Alston & Bird Consumer Finance Blog

State Law

States Impose Commercial Financing Disclosure Requirements

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What Happened:

In a little-noticed development, eight states have enacted legislation that requires specific disclosures for commercial non-real estate secured financing transactions.

Why is it Important:

Recently, California, Connecticut, Florida, Georgia, Kansas, New York, Utah, and Virginia have enacted laws that require or will require certain commercial financing “providers” to furnish burdensome consumer-like disclosures prior to the consummation of commercial financing transactions. Notably, all these state commercial loan disclosure requirements exempt banks.

California

The California disclosure requirements took effect on December 9, 2022, the effective date of final implementing regulations adopted by the California Department of Financial Protection and Innovation (“DFPI”).

Persons providing commercial financing (including small business loans and sales based financing) to small businesses “whose business is principally directed or managed from California” are required to provide borrowers with consumer-like disclosures, after the DFPI issued final regulations in June 2022 to implement SB 1235, otherwise known as the California Commercial Financing Disclosure Law (“CCFDL”). Commercial financing providers must disclose to the recipient at the time of extending a specific offer of commercial financing specified information relating to the transaction and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction.

Notably, the CCFDL does not apply to transactions greater than $500,000 or to real estate-secured commercial loans or financings. The California law otherwise applies to, among other things, commercial loans, certain commercial open-end plans, factoring, sales based financing, and commercial asset-based lending.  Under the California law “provider” is primarily limited to entities extending credit, such as lender/originators, but also includes a non-bank partner in a marketplace lending arrangement who facilitates the arrangement of financing through a financial institution.

Connecticut

On June 28, 2023, Connecticut enacted “An Act Requiring Certain Financing Disclosures,” which: (a) requires lenders offering certain types of commercial purpose “sales-based financing” in amounts of $250,000 or less to provide specified consumer-like disclosures to applicants; and (b) mandates that lenders offering such credit to register annually with the Connecticut Department of Banking starting October 1, 2024. The Connecticut law authorizes the state banking commissioner to adopt promulgating regulations, and the law took effect on July 1, 2023.

The Connecticut law applies to providers of commercial financings and defines “provider” as “a person who extends a specific offer of commercial financing to a recipient and includes, unless otherwise exempt . . . a commercial financing broker.” “Commercial financing” means any extension of sales-based financing by a provider not exceeding $250,000. Under the statute, “sales-based financing” is a

transaction that is repaid by the recipient to the provider over time” (1) as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the recipient’s sales or revenue, or (2) according to a fixed payment mechanism that provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.

Notably, the Connecticut law exempts the following entities and transactions: (a) banks, bank holding companies, credit unions, and their subsidiaries and affiliates; (b) entities providing no more than five commercial financing transactions in a 12-month period; (c) real estate-secured loans; (d) leases; (e) purchase money obligations; (f) technology service providers acting for an exempt entity as long as they do not have an interest in the entity’s program; (g) transactions of $50,000 or more to motor vehicle dealers or rental companies; and (h) transactions offered in connection with the sale of a product that the person manufactures, licenses, or distributes.

Florida

On June 26, 2023, Florida enacted the Florida Commercial Financing Disclosure Law, which requires covered providers to furnish consumer-oriented disclosures to businesses for certain commercial non-real estate-secured financing transactions exceeding $500,000. The Florida law took effect July 1, 2023, and is mandatory for transactions consummated on or after January 1, 2024.

The Florida law applies to providers of commercial financing transactions and defines “provider” as a “person who consummates more than five commercial financings” in Florida during any calendar year.  “Commercial financing transactions” include commercial loans, open-end lines of credit, and accounts receivable purchase transactions.  The Florida law exempts the following entities and transactions: (a) federally insured depository institutions, their subsidiaries, affiliates, and holding companies; (b) licensed money transmitters; (c) real estate-secured loans; (d) loans exceeding $500,000; leases; and (e) certain purchase money transactions.

