Regulation
Second Hearing on Broker Licensing in California
January 16, 2024The Judiciary Committee of the California State Senate was the next in line to discuss the continued push for commercial finance broker licensing. Several organizations came forward in support of the bill while others said that changes were necessary to the current proposal. The licensing bill (SB 869) was also discussed the day before in the Banking Committee.
You can watch the full thing below:
California Senate Committee Finds Support for Small Business Finance Broker Licensure
January 10, 2024The hot topic in a recent California Senate committee hearing was licensure for MCA brokers. In it, legislators took interest in broker commissions and how they’re paid. This was not a one-sided discussion. Representatives for Rapid Finance, Kapitus, Forward Financing, and the RBFC were present and able to give testimony. The general consensus was that a licensure framework was favorable but that there were still issues that need to be resolved. The bill at issue is SB 869.
You can listen to a copy of the audio we’ve obtained of the hearing on Spotify or watch the hearing in full below:
California to Hold Hearings on Commercial Finance Broker Licensing
January 8, 2024Members of the California state legislature are apparently not done with the commercial finance space. This time they want to expand the scope of the California Financing Law (CFL) to include “commercial financing providers” and “commercial financing brokers” for the purpose of licensure, regulation, and enforcement. In Senate Bill 869, commercial financing is defined as an “accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, or lease financing, intended by the recipient for use primarily for a purpose other than a personal, family, or household purpose.”
While the bill was technically introduced last year, its progress stalled. Now it’s not only back but it will also be the subject of back-to-back committee hearings on January 10 and January 11. To the extent these hearings are publicly accessible, deBanked will livestream them.
Biden Vetoes Congressional Resolution to Scrap CFPB’s Small Business Lending Rules
December 19, 2023
Bipartisan or not, President Biden formally vetoed S.J.Res. 32 which would have scrapped the CFPB’s 888 pages of soon-to-be implemented small business lending rules and forced the agency to create new ones.
The CFPB is obligated by the Wall Street Reform and Consumer Protection Act to collect data from small business finance companies (MCA included) so that it will be able to assess the market and measure potential disparities. It is a limited scope law that nevertheless resulted in 888 pages of rules explaining how to collect that data and send it to the federal government. They are slated to go into effect very soon.
Despite data collection being the intended purpose, Biden suggested in his official veto statement that the rules are actually intended to “conduct oversight of abusive and predatory lenders.”
“If enacted, this resolution would harm all those that stand to benefit from expanded transparency and accountability,” Biden said. “By hampering efforts to promote transparency and accountability in small business lending, Republicans are siding with big banks and corporations over the needs of small business owners.”
Unless litigation changes the timelines, many funders and lenders must start complying by October 1, 2024. This is a federal law, not a state requirement.
Brokers: What’s Your Address and Phone Number?
December 14, 2023
Brokers, this is no joke. In eighteen days, the State of Florida will by law require that brokers disclose their actual address and phone number in advertisements that promote their services as a broker. This is because Florida’s commercial financing disclosure law added its own twist by incorporating one of DailyFunder’s original rules to its statute.
Furthermore a broker may NOT:
(1) 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 transaction, 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.
(2) 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.
(3) Make or use any false or deceptive representation in its business dealings.
What’s the risk of non-compliance?
The Florida Attorney General has the right to commence administrative or judicial proceedings to enforce compliance with this part.
1. A violation of this part is punishable by a fine of $500 per incident, not to exceed $20,000 for all aggregated violations, arising from the use of the transaction documentation or materials found to be in violation of this part.
2. A violation of this part after receipt of a written notice of a prior violation from the Attorney General is punishable by a fine of $1,000 per incident, not to exceed $50,000 for all aggregated violations, arising from the use of the transaction documentation or materials found to be in violation of this part.
These rules were signed into law in June of this year and they apply to all deals funded starting January 1, 2024.
Legal Risks: Penalties for Non-Compliance in Revenue-Based Financing
December 11, 2023Jeffrey S. Paige is the General Counsel of CFG Merchant Solutions. Visit: https://cfgmerchantsolutions.com
Staying compliant with disclosure legislation and regulations is paramount for revenue-based financing funders and brokers alike. In states such as California, Virginia, Utah, New York, Georgia, Connecticut, and Florida, there are specific requirements to which commercial financing funders must adhere. Funders and brokers who fail to comply with these requirements could face significant legal and/or financial penalties. Funders and brokers are encouraged to consult their legal counsel to ensure full compliance with all laws and regulations of every state in which they transact business.
California Code of Regulations Title 10, Chapter 3 – California Financing Disclosure Law (Effective December 9, 2022):
Starting on December 9, 2022, commercial financing funders in California are required to provide clients with certain disclosures, including the controversial APR calculation. This became mandatory following the issuance of final regulations by the California Department of Financial Protection and Innovation (DFPI) on June 15th to implement the California Code of Regulations Title 10, Chapter 3. Violations of these disclosure requirements in California can lead to significant penalties, reaching up to $10,000 for willful violations, along with the possibility of imprisonment for licensees who commit violations. To maintain compliance and avoid penalties, consult with your counsel to ensure your disclosures are timely and set forth all required information, including but not limited to:
- Total amount of funds provided
- Total dollar cost of the financing
- Term or estimated term
- Payment details
- Prepayment policies
- Total cost of financing expressed as an annualized rate
Virginia HB1027 – Virginia Financing Disclosure Law (Effective July 1, 2022):
Virginia enacted HB1027, introducing disclosure and registration requirements for sales-based financing funders. Funders conducting business in Virginia are obligated to conform to these regulations, which include but are not limited to:
- Registration: Funders and brokers in revenue-based financing must register with the State Corporation Commission and subsequently renew annually.
- Disclosures: Disclosures for specific financing offers are mandatory, covering total financing amount, finance charges, total repayment amount, estimated payments, payment amounts, and applicable fees.
- Virginia’s Distinction: Unlike California and New York, Virginia does not mandate the disclosure of an annual percentage rate (APR), focusing on the disclosure of the total cost of capital.
Non-compliance with Virginia HB1027, the Virginia Financing Disclosure Law, exposes businesses to substantial penalties. The law empowers the Virginia Attorney General to seek injunctions for violations, in addition to restitution payments, damages, and attorney’s fees for violations.
Utah SB183 – Utah Financing Disclosure Law (Effective January 1, 2023):
Engaging in a commercial financing transaction as a provider in Utah or with a Utah resident has become unlawful unless one is registered with the Utah Department of Financial Institutions (DFI). This registration, akin to California’s process, must be renewed annually through the Nationwide Multistate Licensing System (NMLS). Utah’s unique framework explicitly states that non-compliance does not affect the enforceability of transactions, nor do violations give rise to a private cause of action against the funder. However, civil penalties are not to be underestimated. Violators can face penalties of $500 per violation, not exceeding $20,000 for all violations. For repeat offenders, especially those who receive written notice of prior violations, penalties can escalate to $1,000 per violation, capped at $50,000. To ensure compliance with Utah SB 183 and avoid legal trouble, ensure proper and timely registration and annual renewal. Also, consult with counsel to prepare the required disclosures, which feature (but are not limited to) the total amount of funds provided, the total cost of financing, and any other pertinent material terms and associated costs as required by the regulations.
New York Commercial Financing Disclosure Law (August 1, 2023):
The New York Commercial Financing Disclosure Law (CFDL) mandates standardized disclosures for unregulated financial institutions engaged in commercial financing transactions. Funders failing to comply may face civil penalties, with fines reaching up to $2,000 per violation or $10,000 for intentional violations. In addition, for knowing violations, the Superintendent of the Department of Financial Services can impose restitution payments and/or injunctive relief. Disclosures include, but are not limited to:
- The total amount of funds provided
- The total cost of financing (expressed as an annualized rate)
- A description of the financing product
- Other material terms and fees
- The name and contact information of the funder
- A statement that the borrower has the right to cancel the deal within three business days of receiving the disclosures
- Timing: The disclosure must be given to the borrower when a specific commercial financing offer is made.
- Any portion of the amount financed used to pay unpaid finance charges or fees (referred to in the legislation as “double dipping.”)
Funders should proactively integrate these disclosures to align with New York’s regulatory standards and foster a culture of accuracy and responsibility in commercial financing practices.
Georgia Commercial Financing Disclosure Law (Effective January 1, 2024):
Effective January 1, 2023, Georgia’s Commercial Financing Disclosure Law mandates clear and detailed disclosures for commercial financing funders. The law amends Georgia’s Fair Business Practices Act, applying specifically to providers of commercial loans and accounts receivable purchase transactions under $500,000. Transactions are defined as purchases of accounts receivable or payment intangibles, strategically avoiding loan classification, and notably, no licensing or registration requirements are imposed on funders. Funders failing to comply with these disclosure requirements face potential civil penalties, ranging from $500 to $20,000, with additional penalties for continued non-compliance after notice. Importantly, these penalties do not compromise the enforceability of the transactions, and it is noteworthy that the law does not grant a private right of action.
