Utah and Virginia recently became the first two states to require the registration of providers of merchant cash advances. The new laws also include disclosure requirements. (Although laws requiring disclosures for merchant cash advances already exist in California and New York, those laws have not yet become effective.)
Utah. Signed into law on March 24, 2022, the Commercial Financing Registration and Disclosure Act (CFRDA) provides that beginning January 1, 2023, it is unlawful for a person to engage in a “commercial financing transaction” unless such person is registered with the Utah Department of Financial Institutions. The CFRDA will also require “a provider,” of “commercial financing transaction” to provide certain disclosures.
The CFRDA’s registration and disclosure requirements apply to a “provider.” A “provider” is defined as “a person who consummates more than five commercial financing transactions in [Utah] during any calendar year.” The CFRDA expressly contemplates certain bank partner programs by defining “provider” to include “a person who, under a written agreement with a depository institution, offers one or more commercial financing products provided by the depository institution via an online platform that the person administers.”
A “commercial financing transaction” means “a business purpose transaction under which a person extends a business or commercial loan or a commercial open-end credit plan or that is an accounts receivable purchase transaction.” An “accounts receivable purchase transaction” is defined as “a transaction in which a business forwards or otherwise sells to a person all or a portion of the business’s account…or payment intangibles…at a discount to the accounts’ or payment intangibles’ expected value.”
Entities to which the CFRDA does not apply include depository institutions, subsidiaries of or service corporations for depository institutions that are regulated by a federal banking agency, and money transmitters licensed under the Utah Money Transmitter Act. The CFRDA does not apply to commercial financing transactions secured by real property or that are leases or purchase-money obligations.
The CFRDA requires a provider to give certain disclosures before consummating a commercial financing transaction (and, for a commercial open-end credit plan, after disbursement of funds). While the required disclosures include “the total dollar cost of the commercial financing transaction,” they do not include an APR disclosure.
Virginia. Approved by the Governor on April 11, 2022 , HB 1027 requires a “sales-based financing provider” and a “sales-based financing broker,” by November 1, 2022, to be registered with the Virginia State Corporate Commission and, unless organized under Virginia law or otherwise not required to be qualified to do business in Virginia as a foreign entity, to be qualified to do business in Virginia.
“Sales-based financing” is defined as “a transaction that is repaid by the recipient to the provider, over time, as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient.” It also includes “a true-up mechanism where the financing is repaid as a fixed payment but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”
A “sales-based financing provider” is defined as “a person that extends a specific offer of sales-based financing to a recipient,” and, “[u]nless otherwise exempt….also includes a person that solicits and presents specific offers of sales-based financing under an exclusive contract or arrangement with a provider.” A “sales-based financing broker” is defined as “a person that, for compensation or the expectation of compensation, obtains or offers to obtain sales-based financing from a provider for a recipient.” A recipient” is a person with a principal place of business in Virginia that applies for sales-based based financing and receives a “specific offer” of sales-based financing from a provider. A “specific offer’ is defined as “the specific terms of sales-based financing, including price or amount, that is quoted to a recipient, based on information obtained form or about the recipient, which, if accepted, shall be binding on the provider….”
HB 1027 contains exemptions for a “financial institution” and providers or brokers that enter into no more than five sales-based financing transactions with a recipient in a 12-month period, and sales-based financing transactions in an amount greater than $500,000.
HB 1027 requires a provider to provide certain disclosures to a recipient at the time of extending a specific offer for sales-based financing. The disclosures include the “finance charge” but not an APR.
HR 1027 also includes a provision dealing with arbitration provisions in contracts between a provider or broker and a recipient that prohibits a requirement for face-to-face arbitration proceedings outside of the jurisdiction in which the recipient’s principal place of business is located. The provider must pay any arbitration expenses or fees and any other expenses or fees incurred in the conduct of the arbitration proceedings.
HB 1027 directs the Commission to adopt implementing regulations but does not link the statute’s effective date to the adoption of regulations.