Late last month, the Revenue Based Finance Coalition (RBFC), a trade group of sales-based financing providers, filed a complaint in the U.S. District Court for the Southern District of Florida challenging the Consumer Financial Protection Bureau’s (CFPB or Bureau) final rule under § 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Final Rule). As discussed here, § 1071 amended the Equal Credit Opportunity Act (ECOA) to impose significant data collection and reporting requirements on small business creditors. Specifically, RBFC objects to the CFPB’s characterization of sales-based financing as a form of credit subject to the Final Rule’s collection and reporting requirements.
Sales-based financing is a transaction that is repaid by a recipient business as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales or revenue received by the business. According to the RBFC, sales-based financing does not come under the definition of “credit” under the ECOA. ECOA defines “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor.” RBFC contends that sales-based financing involves a substantially contemporaneous exchange of value — rights to a percentage of revenue generated by a business in exchange for a lump sum payment. Sales-based financing also generally imposes no absolute repayment obligation. The business’s obligation to pay is contingent on actual revenue generated.
On this basis, RBFC argues that the Final Rule violates the Administrative Procedure Act (APA) because the CFPB: (i) acted in excess of its authority by expanding the Final Rule to cover sales-based financing when the Bureau’s § 1071 rulemaking authority extends to regulating only “credit;” (ii) acted arbitrarily and capriciously by considering impermissible considerations like creating a “level playing field” to the benefit of sales-based financing providers’ competitors and failing to consider and respond to adversely affected parties, like RBFC, in the notice and comment period; and (iii) promulgating the Final Rule without considering the unique benefits that sales-based financing brings to the small business financing market along with the immense costs of subjecting sales-based financing transactions to the Final Rule’s collection and reporting requirements.
RBFC also alleges that the Final Rule should be invalidated because the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution, a claim that is currently pending before the U.S. Supreme Court in Community Financial Services Association v CFPB (CFSA case). The Supreme Court is expected to decide the CFSA case during the first half of 2024.