On February 16, Illinois State Representative Hoan Huynh (D) introduced HB3064, the Small Business Truth in Lending Act, that would impose certain mandatory disclosure requirements for commercial financing transactions and require registration of small business finance companies and brokers. Illinois follows the lead of states such as New York, California, Utah, and Virginia which have each enacted legislation imposing additional requirements on small business financing transactions. The differences between the state requirements creates an increasingly complex multi-state regulatory environment for small business finance companies. We expect that additional states will continue to push legislation forward in this area, as legislators in Connecticut, Maryland, and Missouri have also introduced bills this year.

The Illinois bill would impose disclosure requirements on broad categories of commercial financing, including closed-end commercial financing, open-end commercial financing, sales-based commercial financing, factoring transactions, and “other forms” of commercial financing. Much like the requirements in New York and California, the Illinois bill provides for some variations in the disclosure requirements depending on the transaction type. For closed-end financing, the bill would require the following:

  • The total amount of commercial financing, and if different from the financing amount, the disbursement amount after any deductions or withholdings;
  • The finance charge;
  • The percentage rate calculated in accordance with the federal Truth in Lending Act;
  • The total repayment amount, which is the disbursement amount plus the finance charge;
  • The term of the financing;
  • The payment amounts or a description of the methods used to calculate the amounts and frequency and the amounts of the average projected payments per month;
  • A description of all other potential fees and charges not included in the finance charge, including draw fees, late payment fees, and returned payment fees;
  • Any fees that would be assessed for a prepayment in full; and
  • A description of collateral requirements or security interests, if any.

The bill does contain exceptions for certain financing providers such as banks and certain types of financing such as commercial mortgages and transactions of more than $2,500,000. However, much like California and New York, certain bank partners may not be exempt, as the exemptions appear to carve out some technology providers that have an arrangement to obtain an interest in the financing after origination, even if the transaction was originated by a bank.

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

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:

Federal Activities

State Activities

Federal Activities:

  • On February 3, while delivering remarks at the American Bar Association Business Law Section Derivatives and Futures Law Committee Winter Meeting, Commodities Futures and Trading Commission (CFTC) Chairman Rostin Benham noted that “there remains a gap in crypto cash market regulation for non-security tokens, and [he] believes the CFTC is well positioned to fill this specific gap if Congress so chooses.” For more information, click here.
  • On February 3, the U.S. District Court for the Northern District of Illinois dismissed with prejudice claims that Townstone Financial, Inc. and its owner violated Equal Credit Reporting Act by engaging in discriminatory marketing and applicant outreach practices. For more information, click here.
  • On February 1, a U.S. District Court for the Southern District of New York federal judge granted Coinbase, Inc.’s (Coinbase) motion to dismiss a putative class-action lawsuit that alleged Coinbase and its founder enabled Coinbase users to buy and sell 79 different unregistered securities in the form of digital assets (tokens) in violation of federal securities laws due to Coinbase’s purported failure to register with the Securities and Exchange Commission as a securities exchange. The class consisted of “all persons or entities that transacted in the Tokens” on Coinbase’s exchange platform between October 8, 2019 through March 11, 2022 — the class-action lawsuit filing date. Specifically, the class argued that Coinbase was a “statutory seller” of unregistered securities under Section 12(a)(1) of the Securities Act. Under the U.S. Supreme Court decision Pinter v. Dahl, a defendant constitutes a “statutory seller” if the defendant (1) passed title, or other interest in the security, to the buyer for value; and (2) solicited the purchase of a security motivated in part by the defendant’s own financial interests. The court granted Coinbase’s motion to dismiss for two reasons: (1) Coinbase could not obtain title of the tokens under the terms of use agreement it entered with its customers, which stated: “Title to Digital Currency shall at all times remain with you and shall not transfer to Coinbase,” and (2) although the class alleged that Coinbase promoted the sale of the tokens by participating in “airdrops” of the tokens and providing news updates on the price movements of the tokens, the class failed to allege that its selling and purchasing of the tokens resulted from Coinbase’s “direct solicitation.” For more information, click here.
  • On February 1, the Office of the Comptroller of the Currency (OCC) issued a bulletin to inform banks and OCC examining personnel that the loan origination threshold for reporting Home Mortgage Disclosure Act data on closed-end mortgage loans has changed. Due to a recent court decision, the threshold for reporting is now 25 closed-end mortgage loans originated in each of the two preceding calendar years. For more information, click here.
  • On February 1, the Department of Justice filed a complaint on behalf of the Federal Trade Commission (FTC) against GoodRX for allegedly violating the FTC Act and the Health Breach Notification Rule by failing to notify consumers that it was disclosing their personal health information to third parties for advertising purposes. For more information, click here.
  • On January 30, digital news provider Axios reported that crypto-lending firm Gemini Trust Company LLC (Gemini) led its customers to believe that the Federal Deposit Insurance Corporation (FDIC) fully insured its stablecoin, GUSD, and its interest-bearing cryptocurrency deposit product, Gemini Earn. The terms of use agreement Gemini entered with its customers contains an FDIC insurance section that expressly asserts that digital assets held on its platform are not FDIC-insured: “Digital Assets held in your Digital Asset account, including your Gemini Dollars [GUSD], are not subject to deposit insurance protection, including but not limited to, FDIC insurance or Securities Investor Protection Corporation protections.” However, according to the Axios report, Gemini seemingly reassured its customers that their GUSD and Gemini Earn deposits were safe and secure. Genesis Global Capital LLC (Genesis), the entity responsible for providing interest payments to Gemini Earn accountholders, filed for bankruptcy on January 20 after announcing its decision to pause withdrawals of Gemini Earn deposits. At the time of its bankruptcy filing, Genesis possessed approximately $900 million worth of Gemini Earn deposits. For more information about the Axios report, click here.
  • On January 30, Senators Elizabeth Warren (D-MA), John Kennedy (R-LA), and Roger Marshall (R-KS) issued a letter to Silvergate Bank concerning Silvergate’s role in transferring FTX customer funds to FTX’s partner firm and cryptocurrency hedge fund Alameda Research. The 2023 letter constitutes a follow-up response to the senators’ December 5, 2022 letter sent to Silvergate. Notably, the 2023 letter describes Silvergate’s response to the 2022 letter as “evasive and incomplete” and lacking “information needed to assess the extent to which Silvergate is responsible for the improper transfer of FTX customer funds to Alameda … .” For more information, click here.
  • On January 30, Federal Housing Administration (FHA) announced that it will expand and enhance its set of loss mitigation options used to help borrowers struggling to make mortgage payments on their FHA-insured mortgages. The enhancements will extend FHA’s COVID-19 loss mitigation options to all eligible borrowers who fall behind on their mortgage payments, regardless of the cause of their delinquency. The updates also will enable mortgage servicers to use the full 30% of FHA’s partial claim option, rather than the previously permitted 25%, to help maximize the number of borrowers able to retain their homes. Although the changes become effective on April 30, mortgage servicers may begin immediately offering these options to borrowers. For more information, click here.
  • On January 27, the Federal Reserve Board issued a policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status. The statement makes clear that Fed-supervised uninsured and insured banks will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities. For more information, click here.
  • On January 27, the FDIC released a list of 17 administrative enforcement action orders taken against banks and individuals in December 2022; currently, no administrative hearings occur in February 2023. The administrative enforcement actions in those orders consisted of one order to pay civil money penalty, two consent orders, one combined personal consent order and order to pay, two Section 19 orders, four prohibition orders, and seven orders of termination of insurance. For more information, click here.
  • On January 27, the Biden administration issued a blog titled, “The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks.” In the blog, the administration pinpointed certain risks currently associated with digital assets and how the administration intends to limit the extent by which consumers, as well as financial institutions, are subject to those risks. For example, the administration examined “misuses of customers’ assets” and potential disclosure requirement solutions that would enable investors to “make more informed decisions about financial risks” associated with digital asset investing. For more information, click here.
  • On January 26, Representative French Hill (R-AK), the inaugural chairman of the newly established subcommittee of the U.S. House Financial Services Committee — the Subcommittee on Digital Assets, Financial Technology, and Inclusion — delivered remarks on CNBC‘s Squawk Box and noted that although “blockchain is not ready for real-time payments,” “blockchain and distributed ledger technologies are part of [the future of fintech].” For more information, click here.
  • On January 26, the International Swaps and Derivatives Association (ISDA) published a whitepaper concerning a new standard for trading digital asset derivatives through the ISDA Digital Asset Derivatives Definitions, intended to establish an “unambiguous contractual framework” to reduce credit and market risk in digital asset derivatives transaction by setting clear provisions for execution and settlement. For more information, click here.

