Nationally, the Truth-in-Lending Act of 1968 (TILA) regulates and requires of lenders to disclose the repayment term, fees, annual percentage rates (APR) and other terms for loans made to individual consumers.
Lawmakers recently pushed in Congress to introduce the Small Business Lending Disclosure Act of 2021, which would expand for small business loans the same disclosure requirements that apply for individual consumers under TILA (see HR 6054, 117th Congress).
Several states have already, or are working to, pass similar laws through the enactment of commercial finance disclosure law (CFDL) legislation. CFDL legislation is generally aimed at specialty and non-traditional lenders like merchant cash advance companies and factors, and requires that consumer-like disclosures akin to TILA requirements be provided for small business loans.
As of June 2022, four states have passed CFDLs, while six states have pending legislation. The federal effort, together with swift movement at the state-level—and instances where state lawmakers have even reintroduced CFDL proposals a after prior failure—indicates that CFDL legislation is on the uptick and could spread nationwide.
States With Enacted CFDLs
CFDL disclosure requirements are designed to promote and enable comparison shopping by small business borrowers, and to ensure they are equipped with knowledge to make better-informed decisions with respect to available financing options.
California was the first state to pass a CFDL in 2018, requiring that impacted providers disclose certain transaction-related information to prospective borrowers, and also execute agreements showing that disclosure had been made prior to consummation of a loan (see Cal. Fin. Code § 22800). Mirroring California, New York followed in late 2021, requiring TILA-like disclosures for certain commercial financing applicants (see N.Y. Fin. Serv. Law §§ 801-812). In March 2022, Utah adopted its Commercial Financing Registration and Disclosure Act (see Utah Code Ann. § 7-27-201), followed in April 2022 by Virginia’s Merchant Cash Advance Registration and Disclosure Law (see Va. Code Ann. §§ 6.2-2228 – 6.2-2238).
While both California and New York have formally enacted laws, neither has implemented regulations or began enforcement as of early 2022. In California, state agencies are continuing efforts to develop and implement workable regulations before the law will be enforced. Similarly in New York, although passed, actual implementation and enforcement of its CFDL awaits issuance of final regulations.
Utah and Virginia, in contrast, are not delaying implementation. Utah’s CFDL will become effective on January 1, 2023, and Virginia’s on July 1, 2022. Both states require providers to register with state financial regulatory agencies.
The disclosure requirements across all four states are similar—compelling providers to clearly disclose the total amount of funds provided to the borrower; the total financing cost; the total repayment amount to the provider; the payment schedule; and prepayment policies. However, certain other requirements and characteristics do differ by state.
Unlike California and New York, Utah and Virginia do not require disclosure of term or estimated term requirements, nor do they require disclosure of APR based on the terms of repayment and scheduled payment amounts. APR disclosure requirements have been difficult to implement, and are the primary driver behind delayed regulations and implementation in California and New York.
In California, New York and Utah, their respective CFDLs apply broadly to various types of commercial financing, including commercial loans, commercial open-end credit plans, accounts receivable purchase transactions and factoring transactions. New York and California’s laws extend even further to cover closed-end financing, sales-based financing—including merchant cash advances—and asset-based lending transactions. While Virginia’s law is narrowly tailored only to apply to sales-based financing—particularly providers of merchant cash advances.
Additionally, the monetary thresholds vary from state to state. For example, despite being most similar in application requirements, New York’s CFDL exempts commercial financing transactions over $2.5 million, while California’s monetary threshold is set to $500,000. Virginia’s CFDL also exempts transactions over $500,000. Utah’s CFDL provides that transactions over $1 million are exempt.
All four states provide exemptions for authorized depository institutions, as well as providers and brokers that enter into no more than five covered transactions within a one-year period.
Other States And The National Impact
Several other states have recently sought to enact CFDL legislation. These include Maryland (SB 825), New Jersey (SB 819), North Carolina (HB 969), Missouri (SB 963) and Pennsylvania (HB 1793), where legislative proposals remain pending. Proposals in Mississippi (SB 2629 and HB 1179) and Connecticut (SB 745 and SB 272) failed. Maryland’s CFDL passed in the State Senate with modifications, and has seen the most progress. Similar to New York, Maryland exempts qualifying depository institutions. However, Maryland differs from New York and California in exempting factoring transactions of health care receivables and provides no safe harbor for lenders to rely on borrower’s statements when determining if a commercial loan was a financing transaction.
All of the proposed legislation is broad in application, with the exception of New Jersey SB 819 that applies only to merchant cash advances. As to all indicated states, the proposed disclosure requirements are also markedly similar.
Nothing suggests the trend among state legislatures to propose CFDL laws will subside. Rather, as regulations are finalized and released in California and New York, the trend will likely expand at a greater pace.
Specialty and non-traditional lenders should monitor proposed CFDL legislation in all states where they operate. Penalties for noncompliance of enacted and enforceable CFDL laws can be significant, reaching as much as $50,000 in Utah, in the event that the state has provided written notice to a repeat violator regarding use of the same transaction documentation or materials. New York will fine repeat, willful violators as much as $10,000 per violation. In California, a willful CFDL violation could result in a $10,000 fine and one-year imprisonment term.
Enactment of CFDL legislation with severe penalties for non-compliance is reflective of broader trends in the current economic environment. As interest rates increase and lending opportunities for small businesses likely narrow, lawmakers will continue to pursue CFDL legislation designed to ensure that small business borrowers understand the terms of available financing.
Specialty and non-traditional lenders are recommended to review and consider how underwriting, compliance and regulatory practices may need to be modified or conformed as CFDL laws continue to be pursued.
Stephen J. Grable is a litigation partner in the New York office of Thompson Coburn LLP. Nicholas Armstrong is a law clerk in the St. Louis office of Thompson Coburn LLP.
