State legislative sessions are well underway in 2023, and many states already have introduced various forms of commercial financing disclosure legislation. These proposed laws (commercial financing disclosure laws or “CFDLs”) require consumer-like disclosures in commercial financing transactions, unless the loan provider or the product they provide is otherwise exempt. One of the stated purposes of these laws is to introduce standardized disclosures in small business lending, so that the small business borrower can better compare financial products in the marketplace. Standardized disclosures, it follows, will help businesses and individuals understand and compare the terms of different commercial financing offers.
Many of these laws would require specific federal Truth-in-Lending disclosures, an area of consumer lending law likely foreign to financial institutions engaged only in commercial lending. By way of example, “APR” and “finance charge” are unique terms under the Truth-in-Lending Act (“TILA”). Compliance with such terms and the complex calculations associated with them, as may be required by a CFDL, will require TILA and consumer law expertise to avoid missteps, regulatory scrutiny and fines. Financial institutions should be proactive and familiarize themselves with these law and the TILA calculations, that may be incorporated into these new commercial lending disclosure laws.
Currently, three states have enacted CFDLs, namely California, Utah and New York. These laws require disclosures in various forms of lending, including open and closed-end loans. Virginia enacted a narrow CFDL focused solely on sales based financing. The California and Utah laws apply now. Lenders subject to those laws and regulations should be making compliant disclosures. New York’s CFDL and accompanying regulations will become effective August 1, 2023. California and New York require TILA compliance when disclosing terms such as “APR" unless some other exemption applies to the provider or the financing product.
More laws are likely. So far this year, the following states have proposed various forms of CFDLs: Connecticut (Senate Bill 1032), Illinois (Senate Bill 2234 and House Bill 3064), Kansas (Senate Bill 245), Maryland (Senate Bill 496), Mississippi (Senate Bill 2619 and House Bill 1271, both of which have since failed), and Missouri (Senate Bill 187 and House Bill 584). New Jersey’s CFDL remains pending during the carry-over session (Senate Bill 819 and House Bill 2150). If last year’s legislative session is any indication of what may be expected this year, many other proposals may be forthcoming including a possible bill at the federal level.
While the theme of each of these laws and bills remains consistent – requiring consumer type disclosures in commercial loans to allow a “small business” to make more informed borrowing decisions – their reach is not uniform. A number of proposed laws would apply mandatory disclosures in all commercial loans without regard to loan size, unless an exemption applies.
Womble Bond Dickinson (US) LLP is closely monitoring developments in this area and remains ready to assist clients navigate these laws and legislation.
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