State Activities:

  • On February 3, the New Jersey Bureau of Securities (NJ Bureau) issued cease-and-desist orders to MetaCapitals Ltd., Cresttrademining Ltd., and Forex Market Trade, and accused each company of either selling unregistered securities, making materially misleading statements of material fact to New Jersey residents, or acting as a broker-dealer in violation of state securities laws. According to the NJ Bureau, each of these companies engaged in “pig butchering” scams that require a fraudster to gain a victim’s trust before manipulating the victim to invest his/her funds into a phony investment controlled by the fraudster. For more information related to the cease-and-desist order entered against MetaCapitals Ltd., click here. For more information related to the cease-and-desist order entered against Cresttrademining Ltd., click here. For more information related to the cease-and-desist order entered against Forex Market Trade, click here.
  • On February 2, the Supreme Court of Illinois held that the five-year statute of limitations in Illinois Code Section 13-205 applies to actions filed under the Biometric Information Privacy Act (BIPA). The plaintiff filed a class-action lawsuit against his former employer, alleging that his employer violated sections of the BIPA regulating the retention and deletion of biometric information, as well as sections governing the consensual collection and disclosure of biometric identifiers and information, when it scanned the plaintiff’s fingerprints. The plaintiff’s employer moved to dismiss the complaint as untimely, arguing that the one-year limitations period in another section of the Illinois Code applied. The circuit court found that the five-year statute of limitations applied, noting that although the BIPA is a privacy statute, the one-year statute applies in cases where publication of biometric data is at issue, which, as the court found, was not the case with the plaintiff’s claims. The appellate court decided, however, that the one-year statute of limitations was appropriately applied to claims where publication or disclosure of biometric data is an element of the claim. Ultimately, the Illinois Supreme Court determined the BIPA claims were subject to a five-year limitations period. For more information, click here.
  • On February 1, District of Columbia Mayor Muriel Bowser signed B25-0015 — the Public Health Emergency Credit Alert Extension Congressional Review Emergency Amendment Act of 2023. The bill extends certain requirements and limitations on credit reporting agencies and users of credit reports. Among other things, the bill requires credit reporting agencies to accept a personal statement from a consumer, indicating that the consumer experienced financial hardship due to a public emergency and notifying residents of the right to request a personal statement. Additionally, the bill prohibits users of information from considering adverse information in a report resulting from the consumer’s action or inaction during the public health emergency. The bill allows consumers a private right of action for violations of the provisions contained therein. The bill will remain in effect for 90 days. For more information, click here.
  • On February 1, the Superintendent of Financial Services Adrienne Harris announced that the New York State Department of Financial services completed the process for adopting new commercial financing regulation 23 NYCRR 600. The regulation 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. For more information, click here.
  • On January 30, the California Department of Financial Protection and Innovation (DFPI) announced that it commenced enforcement actions against multiple debt collectors for unlicensed activity under the Debt Collection Licensing Act and unlawful and deceptive acts or practices in violation of the California Consumer Financial Protection Law. The desist-and-refrain orders allege that, among other things, the named companies attempted to collect debts that a consumer did not owe, made false claims of pending lawsuits, unlawfully threatened to seize property, and failed to provide validation notices as required by federal law. In addition to thwarting the subject companies’ continued violations of the state’s consumer protection laws, the DFPI also seeks penalty payments, totaling $120,000. For more information, click here.
  • On January 26, the California Department of Motor Vehicles (CA DMV) announced its collaboration with liquid proof-of-stake-based blockchain Tezos and crypto-software developer firm Oxhead Alpha to launch a proof-of-concept blockchain to create digital representations of auto titles through non-fungible tokens (NFTs), which will enable the CA DMV to remove persistent points of friction in the auto title process. For more information about NFTs, click here. For more information about the CA DMV’s collaborative auto title project, click here.

