Banking and Finance Law Daily FTC staff advise CFPB to remind entities that ECOA should be applied broadly
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Friday, January 8, 2021

FTC staff advise CFPB to remind entities that ECOA should be applied broadly

By Nicole D. Prysby, J.D.

The staff comment letter notes that Regulation B explicitly incorporates disparate impact in lending and that ECOA may apply to non-traditional financing extended to small businesses.

Federal Trade Commission staff submitted a comment letter in response to the Consumer Financial Protection Bureau’s request for information on the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. The Bureau asked whether it should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B. The comment letter notes that Regulation B explicitly incorporates disparate impact, and that articulating a single approach to disparate impact analysis that covers diverse sets of facts and circumstances could be difficult and risks being both over and under inclusive. The Bureau also asked in what ways might it support efforts to meet the credit needs of small businesses. The FTC discussed potential abuses with Merchant Cash Advances (MCAs). The comment urges the Bureau to remind entities offering credit to small businesses that credit statutes such as ECOA and Regulation B apply, and that whether a particular statute applies depends on the actual facts and circumstances involved, and not solely on how one party characterizes the transaction or the benefits it claims to provide.

Background. In July 2020 (see Banking and Finance Law Daily, July 29, 2020), the Bureau published a Request for Information on ECOA, and Regulation B. The ECOA and Regulation B make it unlawful for any creditor to discriminate against any applicant with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, or age.

FTC staff comment letter. The FTC responded to the Bureau’s questions concerning disparate impact and small business lending. The Bureau asked whether it should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Reg. B. The comment letter notes that Reg. B explicitly incorporates disparate impact, and that articulating a single approach to disparate impact analysis that covers diverse sets of facts and circumstances could be difficult and risks being both over and under inclusive. If the Bureau provides additional detail regarding its approach to disparate impact analysis, the FTC suggests that it include a disclaimer that the information is not intended to bless any violations of ECOA and Reg. B.

The Bureau also asked in what ways might it support efforts to meet the credit needs of small businesses. The FTC noted that while it has been able to bring many actions protecting small businesses, detecting illegal conduct can be challenging because small business consumers do not always report illegal conduct to law enforcement agencies, perhaps due to uncertainty over their rights and recourse when something goes wrong. This is a particular concern with MCAs. In exchange for a lump sum cash infusion, small businesses typically agree to repay the MCA provider a much larger fixed sum via daily installment payments over a period of several months. MCA providers have taken the position that they are not offering credit because their contracts often state that daily repayment amounts will fluctuate according to the businesses’ fluctuating daily revenues, and that there is no obligation to repay if the business fails. If in practice, however, MCA companies are seeking repayment regardless of contract terms, small business consumers are entering into credit arrangements without the certainty that the protections offered under credit statutes. Many MCA arrangements come with other hallmarks of traditional credit, including personal guarantees of payment, and the FTC has sued one MCA provider for allegedly engaging in collection measures such as confessions of judgment against small business consumers regardless of whether the business has failed. Therefore, the FTC urges the Bureau to remind entities offering credit to small businesses that credit statutes such as ECOA and Reg. B apply, and that whether a particular statute applies depends on the actual facts and circumstances involved, and not solely on how one party characterizes the transaction or the benefits it claims to provide. In addition, educating small business consumers about different products and terms, and potential law violations could assist small businesses in comparing products, lead them to look for and obtain less expensive financing, and encourage them to report misconduct to aid in law enforcement.

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