Georgia

On May 1, 2023, Georgia amended its Fair Business Practices Act to require certain providers of commercial financings of $500,000 or less to furnish various disclosures to small-business borrowers before the consummation of the transactions. The statute applies to covered commercial financings consummated on or after January 1, 2024.

The Georgia law requires providers of commercial credit in amounts of $500,000 or less to provide TILA-like disclosures to small-business borrowers before the consummation of the transaction but does not specify the time period. The Georgia law defines “provider” as “a person who consummates more than five commercial financing transactions” in Georgia during any calendar year, including participants in commercial purpose marketplace lending arrangements. “Commercial financing transactions” include both closed-end and open-end commercial loans as well as accounts receivable purchase transactions but do not include real estate-secured transactions.  The Georgia law exempts: (a) federally insured depository institutions and their subsidiaries, affiliates, and holding companies; (b) Georgia-licensed money transmitters; (c) captive finance companies; and (d) institutions regulated by the federal Farm Credit Act. The law also exempts purchase money obligations.

Kansas

On April 19, 2024, the Kansas Legislature enacted the “Commercial Financing Disclosure Act”, which requires “providers” (defined as entities that consummate more than five commercial financings transactions with businesses located in Kansas in a calendar year), to provide certain TILA-like disclosures to debtor business counterparties prior to consummation.

The legislation exempts from its coverage financings greater than $500,000 and real estate-secured transactions. Further, the statute also exempts depository institutions, their parents, and their owned and controlled subsidiary or service corporation if regulated by a federal banking agency. The Kansas law took effect on July 1, 2024.

New York

The New York disclosure requirements (which are substantively similar to those passed in California) took effect August 1, 2023, six months from the date of the promulgation of final implementing regulations, which were issued February 1, 2023.

The New York Commercial Financing Disclosure Law (“NYCFDL”) requires “providers” of commercial credit to provide Truth in Lending Act-like disclosures to applicants at the time it extends a specific offer of the commercial financing in amounts of $2,500,000 or less. “Providers” include both lenders and brokers.

The New York law applies to closed end financing, open-end financing, sales-based financing, including merchant cash advances and factoring transactions. The NYCFDL provides a de minimis exemption, “for any person or provider who makes no more than five commercial financing transactions in [New York] in a twelve-month period.”  Further, “financial institutions,” which include banks, and certain other chartered depository institutions authorized to conduct business in New York, are also exempt from the commercial loan disclosure law, including the subsidiaries or affiliates of such exempt financial institutions.  Commercial financings over $2,500,000 are exempt from the law as are transactions secured by real property. The obligation to provide disclosures applies if the financing recipient’s business is “principally directed or managed from New York.”

Utah

Effective January 1, 2023, the Utah law requires “providers” to register with the Utah Department of Financial Institutions and maintain such registration annually. Further, prior to consummation of the commercial financing, “providers” must, among other things, disclose to borrowers: (a) the total amount of funds provided to the business; (b) the total amount of funds disbursed to the business; (b) the total amount paid to the “provider” under the financing; (d) the manner, frequency and amount of each payment (or if the amount of each payment may vary, the manner, frequency and estimated amount of the initial payment); (e) information regarding prepayment of the financing; and (f) the amount the “provider” paid to the broker, if applicable.

The Utah law does not apply to consumer purpose transactions, real estate-secured transactions or transactions with loan amounts greater than $1 million—or if the “provider” makes five or fewer Utah commercial financings in any calendar year.

Virginia

Effective July 2, 2022, the Virginia law also contains some of the same disclosure obligations as the California, New York, and Utah laws.  However, the scope of Virginia’s disclosure requirements is limited to sales-based financing contracts (as opposed to the obligations imposed by the new laws in California, New York, and Utah which apply more broadly to commercial financing providers and various commercial finance products) and applies to contracts entered into on or after July 1, 2022.