As discussed here, on December 7, 2022, the Consumer Financial Protection Bureau (CFPB or Bureau) made a preliminary conclusion that a New York commercial financing law was not preempted by the Truth in Lending Act (TILA). The Bureau indicated it was also considering whether to make a preemption determination regarding similar state laws in California, Utah, and Virginia. On January 20, 2023, California Attorney General Rob Bonta submitted a letter to the CFPB agreeing with its preliminary determination that California’s Commercial Financing Disclosures Law (CFDL) is not preempted by TILA because the CFDL only applies to commercial financing and not to consumer credit transactions within the scope of TILA. Attorney General Bonta further urged the CFPB to “revisit the Federal Reserve Board’s (Board) vague and overbroad articulation of the TILA preemption standard. The CFPB should articulate a narrower standard that emphasizes that preemption should be limited to situations where it is impossible to comply with both TILA and the state law or where the state law stands as an obstacle to the full purposes TILA, which is to provide consumers with full and meaningful disclosure of credit terms in consumer credit transactions.”

Continue Reading California AG Agrees with CFPB’s Preliminary Preemption Determination, Urges Bureau to Further Narrow TILA Preemption

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:

Federal Activities

State Activities

Federal Activities:

  • On January 19, the Consumer Financial Protection Bureau (CFPB) issued a new circular, affirming that companies offering “negative option” subscription services must comply with federal consumer financial protection law. Negative option programs include subscription services that automatically renew unless the consumer affirmatively cancels, as well as trial marketing programs that charge a reduced fee for an initial period and then automatically begin charging a higher fee. Companies risk violating the law if they do not clearly and conspicuously disclose the terms of their subscription services and obtain consumers’ informed consent or if they make it unreasonably difficult for consumers to cancel. For more information, click here.
  • On January 19, the Securities and Exchange Commission (SEC) filed a consent order, memorializing crypto-lending firm Nexo Capital, Inc.’s (Nexo) assent to pay a $45 million fine to remedy its offering of an interest-bearing cryptocurrency deposit product called the “Nexo Earn Interest Product” (EIP), which the SEC alleged constituted the offering and selling of unregistered securities in violation of federal securities law. Critically, under the consent order, Nexo must “cease the EIP to all U.S. investors by April 1, 2023 and [must] exit the U.S. entirely shortly thereafter.” For more information, click here.
  • On January 18, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an order, identifying Hong Kong-based cryptocurrency exchange Bitzlato Limited (Bitzlato) as a “primary money laundering concern” due to Bitzlato’s alleged connection to illicit Russian finance and ransomware activities. FinCEN’s order prohibits all “covered financial institutions” from transmitting any funds involving Bitzlato. Notably, FinCEN alleged that public reporting demonstrated that Bitzlato did not effectively implement policies and procedures designed to combat money laundering and illicit finance. For more information, click here.
  • On January 18, the CFPB released the updated “Mortgage Servicing Examination Procedures,” providing transparency to stakeholders about how we do our work. The examination procedures describe the types of information that CFPB examiners gather to evaluate mortgage servicers’ policies and procedures; assess whether servicers are complying with applicable laws; and identify risks to consumers related to mortgage servicing. The updated examination procedures include CFPB guidance released since the last update in June 2016. For more information, click here.
  • On January 18, the U.S. Department of Justice (DOJ) charged Anatoly Legkodymov, the founder of Hong Kong-based cryptocurrency exchange Bitzlato, with conducting a money transmitting business that transmitted illicit funds and with failing to develop and implement an effective KYC/AML program in violation of the Bank Secrecy Act. According to the DOJ, Bitzlato had been responsible for processing approximately $4.58 billion worth of cryptocurrency transactions since 2018. For more information, click here.
  • On January 17, during an interview with Bloomberg, CFTC Commissioner Caroline Phan noted that she believes “crypto financial instruments should be held to the same standard as other financial instruments,” and she is hopeful that the CFTC and other federal regulatory agencies will provide more crypto-related guidance throughout 2023. For more information, click here.
  • On January 17, FinCEN published two notices and requests for comment in the Federal Register related to the reporting process the agency intends to use to collect data. Specifically, FinCEn is issuing a final rule, requiring certain entities to file with FinCEN reports that identify two categories of individuals: the beneficial owners of the entity and individuals who have filed an application with specified governmental authorities to create the entity or register it to do business. These regulations implement Section 6403 of the Corporate Transparency Act, enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021, and describe who must file a report, what information must be provided, and when a report is due. Comments are due by March 20. For more information, click here.
  • On January 17, Acting Comptroller of the Currency Michael Hsu delivered remarks at the Brookings Institute about the limits of large bank manageability. He stated that “[e]nterprises can become so big and complex that control failures, risk management breakdowns, and negative surprises occur too frequently — not because of weak management, but because of the sheer size and complexity of the organization.” He spoke about his belief that the “most effective and efficient way to successfully fix [these] issues … is to simply if — by divesting businesses, curtailing operations, and reducing complexity.” For more information, click here.
  • On January 17, the World Economic Forum (WEF) released a “toolkit” for decentralized autonomous organizations (DAOs). The “toolkit” is comprised of a set of resources that the WEF hopes will help developers, policymakers, and stakeholders in the crypto industry “realize the full potential” of evaluating, engaging, or developing DAOs. The WEF’s toolkit is segmented into five sections:
    • What are DAOs?;
    • DAO operations;
    • DAO governance;
    • Legal structures; and
    • Recommendations.

    For more information about the WEF’s DAO toolkit, click here. For more information about DAOs, click here.

