|03/21/2023||CA disclosure rules reduce $ to SMBs|
|03/17/2023||CA seeks dismissal of disclosure lawsuit|
|03/07/2023||Rapid extends disclosure API to Utah|
|02/23/2023||IL introduces disclosure bill|
|02/07/2023||Summary of NY disclosure rules|
Impact of the Virginia Disclosure Law
New York Disclosure Delay, Coinbase Profits, Going Bananas - Ep 49
Virginia Legislature Discusses Sales-based Financing Disclosures - Pt. 1
SMB Financing Disclosure Bill in NY - In Committee
New California Disclosure Rules Reduce Capital Available to Small BusinessesMarch 21, 2023
In a poll conducted by a leading trade association, since new CA disclosure rules were implemented in December 2022, 40% of respondents were found to be “no longer lending” to prospective borrowers who fall within the regulations’ threshold of less than $500,000. The poll was conducted by The Secured Finance Network (SFNet), an 80-year-old nonprofit with members representing the $4T U.S. secured finance industry. The new law, requiring sweeping financial disclosures, introduced by CA State Senator Steven M. Glazer in 2018, faced four years of strong opposition before being rolled out in December of 2022.
According to the poll, commercial finance companies would rather not lend to small businesses than comply with what they believe are “misguided and un-compliable” requirements. Mark Hafner, president and CEO of Celtic Capital Corporation, based in Calabasas, CA, said, “Unfortunately, we must now shy away from smaller deals (under the $500k threshold) as the disclosure requirements are extremely complicated to figure out and would require getting our attorneys and CPAs involved to ensure compliance. It’s just not worth the costs involved to fund a small deal anymore. The statute is not user friendly and, frankly, not representative of the true costs as there are numerous assumptions that have to be made to calculate the APR based on the state’s requirements. I honestly don’t think it was designed to meet the stated goal of the statute.”
Robert Meyers, president of Republic Business Credit, which does business with many California-based businesses, explained, “While the fines and penalties are clear under the regulations, the state has been unwilling to confirm our compliance or anyone else’s compliance. That fear is what has stopped 40% of our non-banks from doing business in the state, thus reducing access to capital for small- and medium-sized businesses. I expect this number to increase as time goes on. If the goal of this law was to better inform, it is actually doing the opposite as APR just doesn’t apply to our products.”
SFNet reports that its member companies provide “tens of billions” of capital annually in California to small businesses for essential working capital that funds everything from inventory, to work in process to payroll.
“Forty percent of billions is a large number,” said SFNet CEO, Richard D. Gumbrecht. “In attempting to find a one-size-fits-all solution to financial transparency, the State has created a complex set of requirements that misrepresent the actual cost of borrowing. Lenders are saying it’s not worth the cost and risk of complying. If this sample of 50 lenders is indicative of what we can expect, clearly that was not the intent of the legislation. And considering the demise of Silicon Valley Bank, it’s more important than ever that capital is not restricted in California.” The trade association is working with State legislatures to revise the statute. “Other states have found a simpler and more accurate way to protect small borrowers, and given the unintended consequences we are seeing, we are hopeful California will be receptive to these alternative approaches.”
To demonstrate how vital small businesses are to the U.S. economy, and the importance of not curtailing funding, consider these statistics: According to the U.S. Small Business Association (SBA), small businesses of 500 employees or fewer make up 99.9% of all U.S. businesses and 99.7% of firms with paid employees. Of the new jobs created between 1995 and 2020, small businesses accounted for 62%—12.7 million compared to 7.9 million by large enterprises. A 2019 SBA report found that small businesses accounted for 44% of U.S. economic activity.
About Secured Finance Network
Founded in 1944, the Secured Finance Network (formerly Commercial Finance Association) is an international trade association connecting the interests of companies and professionals who deliver and enable secured financing to businesses. With more than 1,000 member organizations throughout the U.S., Europe, Canada and around the world, SFNet brings together the people, data, knowledge, tools and insights that put capital to work. For more information, please visit SFNet.com.
Michele Ocejo, Director of Communications
Secured Finance Network
California DFPI Seeks to Dismiss Commercial Financing Disclosure LawsuitMarch 17, 2023
Clothilde Hewlett, in her official capacity as Commissioner of the California Department of Financial Protection and Innovation, has asked the Court to dismiss the lawsuit over commercial financing disclosures brought by the Small Business Finance Association (SBFA). Both sides have entered in all their arguments (the DPFI filed its reply on March 13th.) It is now up to the Court to decide if the claims survive this stage of litigation.
And Now Florida Has Introduced a Commercial Financing Disclosure BillMarch 16, 2023
Florida has joined the chorus of states introducing commercial financing disclosure bills. While Florida’s bill looks more like Utah’s than it does California’s or New York’s, it seems to make a point about brokers using potentially deceptive business practices. Brokers take note, especially the last paragraph.
