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DFPI seeks to regulate commercial financial products and services under the CCFPL
Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to adopt regulations to implement certain sections of the California Consumer Financial Protection Law (CCFPL) related to commercial financial products and services. (See also text of the proposed regulations here.) As previously covered by a Buckley Special Alert, the CCFPL became law in 2020 and, among other things, (i) establishes UDAAP authority for the DFPI; (ii) authorizes the DFPI to impose penalties of $2,500 for “each act or omission” in violation of the law without a showing that the violation was willful (thus going beyond both Dodd-Frank and existing California law); (iii) provides the DFPI with broad discretion to determine what constitutes a “financial product or service” within the law’s coverage; and (iv) provides that enforcement of the CCFPL will be funded through the fees generated by the new registration process as well as fines, penalties, settlements, or judgments. While the CCFPL exempts certain entities (e.g., banks, credit unions, certain licensees), the law expands the DFPI’s oversight authority to include debt collection, debt settlement, credit repair, check cashing, rent-to-own contracts, retail sales financing, consumer credit reporting, and lead generation.
The NPRM proposes new rules to implement sections 22159, 22800, 22804, 90005, 90009, 90012, and 90015 of the CCFPL related to the offering and provision of commercial financing and other financial products and services to small businesses, nonprofits, and family farms. According to DFPI’s notice, section 22800 subdivision (d) authorizes the Department to define unfair, deceptive, and abusive acts and practices in connection with the offering or provision of commercial financing. Section 90009, subdivision (e), among other things, authorizes the Department’s rulemaking to include data collection and reporting on the provision of commercial financing or other financial products and services.
Among other things, the NPRM:
- Clarifies that the CCFPL makes it unlawful for covered providers, as defined, to engage in unfair, deceptive, or abusive acts or practices;
- Provides standards for determining whether an act or practice is unfair, deceptive, or abusive;
- Defines small business, nonprofit, and family farm, among other terms;
- Clarifies DFPI's ability to enforce the regulation’s provisions;
- Requires covered providers to submit annual reports containing information about their provision of commercial financing or other financial products and services to small businesses, nonprofits, and family farms;
- Identifies persons excluded from the reporting requirement;
- Specifies the information required in the reports, as well as provide guidance on calculating or determining certain information;
- Clarifies the obligations of those also submitting annual reports to DFPI as licensees under the California Financing Law.
Written comments on the NPRM are due by August 8.
CA approves commercial financing disclosure regs
On June 9, the California Office of Administrative Law (OAL) approved the Department of Financial Protection and Innovation’s (DFPI) proposed commercial financial disclosure regulations. The regulations implement commercial financing disclosure requirements under SB 1235 (Chapter 1011, Statutes of 2018). (See also DFPI press release here.) As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written, consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances.
Notably, SB 1235 does not apply to (i) depository institutions; (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) a commercial financing transaction in which the recipient is a vehicle dealer, vehicle rental company, or affiliated company, and meets other specified requirements; and (v) a lender who makes no more than one applicable transaction in California in a 12-month period or a lender who makes five or fewer applicable transactions that are incidental to the lender’s business in a 12-month period. The act also does not cover true leases (but will apply to bargain-purchase leases), commercial loans under $5,000 (which are considered consumer loans in California regardless of any business-purpose and subject to separate disclosure requirements), and commercial financing offers greater than $500,000.
California released four rounds of draft proposed regulations between 2019 and 2021 to solicit public comments on various iterations of the proposed text (covered by InfoBytes here). In conjunction with the approved regulations, DFPI released a final statement of reasons that outlines specific revisions and discusses the agency’s responses to public comments.
Among other things, the regulations:
- Clarify that a nondepository institution providing technology or support services to a depository institution’s commercial financing program is not required to provide disclosures, provided “the nondepository institution has no interest, or arrangement or agreement to purchase any interest in the commercial financing extended by the depository institution in connection with such program, and the commercial financing program is not branded with a trademark owned by the nondepository institution.”
- Provide detailed instructions for the content and layout of disclosures, including specific rows and columns that must be used for a disclosure table and the terms that must appear in each section of the table, that are to be delivered at the time a specific type of commercial financing offer equal to or less than $500,000 is extended.