State Activities:

  • On January 20, California Attorney General Rob Bonta submitted a comment letter, applauding the CFPB for its preliminary determination that the state’s Commercial Financing Disclosure Law (CFDL) is not preempted by the federal Truth in Lending Act (TILA). CFDL was enacted in 2018 as a tool for small businesses seeking to navigate the complex commercial financing market. The CFDL requires uniform disclosures of certain credit terms in a manner similar to those mandated by TILA’s provisions, but for commercial transactions not regulated by TILA. Before the CFDL’s adoption, there were no federal or state law disclosure requirements for commercial financing. For more information, click here.
  • On January 19, New York Attorney General Letitia James and a multistate coalition obtained up to $24 million from cryptocurrency companies Nexo, Inc. and Nexo Capital, Inc. (Nexo) for “engaging in the unregistered offer and sale of securities and commodities” and for allegedly “lying to investors about their registration status.” The agreement represents the culmination of a civil lawsuit brought by the AG in September 2022 and administrative actions by securities regulators in nine other states. Nexo is now banned from the New York securities industry for five years and must notify its investors to withdraw their assets from the platform. For more information, click here.
  • On January 19, New Hampshire Governor Chris Sununu released the final report and recommendations compiled by the governor’s Commission on Cryptocurrencies and Digital Assets, which was established on February 9, 2022. Principally, the commission’s final report touched on three points:
    • Blockchain technology (digital databases secured by cryptographic software protocols distributed across connected computers) will be an important technical innovation with many potentially important applications in our human societies and economies;
    • The legal and regulatory status of blockchain technologies and applications, such as cryptocurrencies and digital assets, is highly uncertain, and this legal and regulatory uncertainty is materially undermining innovation and economic development of new technologies, activities, and industry, as well as protections for investors and consumers; and
    • The New Hampshire government (governor, legislature, executive branch agencies, and courts of our judicial branch) should devote resources to establishing a state legal regime that will offer an attractive jurisdiction for the best responsible blockchain innovators, entrepreneurs, and businesses, while protecting investors and consumers using their applications.

    For more information, click here.

  • On January 18, the New York Department of Financial Services (DFS) announced that it adopted an updated check cashing regulation initially proposed in June 2022. The regulation implements a new method for calculating fees that accounts for the needs of licensees and consumers who utilize check cashing services. In 2005, New York became the only state to grant automatic increases to the maximum percentage check cashing fee, anchoring the increases to the Consumer Price Index (CPI). However, this method did not account how inflation disproportionately impacts underserved New Yorkers who rely on check cashing services to access their funds. The regulation eliminates automatic increases based on CPI, creating instead a two-tier system of fees for check cashers. For more information, click here.

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:

Federal Activities

State Activities

Federal Activities:

  • On December 8, the Office of the Comptroller of Currency (OCC) released its Semiannual Risk Perspective for Fall 2022, which discusses major risk themes facing the federal banking system. In its report, the OCC categorized “crypto-assets” as an “emerging risk” for a variety of reasons, including “high volatility among crypto-assets, high-risk lending and leverage within crypto-asset markets, high interconnectedness and concentration within the crypto industry, and a lack of consistent or comprehensive regulation for certain crypto-asset entities.” The OCC noted that it is primarily concerned with whether banks are integrating cryptocurrencies into their business models in a “safe, sound, and fair manner.” For more information, click here.
  • On December 7, Senators Elizabeth Warren (D-MA) and Senator Tina Smith (D-MN) issued a letter to several federal regulators — Federal Reserve Chairman Jerome Powell, Federal Deposit Insurance Corporation Acting Chair Martin J. Gruenberg, and OCC Acting Comptroller Michael J. Hsu — inquiring about the U.S. banking system’s exposure to the crypto industry. Among other things, the letter discusses Alameda Research, a defunct crypto trading firm and sister-company of bankrupt cryptocurrency exchange FTX, and its $11.5 million investment in Washington-based bank Moonstone Bank. Alameda’s investment in Moonstone constituted “more than double the bank’s worth” at the time the investment was consummated. The letter posits that cryptocurrency consumer deposits accounted for almost 90% of overall deposit base (a total of $11.9 billion) for a bank comparable in size to Moonstone. To better understand the full extent by which crypto has become integrated into the U.S. banking system, the letter requires the federal regulator addressees to submit responses to certain questions by December 21. Notably, one of the questions posed by Senator Warren and Senator Smith probes whether Alameda’s investment in Moonstone includes “FTX customer funds” or “assets received from sources that did not meet the Know Your Customer (KYC) guidelines.” For more information, click here.
  • On December 7, the Consumer Financial Protection Bureau (CFPB) released research, revealing that Reserve and National Guard members called to active duty are paying an extra $9 million in interest every year because they are not always receiving the benefit of their right-to-rate reductions under the Servicemembers Civil Relief Act (SCRA). The SCRA gives active duty servicemembers the right to request interest rate reductions on outstanding loans during the time they are activated and for an additional year in the case of mortgages. For more information, click here.
  • On December 7, the CFPB updated state laws on lending to businesses. Recently, a number of states have enacted laws to require improved disclosure of information in commercial financing transactions. This can include, for example, loans to small businesses. For more information, click here.
  • On December 7, unknown sources close to Senator Elizabeth Warren (D-MA) revealed that she is working on a cryptocurrency bill that will empower the Securities and Exchange Commission (SEC) to exclusively govern the cryptocurrency industry. Still in its infancy, this bill appears to be primarily focused on addressing issues that have recently become amplified in the wake of the implosion of FTX: (1) capital requirements; (2) audited financial statements; and (3) commingling of customer funds. For more information, click here.
  • On December 6, while delivering remarks at the ABA Financial Crimes Enforcement Conference, Financial Crimes Enforcement Network (FinCEN) Acting Director Himamauli Das disclosed that FinCEN is taking a close look at decentralized finance (DeFi) and “its potential to reduce or eliminate the role of financial intermediaries” who currently assist FinCEN with its AML/CTF efforts through suspicious activity reporting required by the Bank Secrecy Act. Considering DeFi’s capacity to disintermediate, FinCEN is reviewing its current money services business framework to determine whether additional regulations or guidance is needed to combat the erosion of financial surveillance. For more information, click here.
  • On December 6, the Federal Reserve (Fed) announced its formation of an industry working group to establish voluntary principles for a consistent end-user experience for solutions leveraging the Fed’s request for payment (RFP) solution, which will enable financial institutions to build instant bill pay services to improve consumer and business cash flow management. The RFP industry working group is comprised of noteworthy U.S. financial institutions and corporations. For more information, click here.
  • On December 6, the CFPB issued its Semi-Annual Report to Congress for the period beginning October 1, 2021 and ending March 31, 2022. For more information, click here.
  • On December 6, Fannie Mae (FNMA/OTCQB) announced enhancements to its automated underwriting system designed to responsibly expand eligibility and further simplify the borrowing process for loans where homebuyers do not have a credit score. For more information, click here.
  • On December 5, Senators Elizabeth Warren (D-MA), John Kennedy (R-LA), and Roger Marshall (R-KS) issued a letter to Silvergate Bank, inquiring into its relationship with FTX, especially since FTX’s sister-company Alameda Research maintained a bank account at Silvergate. FTX ex-CEO Sam Bankman-Fried recently conceded that FTX did not originally have a bank account of its own. Therefore, to facilitate consumer purchases of cryptocurrency on its exchange platform, FTX required consumers to wire money to Alameda’s bank account with Silvergate. The letter primarily takes issue with Silvergate’s role in the transfer of FTX consumer funds to Alameda, but it also criticizes Silvergate for failing to uphold its AML and SAR filing duties under the Bank Secrecy Act. Additionally, the letter requires Silvergate to provide responses to certain questions by December 19. Notably, one of the questions probes whether Silvergate’s AML compliance program has ever undergone an independent audit. For more information, click here.
  • On December 2, the U.S. Department of Education issued a letter, informing guaranty agencies of their obligations regarding the Federal Family Education Loan (FFEL) Program for loans in default according to the Fresh Start Initiative. For more information, click here.
  • On December 2, the Federal Reserve Board finalized clarifying and technical updates to its policy governing the provision of intraday credit to healthy depository institutions with accounts at the Federal Reserve Banks. The updates expand access to collateralized intraday credit under the Policy on Payment System Risk (known as PSR policy), while providing greater clarity to institutions that streamline administrative requirements and support the launch of the FedNow℠ The final updates are substantially similar to the proposal issued in May 2021. For more information, click here.
  • On December 1, the Cato Institute released an article, discussing the launch of Project Hamilton, the Federal Reserve of Boston’s (Boston Fed) 12-week central bank digital currency (CBDC) pilot, and the Boston Fed’s decision to engage certain private financial institutions to research feasible CBDC implementation strategies. Numerous members of Congress believe a conflict of interest between the Boston Fed and the private sector exists since Project Hamilton, although touted as a collaborative research project, could potentially act as a CBDC incubator and provide an unfair competitive advantage to Project Hamilton’s private market participants. For more information, click here.

