LEASINGLEASING LAW LAW By Moorari K. Shah and Doris Yuen

Regulation of Commercial Finance Ramps Up State legislation and enforcement aimed at commercial lessors and lenders continue at frenzied pace

IN RECENT YEARS, commercial finance companies have faced a patchwork of state laws governing their busi- ness, and scrutiny of their activities appears to be on the upswing. Two states that are home to substantial com- mercial finance activity—California and New York—have new requirements for consumer-style disclosures and are signaling greater interest in enforcement and licensing of these activities. While these developments merit careful attention from companies doing business in California and New York, they may also signal broader inter- est nationwide in regulation of commercial finance.

California Commercial Financing commercial financing, lease financing and factoring. Disclosures DFPI just concluded in March a period for public com- California in 2018 became the first state to require ment on whether its implementing regulations for the nonbank lenders and other finance companies to law should define specific acts or practices as unfair, make consumer-style disclosures in some commer- deceptive or abusive, and if the DFPI should require cial transactions, including for small business loans. the collection and reporting of commercial financing The law requires covered lenders to disclose, among data. other things, the total cost of the financing expressed Between the pending disclosure rulemaking and the as an annualized rate for each commercial financing future commercial UDAAP rulemaking, the stage is set transaction. Included in that definition are commercial for California to significantly increase its enforcement in loans, leases, open-end credit plans, asset-based the commercial finance market. loans and purchases of receivables, including factoring. The California Department of Financial Protection and New York Commercial Financing Innovation (DFPI) began work in 2019 to implement Disclosures the law, but final regulations signaling the beginning of New York also recently enacted a commercial financing enforcement have not yet been promulgated; they are disclosure law. Like California’s law, it requires dis- expected to be completed later this year, with compli- closing the total cost of the financing as an annualized ance by early 2022. The proposed regulations cover percentage rate and includes exemptions for financial the general format and content requirements for each institutions (such as a chartered or licensed bank, disclosure. They also provide specifics on calculating trust company, industrial loan company or savings and the APR, including additional details for factoring trans- loan association) and commercial financing transac- actions and sales-based financing transactions, among tions secured by real property. While the law initially others. applied to transactions under $500,000, Gov. Cuomo in February signed into law an amendment that pushes California DFPI Commercial Financing the threshold to $2.5 million. The amendments also UDAAP Authority create a new exemption for vehicle dealers and push California last summer enacted a Consumer Financial the effective date to Jan. 1, 2022. Protection Law that gave the DFPI expanded enforce- This legislative trend is not limited to California and ment power, including the authority to define unfair, New York as Connecticut and New Jersey are also deceptive or abusive acts or practices (UDAAP) in considering enacting similar laws, and a proposed

34 MAY | JUNE 2021 EQUIPMENT LEASING & FINANCE MAGAZINE WWW.ELFAONLINE.ORG amendment to the federal Truth-in-Lending Act intro- ceased brokering when it determined it needed duced last summer would create a disclosure require- one. The DFPI acknowledged the broker’s respon- ment for small business financing transactions less sible conduct, but nonetheless concluded after than $2.5 million. investigation that the broker had engaged in false, misleading or deceptive advertising, and fined the Licensing broker $250,000. Several states have commercial lending licensure • In 2017, the DFPI required a Minnesota-based requirements for nonbanks. For example, the California leasing company with no physical presence in Financing Law (CFL) requires a person making more California to pay an administrative penalty of $5,000 than one commercial loan in a 12-month period to for brokering equipment leases for California cus- obtain a specific license. Currently, New York’s Banking tomers that were deemed to be loans under the Law has a limited licensure requirement that covers CFL. In line with this enforcement action, commer- the execution of commercial-purpose loans of $50,000 cial financing companies applying for licensure in or less with a rate above 16 percent. However, pend- recent years have routinely faced careful scrutiny of ing legislation in New York would expand licensing, their pre-licensure activities to determine if similar requiring a license for those generally engaged in the enforcement and fines may be applicable. business of making or soliciting commercial financing products, which include equipment leasing transac- When DFPI targets a lessor for issuing leases tions, of $500,000 or less. The legislation specifying disguised as loans under the CFL, the regulator has equipment leasing transactions for coverage, which is ordered refunds or credits to the borrowers for any a relative rarity among states, would exempt banking interest charged over the 10 percent cap for nonex- organizations—as well as any lender who makes or empt lenders. solicits five or fewer commercial financing products Other states also appear to be taking a more within a 12-month period. aggressive enforcement posture for commercial lend- ing, including New Jersey, where the state’s attorney State Regulator Commercial Financing general recently took action against several business Enforcement lenders for allegedly engaging in predatory lending and California is vigilant about enforcing licensing require- abusive collection tactics. ments under the CFL, aggressively targeting unli- As state agencies across the country continue to censed businesses that broker transactions originated ramp up their scrutiny, commercial finance compa- by CFL lenders and others that allegedly execute nies must take greater care to avoid running afoul of leases that are functionally structured as loans. The increasingly complex regulatory schemes governing enforcement actions often stem from a license appli- commercial financing. cation, which triggers a DFPI review of pre-application MOORARI K. SHAH is a activity, leading to fines if the applicant has engaged in partner in Buckley LLP’s Los unlicensed activity. Of note, Angeles and San Francisco • In 2020, a California-based broker focused on offices and a member of the ELFA Legal Committee. DORIS small-business financing proactively disclosed that YUEN is a regulatory attorney it had engaged in brokering activity for up to 100 in Buckley’s Los Angeles office. loans without obtaining a license, and immediately

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