On March 1, Senate Bill (SB) 335 was introduced, which, if passed, would impose certain requirements on “commercial financing transactions.” Recently, multiple states have enacted disclosure regulations for commercial financing transactions (see discussions on California, Connecticut, Florida, Georgia, New York, Virginia, and Utah).

Continue Reading Proposed Legislation in Louisiana Aims to Regulate Commercial Financing Transactions

On December 4, a federal district court for the Central District of California granted summary judgment in favor of the Commissioner of the California Department of Financial Protection and Innovation (DFPI) finding that regulations adopted last year under California’s Commercial Financing Disclosures Law (CFDL) do not violate the plaintiff’s First Amendment rights and are not preempted by the Truth in Lending Act (TILA). Under the CFDL, providers are required to give certain disclosures similar to consumer transactions, such as the amount of funding the small business will receive, the APR, a payment amount (if applicable), the term, details related to prepayment policies, and (for products without a monthly payment) an average monthly cost.

Continue Reading California DFPI Wins Big: Federal District Court Holds Commercial Financing Disclosure Regulations Do Not Violate First Amendment And Are Not Preempted by TILA

Earlier this month, the California Department of Financial Regulation and Innovation (CA DFPI) announced a new rule expanding the definition of unfair, deceptive and abusive acts and practices (UDAAP) to commercial financing. Specifically, the rule makes it unlawful “for a covered provider to engage or have engaged in any unfair, deceptive, or abusive act or practice in connection with the offering or provision of commercial financing or another financial product or service to a covered entity.” The new rule also includes annual reporting requirements (described below) for any covered provider who makes more than one commercial financing transaction to covered entities in a 12-month period or who makes five or more commercial financing transactions to covered entities in a 12-month period that are “incidental” to the business of the covered provider. Importantly, this rule does not apply to banks, credit unions, federal savings and loan associations, current licensees of the CA DFPI or licensees of other California agencies “to the extent that licensee or employee is acting under the authority of” the license.

Continue Reading California DFPI Requires Annual Reporting and Expands UDAAP to Commercial Financing

On June 28, Connecticut Governor Ned Lamont signed into law Senate Bill 1032 entitled An Act Requiring Certain Financing Disclosures, which requires certain providers of commercial financing to make various disclosures and requires providers and brokers to register. Connecticut now joins states like Utah, California, Georgia, New York, Florida, and Virginia (discussed here, here, here, here, here, and here) in requiring such disclosures.

Continue Reading Connecticut Becomes Latest State to Enact a Commercial Financing Disclosure and Registration Law

On June 26, Florida Governor Ron DeSantis signed the Florida Commercial Financing Disclosure Law (FCFDL). As discussed here, the FCFDL mandates that covered commercial financing companies provide consumer-like disclosures for certain commercial financing transactions. The law also defines and prohibits specific acts by brokers of those transactions, including the collection of advance fees.

The FCFDL applies to multiple types of commercial financing, including commercial loans, lines of credit, and accounts receivable purchase transactions, subject to certain exceptions. For any covered transaction, the FCFDL requires disclosure of:

  • The total amount of commercial financing, and if different from the financing amount, the disbursement amount after any deductions or withholdings, which must be itemized;
  • The total amount owed to the financing company;
  • The total cost of the financing;
  • The manner, frequency and amount of each payment, or if there are variable payments an estimated initial payment and the methodology used to calculate variable payments and when payments may vary; and
  • Certain information related to prepayment rights and penalties.

The FCFDL has exemptions for certain transactions and entities including:

  • Federally insured Florida and federal “depository institutions,” as well as their holding companies, affiliates and subsidiaries;
  • Commercial mortgages;
  • Individual transactions of more than $500,000;
  • Transactions with providers who sell or lease products manufactured, licensed, or distributed by that provider or certain related companies (e.g., certain commercial credit sales);
  • Certain purchase money obligations;
  • Leases;
  • Providers who originate no more than five covered transactions in a 12-month period;
  • Licensed money transmitters; and
  • Certain floor plan financing transactions with motor vehicle dealers or rental companies.

The exception for Florida and federal depository institutions and related parties raises serious issues under the Commerce Clause of the U.S. Constitution. See Lewis v. BT Investment Managers, Inc., 447 U.S. 27 (1980) (holding invalid certain “parochial” legislation favoring Florida bank holding companies over out-of-state bank holding companies).

The FCFDL disclosures are much more limited than related statutes in California and New York. The Attorney General is given exclusive authority to enforce the FCFDL thorough voluntary compliance, administrative or judicial proceedings to enforce compliance, and fines limited to $20,000 in the aggregate ($50,000 for violations after written notice of prior violations). There is no private right of action under the FCFDL.

Although the FCFDL has an effective date of July 1, 2023, it only applies to transactions consummated on or after January 1, 2024.

In a recent decision, a federal district court for the Central District of California denied a motion to dismiss filed by the Commissioner of the California Department of Financial Protection and Innovation (DFPI) finding that California’s recently adopted Commercial Financing Disclosures Law (CFDL) may violate the plaintiff’s First Amendment rights or be preempted by the Truth in Lending Act (TILA).

Continue Reading California Federal Court Denies DFPI’s Motion to Dismiss: Finds Commercial Financing Disclosure Regulations May Violate First Amendment or Be Preempted

As discussed here, on December 7, the Consumer Financial Protection Bureau (CFPB or Bureau) made a preliminary conclusion that New York’s Commercial Financing Law (the New York law) was not preempted by the Truth in Lending Act (TILA), and was also considering whether to make a preemption determination regarding similar state laws in California, Utah, and Virginia. Today, the CFPB announced that it has determined there is no conflict between the state laws and TILA because the state laws extend disclosure protections to businesses and entrepreneurs that seek commercial financing rather than to consumer purpose transactions. In doing so, the CFPB expressly adopted a narrow view of the scope of TILA preemption of state laws.

As the Bureau stated in the press release announcing the decision, “[s]tates have broad authority to establish their own protections for their residents, both within and outside the scope of the [TILA]. The [TILA] only preempts state laws under what is known as conflict preemption. The state laws reviewed by the CFPB concern protections for businesses to ensure they can understand the credit terms available to them. This is beyond the scope of the [TILA’s] statutory consumer credit purposes. The CFPB’s decision affirms that the four states’ commercial financing disclosure laws do not conflict with the [TILA].”

The CFPB’s decision was prompted by a request from a business trade association asking it to determine that TILA preempts certain provisions in the New York law. Like TILA, the New York law requires rate and cost disclosures for certain covered transactions, however, the New York law applies to multiple types of commercial financing products instead of consumer credit. It requires providers to issue disclosures when “extending a specific offer” for various types of commercial financing. The request asserted that TILA preempts the New York law with respect to its use of the terms “finance charge” and “annual percentage rate” (APR), notwithstanding that the statutes govern different categories of transactions. The request focused on what it alleged are material differences between how the New York law and federal law use the terms “finance charge” and “APR,” and alleged that these differences made the New York law inconsistent with federal law for purposes of preemption.

The CFPB’s preliminary determination was that TILA did not preempt the New York law because the statutes govern different transactions. TILA requires creditors to disclose the finance charge and APR only for “consumer credit” transactions, whereas the New York law requires the disclosures only for “commercial financing.” Second, the CFPB disagreed that the New York law significantly impeded the operation of TILA or with the purposes of the federal scheme. On its own initiative, the CFPB announced that it was considering making a similar determination regarding state laws in California, Utah, and Virginia that prescribe similar disclosures in certain commercial transactions.

The CFPB reached its decision after analyzing 15 comments on its preliminary determination, including one from the Attorney General of California discussed here. In the end, the CFPB determined that Congress adopted a narrow standard for TILA preemption that displaces state law only in the case of inconsistency. “As relevant here, commercial financing transactions to businesses —and any disclosures associated with such transactions — are beyond the scope of TILA’s statutory purposes, which concern consumer credit.”

