Financial disclosure regulation is in vogue in America. In the post-Covid era, 15 states have introduced or enacted legislation requiring commercial lenders to make detailed disclosures to non-mortgage borrowers of designated caps as high as $2.5 million. Each state’s rules have their own flavor and foot-faults, with fines to boot.

While their general intent is to support small businesses by promoting transparency and price-shopping in commercial lending, the effect so far has been deleterious: a further tightening of credit markets for companies that can least afford it.

These novel regulations have already been rolled out in California and Virginia and are forthcoming in Utah (effective July 1), New York (Aug. 1), and Georgia (Jan. 1, 2024). Legislatures in 10 other states—Connecticut, Florida, Illinois, Kansas, Maryland, Mississippi, Missouri, New Jersey, North Carolina, and Texas—are considering or recently considered adopting similar legislation.

The types of loans and lenders subject to these financial disclosure requirements vary greatly by state. California and New York, for instance, try to capture nearly every form of commercial loan, including open-end, closed-end, asset-based and sales-based financing, and AR financing and factoring. Conversely, states like Virginia have tailored their laws to alternative products such as merchant cash advances, which many practitioners say deserve heightened disclosures given their complex fee structures and potential for abuse.

This regulatory patchwork is causing many nonbank institutions to opt out of certain markets and loan products altogether, stemming the flow of capital to small businesses. Among the motivations for these lenders to step away are vague requirements, disparate regulatory regimes, the potential for civil (and, at least in California, criminal) penalties, and the need for back-office buildouts to monitor and maintain compliance in several different jurisdictions.

In some cases, the exacting nature of these regulations is causing consternation as well. New York’s Commercial Financing Disclosure Law, for instance, will require nonbank commercial lenders to provide “offer summaries” at the outset of a transaction detailing the APR and total amount financed, among other items. The regulations prescribe a level of precision for these offer summaries such as the number of decimal points in APR calculations, the font type and size used throughout the summary, and the order in which information is allowed to be presented. A lender’s failure to satisfy any part of the New York law could result in fines of up to $10,000 per violation.

California’s Commercial Financing Disclosure Law, which went into effect on Dec. 9, 2022, is similarly strict, although its disclosure requirements only apply to commercial loans of up to $500,000 (versus loans of up to $2.5 million under the New York law).

Outside of cash-strapped businesses that are more vulnerable to sales-based financings such as MCAs, it’s unclear which entities are supposed to be protected by this new wave of paternalism in private lending. Nonbank lenders that at one time offered a viable financing option for less-creditworthy companies are now choosing to avoid these regulatory regimes altogether. By the Secured Finance Network’s count, 40% of its members are no longer extending loans of less than $500,000 to affected borrowers in California.

There are not yet any reported enforcements of the financial disclosure requirements promulgated to date, but the threat of an overzealous bureaucracy is ever-present.

In time, these financial disclosure regulations could go by the wayside if they fail to be enforced in a meaningful way. But by then it could be too late, with discerning small-market lenders having long left the picture, leaving capital-strapped companies to fend with the very actors that these laws sought to forestall in the first place.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Matt J. Gornick is an attorney at Holland & Knight with broad experience representing lenders and borrowers in domestic and cross-border financing transactions.

Olivia R. Al-Sadi is an attorney at Holland & Knight. She assists financial services and healthcare organizations with a wide range of financial matters.

Scott Kunde is a finance and restructuring attorney at Holland & Knight.

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