The CASH ACT: The Journey to Federal Preemption of State Disclosure Laws
Written by: Liz Craddock, Government Relations Attorney, Holland & Knight
One-size-fits-all financial state disclosure laws are an onerous, and potentially litigious, regulation for the factoring industry. In 2018, state disclosure laws started to get enacted, with California being the first state to enact a law that would impact how factoring companies operated with their customers if doing business in the state. Since then, in nearly half of the state legislatures across the country, similar legislation has been introduced, creating a wildfire-like effect with the American Factoring Association (AFA), the lobbying arm of the IFA, needing to defend against state disclosure laws popping up around the country.
While the AFA is still working to stop states from enacting state disclosure laws, as it did in Texas, or water down the legislation to have minimal impact on the industry, as it did in Florida, there is also another path the AFA Executive Board voted to take, which is to create a Federal law that would preempt these various state laws and provide one standard disclosure that the factoring industry can comply with, versus a patchwork of various forms of disclosure that are often unworkable for the industry.
As such, the AFA, after many working sessions, voted to advance a Federal bill, believing it would be best to create one workable Federal standard, rather than have to comply with a dozen different unworkable state standards of disclosure. The AFA has long enjoyed a friendship with Congressman Frank Lucas (R-OK), who addressed the IFA conference attendees in Boston in May of 2022. Rep. Lucas is one of a handful of U.S. legislators who understands the factoring industry and the value it adds to the U.S. economy. The Congressman agreed to be the original sponsor of the legislation and the AFA has been working with his office in creating the Capital Access for Small Businesses Harmonization Act or the CASH ACT. The CASH ACT will establish clear disclosures of key terms that factors can provide to small businesses at the time of establishment of the factoring facility. The Act would expressly preempt any state laws applying different disclosure standards to factoring transactions.
As new financial services products come online in the U.S., state and Federal regulators are enacting more laws to try and protect consumers and small businesses from nefarious actors. Fortunately, at the Federal level, the factoring industry was intentionally left out of the Consumer Financial Protection Bureau’s (CFPB) 1071 Dodd-Frank regulation that required covered financial institutions to collect and report to the CFPB data on applications for credit for small businesses. After a lengthy and thorough comment period, the CFPB found that factoring was not a “covered credit transaction” under the regulation stating: ‘factoring is a purchase of accounts receivables’ and is distinct from merchant cash advanced payments. Unfortunately, California did not follow suit to leave the factoring industry out of its state disclosure regulation and that has led to the situation the industry faces today.
In addition, these state disclosure laws only target factoring facilities with small businesses as many of these proposed state laws have transaction maximums within the legislation, meaning, if the facility is over a certain amount, then no disclosure is required to the customer. It is clear the intention is to try and protect small businesses. What is frustrating about this situation is that most factoring companies are small businesses too – and these various state disclosure laws that are unworkable for the factoring industry only create more harm for the factoring industry by creating more regulatory burden in attempting to comply with the required disclosures and by placing them in potential jeopardy of being sued or fined for an inadequate disclosure.
The U.S. factoring industry provides a critical financial service tool to small businesses who need access to funding to make further investments to sustain or grow their business. Many of these small businesses are not able to obtain loans from banks (for example, due to being a startup). The state disclosure laws are having a chilling effect on factors continuing to provide this important funding source. As previously mentioned, California was the first state to enact disclosure legislation which went into effect in December 2022. Many factors have decided to no longer do business in California as they are afraid of exposing themselves to significant liability for making an innocent error as a result of the uncertainties created by applying traditional loan disclosure concepts to a totally different form of transaction. A recent AFA survey of its members indicated that nearly 50% of respondents were no longer doing business in California. This will likely occur in other states as well that enact disclosure laws. This will deprive small businesses of a key funding source at a time when banks are becoming less willing to lend money. This will push small businesses to more predatory and expensive funding alternatives, such as merchant cash advances. The CASH ACT is needed to avoid limiting funding options to small businesses at a time when they need it the most.
