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.
Announcement
Proposed Rule
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 undercover agents pretended their fake businesses did $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 of this investigation 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.
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.
Wondering How to Comment on the Impending NY Disclosure Rules?
September 25, 2022The deadline to comment on New York’s latest iteration of its commercial financing disclosure rules is October 31st. As stated on the Department of Financial Service’s website, the agency’s official contact on the matter is George Bogdan (George.Bogdan@dfs.ny.gov). It’s the same contact as was given for the previous comment period.
Notably, the DFS has said that it has received some comments that have asked the agency to abolish the disclosure rules altogether. That won’t happen, the DFS explained, because it is required by law to enact them.
Even if there are no additional comment periods after this one, it is highly unlikely that the NY rules would go into effect this year.
New York DFS Publishes New Proposal on Commercial Financing Disclosure Law
September 15, 2022
The New York regulator in charge of rolling out the commercial financing disclosure law, published a new draft of the rules in the State Register yesterday.
In it, the New York Department of Financial Services (DFS) also gave its own assessment of the comments received from potentially covered parties.
“Some commenters are opposed to the basic purpose of the Commercial Finance Disclosure Law (“CFDL”), Financial Services Law (“FSL”) sections 801-811, and accordingly are opposed to the regulation,” DFS said. “Most commenters acknowledge the need for the rule to implement the CFDL and made comments intended to improve the regulation from their perspective.”
Thus, with all of the feedback previously received, the new proposal is out. The public now has until October 31st to provide further feedback to it.
Think The New California Disclosure Law is Just About a Disclosure Form? Think Again
September 13, 2022
“We’re one of the good guys so of course we’ll comply and include the form with our contracts.”
Variations of the above phrase have been oft-repeated in the last few months by participants in the commercial finance industry when queried by deBanked about California’s new disclosure law. Several companies have shared that they are prepared for what’s to come, but are they? The regulations go into effect on December 9th and begin a new chapter of compliance for the industry.
Though one might be aware that California will require specific disclosures on commercial finance contracts (including purchases of future sales), Katherine C. Fisher, Partner at Hudson Cook, LLP, explained that the breadth of the state’s law will likely require changes to a funding company’s operational processes as well. Fisher told deBanked that there’s not just the matter of disclosing but also the matter of what triggers a disclosure having to be made. What might otherwise be considered the normal discourse between a funding provider and a customer prior to a deal being consummated is now an area requiring close examination.
“If a broker sends a text to a merchant with the offers, could it trigger this?” is one scenario she posed about the threshold for disclosure.
The funding provider needs to know the answer because once the disclosure requirement is triggered, the broker needs to relay back the details of the offers made, the specific disclosures provided, and the timestamp of when this took place. All of this data then needs be stored by the funding provider to maintain compliance.
And funding providers will need to be vigilant.
“The funder is responsible for broker compliance,” Fisher said.
The entire process of who-said-what, when, and how will suddenly become a realm requiring tight control it seems. And that all comes back to the form itself, which is not all that simple either.
California will require funding providers to estimate an APR on a purchase transaction using one of two methods: the Historical Method or the Underwriting Method. While the methodology selected is probably best left to qualified counsel to assist with, the likely deviation of a future estimated APR from a backwards-looking APR was a reality considered by state regulators. To bridge this gap, California requires that funding providers disclose reasonably anticipated true-up scenarios. A true-up in this instance refers to the already well-established option for a merchant to perform a monthly reconciliation of payments if the amount collected is above or below the purchased percentage specified in the contract.
Though the very nature of the reconciliation is a consequence of not being able to predict the future exactly, California’s law requires that funding providers disclose the dates and amounts of the true-ups that they reasonably anticipate. Such concepts and mathematics, once perhaps the subjective domain of a funding provider’s in-house underwriters will soon be subject to regulatory scrutiny for total accuracy. And this just scratches the surface.
The scope of this law is so unique and technical that the Hudson Cook law firm spent a considerable amount of time preparing a guide on this very subject. deBanked saw some of the pages of this guide during a call.
Fisher, meanwhile, insisted that compliance in California is different than compliance with the law recently enacted in Virginia and that if funding providers wait until December to begin preparing, it will probably be too late to be ready in time.
“This is more than just a form,” Fisher said. “You need to spread the word about it.”
Funders Weigh in on the New Disclosure Law in Virginia
August 10, 2022
“I think there are pros and cons on this law,” said Boris Kalendarev, CEO at Specialty Capital, in regards to the recently enacted sales-based financing disclosure law in Virginia. “I’m on the pro side and I think first and foremost it allows the good funders and the good brokers in the space to operate in the right manner.”
The law technically went into effect on July 1st, shaking things up for funding providers and brokers alike, particularly through a set of uniform disclosures that are required every time a contract is put in front of a Virginia-based business.
“It holds a broker more responsible for the transaction that they’re going to complete,” said Sharmylla Siew, Senior Underwriter at Lending Valley. “It builds a deeper bond between the broker and the merchant. And it also creates a better bond between the broker and the funder.”
Echoing Siew’s perspective, Kalendarev also believes that being clear creates an honest business space for the broker, merchant, and funder.
“I think transparency is really the right way to run this business. Let’s try to make sure there’s even more transparency,” said Kalendarev.
One intent behind the law is to provide the business customer with all of the pertinent information in a digestible format. Notably, this includes the commission that a broker may be receiving from the funder.
“I do believe that it should be fully transparent on both sides to understand the transaction in full,” said Dylan J. Howell, CEO of Liquidibee. “The merchant should understand that the broker is getting compensated. And if he decides that the broker deserves an additional commission on top of what he’s getting paid from the funder, well, that’s an informed decision between the merchant and broker to come to an agreement with.”
Howell Suggested that some of what is required would be expected in other types of deals.
“If you would go out and buy a $500,000 house, you get to the closing table and you look at the bill, it says it’s $545,000, but the purchase price is 500,000, you would want a reconciliation page to show where that 45,000 of additional capital is going,” Howell said. “And it’s no different than in this transaction, in my opinion.”
Banks and credit unions were exempt from the law but some view targeted regulations like this one as a way to raise the bar and credibility of sales-based financing products in general.
“Merchants who wouldn’t have considered an MCA as a practical form of funding in the past may decide to explore this avenue knowing that the industry is being held to a higher standard of practice,” Howell said.
Siew, of Lending Valley, echoed same.
“I am actually very excited about the new regulations, and I feel that it would make a huge impact on the MCA industry,” she said.
Fintech and Transparency in Small Business Lending
July 13, 2022
“Increasing the flow of capital to American small businesses is one of this committee’s foundational goals,” said US Rep Dean Philips (D), chairman of the House Small Business Committee, on Wednesday. Phillips was presiding over a hearing on fintech and transparency in small business lending
Witnesses invited to testify on the subject included:
- Sean Salas, CEO, Camino Financial
- Joyce Klein, Senior Director, Aspen Institute
- Diane Patterson, Regional Director, Twin Cities Small Business Development Center
- John Griffin, Chair in Finance, McCombs School of Business, University of Texas
Both members of the Committee and the witnesses shared varying opinions on how to accomplish transparency. Although this is the not the first congressional hearing of its kind, the timing indicates that federal interest is piggy-backing off of similar conversations playing out in several state capitols. The hour-long video is below:
