New regulations in the revenue-based financing space are arising in states including California, New York, and Utah. These states are enacting CFDL compliance regulations to cover close-end financing including asset-based lending transactions and merchant cash advances. Non-traditional lenders are encouraged to review how compliance and regulatory practices may be altered as these disclosure laws go into effect. Â
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California Disclosure LawÂ
California’s new disclosure law went into effect on December 9th, 2022. This law requires lenders and finance companies to provide disclosures for some commercial transactions. This includes merchant cash advances and small business loans. The regulations provide detailed instructions for the content of disclosures, cover commercial loan and cash advance transactions, and require these disclosures to provide specific information on all terms. California is the first to require nonbank lender disclosure of the annual percentage rate businesses pay when they borrow $500,000 or less. Furthermore, funders must get signatures from borrowers on the specific commercial offer of financing before the documents are carried out. More specific requirements can be found below.Â
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Keep in mind that the California Disclosure Law does not apply to depository institutions, commercial financing transactions secured by real property, or cover commercial loans under $5,000.Â
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California Disclosure RequirementsÂ
California’s disclosure law is specific on what information must be disclosed and how it should be disclosed. A financial provider must prepare written disclosures of the funding provided, annual percentage rate (APR), finance charges, total payment amount, and periodic payment amount. Furthermore, they must provide written disclosure to the recipient including when the terms of an existing contract are changed and if the changes result in an APR increase. Lastly, they must have a signed copy of the disclosures before beginning the transaction. Â
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State disclosure laws should be monitored closely by non-traditional lenders.
New York Commercial Financing LawÂ
Using California legislation as a basis, New York is also moving forward with similar disclosure laws. New York signed a disclosure law requiring commercial financing providers to disclose certain information about an offer to the recipient. The law gives regulatory enforcement authority to the New York Department of Financial Services. It includes secured loans, factoring, and merchant cash advances. This law was set to take effect on January 1, 2022. However, days earlier, the New York Department of Financial Services clarified that compliance would not be required until regulations were final, expected in May of 2023. For lenders, this law will require APRs and other disclosures to be presented on commercial finance contracts – even if the agreements are not loans. Â
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Exceptions for this disclosure law include:Â
- Financial institutions such as a bank or a credit union organized under state lawÂ
- Lenders regulated under the federal Farm Credit ActÂ
- Any person who makes no more than five commercial financing transactions in New York a yearÂ
- Commercial financing transaction secured by real property
- A commercial financing transaction where the recipient is a car dealer or affiliate of a rental car company Â
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Utah Disclosure LawÂ
Following California and New York, Utah is now the third state to enact disclosure law requirements for commercial lending transactions. This disclosure law will apply to commercial loan providers who complete more than five commercial financing transactions in Utah. Utah’s commercial financing disclosure law went into effect on January 1, 2023. Registration requirements include a credit report, control person attestation, a business description, and more. Covered parties must also apply for a commercial financing license to register as commercial loan providers with the Utah Department of Financial Institutions. However, the Utah law does not enforce disclosure of an Annual Percentage Rate. Â