As we previously posted here, in March, Utah enacted its Commercial Financing Registration and Disclosure Act (CFRDA), requiring commercial financing providers to register with the Utah Department of Financial Institutions (DFI). The process requires registering with the Nationwide Multistate Licensing System and Registry (NMLS), providing certain information about the provider, and disclosing information about certain control persons relating to specified criminal convictions. Despite the January 1, 2023 deadline for CFRDA registration, the NMLS has already started accepting applications, and the DFI encourages providers to apply early to avoid backlog. To help streamline the process, the NMLS has created a requirement checklist found here.

As a reminder, the CFRDA requires a “provider” of commercial financing transactions to register annually with the DFI and pay a fee, unless an exemption applies.

  • A “commercial financing transaction” includes a commercial loan, a commercial open-end credit plan, and an accounts receivable purchase transaction.
  • A “provider” is a person who offers more than five commercial financing transactions in Utah in any calendar year. A provider also includes a person who, under an agreement with a depository institution, offers one or more commercial financing products provided by the depository institution via an online platform that the person administers.

However, several CFRDA exemptions exist for certain entities and types of transactions, including:

  • Depository institutions and certain regulated subsidiaries and service corporations;
  • Money transmitters licensed under Utah law;
  • Commercial mortgages;
  • Leases;
  • Purchase money obligations;
  • Commercial loans and open-end credit plans of $50,000 or more to motor vehicle dealers or rental companies;
  • Commercial financing transactions offered in connection with the sale of a product that the person manufactures, licenses, or distributes; and
  • Commercial financing transactions of more than $1,000,000.

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

As we previously posted here, in March, Utah enacted its Commercial Financing Registration and Disclosure Act (CFRDA), requiring commercial financing providers to register with the Utah Department of Financial Institutions (DFI). The process requires registering with the Nationwide Multistate Licensing System and Registry (NMLS), providing certain information about the provider, and disclosing information about certain control persons relating to specified criminal convictions. Despite the January 1, 2023 deadline for CFRDA registration, the NMLS has already started accepting applications, and the DFI encourages providers to apply early to avoid backlog. To help streamline the process, the NMLS has created a requirement checklist found here.

As a reminder, the CFRDA requires a “provider” of commercial financing transactions to register annually with the DFI and pay a fee, unless an exemption applies.

  • A “commercial financing transaction” includes a commercial loan, a commercial open-end credit plan, and an accounts receivable purchase transaction.
  • A “provider” is a person who offers more than five commercial financing transactions in Utah in any calendar year. A provider also includes a person who, under an agreement with a depository institution, offers one or more commercial financing products provided by the depository institution via an online platform that the person administers.

However, several CFRDA exemptions exist for certain entities and types of transactions, including:

  • Depository institutions and certain regulated subsidiaries and service corporations;
  • Money transmitters licensed under Utah law;
  • Commercial mortgages;
  • Leases;
  • Purchase money obligations;
  • Commercial loans and open-end credit plans of $50,000 or more to motor vehicle dealers or rental companies;
  • Commercial financing transactions offered in connection with the sale of a product that the person manufactures, licenses, or distributes; and
  • Commercial financing transactions of more than $1,000,000.

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

On June 9, California’s Office of Administrative Law approved commercial financing disclosure regulations (Regulations) which require consumer-like disclosures for certain commercial financing products such as small business loans and merchant cash advances. With this final step completed, the Regulations from the Department of Financial Protection and Innovation (DFPI) will become effective on December 9, 2022, completing a process that began with the passage of SB 1235 in 2018.

Until this year, only New York had also passed a similar law requiring commercial financing disclosures, which is currently at the proposed regulations stage (see our blog post on New York’s proposed regulations here). However, already this year, Utah and Virginia have each passed statutes requiring the registration of certain commercial finance companies in addition to imposing disclosure requirements (see our blog posts on Utah’s law here and Virginia’s law here).

The Regulations require providers of commercial financing to give the recipient of the financing-specific disclosures in the precise language and format detailed by the Regulations at the time the provider extends the commercial financing offer. The format requirements detail specific rows and columns that must be used for a disclosure table and the terms that must appear in each section of the table.

Despite significant pushback from industry groups during the rulemaking process, the regulations require an APR disclosure for all product types, including sales-based financing transactions such as merchant cash advances. The Regulations provide information about how the APR disclosure must be calculated.

Additionally, although there is an exemption for depository institutions, the Regulations expressly apply to certain partners of depository institutions. As a result, despite the exemption, banks will need to determine applicability of the Regulations to appropriately assess their partners’ compliance practices.

