The Consumer Finance Protection Bureau (CFPB) intends to prioritize enforcement of federal lending laws protecting small business owners from unfair and discriminatory practices by banks, non-banks, and potentially alternative finance companies.
The Dodd-Frank Act of 2010, which established the CFPB, included a provision that amended the Equal Credit Opportunity Act (ECOA) to mandate reporting requirements for lenders making small business loans. Currently, it is unclear whether these requirements will apply to alternative funding products.
Nonetheless, the fact that federal regulators are taking a closer look at small business lending is another sign that enhanced regulatory scrutiny is coming to the merchant cash advance (MCA) market. In the meantime, small businesses that are struggling under the terms of an MCA agreement should consult with an experienced debt relief specialist.
The Backdrop
One of the intended purposes of Dodd-Frank was to facilitate fair lending laws and improve credit opportunities for women-owned, minority-owned, and small businesses. The applicable section of the act requires lenders to collect and report data related to the race, sex, and ethnicity of the business owners, the purpose of the loan, the action taken with regards to the loan, the business’s gross annual revenue to the CFPB.
At this juncture, the CFPB has not enacted regulations. Dodd-Frank gives it significant leeway in determining the scope of the reporting requirements, however, and the bureau has been working to issue a rule:
- In August 2020, the CFPB collected information through an online survey from institutions engaged in small business financing regarding one-time costs of compliance with Dodd-Frank.
- In September 2020, the bureau released an outline of proposals that (1) suggests data reporting requirements will be limited to loans made to small businesses and (2) contains potential exemptions for various alternative funding products such as merchant cash advances.
With the new administration in place, however, the CFPB may decide to issue a rule more broader in scope than originally anticipated. And some lawmakers have jawboned the bureau to issue a more comprehensive rule that would include alternative credit instruments such as factoring and MCAs.
In any event, there will be a public comment period as part of the rulemaking process, and banks, credit unions, and other lenders including merchant cash advance companies will be able to weigh in to protect their interests.
Why This Matters
At this juncture, it is unclear if/when the CFPB will issue a proposed rule as the process has been delayed. Nonetheless, business lenders and alternative funders will continue to offer a wide range of credit products to small businesses, including MCAs, with little oversight.
But the political winds are changing, and the CFPB, along with the Federal Trade Commission, state and federal lawmakers, as well as State Attorneys General in New York and California, have merchant cash advances on their radar.