Disclosure Requirements:
- Providers must disclose key terms: total funding amount, net funds disbursed, total payable, financing cost, payment schedule, and prepayment penalties.
- Unlike California and New York, Georgia’s law does not mandate APR calculation.
- The definition of “Providers” is consistent with Utah’s Commercial Financing Registration and Disclosure Act.
- Covers those engaging in more than five commercial financing transactions in Georgia annually, including online platforms partnering with depository institutions.
Florida Commercial Financing Disclosure Law (Effective July 1, 2023):
Effective from July 1, 2023, commercial financing funders in Florida are mandated to comply with the requirements of the Florida Commercial Financing Disclosure Law.
Florida Law Disclosure Requirements:
Non-compliance with these regulations can result in fines ranging from $500 per incident to an aggregate of $20,000, with possible aggregate penalties up to $50,000 for continued violations after receipt of notice. As with other states, transparency in financial dealings is paramount, and funders should stay updated on regulatory changes to ensure continuous compliance.
Connecticut Financing Disclosure Law (Effective July 1, 2024):
Connecticut sets a clear deadline for funders and brokers to register with the state banking commissioner by October 1, 2024. Additionally, the Connecticut Financing Disclosure law requires funders to disclose:
These regulations apply to entities providing commercial financing, and failure to comply can result in severe civil penalties of up to $100,000. The commissioner additionally holds the authority to enjoin those violating the statute. Understanding and fully complying with these requirements is crucial for funders and brokers that transact business in this state.
The Imperative of Adhering to Evolving Commercial Financing Disclosure Laws
The regulatory frameworks in California, Virginia, Utah, Georgia, New York, Florida, and Connecticut, coupled with impending regulations in other states, underscore a growing regulatory focus on transparency, customer protection, disclosure and equitable financial practices. With revenue-based financing facing heightened scrutiny, the strict compliance with these laws cannot be emphasized enough. Ensuring adherence is not just a best practice but a crucial necessity to avoid potential legal penalties and foster a financial ecosystem built on trust, integrity, and responsible funding practices.
Missouri Resurrects its Commercial Financing Disclosure Bill
December 10, 2023For the third time, a commercial financing disclosure bill has been introduced in Missouri. Senate Bill 753, introduced this month, is nearly identical to SB 187 which failed to gain traction this year.
A staple of the bill is its broker licensing requirement, which would require an annual renewal. Brokers would not be able to broker any deals for Missouri merchants until they were registered.
Wait, Is Section 1071 On The Verge Of Being Cancelled?
December 1, 2023
After the CFPB spent 13 years trying to figure out how to implement a wide-reaching poorly-worded law, the ensuing 888-page handbook full of rules for small business lenders to follow so the government can measure disparities in commercial loan underwriting processes, may have all been for naught. Congress wants the rules gone.
The rules in question were mandated by Section 1071 of the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) at a time when the bill’s drafters assumed that all business financing products were loans and all loans came from banks. The consequence has been endless rounds of debates, RFIs, hearings, committees, consultations, explainer guides, and lawsuits. Most recently there was a court-ordered injunction put in place to delay implementation of these rules.
Today, however, the House followed the Senate in voting to strike down the relevant rules. Though it was close in both chambers of Congress, Democrats did join Republicans in reaching this outcome. Nevertheless, reports say that Biden is expected to veto their resolution.
Notably, the passed legislation disapproves the rules submitted by the CFPB, not the underlying section of the law that mandates they draft a set of rules. This is important because it’s not Section 1071 that they’ve voted to undo, but rather the final rules that the CFPB has issued as part of its obligation to Section 1071.
According to House republicans, “By overturning the final 1071 rule, Congress will force the CFPB to reengage small businesses and their lenders to create a rule that is better tailored to their concerns and less likely to reduce the availability of credit.”
This effectively means that Section 1071 itself is safe (unless a court rules it or the CFPB unconstitutional). If the President does not veto it the legislation would force the CFPB to go back to the drawing board on rules it took 13 years to come up with in the first place.
