FTC Staff Comment to the CFPB, Regarding Regulation B, the Implementing Regulation of the Equal Credit Opportunity Act

CFPB Request for Information on Regulation B
(Link to FRN)
I. 	Introduction
The staff of the Federal Trade Commission (“FTC” or “Commission”)1 appreciates the
opportunity to provide information to the Consumer Financial Protection Bureau (“CFPB”)
regarding Regulation B, 12 C.F.R. §§ 202, 1002, the implementing regulation of the Equal Credit
Opportunity Act (“ECOA”), 15 U.S.C. § 1691. ECOA and Regulation B make it unlawful to
discriminate against applicants for credit on the basis of race, national origin, sex, marital status,
age, or other prohibited factors.
The Commission has wide-ranging responsibilities regarding consumer financial issues, and
has enforced ECOA’s and Regulation B’s provisions against auto dealers, subprime lenders, and
non-mortgage creditors.2 Recently, the FTC brought an action against an auto dealership and its
manager alleging that the defendants violated ECOA and Regulation B by discriminating against
African-American and Hispanic consumers who financed vehicle purchases.3 According to the
complaint, defendants charged higher markups for financing on a prohibited basis,
approximately $163 and $211 more for African-American and Hispanic applicants, respectively.
The order requires defendants to pay $1.5 million to settle these charges.
Our agencies have formed a valuable partnership in rooting out unlawful practices and
coordinating to protect consumers, including against ECOA violations. The agencies recently
filed a joint amicus brief stating that the term “applicant” in the Equal Credit Opportunity Act
and Regulation B includes both those who are currently seeking credit and those who sought and
have now received credit.4 Through this type of advocacy work, our agencies have reminded
market participants that ECOA applies broadly in prohibiting discrimination with respect to any
aspect of a credit transaction, and not just, for example, to initial extensions of credit.
Below, we respond the CFPB’s questions concerning disparate impact and small business
lending.
1 	This comment expresses the views of staff of the FTC’s Bureau of Consumer Protection. It does
not necessarily represent the views of the Federal Trade Commission or of any individual Commissioner. The
Commission has, however, voted to authorize the submission of this comment.
2 	Pursuant to ECOA, a violation of ECOA is deemed to be a violation of the FTC Act. 15 U.S.C.
§ 1691c(c).
3 	Federal Trade Commission v. Liberty Chevrolet, Inc., et al., No. 20-3945 (S.D.N.Y. 2020).
4 	See Br. of Amici Curiae, Tewinkle v. Capital One, N.A., No. 20-2049 (9th Cir. Oct. 7, 2020),
available at https://www.ftc.gov/system/files/documents/amicus_briefs/bradley-tewinkle-v-capital-one-
na/tewinkle_amicus_brief.pdf.

II. 	Disparate Impact
The first question in the CFPB’s request for information concludes as follows: Should the
Bureau provide additional clarity regarding its approach to disparate impact analysis under
ECOA and/or Regulation B? If so, in what way(s)?
By way of background, when enacted in 1974, the ECOA prohibited discrimination on the
basis of marital status and sex.5 Two years later, when the Act was amended to add other
prohibited bases of discrimination, Congress noted that courts and enforcement agencies were to
analyze creditors’ policies and practices for disparate impact, also known as the “effects test.”6
Based on this legislative history, since 1977, Regulation B has explicitly incorporated
disparate impact,7 and the Commentary accompanying Regulation B explains that, “The act and
regulation may prohibit a creditor practice that is discriminatory in effect because it has a
disproportionately negative impact on a prohibited basis, even though the creditor has no intent
to discriminate and the practice appears neutral on its face, unless the creditor practice meets a
legitimate business need that cannot reasonably be achieved as well by means that are less
disparate in their impact.”8
Courts have considered this framework in cases involving disparate impact, examining
whether there is an outwardly neutral practice or policy that has caused a significantly adverse or
disproportionate impact on applicants of a particular type.9 Courts also have explained that, to
defeat a claim of disparate impact, defendants must show a legitimate business need for the
5 	The Supreme Court has held that the same language in the Civil Rights Act, prohibiting sex
discrimination, includes discrimination on the basis of homosexuality or transgender status. Compare Bostock v.
Clayton Cty., Georgia, 140 S. Ct. 1731, 207 L. Ed. 2d 218 (2020) (holding that language in Title VII of the Civil
Rights Act of 1964 barring an employer from “discriminat[ing] against any individual … because of such
individual’s … sex” also bars similar discrimination “for being homosexual or transgender”) with 15 U.S.C.
§ 1691(a) (ECOA prohibition of “discriminat[ion] against any applicant … on the basis of … sex”).
6 	S. REP. 94-589, 1976 U.S.C.C.A.N. 403, p. 406; House Report that accompanied H.R. 6516, No.
94-210, p. 5.
7 	12 C.F.R § 1002.6 (“[t]he legislative history of the Act indicates that the Congress intended an
“effects test” concept”); see also 42 Fed. Reg. 1242, 1246 (Jan. 6, 1977) (amending Regulation B to explicitly
incorporate the effects test, and stating that the rule “is not limited to intentional acts of discrimination,” but rather
“may be interpreted as prohibiting actions that have the effect of discriminating against applicants on a prohibited
basis”).
8 	12 C.F.R. pt. 1002, Supp. I, § 1002.6, ¶ 6(a)-2.
9 	See, e.g., Adhvaryu v. Bank of Am., N.A., No. 18-1836, 2019 WL 6499211, at *5 (C.D. Cal. Aug.
1, 2019); Duarte v. Quality Loan Serv. Corp., No. 217CV08014ODWPLA, 2018 WL 2121800, at *4 (C.D. Cal.
May 8, 2018); see also Hernandez v. Sutter W. Capital, No. C 09-03658 CRB, 2010 WL 3385046, at *4 (N.D. Cal.
Aug. 26, 2010) (denying motion to dismiss where complaint alleged neutral policies with discriminatory effects);
Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251, 255 (D. Mass. 2008) (same).

