Financing

Regulators say loans to franchisees, even by franchisors, are subject to federal credit rules

The Consumer Financial Protection Bureau said that any entity that provides loans to franchises could be sued for discrimination and is subject to Dodd-Frank rules on data reporting.
franchise rules
Franchising is under increasing regulatory scrutiny amid various scandals. / Photograph: Shutterstock.

Any entity providing loans to franchisees—including franchisors themselves—is subject to federal rules protecting borrowers from discrimination in credit decisions, the Consumer Financial Protection Bureau said in a three-page report this week.

The clarification also would give franchisees the right to sue those creditors in certain instances of perceived discrimination or, perhaps, if the lender provided misleading information. Lenders who make more than 100 such loans would also be subject to data reporting rules governing banks and other financial institutions. Franchisors could be subject to discrimination rules, but not the data reporting requirement, according to the CFPB's report.

The report came after a request from U.S. Sen. Catherine Cortez Masto, who in April asked CFPB Director Rohit Chopra for clarification on whether credit provided to franchisees would be subject to the rules, which were put in place by the 2010 Dodd-Frank Wall Street Reform Act.

“It is our responsibility to keep consumers and small business owners safe from deceptive practices, and I’m pleased to see Director Chopra and the Consumer Financial Protection Bureau taking action to make sure these entrepreneurs are protected by consumer protection laws,” Cortez Masto said in a statement. “For years, I have highlighted unfair and abusive practices in this sector, and this step will make a big difference for small businesses across the country.”

The International Franchise Association, the trade group representing the franchise business model, called the agency’s actions “problematic.”

“As with any regulatory action, applying a one-size-fits-all approach to franchising could be problematic given the business model is used by a vast array of over 300 different industries,” Matthew Haller, IFA’s president and CEO, said in a statement sent to Restaurant Business. “Furthermore, the CFPB, like many other government agencies, has repeatedly exceeded the scope of its statutory authority, particularly without engaging industry stakeholders on the front end.”

The rules themselves would only govern situations in which loans are made to franchisees. Yet it highlights the growing push by federal regulators and some members of Congress to increase regulatory scrutiny over the franchise sector, which has seen its share of problems over the years.

That includes the downfall of the Quiznos sandwich chain, which left thousands of closed restaurants in its wake, and the collapse of the burger franchise Burgerim, whose founder convinced 1,500 to buy a franchise before he shut the doors and apparently fled the country.

Cortez Masto, for instance, is calling for more transparency and oversight in the sector. The U.S. Federal Trade Commission, which sued Burgerim over its practices last year, is also examining its rule governing franchising.

Franchises are a substantial business in the U.S., with some 733,000 establishments, 7.6 million jobs and $674 billion in economic output, according to the International Franchise Association.

The CFPB’s ruling would cover any third-party entity that provides loans to franchisees, meaning a business that provides an equipment loan to franchisees would be subject to discrimination rules and would be required to collect and report data. Franchisors would be exempt from the data reporting requirement if it made those equipment loans itself, but could be sued for discrimination or for providing misleading information in connection with the loan. 

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