We routinely assist clients in developing and maintaining commercial finance programs and will continue to monitor the developments of state regulation of commercial finance.

On March 24, Utah’s governor signed the Commercial Financing Registration and Disclosure Act (CFRDA) into law. Under the CFRDA, beginning January 1, 2023, commercial financing providers must register with the Utah Department of Financial Institutions (Department) and provide certain disclosures.

Utah’s registration requirement is the first applicable to providers of accounts receivable purchase transactions (commonly known as merchant cash advances, or MCAs), as Virginia’s governor has not yet signed HB1027, which also has registration and disclosure requirements.

Utah is also the third state to create commercial financing disclosure requirements applicable to accounts receivable purchase transactions, after New York and California. The New York and California requirements have not yet taken effect due to regulatory delays, but unlike New York and California, Utah does not require an APR or similar rate disclosure.

Who Will Be Required to Register?

The CFRDA requires a “provider” of commercial financing transactions to register annually with the Department and pay a fee, unless an exemption applies.

A “commercial financing transaction” includes a commercial loan, a commercial open-end credit plan, and an accounts receivable purchase transaction.

A “provider” is a person who offers more than five commercial financing transactions in Utah in any calendar year. A provider also includes a person who, under an agreement with a depository institution, offers one or more commercial financing products provided by the depository institution via an online platform that the person administers.

However, there are several exemptions from the CFRDA for certain entities and types of transactions, including for:

  • Depository institutions and certain regulated subsidiaries and service corporations;
  • Money transmitters licensed under Utah law;
  • Commercial mortgages;
  • Leases;
  • Purchase money obligations;
  • Commercial loans and open-end credit plans of $50,000 or more to motor vehicle dealers or rental companies;
  • Commercial financing transactions offered in connection with the sale of a product that the person manufactures, licenses, or distributes; and
  • Commercial financing transactions of more than $1,000,000.

As a result, although depository institutions and some regulated subsidiaries are exempt from the CFRDA, some bank partners who administer an online platform under an agreement with a depository institution may be required to register if they “offer” one or more products provided by the depository institution. The term “offer” is not defined.

Registration will require registering with the Nationwide Multistate Licensing System and Registry (NMLS), providing certain information about the provider, and disclosing information about certain control persons relating to specified criminal convictions. However, the Department may issue a rule requiring additional information.

What Are the Disclosure Requirements?

The CFRDA requires a provider to give certain disclosures before consummating a commercial financing transaction. Unlike California and New York, Utah will not require an APR or similar rate disclosure.

For all commercial financing transactions, the CFRDA requires the following disclosures:

  1. The amount of funds provided to the business under the terms of the commercial financing transaction, and the amount disbursed to the business, if less than the amount of funds provided;
  2. The total amount to be paid to the provider;
  3. The total dollar cost of the commercial financing transaction, which is the difference between the amount provided to the business and the amount to be paid to the provider;
  4. The manner, frequency, and amount of each payment, or an estimated amount of an initial payment if the payments vary;
  5. Information about costs or discounts associated with prepayment; and
  6. Any amounts provided to the business under the agreement that will be paid by the provider to a broker.

The agreement also must include a description of the method of calculating any variable payments and the circumstances under which payments may vary.

For commercial open-end credit plans the disclosures also must be provided after any disbursement of funds. Those disclosure requirements apply to a commercial financing transaction consummated after January 1, 2023. The Department may also require additional disclosures.

On October 20, the New York Department of Financial Services (NYDFS) published a notice in the New York State Register announcing that it has issued a proposed regulation to implement S 5470-B, which requires disclosures for commercial financing transactions of $2.5 million or less under a commercial financing agreement.

The notice allows for public comment for 60 days. The bill becomes effective on January 1, 2022, but compliance with the rule will not be mandated until six months after final publication.

The regulation seeks to parallel Truth in Lending Act (TILA) disclosures for small business financings, so business owners are provided with “the necessary information to make an informed, financially responsible decision. Standardized disclosures will also allow borrowers to compare the pricing and costs of a commercial financing among several providers.” The statute specifies four types of financings affected — sales-based, closed-end, open-end, and factoring — along with the disclosures required for each.

Notably, the definition of “sales-based financing” under the bill captures the practices of many merchant cash advance providers. Indeed, “sales-based” financing means “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 “a true-up mechanism where the financing is repaid as a fixed payment but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”

The statute expressly exempts: (1) financial institutions, (2) lenders regulated under the Farm Credit Act, (3) commercial financing secured by real property, (4) technology service providers that only provide software and support services, (5) lenders who make no more than five applicable transactions in New York in a 12-month period, (6) individual financings exceeding $2.5 million, and (7) automobile financings.