policy that cannot be met with a less discriminatory alternative.10 Using this framework, the
FTC and other federal law enforcement agencies have brought multiple cases alleging
discrimination, in a variety of different circumstances.11 Articulating a single approach to
disparate impact analysis that covers diverse sets of present and future facts and circumstances of
discrimination may be difficult and could risk being both over and under inclusive. Therefore, if
the CFPB provides additional detail, we urge it to include a reminder that such information is
intended to provide examples of how the agency might approach a fair lending matter, that
approaches may vary according to the facts and circumstances of each situation, and that such
information is not intended to bless any violations of ECOA and Regulation B.
III. 	Small Business Lending
The CFPB’s request for information also asks the following: In light of the Bureau’s
authority under ECOA/Regulation B, in what way(s) might it support efforts to meet the credit
needs of small businesses, particularly those that are minority-owned and women-owned?
As part of its law enforcement efforts, the FTC has brought a number of cases involving
small businesses; many recent actions involve deceptively advertised financing products and
unfair billing and collection practices. For example, in FTC v. Yellowstone Capital, the FTC’s
complaint includes allegations that the financing company made false claims regarding
collateral, personal guarantees, and financing amounts, and continued charging small business
consumers after they had already paid what they owed.12 In FTC v. RCG Advances, the FTC has
alleged that the defendants marketed deceptive financing products to small businesses and
unfairly used confessions of judgments, collection threats, and unauthorized withdrawals.13 In
FTC v. Fleetcor Technologies, the FTC has charged a company marketing fuel payment cards to
small businesses with misrepresenting savings and fees, and employing deceptive and unfair
billing practices.14 Most recently, the FTC settled another law enforcement action against a
company for allegedly falsely claiming an affiliation with the U.S. Small Business
Administration (SBA) and marketing itself to small businesses as an approved lender under
10 	See e.g., Ramirez v. GreenPoint Mortgage Funding, Inc., No. C08-0369-TEH, 2008 U.S. Dist.
LEXIS 62810, at *7-*11 (N.D. Cal. May 13, 2008).
11 	See e.g., Federal Trade Commission v. Liberty Chevrolet, Inc., et al., No. 20-3945 (S.D.N.Y.
2020); United States v. American Honda Finance Corp., No. 15-05264 (C.D. Cal. 2015); United States v. Ally
Financial, Inc., et al., No. 13-15180 (E.D. Mich. 2013); United States v. GFI Mortgage Bankers, Inc., No. 12-2502
(S.D.N.Y. 2012).
2020).
12 	Federal Trade Commission v. Yellowstone Capital, LLC, et al., No. 20-06023 (S.D.N.Y. Aug. 4,
13 	Federal Trade Commission v. RCG Advances, LLC, et al. No. 20-04432 (S.D.N.Y. June 10, 2020).
2019).
14 	Federal Trade Commission v. Fleetcor Technologies, Inc., et al., No. 19-05727 (N.D. Ga. Dec. 20,