It must be stated that the factoring industry is not opposed to providing disclosures to its customers, but if doing so, the industry strongly believes the disclosures must be accurate and meaningful to their clients. The various state disclosure laws are drafted in a way that does not allow factors to comply and can put factoring companies at risk of litigation. The CASH ACT would address this by establishing disclosures specifically tailored for factors that they can in good faith comply with. In addition, with most factors as small businesses themselves, having to comply with a patchwork of state disclosure laws is burdensome and expensive. The CASH ACT would create uniformity for factors and lessen this burden for the industry.
Enacting any Federal law is a lengthy process and we are just at the beginning with the CASH ACT in Congress. With the bill’s introduction, the legislation will next be referred to a House Committee to await further action. The committee will conduct a legislative hearing to review the legislation and hear testimony from witnesses who might be in favor or against it. After that hearing, the legislation will be slated for a legislative mark-up where amendments can be made to the legislation and ultimately the legislation is voted on. If the committee has enough votes to support and approve the legislation, it will then be reported to the House Floor, where the bill can be called up for a House Floor vote. Once the bill passes the U.S. House, it will then need to repeat all of these steps in the U.S. Senate. Once both chambers have voted to approve the legislation in identical form, it can then be sent to the President’s desk for signature and enactment. In reality, it is likely this legislation will be attached to another vehicle moving through Congress, instead of moving as an individual bill.
Due to the election year, and the 118th Congress coming to a close in early January 2025, the AFA is using the remainder of this Congress to build support for the CASH ACT in Congress. In September, AFA Board Members are headed to Washington, D.C. for a fly-In to meet with Members of Congress and to ask them to co-sponsor the legislation. In addition, the elections are likely to shake up the control of Congress, with the U.S. House potentially changing control to the Democrats and the U.S. Senate to the Republicans – although given the already close margin of control in each chamber – no matter the outcome, each chamber will likely continue to hold a very slim majority necessitating bi-partisan support to advance any legislation next Congress. The goal is to build support for this Congress, with both Democrats and Republicans, and then hit the ground running next Congress with a re-introduction of the legislation quickly in January, and to move through the legislative process thereafter. With that timeline in mind, the AFA will need to continue its work to educate state legislators and defend against new state disclosure laws that continue to pop up around the country.
There are several ways you can help the AFA in this effort. We invite you to renew your membership in the AFA or become a member if you haven’t already. Your engagement can help the AFA spot new matters impacting the industry in your state and your support is vital to help our efforts in advocating for the factoring industry and navigating the complex regulatory landscape. By joining the AFA, you contribute to a collective voice that strives to influence policy, educate legislators, and ensure the continued success of our industry. Together, we can achieve more and ensure that our industry not only meets challenges but thrives. Your membership and involvement are crucial to our journey, and we deeply appreciate your support. For more information and to support the AFA, go to www.americanfactoring.org.
About Liz Craddock:
Elizabeth "Liz" Leoty Craddock is a government relations attorney in Holland & Knight's Washington, D.C., office. Ms. Craddock draws on two decades of legislative and private sector experience to help corporations, industry organizations, trade groups and nonprofit entities work with elected and appointed officials to develop, negotiate and pass legislation critical to the success of the U.S. economy. Her areas of focus include energy, environment, natural resources, agriculture, climate change and trade policy, as well as social justice ethics, sanctions and governance issues.
Known for her bipartisanship, strategic thinking and ability to manage the practical aspects of the legislative process, Ms. Craddock has facilitated the enactment of hundreds of legislative bills. Among her many accomplishments, as staff director of the Senate Committee on Energy and Natural Resources, she helped secure the bicameral passage of a package of 80-plus public lands bills that had been blocked by more than three Congresses and were successfully included as part of the National Defense Reauthorization Act of 2014. As legislative director and counsel to former Sen. Mary Landrieu (D-La.), she played a key role in the passage of the bipartisan Resources and Ecosystems Sustainability, Tourist Opportunities and Revived Economies of the Gulf Coast Act (RESTORE Act) and, previously, the Gulf of Mexico Energy Security Act (GOMESA). These and other pieces of high-profile, high-impact legislation have directed billions of dollars to projects in Louisiana and other Gulf Coast states.
In addition, Ms. Craddock has extensive experience negotiating legislative language as well as procedural process agreements with legislative and committee staff, and the Senate and House at large. While on Capitol Hill and in private practice, she also spoke frequently before industry conferences, boards of directors and trade associations on a wide range of policy developments.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.