Alston & Bird Consumer Finance Blog

State Law

New York Passes New Removal Procedures for Officers, Directors, Trustees, and Partners of Any Entity Regulated by Department of Financial Services

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What Happened?

On December 21, 2024, New York Governor Kathy Hochul, signed into law, S7532, which repealed the existing section of the Banking Law addressing the removal of officers, directors, and trustees of banking organizations, bank holding companies and foreign banks (“covered individuals”), and enacted a new section providing a clearer process for removing such individuals and expanding the scope of the removal authority to apply to all entities regulated by the New York Department of Financial Services (“the Department”).

Repealed Section:

The former provisions regarding the removal of covered individuals were limited to banking organizations, bank holding companies, and foreign banks.

The Superintendent of the Department (“the Superintendent”) was authorized to bring an action to the Banking Board (“the Board”) to remove an officer, director, or trustee whenever it found that such individual:

  • violated any law or regulation of the Superintendent of financial services, or
  • “continued unauthorized or unsafe practices . . . after having been ordered or warned to discontinue such practices.”

Note that the Banking Board has not existed since the Department of Financial Services was created in 2011.

The Board would then serve notice of the action to the covered individual to appear before the Board to show why they should not be removed from office. A copy of this notice would be sent to each director or trustee of the banking organization and to each person in charge of and each officer of a branch of a foreign banking corporation.

If after a three-fifths vote by the Board members the Board found that the individual committed such violations, an order would be issued to remove the individual from office.

The removal became effective upon service of the order. The order and findings were not made public, and were only disclosed to the removed individual and the directors or trustees of the banking organization involved. Any such removed individual that participated in the management of such banking organization without permission from the Superintendent would be guilty of a misdemeanor.

Newly Enacted Section:

The new provision expands the removal authority of the Superintendent to apply to all entities regulated by the Department (“covered entities”), including: banks, trust companies, limited purpose trust companies, private banks, savings banks, safe deposit companies, savings and loan associations, credit unions, investment companies, bank holding companies, foreign banking corporations, licensed lenders, licensed cashers of checks, budget planners, mortgage bankers, mortgage loan servicers, mortgage brokers, licensed transmitters of money, and student loan servicers.

The Superintendent is authorized to bring an action to remove such individuals whenever it finds reason to believe that they:

  • caused, facilitated, permitted, or participated in any violation by a covered entity of a law or regulation, order issued by the Superintendent or any written agreement between such covered entity or covered individual and the Superintendent;
  • engaged or participated in any unsafe or unsound practice in connection with any covered entity; or
  • engaged or participated in any willful material act or omitted to take any material act that directly contributed to the failure of a covered entity.

The notice and hearing provisions were changed to allow the Superintendent to serve a statement of charges against the covered individual and a notice of an opportunity to appear before the Superintendent to show cause why they should not be removed from office. A copy of such notice must now be sent to the affected covered entity, instead of the directors or trustees of the covered entity and persons in charge of foreign bank branches.

Additionally, the threshold for removal was changed. Instead of being removed by a three-fifths vote of a board that no longer exists, the covered individual may be removed if, after notice and hearing: (1) the Superintendent finds that the covered individual has engaged in the unlawful conduct, or (2) if the individual waives a hearing or fails to appear in person or by authorized representative.

The order of removal is effective upon service to the individual. The order must also be served to any affected covered entity along with the statement of charges. The order remains in effect until amended, replaced, or rescinded by the Superintendent or a court of competent jurisdiction. Such removed individual is prohibited from participating in the “conduct of the affairs” of any covered entity unless they receive written permission from the Superintendent. If the individual violates such prohibition, they are guilty of a misdemeanor.

Furthermore, the Superintendent is now authorized to suspend the covered individual from office for a period of 180 days pending the determination of the charges if the Superintendent has reason to believe that:

  • a covered entity has suffered or will probably suffer financial loss that impacts its ability to operate in a safe and sound manner;
  • the interests of the depositors at a covered entity have been or could be prejudiced; or
  • the covered individual demonstrates willful disregard for the safety and soundness of a covered entity.

