Commercial Disclosure Laws create Legal Challenges for Referral Partners

By Robert Whited Day-to-Day Business Operations Legal August 12, 2022

You may be aware that new commercial financial product disclosure laws have been adopted in several states, but did you know that these laws impose significant obligations on both the providers of these products and the referral partners who source the customers for these providers? Are you and your funders ready for these changes? This article will summarize the current laws and will provide some insight as to what you can do as a referral source to protect yourself from exposure to inadvertently violating these laws. The first small business commercial products disclosure law went into effect in Virginia on July 1, 2022. This law will be followed by much more expansive laws that will go into effect in California on December 7, 2022, Utah on January 1, 2023, and New York is expected to be in place within the next few months. California has recently adopted final regulations to implement the California Commercial Finance Disclosure Law which was passed by the California legislature in 2018. The California law is very expansive and imposes significant responsibilities on both “Providers” as well as “Brokers” of a broad range of commercial financial products, including closed end loans, factoring contracts, asset based loans and MCAs. California imposes an obligation on both financial product providers (including providers working in partnership with banks) and referral partners and brokers, to provide detailed information about the true cost of the financing. These disclosure requirements are intended to mirror disclosures required for consumer financial products under the Federal Truth In Lending Law and include the requirements for disclosure of the amount financed, fees charged and paid to third parties, the payment schedule, the average monthly cost of the financing, the total cost of the financing, prepaid charges and a disclosure of the annualize percentage rate, even for MCA products. Referral Partners, broadly defined as “brokers’ under the law, also have obligations to ensure that the provider of the financing makes timely and accurate disclosures when a specific offer is extended to any prospective customer and that the disclosure be signed by the customer prior to completing the financing. The disclosure rules for MCAs are even more complicated in that MCA providers will need to back test their disclosures based upon actual collections compared to the anticipated charges on which their disclosures are based. Some of these funders may determine that compliance is too complicated and risky and will stop offering products to small businesses in these states. The New York law and proposed regulations will closely mirror California’s regulations with some notable additional disclosure requirements. These include disclosure of the type of collateral required, any avoidable charges that the recipient may incur and if a financial product offer is being used in connection with the payoff of an existing financial product, the amount of finance charges being paid from the proceeds of the new advance, i.e. so called “double dipping.” Virginia’s commercial finance disclosure law only applies to providers of MCA products but imposes both a registration and disclosure obligation on both providers and brokers of such products. Utah’s laws will go into effect on January 1, 2023, and also require registration of both providers and brokers of commercial financial products offered in the state. The scope of products that the Utah law covers are more broad based like California and NY but the disclosure does not require disclosure of an “APR.” In addition, several other states are proposing similar disclosure laws as of this date and it is expected that over the next few years, disclosure and state registration requirements in the offering of commercial financial products will be the norm. At ARF, we have been preparing for this new reality for over three years and we welcome the transparency that these new laws will bring to the industry. We are confident that the loan products which we offer on behalf of our partner banks, when compared side by side with other financial products, such as MCAs, will demonstrate the many advantages of our products to MCAs and other competitor products. We have developed processes to timely present the appropriate disclosures in each state where these laws apply to the recipients of loan offers to fulfill our legal obligations. While referral partners need to independently determine their own obligations in each state, you can be assured that ARF will be in compliance and that our efforts will also assist and benefit you in complying with these laws. ARF was the first company to develop a bank model for offering financial products to small businesses and is the only provider in the industry that is fully bank compliant. Our programs have been reviewed by the FDIC and by the state banking regulators of our bank partners multiple times. The financial products we offer have always been clear and understandable to our customers. If you are a referral partner to one or multiple funders, now is the time you should be asking these funders what steps they have taken to comply with the new disclosure requirements. Why take the risk in doing business with a funder that could put you in legal jeopardy?

You may be aware that new commercial financial product disclosure laws have been adopted in several states, but did  you know that these laws impose significant obligations on both the providers of these products and the referral partners who source the customers for these providers?  Are you and your funders ready for these changes?  This article will summarize the current laws and will provide some insight as to what you can do as a referral source to protect yourself from exposure to inadvertently violating these laws.

The first small business commercial products disclosure law went into effect in Virginia on July 1, 2022.  This law will be followed by much more expansive laws that will go into effect in California on December 7, 2022, Utah on January 1, 2023, and New York is expected to be in place within the next few months.  California has recently adopted final regulations to implement the California Commercial Finance Disclosure Law which was passed by the California legislature in 2018.

The California law is very expansive and imposes significant responsibilities on both “Providers” as well as “Brokers” of a broad range of commercial financial products, including closed end loans, factoring contracts, asset based loans and MCAs.  California imposes an obligation on both financial product providers (including providers working in partnership with banks) and referral partners and brokers, to provide detailed information about the true cost of the financing.  These disclosure requirements are intended to mirror disclosures required for consumer financial products under the Federal Truth In Lending Law and include the requirements for disclosure of the amount financed, fees charged and paid to third parties, the payment schedule, the average monthly cost of the financing, the total cost of the financing, prepaid charges and a disclosure of the annualize percentage rate, even for MCA products.

Referral Partners, broadly defined as “brokers’ under the law, also have obligations to ensure that the provider of the financing makes timely and accurate disclosures when a specific offer is extended to any prospective customer and that the disclosure be signed by the customer prior to completing the financing.  The disclosure rules for MCAs are even more complicated in that MCA providers will need to back test their disclosures based upon actual collections compared to the anticipated charges on which their disclosures are based.  Some of these funders may determine that compliance is too complicated and risky and will stop offering products to small businesses in these states.

The New York law and proposed regulations will closely mirror California’s regulations with some notable additional disclosure requirements.  These include any avoidable charges that the recipient may incur and  if a financial product offer is being used in connection with the payoff of an existing financial product, the amount of finance charges being paid from the proceeds of the new advance, i.e. so called “double dipping.”

Virginia’s commercial finance disclosure law only applies to providers of MCA products but imposes both a registration and disclosure obligation on both providers and brokers of such products.  Utah’s laws will go into effect on January 1, 2023, and also require registration of both providers and brokers of commercial financial products offered in the state.  The scope of products that the Utah law covers are more broad based like California and NY but the disclosure does not require disclosure of an “APR.”  In addition, several other states are proposing similar disclosure laws as of this date and it is expected that over the next few years, disclosure and state registration requirements in the offering of commercial financial products will be the norm.

At ARF, we have been preparing for this new reality for over three years and we welcome the transparency that these new laws will bring to the industry.  We are confident that the loan products which we offer on behalf of our partner banks, when compared side by side with other financial products, such as MCAs, will demonstrate  the many advantages of our products to MCAs and other competitor products.

We have developed processes to timely present the appropriate disclosures in each state where these laws apply to the recipients of loan offers to fulfill our legal obligations.  While referral partners need to independently determine their own obligations in each state, you can be assured that ARF will be in compliance and that our efforts will also assist and benefit you in complying with these laws.  ARF was the first company to develop a bank model for offering financial products to small businesses and is the only provider in the industry that is fully bank compliant.  Our programs have been reviewed by the FDIC and by the state banking regulators of our bank partners multiple times.  The financial products we offer have always been clear and understandable to our customers.

If you are a referral partner to one or multiple funders, now is the time you should be asking these funders what steps they have taken to comply with the new disclosure requirements. Why take the risk in doing business with a funder that could put you in legal jeopardy? Take a look at the recorded webinar where ARF Financial’s Legal Counsel discuss the Commercial Disclosure Laws.