Regulation

New Commercial Financing Disclosure Bills Emerge in Several States

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

Think you know APR? Think Again.

It has been just over two months since the California financing disclosure law was enacted. With New York on the heels of California, getting APR disclosure correct is a legal requirement, let alone a competitive one.

At Austin LLP, we developed a simple and versatile APR calculator as part of our California disclosure law guide. However, while training and using this calculator with our clients, we learned just how tricky an APR calculation could be. Having an accurate APR calculation method or software tool is just the beginning. Below we discuss one pitfall we have observed when calculating an APR for an MCA funding deal. In future articles, we will highlight other scenarios where calculations may not be as straightforward as one may think.

MCA Funding APRs Change Depending on the Day of Disbursement

When disclosing a daily (Monday-Friday) MCA financing offer in California or New York, it is essential to understand that the “APR,” which funders are required to disclose, will change depending on the day of the week the funding is disbursed. For example, the APR you calculate with a Monday disbursement will have a different APR if that same deal is funded on a Tuesday. This difference in APR is because MCA funders take payments only Monday through Friday, resulting in a different payment schedule as the week progresses, because later disbursement equals fewer payments before the weekend.

We’ve seen APRs for the exact same financing deal change as much as 8-10%, based solely on the day of the week the funding is disbursed. Therefore, funders, underwriters, and brokers must be aware of how an APR calculation changes based on the day of the week.

APRs Decrease as the Week Progresses

Using our MCA-APR calculator, we found that as the week progressed, the APR of the deal decreases. For example, the APR calculated using a Monday disbursement and a Tuesday first payment will be higher than the same deal disbursed on a Tuesday with a first payment on a Wednesday. This trend continues for the entire week, with a Friday disbursement and a Monday first payment having the lowest APR.

California and New York disclosure laws allow for the disclosure of a higher APR. Therefore, as long as the funds are disbursed in the same week as the disclosure, the actual APR will be lower than the APR that was disclosed to the merchant. However, a disclosure made on a Thursday or Friday of one week that does not disburse until the following week will have a higher actual APR than was disclosed.

Should it always be Monday?

For these reasons, no matter which APR calculator you use, ensure you input the expected disbursement day and first payment day. And for any disclosure offer made that is not disbursed by Friday, remember to re-calculate the APR and re-disclose on the following Monday.

Some of our clients are adopting an “every day is Monday” approach to avoid an accidental under-disclosure of an APR. The APR disclosure regulations are tricky and have many pitfalls. With a regulatory tolerance of less than one eighth of one percent, accuracy matters, specifically when considering the potential for regulatory oversight and downstream litigation.

This article has been provided as general guidance and should not be considered legal advice. Feel free to reach out to us at mca@austinllp.com for any specific questions you may have. We are happy to be of service.

The FTC Proposes to Ban Employment Non-Compete Clauses

As also published in Leasing News

To welcome in the new year in its inimitable way, the Federal Trade Commission (“FTC”) proposed new rules that would ban employers from imposing non-compete on their employees. If passed, the new rule would provide that it is an “unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with an employee, to maintain a worker with a non-compete clause, or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”

Per the FTC, a non-compete clause is a “contractual term between an employer and a worker that typically blocks the worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.” As such, these clauses have historically been considered appropriate subjects for scrutiny under the nation’s antitrust laws such as the Sherman Act.

The prospective change in federal law was prompted by what the FTC calls “natural experiments” by virtue of new legislation in several states that limit or ban non-competes.  Non-competes are either entirely or largely unenforceable as against public policy in California, North Dakota, the District of Columbia, and Oklahoma. Maine, Maryland, New Hampshire, Rhode Island, Washington and most recently, Colorado, have severe limitations on non-competes. The “experiments” in these states apparently prompted President Biden, in July of 2021, to issue his “Promoting Competition in the American Economy Order”, a broad Executive Order that purports to encourage innovation and competition in the American workplace. The Order asks the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Here is what the Executive Order looks like:
https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/

The FTC has sought public comments to the proposed rule. The comment period ends on March 6, 2023. Thereafter, the new law may take effect as soon as 180 days following the comment period. Instructions for sending comments are found in the Notice of Proposed Rulemaking.
https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf

One of the upsides of a non-compete is that it helps protect trade secrets and IP, but this can be achieved through a confidentiality or non-disclosure provision. It also keeps former employees from taking your business model and creating a competitive business, which may be difficult to achieve otherwise. However, do you really want to retain an employee who wants to leave simply because he signed an agreement that says he or she cannot compete with you?

The downside of non-competes is that, to some, they violate public policy by restricting the mobility of workers. They are also limited in scope, and expensive to enforce.

What does it mean to you? The general consensus is that the new law will be challenged in court. If it is not, and it becomes law, not only will you no longer be able to legally use non-competes with your employees, but you will have to rescind existing non-competes and inform your employees that the clauses are no longer in effect.

Stay tuned for updates.

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