U.S. Developments

California Proposes Regulations to Implement New Disclosure Requirements for Commercial Financing

Recently, the California Department of Business Oversight (“CA DBO”) issued proposed regulations to implement SB 1235, a 2018 law that, in certain situations, requires consumer-like disclosures for certain commercial financing transactions. The law has a few notable exemptions, including depository institutions, financings in excess of $500,000, transactions secured by real property, and closed-end loans that involve a principal of less than $5,000. The CA DBO is accepting public comment on the proposed regulations until September 9, 2019.

Once the regulations are adopted, the 2018 law will take effect. The 2018 law requires that regulations be promulgated to create disclosures to commercial financing transactions under the California Financing Law that include the following:

  • Total amount of funds provided;
  • Total dollar cost of financing;
  • Term or estimated term;
  • Method, frequency, and amount of payments;
  • Description of prepayment policies; and
  • Total cost of the financing expressed as an annualized rate.

The proposed regulations would implement the 2018 law and contain provisions that would do the following:

  • Establish general and detailed formatting and content requirements for the disclosures specific to the commercial lending industry (i.e., there are specific formatting and content requirements for different kinds of commercial lending such as closed-end and open-end loans, factoring arrangements, lease financing).
  • Require that signatures be obtained to confirm delivery of disclosures.
  • Describe how APR and finance charges are calculated.
  • Describe how to calculate loan amounts for purposes of exemptions from the disclosure requirement (e.g., above $500,000 or closed-end loans of less than $5,000).
  • Provide model disclosures for asset-based lending, closed-end loans, factoring, lease financing, sales-based financing, and open-end credit plans.

Credit Unions Get Initial Approval to Bank Hemp Producers

This week, the National Credit Union Administration (“NCUA”) issued interim guidance for credit unions regarding hemp, giving credit unions the green light to provide banking services to companies in the hemp industry. The NCUA’s interim guidance warns credit unions that they must continue to be aware of possible money laundering and suspicious activity, along with a warning that state laws applicable to the hemp industry vary widely and could change in the future. The move comes in the wake of the legalization of hemp in the 2018 Farm Bill, with the U.S. Department of Agriculture still working on finalizing regulations and guidelines to implement the new legalization. The NCUA’s guidance will be updated to reflect those regulations and guidelines once they are finalized.

HUD Proposes Revisions to Disparate Impact Rule

The U.S. Department of Housing and Urban Development (“HUD”) released proposed revisions to its disparate impact rule. The proposed rule follows the HUD’s June 2018 advanced notice of proposed rulemaking, and would revise its 2013 rule, which established that HUD or a private plaintiff could establish liability under the Fair Housing Act (“FHA”) pursuant to a disparate impact claim. A disparate impact claim alleges that a creditor’s practices have had a disproportionately negative effect on a protected group, even if the practices are facially neutral and not intended to discriminate. The HUD is seeking comment on the proposed rule, with comments due by October 18, 2019.

The changes reflect an effort to bring the rule in line with a 2015 U.S. Supreme Court ruling, Texas Department of Housing and Community Affairs v Inclusive Communities Project, Inc., which called into question the 2013 rule. In Inclusive Communities, the Supreme Court held that disparate impact claims may be brought under the FHA, but that such claims, if based on a statistical disparity, would “fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” Further, the Court required that there be a “robust causality requirement,” so a racial difference in the resulting credit or housing availability, standing alone, would not establish a prima facie case of disparate impact. The Inclusive Communities decision, therefore, permitted disparate impact claims under the FHA, but also significantly limited them by requiring a greater and more narrowly tailored showing of discrimination. Additionally, this case had a ripple effect, leading the Consumer Financial Protection Bureau to call into question whether disparate impact claims could be brought under the Equal Credit Protection Act even though the Inclusive Communities decision did not address that issue.

Under the proposed rule, plaintiffs would be required to plead five elements to establish a disparate impact claim. These elements include the following: that the policy or practice in question is arbitrary, artificial, and unnecessary; that there is a robust causal link between the policy or practice in question and the alleged disparate impact; an explanation as to how the policy or practice in question has created harm on a protected class; that the disparity is significant; and that the injury is directly caused by the policy or practice in question. The proposed rule would establish that the remedy for a disparate impact should be to eliminate or reform the discriminatory practice, and not result in punitive or exemplary damages.

The revisions would credit several methods for defendants to rebut claims, including a showing that the policy or practice is required by law, regulation, or court order and that the policy or practice in question is based on a sound algorithmic model. If the alleged disparate impact is attributable to an algorithm, the defendant can rebut these claims by:

  • Identifying material factors in the algorithmic model and demonstrating how each factor could not be the cause of the disparate impact and advances a valid objective;
  • Showing that a third party produces, maintains, or distributes the industry standard, the inputs and methods in the model are not determined by the defendant and the defendant is using the model as intended by the third party; and
  • Showing that the model has been subjected to critical review and has been validated by an objective and unbiased neutral third party which has analyzed the model and found the model was empirically derived, demonstrably and statistically sound, and none of the factors in the model are not proxies for protected classes under the FHA.

CSBS Launches New Tools to help Fintechs

The Conference of State Banking Supervisors (“CSBS”), a group of financial regulators from all 50 states, the District of Columbia, Puerto Rico, Guam, American Samoa, and the U.S. Virgin Islands, has launched a number of tools aimed at helping non-bank fintech companies navigate applicable state regulations. The tools include a web portal containing state agency guidance for non-bank fintechs, an interactive map of agent-of-the-payee exemptions for money transmission laws, and a cybersecurity resource center for banks and non-bank fintechs.

The tools are part of the CSBS’s Vision 2020, a set of initiatives aimed at helping non-bank fintechs deal with state licensing and supervision requirements. Other Vision 2020 initiatives include the development of a potential model payments law that could harmonize disparate existing state regulations.