Consumer lending has always been regulated by consumer protection laws, but commercial lending has typically had less compliance requirements, especially for independent lenders. This is no longer the case as the regulation dominoes have fallen and more and more states are adopting disclosure requirements on fees and pricing information offered by commercial lenders.
The changes in loan disclosures started with California in 2022, and then New York, and now other states (Connecticut, Florida, Georgia, Utah and Virginia) are also requiring lenders to send out pricing and fee disclosures every time you hand over pricing information, term sheets, proposals and even loan agreements. It doesn’t matter where the lender lives, all lenders are affected since the laws apply to the location of the borrower and where their business originated.
These new commercial finance regulations are similar to The Truth in Lending Act (TILA), enacted in 1968 to protect consumers against inaccurate and unfair credit billing and credit card practices. The new laws are imposed on providers of various commercial loans, asset-based loans, factoring facilities, receivables lending and other types of small business loans.
How Can Loan Management Software Help with the New Loan Disclosure Regulations?
The new disclosure laws bring significant operational changes for lenders. Many commercial lenders specifically choose NOT to lend in certain states simply to avoid compliance headaches. While these changes may seem daunting and incite fear for increased manual work for sales, underwriting and legal teams, working with a smart loan origination system enables commercial lenders to manage these compliance requirements easily and seamlessly. The right system gives lenders the freedom to finance businesses in any state, helping you build your portfolios.
Benefits of working with cutting-edge lending software:
Automated State Detection and Sending of Disclosures
The lack of standardized disclosures will present a challenge to lenders as you try to navigate your new norm. Advanced lending origination software can automatically detect what state the business operates in and was formed in, and automatically send the appropriate disclosures, completely eliminating manual work.
Automated Calculations of Disclosure Fees Specific to the Loan Amount
Calculations for disclosures can be complex. Many commercial lenders are required to show all of the associated fees relating to a specific loan amount, and the fees need to be calculated prior to sending out the disclosures. Many states do not accept a sample static loan amount with respective static calculations and require lenders to provide the exact fee calculations of the specific loan amount and terms being offered. Smart loan origination software that automatically calculates loan disclosure fees specific to the loan amount or pricing terms being offered enables lenders to eliminate the headaches of manual calculations and protects you from costly mistakes.
Ability to Customize Pricing and Pivot Quickly as More States are Added
As if all this is not enough for commercial lenders to contend with, more and more states will jump onboard and add different disclosure requirements. Lenders will be expected to meet tight deadlines as you meet new compliance requirements. Having a loan origination system with sophisticated document management allows lenders to remain nimble and quickly adjust your pricing accordingly – and with minimal effort.
In maintaining efficient business operations, lenders can continue to capture new clients without downtime since both lenders and borrowers benefit from a faster and more automated process of signing up a new borrower. There’s intense competition in commercial lending and having to manually calculate fees and be subjected to additional compliance processes can slow lenders down. Borrowers will simply go to other lenders who can provide a faster response and smoother experience.
Being Proactive for Uninterrupted Business
Even though all states are not currently affected by these new regulations, the list of states getting onboard will grow. It’s best to establish the right process now to be ready for the upcoming changes and to be able to pivot quickly when new states are inevitably added. Get established with software that can support you with this shift. Decipher Credit’s loan platform with powerful automation makes the complex more simple and streamlines the lending process. Schedule a demo with our team today.
Learn More About Loan Disclosure Laws by State
As of January 2024, seven states have already passed commercial financing disclosure laws. More states are expected to pass similar laws, as the following have proposed laws that may soon require loan disclosures if signed into law:
On December 9, 2022, California put legislation into place regulating the disclosure of specific information when extending a commercial financing offer of $500,000 or less. Providers must disclose the funding provided, finance charge, total payment amount, annual percentage rate (APR) and other details akin to most other state disclosure laws. Providers are not mandated to register to offer commercial financing in California.
Disclosure laws in Connecticut will officially take effect on July 1, 2024. They apply to providers of sales-based financing (i.e., merchant cash advances (MCAs)) of $250,000 or less. Before making a final and binding offer, providers are required to provide borrowers with certain information, including the total amount of the loan and cost of borrowing, a repayment schedule, and details about how much money brokers will earn from the transaction. Providers are not required to disclose estimated APR, but must register with the state banking commissioner by October 24, 2024, and renew annually.
Enacted on July 1, 2023, the Florida Commercial Financing Disclosure Law (FCFDL) applies to commercial closed- and open-end loans and accounts receivable purchase transactions of $500,000 or less and providers who conduct more than five qualifying transactions per calendar year. Providers have to disclose the essential terms of financing, including total funds provided, dollar cost of financing, payment schedule, prepayment penalties, and other critical information.
Providers are required to make only one disclosure at the time of, or before, completing each transaction. However, they are not obligated to revise or amend these disclosures in response to any changes occurring after the transaction has been consummated. Florida does not require providers to register with the state.
Having just taken effect on January 1, 2024, Georgia’s commercial financing disclosure law applies to various types of commercial loans and accounts receivable purchases under $500,000. The law applies to providers with more than five commercial financing transactions in the state within one year. It also applies to someone offering commercial financing on behalf of a bank through an online lending platform they’re managing.
Similar to disclosures under TILA for consumer credit transactions, providers are required to share information including the total funding amount, total funds disbursed net of fees and costs, total amount to be paid to the provider, total dollar cost of the financing, payment schedule, and other critical information. The law does not require calculating or disclosing APR, nor does it require providers to register with the state.
The Commercial Finance Disclosure Law (CFDL) went into effect in New York on August 1, 2023. The new law covers various types of commercial financing for up to $2.5 million, including sales-based financing, closed- and open-end financing, factoring transactions, lease financing, and more.
CFDL applies to non-bank entities providing commercial financing and those who promote such offers on behalf of others. The regulations are only applicable to commercial financing transactions when either the borrower’s business is mainly run from New York, or if the recipient is an individual who legally resides in the state. New York does not require state registration.
CFDL mandates written disclosures of the total amount of commercial financing, disbursement amount, the finance charge, APR, and other items. With transactions that involve a broker, providers must also disclose how and by whom brokers will be compensated.
Utah’s Commercial Financing Registration and Disclosure Act (CFRDA) went into effect on January 1, 2023, and applies to various commercial financing in amounts of $1 million or less. Any person who conducts more than five commercial financing transactions in Utah during the calendar year is affected. Providers are required to apply for a commercial financial license, register with the Utah Department of Financial Institution, and maintain annual registration.
Before consummating a commercial financing transaction, providers have to disclose terms including the total amount of funds provided and disbursed to the business, total amount to be paid to the provider, and the manner and frequency of each payment. Any commissions paid to a broker also have to be disclosed. Utah does not require disclosure of APR.
Having gone into effect July 1, 2022, Virginia’s regulations focus on sales-based financing, specifically MCAs for less than $500,000. The law requires providers to register with the Virginia State Corporation Commission on an annual basis, ensure up-front disclosures about terms, and follow specific dispute-resolution procedures.
Providers are required to disclose total funds provided, total funds disbursed (if less than funds provided), total amount to be paid to the provider, the total dollar cost of the transaction, payment manner, amount and frequency, prepayment penalties, if any, and funds paid to brokers. APR disclosure is not mandated.