State Activities:

  • On December 8, New York Governor Kathy Hochul announced a report from the Department of Financial Services (DFS), highlighting racial disparities in mortgage lending practices in certain parts of the state. This new report comes on the heels of another report released by DFS earlier this year that identified redlining and other forms of housing discrimination by mortgage lenders. In light of the findings noted in the report, two mortgage lenders in the state agreed to reform their lending practices and implement programs to ensure better access to underserved communities, even though DFS did not find that either lender violated any of the state’s fair lending laws. However, DFS continues to investigate the lending practices of other lenders in the state. For more information, click here.
  • On December 7, New York Governor Kathy Hochul announced that DFS adopted a new regulation to address circumstances where consumers seek medical treatment with an out-of-network health care provider after relying on misinformation found in their insurer’s provider directory that indicates the provider is in-network. In such instances, the new regulation will limit consumer payment costs to their in-network costs. The regulation sets forth several instances where “misinformation” occurs, including when an insurer fails to provide network status information in writing to a consumer within a certain number of days of the consumer’s request for such information by phone or through electronic means. The new regulation squares with the state’s No Surprises Act and is a part of Hochul’s “commitment to ensuring consumers are treated fairly.” For more information, click here.
  • On December 7, Texas Attorney General Ken Paxton joined a multistate comment letter championed by Massachusetts Attorney General Maura Healey, which urged the Federal Trade Commission (FTC) to implement stronger privacy protections related to commercial surveillance and data security. In the letter, Paxton underscores location data, biometric data, and medical data as areas of particular vulnerability requiring increased safeguards. The letter demands aggressive data minimization efforts be considered and adopted to address Americans’ fears around data aggregation. For more information, click here.
  • On December 5, the California Department of Financial Protection and Innovation (DFPI) announced that it was investigating crypto-related lending company CONST LLC (doing business as “MyConstant”), which is not licensed to operate in California by DFPI. For more information, click here.

On December 7, the Consumer Financial Protection Bureau (CFPB) published a notice of intent to make a preemption determination on whether the Truth in Lending Act (TILA) preempts a New York commercial financing law. The CFPB has made a preliminary conclusion that the law is not preempted by TILA, and is also considering whether to make a preemption determination regarding similar state laws in California,

Utah, and Virginia. The practical effect of the CFPB’s planned position is to remove a potential roadblock to the implementation of new laws in New York and other states requiring lenders to provide disclosures to commercial borrowers of the cost of financing, similar to those required by TILA and other state laws for consumer financing transactions. The CFPB will be accepting comments on its proposal until January 20, 2023.

