Rep. Emanuel Cleaver II,  raised certain concerns  in a recent letter to the CFPB (the “Cleaver Letter”) , which can help us answer this question.  As we know, fintech lending is based upon the use of algorithms to determine whether to provide commercial credit to a small business.  Since the algorithms are created by individuals  looking at various factors, an argument arises  that these practices could create higher interest rates thus,  discriminatory lending practices.  The Cleaver Letter raised issues regarding collection of data which would  better help us to understand the issues.

Dodd Frank Section  1071, amended the Equal Credit  Opportunity Act (“ECOA”) to require financial institutions to collect and maintain certain data in connections with credit applications made by women or minority owned and small businesses.  Such data includes the race, sex and ethnicity of the principal owners of the business.  At this time, the rule-making by the CFPB to implement Section 1071 has not taken place.

Another question asked is whether the CFPB has engaged in supervisory activities over fintech small business lenders?  The CFPB has stated that it has authority regarding small business lending and would like information about data and models for collection of information in this area.  The CFPB has been accepting consumer complaints related to  loans obtained from marketplace lenders.

What is the difference between institutional commercial business loans and the fintech lender?

The institutional lender has a relationship with its borrower, meets the borrower in person, analyzes the credit, etc.  There is already a statute which addresses discrimination called the Community Reinvestment Act   (“CRA”).     CRA authorizes  the federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or mergers and acquisitions.

There has been a discussion in the marketplace about access to commercial credit so the CFPB may very well create rules to enforce Section 1071.

Save

The post CFPB And Commercial Credit appeared first on Alexson Law.

My firm specializes in transactions, regulations, strategic alliances and mixed collateral loan transactions in the real estate and financial services industries. We are positioned in a unique space in that my many years in big firm law and my expertise in complex mixed collateral transactions, mergers and acquisitions, private funds, fintech  and bank regulation allow us to provide consulting services and training  in-house for commercial and real estate lenders.

As a result of the 2016 election, there has been renewed interest in the Dodd-Frank Law and other laws regulating  banks and mortgage lenders.   Additionally,  private real estate funds organized under Regulation D are increasingly concerned about the requirements and changes affecting the prospectus disclosures.

The Consumer Financial Protection Bureau (“CFPB”), created under Dodd-Frank to protect consumers has been very active and we are now beginning to see cases where the power of the Agency, through its structure, is being litigated.  Dodd-Frank was intended to primarily protect consumers against certain residential lending practices, but some of the rules have already reached  the commercial real estate market, as the Credit Risk Retention Rule that went into effect, Dec. 24, 2016  also applies to securitization of commercial real estate loans.

Sponsors in the CMBS market are concerned about compliance with this rule.  Since the FDIC has seen a sharp drop in de novo bank applications, a new advisory handbook is now going through a comment period.  The OCC, has now decided that it will grant limited charters to fintech companies.  We do not know yet what the requirements will be and what compliance rules and procedures must be put into effect for each new entity.

We are also working with financial institutions, to provide education and training for the commercial, middle market and real estate lenders.  Although some lenders use certain form loan documents, the loan processors need to understand the documents, changes in the law must be updated into these documents and the lenders must learn to negotiate the loan documents, amendments and workouts to reduce the risk of lender liability claims by borrowers and guarantors.   Corporate training in a lender’s core business reduces risk and litigation costs  to the financial institution.

We consult with investment advisory firms and structure private real estate funds under Regulation D.  Our role can be that of consultant or strategic partner to in-house or outside counsel, accounting firms and investment advisors.   We work with real estate brokers, marketplace lenders,  community banks and finance lenders to create value between different lending platforms,  in compliance with state and federal law.   There are a number of new cases, one most recently in Ca. which address the structure of a strategic alliance between a marketplace and traditional lender.    We will be consulting with our clients on the new FDIC requirements to own and operate an FDIC insured financial institution and  the new OCC limited charters for fintech.  Our consulting and training will be essential to reducing costs and risk to your fund, institution, advisory or brokerage firm.

Save

Save

Save

Save

Save

Save

Save

Save

The post AlexsonLaw Services. How We Help You To Reduce Costs And Legal Risk appeared first on Alexson Law.

The Dodd-Frank statute also led to the adoption of Regulation 15G of the Securities and Exchange Act of 1934 (15 U.S.C.A. § 78o-11), which requires the sponsor in a CMBS securitization to retain a 5% stake in the credit risk of the underlying commercial real estate asset. The purported purpose of the regulations is to require CMBS lenders to stay involved in the process and the transaction. The rules were finalized on October 22, 2014, but become effective for CMBS transactions on December 24, 2016.

Under the standard risk retention options, the sponsor must retain certain securities or find B-piece investors as follows.

1. 5% of the face value of each class of securities issued in the CMBS transaction.
2. 5% of the fair value of all CMBS securities issued, but only of the most subordinate class of securities.
3. 5% of the value of transaction through a combination of either of the above options.
4. An alternative option allows the sponsor to find up to two B-piece investors willing to assume the risk retention obligation of the sponsor, subject to certain restrictions.

The practical implications are additional transaction costs in complying with this statute.  It could create more due diligence and a slower closing process for the commercial real estate lender.

Save

Save

Save

The post Commercial Real Estate And Dodd-Frank Risk Retention Rules appeared first on Alexson Law.

What’s Next?

Some experts in the financial services industry, believe that the new Trump administration may change or roll-back a portion of the Dodd-Frank legislation.

Financial institutions, mortgage companies, securitization sponsors, etc.  must continue to treat  current regulatory requirements as applicable to the business.  It is important to differentiate the commitment to protection of consumers in lending and other banking and financial services transactions from commercial lending.

I think we will continue to see a concern for the protection of consumers and the continuation of  legislation that provides these protections, both at the state and federal level.  However, the question becomes whether rules such as the “credit risk retention rule” which relate to both consumer and commercial securitizations, will be expanded beyond the current legislation.

Save

The post Dodd-Frank And Commercial Real Estate appeared first on Alexson Law.