On March 22, the Virginia legislature sent HB1027 (Act) to the governor. If signed by April 11, the Act will impose the nation’s first registration requirement on sales-based financing providers and brokers.

Virginia would also be the third state to create commercial financing disclosure requirements applicable to sales-based financing, after New York and California. The New York and California requirements have not yet taken effect due to regulatory delays.

What Is Sales Based Financing Under HB1027?

HB1027 imposes requirements related to “sales-based financing.”

Sales-based financing is a transaction that is repaid by a recipient Virginia business as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales or revenue received by the business. The term also includes a transaction with a true-up mechanism for financing that is repaid as a fixed payment but provides for a reconciliation that “adjusts the payment” to an amount that is a percentage of sales or revenue.

That definition does not distinguish between sales and loans, and therefore covers both merchant cash advances and loans that otherwise meet the definition. However, it is unclear whether that definition covers all types of merchant cash advances.

For example, in some merchant cash advances, a reconciliation does not result in an adjustment to payments going forward, but instead involves providing a refund of any excess amounts collected in fixed payments where the fixed payments did not precisely match the percentage of the recipient’s actual sales or revenue that was required to be paid. Those contracts involve a reconciliation, but do not include an adjusted payment.

As a result, providers using that alternative model, which is not expressly addressed, must consider whether HB1027 applies.

Who Will Be Required to Register?

HB1027 will require registration with the commissioner of financial institutions for both sales-based financing providers and brokers by November 1, 2022.

Under the Act, a broker is a person who for compensation or in the expectation of compensation obtains or offers to obtain sales-based financing from a provider for a recipient.

A provider is a person that extends a specific offer of sales-based financing to a recipient. It also includes a person that solicits and presents offers of sales-based financing under an exclusive contract or arrangement with a provider.

HB1027 has exemptions for a financial institution, providers, and brokers with no more than five sales-based financing transactions in 12 months, and individual sales-based financing transactions of more than $500,000.

There is no express exception for employees of providers. If the issue is not clarified by the commissioner, providers may need to consider whether the definition of provider is broad enough to cover employees engaged in solicitation of merchants, in addition to registration of the provider’s business.

The registration requires an application that will require certain control persons of providers and brokers to disclosure specified judgments, orders, and convictions. Virginia will also require the provider or broker to have authority to transact business in Virginia and to pay a fee of $1,000 (and $500 in subsequent years).

What Are the Disclosure Requirements?

HB1027 also imposes disclosure requirements when a specific offer for sales-based financing is given to the recipient Virginia business. Unlike California and New York, Virginia will not require an APR or similar rate disclosure.

However, Virginia will require disclosure of nine specific items:

  1. The total amount of the sales-based financing, and the disbursement amount, if different from the financing amount, after any fees deducted or withheld at disbursement;
  1. The finance charge;
  1. The total repayment amount, which is the disbursement amount plus the finance charge;
  1. The estimated number of payments, which is the number of payments expected, based on the projected sales volume, to equal the total repayment amount;
  1. The payment amounts, based on the projected sales volume (this requirement differs for fixed and variable payment contracts);
  1. A description of all other potential fees and charges not included in the finance charge;
  1. Certain information related to prepayments;
  1. A description of collateral requirements or security interests, if any; and
  1. A statement of whether the provider will pay compensation directly to a broker in connection with the specific offer of sales-based financing and the amount of compensation.

Additionally, updated disclosures are required if the business elects to prepay or refinance the sales-based financing.

The requirement to provide a statement regarding compensation paid by a provider to a broker is notable as the plain language is not limited to fees paid by the merchant. As a result, a provider may be required to disclose a fee paid to a broker even if that fee is not directly passed on to the recipient.

The disclosures must be provided separately from other information given to the recipient, and the recipient must sign the disclosures at the time a specific offer is accepted.

Effective Date and Potential Regulations

HB1027 authorizes the commission to adopt appropriate regulations to implement the Act. However, HB1027 applies to contracts entered into on or after July 1, 2022.

That effective date is not expressly delayed if the commission has not yet issued regulations.

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Photo of Caleb Rosenberg Caleb Rosenberg

Caleb is an associate in the firm’s Consumer Financial Services Practice Group. He focuses his practice on helping federal and state-chartered banks, fintech companies, finance companies, and licensed lenders navigate regulatory risks posed by state and federal laws aimed at protecting consumers and…

Caleb is an associate in the firm’s Consumer Financial Services Practice Group. He focuses his practice on helping federal and state-chartered banks, fintech companies, finance companies, and licensed lenders navigate regulatory risks posed by state and federal laws aimed at protecting consumers and small businesses in the credit and alternative finance products industry.

Photo of Mark Furletti Mark Furletti

Mark is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He focuses on federal and state consumer and small business lending and payments laws, including those that apply to payment cards, buy-now-pay-later transactions, vehicle-secured loans, lines of credit, unsecured…

Mark is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He focuses on federal and state consumer and small business lending and payments laws, including those that apply to payment cards, buy-now-pay-later transactions, vehicle-secured loans, lines of credit, unsecured loans, and deposit products. He counsels providers of consumer and small business financial services, including banks, on regulatory compliance, and defends them in class action litigation and government supervisory and enforcement matters. He also counsels purchasers of merchant receivables, companies that specialize in online small business lending, and companies that interact with their customers electronically or that set up recurring billing arrangements with their customers.

Mark regularly provides guidance on electronic payments and payment network rules, electronic contracting and mobile commerce, online banking, retail installment sales, preparing for examinations by the Consumer Financial Protection Bureau (CFPB), responding to CFPB supervisory requests (including so-called PARR letters), Article 9 of the Uniform Commercial Code, lease-purchase transactions and consumer protection laws, such as the Telephone Consumer Protection Act (TCPA), Truth in Lending Act (TILA), Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA), Electronic Funds Transfer Act (EFTA), Electronic Signatures in Global and National Commerce Act (E-SIGN), and statutes prohibiting unfair, deceptive, and abusive acts and practices.

He is the co-chair of the American Bar Association’s (ABA’s) National Institute on Consumer Financial Services Basics. He previously served as co-chair of the Electronic Financial Services Subcommittee of the ABA’s Consumer Financial Services Committee.

Previously, Mark worked for the Federal Reserve Bank of Philadelphia for several years, during which he wrote more than 15 articles on consumer credit and payments topics and advised those crafting regulations on consumer credit and consumer payments issues. One article, “The Debate Over the National Bank Act and the Preemption of State Efforts to Regulate Credit Cards,” 77 Temple L. Rev. 425 (2004), was named best student article by the American College of Consumer Financial Services Lawyers. Other published articles include “Credit Card Pricing Developments and Their Disclosure,” 13 J. of Fin. Transformation 5 (2005).

Mark also worked as a business consultant, assisting the nation’s largest retail banks and credit card lenders with customer strategy issues, and as a manager at one of the largest credit card issuers in the United States.