Regulation
Lawyers Weigh in on Federal Decision That CFPB is Unconstitutional
June 22, 2018In light of a federal court ruling yesterday that the structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional, deBanked spoke with some lawyers to get their perspective on what this decision could mean.
Alan Kaplinsky, Partner, Ballard Spahr
“I think it will sow more confusion related to the CFPB. I think it’s important to note that this opinion – while it is precedent that could be cited in other cases…it’s not binding on any other court anywhere in the country, including in the Southern District of New York. That being said, I anticipate that the CFPB will appeal [the decision] if for no other reason than because they have other cases. Ultimately, I would anticipate that the case will end up in the U.S. Supreme Court.”
Lucy Morris, Partner, Hudson Cook (previously a Deputy Enforcement Director at the CFPB)
“The bottom line is that it creates yet more uncertainty for the bureau, for industry and for consumers. Is this bureau legitimate or not? And if not, what does that mean for all of the many decisions and actions taken by the former [CFPB] director Cordray and the current acting director, Mulvaney.
Maybe this can add to a momentum to create a bipartisan commission to finally resolve this, and to give everyone a commission that…avoids the wide pendulum swings that have been happening. This requires a legislative fix, which is challenging of course.”
Lawrence Kaplan, Of Counsel, Paul Hastings
“Typically, in a case like this, you would have a circuit split, where now you have one circuit saying yes and one circuit saying no. And ultimately that would go up to the supreme court. But you could have the administration saying ‘We’re not going to defend this.’ [Given the administration’s unfavorable attitude toward the CFPB], it’s likely that you’re not going to see anyone vigorously defend the agency.
As for alternative lenders, [these] are state issues. And as a result, [lenders] are not off the hook…At the end of the day, everyone will still have to comply with a patchwork of state laws. You’re really taking away the federal hammer. So, [certain cases] may no longer be a federal case. Now, in some ways, be careful what you wish for, because now you have to face 50 executioners [because] a lot of the states would defer to and join with the feds.”
Commercial Financing Disclosures Bill Approved in the CA Senate
May 31, 2018The use of an annualized cost metric on loan and non-loan contracts alike is now one step closer to becoming the law in the State of California. On Thursday, SB 1235 was approved on the Senate floor. The bill calls for commercial finance companies to disclose an Estimated Annualized Cost of Capital. In previous hearings, the bill’s author, Sen. Steve Glazer (D), stated that it was his intention that this apply to merchant cash advances as well.
“This estimate includes all charges and fees incurred for the financing, assuming you make all payments when scheduled and adhere to the terms of the agreement. This number is based on the estimated term. If the actual term is shorter than estimated, the annualized cost of capital may be higher than shown. If the actual term is longer than estimated, the annualized cost of capital may be lower. This is not an Annual Percentage Rate (APR).”
Here is how to calculate the Estimated Annualized Cost of Capital as set forth in the bill:
(1) Divide the total dollar cost of financing by the total amount of funds provided.
(2) Multiply the result in paragraph (1) by 365.
(3) Divide the result from paragraphs (1) and (2) by the term or estimated term of the financing in days.
(4) Multiply the result from paragraph (3) by 100.
(5) The result from paragraph (4) shall be labeled “The Estimated Annualized Cost of Capital.”
In addition, commercial finance companies will also have to disclose the total dollar cost of the transaction and the total amount of money the merchant will receive net of all fees.
The bill must now pass through the solidly Democrat-controlled Assembly and be signed by the Governor to become the law.
New Law Benefits Small Banks
May 24, 2018
President Trump signed into law today the Economic Growth, Regulatory Relief and Consumer Protection Act, which pares down Dodd-Frank regulations for thousands of small and medium-sized American banks. Dodd-Frank refers to the 2010 Dodd-Frank Act, which instated laws to regulate the risky behaviors of banks that led to the 2008-2010 financial crisis.
Among the changes this new law makes to Dodd-Frank is reducing the number of banks that are subject to strong government oversight because they are considered “systemically important.” Banks with assets of $50 billion or more had been considered “systemically important.” As of today, only banks with assets of $250 billion or more will get that moniker and be subject to the strictest government regulations.
In addition to this, small banks – generally with assets of $10 billion or less – will now be much freer to originate residential mortgages. And they will have to comply with fewer regulations in general.
“There are simplifications in [this law] that change the capital costs for smaller banks,” said Dodd-Frank expert and Senior Counsel at Morrison & Foerster, Oliver Ireland. “By lowering the cost structure of the bank, you may facilitate lending at either lower rates, or more lending.”
Ireland said that there is no way to quantify this, but acknowledged that small banks will be in a stronger position with this new law in place. As for the effect of the new law on alternative lenders, Ireland didn’t predict anything at all dramatic.
