State laws requiring commercial financing providers to provide disclosures and to register take effect
Update: On February 1, 2023, New York adopted final regulations implementing its Commercial Finance Disclosure Law. Compliance with the law and implementing regulations is required six months after the publication of the Notice of Adoption of the regulations in the New York State Register.
In the last six months, multiple state laws and regulations that require a broad class of commercial financing providers, including those providing merchant cash advances and factoring, to provide consumer-like disclosures to financing recipients have taken effect. In Utah and Virginia specifically, certain providers are also required to register with the applicable state agency. The relevant state laws are summarized below.
We encourage any businesses impacted by these regulations to contact us should they need assistance in (i) determining whether the laws and regulations are applicable to their business; (ii) drafting disclosures that meet these state requirements; or (iii) navigating the application and registration processes.
Beginning December 9, 2022, persons providing commercial financing (including small business loans and merchant cash advances) to borrowers “whose business is principally directed or managed from California” are required to provide borrowers with consumer-like disclosures, after the California Department of Financial Protection and Innovation (DFPI) issued final regulations on June 15th to implement SB 1235, otherwise known as the California Commercial Financing Disclosure Law (CCFDL). While the CCFDL was signed into law on September 30, 2018, it could not take effect until the DFPI issued final regulations, which has now been done. We previously summarized the CCFDL and its implementing regulations in the June 28, 2022 issue of Bank Regulatory News and Trends.
Under the CCFDL, a provider of commercial financing must disclose critical terms at the time the provider extends the offer to finance:
(1) The total amount of funds provided.
(2) The total dollar cost of the financing.
(3) The term or estimated term.
(4) The method, frequency, and amount of payments.
(5) A description of prepayment policies.
(6) The total cost of the financing expressed as an annualized rate.
The regulations provide detail as to format and content of the disclosures and those requirements vary depending on the type of commercial financing offered. The regulations also contain very specific requirements for closed-end transactions, factoring transactions, commercial open-end credit plans, sales-based financing, lease financing, and asset-based lending transactions.
The CCFDL contains exemptions and carveouts for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property. While depository institutions are exempt, the CCFDL treats certain partners to banks as “providers” subject to the law’s disclosure requirements. A “provider” includes a nonbank which enters into a written agreement with a bank to arrange for the extension of commercial financing by the bank to a recipient via an online lending platform administered by the nonbank.
Governor Spencer Cox signed the Commercial Financing Registration and Disclosure Act (CFRDA) into law on March 24, 2022. Pursuant to the CFRDA, commercial financing providers who make more than five commercial financing transactions in Utah in any calendar year must register with the Utah Department of Financial Institutions and provide certain disclosures, effective January 1, 2023. The CFRDA confirms that a commercial financing transaction includes a commercial loan, a commercial open-end credit plan, and an accounts receivable purchase transaction in amount of $1 million or less. Utah’s requirements apply to both providers and brokers of commercial financial products offered in Utah.
Before consummating a commercial financing transaction, a provider must disclose certain transaction terms, including the total amount of funds provided to the business; the total amount to be paid to the provider; the total dollar cost of the commercial financing transaction; the manner, frequency, and amount of each payment; and any prepayment penalties, among other items. Disclosure requirements apply to commercial financing transactions consummated on or after January 1, 2023.
Virginia adopted registration requirements applicable to merchant cash advance providers, when, on April 11, 2022, Governor Glenn Youngkin signed House Bill 1027 into law. Unlike the laws of Utah and California which apply broadly to many forms of commercial financing, Virginia’s new law is narrowly focused on providers of sales-based (ie, merchant cash advance) financing.
The law defines sales-based financing as a “transaction that is repaid by the recipient to the provider, over time, as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient.” The term also includes transactions with a true-up mechanism where the financing is repaid as a fixed payment but provides for reconciliation that adjusts the payment to a percentage of sales or revenue.
The new law requires MCA providers to register with the Virginia State Corporation Commission and annually renew thereafter. The Virginia law exempts any transactions over $500,000 and any entity entering five or less transactions in Virginia in a 12-month period.
In addition to the registration requirement, the law also imposes disclosure obligations on merchant cash advance providers similar to the disclosure requirements under the Utah and California laws, except that Virginia does not require disclosure of the annual percentage rate. Disclosure obligations took effect on July 1, 2022.
Further, the law imposes several dispute-resolution requirements. First, it prohibits providers from using confession-of-judgment provisions. Second, it requires that any court action related to a sales-based financing agreement be brought in Virginia, and forum-selection clauses requiring that court actions be brought outside Virginia are unenforceable. Third, it includes two restrictions on arbitration clauses in sales-based financing agreements. Specifically, the arbitration clause cannot require face-to-face arbitration to occur outside of the jurisdiction where the merchant’s principal place of business is located, and providers must pay all arbitration costs.
New York passed a law in 2020 requiring providers of commercial financing to provide consumer-like disclosures. However, New York’s requirement will not take effect until the New York Department of Financial Services (NYDFS) finalizes implementing rules and regulations. Most recently, in September 2022, NYDFS published proposed rules with a compliance date for the disclosures six months after the date of publication of the Notice of Adoption of the final regulations in the New York State Register.
Under New York’s law, commercial finance companies will be required to give disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.
The rules proposed in September 2022 indicated the NYDFS intends to align with California where possible. Like California, New York will exempt financial institutions (eg, banks, trust companies, savings and loans associations), but not bank subsidiaries.
Of note, NYDFS’s most recently proposed rules added an additional requirement that if the finance company is operated out of New York, then the New York disclosure law applies to all their transactions, without regard to where the borrower is located or managed from.
To learn more about these new requirements and their implications for your business, please contact either of the authors or your DLA Piper relationship attorney.