TILA authorizes the CFPB to determine whether a state law requirement is preempted, upon its own motion or upon the request of a creditor, state, or other interested party. In this instance, the CFPB received a request from a business trade association asking it to determine that TILA preempts certain provisions in New York’s Commercial Financing Law (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 make the New York law inconsistent with federal law for purposes of preemption. For example, the request noted that the New York law defines “finance charge” to include any charge imposed by a “provider,” which includes “a person who solicits and presents specific offers of commercial financing on behalf of a third party.” The request stated that the definition is broader than the federal definition, under which the requester asserted a “finance charge” for non-mortgage transactions includes certain broker fees only if the creditor requires the use of the broker. Additionally, the request asserted that the “estimated APR” disclosure that the New York law requires for certain transactions is less precise than the APR calculation under TILA and Regulation Z, and that the New York law requires certain assumptions about payment amounts

and payment frequencies to calculate APR and estimated APR, whereas TILA does not require similar assumptions. The request stated that these types of differences could lead to variances in the disclosures required under state and federal law, and, thus, the federal law preempts the New York law. Notably, the New York law also requires a closed-end APR calculation method for open-end transactions, which significantly differs from the APR calculation for open-end transactions under Regulation Z.

The CFPB’s preliminary determination is that TILA does not preempt the New York law for two reasons. First, the statutes govern different transactions. TILA requires creditors to disclose the finance charge and APR only for “consumer credit” transactions, which the statute defines as credit that is “primarily for personal, family, or household purposes.” The New York law, on the other hand, requires the disclosures only for “commercial financing,” specifically defined as financing “the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.” Second, the CFPB disagrees that the New York law significantly impedes the operation of TILA or interferes with the purposes of the federal scheme. A primary purpose of TILA is to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available and avoid the uninformed use of credit. The differences between the New York and federal disclosure requirements do not frustrate these purposes because lenders are not required to provide the New York disclosures to consumers seeking consumer credit. Therefore, consumers applying for consumer credit should continue receiving only TILA disclosures.

The CFPB concluded by stating it is also considering making determinations regarding whether TILA preempts state laws in California, Utah, and Virginia that prescribe disclosures in certain commercial transactions. The CFPB has conducted a preliminary review of these laws, which are similar to the New York law because they do not apply to consumer credit transactions that are within the scope of TILA. Accordingly, the CFPB’s preliminary conclusion is that TILA does not preempt these state laws. The CFPB is encouraging commenters to provide information about any relevant differences in these state laws that would affect the CFPB’s preemption analysis and final determination.

Notably, the California Commercial Financing Disclosures (California Disclosure Regulations) are set to take effect on December 9 and are already the subject of litigation in the United States District Court for the Central District of California. There, the Small Business Finance Association filed a complaint against the Commissioner of the California Department of Financial Protection and Innovation, in part, on the grounds that the California Disclosure Regulations are preempted by TILA. The stated purpose of the California Disclosure Regulations is to assist small businesses in making informed decisions about the potential costs of various commercial financing options. The industries subject to the regulation include, among others, traditional installment loans and open-end credit, factoring, and merchant cash advances. Providers will be required to disclose metrics such the amount of funding the small business will receive, the APR calculated for the transaction, a payment amount (if applicable), the term, details related to prepayment policies, and (for products without a monthly payment) an average monthly cost.

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:

Federal Activities

State Activities

Federal Activities:

  • On September 23, the Federal Reserve Board invited comment on operational risk-management requirement updates for certain systemically important financial market utilities (FMUs) supervised by the Fed. FMUs provide essential infrastructure to clear and settle payments and other financial transactions relied upon by financial markets and the broader economy to function effectively. The proposed updates generally provide more specificity to the existing requirements. For more information, click here.
  • On September 22, the Consumer Financial Protection Bureau (CFPB) announced its request for public input on ways to spur new mortgage products that help households. The CFPB invites insights on ways to improve mortgage refinances for homeowners who would benefit from refinancing, especially for borrowers with smaller loan balances. The CFPB also seeks public input on ways to support automatic short- and long-term loss mitigation assistance for homeowners experiencing financial disruptions. The CFPB plans to use this information as it considers steps to support household financial stability and address refinance market gaps. For more information, click here.
  • September 22, the Commodity Futures Trading Commission (CFTC) entered an order, simultaneously filing and settling charges against Ooki DAO and its co-founders Tom Bean and Kyle Kistner. The order states that the bZx protocol, the predecessor of Ooki DAO, violated the Commodity Exchange Act (CEA) by failing to register as a futures commission merchant prior to enabling users of the bZx protocol to engage in margin and leverage trading. Notably, the order specifically stated that “[v]irtual currencies such as ETH, DAI, and others” traded on the bZx protocol constitute “commodities” under the CEA. Additionally, the order held that Ooki DAO is an unincorporated association, and as a result, the co-founders are personally liable for CEA violations committed by Ooki DAO. In July 2020, alleged members of Ooki DAO brought a class-action lawsuit against the DAO in a California federal court, which we discussed in depth here. For more information about the CFTC’s recent settlement with Ooki DAO, click here.
  • On September 22, the Department of Justice and the Internal Revenue Service announced that a federal judge granted their request for an order, authorizing the IRS to issue a John Doe summons requiring M.Y. Safra Bank to produce information about U.S. taxpayers who may have failed to report to the IRS, and pay taxes on, cryptocurrency transactions. For more information, click here.
  • On September 20, an identified party hacked DeFi liquidity provider Wintermute and absconded with $160 million worth of cryptocurrency. For more information, click here.
  • On September 19, the CFPB released its annual report on residential mortgage lending activity and trends for 2021, based on data from thousands of the nation’s lending institutions per the Home Mortgage Disclosure Act. The report shows a shift from refinance loans in 2020 to home purchase loans in 2021, with a greater share of home purchase loans going to Asian, Black, and Hispanic white borrowers relative to the share of home purchase loans for non-Hispanic white borrowers. The top 25 closed-end lenders by loan volume held nearly half of the market share of residential mortgage lending — a trend that has risen each year since 2018. For more information, click here.
  • On September 19, the Securities and Exchange (SEC) issued a cease-and-desist order against Sparkster Ltd. and Sparkster CEO Sajjad Daya for the unregistered offer and sale of crypto-asset securities from April 2018 through July 2018 and charged crypto influencer Ian Balina for failing to disclose compensation he received after reselling Sparkster tokens. For more information, click here.
  • On September 19, Representatives Peter Welch (D-VT) and Lance Gooden (R-TX) introduced the House companion of the Credit Card Competition Act of 2022 (CCCA), which Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) introduced in late July 2022. The bill intends to expand interchange price controls by creating a new credit card routing mandate. For more information, click here.
  • On September 14, while addressing testimony presented by SEC Commissioner Gary Gensler, U.S. Senate Banking Committee Ranking Member Pat Toomey (R-PA) clearly expressed his frustration toward the SEC’s lack of helpful public guidance concerning the distinction between cryptocurrencies that constitute securities and cryptocurrencies that do not. For more information, click here.

