New consumer-style disclosure laws for certain commercial finance providers are springing up throughout the United States. States such as Connecticut, Missouri, New Jersey, North Carolina, Maryland, Utah, and Virginia have introduced commercial finance disclosure bills which are in the various stages of legislation. Most notably, California and New York, have signed these bills into law, and are currently promulgating regulations for the laws’ enforcement. California and New York, being two states that are home to a significant amount of commercial finance activity, can be seen as a foreshadowing of what is to come throughout the rest of the country.
Passing of the Laws
California led the way in 2018 with the passage of the state Senate Bill 1235 (the “California Disclosure Law”), an amendment to the California Finance Lenders Law (“CFL”).
The passage of the California Disclosure Law made California the first state to require certain non-bank lenders and other finance companies that are licensed under the CFL to make consumer-style disclosures at the time of extending a specific offer of commercial financing. New York followed suit when in late December of 2020, a similar bill was signed into law in the state of New York known as the Commercial Finance Disclosure Law (the “New York Disclosure Law”).
Contents of the Disclosures
Both the California Disclosure Law and New York Disclosure Law require certain providers to disclose at the time of the offer to extend commercial financing: (a) the total amount of funds provided; (b) the total dollar cost of financing; (c) the term or estimated term; (d) the method, frequency, and amount of payments; (e) a description of the prepayment policy; and (f) the total cost of the financing expressed as an annualized rate. While the California Disclosure Law applies to offers of Commercial Financing (hereinafter defined) of $500,000 or less, the New York Disclosure Law applies to offers of Commercial Financing of $2.5 Million or less made to a recipient who intends to use it primarily for purposes other than personal, family, or household purposes.
Applicability
In both the California Disclosure Law and New York Disclosure Law, Commercial Financing means: (a) accounts receivable purchase transactions; (b) factoring; (c) asset-based lending transactions; (d) commercial loans; (e) commercial open-end credit plans; and (f) lease financing transactions. Certain transactions are exempt from the California Disclosure Law and the New York Disclosure Law: (a) a commercial transaction secured by real property, and (b) when the borrower is a vehicle dealer or vehicle rental company. Additionally, the following commercial financing providers are exempt from the California Disclosure Law and New York Disclosure Law: (a) a depository institution, such as a state or federally chartered bank, savings association, or credit union authorized to transact business in California or New York, as applicable; (b) a lender regulated under the federal Farm Credit Act; (c) any person or entity that makes no more than one commercial financing transaction in California or New York, as applicable, in 12months; and (d) any person who makes five or less commercial financing transactions in California or New York, as applicable, in 12monthsthat are incidental to the business of the person relying on the exemption.
Proposed Regulations of the New Laws
Both New York and California regulators have yet to finalize proposed regulations for implementation. As of December 30, 2021, the proposed regulations for the California Disclosure Law are under review with California’s Office of Administrative Law after four separate modifications to the regulations of the 2018 enacted law. Similarly, as of January 1, 2022, New York regulators have not issued final regulations to implement the New York Disclosure Law and have advised that commercial finance providers’ obligations do not mature until the New York State Department of Financial Services issues final implementing regulations and those regulations take effect. However, while neither the California Disclosure Law nor the New York Disclosure Law will likely take effect until at least the summer of 2022, applicable lenders doing business in California and New York should be using this time to shape and revise their compliance programs. Additionally, Lenders in other states should start expecting the same to occur nationwide.
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