Still, he said, “There are a number of provisions in here that make the cost of being a small bank somewhat less. That may put them in a better position to compete with non-bank lenders.”
Andrew Smith Named Director, FTC’s Bureau of Consumer Protection
May 20, 2018
On Wednesday, Andrew Smith, former partner of the law firm Covington & Burling, was named the Federal Trade Commission’s Director of the Bureau of Consumer Protection.
This is not Smith’s first role in government. From 1997 to 2000, Smith worked as a lawyer for the Securities and Exchange Commission. And from 2001 to 2005, he worked as a lawyer for for the Federal Trade Commission (FTC), where he will now be returning.
Since leaving the FTC, Smith served as a partner at Morrison & Foerster and most recently at Covington & Burling. Smith’s recent appointment garnered criticism from government officials who pointed out that Smith has represented egregious offenders of consumer rights. Of the five FTC commissioners, the two Democratic commissioners voted against his appointment.
But a recent New York Times article, which stressed the fact that Smith has represented violators of consumer rights, also acknowledged that he is “regarded as a hard-working and knowledgeable lawyer even by critics.”
Chairman of the FTC Joe Simons, who appointed Smith, expressed dismay over his colleagues’ rejection of Smith.
“I am disappointed that two of my new colleagues have chosen to turn Mr. Smith’s appointment into a source of unnecessary controversy,” Simon said in an FTC statement. “I am highly confident that Mr. Smith will be an effective leader of the Bureau of Consumer Protection. He is widely respected as one of our country’s best and most experienced consumer protection lawyers.”
Smith has recently represented Facebook, Uber and Equifax, all companies with cases before the FTC. Because of this, it is most likely that Smith will recuse himself from these cases. Critics of Smith’s appointment, including Democratic U.S. Senators Elizabeth Warren, Richard Blumenthal and Brian Schatz believe that this makes him unfit to be director of the bureau. But Simon strong disagrees.
“When a political appointee is recused, the Commission relies even more heavily on these seasoned career professionals to allocate resources and tee up recommendations for the Commissioners, who are the ultimate decision makers,” Simon said in an FTC statement. “When Mr. Smith is recused on a matter, I know [the bureau’s] career managers and staff will ensure that American consumers are still well protected.”
California Commercial Financing Disclosures Bill Still a Work in Progress
May 8, 2018
SB-1235, a bill that would require APR disclosures on all types of commercial financing products transacted in California (including some types of factoring, leasing, and merchant cash advance), survived the Judiciary Committee hearing on Tuesday. The bill was previously debated by the Senate Committee on Banking and Financial Institutions, where key provisions like a uniform APR disclosure came under fire.
Since then, Senator Steve Glazer, the bill’s author, is now proposing an alternative Annualized Cost of Capital metric rather than an Annual Percentage Rate in an attempt to compromise with the opposition that says the metric will not work for non-lending products.
On Tuesday, two trade association representatives continued to press their case for a collaborative solution that would work best for all parties, especially small businesses.
Scott Riehl, VP, State Government Relations at the Equipment Leasing and Finance Association (ELFA) said that his association, whose members include Caterpillar and Hewlett Packard, was not on board with the bill as currently drafted. No one in the financial community has ever even heard of the term Annualized Cost of Capital, Riehl said.
Katherine Fisher, Partner at Hudson Cook, LLP, who was there on behalf of the Commercial Finance Coalition, testified that it would not be possible to calculate an annualized rate when the timeframe of products like factoring and merchant cash advances were indeterminate.
Judiciary Committee Chairwoman Hanna-Beth Jackson wrapped up the lively debate by saying that ultimately California “wants a robust small business community” after several of her committee members voiced concerns that the bill in its current form could potentially deter commercial finance companies from providing capital in their state.
The hearing concluded with only 3 aye votes, putting the bill “on call,” wherein no decision was formally reached.
Update: Before the close of the day, the committee secured a 4th aye vote, pushing the bill forward.
Hearing on Commercial Financing Disclosures Scheduled in California State Senate
May 7, 2018Update: Link to the LIVE stream is here
The Senate Judiciary Committee for the State of California will convene for a hearing on the commercial financing disclosures bill at 1:30 PST on May 8th. SB-1235, as its known, previously survived the Senate Committee on Banking and Financial Institutions when it was debated and contested on April 19th. (a video of that hearing is available here)
deBanked will attempt to stream the hearing or provide a link to it when it begins. Check back here for more details.
