Last year, the CFPB issued a notice and request for information on the Equal Credit Opportunity Act (ECOA) and Regulation B. Specifically, the CFPB sought “comments and information 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 topics were identified for comment: disparate impact, limited English proficiency, special purpose credit programs, affirmative advertising to disadvantaged groups, small business lending, sexual orientation and gender identity discrimination, scope of federal preemption of state law, public assistance income, artificial intelligence and machine learning, and ECOA adverse action notices. The FTC recently released a comment from its staff related to two of those topics: disparate impact and small business lending.
The CFPB’s request for information related to disparate impact focused on whether it should provide additional clarity related to the disparate impact analysis under ECOA and Regulation B. In its comment, the FTC provided a brief history related to Regulation B’s incorporation of disparate impact and discussed how courts have addressed disparate impact claims. In particular, the FTC noted that to overcome a claim for disparate impact, a defendant must demonstrate “a legitimate business need for the policy that cannot be met with a less discriminatory alternative.”
Because the FTC and other federal law enforcement agencies have pursued claims under this approach, the FTC raised the 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.” As such, the FTC asked that the CFPB include a reminder to 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 CFPB also asked for comments on what “way(s) might it support efforts to meet the credit needs of small businesses, particularly those that are minority-owned and women-owned?” In response, the FTC noted its recent enforcement actions related to alleged “deceptively advertised financing products and unfair billing and collection practices.” The FTC specifically highlighted several recent enforcement actions, including against a company marketing fuel payment cards and a company allegedly falsely claiming an affiliation with the Small Business Administration, and warning letters it sent to companies related to SBA loans.
The FTC primarily focused its small business financing comment on merchant cash advance (MCA) products. While the FTC acknowledged that MCA providers indicate that a merchant cash advance is not a loan, but rather, the purchase of a merchant’s future receipts, it warned that actual implementation of a MCA purchase and sale agreement could be recharacterized as a loan, depending on the course of dealing between the MCA company and the merchant. The FTC also suggested that “many MCA arrangements come with other hallmarks of traditional credit, including personal guarantees of payment.”
Based on the FTC’s analysis of small business lending, it recommended that the CFPB “remind” lenders that ECOA and Regulation B applies 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. The FTC also indicated that the CFPB’s upcoming rulemaking related to Dodd Frank Section 1071 will assist with enforcement. Finally, the FTC recommended that the CFPB encourage small businesses to report complaints and refer those complaints to the FTC and state agencies for potential enforcement actions.
The substance of the FTC’s comment on ECOA and Regulation B indicates that it remains focused on small business lending. In particular, the FTC continues to address its concerns with MCAs and alleged practices of MCA providers. Indeed, even though the FTC referenced cases involving nonprofits when discussing how the facts and circumstances will dictate whether a transaction is covered by ECOA and Regulation B, it is not difficult to conclude that the FTC might also file an enforcement action against an MCA provider under the ECOA and Regulation B under a theory that the MCA constitutes an offer of credit. Therefore, this is an important reminder for MCA providers to ensure not only that their MCA purchase and sale agreements comply with various state authority governing such agreements, but that their marketing and collection practices conform to state law (e.g., New York and Florida).