The suspension may be extended for additional periods of 180 days if the hearing is not completed within the previous period due to the request of the covered individual.

Why Does it Matter?

Prior to the update, the Superintendent only had the power to remove individual officers, directors, or trustees from office in various bank organizations. The new law expands this removal power to all entities regulated by the Department.

The amended statute creates an additional penalty for individuals who caused, facilitated, permitted, or participated in the violation of the Banking Law in their positions of power of a regulated entity. Such individuals may be removed from their positions and prohibited from participating in the management of any regulated entity, until they receive written permission from the Superintendent. If they violate the prohibition, they are guilty of a misdemeanor, which can be punished by imprisonment for up to 364 days or by a fine set by the Superintendent.

What Do I Need To Do?

Entities regulated by the Department that are now covered under this section should be aware that violations of law by a licensee may also lead to the removal of certain high-level individuals within the organization. If removed, such individuals would also be prohibited from managing any regulated entity until the Superintendent provides written permission to do so. Affected entities and individuals should take care to ensure compliance with the law to avoid these new penalties.

Missouri Enacts Commercial Financing Law

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What Happened?

As we have previously apprised you, California, New York, Utah, Virginia, Georgia, Florida, Connecticut, and Kansas have enacted laws that require certain commercial financing “providers” to furnish certain consumer-like disclosures prior to the consummation of commercial financing transactions. Now, Missouri has joined this state hit parade of laws requiring cumbersome commercial disclosures to businesses who will likely ignore them.  On July 11, 2024, Governor Mike Parson signed Missouri Senate Bill 1359 into law, which includes notable provisions for commercial lending disclosures as well as a registration requirement for brokers.  This new Missouri law becomes effective six months after the Missouri Division of Finance (the “Division”) finalizes promulgating rules or, if the Division does not intend to promulgate such rules, on February 28, 2025.

Why it is Important?

The Missouri law requires “providers” to furnish several disclosures to business purpose borrowers at or before consummation of certain types of commercial financing transactions. The statute defines “provider” as a “person who consummates more than five commercial financings” to a business located in Missouri–or to entities that who arrange those transactions through online platforms– in any twelve-month period.

“Commercial financing transactions” include any unsecured and secured commercial loan, accounts receivable purchase transaction, commercial open-end credit plan or each to the extent the transaction is a business purpose transaction. Significantly, the law includes in its scope marketplace lending arrangements pursuant to which non-banks partner with banks to provide financial products.

Exemptions from the Statute:

Exemptions from the Missouri law include the following entities and transactions: a depository institution or a subsidiary or affiliate; a service corporation to a depository institution that is owned and controlled by same and regulated by a federal banking agency; a lender regulated by the Federal Farm Credit Act; real estate-secured loans; a lease; a licensed money transmitter; loans exceeding $500,000; and certain purchase money transactions.

Required Disclosures:

At or prior to the consummation of a transaction, a provider must disclose to the business purpose borrower: (a) the total sum being financed; (b) the total amount of funds disbursed after deducting any fees or withholdings; (c) the total amount the business will repay; (d) the total cost of the financing in dollar; (e) the payment terms, frequency, and amounts; and (f) any costs or discounts associated with prepaying the financing.

Broker Registration:

This law also contains a registration requirement for brokers, which involves registering with the Division and maintaining a $10,000 surety bond.  The Missouri law defines a “broker” as a person who “for compensation” or the “expectation of compensation” obtains a binding offer for a loan from a third party and communicates that offer to a business located in Missouri.

Penalties for Non-Compliance:

The Missouri law authorizes the Missouri Attorney General to bring civil actions against providers and brokers who violate the law, with initial violations punishable by fines of $500 per incident with a total aggregated limit of $20,000, with additional fines for violations after notice from the Attorney General. Notably, violations of the law do not impair the enforceability of the loans or give borrowers a private right of action against a provider or broker.

What To Do Now?