What You Can Find on the BCFP Consumer Complaint Database
April 30, 2018
Last week, Acting Director of the BCFP Mick Mulvaney told bankers that he had plans to make the agency’s consumer complaints database no longer visible to the public. In light of this, deBanked searched the agency’s complaint database. While there were numerous grievances that consumers reported because they could not fully resolve an issue with a financial service company on their own, we also found a host of questionable entries that leave much to be desired about the underlying issue and resolution sought.
Part of a complaint from last April against Bank of America reads as follows:
“The XXXX XXXX XXXX Police Beat you up XXXX Times and dont file Charges 5 times stays on youre record and you cant get Residency. All Countries murder the XXXX XXXX collect there benefits indefinitely After youre XXXX.”
Another complaint against Wells Fargo from December of last year reads:
“They are lower than pond scum and belong in prison. both XXXX XXXX executive resolution specialist and XXXX XXXX Sr. VP refuse to return my calls.”
And yet another complaint against U.S. Bancorp from July of last year asserts that a certain fraud department is:
“full of shit.”
Others are incomplete, like the following complaint against Experian from earlier this month:
“I’m an authorized user on this account but did not sign up for this on XXXX account.”
Taking the consumer complaints database out of public view could benefit lenders from complaints that have not been fully vetted. A consequence of it being public is that an independent party could paint a picture about a financial company’s behavior by simply tallying the raw number of complaints, regardless of whether those complaints are genuine.
Such a thing has been done. Several months ago, LendEDU published a ranking system of banks by the number of complaints they have received, placing Wells Fargo and Bank of America in the #1 and #2 spots respectively. Time Magazine picked up that story and presented it as “20 Banks That Consumers Loved to Hate in 2017” and ranked the number of complaints to the banks’ total deposits. Minnesota-based TCF Bank was crowned the worst.
Among some of the complaints that deBanked reviewed about TCF Bank did not even appear to be complaints at all. Interspersed with seemingly real grievances were some rather general questions or comments like how to view an account balance, how to access your account information through the mobile app, a purported compliment about the bank’s service that was nonetheless attributed to them as a complaint, and complaints about other companies that did not even mention TCF Bank but nonetheless counted as a complaint against them. All of these counted toward their complaint totals regardless of the content.
Despite Movement of Negative Bill for MCA and Factoring Industries, Hope for a Solution
April 23, 2018Last week, California State politicians gathered for a hearing on SB 1235, a bill that would require the disclosure of an Annual Percentage Rate (APR) for all loans and non-loans, including MCA and factoring products. This is very problematic because APR (which includes interest rate) cannot be calculated for most MCA and factoring products for one reason: time. What makes merchant cash advance and factoring unique is that the timing of payments is flexible, and therefore unknown.
“It’s impossible to compute,” said veteran factoring lawyer Bob Zadek about calculating APR for most MCA and factoring products. “Interest = principal x rate x time. Since [they] cannot determine how long the advance will be outstanding – since repayment is a function of the borrower’s cash flow – the algebra doesn’t work.”
The bill, introduced by California State Senator Steve Glazer, moved out of the Senate committee on Banking and Financial Institutions and is headed to the Judiciary committee – closer to potential passage. Yet advocates of the MCA industry, one of whom testified in the assembly room in Sacramento, are hopeful.
“There were a number of state senators who clearly understood the problems with applying an APR to a commercial transaction and to a purchase and sale of receivables transaction,” said Katherine Fisher, a partner at Hudson Cook, LLP who spoke on behalf of the Commercial Finance Coalition (CFC). CFC is an alliance of financial companies that educates government regulators and elected officials on issues related to non-bank commercial finance. CFC Executive Director, Dan Gans, told deBanked that he believed the committee really understood what Fisher was trying to convey.
Another major advocacy group is the Small Business Finance Association (SBFA). They brought Joseph Looney, COO and General Counsel of RapidAdvance, to testify against SB 1235, and SBFA Chief of Staff Steve Denis sounded optimistic, saying that they have a very good relationship with State Senator Glazer’s office.
“To me, despite the fact that they moved [on] a bill that we’re opposed to through the process,” Denis said. “I think the folks that we’ve been meeting with out there – the senators – they’re all very open to our industry and open to having broader discussion about how to [best] disclose these terms and how to make sure we’re doing what’s in the best interest of small business owners. That’s a real positive, and I’m optimistic that we can get something done.”
As for concern about the bill moving forward, Denis said it’s what he expected.
“It’s just the way the process works in California,” Denis said. “If you look at committee history, they don’t really reject a lot of bills. They like to move bills forward so they can be discussed and negotiated.”
As of this story’s publication, SB 1235’s Judiciary committee hearing had not yet been scheduled.
Update 4/26/18: The hearing is scheduled for May 8, 2018 at 1:30 p.m. PST in Room 112.
Full video of the April 18th hearing below:
