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You may be aware that new commercial financial product disclosure laws have been adopted in several states, but did\u00a0 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?\u00a0 Are you and your funders ready for these changes?\u00a0 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.<\/p>\n
The first small business commercial products disclosure law went into effect in Virginia on July 1, 2022.\u00a0 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.\u00a0 California has recently adopted final regulations to implement the California Commercial Finance Disclosure Law which was passed by the California legislature in 2018.<\/p>\n
The California law is very expansive and imposes significant responsibilities on both \u201cProviders\u201d as well as \u201cBrokers\u201d of a broad range of commercial financial products, including closed end loans, factoring contracts, asset based loans and MCAs.\u00a0 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.\u00a0 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.<\/p>\n
Referral Partners, broadly defined as \u201cbrokers\u2019 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.\u00a0 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.\u00a0 Some of these funders may determine that compliance is too complicated and risky and will stop offering products to small businesses in these states.<\/p>\n
The New York law and proposed regulations will closely mirror California\u2019s regulations with some notable additional disclosure requirements.\u00a0 These include any avoidable charges that the recipient may incur and \u00a0if 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 \u201cdouble dipping.\u201d<\/p>\n
Virginia\u2019s 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.\u00a0 Utah\u2019s 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.\u00a0 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 \u201cAPR.\u201d\u00a0 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.<\/p>\n
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.\u00a0 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\u00a0 the many advantages of our products to MCAs and other competitor products.<\/p>\n
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.\u00a0 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.\u00a0 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.\u00a0 Our programs have been reviewed by the FDIC and by the state banking regulators of our bank partners multiple times.\u00a0 The financial products we offer have always been clear and understandable to our customers.<\/p>\n