Missouri becomes the ninth state to impose nettlesome disclosure requirements on providers of commercial non-real estate secured financings in amounts less than $500,000, and, like the laws enacted in Utah and Virginia, includes a “registration” component.  While the Missouri law excludes banks from its scope, it specifically covers marketplace lending arrangements.  We expect other states to enact similar types of laws which will create a patchwork of compliance challenges for small balance commercial loan lenders.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from three states:

Delaware: 

  • Effective August 9, Senate Bill 245 amends mortgage foreclosure provisions of the Delaware Code.  Principally, the measure updates the content of the pre-foreclosure notice that a mortgagee must send – as set forth in Section 5062B of Title 10 of the Code – to reflect that the Delaware State Housing Authority is the appropriate group to contact for financial assistance, and to permit alteration of the statutory language as recommended by the administrator of the Residential Mortgage Foreclosure Mediation Program.  The measure also eliminates the previously scheduled January 1, 2025, expiration date of provisions including Sections 5062A (loss mitigation affidavit), 5062C (Residential Mortgage Foreclosure Mediation Program), and 5062D (complaints) of Title 10; those sections now apply to any foreclosure action initiated on or after January 19, 2012.

Illinois: 

  •  Effective August 9, 2024, Senate Bill 3550 amends the Consumer Installment Loan Act by: (a) clarifying that licensees thereunder have authority to make a loan with a maximum principal amount of $40,000 and to charge, contract for, and receive an annual percentage rate of no more than 36% (rather than charges at an APR of more than 36%); and (b) amending disciplinary provisions, including those applicable to persons engaged in unlicensed activity.  The measure also establishes the “Financial Institutions Act” (20 ILCS 1205/1) from existing provisions of the Financial Institutions Code.
  • Effective January 1, 2025, Senate Bill 2919 amends the Mortgage Foreclosure article of the Illinois Code of Civil Procedure to provide for online foreclosure sales, among other topics.  First, the measure amends Section 15-1507 to permit a mortgagee to request that a judge, sheriff, or other person to conduct the sale of a foreclosed home either in-person and/or online, and to add corresponding content to the public notice of sale that the mortgagee must provide.  Second, the measure adds Section 15-1507.2 to establish procedures for the conduct of online judicial sales, addressing applicable fees, bid procedures, proper information security controls, and the engagement of third-party purchasers.  Finally, the measure adds Section 15-1510.1, prohibiting the charging of any fee beyond the winning bid amount to a third-party bidder or purchaser who is not a party to the case in a residential real estate sale.
  •  Effective January 1, 2025, Senate Bill 3551 amends the Residential Mortgage License Act of 1987 (RMLA) and the Residential Real Property Disclosure Act (RRPDA).  First, the measure adds the term “shared appreciation agreement” to the definitions section of the RMLA, and amends related terms (“mortgage loan”, “residential mortgage loan”, and “home mortgage loan”) to “include a loan in which funds are advanced through a shared appreciation agreement.”  Second, the measure adds to the RMLA a new section addressing counseling and disclosure requirements for shared appreciation agreements.  Third, the measure adds to the RRPDA provisions relating to counseling, such that: (a) counseling is required to be provided in person, or by remote electronic or telephonic means, with the permission of all borrowers; (b) counseling must be provided in a private session; and (c) the counselor must verify the identity of each borrower, as well as document the counseling session, subject to any implementing regulations.

New Hampshire: 

  • On August 23, New Hampshire Governor Chris Sununu signed into law House Bill 1241, which amends provisions of the New Hampshire statutes relating to the regulation of money transmitters and mortgage licensees, among other topics beyond the scope of our reporting.   First, effective October 22, the measure repeals New Hampshire’s existing money transmission laws and adopts the model Money Transmission Modernization Act.  The Act requires the licensing of persons engaged in money transmission and establishes licensing application requirements, licensee reporting obligations, and enforcement provisions, among others. Second, the measure amends Chapters 397-A and 399-A with respect to license renewals for mortgage loan originators; mortgage bankers, brokers, and servicers; small loan lenders; and debt adjustment services. Going forward, a license term will run from the date of approval of an application December 31 of the year in which the license term began; however, if the initial license date is between November 1 and December 31, the initial license term will run through December 31 of the following year.

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.