The New Consumer Financial Protection Agency Could Spell Trouble for the Factoring Industry
As part of Dodd-Frank, a new federal agency was created: the Consumer Financial Protection Bureau (CFPB). The board of the American Factoring Association, notes that the CFPB, which is authorized to promulgate regulations relating to consumer protection, could deem crucial aspects of factoring transactions as being “abusive” and impermissible.
In response to the bursting of the housing bubble, the economic recession and the unprecedented efforts to [regulate] the financial system, Congress passed, and the President signed, the Dodd-Frank Wall Street and Consumer Protection Reform Act (Dodd-Frank). In the name of greater transparency, accountability and prudential behavior by financial and non-financial institutions, Dodd-Frank put into place a structure that will dramatically increase the scope of statutory and regulatory requirements on these institutions.
As part of Dodd-Frank, a new federal agency was created, the Consumer Financial Protection Bureau (CFPB). Though housed in the Federal Reserve, in reality this agency is functionally independent with virtually no checks and balances. Under its current makeup, the CFPB would be headed by a single individual, as opposed to having a commission form of governance, unlike almost all other federal financial regulatory bodies. The CFPB is authorized to promulgate regulations relating to consumer protection in the realm of financial products.
While under prior law federal regulators could curb products deemed unfair or deceptive, Dodd-Frank gives the CFPB the authority to limit or bar products or practices the CFPB deems “abusive.” The Federal Reserve had rarely used its authority relating to practices deemed unfair or deceptive, but most observers believe the CFPB is much more likely to be active in this area. Beyond that, the biggest concern is that no one knows how “abusive” will be defined and applied. With the unfair or deceptive standard, there is a large body of case law to provide guidance. With this new “abusive” standard, the CFPB will have the unfettered ability to extend its reach through regulation and enforcement actions.
After passage of Dodd-Frank, the President appointed Professor Elizabeth Warren, the originator of the concept of the CFPB, to set up the new agency. Subsequently, the President named former Ohio Attorney General Richard Cordray as his nominee for this position. Cordray had his nomination hearing before the Senate Banking Committee on September 6. Over 40 Senate members have written to President Obama stating that they will not confirm Cordray or any other nominee without a restructuring of the Bureau. Senator Richard Shelby of Alabama, the Ranking Republican on the Senate Banking Committee, has led this effort stating that he would oppose confirmation of any nominee without three changes to the CFPB: 1.) the creation of a commission form of governance for the Bureau; 2.) putting the Bureau under the Congressional appropriations process; and 3.) providing bank regulators with more effective ability to control CFPB regulations on safety and soundness grounds. The CFPB website can be found at www.consumerfinance.gov.
Although Senator Shelby and his colleagues appear to be able to block Richard Cordray from being confirmed by the Senate for now, the CFPB and its core regulatory authorities are very likely to survive intact in the view of Arnie Havens and Palmer Hamilton of Jones Walker, who represent the American Factoring Association (AFA) in Washington, D.C. (see attached bios).
The CFPB could try to use its authority to extend the agency’s reach to the factoring world. As a very senior Congressional staffer observed to an AFA board member, the CFPB might well someday declare that ultimate use of business proceeds was of a “consumer” nature, and, thus, factoring transactions that produce proceeds that are used by individuals for personal purposes would be governed by the CFPB regulations and enforcement.
For example, the CFPB could deem crucial aspects of factoring transactions as being “abusive” and impermissible. In fact, during AFA meetings over the last 18 months, certain members of Congress and Congressional staffers have expressed surprise and concern that factoring is not “regulated” at the federal level. It is such a reaction that indicates the need for AFA and its ongoing outreach in Washington.
Thus, one of the principal goals of the AFA has been and remains the education of both members of Congress and Congressional staffers, as well as the Executive Branch, about the factoring industry and its vital role in serving both small business in general and startup companies in particular. In this regard, the AFA wants to be sure they understand the current competitive nature of the factoring industry. With this in mind, Havens and Hamilton developed an outreach program for the AFA focused on the House and Senate Banking Committees, the Senate Small Business Committee, selected leadership staff in the Congress and senior officials in the Executive Branch. This effort has led to meetings with 36 Congressional offices, including meetings, with Senators Shelby, John Thune (a member of the Senate Republican leadership), and Mary Landrieu (chairman of the Senate Small Business Committee), as well as a number of key members of the House, including the chairman of the House Financial Institutions Subcommittee, Congressman Shelley Moore Capito. Additionally, the AFA has had meetings with senior bank regulatory officials and senior officials of the Department of the Treasury to discuss the factoring industry and the strong financial record the industry enjoys. (Attached is a list of the AFA meetings in the last year and a half.).
In addition to using these meetings as an educational opportunity, we are focused on developing relationships and support for the factoring industry. The importance of building and maintaining these relationships is critical to assure that our message is understood and embraced.
We have made important progress to date. We successfully avoided any specific language being included in the Dodd-Frank Act that would have been harmful to factors, and we have begun to build relationships that are important both in the short and long term, particularly given the regulatory authority and reach provided to the regulatory agencies, including the CFPB. Building additional relationships and maintaining and solidifying those that we have developed remain critical for the industry.
This article was prepared by the AFA Board of Directors, which consists of: President: Allen Frederic, Republic Business Credit; Vice President: Bob Zadek, Esq., Buchalter Nemer; Chief Financial Officer: Brian Van Nevel, SPECTRUM Commercial Services Corporation; and Secretary: Diana Clover, D&S Factors. Other board members include: Ivan Baker, United Capital Funding Corporation; Bert Goldberg, International Factoring Association; Cole Harmonson, Far West Capital; Leigh Lones, Bibby Financial Services, Inc.; Gage Price, MP Star Financial; Kwesi Rogers, Federal National Payables, Inc.; Jeff Rose, National Bankers Trust Corporation; Dave Tull, Crestmark Bank; and Debra Wilson, Vertex Financial, Ltd.