Key points

• Private credit funds and insurers increasingly finance consumer and retail receivables directly, through forward-flow agreements, warehouse facilities and partnerships with retailers and fintech originators.
• The regulatory perimeter follows the loan, not the lender: licensing, disclosure, fair lending and servicing rules can apply to a fund's counterparties and, in some structures, to the fund itself.
• Where a bank originates and a third party buys the loans or the economics, courts and regulators ask who holds the predominant economic interest, often called the true lender question.
• Buy now, pay later and retailer-branded credit raise distinct disclosure and credit reporting questions.
• Documentation should address data rights, repurchase for compliance breaches, and what happens if a platform partner fails.

Introduction

Banks have pulled back from parts of consumer and retail lending while borrowers and merchants still want flexible credit at the point of sale. Private credit funds, with long-dated capital and an appetite for granular, short-duration assets, have stepped into the gap. Retailers, consumer brands and fintech platforms now have a wider set of financing counterparties than they did even two years ago. This note describes the main structures and the legal issues that decide whether they work.

How the structures work

The most common arrangement is a forward-flow agreement in which a fund commits to buy eligible receivables from an originator over a period, subject to credit criteria. The originator may be a bank, a licensed non-bank lender or a retailer's financing partner. Receivables are often funded through a warehouse facility and later refinanced through an asset-backed securitization.

Variants include direct lending to the originator secured by a receivables pool, risk-sharing arrangements in which the fund bears a first-loss tranche, and programs in which a retailer's installment plan is sold to a fund while the retailer keeps the customer relationship. In each case the fund wants predictable cash flows and reliable data, and the originator wants funding that does not depend on one balance sheet.

The regulatory perimeter

Consumer credit in the United States is regulated at federal and state levels. The Truth in Lending Act and Regulation Z set disclosure and billing rules. The Equal Credit Opportunity Act and Regulation B prohibit discrimination in credit decisions, which matters where underwriting uses machine-learning models. The Fair Credit Reporting Act governs the use and furnishing of credit information. State laws add licensing requirements for lenders and purchasers of consumer loans, interest-rate limits and collection rules, and they vary significantly.

A fund that purchases consumer loans may itself need a state license or an exemption. Funds should confirm early whether purchasing, holding or servicing is licensed activity where borrowers live, and should expect diligence on the originator's compliance management system, complaint handling and marketing.

The true lender question

Some programs rely on a bank's ability to export its home-state interest rates and then transfer the loans, or their economics, to non-bank investors. The question is whether the bank or the investor is the true lender, and so whether state caps apply. Courts have looked at which party funds the loan, bears the credit risk, controls underwriting and holds the predominant economic interest. Structures in which the bank keeps a meaningful share, or in which pricing sits well within state limits, reduce exposure. The law is unsettled and several states have taken active positions, so each program deserves a state-by-state view.

Buy now, pay later and retailer credit

Short-term installment products offered at checkout have grown quickly. Regulators in the United States and the United Kingdom have focused on whether disclosures are clear, whether products are marketed as free when fees can arise, how returns and refunds interact with the loan, and whether payment history is reported. The United Kingdom has legislated to bring deferred payment credit within Financial Conduct Authority regulation. Retailers that promote these products carry reputational and sometimes legal responsibility for how they are described, so funds financing them should review merchant-facing materials as well as the loan agreement.

Key terms to negotiate

• Eligibility and repurchase. Receivables that breach compliance representations, such as a defective disclosure or unlicensed origination, should be repurchased at par, and the repurchase counterparty needs the credit to honor that obligation.
• Data and model rights. The fund should have loan-level data, the ability to audit underwriting models and rights to the data if the platform fails.
• Servicing and backup servicing. Collections practices carry legal risk, and a pre-agreed backup servicer reduces disruption.
• Triggers. Triggers tied to delinquency, merchant concentration or the originator's compliance standing let the fund stop funding.
• Regulatory change. Provisions allowing repricing or exit if a law or enforcement position changes protect both sides.

What retailers and funds should do now

Retailers weighing a financing partner should ask who is the lender of record, who bears compliance responsibility, and what happens to customers if the partner stops funding. Funds should map the perimeter state by state, test the originator's complaint and exception data, and avoid reliance on a single bank or platform. Both should expect scrutiny from state attorneys general and consumer finance regulators on fees, disclosure and servicing.

Corvane Ryle's banking and private credit lawyers, including Benedikt Sauerland and Naomi Feldspar, advise lenders, funds, retailers and fintech platforms on these structures together with our consumer protection and retail and consumer products teams.