- Cover the following commercial loan transactions: closed-end transactions, commercial open-end credit plans, factoring transactions, sales-based financing, lease financing, asset-based lending transactions. Disclosure formatting and content requirements are also provided for all other commercial financing transactions that do not fit within the other categories.
- Require disclosures to provide, among other things, the amount financed; itemization of the amount financed; annual percentage rate (the regulations provide category-specific calculation instructions); finance charges (estimated and total); payment methods, including the frequency and terms for both variable and fixed rate financing; details related to prepayment policies; and estimated loan repayment terms.
The regulations take effect December 9.
California reinstates single commercial loan licensing exemption under the CFL
On April 28, the California governor signed SB 577, which amends provisions relating to certain financial institutions, including California Financing Law (CFL), Escrow Agent, and Money Transmitter licensees.
The bill reinstates a licensing exemption available to commercial lenders in California. Specifically, the bill reenacted a provision that formerly expired on January 1, 2022. This reinstated provision permits a lender to make a single loan within a 12-month period, if the loan is a commercial loan as defined by the CFL, without having to obtain a CFL license.
The bill also updates contact information to be included on notices posted by California Money Transmitter licensees. Specifically, the bill establishes that California Money Transmitter licensees are required to prominently post, in English and in the same language used by the licensee to conduct business, on the premises of each branch office that conducts money transmission activities a certain notice, including specific contact information for the California Department of Financial Protection and Innovation.
Finally, the bill removes obsolete language from provisions governing criminal and civil background requirements for Escrow Agent licensees.
The bill is effective immediately.
Utah enacts financial institution provisions
On March 24, the Utah governor signed SB 183 into law, which amends the state’s provisions related to financial institutions. Among other things, the bill: (i) modifies the definition of “control” for purposes of the Financial Institutions Act and provides penalties for failure to comply with registration and disclosure requirements. Additionally, the bill enacts the Commercial Financing Registration and Disclosure Act, which requires individuals who provide certain commercial financing products to register with the Department of Financial Institutions and make certain disclosures in connection with each commercial financing product.
NYDFS puts CFDL compliance obligations on hold
On December 31, NYDFS announced that providers’ compliance obligations under the state’s Commercial Finance Disclosure Law (CFDL) will not take effect until the necessary implementing regulations are issued and effective. The CFDL was enacted at the end of December 2020, and amended in February 2021, to expand coverage and delay the effective date to January 1, 2022. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which include persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less. In October 2021, NYDFS published a notice announcing a proposed regulation (23 NYCRR 600) to implement the CFDL, which provided that the compliance date for the final regulation will be six months after the final adoption and publication of the regulation in the State Register (covered by InfoBytes here). Comments on the proposed regulation were due December 19. NYDFS noted in its announcement that “[i]n light of the significant feedback received, the Department is carefully considering the comments received and intends to publish a revised proposed regulation for notice-and-comment early in the new year.”
DFPI issues fourth round of draft regulations for commercial financing disclosures
On November 5, the California Department of Financial Protection and Innovation (DFPI) issued a fourth draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written, consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. California released the first draft of the proposed regulations in July 2019, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released second and third rounds of modifications in August and October of this year (covered by InfoBytes here, here, here, and here). The fourth modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications amend the term “average monthly cost” to mean the average total amount paid by the recipient (for periodic and irregular payments) over a contract’s term divided by the number of months specified in the contract. Providers may divide the number of days in the contract term by 30.4 to determine the number of months in the contract term. This calculation may also be used to determine the “estimated monthly cost.” Comments on the fourth modifications must be received by November 22.
NYDFS seeks to implement Commercial Finance Disclosure Law
On October 20, NYDFS published a notice announcing a proposed regulation (23 NYCRR 600) to implement New York’s Commercial Finance Disclosure Law (CFDL) (covered by InfoBytes here). The CFDL was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date to January 1, 2022. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which includes persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.
