Weigh In: Should The New York Commercial Financing Disclosure Law Be Preempted by TILA?
December 7, 2022
The CFPB issued a statement on Wednesday to announce that it does not believe that New York’s commercial financing disclosure law is preempted by the Truth in Lending Act (TILA).
In a simple sense, the question of whether or not commercial finance companies can potentially disregard portions of New York’s commercial finance disclosure law on the basis that a similar federal law (TILA) has the superior claim to the legalities surrounding APR disclosures, has been answered by the CFPB. It says no. The agency believes that the two laws do not conflict with each other on the stated basis that TILA regulates “consumer purpose transactions” hence New York’s law is not preempted by TILA. At this time this is merely the CFPB’s “preliminary determination.” Now it is asking for the public’s thoughts on the matter.
“The CFPB is requesting comment on whether it should finalize its preliminary determination that the New York law – as well as potentially similar laws in California, Utah, and Virginia – are not preempted.”
The formal Request for Comment and instructions to submit comment can be found here.
The timing is a bit curious given that this issue has just been legally raised in another state. The deadline to submit comment to the CFPB is January 20, 2023.
Don’t Forget About Utah’s Disclosure Law
November 14, 2022
While a new era of business moves forward in Virginia and the clock ticks down to compliance with the new complicated disclosure law in California on December 9th, it can be easy to miss state #3 in all of this, Utah.
Utah’s commercial financing disclosure law goes into effect on January 1, 2023. It’s more than just a form. Covered parties must apply for a commercial financing license. A checklist for that can be found here. Similar to other states, the commission paid to a broker must be disclosed but there is no APR requirement.
Think The New California Disclosure Law is Just About a Disclosure Form? Think Again
September 13, 2022
“We’re one of the good guys so of course we’ll comply and include the form with our contracts.”
Variations of the above phrase have been oft-repeated in the last few months by participants in the commercial finance industry when queried by AltFinanceDaily about California’s new disclosure law. Several companies have shared that they are prepared for what’s to come, but are they? The regulations go into effect on December 9th and begin a new chapter of compliance for the industry.
Though one might be aware that California will require specific disclosures on commercial finance contracts (including purchases of future sales), Katherine C. Fisher, Partner at Hudson Cook, LLP, explained that the breadth of the state’s law will likely require changes to a funding company’s operational processes as well. Fisher told AltFinanceDaily that there’s not just the matter of disclosing but also the matter of what triggers a disclosure having to be made. What might otherwise be considered the normal discourse between a funding provider and a customer prior to a deal being consummated is now an area requiring close examination.
“If a broker sends a text to a merchant with the offers, could it trigger this?” is one scenario she posed about the threshold for disclosure.
The funding provider needs to know the answer because once the disclosure requirement is triggered, the broker needs to relay back the details of the offers made, the specific disclosures provided, and the timestamp of when this took place. All of this data then needs be stored by the funding provider to maintain compliance.
And funding providers will need to be vigilant.
“The funder is responsible for broker compliance,” Fisher said.
The entire process of who-said-what, when, and how will suddenly become a realm requiring tight control it seems. And that all comes back to the form itself, which is not all that simple either.
California will require funding providers to estimate an APR on a purchase transaction using one of two methods: the Historical Method or the Underwriting Method. While the methodology selected is probably best left to qualified counsel to assist with, the likely deviation of a future estimated APR from a backwards-looking APR was a reality considered by state regulators. To bridge this gap, California requires that funding providers disclose reasonably anticipated true-up scenarios. A true-up in this instance refers to the already well-established option for a merchant to perform a monthly reconciliation of payments if the amount collected is above or below the purchased percentage specified in the contract.
Though the very nature of the reconciliation is a consequence of not being able to predict the future exactly, California’s law requires that funding providers disclose the dates and amounts of the true-ups that they reasonably anticipate. Such concepts and mathematics, once perhaps the subjective domain of a funding provider’s in-house underwriters will soon be subject to regulatory scrutiny for total accuracy. And this just scratches the surface.
