In California, New York and Utah, their respective CFDLs apply broadly to various types of commercial financing, including commercial loans, commercial open-end credit plans, accounts receivable purchase transactions and factoring transactions. New York and California’s laws extend even further to cover closed-end financing, sales-based financing—including merchant cash advances—and asset-based lending transactions. While Virginia’s law is narrowly tailored only to apply to sales-based financing—particularly providers of merchant cash advances.
Additionally, the monetary thresholds vary from state to state. For example, despite being most similar in application requirements, New York’s CFDL exempts commercial financing transactions over $2.5 million, while California’s monetary threshold is set to $500,000. Virginia’s CFDL also exempts transactions over $500,000. Utah’s CFDL provides that transactions over $1 million are exempt.
All four states provide exemptions for authorized depository institutions, as well as providers and brokers that enter into no more than five covered transactions within a one-year period.
Other States And The National Impact
Several other states have recently sought to enact CFDL legislation. These include Maryland (SB 825), New Jersey (SB 819), North Carolina (HB 969), Missouri (SB 963) and Pennsylvania (HB 1793), where legislative proposals remain pending. Proposals in Mississippi (SB 2629 and HB 1179) and Connecticut (SB 745 and SB 272) failed. Maryland’s CFDL passed in the State Senate with modifications, and has seen the most progress. Similar to New York, Maryland exempts qualifying depository institutions. However, Maryland differs from New York and California in exempting factoring transactions of health care receivables and provides no safe harbor for lenders to rely on borrower’s statements when determining if a commercial loan was a financing transaction.
All of the proposed legislation is broad in application, with the exception of New Jersey SB 819 that applies only to merchant cash advances. As to all indicated states, the proposed disclosure requirements are also markedly similar.
Nothing suggests the trend among state legislatures to propose CFDL laws will subside. Rather, as regulations are finalized and released in California and New York, the trend will likely expand at a greater pace.
Specialty and non-traditional lenders should monitor proposed CFDL legislation in all states where they operate. Penalties for noncompliance of enacted and enforceable CFDL laws can be significant, reaching as much as $50,000 in Utah, in the event that the state has provided written notice to a repeat violator regarding use of the same transaction documentation or materials. New York will fine repeat, willful violators as much as $10,000 per violation. In California, a willful CFDL violation could result in a $10,000 fine and one-year imprisonment term.
Enactment of CFDL legislation with severe penalties for non-compliance is reflective of broader trends in the current economic environment. As interest rates increase and lending opportunities for small businesses likely narrow, lawmakers will continue to pursue CFDL legislation designed to ensure that small business borrowers understand the terms of available financing.
Specialty and non-traditional lenders are recommended to review and consider how underwriting, compliance and regulatory practices may need to be modified or conformed as CFDL laws continue to be pursued.
Stephen J. Grable is a litigation partner in the New York office of Thompson Coburn LLP. Nicholas Armstrong is a law clerk in the St. Louis office of Thompson Coburn LLP.