is ‘Let’s take a step back.’ The Department of Financial Services needs to look at our industry, they need to get to know our industry. They are the experts that understand the space, they understand disclosure, and they understand what they need to do to bring responsible lending to New Yorkers. And we would like to work with the NYDFS and a broader industry to put forward a bill that’s led by the Governor and the Governor’s office that brings meaningful disclosure and meaningful safeguards to this industry.”

The SBFA later published the results of a study that supports their arguments.

In qualitative testing of 24 small business owners and executives who have experience taking commercial loans, the study concluded participants did not understand what APR was.

APR disclosure, of course, is the centerpiece of the entire bill.

It is still possible the bill’s language could be amended before the governor signs it. It’s happened before.

In 2017, for example, the state legislature passed a bill that would establish a 7-person task force to analyze online lending activity in the state. The bill, dubbed the Online Lending Task Force bill, called for industry participants to serve on it. The final version signed by the governor, however, was completely rewritten to the point that the online lending task force bill had completely eliminated the task force portion of it and no one was allowed to participate in any analysis except for NYDFS.

Fed Lowers Minimum Main Street Lending Program Loan to $100,000: Too Little, Too Late?

November 8, 2020
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federal reserve“$100,000, we can make that work,” said Ryan Metcalf, head of Public Policy Affairs at Funding Circle. “But we can help a lot more small business if it was $50,000.”

Metcalf was referring to a recent change in the minimum loan amount in the Main Street Lending Program (MSLP.) Just recently, the Federal Reserve lowered the minimum loan amount for the MSLP for a third time, to $100,000. The change was intended to broaden the underused Cares Act aid facility but it might not be enough.

Though changing the program days before, at a press briefing Thursday Fed chair Jerome Powell said SMB aid projects like PPP and the MSLP were up to the gridlocked House and Senate.

“The Fed cannot grant money to particular beneficiaries; we can only create programs or facilities to make loans that will be repaid,” Powell said. “Elected officials have the power to tax and spend, and to make decisions about where we as the society should direct our collective resources.”

Despite Powell’s talk of inaction in the face of an undecided congress, Metcalf said the Fed’s actions have proved that changes can be made to existing programs. Metcalf has been fighting for changes to MSLP for months on behalf of the small business lending community, he says.

In July, Metcalf, in partnership with the Innovative Lending Platform Association and Marketplace Lending Association, wrote a letter to the fed to argue for changes to the MSLP.

The letter argued that the Cares Act made non-depository finech lenders eligible to participate in PPP lending. Though these lenders saved millions of jobs, they were not allowed to lend through the MSLP facility.

Even if they could, the minimum loan size was still too large for “main street” American businesses that needed capital. The letter advocated for a lower minimum of $50,000, allow lenders that were approved for PPP to lend in the MSLP, and create a Special Purpose Vehicle for fintechs.

Metcalf said the Fed has only responded, “that is not under consideration.” 

So far, 400 borrowers have taken out $3.7 billion in loans, of the $600 billion allocated. The program offers Fed backed five-year loans with differed principal and interest payments and minimal rates. With the facility’s deadline approaching Dec 31 and no changes in sight, Metcalf said the program’s vultures are circling. 

If new aid, revisions, or at least an extension is not passed by when the government is funded Dec 11, Metcalf said the program might be finished.

Back in September, Powell testified before Congress that lowering the minimum any further wouldn’t change the adoption rate.

“We have very little demand below a million, as I told the chair a while back,” Powell said. “We’re not seeing demand for very small loans. And that’s really because the nature of the facility and the things you’ve got to do to qualify, it tends to be larger sized businesses.”

Mnuchin has consistently argued that grant programs like PPP would most benefit smaller firms. Metcalf said this was only the case because the MSLP facility has left out smaller firms and alternative lenders that need the capital. 

“My response to that was no, there’s been no uptick in your program because the requirements of the program are not attractive enough to make it workable,” Metcalf said. “Don’t scrap the entire program altogether; look at the proposal that we sent you back in July and work with us on amending the facility.”