From the AFA: Weighing the Pros and Cons of a National Uniform Disclosure Law

In the American Factoring Association’s regular letter, Palmer Hamilton provides an update on new disclosure legislations and the potential need for a national uniform disclosure law. The AFA is still determining if such a national standard is the right course of action.

BY PALMER HAMILTON, ESQ., PARTNER​, JONES WALKER LLP

As many know, the American Factoring Association has been monitoring and endeavoring to affect pending legislation in various States that would mandate various disclosures in commercial lending situations.  

The first such legislation was California SB 1235 which passed. After enactment, the AFA has worked to address how this legislation would be implemented through regulation. Other States, such as New York, Connecticut and Massachusetts, seem headed down the same path as California in this regard. This could result in different standards across the country, and a factor doing business in several States would be subject to understanding each State’s disclosure regulations, which can constantly be changing and evolving. It could be a real problem as a practical matter.  

To combat this kind of fragmentation of disclosure laws, the AFA has been studying whether it might be wise for the factoring industry to push for a uniform national standard that would preempt the varied and differing state requirements. The AFA believes this might be much more efficient and limit the liability exposure of inadvertent errors

The benefits of a uniform national disclosure law would be the reduction of the administrative burden and cost as wells as providing a statutory safe harbor from penalties for inadvertent errors. 

Also, with full transparency of rate, MCA lenders will be required to disclose in the same manner as a factor, and this will highlight the true cost of merchant cash advances. Hopefully this would reduce the use of these predatory loans. 

The AFA is conscious, however, that there are potential downsides. There could be increased consolidation, as smaller factors will not be able to afford the compliance costs, and fewer financing options for small businesses if the factoring industry has fewer factors. Of course, much the same could arise from the current trend of differing state disclosure laws.  

The IFA, on behalf of the AFA, recently conducted a survey of its members on the subject of a uniform national disclosure law. There were 34 responses, with 20 in favor of a uniform national disclosure law and 14 against.  

The AFA board continues to wrestle with this issue. If the AFA does conclude to move forward, this will not be a quick process. It will require us to consult those Members of Congress with whom we have established a good working relationship after we have drafted a bill. We also will want to consult small business trade associations to see if we can partner with them on this effort, assuming the AFA does move forward. The AFA is committed to protecting its members to the extent possible. Thus, if we do move forward, we would want the federal disclosure to be as least burdensome as possible.

The goal of the AFA is to increase membership and financial support from every IFA member. We urge every IFA member to contribute to the AFA as we are in the midst of our annual membership fund drive. Currently, we have Bronze Members, who have contributed as little as $500, up to Diamond Members, who have contributed in excess of $10,000. This is a very inexpensive insurance policy to help protect our industry from needless regulation which will be both costly and prohibitive. Please consider supporting the American Factoring Association.