State Activities:

  • On September 20, Colorado Governor Jared Polis (D) announced that Colorado residents may now pay state taxes with cryptocurrencies using PayPal. For more information, click here.
  • On September 15, California Governor Gavin Newsom signed into law Assembly Bill 1904, which amends the California Consumer Legal Remedies Act to make it unlawful for “covered persons” to fail to include certain information in a solicitation to a consumer for a financial product or service. The amendment supplements already-existing consumer protection laws, targeting the unlawful, unfair, deceptive, or abusive acts or practices related to consumer financial products or services, as well as unfair competition and deceptive acts pertaining to the sale or lease of goods or services to a consumer. As an example, the amendment would require a “covered person” to disclose that a solicitation is an “advertisement” and does not require payment or other action by the consumer. For more information, click here.
  • On September 15, New York Governor Kathy Hochul signed legislation to expand the reach of the federal Public Service Loan Forgiveness (PSLF) program statewide. PSLF incentivizes public service work by forgiving a portion of borrowers’ federal student loan debt. Hochul noted that “this legislation acknowledges the significant contributions of our public servants, first responders, educators, and more, by helping unlock federal loan forgiveness for countless members of New York’s workforce.” An estimated 2.7 million people currently serve New York’s public or nonprofit sectors. For more information, click here.
  • On September 14, the New York Department of Financial Services issued notice of proposed rules, pertaining to the state’s Commercial Finance Disclosure Law (CFDL). The CFDL requires certain providers of commercial financing to provide prescribed disclosures when extending a financing offer to a potential recipient. Among some of the issues addressed by the proposed regulations are the disclosure of annual percentage rate, a formula for determining when an annual percentage rate disclosure is accurate, and formatting and content requirements for various disclosures. Though the rules’ reception varied, many commenters acknowledged the rules as necessary to implement the CFDL. The public have until October 31 to provide further feedback on the proposed rule. For more information, click here.
  • On September 13, California Governor Gavin Newsom signed Assembly Bill 2311, which, among other things, would prevent a seller from conditioning the extension of credit, term of credit, or terms of a conditional sale contract for purchase of an automobile on the consumer’s purchase of a guaranteed asset protection (GAP) waiver. Additionally, the bill would prevent a GAP waiver sale where the loan-to-value ratio of the vehicle purchase exceeds the maximum loan-to-value ratio of the waiver, unless the GAP waiver discloses and the consumer is informed of the limitation. Furthermore, the bill would require that the GAP waiver include a statement, advising the consumer of the right to a refund of any unearned portion of the waiver on a pro-rata basis. For more information, click here.

Like most industries today, Consumer Finance Services businesses continue to be significantly impacted by COVID-19. To help you keep abreast of relevant activities, below find a breakdown of some of the biggest legislative and regulatory events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Privacy and Cybersecurity Activities

Federal Activities:

  • On June 9, the Consumer Financial Protection Bureau (CFPB) launched an inquiry into practices and financial products that may leave employees indebted to their employers. In the request for information, the CFPB seeks data about, and worker experiences with, these emerging practices and financial products referred to as employer-driven debt. For more information, click here.
  • On June 8, Office of the Comptroller of the Currency (OCC) proposed adding cannabis and digital currency activities to the list of business data it collects from banks in an attempt to better identify areas of risk in the financial system. For more information, click here.
  • On June 7, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act, a bill highly anticipated by all cryptocurrency industry stakeholders. For more information, click here.
  • On June 7, the Federal Reserve announced it will release a second tool to help community financial institutions implement the Current Expected Credit Losses (CECL). Known as the Expected Losses Estimator, the spreadsheet-based tool utilizes a financial institution’s loan-level data and management assumptions to aid community financial institutions in calculating their CECL allowances. For more information, click here.
  • On June 3, the Federal Trade Commission (FTC) published a request for information that could form the basis for a major update of its digital advertising guidance. The FTC’s most recent digital advertising guidance — the 2013 “.com Disclosures – How to Make Effective Disclosures in Digital Advertising” (.com Disclosures Guide) — provides guidance on how to make “clear and conspicuous” disclosures in online advertisements, while also offering examples of problematic advertisements with explanations for how to make clear and conspicuous disclosures. The .com Disclosure Guide has been hugely influential in setting the bar for compliant internet advertising. For more information, click here.

State Activities:

  • On June 9, California’s Office of Administrative Law approved commercial financing disclosure 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, these Department of Financial Protection and Innovation regulations will become effective on December 9, completing a process that began with the passage of SB 1235 in 2018. For more information, click here.
  • On June 8, Colorado Governor Jared Polis signed a bill into law, prohibiting health care facilities from pursuing debt collection activities against individuals with unpaid medical bills unless those facilities comply with federal price transparency guidelines. For more information, click here.
  • On June 8, the New York Department of Financial Services issued new compliance requirements for issuers of U.S. dollar-backed stablecoins. For more information, click here.
  • On June 2, the Washington, D.C. City Council unanimously approved the “Protecting Consumers from Unjust Debt Collection Practices Amendment Act of 2022.” The bill clarifies that a debt collector or debt buyer may only send text messages, emails, or private messages on social media after sending the required written notice to consumers. It also clarifies that a debt collector or debt buyer may send one text message, email, or private message in any seven-day period for the purposes of acquiring consent from the consumer to communicate via one or more of these methods. For more information, click here.

