The Equal Credit Opportunity Act (ECOA) and Regulation B were the subject of a notice and request for information that the CFPB published last year. The CFPB sought comments and information specifically to “identify opportunities to prevent credit discrimination, encourage responsible innovation, promote fair, equitable, and nondiscriminatory access to credit, address potential regulatory uncertainty, and develop viable solutions to regulatory compliance challenges under” the ECOA and Regulation B. Ten issues were chosen for discussion: disparate impact, low English proficiency, special purpose credit programs, affirmative advertising to underrepresented groups, small business lending, sexual orientation and gender identity discrimination, the extent to which federal law preempts state law, public assistance income, artificial intelligence and machine learning, and ECOA adverse action notices. Recently, the FTC released a staff comment on two of those subjects: lending to small businesses and disparate impact.
Disparate Impact
The CFPB sought information on disparate impact in order to determine whether it should clarify the disparate impact analysis under ECOA and Regulation B. The FTC discussed how courts have handled disparate impact claims and gave a brief history of how disparate impact was included in Regulation B in its comment. The FTC specifically stated that a defendant must show “a legitimate business need for the policy that cannot be met with a less discriminatory alternative” in order to defeat a claim for disparate impact. ”.
The FTC expressed concern that “a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination may be difficult and could risk being both over and under inclusive” because it and other federal law enforcement agencies have pursued claims using this method. The FTC requested that the CFPB remind regulated entities that any commentary is “intended to provide examples of how the agency might approach a fair lending matter, that approaches may vary according to the facts and circumstances of each situation, and that such information is not intended to bless any violations of ECOA and Regulation B. ”.
Small Business Lending
The FTC noted its recent enforcement actions related to alleged “deceptively advertised financing products and unfair billing and collection practices” in response to the CFPB’s request for comments on how it “might support efforts to meet the credit needs of small businesses, particularly those that are minority-owned and women-owned.” The FTC specifically mentioned several recent enforcement actions, including against a business marketing fuel payment cards and a business allegedly falsely claiming an affiliation with the Small Business Administration, as well as warning letters it sent to businesses regarding SBA loans.
In its small business financing comment, the FTC mainly focused on merchant cash advance (MCA) products. The FTC acknowledged that MCA providers state that a merchant cash advance is not a loan but rather the purchase of a merchant’s future receipts, but it issued a warning that the implementation of a MCA purchase and sale agreement may be recharacterized as a loan depending on how the MCA company and the merchant conduct their business. According to the FTC, “many MCA arrangements also include other traditional credit hallmarks, such as personal guarantees of payment.” ”.
The CFPB should “remind” lenders that ECOA and Regulation B apply to offering credit to small businesses, and that it applies based on the circumstances of the transaction, not necessarily on the characterization of the transaction, according to the FTC’s analysis of small business lending. The FTC also stated that enforcement will be aided by the CFPB’s upcoming rulemaking regarding Dodd Frank Section 1071. CFPB should encourage small businesses to file complaints and refer those complaints to the FTC and state agencies for possible enforcement actions, according to the FTC’s final recommendation.
Takeaways
The FTC’s substantive comments on ECOA and Regulation B show that it is still committed to small business lending. The FTC continues to address its concerns with MCAs and alleged MCA provider practices in particular. Although the FTC cited instances involving nonprofits when describing how the facts and circumstances will determine whether a transaction is covered by ECOA and Regulation B, it is not difficult to draw the conclusion that the FTC may also bring an enforcement action against an MCA provider under ECOA and Regulation B on the grounds that the MCA constitutes an offer of credit despite the FTC’s use of cases involving nonprofits as examples. This serves as a crucial reminder to MCA providers to make sure that their marketing and collection practices comply with state law, as well as that their MCA purchase and sale agreements comply with the various state authorities governing such agreements. g. , New York and Florida).
FAQ
Does Regulation B apply to commercial loans?
Except for an entity that is exempt from coverage of this part (but not the Act) by section 1029 of the Consumer Financial Protection Act of 2010 (12 U), the Equal Credit Opportunity Act and Regulation B apply to all credit, both commercial and personal. S. C.
What loans are covered by ECOA?
Loans of all kinds, including those for cars, credit cards, homes, students, and small businesses, are subject to the ECOA.
What is not covered under ECOA?
Second liens, other subordinate loans, loans that are not secured by a dwelling (such as loans secured only by land), and other loans that are not secured by a dwelling are not covered by the ECOA Valuations Rule.
Does FCRA apply to commercial credit?
In general, commercial transactions—including those involving agricultural credit—are exempt from the FCRA. It does not grant any federal agency the power to enact laws that have the same force and effect as regulations.