The scope of this law is so unique and technical that the Hudson Cook law firm spent a considerable amount of time preparing a guide on this very subject. AltFinanceDaily saw some of the pages of this guide during a call.
Fisher, meanwhile, insisted that compliance in California is different than compliance with the law recently enacted in Virginia and that if funding providers wait until December to begin preparing, it will probably be too late to be ready in time.
“This is more than just a form,” Fisher said. “You need to spread the word about it.”
Utah Passes Commercial Financing Disclosure Law
March 28, 2022
The Governor of Utah signed SB183 last Thursday, a law that will require commercial financing providers to formally register with the State as well as provide uniform disclosures on the transactions they conduct.
Beginning January 1, 2023, covered parties will require State approval to conduct business with Utah customers. Following that, the disclosures listed below will be required in the contracts:
- Total amount of funds provided to the business
- Total amount of funds disbursed
- The total amount to be paid
- The total dollar cost of the transaction
- The manner, amount, and frequency of each payment OR the estimated amount of the initial payment
- A statement of costs or discounts associated with prepayment
- The broker’s commission amount
- Explanation of payment methodology and hypothetical circumstances that could cause it to vary
The full text can be read here. AltFinanceDaily first reported on this bill on February 9th.
Utah follows Virginia, New York, and California who have all passed their own versions of a commercial financing disclosure law. Maryland is the most likely state to pass one next.
Virginia Passes Landmark Sales-Based Financing Bill
March 7, 2022
The Virginia State legislature unanimously passed HB1027 on Monday, a law aimed squarely at revenue-based financing providers. Virginia Delegate Kathy Tran (D) celebrated the passage on twitter by saying that the law will “protect small business owners from merchant cash advances.”
The law will require “a provider or broker of sales-based financing to register with the State Corporation Commission (the Commission) in accordance with procedures established by the Commission,” the legislative summary reads. Furthermore, it will require “a sales-based financing provider to provide certain disclosures to a recipient at the time of extending a specific offer of sales-based financing.”
That is just the tip of the iceberg. The bill’s language changed somewhat since it was first introduced in January.
Despite some industry pushback, there was no opposition to the bill on either side of the political aisle and it passed through both chambers unanimously. Virginia has become the third state, following California and New York, to pass a commercial financing disclosure law.
Today, we had the final vote on my bill HB1027 – it passed unanimously and is headed to the Governor! We’re taking key steps to protect small business owners from merchant cash advances, a predatory financial practice. Thanks to @TCIFiscal @VPLC @rbrexperience for your support! pic.twitter.com/Wv8NRL9SOp
— Kathy Tran (@KathyKLTran) March 8, 2022
Delegate Tran thanked The Commonwealth Institute, the Virginia Poverty Law Center, and the Richmond Black Restaurant Experience for their support in making the law happen. The bill now just needs the governor’s signature to become law.
Virginia Hops on the Commercial Finance APR Disclosure Bandwagon
January 14, 2022Add Virginia to the list of states introducing initiatives to codify disclosures in commercial finance. Virginia House Bill 1027 is aimed squarely at “sales-based financing providers.”
The Virginia bill calls for an estimated APR to be disclosed on sales-based financing contracts using methods conceived in New York’s recent legislation.
As has been witnessed, however, New York’s regulators recently discovered weaknesses in their own law.
The Virginia bill is in its very early stages. It was introduced on Wednesday, January 12th by Delegate Kathy K.L. Tran (D).
Analysis: New York’s Lender/Broker Licensing Proposal
February 7, 2017
New York Governor Andrew Cuomo’s proposed budget includes a legislative proposal to “allow the Department of Financial Services (“DFS”) to better regulate the business practices of online lenders.”1 This legislation, which would amend Section 340 of the Banking Law, could have a dramatic impact on lending and brokering loans to New York businesses, as such lenders would have to obtain licenses to engage in business-purpose lending and could only charge rates and fees expressly permitted under New York law.2 It may impact the secondary market for merchant cash advances. If passed, the licensing requirements will take effect January 1, 2018.
