Federal and State Laws and Regulations for Online Commercial Lending
Online small business lenders are transforming the small business lending market by making it more cost efficient and convenient for small businesses to access the capital they need to acquire equipment, hire employees, and grow. These online small business lenders use advanced analytics and technology platforms to lend to small businesses.
Although online small business lending has received considerable attention in recent years as a beneficial and “new” technology, the business model, at a basic level, involves many of the same steps as traditional commercial lending – the marketing, underwriting, closing, servicing, securitization (in some cases), and collection of loans.
In this regard, contrary to frequent references to the “Wild West,” commercial online lending is subject to various federal and state laws and regulations. Depending on circumstances, such as the nature of the product, the lending model, and the states in which the loans are offered, these laws may include requirements related to fair lending, licensing, interest rates, credit reporting, and debt collection, among other requirements.[1]
For more information, please contact Scott Talbott, Senior Vice President, Government Relations, the Electronic Transactions Association at [email protected].
The following chart outlines federal and state laws relevant to commercial online small business lending.
| Law[2] | Summary |
| Section 5 of the Federal Trade Commission Act | Prohibits unfair or deceptive business acts or practices (UDAP). |
| Equal Credit Opportunity Act (Regulation B) | Prohibits creditors from discriminating against applicants on basis of race, color, religion, national origin, sex or marital status, or age, or the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law. Requires creditors to provide notice of the reasons for any adverse action taken on a credit application or existing credit account. |
| Fair Credit Reporting Act (Regulation V) | Requires a permissible purpose to obtain a consumer credit report, and requires persons to report information to credit bureaus accurately; imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in credit reports; requires creditors to develop and implement an identity theft prevention program. |
| Bank Secrecy Act as amended by the Patriot Act | Requires covered financial institutions to implement anti-money-laundering procedures and customer verification programs. |
| Economic Sanctions | Requires compliance with economic and trade sanctions against targeted countries, entities, and individuals. |
| Electronic Signatures in Global and National Commerce Act | Authorizes legally valid and enforceable agreements utilizing electronic records and signatures and requires businesses that want to use electronic records or signatures in consumer transactions to obtain the consumer’s affirmative consent to receive information electronically. |
| Investment Advisers Act of 1940 | Requires investment advisers to meet record-keeping, custodial, reporting, and other regulatory responsibilities. |
| Securities Act of 1933 (Public Offerings and Private Offerings) | Public Offerings: Online lenders engaged in the public offering of securities are required to register the securities offerings with the Securities and Exchange Commission, unless the securities or offerings are exempt from the registration requirements of the Securities Act of 1933.
Private Offerings: Online lenders may engage in private offerings of their securities, including offerings made in reliance on the safe harbors in Regulation D. |
| Securities Exchange Act of 1934 Risk Retention Rule | Securitizers or sponsors of asset-backed securitizations (ABS), including securitizers that are depository institutions, are generally required to retain an economic interest equal to at least 5 percent of the credit risk of the assets collateralizing the ABS issuance. |
| State Lending Laws | Some states have licensing requirements applicable to brokers, lenders, servicers, collectors and investors of commercial loans and leases, including equipment leases and loans, mezzanine loans, mortgage loans, and unsecured loans. |
| State UDAP Laws | Most states have “mini-FTC acts” that prohibit unfair or deceptive business acts or practices. |
| State Usury Laws | Govern the amount of interest that can be charged on a loan. |
| State Debt Collection Laws | Some states have debt collection laws applicable to commercial finance transactions. |
| Uniform Commercial Code | Comprehensive set of laws governing commercial transactions. |