Our Financial Services & Products Group highlights three new state laws in Georgia, Florida and Connecticut that require vendor disclosures in commercial financing transactions. These new regulations:
- Require vendors to make TILA-like disclosures
- Apply for business transactions
- Are part of a growing trend of state legislatures
Georgia, Florida and Connecticut are among a growing list of states, including California, New York, Utah and Virginia, that have enacted laws mandating consumer-like disclosures for commercial financing transactions. These laws are part of a burgeoning trend for state legislatures to impose onerous disclosures on small commercial loan and financing providers, as required by the federal Truth in Lending Act (TILA). These laws apply to business transactions, but not to consumer, family, or household transactions.
The Georgia Law
On May 1, 2023, Georgia amended its Fair Business Practices Act to require certain commercial financing providers of $500,000 or less to provide various disclosures to small business borrowers prior to the closing of transactions. The legislation, known as Senate Bill 90, applies to covered commercial financings closed on or after January 1, 2024.
Georgian law requires trade credit providers of US$500,000 or less to provide TILA-like disclosures to small business borrowers prior to closing the transaction, but does not specify a timeframe. Georgian law defines “provider” as “a person who enters into more than five commercial financing transactions in Georgia during a calendar year”, including participants in marketplace lending arrangements for commercial purposes. “Commercial financing transactions” include both closed and open commercial loans and debt purchase transactions, but excludes real estate-backed transactions.
Georgian law exempts state-insured custodians and their subsidiaries, affiliates and holding companies; Georgia Licensed Money Transmitters; captive finance companies; and institutions governed by the federal law on agricultural credit. The law also exempts from purchase money obligations.
Georgian law requires providers of commercial financing transactions to provide the following information prior to closing:
- Total amount of funds made available to the company.
- Total Funds Disbursed.
- Total amount paid to the provider.
- Total transaction cost in dollars.
- payment plan.
- Costs associated with prepayment.
Vendors that violate these disclosure requirements face civil penalties ranging from $500 per violation to $20,000, with possible additional penalties for sustained violations. In particular, violations do not affect the enforceability of the transactions and there is no private right of action under the law.
The Florida Law
On June 26, 2023, Florida enacted the Florida Commercial Financing Disclosure Law, which requires Covered Providers to provide consumer-oriented disclosures to businesses for certain commercial non-backed real estate financing transactions over $500,000. Florida law takes effect on July 1, 2023 and will become binding on transactions completed on or after January 1, 2024.
Florida law applies to providers of commercial financing transactions and defines “provider” as “a person who closes more than five commercial financing transactions in Florida during a calendar year.” “Commercial financing transactions” include commercial loans, perpetual lines of credit and accounts receivable purchase transactions. Florida law exempts the following companies and transactions: federally insured custodians, their subsidiaries, affiliates and holding companies; licensed money transmitters; loans secured by real estate; Loans over $500,000; rental agreements; and certain purchase money transactions.
Vendor is required to disclose the following in writing upon or prior to entering into any Commercial Financing Transaction:
- The total amount of funds made available to the company.
- The total amount of funds paid to the Company if less than the total amount provided due to any fees deducted or withheld upon payment and any amounts paid to third parties on behalf of the Company.
- The total amount is to be paid to the provider.
- The total dollar cost of the commercial financing transaction, calculated by subtracting the total committed funds from the total payments.
- The nature, frequency and amount of each payment or, if variable payments, an estimated initial payment and the method used to calculate it.
- Certain Prepayment Information.
Florida law prohibits a broker arranging a consumer financing transaction from engaging in any of the following acts:
- Determining, collecting or demanding an upfront fee from a company for the provision of services to a broker. However, this prohibition would not prevent a broker from asking a company to pay for actual services required to apply for commercial financial products, such as: a credit check or security assessment, or prevent a company from paying for them provided certain conditions are met.
- In offering or selling the services of a broker, make or use false or misleading representations, or omit material facts, or engage in any activity that “would act as fraudulent or deceptive to any person in connection with the offering or sale of the services.” of the broker, notwithstanding the company’s lack of trust.”
- Do not make or use false or misleading representations in your business dealings.
- Offering the services of a broker through advertising without disclosing the actual address and telephone number of the broker’s business.
Like Georgia law, Florida law punishes violators with civil fines ranging from $500 per incident to $20,000, with possible additional penalties for “summarized violations.” In particular, violations neither affect the enforceability of the transactions nor do they justify a private right of action.
The Connecticut Act
On June 28, 2023, Connecticut enacted a “Certain Financing Requirement Disclosures Act” that (1) requires lenders offering certain types of “sale-based financing” for commercial purposes of $250,000 or less to: provide applicants with certain consumer-like disclosures; and (2) requires lenders offering such loans to register annually with the Connecticut Department of Banking beginning October 1, 2024. Connecticut law empowers the state banking commissioner to make regulations, and the law takes effect on July 1, 2024.
Connecticut law applies to providers of commercial finance and defines “provider” as “a person who makes a specific offer of commercial finance to a recipient and includes, unless otherwise stated, a commercial finance broker.”
“Commercial Funding” means any renewal of revenue-based funding from a Provider not exceeding $250,000. According to the law, “sales-based financing” is a “transaction that is repaid by the recipient to the provider over time” (1) as a percentage of sales or revenue, where the payment amount may increase or decrease depending on the recipient’s revenue or sales or (2) under a fixed payment mechanism that provides for a reconciliation process that adjusts the payment to an amount equal to a percentage of sales or revenue.
Specifically, Connecticut law exempts the following businesses and transactions from tax:
- Banks, bank holding companies, credit unions and their subsidiaries and affiliates.
- Companies conducting no more than five commercial financing transactions in a 12-month period.
- Loans secured by real estate.
- Purchase Money Obligations.
- Technology service providers acting on behalf of an exempt company so long as they have no interest in the company’s program.
- Transactions of $50,000 or more to car dealers or rental companies.
- Transactions offered in connection with the sale of a product that the person manufactures, licenses, or distributes.
Connecticut law requires that before making a “specific offer” (ie, a binding offer of credit), providers must make certain disclosures to borrowers in a form prescribed by the state Banking Commissioner, including:
- The total amount of commercial funding.
- The Payout Amount, which is the amount paid to or on behalf of the Recipient, excluding any Finance Charges that are deducted or withheld from the payout.
- The financing fee.
- The total repayment amount, i.e. the payout amount plus the financing fee.
- The estimated repayment period.
- A payment plan.
- A description of the fees not included in the financing fee, e.g. B. Drawing Fees and Late Fees.
- A description of any collateral requirements.
- Broker Compensation Information.
The Connecticut Banking Commissioner is expected to issue implementing rules and model disclosures prior to the July 1, 2024 effective date.
Connecticut law requires vendors and brokers to register with the state banking commissioner and qualify to “do business” in the state by October 1, 2024. Registration must be renewed annually.
The law authorizes the Banking Commissioner to impose civil penalties of up to $100,000 for violations of the law and to fine those who break the law.
The three state statutes recently enacted in Georgia, Florida and Connecticut are part of a growing trend in the states to regulate small balance commercial loans not secured by real estate. The burdens imposed by the statutes are borne by the lenders unless they can avoid triggering the statutes.
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