Adding New Products Adds New Legal Concerns
by: Robert Cook, Kate Fisher and Chris Chamness, Hudson Cook, LLP
Traditional merchant cash advance companies are expanding their product portfolios to offer more choices to their customers. As business models change, companies need to be aware that new legal requirements can arise. This article examines one federal law that applies when a merchant cash advance company moves away from traditional merchant cash advances and begins to offer small business loans.
The federal Equal Credit Opportunity Act is familiar to any lender that offers consumer loans. But, both the ECOA and its implementing regulations (Regulation B) also apply to commercial purpose loans. The rules are slightly different for commercial versus consumer credit, but penalties for violations are the same. These can include punitive damages of up to $10,000 in an individual action or up to $500,000 in a class action, plus attorneys’ fees. For commercial transactions, the ECOA can be enforced by the Federal Trade Commission as well as merchants that have been harmed by a lender’s actions.
The primary purpose of the ECOA is to prohibit a lender from discriminating on a prohibited basis, including: race, color, religion, national origin, sex, marital status or age (provided the applicant has the capacity to enter into a legally binding contract); because part or all of an applicant’s income derives from a public assistance program; or because the applicant previously exercised in good faith any right under the Consumer Credit Protection Act, which includes the ECOA.
We assume no funding provider that relies on daily repayments (a “daily funder”) intentionally discriminates. (Whether you can get in hot water for unintentional discrimination is the subject for another article.) However, the ECOA also imposes paperwork requirements on lenders. For a daily funder that is offering a new commercial loan product, it is easy to overlook these requirements.
The ECOA and Regulation B require a lender to tell an applicant when the lender approves or denies an application, or makes a counter offer. Notification requirements for consumer credit are very detailed, and when consumer credit is denied a lender must send a written “adverse action notice.”
Fortunately, the less complex rules apply to business purpose credit. Regulation B allows a lender that takes adverse action on a business credit application to provide the notification orally. Regulation B further provides different procedures of notification based on the revenues of the business applicant. One standard applies to businesses with revenues of $1 million a year or less. Another less formal standard applies to businesses with revenues of more than $1 million.
Applicants with revenues of $1 million of less: A lender must communicate a credit decision within 30 days of receiving a completed application. The lender can provide the notification of the action taken (approval, denial or counteroffer) orally. However, the oral notification also must contain the information that appears in the second paragraph of the notice below. Business lenders have the option to provide this additional information in written form at the time of application. In this case, the lender must provide the additional information in a form that can be retained by the applicant. A notice such as the following complies with the ECOA:
If we take adverse action on your application for credit, you have the right to a statement of specific reasons as to why we took such adverse action within 30 days if you request the statement within 60 days of our notification. You may contact [the name, address, and telephone number of the lender] to obtain the statement of reasons.
The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The Federal Trade Commission, Equal Credit Opportunity, Washington, DC 20580 administers our compliance with the Equal Credit Opportunity Act.
Of course, if an applicant asks for a statement of why the application was denied, be prepared to provide one that complies with the requirements of the ECOA and Regulation B.
Applicants with revenues of more than $1 million: A lender does not have a set timeframe in which to notify larger applicants of the action taken. The lender just has to inform the applicant of the lender’s decision within a “reasonable time.” The lender does not have to provide a written notice with the application, but if the applicant requests, must provide a written statement of the reasons for any adverse action taken and a statement similar to the second paragraph of the notice above. Alternatively, a lender can follow the rules that apply to smaller applicants for all business loan applicants.
There is an argument that Regulation B permits a daily funder to follow these more lenient requirements for any applicant regardless of size, but the safe approach is to follow the rules for applicants with lower revenues.
Takeaways: (1) Include a notice such as the one above on your application or on a separate form, and provide a copy to the applicant. (2) Have procedures to ensure that applicants are promptly notified of your decision. (3) Be ready to respond in writing if an applicant requests a statement of reasons for a denial. ———-
Robert Cook is a partner in the Maryland office of Hudson Cook, LLP. Robert can be reached at 410-865-5401 or by email at rcook@hudco.com. Kate Fisher is an associate in the Maryland office of Hudson Cook, LLP. Kate can be reached at 410.782.2356 or by email at kfisher@hudco.com. Chris Chamness also is an associate in the Maryland office of Hudson Cook, LLP. Chris can be reached at 410.782.2321 or by email at cchamness@hudco.com.