Notably, the Virginia law requires sales-based financing providers to make disclosures of the financing terms at the time the provider offers sales-based financing to a recipient.  Virginia has issued implementing regulations that prescribe the form of disclosure for sales-based financing transactions, which became effective January 19, 2023. The Virginia law also requires providers to register with the Virginia State Corporation Commission as of November 1, 2022.

The law exempts sales-based financings in amounts over $500,000 and contains a de minimis exemption for a person that enters into no more than five “sales-based financing” transactions in any 12-month period.

What to Do Now:

California, Connecticut, Florida, Georgia, Kansas, New York, Utah, and Virginia all require commercial financers to provide certain disclosures to borrowers as part of the transaction—all of which would be applicable to small business purpose non-real estate secured loans.  Lenders must either comply with these nettlesome laws or structure their transaction to avoid triggering them. It is anticipated that other states will enact similar laws in the future that will impact small balance commercial lending.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights three recently enacted measures of potential interest from California, Missouri, and North Carolina:

  • California: Effective upon approval by Governor Gavin Newsom on July 18, Assembly Bill 295 amends provisions of the California Civil Code applicable to mortgages. Among other changes, first, the measure amends Section 2924(b) to clarify that when responding to a request for payoff or reinstatement information, a trustee is not liable for good faith error resulting from reliance on information provided in good faith by the beneficiary, or subject to the provisions of the Rosenthal Fair Debt Collection Practices Act. Second, the measure amends Section 2924c to allow a trustee to recover reasonable costs and expenses that “will be incurred as a direct result of the payment being tendered,” instead of limiting recovery to expenses actually incurred.  Third, the measure amends Section 2924m, which relates to the sale of tenant-occupied residential property, to clarify that if the winning bidder at a sale is not required to submit an affidavit or declaration regarding eligibility to bid, the trustee must attach as an exhibit to the trustee’s deed a statement that no such affidavit or declaration is required, and that the lack thereof does not preclude recording of the deed or invalidate the transfer of title pursuant to the trustee’s deed.Finally, the measure amends Section 3273.10, under the COVID-19 Small Landlord and Homeowner Relief Act, to clarify that the requirement for the mortgage servicer to provide a notice as prescribed by Section 2923.5(b) after denial of a forbearance applies only to a request made between August 30, 2020, and December 1, 2021.
  • Missouri: Effective August 28, 2024, Senate Bill 1359 enacts the “Money Transmission Modernization Act of 2024” (“Act,” Mo. Rev. Stat. §§ 361.900 to 361.1035) and the “Commercial Financing Disclosure Law” (“Law,” Mo. Rev. Stat. 427.300).First, the Act replaces Missouri’s existing money transmission laws and requires the licensing of persons engaged in money transmission (e.g., selling or issuing stored value, or receiving money for transmission from a person located in the state).  The Act sets forth relating regulatory processes such as license application requirements, licensee reporting obligations, compliance management system requirements (for supervision of delegates), and the relationship between the Act’s provisions and federal law.Second, the Law addresses obligations applicable in connection with a “commercial financing transaction” meaning “any commercial loan, accounts receivable purchase transaction, commercial open-end credit plan or each to the extent the transaction is a business purpose transaction.”  The Law requires a provider of such transaction to provide a disclosure of the terms prior to or at consummation of the transaction that includes, among other information, the total amount of funds provided to the business, the total amount of payments that will be due to the provider, and the manner, frequency, and amount of each payment.  Among others, the Law does not apply to: (a) a depository institution providing commercial financing; or (b) a commercial financing transaction that is secured by real property, a lease, or a purchase money obligation that is incurred as all or part of the price of the collateral (or for value given to enable the business to acquire rights in or the use of the collateral, if the collateral is so used).
  • North Carolina: Effective October 1, 2024, Senate Bill 319 (2024 N. C. Sess. Laws 29) amends provisions of the North Carolina General Statutes relating to powers of sale.  First, the measure amends Section 45-21.4 to permit a sale pursuant to a power of sale in a mortgage or deed of trust to occur at any public location within the county where the land is situated (or, for properties located in more than one county, in one of the counties in which the land is situated) as an alternative to the county courthouse. If permitted by the mortgage or deed of trust, the mortgagee or trustee may designate the alternative location; if the instrument does not contain such authority for the mortgagee or trustee, the clerk of the county superior court may do so.  Second, the measure amends Section 45-21.23, which relates to time of sale, to require a sale to begin no later than three hours (as opposed to one hour, under existing law) after the designated start time in the notice of sale, unless a delay occurs by other sales held at the same place.  Third, the measure adds new Section 45-21.25A establishing the procedure for placing remote bids at foreclosure sales.

