Alston & Bird Consumer Finance Blog

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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.

Georgia, Florida, Connecticut Enact Commercial Financial Disclosure Laws

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A&B Abstract:

Georgia, Florida, and Connecticut are among a growing list of states, including California, New York, Utah, and Virginia, that have enacted laws requiring consumer-style disclosures for commercial financing transactions. These laws are part of a burgeoning trend by state legislatures to impose burdensome disclosures, like those required by the federal Truth in Lending Act (TILA), on providers of small-balance commercial loans and financings. These laws apply to business-purpose transactions but not to transactions having a consumer, family, or household purpose.

The Georgia Law

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, known as Senate Bill 90, 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.

Exemptions

The Georgia law exempts federally insured depository institutions and their subsidiaries, affiliates, and holding companies; Georgia-licensed money transmitters; captive finance companies; and institutions regulated by the federal Farm Credit Act. The law also exempts purchase money obligations.

Required Disclosures

The Georgia law requires providers of commercial financing transactions to furnish the following information prior to consummation:

  • Total funds provided to the business.
  • Total funds disbursed.
  • Total amount paid to the provider.
  • Total dollar cost of the transaction.
  • Payment schedule.
  • Costs associated with prepayment.

Penalties

Providers who violate these disclosure requirements face civil penalties ranging from $500 per violation to $20,000 with possible additional penalties for continued violations. Notably, violations do not affect the enforceability of the transactions, and there is no private right of action under the law.

The Florida Law

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 takes effect July 1, 2023 and becomes 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: federally insured depository institutions, their subsidiaries, affiliates, and holding companies; licensed money transmitters; real-estate-secured loans; loans exceeding $500,000; leases; and certain purchase money transactions.

Required Disclosures

The provider is required to disclose in writing the following at or before the consummation of a commercial financing transaction:

  • The total amount of funds provided to the business.
  • The total amount of funds disbursed to the business if less than the total amount of funds provided because of any fees deducted or withheld at disbursement and any amount paid to a third party on behalf of the business.
  • The total amount to be paid to the provider.
  • The total dollar cost of the commercial financing transaction, calculated by subtracting the total amount of funds provided from the total amount of the payments.
  • The manner, frequency, and amount of each payment or, if there are variable payments, an estimated initial payment and the methodology used for calculating it.
  • Certain information about prepayments.

Prohibited Acts

The Florida law prohibits a broker arranging a consumer financing transaction from engaging in any of the following acts:

  • Assessing, collecting, or soliciting an advance fee from a business to provide services to a broker. However, this prohibition would not preclude a broker from soliciting a business to pay for, or preclude a business from paying for, actual services necessary to apply for commercial financial products, such as a credit check or an appraisal of security, if certain conditions are met.
  • Making or using any false or misleading representations or omitting any material facts in the offer or sale of the services of a broker or engaging in any act that would “operate as fraud or deception upon any person in connection with the offer or sale of the services of the broker, notwithstanding the absence of reliance by the business.”
  • Making or using any false or deceptive representations in its business dealings.
  • Offering the services of a broker by any advertisement without disclosing the actual address and telephone number of the business of the broker.

Penalties 

Like the Georgia law, the Florida law punishes violations with civil fines ranging from $500 per incident to $20,000 with possible additional penalties for “aggregated violations.” Notably, violations do not impair the enforceability of the transactions or create a private right of action.

The Connecticut Law

On June 28, 2023, Connecticut enacted “An Act Requiring Certain Financing Disclosures,” which requires (1) 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 (2) mandates that lenders offering such credit register annually with the Connecticut Department of Banking starting by October 1, 2024. The Connecticut law authorizes the state banking commissioner to adopt promulgating regulations, and the law takes effect on July 1, 2024.

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:

  • Banks, bank holding companies, credit unions, and their subsidiaries and affiliates.
  • Entities providing no more than five commercial financing transactions in a 12-month period.
  • Real-estate-secured loans.
  • Leases.
  • Purchase money obligations.
  • Technology service providers acting for an exempt entity as long as they do not have an interest in the entity’s program.
  • Transactions of $50,000 or more to motor vehicle dealers or rental companies.
  • Transactions offered in connection with the sale of a product that the person manufactures, licenses, or distributes.