Our Take. While this regulation should not impose a heavy burden on most companies, it will take time to create the appropriate disclosures and train staff. While New York has joined California in enacting legislation requiring consumer-like disclosures for commercial financing transactions, we do not expect to see a widespread enactment of similar state laws.

To keep you informed of recent activities, below are several of the most significant federal and state events that have influenced the Consumer Financial Services industry over the past week:

Federal Activities

State Activities

Continue Reading Troutman Pepper Weekly Consumer Financial Services Newsletter

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Continue Reading Troutman Pepper Weekly Consumer Financial Services Newsletter

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Continue Reading Troutman Pepper Weekly Consumer Financial Services Newsletter

On April 5, the Georgia legislature sent SB 90 (Act) to Governor Kemp for signature. The Act aims to amend Chapter 1 of Title 10 of the Georgia Code to require commercial financing disclosures.

What Is A Commercial Financing Transaction Under SB 90?

SB 90 imposes requirements related to “commercial financing transactions.”

Under the Act, a “commercial financing transaction” means a business purpose transaction under which a person extends a business a commercial loan or a commercial open-end credit plan or that is an accounts receivable purchase transaction.

A “business purpose” transaction is one where the proceeds that a business receives are provided to the business or intended to be used to carry on the business.

Who Does SB 90 Apply To?

Under the Act, a provider is a person who consummates more than five commercial financing transactions in the state during any calendar year. A provider also includes “a person who, under a written agreement with a depository institution, offers one or more commercial financing products provided by the depository institution via an online platform that the person administers.”

SB 90 has exemptions for federally insured financial institutions, providers with no more than five commercial financing transactions in 12 months, commercial financing transactions secured by real estate, commercial financing transactions of more than $50,000 to motor vehicle dealers, and commercial financing transactions of more than $500,000.

What Are The Disclosure Requirements?

SB 90 requires disclosure of the following:

  • The total amount of funds provided to the business under the terms of the commercial financing transaction;
  • The total amount of funds disbursed to the business as a result of any fees deducted or withheld at disbursement, any amount paid to the provider to satisfy a prior balance, and any amount paid to a third party on behalf of the business;
  • The total amount paid to the provider;
  • The total dollar cost of the commercial financing transaction, calculated by finding the difference between the total amount of funds provided and the total amount paid by the provider;
  • The manner, frequency, and amount of each payment. If the payment is variable, the manner, frequency, and estimated amount of the initial payment; and
  • A statement of whether there are any costs or discounts associated with prepayment.

The disclosure requirements apply to any commercial financing transaction consummated on or after January 1, 2024.

What Are The Broker Requirements?

Under SB 90, a broker means a person who, for compensation, arranges a commercial financing transaction between a third party and a business in the state.

The Act prohibits any broker from assessing or soliciting an advance fee from a business to provide services as a broker. The Act would not prohibit a broker from soliciting a potential business to pay for actual services necessary to apply for a commercial financing transaction, including, credit checks or appraisals, where such payment is made by check or money order payable to an independent third-party.

The Act further prohibits brokers from making false or deceptive representations in its business dealings.

What Remedies Apply?

The Act provides that the Attorney General may receive and act on complaints received under the Code section. The Act further provides for monetary penalties. No private right of action exists under the Act.

Recently, multiple states have had disclosure regulations for commercial financing transactions either enacted (see discussions on New York and Utah) or proposed (see discussions on Missouri, Illinois, Florida, and Connecticut). Troutman Pepper will continue to monitor and report on developments in this area.

On March 2, Florida State Representative Doug Bankston introduced HB1353, the Florida Commercial Financing Disclosure Law, that would mandate covered commercial financing companies provide consumer-like disclosures for certain commercial financing transactions. The law would also define and prohibit specific acts by brokers of those transactions, including the collection of advance fees. New York, California, Utah and Virginia have each enacted legislation, discussed here, here, here, and here, imposing additional requirements on small business financing transactions. We expect that additional states will continue to push legislation forward in this area, as legislators in Connecticut, Illinois (discussed here), Maryland and Missouri (discussed here) have introduced bills this year.

The Florida law would apply to multiple types of commercial financing, including commercial loans, lines of credit, and accounts receivable purchase transactions, subject to certain exceptions. For example, like California and New York, the Florida law contains an exception for banks. For any covered transaction, the Florida law would require 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.

If enacted, the law will apply to transactions beginning January 1, 2024.