As previously covered by InfoBytes, NYDFS solicited comments on a pre-proposed regulation released last month, which, among other things, (i) specified persons and entities required to comply with the regulation; (ii) defined terms used within the CFDL, including “commercial financing” and “finance change”; (iii) explained APR rate calculations and allowed tolerances; (iv) outlined specific disclosure requirements, including formatting and signature requirements; and (vi) detailed several provisions related to commercial financings that offer multiple payment options, certain duties of financers and brokers involved in commercial financing, record retention requirements, and the reporting process for certain providers that calculate estimated annual percentage rates.
The proposed regulation made several changes to the pre-proposed regulation based on comments NYDFS received. These include:
- Modifying the definition of when a specific offer is made that triggers the requirement to provide a disclosure. NYDFS stated that this change “should allow for some negotiations between borrowers and lenders before disclosures are required.”
- Adding the Secured Overnight Financing Rate (SOFR) as an acceptable rate index for use in adjustable-rate financings due to the cessation of LIBOR at the end of the year.
- Clarifying the definition of a “broker” to be “defined in terms of the substantive services they perform during the underwriting process.”
- Modifying the allowed tolerances when calculating APRs as required under Part 600.04. For most transactions, NYDFS explained that the tolerance threshold will remain one-eighth of one percent. For irregular transactions, NYDFS proposed a larger tolerance of one-quarter of one percent.
Additionally, the proposed regulation provides that the compliance date for the final regulation will be six months after the final adoption and publication of the regulation in the State Register. Comments on the proposed regulation are due December 19.
DFPI issues third round of draft regulations for commercial financing disclosures
On October 12, the California Department of Financial Protection and Innovation (DFPI) issued a third draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released a second round of modifications in August (covered by InfoBytes here, here, and here). The third modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications:
- Amend several terms including “approved advance limit,” “approved credit limit,” “at the time of extending a specific commercial financing offer,” “benchmark rate,” “broker,” “provider,” and “recipient funds.”
- Define the term “specific commercial financing offer” to mean a written communication to a recipient related to specific payment amounts and costs of financing, but does not include a recipient’s name, address, or general interest in financing.
- Amend certain disclosure requirements and thresholds, including specific circumstances that a provider can disregard when making calculations and disclosures.
- Clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of financing used to pay down or pay off other amounts owed by a recipient.
- Amend duties and requirements for financers and brokers.
- Amend criteria for specifying the amount of funding a recipient will receive.
Comments on the third modifications must be received by October 27.
NYDFS issues pre-proposed regulation to implement Commercial Finance Disclosure Law
On September 21, NYDFS Acting Superintendent Adrienne A. Harris announced a pre-proposed regulation to implement New York’s Commercial Finance Disclosure Law (CFDL) (covered by InfoBytes here), which was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date to January 1, 2022. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which includes persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients at the time a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.
The CFDL and the pre-proposed implementing regulation are applicable to persons or entities who (i) extend a specific offer of commercial financing to a recipient (i.e., a person who applies for commercial financing and is made a specific offer of commercial financing); (ii) solicit and present specific offers of commercial financing on behalf of a third party; or (iii) provide or will provide commercial financing to recipients and communicate a specific amount, rate or price, in connection with the commercial financing, either directly to a recipient, or to a broker with the expectation that the information will be shared with a recipient.
The term “commercial financing” is defined broadly to include:
- Open-End Financing
- Closed-End Financing
- Sales-Based Financing (i.e., merchant cash advance)
- Defined to mean any transaction repaid over time as a percentage of sales or revenue, in which the payment amount may vary by sales or revenue volume, including any financing with a sales or revenue based true-up mechanism.
- Accounts Receivable Purchase Transactions, including Factoring
- Factoring is defined to mean any accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods or services that have been supplied or rendered, but for which payment has not yet been made.
- Asset-Based Lending
- Defined to mean a transaction in which advances are made from time to time contingent upon a recipient forwarding payments received from one or more third parties for goods or services the recipient has supplied or rendered to such third party.
- Lease Financing
- Defined to mean providing a lease for goods that includes a purchase option that creates a security interest in the goods leased, including a “finance lease” as defined in the UCC.
- Any other form of financing for which proceeds are not primarily intended for consumer-purpose.
