Navigating Financial Disclosure Regulations: A Guide for Factoring Companies and Other Funders
Andrew Coon has over thirty years of experience in the financial services industry. Mr. Coon co-founded CapFlow Funding Group (“CapFlow”) in 2009 and CFG Merchant Solutions (“CFGMS”) in 2015. Throughout his career, Mr. Coon has gained a reputation as a seasoned leader, having worked for major financial institutions such as Morgan Stanley, Merrill Lynch, Standard and Poor’s and Salomon Smith Barney. Mr. Coon currently serves as the CEO of CapFlow which provides factoring and working capital solutions to small and medium-sized businesses throughout the US. His commitment to providing innovative solutions to his clients has earned him a reputation as a thought leader in the commercial finance industry. Mr. Coon holds a BA in International Relations and Economics from Brown University, and an MBA in Finance from Washington University.
Navigating Financial Disclosure Regulations: A Guide for Factoring Companies and Other Funders
The factoring industry is undergoing a shift due to emerging regulatory disclosure laws, primarily at the state level. These regulations impact our industry, necessitating an understanding of compliance requirements. To navigate this evolving landscape effectively, factoring companies and other funders must equip themselves with the knowledge needed to stay compliant.
Understanding the Essence of State-Specific Disclosure Regulations
Several U.S. states have implemented registration disclosure requirements in an effort to safeguard small business interests. Staying compliant is essential, demonstrating a commitment to merchant protection and avoiding potential sanctions for non-compliance. This proactive approach enables accurate and comprehensive disclosures about terms, fees, repayment schedules, and potential financing risks. Adhering to these requirements fulfills regulatory obligations and maintains the integrity of the factoring industry.
New York Strengthens Small Business Lending Transparency with Adoption of Commercial Finance Disclosure Regulation
New York Superintendent of Financial Services Adrienne A. Harris announced the adoption of the Commercial Finance Disclosure Law (“CFDL”). This regulation pertains to disclosure requirements for commercial financing in line with the Commercial Finance Disclosure Law, encompassing sections 801 to 811 of the New York Financial Services Law. The CFDL obligates designated providers of commercial financing, with financing amounts up to $2,500,000, to furnish standardized disclosures to prospective clients upon extending financing offers. This new regulation outlines specific guidelines for commercial financing providers to comply with the CFDL, including detailed definitions of terms, computation of finance charges and annual percentage rates, formatting requirements for various financing types, disclosure thresholds, and reporting obligations for accurate estimates of annual percentage rates.
Navigating California's New Disclosure Law for Commercial Financing: Insights for Funders
The California Office of Administrative Law's approval of the Department of Financial Protection's regulations (“DFPI”) took effect on December 9, 2022. These regulations require commercial financing providers across multiple industries to furnish essential information mandated by the California Legislature. Industries covered by the regulation include traditional installment loans, open-end credit, commercial factoring, revenue-based financing, and more. Funders will be obliged to disclose crucial metrics such as funding amounts, APR, payment details, terms, prepayment policies, and average monthly costs. The DFPI's oversight extends to various financial sectors, including state-charted banks, credit unions, lenders, investment advisers, and more. By providing these disclosures, the regulations empower small businesses to navigate the realm of commercial financing with confidence.
Utah's Drive for Transparent Commercial Financing
Under the Commercial Financing Registration and Disclosure Act (CFRDA), beginning on January 1, 2023, commercial financing providers who conduct more than five commercial financing transactions in Utah in any calendar year must register with the and provide certain disclosures, effective January 1, 2023. Disclosure requirements include transaction terms such as the total amount of funds provided, the total amount to be paid to the provider, the total dollar cost of the financing, payment details, prepayment penalties, and more. Utah Department of Financial Institutions and provide certain disclosures. Disclosure requirements include transaction terms such as the total amount of funds provided, the total amount to be paid to the provider, the total dollar cost of the financing, payment details, prepayment penalties, and more.
Registrations and renewals are subject to annual expiration, and the process involves payment of fees along with the submission of a detailed registration statement containing pertinent information. The Utah Code mandates that a disclosure form must be provided to recipients when a provider extends a specific offer. The form's content, including the name of the business, principal office address, information on commercial financing offices, and designated agent for service of process, must be accurately stated. A recipient's signature and date are essential components of the form, ensuring their acknowledgment and understanding of the provided information. Importantly, the form must be separate from other documents, either in physical or electronic format, allowing recipients to retain it for future reference.
Upcoming Disclosure Regulation Law in Georgia and Florida
Georgia recently amended its Fair Business Practices Act for commercial financing transactions. This new Georgia law, Senate Bill 90 (“SB 90”), requires commercial financing providers, involving amounts of $500,000 or less, and conducting more than five transactions annually in the state, to adhere to disclosure requirements. The law goes into effect on January 1, 2024. Factoring lenders that are participating in financing transactions in Georgia must provide detailed disclosures before finalizing the transaction with its prospective merchant client.
The information to be disclosed includes the total funds provided to the business, disbursed funds (if different from the provided amount), the total payment to the provider, the dollar cost of the transaction, payment details (frequency, manner, and amount), and any costs or discounts related to prepayment. This regulatory trend highlights the industry's shift towards standardized disclosures, aiming to ensure that small-business borrowers have the information necessary to make informed financial decisions.
As with the Georgia SB90 bill, the Florida House Bill 1353 (“CS-HB 1353”) goes into effect January 1, 2024, and mandates that factoring providers involved in commercial financing transactions must make disclosures. Florida's Commercial Financing Disclosure Law (“CFDL”) is applicable to a wide range of commercial loans, accounts receivable purchase transactions, and open-end credit plans involving businesses within the state. The mandated disclosures encompass various details such as the total funds provided, disbursed, and payable, along with information about the dollar cost of the transaction, payment terms, and prepayment details.
It's crucial to highlight that neither Florida nor Georgia imposes an APR disclosure requirement, and they do not incorporate specific provisions from the Truth in Lending Act ("TILA") related to consumer loans.
Navigating Licensure Requirements for Non-Bank Lenders
In addition to implementing regulatory disclosure laws, specific states are now mandating that non-bank lenders secure specific licenses. For instance, in California and Utah, funders, including non-recourse factors, must be registered with the Nationwide Multistate Licensing System and Registry. Notably, similar regulatory trends are emerging in other states as well. In Virginia, funders are required to register with the Virginia State Corporation Commission on an annual basis. As the regulatory landscape evolves, factoring lenders are advised to stay updated on licensing requirements across states to ensure compliance and mitigate potential liabilities.
Federal Intervention Amidst State-Level Legal Complexities: Nationwide Injunction Impacts CFPB's Small Business Lending Rule
In a sweeping legal development, the US District Court for the Southern District of Texas, issued a nationwide injunction, effectively preventing the Consumer Financial Protection Bureau (CFPB) from implementing or enforcing its small business lending rule. Crafted to execute Section 1071 of the Dodd-Frank Act, the contested rule mandates banks, credit unions, and small business lenders to gather and report data on small business loan applicants, with a particular focus on applications from minority-owned businesses. Detractors of the rule argue that it imposes undue burdens and could substantially escalate borrowing costs. Originally, the district court had confined its injunction to named plaintiffs in a case challenging the rule, primarily rooted in concerns about the CFPB's constitutional standing—a matter previously raised in the same circuit that issued this far-reaching injunction. However, subsequent motions from other affected entities prompted the court to broaden the scope of its injunction to encompass all covered institutions nationwide. The Fifth Circuit contends that the funding structure of the CFPB is unconstitutional. Importantly, the outcome of the injunction depends on an upcoming Supreme Court decision anticipated next year.