Brokers: What’s Your Address and Phone Number?

Brokers, this is no joke. In eighteen days, the State of Florida will by law require that brokers disclose their actual address and phone number in advertisements that promote their services as a broker. This is because Florida’s commercial financing disclosure law added its own twist by incorporating one of DailyFunder’s original rules to its statute.

Furthermore a broker may NOT:

(1) Assess, collect, or solicit an advance fee from a business to provide services as a broker. However, this subsection does not preclude a broker from soliciting a business to pay for, or preclude a business from paying for, actual services necessary to apply for a commercial financing transaction, including, but not limited to, a credit check or an appraisal of security, if such payment is made by check or money order payable to a party independent of the broker.

(2) Make or use any false or misleading representation or omit any material fact in the offer or sale of the services of a broker or engage, directly or indirectly, in any act that operates or would operate as fraud or deception upon any person in connection with the offer or sale of the services of a broker, notwithstanding the absence of reliance by the business.

(3) Make or use any false or deceptive representation in its business dealings.

What’s the risk of non-compliance?

The Florida Attorney General has the right to commence administrative or judicial proceedings to enforce compliance with this part.

1. A violation of this part is punishable by a fine of $500 per incident, not to exceed $20,000 for all aggregated violations, arising from the use of the transaction documentation or materials found to be in violation of this part.

2. A violation of this part after receipt of a written notice of a prior violation from the Attorney General is punishable by a fine of $1,000 per incident, not to exceed $50,000 for all aggregated violations, arising from the use of the transaction documentation or materials found to be in violation of this part.

These rules were signed into law in June of this year and they apply to all deals funded starting January 1, 2024.

Full law here

Legal Risks: Penalties for Non-Compliance in Revenue-Based Financing

Jeffrey 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.

BHG Financial Tightening Its Credit Box, Dealing With Tough Environment

BHG Financial (formerly Bankers Healthcare Group) originated $1 billion in loans in Q3, according to recently filed disclosures about the company. That was down from $1.1B in Q2. BHG mainly provides business loans and unsecured loans to healthcare practitioners. Although the company considered it to be a stronger quarter than anticipated, it predicts that Q4 will not be as strong and that originations will actually drop significantly to between $600M to $800M.

“As we look to the fourth quarter, BHG believes origination volumes will likely be less than Q3 as they continue to shrink their credit box,” said Terry Turner, CEO of Pinnacle Financial Partners, which owns 49% of BHG.

While originations start to slow, loan loss reserves have also increased.

“The decrease in income from BHG during the three and nine months ended September 30, 2023 as compared to the same periods in the prior year is largely the result of increases in (i) the liability for estimated future inherent losses for the outstanding core portfolio of loans sold to banks through the auction platform that may be subject to future substitution due to payment default or prepayment and (ii) the allowance for loan losses for loans BHG has retained on its balance sheet due to the uncertain economic environment.”

BHG is also exiting its “merchant financing business,” according to Pinnacle CFO Harold Carpenter. Carpenter was referring to NaluPay, BHG’s Point of Sale financing division. NaluPay launched a little over a year ago to great fanfare, claiming it would enable merchants “to offer their customers large credit lines, a suite of promotional and non-promotional financing options, and instant credit decisions within seconds.”

Nevertheless, Pinnacle says that BHG is feeling good about the direction things are heading.”BHG is optimistic about credit at the end of the third quarter,” Turner said.

Whoa, That’s a Lot of Bad EIDL Loans

When the SBA revealed it had charged off $220M worth of covid-related EIDL funds before the first payment on any of those loans was even due, it suggested that things were not going to go well. Payments on just the earliest issued loans started at the end of last year and by March the SBA made a shocking disclosure. $62 billion worth of loans were already delinquent. This number is all the more alarming when put into the perspective that there were only $380B in EIDL funds loaned total. That means that 16% went bad straight out of the gate.

Oh, and this number is growing and the SBA is feeling overwhelmed to the point where they’re not even trying to collect on many loans.

“…the SBA had already decided that it would not take the most aggressive actions possible to pursue borrowers who received loans worth $100,000 or less,” the Washington Post reported.

This strategy has not been well received by Office of Inspector General Hannibal Ware. In a letter Ware wrote to SBA Administrator Isabella Guzman on September 29, he said, “SBA’s decision to cease collections risks violating the Debt Collection Improvement Act of 1996, which prohibits ending collections on fraudulent, false, or misrepresented claims, because SBA OIG and other oversight agencies are continuing to work on identifying COVID-19 EIDL fraud that may not have been identified by the agency. It is also unclear whether SBA plans to end active collections on loans for borrowers who received multiple COVID-19 EIDLs of $100,000 or less that, when combined, exceed $100,000.”

Unlike PPP loans, which if not forgiven had to be repaid in full within two years, the EIDL program extended very generous terms with a 30 year repayment schedule.

The OIG has asked the SBA to evaluate the possibility of selling a portion of its EIDL debt to maximize the return to taxpayers.