Last year, Missouri State Senator Justin Brown (R) introduced a bill that would have imposed certain mandatory disclosure requirements for commercial financing transactions. Ultimately, the bill failed to advance. On December 1, 2022, Senator Brown reintroduced a similar bill, known as SB 187, which also requires registration of a commercial financing broker. The bill would also impose a list of mandatory disclosure requirements in commercial financing transactions but is more similar to Utah’s impending disclosure requirements discussed here, than the more stringent requirements imposed by California and New York (discussed here and here).

The bill states that a “provider” who consummates more than five commercial financing products to a business located in the state of Missouri in a calendar year would be required to make the following disclosures:

  • The total amount of funds provided to the business under the terms of the commercial financing product;
  • The total amount of funds disbursed to the business under the terms of the commercial financing product, if less than the total amount of funds provided, as a result 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 pursuant to the commercial financing product agreement;
  • The total dollar cost of the commercial financing product under the terms of the agreement, derived by subtracting the total amount of funds provided from the total of payments;
  • The manner, frequency, and amount of each payment; and
  • A statement of whether there are any costs or discounts associated with prepayment of the commercial financing product including a reference to the paragraph in the agreement that creates the contractual rights of the parties related to prepayment.

The bill defines commercial financing relatively broadly to include both traditional loans and lines of credit and accounts receivable purchase transactions but contains exceptions for certain financing “providers” such as banks and certain types of financing such as commercial mortgages. However, like the California and New York laws, certain bank partners may not be exempt because the definition of “provider” is broad and includes a “person that enters into a written agreement with a depository institution to arrange for the extension of a commercial financing product by the depository institution to a business via an online lending platform administered by the person.”

Unlike the California, New York, Virginia, and Utah commercial financing disclosures laws, the Missouri bill does not provide a general exemption for large-dollar commercial loans or lines of credit.

Troutman Pepper routinely assists clients in complying with commercial disclosure laws and will continue to monitor the developments in state and federal commercial finance regulation.

On February 1, the Superintendent of Financial Services Adrienne A. Harris announced that the New York State Department of Financial Services completed the process for adopting a new regulation relating to disclosure requirements for commercial financing. The regulation, 23 NYCRR 600, applies to multiple types of commercial financing products and requires providers to issue disclosures when “extending a specific offer” for various types of commercial financing.

As explained in the press announcement, the new regulation “requires certain providers of commercial financing in amounts of up to $2,500,000 to provide standardized disclosures to potential borrowers at the time financing offers are extended. These standardized disclosures are designed to help businesses and individuals understand and compare the terms of different commercial financing offers. The regulation implements the [Commercial Finance Disclosure Law or CFDL] and provides specific instructions to commercial financing providers on how to comply with the CFDL.”

Among other things, the regulation:

  • Explains how providers should calculate the finance charge and annual percentage rate (APR);
  • Sets forth detailed formatting requirements for disclosures required for sales-based financing, closed-end financing, open-end financing, factoring transaction financing, lease financing, and general asset-based financing;
  • Describes how the CFDL’s disclosure threshold of $2,500,000 is calculated; and
  • Prescribes a process under which certain providers calculating estimated APRs will report data to the superintendent of financial services relating to the actual retrospective APRs of completed transactions, in order to facilitate accurate estimates for future transactions.

We previously reported on an industry group lawsuit challenging California’s similar disclosure regulations asserting those disclosure requirements violate the First Amendment by compelling inaccurate speech and are preempted by TILA. New York’s regulations may be subject to similar industry attacks in the future.

Please join Troutman Pepper Partner Chris Willis and his colleagues Associates Caleb Rosenberg and Josh McBeain as they discuss commercial financing regulatory developments, specifically what is happening in both legislatures and regulatory agencies to extend consumer-like protections to business borrowers.

Continue Reading Commercial Financing Regulatory Developments