Iowa Adopts Mortgage Servicer Prudential Standards

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What Happened?

Effective July 1, Iowa House File 2392 (the “Iowa Law”) enacts mortgage servicer prudential standards (codified in Chapter 535B of the Iowa Code) that largely follow those promoted by the Conference of State Bank Supervisors (“CSBS”).

As we have previously reported, the CSBS adopted model “State Regulatory Prudential Standards for Nonbank Mortgage Servicers” (the “CSBS Standards”) in 2021.  The CSBS Standards address financial condition and corporate governance requirements for certain mortgage servicers.

Why Is It Important?

Following the CSBS Standards, the Iowa Law’s requirements apply to a “covered institution.”  A “covered institution” services or subservices at least 2,000 residential mortgage loans (excluding whole loans owned and loans being interim serviced prior to sale) as of the most recent calendar year end as reported on the NMLS mortgage call report.  For entities within a holding company or an affiliated group of companies, the Iowa Law’s requirements apply at the covered institution level.

Financial Condition:

The Iowa Law requires a covered institution to meet specified financial condition standards. First, a covered institution must maintain capital and liquidity as set forth in new Section 535B.24.  Second, a covered institution must maintain written policies and procedures necessary to implement that section’s capital, operating liquidity, servicing liquidity requirements.

Third, a covered institution must maintain sufficient allowable assets for operating liquidity, in addition to amounts required for servicing liquidity.  Fourth, a covered institution must develop, establish, and implement written plans, policies and procedures, utilizing sustainable documented methodologies to maintain operating liquidity.  Finally, a covered institution must have a sound written cash management plan and a sound written business operating plan (commensurate with the entity’s complexity) that ensures normal business operations.

The financial condition standards do not apply to servicers that solely own or conduct servicing on reverse annuity mortgage loans, or to a covered institution’s  reverse annuity mortgage loan portfolio.

Corporate Governance:

The Iowa Law also requires a covered institution to comply with enumerated corporate governance requirements. First, a covered institution must establish and maintain a board of directors (or equivalent body).  The board’s responsibilities include: (a) establishing a written corporate governance framework that includes appropriate internal controls to monitor and assessing compliance with the corporate governance framework; (b)  monitoring and ensuring that the covered institution complies with the corporate governance framework and with the Iowa Law’s requirements; and (c) ensuring that the covered institution establishes and maintains a risk management program that identifies, measures, monitors, and controls risk commensurate with the covered institution’s size and complexity.

Second, new Section 535B.25 enumerates criteria for a covered institution’s risk management program (to include addressing the potential that a borrower or counterparty fails to perform on an obligation). Third, the Iowa Law requires a covered institution to undergo an annual external audit (including an evaluation of the entity’s internal control structure, a review of the entity’s annual financial statements of the company, and a computation of the entity’s tangible net worth).

Fourth, the Iowa law requires a covered institution to conduct an annual risk management assessment that concludes with a formal report to the board of directors. The risk management assessment must include findings and action taken to address each issue. Additionally, a covered institution must maintain ongoing documentation of risk management activities and include the documentation in its risk management assessment.

What Do I Need to Do?

