In late December 2020, New York Governor Andrew Cuomo signed S.B. 5470 into law, which will impose a range of Truth in Lending Act-like disclosure requirements on providers of commercial financing in amounts of $500,000 or less. The law will have a significant impact on providers beyond traditional commercial lenders, as it broadly defines “commercial financing” to include the providers, and third-party solicitors, of sales-based financing, closed-end commercial financing, open-end commercial financing, factoring transactions, and other forms of commercial financing as the New York Department of Financial Services may provide. S.B. 5470 will affect a broad range of nonbank and fintech companies offering smaller balance commercial financing, following in the footsteps of a similar law enacted in California in 2018.

Read more in Mayer Brown’s Legal Update.

New California legislation will impose disclosure requirements, similar to those under the federal Truth in Lending Act, on commercial-purpose loans of $500,000 or less, including arrangements such as factoring, merchant cash advances, and certain assignments of accounts and receivables. The disclosures will generally include the total cost of the financing, expressed both as a dollar amount and an annualized rate, with variations applicable to different types of transactions. While the requirements will not apply to depository institutions, they will apply to certain bank partner arrangements, such as a non-depository institution that enters into a written agreement with a depository institution to arrange for commercial financing via an online lending platform. The requirements will not, however, apply to transactions secured by real property, among other exemptions. The law becomes effective January 1, 2019, but providers are not required to comply with the disclosure requirements until final regulations become effective.

Read about the new California requirements in Mayer Brown’s latest Legal Update.

Mere days before Halloween, California enacted California Senate Bill 666, imposing a set of restrictions on the fees that commercial financers may charge their small business customers. Signed by the governor on October 13, the legislation marks an escalation of the state’s regulation of commercial financing. What began as a disclosure-based regime with California’s broad 2018 commercial finance disclosure law (the “CFDL”) has developed into the direct regulation of commercial financing business practices with the affirmative prohibition of charging certain fees to “small businesses.” SB 666 closely follows an August 2023 rulemaking by the California Department of Financial Protection and Innovation (“DFPI”) targeting unfair, deceptive, or abusive acts or practices (“UDAAPs”) in commercial financing and requiring commercial financers to submit annual reports of their activities to the state.

Read more in this Mayer Brown Legal Update.

In explaining its view of the pleading standards in a disparate treatment discrimination case, the Consumer Financial Protection Bureau (“CFPB”) shed light on its interpretation of the Truth in Lending Act’s (“TILA’s”) appraisal independence standards, providing that a lender is not required to rely on a biased appraisal.

The underlying case relates to a claim that an appraiser undervalued a home because of the homeowners’ race, and that the lender knew of the undervaluation. In mid-March, the CFPB and the Department of Justice filed a Statement of Interest in the case, addressing the applicability of nondiscrimination principles in the property valuation context. In doing so, the agencies also addressed the federal requirements for appraiser independence.

TILA and its Regulation Z prohibit lenders or other covered persons from coercing, instructing, or inducing an appraiser to cause the appraised value to be based on any factor other than the appraiser’s independent judgment. They also prohibit lenders from suborning any mischaracterization of a property’s appraised value or materially altering a property valuation. A lender that reasonably believes an appraiser has materially violated ethical or professional requirements must report the appraiser to the appropriate state agency. In addition, to comply with Regulation Z’s conflict-of-interest requirements, mortgage lenders generally ensure that the appraiser reports to a person who is not part of the lenders’ loan production function, and that no person in that function is involved in selecting the appraiser. Agencies and investors may impose additional requirements or prohibitions addressing appraisal independence.

The regulations expressly permit a lender to ask the appraiser to consider additional information, provide further detail or explanation, or correct errors. However, lenders must walk a fine line – while they may ask for additional information, explanations, or corrections, they are understandably careful in questioning an appraiser’s conclusions and are limited in their ability to obtain a second appraisal. (For instance, Fannie Mae generally prohibits its lenders from obtaining a second appraisal without a reasonable and documented basis for believing that the first appraisal is flawed.)

Continue Reading CFPB Addresses the Fine Lines of Appraisal Independence

Small business lenders hoping for federal intervention will be disappointed to learn that the Consumer Financial Protection Bureau (CFPB) has reached a preliminary determination that New York’s new commercial financing disclosure law is not preempted by the federal Truth in Lending Act (TILA). The CFPB’s public notice indicates that it initially takes the same view on similar laws recently enacted in California, Utah and Virginia—that these state laws are not preempted by TILA because they do not apply to the same types of transactions regulated by TILA.

Mayer Brown’s Legal Update provides background and further detail on the CFPB’s initial determination and notes next steps for industry.

The New York Department of Financial Services (NYDFS) has issued “pre-proposed” rules under New York’s commercial financing disclosure law that was enacted at the end of 2020. The pre-proposed rules are 45 pages long and were posted on the NYDFS website on September 21. Comments on the pre-proposed rules are due by October 1. There will be a longer comment period once a proposed rule is published in the State Register. The NYDFS aims to finalize the rules before the law takes effect on January 1, 2022.

