Regulation
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.
Two Commercial Financing Bills Introduced in Pennsylvania
October 28, 2023
Add Pennsylvania to the list of states with commercial financing bills. Last week, Representative Kristine C. Howard introduced HB1791 and HB1972, which would outlaw Confessions of Judgment provisions in contracts and require mandatory disclosures to businesses respectively. In the latter, commercial financing providers would be required to disclose the total amount of funds provided, the total dollar cost of the financing, the term or estimated term, the payment method/frequency, prepayment policy, and APR.
The bills were expected. Rep. Howard pledged to introduce them back in February when she circulated a memo titled “Protecting Small Businesses from Predatory Lending.“
Massachusetts Legislators Propose Small Business Lending Data Collection
October 16, 2023
Legislators in Massachusetts are proposing a set of requirements designed to monitor small business lending in a manner that is similar to the CFPB.
In a set of parallel bills that mostly say the same thing (S.234, S.1986 H.2997), they call for the Division of Banks to require “the collection of small business lending data from all lenders, including online lenders, and small businesses on an annual basis.”
It also said that the regulations would include:
(1) the establishment of a central depository of the collection and analysis of small business lending data, to include, but not be limited to the following: lending and banking institutions’ average annual percent rates, default rates, and fees.
(2) procedures for the solicitation and acceptance of reports regarding small businesses’ incidents of predatory lending practices.
(3) procedures for assessing the credibility and accuracy of reports of small business lending data from lending institutions.
Although this was proposed back in February it has since shifted back into the conversation in the state. The next hearing on the bill will take place on October 19. It can be found under the category of “An Act to promote inclusive entrepreneurship and economic justice.”
California Eliminates The Disclosure Law’s Sunset Date
September 25, 2023When California passed its landmark commercial financing disclosure law in 2018, some theorized that it was all just a five-year experiment. That’s because legislators wrote into the statute that the APR component of disclosures would only be required until January 1, 2024 and would then automatically be repealed. Then something unexpected happened, it took four years just to put the law into effect. And so with the clock ticking down toward repeal, California’s legislature passed a law last week that removes that line from the statute entirely. Now there is no sunset date. It’s permanent.
Although deBanked has learned that many providers are complying with the disclosure law, not everyone believes that doing so helps business owners or that its requirements are constitutional.
Meanwhile, California also passed ANOTHER commercial financing bill last week, Senate Bill 666, which you can read about here.
US Senators Introduce National Interest Rate Cap Bill
September 12, 2023
Four Democratic US Senators want to establish a national usury rate for credit transactions. S. 2730, dubbed the “Protecting Consumers from Unreasonable Credit Rates Act of 2023” says that “attempts have been made to prohibit usurious interest rates since colonial times” but that high interest rates have prevailed because of loopholes, safe harbor laws, and the “exportation of unregulated interest rates permitted by preemption.”
The solution to all this, it says, is a nationwide 36 percent rate cap that no one can ever circumvent and for which no exemptions would be allowed. The bill repeatedly references “consumers” and makes no mention of commercial or business credit. The bill would technically amend the Truth in Lending Act, however, so TILA covered parties are the likely covered parties for this bill as well.
The sponsors are Sen. Durbin, Sen. Blumenthal, Sen. Merkley, and Sen. Whitehouse.
This bill is new. Whether it progresses remains to be seen.
California On Verge of Passing Another Commercial Financing Bill
September 12, 2023
Complying with the recent California commercial financing disclosure law? Great! Get ready for another one. Senate Bill 666 (unfortunate number choice) has been making its way through the state legislature since February and is approaching a final vote.
The bill would prohibit covered entities from charging:
(a) A fee for accepting or processing a payment required by the terms of the commercial financing contract as an automated clearinghouse transfer debit, except for a fee imposed for a payment by an automated clearinghouse transfer that fails because of insufficient funds in the transferor’s account.
(b) A fee for providing a small business with documentation prepared by the covered entity that contains a statement of the amount due to satisfy the remaining amount owed, including, but not limited to, interest accrued to the date the statement is prepared and a means of calculating per diem interest accruing thereafter.
(c) A fee in addition to an origination fee that does not have a clear corresponding service provided for the fee, including, but not limited to, a risk assessment, due diligence, or platform fee.
(d) A fee for monitoring the small business’s collateral, unless the underlying commercial financing transaction is delinquent for more than 60 days.
(e) A fee for filing or terminating a lien filed in accordance with the provisions of the Uniform Commercial Code against the business’s assets that exceeds 150 percent of the cost of the filing or termination.
Overall, the bill is not that extreme. The bill can be viewed and tracked here.
