New Disclosure Laws Raise Concerns For Nontraditional Lenders – Financial Services

New regulations in the commercial lending space are percolating
in New York and across the country with 11 states passing or
introducing similar laws through the enactment of commercial
finance disclosure law (CFDL) legislation. In articles for
Financial Advisor and BAI Banking Strategies,
partner Stephen Grable discusses
which states have enacted CFDLs, how these apply, the repercussions
for non-compliance and the likelihood the trend will continue to
expand.

Stephen points out that in California, New York and Utah, their
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,” he writes.

The trend among state legislatures to propose CFDL laws
doesn’t seem to be going away either. “Rather, as
regulations are finalized and released in California and New York,
the trend will likely expand at a greater pace,” he adds.

Stephen notes that some lenders will not be able to comply with
new disclosure requirements, because the lending products they
offer don’t conform to them. As a result, some lenders may exit
states where they cannot comply with disclosure regulations,
potentially leading to less competitive finance in the marketplace
and fewer loan products available to small business borrowers.

He advises specialty and non-traditional lenders to monitor
closely. “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.”

The severe penalties for non-compliance are 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.”

Read the full Financial Advisor and
BAI Banking Strategies
articles.

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