The CFPB recently
published a letter clarifying the extent to which ECOA and Regulation B apply to franchise financing. The letter also examines how the Bureau’s small business lending rule (finalized in March and covered by InfoBytes
here) applies to franchise financing. The Bureau explained that franchisees generally obtain credit either directly from the franchisor or from a third-party finance company. ECOA and Regulation B, the Bureau said, generally apply to business credit (defined as “extensions of credit primarily for business or commercial (including agricultural) purposes,” with limited exclusions), as well as to other credit extended primarily for personal, family, and household use, and that, as such, creditors, including franchisors that provide financing to franchisees are subject to ECOA and Regulation B’s core prohibitions against discrimination. The small business lending rule also covers business credit, the Bureau said, commenting that entities providing credit to franchisees “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, unless they are subject to one of the narrow exclusions from coverage.”
The Bureau added that it also “anticipates that third-party entities providing credit to franchisees that meet the origination threshold for coverage will be required to collect and report data under the small business lending rule regardless of whether that company is affiliated with the franchisor.” A possible “trade credit” exemption may apply in certain circumstances where a franchisor directly provides credit to a franchisee (trade credit is defined under the small business lending rule “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.’”). However, even if the franchisor is covered by the trade credit exemption it still must comply with ECOA and Regulation B’s prohibitions against discrimination.