Privacy and Cybersecurity Activities:

  • The U.S. House Committee on Energy and Commerce’s Subcommittee on Consumer Protection and Commerce will hold a hearing on June 14 to discuss the American Data Privacy and Protection Act. Subcommittee members U.S. Representatives Frank Pallone (D-NJ) and Cathy McMorris Rodgers (R-WA) co-authored the draft.
  • On June 8, the California Privacy Protection Agency Board voted unanimously to authorize Executive Director Ashkan Soltani to begin the California Privacy Rights Act rulemaking process. The agency released draft regulations in preparation for the June 8 meeting, while Director Soltani previously stated that the agency would go past the July 1 deadline, with anticipated rulemaking completion in Q3 or Q4. To read more, click here.

Our Cannabis Practice provides advice on issues related to applicable state law. Cannabis remains an illegal controlled substance under federal law.

Like most industries today, Consumer Finance Services businesses are being significantly impacted by the novel coronavirus (COVID-19). Troutman Pepper has developed a dedicated COVID-19 Resource Center to guide clients through this unprecedented global health challenge. We regularly update this site with COVID-19 news and developments, recommendations from leading health organizations, and tools that businesses can use free of charge.

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest COVID-19 driven events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Privacy and Cybersecurity Activities

Federal Activities:

  • On April 8, Acting Comptroller of the Currency Michael Hsu discussed the architecture of a U.S. dollar-based stablecoin system and policy considerations regarding stablecoin stability, interoperability, and separability. For more information, click here.

  • On April 7, the Consumer Financial Protection Bureau (CFPB) announced that it is using its rulemaking authority to propose that consumer reporting agencies (CRAs) do not prevent human trafficking survivors from achieving financial independence. The proposed rule would protect human trafficking survivors by preventing CRAs from including negative information resulting from abuse. Congress required the CFPB to issue rules as part of the recently enacted Debt Bondage Repair Act. For more information, click here.

  • On April 7, Secretary of the Treasury Janet Yellen addressed the Biden administration’s forthcoming legislative approach to digital assets, as we discussed here, as well as the digitization of the American economy, which Yellen assessed through the lens of five lessons she suggests are often implicated by emerging technologies generally: (1) responsible innovation; (2) appropriate guardrails; (3) monetary sovereignty; (4) technological neutrality; and (5) interagency and international collaboration. For more information, click here.

  • On April 6, the U.S. Department of Education announced an extension of its pause on student loan repayment, interest, and collections through August 31, 2022. For more information, click here.

  • On April 6, the CFPB published a report, showing that few payday loan borrowers benefit from no-cost extended payment plans, which must be offered to borrowers in the majority of states that do not prohibit payday lending. Instead of using the payment plans, borrowers continue to pay for costly loan rollovers. While no-cost extended payment plans are meant to help borrowers exit the cycle of rollovers and fees, the payday business model continues to depend on high rollover rates and fees. For more information, click here.

  • On April 6, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac will require servicers to suspend foreclosure activities for up to 60 days if the servicer has been notified that a borrower has applied for assistance from the Treasury Department’s Homeowner Assistance Fund. For more information, click here.

  • On April 6, Senator Pat Toomey (R-PA) released a draft of the Stablecoin Transparency of Reserves and Uniformed Safe Transactions Act, also called the Stablecoin TRUST Act of 2022. The bill includes a definition of “payment stablecoin,” which must be convertible directly to fiat currency and its backing must be with assets “with a market value equal to not less than 100 percent of the par value of the payment stablecoins outstanding” and “that are cash and cash equivalents or level 1 high-quality liquid assets denominated in United States dollars.” For more information, click here.

  • On April 5, the Federal Reserve Board announced that it had prohibited six former bank employees from future employment in the banking industry for fraudulently obtaining loans and grants administered under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. For more information, click here.

State Activities:

  • On April 7, the New York Department of Financial Services issued guidance “to address potential confusion” about how to comply with a new statute of limitations requirement that went into effect last week. The new requirement would lower the statute of limitations period to three years, while also disallowing a partial payment to restart the statute of limitations and requiring additional disclosures to be made. For more information, click here.

  • On April 6, New York Attorney General Letitia James announced a lawsuit against a law firm and its partners for “engaging in deceptive rent collection practices and initiating frivolous lawsuits against New York tenants.” The lawsuit was filed after the attorney general’s office investigated the firm and found it “did not conduct any meaningful reviews of their non-payment eviction cases before filing litigation, resulting in the distribution of deceptive rent collection letters, unnecessary legal actions against tenants, and improper evictions without cause.” Attorney General James’ office claims the conduct “violates New York Executive Law, the Federal Debt Collection Practices Act, and the New York General Business Law.” For more information, click here.

  • On April 6, California Attorney General Rob Bonta, as part of a multistate coalition of 17 attorneys general, urged the nation’s largest banks to eliminate overdraft fees. According to the press release, “U.S. consumers paid an estimated $11 billion in overdraft fees in 2019, with the financial burden disproportionately falling on low-income consumers and consumers of color.” In support of the request, Attorney General Bonta stated, “For banks, overdraft fees are easy way to pad their profits, but for struggling consumers, these fees can seriously derail their financial plans.” For more information, click here.

  • 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 and provide certain disclosures. These disclosures include the amount of funds provided to the business, the total amount to be paid to the provider, and information about the costs or discounts associated with the prepayment. For more information, click here.

Privacy and Cybersecurity Activities:

  • On April 6, the Department of Human Health and Services (HHS) issued a request for information, seeking input on two requirements of the Health Information Technology for Economic and Clinical Health Act of 2009 (HITEACH Act), as amended in 2021. Specifically, HHS seeks comment on Section 13412 and Section 13410(c)(3). Section 13412 requires the HHS to consider certain recognized security practices of covered entities and business associates when determining potential fines, audit remedies, or other remedies for resolving potential violations of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Section 13410(c)(3) requires the HHS to establish a methodology to determine potential civil monetary penalties and settlement sharing for individuals harmed by a potential violation of the HIPAA Privacy, Security, and/or Breach Notification Rules. For more information, click here.

  • On April 7, California Attorney General Rob Bonta announced a new partnership with the Federal Communications Commission (FCC) on robocall investigations to protect consumers and businesses from scams and financial loss. This partnership establishes critical information sharing and cooperation structures to investigate spoofing and robocalls scam campaigns. For more information, click here.

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.