Required Disclosures

The Connecticut law requires that before making a “specific offer” (i.e., a binding offer of credit) providers must furnish certain disclosures to borrowers, in a form prescribed by the state banking commissioner, including:

  • The total amount of the commercial financing.
  • The disbursement amount, which is the amount paid to the recipient or on the recipient’s behalf, excluding any finance charges that are deducted or withheld at disbursement.
  • The finance charge.
  • The total repayment amount, which is the disbursement amount plus the finance charge.
  • The estimated repayment period.
  • A payment schedule.
  • A description of fees not included in the finance charge such as draw fees, and late charges.
  • A description of any collateral requirements.
  • Information about brokerage compensation.

The Connecticut banking commissioner is expected to promulgate implementing regulations and model disclosures before the effective date of July 1, 2024.

Registration Requirement

The Connecticut law requires providers and brokers to register with the state banking commissioner by October 1, 2024 and to qualify to “do business” in the state. The registration must be renewed annually.

Penalties

The statute authorizes the banking commissioner to impose civil penalties of up to $100,000 for violations of the law as well as enjoin those violating the statute.

Takeaway

The three state laws recently enacted in Georgia, Florida, and Connecticut are part of a growing trend among states to regulate small-balance commercial non-real-estate-secured loans. The burdens imposed by the laws will be the lenders’ cross to bear unless they can avoid triggering the coverage of the statutes.

Utah to regulate smaller commercial non-real estate secured financings

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A&B Abstract:

We wanted to apprise you of a significant development impacting the commercial non-real estate secured lending arena which until recently has been lightly regulated by the states.  On March 24, 2022, Utah Governor Spence Cox signed into law S.B. 183, the “Commercial Financing Registration and Disclosure Act” (the “Act”) which, commencing on January 1, 2023, requires certain “providers” of non-real estate secured loans in amounts of $1 million or less (referred to as “commercial financing transactions”) to (i) register with the Utah Department of Financial Institutions (the “UDFI”) and (ii) provide certain disclosures to borrowers prior to the consummation of the transaction. Utah becomes the third state to regulate smaller commercial non-real estate secured financings, joining California and New York State which have enacted similar type of laws, but neither of which are yet effective, pending implementing regulations. Further, Utah becomes a rare state to require registration in connection with the origination of commercial purpose transactions.

Applicability of the Utah Law:

As a threshold matter, the Act applies to “providers” of “commercial financing transactions.” The Act defines “provider” as “a person who consummates more than five “commercial financing transactions” in Utah during any calendar year, including certain brokers who assist depository institutions offer “commercial financing products via an online platform.” Depository institutions and Utah-licensed money transmitters are exempt from the Act. The Act defines “commercial financing transaction” as a “business purpose transaction under which a person extends a business or commercial loan or a commercial open-end credit plan; or that is an accounts receivable purchase transaction [i.e., merchant cash advance transaction].” Notably, the Act does not apply to consumer purpose transactions, commercial transactions secured by real estate, transactions in excess of $1 million or transactions of at least $50,000 where the recipient of the funding is a motor vehicle dealer.

Notable Requirements of the Utah Law:

Effective January 1, 2023, the Act requires “providers” to register with the UDFI and maintain such registration annually. Further, prior to consummation of the commercial financing, “providers” must, among other things, disclose to borrowers: (i) the total amount of funds provided to the business; (ii) the total amount of funds disbursed to the business; (iii) the total amount paid to the “provider” under the financing; (iv) 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); (v) information regarding prepayment of the financing; and (vi) the amount the “provider” paid to the broker, if applicable. It is anticipated that the UDFI will prescribe the specific form of the disclosures in a forthcoming rulemaking.

A person who violates the Act is subject to a civil penalty of $500 per violation, not to exceed $20,000 for all violations arising from use of the same transaction documentation or materials. Violators are exposed to civil penalties of up to $50,000 for repeat offenses after receiving notice of a prior violation.  However, violations do not impair the enforceability of the financings or create a private right of action.

Again, the Act 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.

Takeaway:

Notwithstanding these broad exemptions, this development in Utah is part of a growing trend among states to regulate small balance commercial purpose lending. Several other state legislatures are considering similar legislation which should be monitored carefully.