We recently reported that the Maryland Senate unanimously approved amended Senate Bill 496 – a broad measure proposed to curb perceived commercial lending abuses in Maryland. The bill has moved on to the House of Delegates for consideration.
Sponsored by Senator Ben Kramer, Senate Bill 496 contains legislation substantially similar to the Commercial Finance Disclosure Law (CFDL) in New York, the provisions of which will be effective August 1, 2023. (N.Y. Fin. Serv. Law §§ 801 et seq.). Tracking Senator Kramer’s bill introduced last session that faced much opposition and later failed due to adjournment, the bill proposes to require certain providers of loans to small businesses in the amount of $2.5 Million or less, to disclose consumer-like loan information, similar to certain federal Truth-in–Lending Act disclosures. The bill mandates disclosures, including annual percentage rate (APR) calculations, repayment terms, and other related items.
The House Economic Matters Committee held a hearing on Senate Bill 496 on March 28, 2023. Acknowledging that the Maryland General Assembly does not typically get involved in “business to business” dealings, Senator Kramer stressed the need for transparency in lending to small “mom and pop” businesses and a need to curb abusive predatory “pay-day” lending practices in commercial loans, where loan interest rates may reach 300%. Senator Kramer proposes to regulate these current, reckless lending practices in Maryland with a regime that is identical to New York, as a means of promoting disclosure and transparency to small businesses as well as uniformity among laws for regulated entities.
Supporters of the bill, including the Maryland Bankers Association (banks would not be regulated by the bill), believe regulation of currently unregulated lenders and transparency in loans is in the best interest of Maryland small businesses. The bill’s supporters almost exclusively focused on sales-based financing transactions and the abuses related to that type of lending product. Sales-based financing transactions are financings that are repaid with a fee, based on future revenue and collections and typically taken directly from the borrower’s bank account. This type of transaction arguably includes and has been referred to as a “merchant cash advance” loan despite some differences between the products.
Opponents of the bill cite to lending pullback in the industry where disclosures require APR, like California currently and New York as of August 1, 2023. According to opponents, including the Revenue Based Finance Coalition and Small Business Finance Association, the APR calculation does not work uniformly for all loans and causes inaccurate disclosures with respect to sales-based financings. They argue that forcing an APR disclosure in sales-based transactions would mislead small businesses, because an APR cannot be accurately calculated or easily estimated due to the unique attributes of the financing and the lack of a fixed payment schedule and term. Opponents suggest that an alternative “fee disclosure” would not be objectionable. Opponents have pointed favorably to other states that have proposed mandatory commercial disclosures without an APR disclosure requirement.
Former Delegate Sid Saab, a sponsor of a prior House bill similar to Senate Bill 496, now opposes the current bill having “made a mistake” in supporting it previously. He believes the bill will harm small business in Maryland. Former Delegate Saab suggests tailored legislation to curb abuses within that sales-based financing industry. He supports leaving open this alternative source of financing for many small businesses that cannot qualify for a traditional bank loan or lack time to obtain one, where, for example, payroll must be paid immediately. Many questions and statements from members of the Committee focused on the need for non-bank loans and access to capital for small businesses where traditional banks may not lend, and whether passage of Senate Bill 496 may limit non-bank financial alternatives for small businesses.
Senate Bill 496 is not limited to sales-based lending products, even though most of the hearing was focused on that specific lending product. Instead, all commercial loans of $2.5 million and less would be subject to the law’s disclosure requirements, unless an exemption applies. The loan products captured by the legislation include sales-based financings – but also open-end and closed-end credit facilities, factoring transactions, and other types of commercial financings. Commercial financings defined by the bill include any form of financing, as long as the loan recipient does not intend to use the proceeds of the loan primarily for personal, family or household purposes.
Although much of the debate before the House Economics Committee focused on sales-based financing and APR, Virginia’s CFDL was not discussed. Virginia enacted a narrow CFDL in 2022, limited to regulating sales based financing. Virginia’s law defines “sales-based financing” 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 transactions with “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.” Virginia’s narrowly focused CFDL is sales-based financing specific, requires licensing of those extending and promoting such loans, and mandates many of the same disclosures required by California and New York. But the law does not include an APR disclosure requirement. Virginia has also published rules and guidance, including a form for disclosure and compliance purposes. It remains unclear from the committee hearing whether Virginia’s CFDL was considered as an option or compromise to Senate Bill 496.
Senate Bill 496 follows California and New York, both of which require disclosures across many lending products and require an APR disclosure. California’s APR disclosure requirement sunsets (i.e., goes away unless extended) on January 1, 2024, presumably to better understand the APR requirement and its impact on transactions. Maryland Senate Bill 496’s APR requirement does not sunset. California and New York also differ dramatically with respect to the number of loans captured by their respective laws. California limits its regulation to loans at $500,000 or less, in contrast to New York at loans of $2.5 Million or less. Senate Bill 496 suggests that Maryland should regulate more loans by following New York’s lead. Utah has enacted a similar CFDL to capture multiple lending products, but without an APR disclosure.
As of the date of this post, the following states have proposed various forms of commercial financing laws, many of which including an APR disclosure requirement: Connecticut (Senate Bill 1032 (APR Required)), Florida (Senate Bill 1624 and House Bill 1353 (No APR Required)); Illinois (Senate Bill 2234 and House Bill 3064 (APR Required)), Kansas (Senate Bill 245 (No APR Required)), Mississippi (Senate Bill 2619 and House Bill 1271, both of which have since failed (No APR Required)), and Missouri (Senate Bill 187 and House Bill 584 (No APR Required)). New Jersey’s proposed CFDL remains pending during the carry-over session (Senate Bill 819 and House Bill 2150 (APR Required)). The Uniform Law Commission (also known as the National Conference of Commissioners on Uniform State Laws) formed a committee in late 2022, to study the need for a uniform or model act for standardization of disclosures in commercial financing transactions.
Womble Bond Dickinson (US) LLP is closely monitoring developments in this area and remains ready to assist clients navigate these laws and legislation.
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