Burdensome consumer-like disclosures are making their way into the commercial realm as nine states have enacted legislation mandating that specific disclosures be made to financing recipients in certain commercial financing transactions at (or, in some cases, before) the consummation of the financing transaction.

To date California, Connecticut, Florida, Georgia, Kansas, Missouri, New York, Utah, and Virgina have enacted state commercial loan disclosure requirements, with similar requirements being discussed in various state legislatures around the country. Some states also require covered providers to register as such in the state.

While common themes run through the commercial disclosure laws enacted by the various states, the laws are not identical. The stated purpose of these disclosure laws is to provide small businesses with transparency into the terms of their financing by requiring streamlined summations of the costs and material elements of their financing terms.

What Providers are Covered?

Generally, a provider subject to the statute is defined as a person who consummates more than a specified number (typically five) of commercial financing transactions with recipients located in (or principally directed or managed from) the governing state in a calendar year.

In addition, it is common in these regulatory regimes for certain partners to banks to be subject to the disclosure requirements.

Thus, a “provider” will often include a nonbank that enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to the recipient via an online lending platform administered by the nonbank.

Which Commercial Financing Transactions Are Covered?

With some exceptions, these laws typically apply to an array of transactions, including:

• commercial loans (both secured and unsecured);

• commercial open-end financings;

• sales-based financings; and

• accounts receivable purchase transactions (broadly defined as a transaction in which a business forwards or otherwise sells to a provider all or a portion of the business’ accounts or payment intangibles at a discount to their expected value), factoring transactions and revenue- or sales-based purchase transactions (such as merchant cash advances).

What Exemptions Apply?

The laws contain a threshold exempting financings greater than a certain dollar amount (the threshold amount varies by state but generally ranges from $250,000 to $2,500,000), and a de minimis exception for providers who enter into no more than a specified number of financings (typically five transactions with recipients located or operating in the governing state) in a twelve-month period.

In addition, the laws generally exempt the following:

• depository institutions and affiliates thereof;

• lenders regulated under the Farm Credit Act;

• transactions secured by real property;

• true leases not intended for security purposes;

• purchase money obligations;

• a transaction of $50,000 or more in which the recipient is a motor vehicle dealer or rental company or affiliate thereof;

• a transaction offered by a “captive” company, meaning an entity that offers financing in connection with the sale or lease of products that such entity manufactures, licenses, or distributes, or whose parent company or any of its directly or indirectly owned and controlled subsidiaries manufactures, licenses, or distributes;

• factoring or purchasing of accounts receivable related to personal injury health care debts; and

• a money transmitter licensed in any state.

What Must Be Disclosed?

As noted above, the stated goal of these regulatory requirements is to provide small businesses streamlined summations of the costs and material elements of the financing terms that might otherwise be confusing to or not fully understood by the borrower.

In general, these laws require covered financing providers to disclose certain specific transaction terms, including (but not limited to):

• the total amount of funds provided to the business applying for the financing;

• the APR;

• the total amount of funds actually disbursed to the business if less than the total amount of funds provided after accounting for fees and third-party costs;

• the total amount the recipient will pay to the provider when all payments are made;

• the total dollar cost of the financing transaction (defined as the delta between the total of payments and the total of funds provided);

• the manner, frequency and amount of each payment; and

• any costs or discounts associated with prepayment, among other items.

Frequently, only one disclosure is required for each transaction – typically at the outset of the transaction prior to closing – and new disclosures are not required to be given as a result of the modification of the terms of a transaction. ‘

Further, the disclosure may be illustrative in nature, showing a “model transaction” that might be effected under the financing agreement in question. This would mean, for instance, at the implementation of a facility wherein the provider from time to time will purchase a business’s invoices or receivables in a factoring transaction that only one disclosure needs to be given at the outset, rather than a disclosure prior to each such purchase transaction under such facility.

Unfortunately, the laws do not specify or provide a particular form or template. Some state laws (California and New York), however, contain in their statutes very specific requirements detailing the precise format and content of the disclosures, including font type and size, table column widths, and decimal points in APR calculations, depending on the type of commercial financing offered.

Who Must Register?

Brokers are required to register with the applicable state regulatory authority and obtain a surety bond (typically, $10,000).

Brokers are generally defined as any person who, for compensation or the expectation of compensation, obtains a commercial financing transaction or offer for a commercial financing transaction from a third party that would, if executed, be binding upon that third party and communicates that offer to a business located in the impacted state. A broker excludes a provider, persons whose compensation is not based on the terms of the specific financing offered, and persons who receive no compensation.

The registration requirements are often minimal. Applicants for a broker registration need only provide basic information such as the entity name, any d/b/a name in use, principal office address, confirmation of whether any officer, director, manager, operator or principal of the broker has been convicted of a felony involving an act of fraud, dishonesty, breach of trust, or money laundering, and the name and address of the designated agent for service of process.

Note that certain states (Utah and Virginia) require specified commercial financing providers to register with the state regulatory authority.

What Are the Penalties for Violation?

Commercial financing providers that fail to comply with these laws may be subject to civil monetary penalties, such as fines ranging from $500 per violation to $10,000 per violation, if willful.

The laws do not typically provide for the impairment of contracts made in violation of such laws or authorize a private right of action.

What Can Be Expected Next?

It is anticipated that in the future, additional states will enact similar disclosure laws applicable to small-balance commercial lending transactions. Seven states currently have commercial financing disclosure bills pending.

New state laws should not be expected to be identical to the laws enacted in other states, although these laws tend to share many similarities.

Navigating this patchwork of similar but different state laws is challenging for providers with a national platform. It is especially important to monitor the regulatory landscape to stay informed as these transparency laws are enacted in additional states.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section webpages to learn more about the benefits of section membership.