Notwithstanding, the pre-proposed regulation provides that commercial financing does not encompass any transaction in which a financer provides a disclosure required by the Truth in Lending Act. The following entities and transactions are exempt from the CFDL: (i) financial institutions (defined as a chartered or licensed bank, trust company, industrial loan company, savings and loan association, or federal credit union, authorized to do business in New York); (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) technology service providers; (v) certain lease transactions under the New York Uniform Commercial Code; (vi) lenders who make no more than five applicable transactions in New York in a 12-month period; (vii) individual commercial financing transactions in an amount over $2.5 million; and (viii) commercial financing transactions involving certain vehicle dealers.
Among other things, the pre-proposed regulation:
- Includes definitions for terms used in the CFDL and the pre-proposed regulation, including definitions of “finance charge” under the different covered transactions (e.g., commercial financing transactions generally, account receivable purchase transactions that are not factoring transactions, factoring transactions, lease financing transactions).
- Explains how providers should calculate the annual percentage rate and outlines allowed tolerances.
- Outlines formatting requirements for disclosures for the following types of financing: (i) sales-based financing (including merchant cash advances); (ii) closed-end financing; (iii) open-end financing; (iv) factoring transaction financing; (v) lease financing; (vi) general asset-based financing; and (vii) all other commercial financing transactions.
- Provides disclosure requirements for instances where the amount financed is greater than the recipient funds, which includes a disclosure entitled “Funding You Will Receive.”
- Provides that, consistent with the CFDL, a provider must give the required disclosures to a recipient at the time of extending a specific offer for commercial financing. The pre-proposed regulation defines “at the time of extending a specific offer” to mean (i) any time a specific periodic or irregular payment amount, rate or price in connection with commercial financing is quoted in writing to a recipient, based upon information from, or about, the recipient; and (ii) any subsequent time when the terms of an existing consummated commercial financing contract are changed, prior to the recipient agreeing to the changes, if the resulting changes would increase the finance charge (certain alternative parameters apply with respect to open-end credit plans). The pre-proposed regulation also notes that where a provider allows a recipient to select from multiple offer options or customize a financing offer, the provider need only provide the disclosure(s) for the specific offer that the recipient elects to pursue.
- Provides disclosure signature requirements, which may be electronic (prior to consummating a commercial financing, a financer must obtain a copy of the disclosures made pursuant to the CFDL that are signed by the recipient).
- Describes how the CFDL’s $2.5 million disclosure threshold is calculated.
- Outlines requirements for commercial financings that offer multiple payment options.
- Specifies certain duties of financers and brokers involved in commercial financing, including record retention requirements (four years).
- Details the reporting process for which certain providers calculating estimated annual percentage rates will report data to the superintendent relating to “the estimated annual percentage rates disclosed to the recipient and actual retrospective annual percentage rates of completed transactions” in order to facilitate accurate estimates for future transactions.
Outreach comments on the pre-proposed regulation are due by October 1. After NYDFS completes this preliminary phase, NYDFS will make a formal proposed regulation. Comments on the formal proposed regulation will be due within 60 days of publication in the State Register. NYDFS expects to have a final regulation in place by January 1, 2022, which is the effective date set forth in the underlying law.
DFPI again modifies draft regulations for commercial financing disclosures
On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a second draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, and last September, California initiated the formal rulemaking process with the Office of Administrative Law (covered by InfoBytes here and here). The second modifications to the proposed regulations follow a consideration of public comments received on the initial proposed text, as well as additional comments received on modifications made to the proposed text in April. Among other things, the proposed modifications (i) amend several terms including “approved advance limit,” “approved credit limit,” and “amount financed”; (ii) clarify the definition of “at the time of extending a specific commercial financing offer”; (iii) replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate as one of the benchmark rate options; (iv) add several terms including “broker,” “recipient funds,” “average monthly cost,” “estimated monthly cost,” and “prepaid finance charge”; (v) provide that for disclosure purposes, “a provider shall assume that there are 30 days in every month and 360 days in a year” and specify that the annual percentage rate must be expressed to the nearest ten basis points; (vi) amend certain disclosure requirements and thresholds; (vii) clarify methods for estimating monthly sales, income, or receipt projections for sales-based financing; (viii) amend duties and requirements for financers and brokers; and (ix) clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of funding a recipient will receive.
Comments on the second modifications must be received by August 24.