The proposed law would amend NY Banking Law § 340 to require anyone “engaging in the business of making loans” of $50,000 or less for business or commercial purposes to obtain a license. The term “engaging in the business of making loans” means a person who solicits loans and, in connection with the solicitation, makes loans; purchases or otherwise acquires from others loans or other forms of financing; or arranges or facilitates the funding of loans to businesses located or doing business in New York.
Although the proposed law would require a license only for a person who “solicits” loans and makes, purchases or arranges loans, the DFS takes the position that the licensing law (as currently enacted) applies broadly and that “out-of-State entities making loans to New York consumers . . . are required to obtain a license from the Banking Department.”3 As a result, there is probably no exemption from licensing for a person who does not “solicit” loans in New York.
The potential impact of the legislation is significant.
Potential Impact on Lenders:
Licensing Required and Most Fees Prohibited. New York law already requires a lender to obtain a license to make a business or commercial loan to individuals (sole proprietors) of $50,000 or less if the interest rate on the loan exceeds 16% per year, inclusive of fees. The proposed law would require any person who makes a loan of $50,000 or less to any type of business entity and at any interest rate to obtain a license. And a licensed lender is governed by New York lending law that regulates refunds of interest upon prepayment;4 and significantly limits most fees that a lender can charge to a borrower, including prohibiting charging a borrower for broker fees or commissions and origination fees.5
Essentially, the DFS will regulate lenders who originate loans to businesses of $50,000 or less in the same manner as consumer loans of less than $25,000. The proposed law would exempt a lender that makes isolated or occasional loans to businesses located or doing business in New York.
Potential Effect on Choice-of-Law. The proposed law could lead courts to reject contractual choice-of-law provisions that select the law of another state when lending to New York businesses. With new licensing requirements and limits on loans to businesses, a court could reasonably find that New York has a fundamental public policy of protecting businesses from certain loans, and decline to enforce a choice-of-law clause designating the law of the other state as the law that governs a business-purpose loan agreement.
For example, the holding of Klein v. On Deck6 might have come out differently if New York licensed and regulated business loans at the time the court decided it. In the Klein case, a business borrower sued On Deck claiming that its loan was usurious under New York law. The loan contract included the following choice-of-law provision:
“[O]ur relationship including this Agreement and any claim, dispute or controversy (whether in contract, tort, or otherwise) at any time arising from or relating to this Agreement is governed by, and this Agreement will be construed in accordance with, applicable federal law and (to the extent not preempted by federal law) Virginia law without regard to internal principles of conflict of laws. The legality, enforceability and interpretation of this Agreement and the amounts contracted for, charged and reserved under this Agreement will be governed by such laws. Borrower understands and agrees that (i) Lender is located in Virginia, (ii) Lender makes all credit decisions from Lender's office in Virginia, (iii) the Loan is made in Virginia (that is, no binding contract will be formed until Lender receives and accepts Borrower's signed Agreement in Virginia) and (iv) Borrower's payments are not accepted until received by Lender in Virginia.”
The court concluded that this contract language showed that the parties intended Virginia law to apply. However, the court also considered whether the application of Virginia law offended New York public policy. The court compared Virginia law governing business loans against New York law governing business loans, and decided that the two states had relatively similar approaches. As a result, the court found that upholding the Virginia choice-of-law contract provision did not offend New York public policy.
The loan amount in the Klein case was above the $50,000 threshold for regulated loans in the proposed New York law, so this exact case would not have been affected. However, the court’s analysis in the Klein case would have been the same for loans of $50,000 or less. Accordingly, the new law could cause a New York court to reject a contractual choice-of-law provision.
Effect on Bank-Originated Loans. This proposed law apparently would not directly affect loans made by banks that are not subject to licensing under the statute.7 But, the law would require non-banks that offer business-purpose lending platforms that partner with FDIC-insured banks to obtain a license to “solicit” loans. And, it is possible, that the DFS could later, by regulation or examination, prohibit such licensees from soliciting loans at rates higher than permitted under New York law.