A broker may not:
Assess, collect, or solicit an advance fee from a business to provide services as a broker. However, this subsection does not preclude a broker from soliciting a business to pay for, or preclude a business from paying for, actual services necessary to apply for a commercial financing product, including, but not limited to, a credit check or an appraisal of security, if such payment is made by check or money order payable to a party independent of the broker;
Make or use any false or misleading representation or omit any material fact in the offer or sale of the services of a broker or engage, directly or indirectly, in any act that operates or would operate as fraud or deception upon any person in connection with the offer or sale of the services of a broker, notwithstanding the absence of reliance by the business;
Make or use any false or deceptive representation in its business dealings; or
Offer the services of a broker by making, publishing, disseminating, circulating, or placing before the public within the state an advertisement in a newspaper or other publication or an advertisement in the form of a book, notice, handbill, poster, sign, billboard, bill, circular, pamphlet, letter, photograph, or motion picture or an advertisement circulated by radio, loudspeaker, telephone, television, telegraph, or in any other way, in which the offer or advertisement does not disclose the name, business address, and telephone number of the broker. For purposes of this subsection, the broker shall disclose the actual address and telephone number of the business of the broker in addition to the address and telephone number of any forwarding service that the broker may use.
Both the State Senate and House versions of the bill were introduced by republicans.
New Commercial Financing Disclosure Bills Emerge in Several StatesFebruary 24, 2023
Several states have resumed efforts to pass a commercial financing disclosure bill this year, following successes that have already taken place in other states. Below are three on the table so far:
- Illinois – Small Business Truth in Lending Bill
- Maryland – Consumer Credit Commercial Financing Transactions
- Connecticut – An Act Requiring Certain Financing Disclosures
New York Commercial Disclosure Regulations ApprovedFebruary 7, 2023
With permission to be republished from Leasing News
Ken Greene is an attorney and Editor of Leasing News. To contact Ken, email: email@example.com.
On February 1, 2023, the New York State Department of Financial Services (“DFS”) adopted final regulations related to its new Commercial Finance Disclosure Law (“CFDL”) found in Article 8, Sections 801-811 of the New York Financial Services Law.
As a reminder, here are the major provisions of the CFDL:
- The law only applies to transactions which are less than $2.5 million;
- Banks and similar financial institutions are exempt;
- True (operating) leases are exempt;
- Commercial transactions secured by real property are exempt;
- Anyone who makes no more than 5 transactions in New York in a 12 month period is exempt;
- Certain vehicle dealers (for transactions which exceed $50k) are exempt;
- Disclosures must be made at the time of extending a specific offer; and
- Generally, the disclosures must include the amount of financing, APR, repayment amounts, term, finance charge, and description of collateral, if any.
Pursuant to the 53 pages of regulation, the CFDL:
- Applies only to transactions where the recipient is in New York;
- Exemptions extend to all majority owned subsidiaries of banks (because they are subject to consolidated oversight);
- Does not require disclosure of broker compensation in the disclosure forms, but still requires disclosure of broker fees in writing;
- Requires that APR be calculated in accordance with either the United States Rule or Appendix J of Reg Z;
- Allows for a digital signature by the recipient on the disclosure forms;
- Has font, rows and column requirements virtually identical to California law;
- Limits the duties of brokers to transmittal of disclosures and providing financer with evidence of transmission. There does not appear to be a document retention requirement like the one in California.
The New York regulations are quite similar to the California rules.
One important difference between the two is the $2.5 million threshold for New York versus the $500k threshold in California. Another major distinction between the two is the express inclusion of bank subsidiaries in the New York law, whereas the California regulations are unclear on this issue.
The compliance date for these regulations is six months after publication of the Notice of Adoption in the State Register. That appears to have happened already, so prepare for compliance on or before August 1, 2023.
This article is presented by the Law Office of Kenneth Charles Greene. All copyrightable text, the selection, arrangement, and presentation of all materials (including information in the public domain), and the overall design of this presentation are the property of the Law Office of Kenneth Charles Greene. All rights reserved. Permission is granted to download and reprint materials from this article for the purpose of viewing, reading, and retaining for reference. Any other copying, distribution, retransmission, or modification of information or materials from this article, whether in electronic or hard copy form, without the express prior written permission of Kenneth C. Greene, is strictly prohibited. The materials available from this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to these materials does not create an attorney-client relationship between the Law Office of Kenneth Charles Greene and the user or viewer. The opinions expressed herein are the opinions of the individual author.
New York Finalizes its Commercial Financing Disclosure RulesFebruary 1, 2023
That’s all folks. New York State’s Department of Financial Services has finalized its rules on commercial financing disclosures. The Fifty-three page rulebook dictates what covered parties will be required to do.
“The New York State Department of Financial Services received 21 comments on proposed revised rule 23 NYCRR 600,” a note accompanying the finalized rules said. “The Department has considered every comment received and has made several revisions…”
Those expecting years of possible back-and-forth commentary like what happened in California may be surprised to find that this is the final version. The effective date of the rule is the date the notice is published in the State Register, but compliance with the rules themselves is slated to take effect six months from that date (please consult with attorney to confirm).
“Clear and easy-to-compare disclosures are paramount as entrepreneurs and small businesses evaluate financing,” said DFS Superintendent Adrienne A. Harris in an official press release.
