Factoring companies in the United States are not regulated by any known government agency. Most often, these establishments are part of associations that come together to self-regulate their collective and individual activities.
For example, there are the International Factoring Association and the Commercial Finance Association that provide oversight, training, as well as tools to its members. Another valid Association is the Independent Factoring Standards Association.
Accounts receivable factoring has proven to be a valid means for small businesses to obtain cash at critical times when they need it.
Invoice factoring services cost more, especially when put in comparison with small business loans. Factoring companies work with higher-risk clients and make available more leeway to the companies they provide financing. They regularly provide their services to companies that are rejected by banks.
Just as was noted above, no government agency exists particularly to regulate or play the oversight role over businesses that offer such delicate services.
Rather, you will find industry associations that seem to support these businesses by ensuring adequate transparency since they want as little government regulation as possible. It simply means that invoice factoring services are not regulated in the same way banks are, though the possibility exists that this could change.
Rules and Regulations for Factoring Companies
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Licensing and Registration
Same as with many other businesses operating in the United States, these businesses are expected to obtain certain authorizations and licenses. Note that the exact licenses these businesses need will vary depending on their location in the United States; as such, you need to find out all that is required of you to make sure that you are within the right frame of the law.
The essence of this law is to regulate the amount of interest that can be charged on a loan. Usury laws focus on the practice of charging excessively high rates on loans by putting restrictions and caps on the maximum amount of interest that can be levied.
The primary intention of these laws is to protect consumers. Factoring transactions are usually not seen as loans, but some states might regulate the fees and discount rates that factoring companies can charge to ensure they do not exceed usury limits.
In a good number of places in the United States, these companies are legally expected to make available certain disclosures to the businesses they work with, and this will most often include fees, rates, and terms of the factoring arrangement.
Have it in mind that the primary objectives of these disclosures are to guarantee transparency and ensure that the interests of the businesses entering into factoring agreements are adequately protected.
Fair Debt Collection Practices Act (FDCPA)
This is a federal regulation that works to put a limit on the actions of third-party debt collectors who are looking to collect debts on behalf of another person or entity.
Have it in mind that factoring companies that collect payments from customers on behalf of the original company will have to comply with the provisions of the FDCPA. The law controls the ways that collectors can reach out to debtors along with the time of day and number of times that contact can be made.
In the United States, if this act is violated, the debtor has the right to sue the debt collection company in addition to the individual debt collector for damages and attorney fees.
Consumer Financial Protection Bureau (CFPB)
The Consumer Financial Protection Bureau is a federal agency that works to assist consumers by making available necessary educational materials and accepting complaints. It maintains oversight over banks, lenders, and large non-bank entities, including credit reporting agencies and debt collection companies.
Although their main focus is on consumer-related financial products, the CFPB might have some oversight and regulatory authority over certain aspects of factoring transactions, especially in a situation where consumer debt is involved.
Anti-Money Laundering (AML) Regulations
Factoring companies are expected to comply with AML rules in the US and maintain risk-based AML programs. The essence of these regulations is to prevent money laundering and terrorist financing by putting in place certain reporting and compliance requirements.
The main AML legislation in the US is the Bank Secrecy Act (BSA). Put in place in 1970, the BSA mandates reporting and record-keeping obligations on US financial institutions (including banks, brokerage firms, insurance companies, factoring companies, etc.) with the sole intention to prevent criminals from utilizing their products and services to launder the proceeds of their crime.
Just as was noted above, no government agency exists to regulate or play the oversight role over businesses that offer factoring services. Most often, these establishments are part of associations where they come together to self-regulate their collective and individual activities.
Nevertheless, it is always recommended that these businesses take time to research their location and the necessary requirements imposed by the government.