| Of Interest

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.

A&B Abstract:

On May 2, 2022, Georgia Governor Brian Kemp signed HB 891 and SB 470 into law. HB 891, effective July 1, 2022, updates various laws enforced by the Georgia Department of Banking and Finance (the “Department”) including, among other things, by amending (1) certain exemptions from licensure under the Georgia Residential Mortgage Act (“GRMA”), and (2) the Georgia Installment Loan Act (“GILA”) to impose a new licensing obligation to service installment loans subject to the GILA. Similarly, SB 470, which took effect immediately, amends the GRMA’s provisions regarding felony restrictions for employees of mortgage licensees.

Changes to Licensing of Mortgage Lenders and Brokers

HB 891 made several changes to Title 7 of the Georgia Code, including several amendments to the GRMA, but perhaps one of the most notable changes with respect to mortgage lending involves the creation of a new exemption from licensure under the GRMA for persons holding loans for securitization into a secondary market. Specifically, as of July 1, 2022, any person who purchases or holds closed mortgage loans for the sole purpose of securitization into a secondary market, is expressly exempt from licensing, provided that such person holds the individual loans for less than seven days. Note that the statute further defines “person” as any individual, sole proprietorship, corporation, LLC, partnership, trust, or any other group, however organized. As written, the new exemption language suggests that persons holding loans as part of the securitization process for longer than 7 days could not rely on the exemption. Note that the GRMA’s existing definition of a “mortgage lender” includes a “person who directly or indirectly…holds, or purchases mortgage loans” and the GRMA contains an existing exemption for any person who purchases mortgage loans from a mortgage broker or mortgage lender solely as an investment and who is not in the business of brokering, making, purchasing, or servicing mortgage loans.

HB 891 also amended an existing exemption from licensure applicable to certain natural persons under an exclusive written independent contract agreement with a mortgage broker who is, or is affiliated with, an insurance company or broker dealer. Under the exemption, as amended, a natural person otherwise required to be licensed is exempt from licensure as a mortgage lender or broker, when under an exclusive written independent contractor agreement with a licensed mortgage broker, so long as the mortgage broker satisfies certain expanded criteria, including, among others (1) maintaining an active mortgage broker license, (2) maintaining full and direct financial responsibility for the mortgage activities of the natural person, (3) maintaining full and direct responsibility for the natural persons education, handling of consumer complaints, and supervision of the natural person’s mortgage activities, (4) having listed securities for trade and meeting certain market capitalization requirements, (5) being licensed as an insurance company or registered as a broker-dealer, and (6) being licensed as a mortgage lender or broker in ten or more states. The exemption previously applied to certain natural persons employed by the subsidiary of certain financial holding companies. Notably, to maintain the exemption, the natural person must, among other things (1) be licensed as a mortgage loan originator in Georgia and work exclusively for the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company, and (2) be licensed as an insurance agent or registered as a broker-dealer agent on behalf of the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company.

HB 891’s amendments to the GRMA’s licensing provisions follow SB 470, which provided welcome changes to the GRMA’s felony restrictions. As amended, Georgia law now provides that the Department may not issue or may revoke a license or registration if it finds that the mortgage loan originator, broker, or lender, or any person who is a director, officer, partner, covered employee or ultimate equitable owner of 10% or more of the mortgage broker or lender or any individual who directs the affairs or establishes policy for the mortgage broker or lender applicant, registrant, or licensee, has been convicted of a felony in any jurisdiction or of a crime which, if committed in Georgia, would constitute a felony under Georgia law. Previously, Georgia law arguably prohibited a licensee from retaining any individual convicted of a felony that could be deemed an employee or agent of the licensee. As amended, the employee restriction is relaxed to apply only to a “covered employee,” a newly defined term that means an employee of a mortgage lender or broker “involved in residential mortgage loan related activities for property located in Georgia and includes, but is not limited to, a mortgage loan originator, processor, or underwriter, or other employee who has access to residential mortgage loan origination, processing, or underwriting information.” Notably, the restriction no longer applies to an “agent” of a licensee.

Changes to Installment Loan Licensing

HB 891 also amended the GILA to require licensure for persons engaged in servicing of installment loans. Before the amendments, the GILA only imposed a licensing obligation on persons who advertise, solicit, offer, or make installment loans to individuals in amounts of $3,000 or less. As amended, any person that services installment loans made by others, excluding loans made by affiliated entities, is also required to obtain a license. HB 891’s amendments also added a number of new exemptions from licensure, including for (1) retail installment transactions engaged in by retail installment sellers and retail sellers, as those terms are defined, and (2) transactions in which a lender offers a consumer a line of credit of more than $3,000 but the consumer utilizes $3,000 or less of the line, so long as there are no restrictions that would limit the consumer’s ability to utilize more than $3,000 of the line at any one time. Additionally, the GILA’s provisions relating to tax on interest has been repealed and reenacted and now requires that installment lenders remit to the Department a fee of 0.125 percent of the gross loan amount on each loan made on or after July 1, 2022, and such fee becomes due on the making of any loan subject to the GILA. This revised fee replaces the prior fee of three (3) percent of the total amount of interest on any loan collected. The statute clarifies that the per loan fee must be paid by the licensee and cannot be passed through to the borrower as an additional itemized fee or charge. The method by which a licensee pays the fee is subject to further clarification via Department regulations.

Takeaway

Mortgage lenders and brokers should review the GRMA, as amended, to determine whether, and if so how, the amendments impact their licensing obligations or their policies with respect to employee background checks in Georgia. Additionally, entities servicing installment loans subject to the GILA, which are originated by non-affiliates, must now obtain a license. Licensees should also take note of the new per loan fee requirements in lieu of prior tax payment regulations.