In a simple sense, the question of whether or not commercial finance companies can potentially disregard portions of New York’s commercial finance disclosure law on the basis that a similar federal law (TILA) has the superior claim to the legalities surrounding APR disclosures, has been answered by the CFPB. It says no. The agency believes that the two laws do not conflict with each other on the stated basis that TILA regulates “consumer purpose transactions” hence New York’s law is not preempted by TILA. At this time this is merely the CFPB’s “preliminary determination.” Now it is asking for the public’s thoughts on the matter.
“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 timing is a bit curious given that this issue has just been legally raised in another state. The deadline to submit comment to the CFPB is January 20, 2023.
In a preview of what’s to come in 2023, Missouri State Senator Justin Brown (R) has reintroduced a commercial financing disclosure bill. SB 187, which is significantly less stringent than the law about to go into effect in California, nonetheless would require brokers to be licensed in the state.
“The act requires registration with the Division of Finance prior to engaging in business as a commercial financial broker,” the bill states. “Specifically, the act requires filing a registration form, submitting a fee of $100, and obtaining a surety bond in the amount of $10,000. A registration renewal is required every year…”
This bill was introduced last year but failed to advance. Other states that are expected to reintroduce similar bills this year include Connecticut and Maryland.
The alarm bells sounded over California’s commercial financing disclosure law were more than rhetorical bluster. This past Friday, a trade association representing dozens of small business finance companies filed a lawsuit against the Commissioner of the California Department of Financial Protection and Innovation (DFPI) on the basis that the regulations scheduled to go into effect on December 9th are unlawful.
The suit, filed by the Small Business Finance Association, makes two claims.
First, that the regulations violate the First Amendment on the premise that they compel the group’s members to make inaccurate disclosures to customers while at the same time prohibiting members from engaging in communications that could be used to clarify or correct the required false or misleading information to customers. This in part refers to the requirement that funders assign misleading and/or false APRs to purchase transactions while being forced to use language and terminology that contradicts the contracts themselves.
Second, that APR disclosures are defined and governed at the federal level by the Truth in Lending Act and that California’s custom formulas and disclosures would only serve to confuse customers. The SBFA argues that the regulations are “preempted” by TILA.
These controversies, which have been the subject of debate for years, are not new information, but enforcement of the law is finally slated to begin in just 3 days. The complaint argues that compliance with the law may expose its members to civil and criminal liability and thus they are left with no choice but to proceed accordingly. Given the circumstances, however, there does not appear to be hard feelings about the situation.
“The SBFA enjoys a great working relationship with the DFPI and share their commitment to providing meaningful disclosures to small business owners,” said SBFA Executive Director Steve Denis when asked what this lawsuit meant.
“We recognize the challenges involved in implementing SB 1235 and appreciate the effort and transparency the DFPI provided during the regulatory process. This is a complex issue and our lawsuit reflects the comments we have made during the regulatory process. We believe there are significant issues with the regulation that not only makes it difficult for us to accurately comply, but are inconsistent, create liability, and will provide further confusion for our small business customers. Again, we appreciate the effort by the DFPI and look forward to continuing our work together as the matter is resolved.”
The law is scheduled to go into effect on December 9th.
We’re now 9 days away from the commencement of California’s Commercial Financing Disclosure Law. Despite the industry’s best efforts to spread the word about the upcoming changes, deBanked has informally queried several industry participants over the last few weeks to assess their preparedness and in the process learned that a significant percentage of funders and brokers still believe that the law is just about some kind of new form that has to be included with the contract.
This despite a widely read September 9th story that conveyed that there was much more to it than that.
Since then, however, a number of brokers in the market have been asked to resign ISO agreements or to prepare for compliance with the necessary processes governing disclosure trigger events (wait, the what now?). Brokers may also have noticed that a number of funders have also made changes to their stip requirements as they narrow down which permissible method they’ll use to calculate an estimated APR while at the same time formulating a mathematical model to be able to comply with the reasonably anticipated true-up scenario disclosures (huh?).
Some participants have heralded the law as a turning point for eliminating bad actors while later discovering only recently for the first time that the law may actually adversely impact their business as well. From there it’s like a roller coaster through the five stages of grief, in which they all do the math and realize that California is 12% of the population and can’t be written off. The acceptance phase is when they finally decide that they will figure out what form they need to include, only to find out that it really is more than just a form.
To be sure, several participants have also communicated that they’re feeling good about preparedness for compliance, so the world won’t end. It just might be tricky now for the segment of the industry that’s been putting off addressing this change to be ready in time. It’s a lot more complicated than it sounds. Are you ready?
Former MJ Capital Funding CEO Johanna Garcia is expected to consent to judgment with the SEC without admitting or denying the claims, according to documents filed in the SEC case. As part of that she will have to disgorge ill-gotten gains, pay prejudgment interest thereon, and incur a civil penalty. The total amount is to be determined.
At last tally, the Receiver said it had received more than 10,000 claims and is busy verifying all of them. MJ Capital raised nearly $200M from investors.
While a new era of business moves forward in Virginia and the clock ticks down to compliance with the new complicated disclosure law in California on December 9th, it can be easy to miss state #3 in all of this, Utah.
Utah’s commercial financing disclosure law goes into effect on January 1, 2023. It’s more than just a form. Covered parties must apply for a commercial financing license. A checklist for that can be found here. Similar to other states, the commission paid to a broker must be disclosed but there is no APR requirement.
The deadline to comment on New York’s latest iteration of its commercial financing disclosure rules is October 31st. As stated on the Department of Financial Service’s website, the agency’s official contact on the matter is George Bogdan (George.Bogdan@dfs.ny.gov). It’s the same contact as was given for the previous comment period.
Notably, the DFS has said that it has received some comments that have asked the agency to abolish the disclosure rules altogether. That won’t happen, the DFS explained, because it is required by law to enact them.
Even if there are no additional comment periods after this one, it is highly unlikely that the NY rules would go into effect this year.
In it, the New York Department of Financial Services (DFS) also gave its own assessment of the comments received from potentially covered parties.
“Some commenters are opposed to the basic purpose of the Commercial Finance Disclosure Law (“CFDL”), Financial Services Law (“FSL”) sections 801-811, and accordingly are opposed to the regulation,” DFS said. “Most commenters acknowledge the need for the rule to implement the CFDL and made comments intended to improve the regulation from their perspective.”
Thus, with all of the feedback previously received, the new proposal is out. The public now has until October 31st to provide further feedback to it.