On September 30, 2018, California enacted the nation’s first small business truth-in-lending law when Governor Jerry Brown signed into law SB 1235. The law aims to protect small businesses from predatory lending practices by requiring increased transparency of certain business-purpose loans marketed to small businesses.

SB 1235 draws comparisons to the federal Truth in Lending Act, which imposes disclosure requirements for consumer-purpose, but not business-purpose loans.  SB 1235 covers “commercial financing,” defined to include commercial loans, commercial open-end credit plans, factoring, and merchant cash advances, for transactions less than $500,000.  Of note, SB 1235 applies to nondepository institutions, such as an “online lending platform,” and exempts traditional depository institutions.

Disclosures required by the law include: (i) the total amount of funds provided, (ii) the total dollar cost of the financing, (iii) the term or estimated term, (iv) the method, frequency, and amount of payments, (v) the description of prepayment policies, and (vi) the annualized rate of the total cost of financing. The California Department of Business Oversight (DBO) is tasked with developing regulations to clarify the ambiguous scope of SB 1235.

The law has garnered broad industry support from signatories to the Small Business Borrowers’ Bill of Rights, which encompasses small business lenders, fintech companies, advocacy groups, and community organizations. Some business groups, including the Commercial Finance Association and Electronic Transactions Association, have chosen not to support the bill.

 

 

On December 21, 2017, the Consumer Financial Protection Bureau (CFPB) issued a public statement regarding implementation of the Home Mortgage Disclosure Act (HMDA), noting that it plans to reconsider aspects of the mortgage data rule.

The HMDA, enacted in 1975, requires many lenders to report information concerning applications they receive for particular mortgage loans and other loans they purchase. The Dodd-Frank Act directed the CFPB to expand the collection of this data, prompting the Bureau to issue a rule in 2015 that required financial institutions to collect and report additional mortgage information beginning in 2018. The CFPB then issued a final rule in August of 2017 regarding this collection of information.

Despite this relatively recent final rulemaking, the CFPB has announced that it “intends to engage in a rulemaking to reconsider various aspects of the 2015 HMDA Rule such as the institutional and transactional coverage tests and the rule’s discretionary data points.” According to the CFPB, this rulemaking will likely re-examine, among other things, lending-activity criteria that determines whether data and transactions must be reported.

At this point, it is unclear how the regulations will change, but it appears likely that the modifications will reduce the amount of information about borrowers that banks and other lenders are required to submit to regulators. Further, the number and types of institutions required to report certain information could be reduced. For now, lenders will have to comply with the rule coming into effect, though the CFPB has said that it “does not intend to require data resubmission unless data errors are material.” Moreover, the Bureau doesn’t intend to assess penalties with respect to data collected in 2018 and reported in 2019, and will only use examinations of 2018 data as diagnostic, to aid in identifying compliance weaknesses.

This announcement may signal a new approach by the CFPB, which traditionally has taken an expansive view toward regulation of financial institutions, particularly as this news comes less than a month after Mick Mulvaney, the Director of the Office of Management and Budget, took the reins at the CFPB. This new rulemaking should be closely tracked so financial institutions may appropriately adjust their compliance programs to this shifting landscape.

On Thursday, June 22, 2017, the Consumer Financial Protection Bureau (CFPB) provided updated guidance for supervisory examinations of student loan servicers.  Richard Cordray, the Director of the CFPB, gave prepared remarks in Washington D.C.  He explained his concerns related to the Public Service Loan Forgiveness program and how certain practices may be delaying or denying borrowers’ access to this debt relief.

The Public Service Loan Forgiveness program allows those who accept certain public service jobs to have their debt forgiven after ten years.  Director Cordray discussed a new CFPB report that highlights complaints concerning practices of student loan servicers that may hamper the program’s intentions.  The report focused on analyzing a year of complaints from borrowers, which reflected a delay or denial of promised debt relief.  Primarily, the complaints included incorrect, untimely, or inadequate information from servicers about borrowers’ eligibility for loan forgiveness.  Other complaints from borrowers included slow payment processing and receiving inaccurate denial letters that can lead to qualified payments being miscounted or not properly credited.
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The CFPB’s updated exam procedures attempt to guide “how examiners assess risks to consumers and review servicers’ compliance with the law when they administer this program,” seeking to guarantee stronger oversight of servicers’ administration of the program.  Further, the examiners will “scrutinize whether servicers are telling consumers what they need to do to qualify for loan forgiveness” and check “whether servicers accurately calculate the number of qualifying payments to make sure that borrowers get their full benefits.”  Cordray emphasized that “borrowers working in public service should not miss out on key consumer benefits because their student loan servicer failed to comply with the law.”  The updated guidelines counsel agency examiners to ensure that loan servicers are informing borrowers about their requirements and obligations for loan forgiveness.  Additionally, examiners ought to confirm that loan servicers accurately track the progress of borrowers and warn those that may be mistaken as to their pathway to loan forgiveness.

Alongside these updated exam procedures, the CFPB is conducting a campaign to make sure borrowers seeking to take advantage of the Public Service Loan Forgiveness program are fully aware of the tools available to ensure they can navigate the process and reap the benefits.  This campaign has a specific emphasis on awareness for first responders and teachers.

It will be important to continue watching the CFPB’s action and administration concerning this program, to gauge the effectiveness of these new guidelines and how it may impact the inner working of loan servicers.  Finally, how well the Public Service Loan Forgiveness program is perceived to be functioning could affect the survival of the program itself, given that the 2018 White House budget has suggested the elimination of the program altogether.