Mortgage servicers subject to the Iowa Law should review the new standards and ensure that their business practices are compliant.  We will continue to monitor other states for adoption of their own versions of the CSBS Standards.

Fannie Mae Issues Guidance in Response to New York Foreclosure Abuse Prevention Act

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What Happened?

On March 13, 2024, Fannie Mae issued Servicing Guide Announcement (SVC-2024-02) (the “Announcement”), which announced, among other things, updates to Fannie Mae’s Loan Modification Agreement (Form 3179), with additional instructions in response to the New York Foreclosure Abuse Prevention Act (“FAPA”). Specifically, for all Loan Modification Agreements (Form 3179) sent to a borrower for signature on or after July 1, 2024, servicers are required to amend the modification agreement to insert the following as new paragraphs 5(e) and (f) for a mortgage loan secured by a property in New York:

(e) Borrower promises to pay the debt evidenced by the Note and Security Instrument.  Further, Borrower acknowledges and agrees that any election by Lender to accelerate the debt evidenced by the Note and Security Instrument and the requirement by Lender of immediate payment in full thereunder is revoked upon the first payment made under the Agreement; and, the Note and Security Instrument, as amended by the Agreement, are returned to installment status and the obligations under the Note and Security Instrument remain fully effective as if no acceleration had occurred.

(f) Borrower further agrees to execute or cause to be executed by counsel, if applicable, a stipulation (to be filed with the court in the foreclosure action), that the Lender’s election to accelerate the debt evidenced by the Note and Security Instrument and requirement of immediate payment in full thereunder is revoked upon the first payment made under the Agreement and the debt evidenced by the Note and Security Instrument is deaccelerated at that time pursuant to New York General Obligations Law § 17-105, or other applicable law.

Fannie Mae encourages servicers to implement these changes immediately but requires that servicers do so for all modification agreements sent to the borrower for signature on and after July 1, 2024. Freddie Mac does not yet appear to have issued similar guidance.

Why Is It Important?

As we previously discussed in a prior blog post, FAPA reversed judicial precedent that permitted a lender, after default, to unilaterally undo the acceleration of a mortgage and stop the running of the statute of limitations in a foreclosure action through voluntary dismissal, discontinuance of foreclosure actions, or de-acceleration letters. For more than a year following FAPA’s enactment, the mortgage industry has grappled with how to address certain of the risks created by FAPA, including whether certain language could be adopted and incorporated into servicers’ loss mitigation documents to mitigate FAPA risk.

Fannie Mae’s Announcement is significant because it represents the first piece of guidance from a federal agency or government-sponsored enterprise (i.e., Fannie Mae or Freddie Mac) that provides some clarity as to what language may be appropriate to mitigate certain of the risks engendered by the New York FAPA.

What Do I Need to Do?

Servicers of Fannie Mae-backed mortgage loans (secured by property in New York) should evaluate their loss mitigation processes and make appropriate updates to ensure compliance with the Announcement.  Servicers should also continue to monitor for additional guidance or caselaw as this issue remains in flux.

Appraisal Bias Focus Continues in 2024

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What Happened?

Building on the 2021 announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”) and a series of federal agency actions in the intervening months, 2024 brings new efforts at the state and federal levels to address appraisal bias and promote fair valuations.  Notably, a new version of the Uniform Standards of Professional Appraisal Practice (“USPAP”) is in effect, prohibiting discrimination.

Why Is It Important?

USPAP:

As of January 1, the amended USPAP (the operational standards that govern real property appraisal practice) includes updates to the Ethics Rule that expressly prohibit appraisers from engaging in both unethical discrimination and illegal discrimination.  An appraiser cannot engage in illegal discrimination, which includes acting in a manner that violates or contributes to a violation of applicable anti-discrimination laws or regulations, including, but not limited to, the Fair Housing Act (“FHA”), the Equal Credit Opportunity Act (“ECOA”), and the Civil Rights Act of 1866.