SBA’s Paycheck Protection Program.15 In addition to these law enforcement actions, the FTC
along with the SBA sent eight warning letters to companies potentially misleading small
businesses seeking SBA loans as a result of the coronavirus pandemic.16
While the FTC has been able to bring many actions protecting small businesses, detecting
illegal conduct in this space can be challenging. Small business consumers do not always report
illegal conduct to law enforcement agencies, perhaps due to uncertainty over their rights and
recourse when something goes wrong. For example, after entering into a transaction with a
financing company, the small business consumer may later learn that the company does not view
its product as a credit product, and thus the consumer cannot be assured that protections under
credit statutes are available.
This is a particular concern with Merchant Cash Advances (“MCAs”). In exchange for a
lump sum cash infusion, small businesses typically agree to repay the MCA provider a larger
(often 50% more), fixed sum via daily installment payments over a period of several
months. MCA providers have taken the position that they are not offering credit because their
contracts often state that daily repayment amounts will fluctuate according to the businesses’
fluctuating daily revenues, and that there is no obligation to repay if the business fails.17 If in
practice, however, MCA companies are seeking repayment regardless of contract terms, small
business consumers are entering into credit arrangements without the certainty that the
protections offered under credit statutes would apply as they would if the consumer obtained
credit elsewhere. Indeed, many MCA arrangements come with other hallmarks of traditional
credit, including personal guarantees of payment, and the FTC has sued one MCA provider for
allegedly engaging in collection measures such as confessions of judgment against small
business consumers regardless of whether the business has failed, and regardless of the
limitations the provider’s contract claims to have placed on such measures.18
15 	Federal Trade Commission v. Ponte Investments, LLC, et al., No. 20-cv-00177 (D. RI Aug. 17,
2020).
16 	See FTC Press Release, FTC and SBA Warn Six Companies to Stop Potentially Misleading
Marketing Aimed at Small Businesses Seeking Coronavirus Relief Loans (June 24, 2020), https://www ftc.gov/news-
events/press-releases/2020/06/ftc-sba-warn-six-companies-stop-potentially-misleading-marketing; FTC Press
Release, FTC and SBA Warn Operator of SBA.com and Lead Generator Lendio to Stop Potentially Misleading
Coronavirus Relief Loan Marketing (May 18, 2020), https://www ftc.gov/news-events/press-releases/2020/05/ftc-
sba-warn-operator-sbacom-lead-generator-lendio-stop?utm_source=govdelivery.
17 	“Strictly Business” Forum, Staff Perspective 6 (Feb. 2020), available at
https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-
forum/strictly_business_forum_staff_perspective.pdf; Transcript at 40, Strictly Business: An FTC Forum on Small
Business Financing (May 8, 2019), available at https://www ftc.gov/system/files/documents/videos/strictly-
business-ftc-forum-small-business-financing/ftc_strictly_business_forum_on_small_business_
financing_transcript_5-8-19.pdf.
18 	Federal Trade Commission v. RCG Advances, LLC, et al., No. 20-4432 (S.D.N.Y. June 10, 2020).

Therefore, the FTC urges the CFPB to remind entities offering credit to small businesses that
credit statutes such as ECOA and Regulation B apply, and that whether a particular statute
applies depends on the actual facts and circumstances involved, and not solely on how one party
characterizes the transaction or the benefits it claims to provide.19 The CFPB’s rulemaking
under Dodd-Frank to require financial institutions to collect demographic data in connection with
small-business lending also will aid in enforcement efforts.20 Encouraging small businesses to
complain about misconduct, and referring complaints to the FTC and states, also would aid in
enforcement. Additionally, educating small business consumers about different products and
terms, and potential law violations—as the FTC has done21—could assist small businesses in
comparing products, lead them to look for and obtain less expensive financing, and encourage
them to report misconduct to aid in law enforcement.
***
We appreciate the opportunity to provide this information, and look forward to continued
collaboration on fair lending issues.
19 	For example, while some entities have claimed they are exempt from FTC jurisdiction by virtue of
their nonprofit status, courts routinely have looked beyond the label and examined whether the company is in fact
operating for the profit its members. See, e.g., Community Blood Bank of the Kansas City Area, Inc. v. FTC, 405
F.2d 1011, 1019 (8th Cir. 1969) (“mere form of incorporation does not put them outside the jurisdiction of the
Commission”); FTC v. Ameridebt, Inc., 343 F. Supp. 2d 451, 460 (D. Md. 2004) (“Although Ameridebt is
incorporated as a non-stock corporation with tax-exempt status, the Court finds this insufficient to insulate it from
the regulatory coverage of the FTC Act.”); see also, e.g., In re Daniel Chapter One, 2009 WL 5160000 at *12
(F.T.C. 2009) (“As recognized by the ALJ, however, ‘courts and the Commission look to the substance, rather than
the form, of incorporation in determining jurisdiction under the FTC Act.’”), aff’d, 405 Fed. Appx. 505 (D.C. Cir.
2010).
20 	See Small Business Advisory Review Panel for Consumer Financial Protection Bureau, Small
Business Lending Data Collection Rulemaking, Outline of Proposals Under Consideration and Alternatives
Considered (Sept. 15, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_outline-of-proposals-
under-consideration_2020-09.pdf.
21 	See, e.g., Andrew Smith, Protecting Small Businesses Seeking Financing During the Pandemic
(Aug. 3, 2020), https://www.ftc.gov/news-events/blogs/business-blog/2020/08/protecting-small-businesses-seeking-
financing-during; Lesley Fair, Looking for Small Business Financing? Read This First (June 10, 2020),
https://www.ftc.gov/news-events/blogs/business-blog/2020/06/looking-small-business-financing-read-first; Lesley
Fair, Small Business Financing: Considerations for Borrowers and Lenders During the Coronavirus Crisis (Apr. 15,
2020), https://www ftc.gov/news-events/blogs/business-blog/2020/04/small-business-financing-considerations-
borrowers-lenders; FTC Press Release, FTC Staff Perspective Recaps Small Business Financing Forum (Feb. 26,
2020), https://www ftc.gov/news-events/press-releases/2020/02/ftc-staff-perspective-recaps-small-business-
financing-forum.