Regulators Seek to Shore Up Potential Hole in Commercial Financing Disclosure RulesJanuary 25, 2023
After a trade association sued the Commissioner of the California Department of Financial Protection and Innovation over its allegedly unlawful disclosure rules, regulators appear to be scrambling to cover their bases. In particular the SBFA, as plaintiff, has argued that California’s prescribed APR formulas are actually preempted by the federal Truth in Lending Act (TILA) and thus irrelevant.
Within 24 hours of the lawsuit becoming public, a federal agency, the CFPB, coincidentally asked the public to comment on whether or not the disclosure law of a separate state (New York) should be preempted by TILA.
“The CFPB is requesting comment on whether it should finalize its preliminary determination that the New York law – as well as potentially similar laws in California, Utah, and Virginia – are not preempted,” the agency said.
It is of the CFPB’s opinion that such state laws are not preempted and it has proposed to codify such in an official ruling. On January 20th the Attorney General for the State of California praised the CFPB for this initiative.
“…if TILA were to preempt the CFDL’s commercial financing disclosures, there would be no required disclosures at all for commercial credit in California, undermining TILA’s purpose in promoting uniform information and eliminating protections for small businesses and entrepreneurs in California,” said AG Rob Bonta.
The disclosure rules in California went into effect on January 1st despite the lawsuit being filed in December. The SBFA did not attempt to obtain a temporary injunction so there was no anticipation of a delay. The only thing that has happened in the case thus far is that California has asked for an extension to answer the lawsuit. The State now has until February 21st to submit it. In the meantime, the comment period for the CFPB’s proposed rule ended on January 20th, which now potentially puts the agency on course to quickly invent a rule to head off the challenge in California and other states.
Tackling the California Disclosure Law With David J. Austin, Esq.December 16, 2022
“I believe the law can be complied with in a technical sense based on how the statute is written,” said David J. Austin, Esq. of Austin LLP, “however, it opens up a funder to a number of attacks when they’re trying to enforce the funding.”
Austin, an attorney well-read on California’s new commercial financing disclosure law, has created a compliance guide specifically for merchant cash advance funders. Now that the law is in effect, he’s noticed a sudden urgency from small business finance companies to quickly wrap their heads around what they need to be doing.
“There’s nothing ambiguous about certain things in the statutes,” he said. “And it’s very specific, you have to use this font, you can’t use bold or italics, and I discussed that a little bit in [the guide]. It’s very specific about what you need to do.”
Austin imparted some helpful wisdom based upon the risks he sees. First, that funders need not just worry about the Department of Financial Protection and Innovation (DFPI) auditing one’s compliance, but also about what attorneys on the opposite side of the table might attempt to attack if these contracts ever end up in litigation, which they inevitably will. There should be concern, he said, about surrendering some control of the disclosure process to brokers, especially for this reason.
“In my view, the biggest liability in this statute is the broker screwing you up,” Austin said. “I can’t begin to say how important I think it is to—just for that one disclosure, take the broker out of the equation…”
Austin suggested that as far as California is concerned, funders should have direct communication with the merchant early on in the process so that when it comes time to make offers, the funder is able to send the required disclosures to the merchant themselves, and that the broker can simply be included in those communications. This workflow system might depart from one where a broker is accustomed to retaining all control of merchant communications, but Austin is looking at the risks through the lens of a funder.
“I think you just have to say, ‘look, it’s the law and we’re not going to do it any other way,'” he said.
While a much more complete scope of what’s required is all part of the guide he’s offering, he hinted that the “reasonably anticipated true-up” requirement of the disclosure was mostly centered around the knowable seasonality of a business and that he likes the Historical Method of predicting a business’s future sales versus the state’s other allowable option, the Underwriting Method. The Historical Method requires that a funding company examine at least 4 months of a business’s previous history, so if any brokers have been left wondering why a funder has recently started asking for 4 months bank statements instead of 3, this is probably the reason. Austin believes that the Underwriting method, by contrast, creates a lot of extra work, like state audits and additional litigation risk.
“The statute [on the Underwriting Method] is long,” he said. “And like I said, it requires auditing. So the first thing that’s going to happen in any litigation is you’re going to be asked to provide those auditing details.”
Any mca funder curious about compliance, including for access to the full guide, should contact David Austin directly at firstname.lastname@example.org.
Since the law has gone into effect, deBanked has determined that some funders are complying with the law already and are continuing to operate in the state like normal while others are taking a wait-and-see approach. Any funder thinking they can fly under the radar of the DFPI and ignore the regulations should consider that a compliance failure could likely be exposed in litigation.
“We know what the defense counsel is going to do,” said Austin, speaking on merchants’ lawyers using the disclosure requirements as a weapon. “They’re gonna push, push, push, push, push.”
LOL, those are my leads...
disclosures about who you are, are required or account will be banned., , i am a lead broker out of philadelphia, apparently one of my clients is buying my stuff and re-selling them. i offer those same leads ...
disclosures about who you are, are required or account will be banned....
disclosures., , literally 40% of this industry man....