Potential Impact on Merchant Cash Advance Companies:
The proposed law imposes a license requirement if a person “purchases or otherwise acquires from others loans or other forms of financing.” New York law does not define the term “other forms of financing.” However, the DFS may consider merchant cash advance transactions to be a regulated transaction for which licensing is required.
As written, only purchasing or acquiring other forms of financing, such as a merchant cash advance, might require a license. As a result, the proposed law only has the potential for affecting the sale and syndication of merchant cash advances. It is unclear whether buying only a portion of a merchant cash advance, or “participation” could require a license, or if only purchasing the entire obligation could require a license.
Potential Impact on Brokers:
Because the new law would require a license to “arrange or facilitate” a business loan of $50,000 or less, ISOs and loan brokers would need a license. As mentioned above, a licensed lender is prohibited from charging broker fees or commissions. It is not clear at the moment whether an ISO or loan broker could contract directly with the borrower for a commission.8
1 See https://www.budget.ny.gov/pubs/executive/eBudget1718/fy18artVIIbills/TEDArticleVII.pdf, page 243. Although not discussed in this article, the proposal would also impose new licensing requirements on certain consumer lenders.
2 A licensed lender may impose a rate in excess of the 16% civil usury limit in New York, but is still subject to the 25% criminal usury limit. See, New York Banking Law § 351(1) and New York Penal Law § 190.40.
3 See http://www.dfs.ny.gov/legal/interpret/lo991206.htm The term “solicitation” of a loan includes any solicitation, request or inducement to enter into a loan made by means of or through a direct mailing, television or radio announcement or advertisement, advertisement in a newspaper, magazine, leaflet or pamphlet distributed within this state, or visual display within New York, whether or not such solicitation, request or inducement constitutes an offer to enter into a contract. NY Banking Law § 355.
4 NY Banking Law § 351(5).
5 NY Banking Law § 351(6).
6 Klein v. On Deck Capital, Inc., 2015 N.Y. Misc. LEXIS 2231 (June 24, 2015).
7 See NY Banking Law § 14-a; 3 NY ADC 4; NY Gen. Oblig. Law § 5-501.
8 See NY Gen. Oblig. Law § 5-531 that limits fees that brokers can charge on non-mortgage loans to not more than 50 cents per $100 loaned.
Katherine C. Fisher is a partner in the Hanover, MD office of Hudson Cook, LLP. Kate can be reached at 410-782-2356 or by email at kfisher@hudco.com.
Texas Commercial Sales-Based Financing Bill Gets Last Minute ACH Ban Amendment
May 27, 2025The Commercial Sales-Based Financing bill that passed through the Texas House of Representatives two weeks ago has now also passed through the Senate, but with a rather controversial amendment. In the Senate version, passed yesterday, and viewable on the right hand side of this document, sales-based financing providers would not be allowed to automatically debit a merchant’s account unless they have a “validly perfected security interest in the recipient’s account under Chapter 9, Business & Commerce Code, with a first priority against the claims of all other persons.” That means any sales-based funding (like an MCA or revenue-based financing loan) would be prohibited from debiting merchants automatically unless they were in true first position. And not just a first position MCA, but first position on all arrangements the merchant has altogether. AND it would have to be perfected in accordance with this statute.
The Senate Amendment:
CERTAIN AUTOMATIC DEBITS PROHIBITED.
A provider or commercial sales-based financing broker may not establish a mechanism for automatically debiting a recipient’s deposit account unless the provider or broker holds a validly perfected security interest in the recipient’s account under Chapter 9, Business & Commerce Code, with a first priority against the claims of all other persons.
Since the main difference between what the Senate and House passed is that one sentence prohibiting automatic debits, they have until June 2nd to decide which version of the passed bill is final.
Sales-based financing is broad. While the term encompasses sales-based purchase transactions (MCAs), firms like Walmart and PayPal engage in loan-based sales-based financing. Both firms, for example, are registered sales-based financing providers in the state of Virginia.
The Texas Senate amendment language is new. It does not resemble anything passed in a state commercial financing disclosure law to date.
An estimated 10% of all sales-based financing in the US takes place with Texas-based businesses.