The pre-proposed rules give the state’s commercial financing disclosure law, colloquially known as the “NY TILA,” the formal name of the “Commercial Finance Disclosure Law (CFDL).” The pre-proposed rules also define terms and provide detailed requirements for the content and formatting of the CFDL-required disclosures. The proposed definitions borrow heavily from, but do not exactly mirror, those under the California Department of Financial Protection and Innovation’s (DPFI) proposed rules to implement its own commercial financing disclosure law. The lack of uniformity between the two states’ regulations will complicate compliance for commercial financers subject to both laws. Where the NYDFS rules borrow most substantially from the California rules, the NYDFS tends to draw from the prior version of those rules, before the DFPI’s second round of modifications issued August 9, 2021. This raises the question of whether the NYDFS will incorporate California’s latest modifications when the NYDFS issues the next version of its proposed rules. Continue Reading NYDFS Issues Pre-Proposed Rules to Implement New Commercial Financing Disclosure Law

On September 7, 2021, the CFPB announced that it had entered into a consent order with an education finance nonprofit (“nonprofit”) in connection with the nonprofit’s offering of income share agreements (“ISAs”). In the consent order, the CFPB asserted that ISAs are extensions of credit covered by the Consumer Financial Protection Act and the Truth in Lending Act (“TILA”) as well as TILA’s requirements with respect to “private education loans.” Because the CFPB asserts in the consent order that it views the nonprofit’s ISAs as credit, the CFPB takes the position that they are also subject to numerous other federal consumer financial protection laws that impose requirements and restrictions on student loan products. This consent order has significant implications for those in the ISA market, as it indicates how the CFPB views re-characterization for ISAs and similar products. Continue Reading CFPB Finds that Income Share Agreements are Credit Products

On November 30, 2020, the US Consumer Financial Protection Bureau (CFPB) issued its final Advisory Opinion Policy, along with two Advisory Opinions (AOs) addressing the applicability of the Truth in Lending Act (TILA) to certain earned wage access (EWA) programs and private education loans. The CFPB first proposed a pilot AO program in June 2020. In this Legal Update, we analyze the EWA AO, including: (1) the regulatory landscape for EWA programs prior to the AO; (2) application of TILA and consumer credit laws to EWA programs based on the AO; and (3) the practical implications of the AO on EWA programs more generally.

Read more in Mayer Brown’s Legal Update.

The agencies responsible for the securitization credit risk retention regulations and qualified residential mortgages (“QRMs”) are asking for public input as part of their periodic review of those requirements. Comments on the review are due by February 3, 2020.

Five years ago, in response to the Dodd-Frank Act, an interagency final rule provided that a securitizer of asset-backed securities (“ABS”) must retain not less than five percent of the credit risk of the assets collateralizing the securities. Sponsors of securitizations that issue ABS interests must retain either an eligible horizontal residual interest, vertical interest, or a combination of both. The Act and the rule establish several exemptions from that requirement, including for ABS collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages,” as defined in the rule.

The Act provides that the definition of QRM can be no broader than the definition of a “qualified mortgage” (“QM”), as that term is defined under the Truth in Lending Act (“TILA”) and applicable regulations. QMs are a set of residential mortgage loans deemed to comply with the requirement for creditors to determine a borrower’s ability to repay. The Office of the Comptroller of the Currency (“OCC”), Federal Reserve Board, Federal Deposit Insurance Corporation (“FDIC”), Securities and Exchange Commission (“SEC”), Federal Housing Finance Agency (“FHFA”), and Department of Housing and Urban Development (“HUD”) decided to define a QRM in full alignment with the definition of a QM. The agencies concluded that alignment was necessary to protect investors, enhance financial stability, preserve access to affordable credit, and facilitate compliance. Their rule also includes an exemption from risk retention for certain types of community-focused residential mortgages that are not eligible for QRM status but that also are exempt from the TILA ability-to-pay rules under the TILA. The credit risk retention requirements became effective for securitization transactions collateralized by residential mortgages in 2015, and for other transactions in 2016.

The agencies of the credit risk retention regulations committed to reviewing those regulations and the definition of QRM periodically, and in coordination with the CFPB’s statutorily mandated assessment of QM. Continue Reading Agencies to Review QRM / Securitization Credit Risk Retention Rule

Congress amended the Truth in Lending Act in May 2018 by directing the Consumer Finance Protection Bureau to prescribe ability-to-repay regulations with respect to Property Assessed Clean Energy (“PACE”) financing. PACE financing helps homeowners cover the costs of home improvements, which financing results in a tax assessment on the consumer’s property. Ability-to-repay regulations, which TILA and the CFPB currently impose in connection with most closed-end residential mortgage loans, would generally require a creditor to consider specific factors about a consumer’s finances, including income, assets, and debt obligations, and to verify the income and assets with reliable third-party documentation, prior to extending the financing.

On March 4, 2019, the CFPB issued an Advance Notice of Proposed Rulemaking (“ANPR”) seeking information regarding, and responses to specific questions related to, PACE financing.

Read more in Mayer Brown’s Legal Update.