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
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.
However, several CFRDA exemptions exist for certain entities and types of transactions, including:
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.
However, several CFRDA exemptions exist for certain entities and types of transactions, including:
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:
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:
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:
Continue Reading Troutman Pepper Weekly Consumer Financial Services Newsletter
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:
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