The prohibition also encompasses unethical discrimination – developing an opinion of value based or with bias with respect on an actual or perceived protected characteristic of any person, “upon the premise that homogeneity of the inhabitants of a geographic area is relevant for the appraisal,” or using a characteristic to attempt to conceal a bias in the performance of an appraisal assignment.

OCC Hearing on Appraisal Bias:

On February 13, the Office of the Comptroller of the Currency (“OCC”) held the fourth of the Appraisal Subcommittee’s public hearing on appraisal bias.  Representatives of the Federal Financial Institutions Examination Council (“FFIEC”) regulatory agencies (the Federal Reserve Board, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, National Credit Union Administration, and OCC), the U.S. Department of Housing and Urban Development, and the Federal Housing Financial Agency took questions from individuals speaking on behalf of the Appraisal Foundation, the Mississippi and Texas state appraiser regulatory boards, and the appraisal profession.

The discussion focused on efforts to combat appraisal bias, including through diversification of the appraisal profession.

FFIEC Statement on Valuation Bias:

On February 14, the FFIEC on behalf of its member entities outlined consumer compliance and safety and soundness examination principles to “promote credible appraisals” and mitigate risk from valuation practices due to potential discrimination. Through this guidance, the FFIEC encourages institutions to establish a formal valuation program “to identify noncompliance with appraisal regulations, USPAP, inaccuracies, or poorly supported valuations.”

The guidance identifies: (a) ECOA, the FHA, the Truth in Lending Act, and the Federal Trade Commission Act as the applicable consumer protection laws; and (b) Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and USPAP as safety and soundness requirements.

Under the guidance, the consumer compliance examination principles focus primarily on compliance with consumer protection requirements and prohibitions on discrimination relating to valuation practices.  The FFIEC designed these principles to ensure that an institution’s board and management oversight, third party risk management and compliance management program (including policies and procedures, training, monitoring and/or audit, and consumer complaint handling) are commensurate with the size of the institution and appropriate to identify potentially discriminatory valuation practices or results.

Similarly, the FFIEC’s safety and soundness examination principles focus on financial condition and operations relating to the review and assessment of an “institution’s practices for identifying, monitoring and controlling the risk of valuation discrimination or bias.” Such assessments are similar to the consumer compliance examination principles, but also include an evaluation of the collateral valuation program and valuation review function, credit risk review function, and consideration of materiality in relation to the institution’s overall lending activities.

New Jersey Anti-Discrimination Initiative: 

Following other states (such as Texas) that have stepped up anti-discrimination efforts, the New Jersey Office of the Attorney General and Division on Civil Rights provided guidance on their enforcement of the state’s Law Against Discrimination (“LAD”) in home appraisals.

The guidance clarifies that LAD applies not only to appraisers, but also to “’any person’ who is involved in the ‘furnishing of facilities or services’ or ‘involved in the making or purchasing of any loan or extension of credit,” and thus encompasses bank and non-bank mortgage lenders, appraisal management companies (“AMCs”), insurance companies, and others.

The guidance also expressly prohibits subject individuals and entities from: (a) engaging in disparate treatment of individuals (e.g., borrowers) based on protected characteristics; (b) maintaining policies or practices that have unlawful disparate impacts; or (c) submitting or relying on an appraisal that is known (or should be known) to be discriminatory.

What Do I Need to Do?

While the above actions will impact lenders, appraisers, and AMCs differently, overall they indicate regulators’ continued (and increased) attention to fair valuations matters.  Lenders and AMCs should ensure that their in-house appraisal processes prohibit engagement in discriminatory valuations, their compliance management programs are well documented and working appropriately, and that they have escalation processes in place to address any alleged issues that may arise.  (We routinely provide compliance management system readiness reviews.)  Appraisers need to keep abreast not only of the new USPAP requirements, but also of changes to state continuing education requirements that implicate fair valuations.