The CFPB has published a document on its website that “communicates the extent to which the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B apply with respect to franchises seeking credit to finance their businesses.”  The document also addresses the application of the CFPB’s Section 1071 rule on small business lending to franchise financing.

With regard to ECOA and Regulation B coverage, the CFPB first observes that franchisees generally obtain credit either directly from the franchisor or from third party finance companies that are either independent of the franchisor or brokered by or affiliated with the franchisor.  It then states that because in either scenario the franchisee is being granted the right to defer payment for debts they incur, the financing would be “credit” under the ECOA and Regulation B.   The CFPB indicates that franchise financing would also constitute “business credit” subject to the ECOA and Regulation B, which is defined as  “extensions of credit primarily for business or commercial (including agricultural) purposes.”  As a result, the CFPB will treat creditors, including franchisors, providing financing to franchisees as subject to the ECOA and Regulation B prohibitions against discrimination.

With regard to coverage of the CFPB’s Section 1071 rule on small business lending, the CFPB indicates that entities providing credit to franchisees, whether or not affiliated with the franchisor, would generally be “financial institutions” subject to the rule’s data collection and reporting requirements to the same extent as any other provider of business credit.  The CFPB notes, however, that under certain circumstances, franchisors that directly provide credit to franchisees may be subject to the rule’s exception for “trade credit,” which the rule defines as a “financing arrangement wherein a business acquires goods or services from another business without making immediate payment in full to the business providing the goods or services.”  Thus, according to the CFPB, “if a franchisor— rather than a third party providing credit to franchisees—is providing goods and services (such as inventory, marketing rights, or licensing) and allowing the franchisee to repay it for those goods and services over time, that transaction could meet the definition of trade credit such that reporting would not be required under the rule.”  (We assume that the CFPB’s reference to “a third party providing credit to franchisees” is intended to refer to a third party providing credit to a franchisee that the franchisee uses to purchase goods and services from the franchisor or another provider.) 

The CFPB adds two caveats.  The first caveat is that even if a franchisor is providing trade credit to franchisees and thus is not required to collect and report data under the small business lending rule, it remains subject to the ECOA and Regulation B prohibitions against discrimination.  The second caveat is that to the extent a franchisor is providing credit that could be used for purposes other than the purchase of its own goods or services, such as general operating expenses, purchase of the premises in which the franchise will operate or cash register funds, that aspect of the transaction would not constitute trade credit and the franchisor would be required to collect and report data under the rule if it meets the rule’s origination threshold for coverage.

The “document” published by the CFPB appears to be yet another substitute for amendments to the Official Staff Commentaries.  We continue to encourage the CFPB to revive the Official Staff Commentaries as the appropriate method for interpreting its regulations rather than through the issuance of arbitrary “documents.”