Utah has followed California and New York by enacting its own Truth in Lending-like commercial financing disclosure law, but with an additional twist—Utah’s new law has a registration requirement. On March 24, Utah Governor Spencer Cox signed SB 183 into law, with an effective date of January 1, 2023. This Legal Update discusses how this new law fits into the recent trend of states enacting commercial financing disclosure laws, the companies that are subject to and exempt from the Utah law, the law’s registration obligation, the disclosures that a commercial financer must provide before consummating a transaction, and additional details and takeaways.
The Start of the Trend
The trend began with the 2018 enactment of California’s commercial financing disclosure law as a quasi-addendum to the California Financing Law and then continued with the enactment of the very similar New York Commercial Financing Disclosure Law (“NY CFDL”) in December 2020, followed by the NY CFDL’s amendment shortly thereafter in February 2021. The California and New York laws are modeled after the federal Truth in Lending Act (“TILA”) and require that offers of commercial financing, broadly defined, be accompanied by TILA-like disclosures theoretically designed to help a financing applicant compare credit offers. Neither state’s law has taken effect yet, as implementing regulations are still proceeding through the administrative rulemaking process.1
Other Recent State Developments
In the meantime, other state legislatures have begun testing the waters by introducing their own legislation to regulate offers of commercial financing and require disclosures explaining the terms of financing, although no such bills have been enacted until now. In particular, there are pending bills in various stages of the legislative process in Maryland,2 Missouri,3 New Jersey,4 North Carolina5 and Virginia.6 (Bills in Connecticut7 and Mississippi8 died in early 2022.) Like the California and New York laws, these bills would, if enacted, require providers of commercial financing to provide recipients with prescribed disclosures in connection with transactions of $500,000 or less (in New Jersey, North Carolina and Virginia), $2.5 million or less (in Maryland) and with no express dollar amount maximum in Missouri (although rules may later narrow the law’s scope). Like the enacted California and New York laws, these bills would not require a license or registration in addition to the disclosure requirements—with the exception of the North Carolina and Virginia bills, which would require covered providers of commercial financing to register with the state. Pending New York legislation would add its own licensing obligation to the disclosure obligations for commercial financing of $500,000 or less.9
The Utah Commercial Financing Registration and Disclosure Act
The Utah Commercial Financing Registration and Disclosure Act (the “Utah Act”) is similar to the previously enacted California and New York commercial financing disclosure laws but differs from those laws in some significant respects—not least of which is the Utah law’s registration requirement.
The Utah Act regulates non-real estate secured commercial-purpose transactions in amounts of $1 million or less that qualify as commercial loans,10 commercial open-end credit plans11 or accounts receivable purchase transactions, the latter being defined to reach typical merchant cash advance or factoring transactions.12 Helpfully, the Utah Act does not define a commercial financing transaction so broadly that it could encompass any financing, whether specifically contemplated by the law or not, in contrast to the proposed rules under the New York law and California laws that apply to undefined “other” forms of financing beyond the categories addressed in the statutes. However, the Utah Act defines “commercial loan” broadly and does not define “loan,” which creates the risk that these terms could be construed broadly by courts or regulators to cover incidental or occasional credit.
The Utah Act expressly applies to “providers” of financing, which include online financing platforms operated within a bank partnership model, so at least some transactions funded by depository institutions are within the scope of the law.13 However, the law provides multiple broad exemptions that will serve to exclude a number of lenders from having to comply with the new requirements.
Beginning January 1, 2023, it will be unlawful for a person to “engage in a commercial financing transaction as a provider in Utah or with a Utah resident” unless registered with the Utah Department of Financial Institutions (“DFI”). Registrations must be renewed annually. Because a license applicant must be registered with the Nationwide Multistate Licensing System and Registry (“NMLS”), it is likely that license application, maintenance and renewal will be conducted through the NMLS. The Utah Act’s use of the NMLS may ease the compliance burden for companies that already have an NMLS record. Companies without an NMLS record will have to create one before registering.
A provider of financing must make the Utah Act’s required disclosures before consummating a commercial financing transaction. The exact format of disclosures will likely be determined by administrative regulations, but the law mandates that a financer disclose, at a minimum: (i) total funds provided; (ii) total funds disbursed (if less than funds provided); (iii) total amount to be paid the provider; (iv) the total dollar cost of the transaction; (v) payment manner, amount and frequency; (vi) prepayment penalties, if any; and (vii) funds paid to brokers.
The Utah Act exempts a wider range of persons and transactions than the California and New York laws exempt.
Persons and Miscellaneous Transactions
The provisions of the law do not apply to the following entities and transactions, among others: (i) persons not consummating in excess of five commercial financing transactions in Utah per calendar year; (ii) depository institutions, as well as their subsidiaries and service corporations regulated by a federal banking agency; (iii) Utah-licensed money transmitters; (iv) transactions secured by real property; (v) financings of $50,000 or more to motor vehicle dealers or motor vehicle rental companies and affiliates of either (e.g., most floor-plan financings); and, as noted above, (vi) transactions of more than $1 million.
“Leases” as defined under the Utah UCC are exempt. There has been some confusion surrounding the applicability of the California and New York laws to leases where a security interest is taken, and the answer has changed over time as proposed rules were revised. Utah’s exemption for leases arguably excludes leases that involve a security interest, which could exclude most finance leases from the exemption.14
Notably, purchase-money obligations as defined in the Utah UCC are exempt from the Utah Act, which excludes all commercial financing transactions in which funds are used to purchase equipment or vehicles. This exemption effectively removes most secured financings from the scope of the law, including transactions that finance the purchase of commercial, construction or agricultural equipment, an important carve-out for non-captive finance companies.
Also exempt from the provisions of the Utah Act are traditional captive financing arrangements whereby a lender finances the purchase of products manufactured by an affiliate of the lender or the lender itself. Specifically, the Utah Act does not apply to “a commercial financing transaction offered by a person in connection with the sale of a product or service that: (a) the person manufactures, licenses, or distributes; or (b) the person's parent company or the person's owned and controlled subsidiary manufactures, licenses, or distributes.” This exclusion is another benefit for commercial, construction or agricultural equipment manufacturers that also provide financing through their captive finance companies.
Rulemaking and Administration
More detailed disclosure requirements are expected with rulemaking, which the Utah Act authorizes the DFI to undertake. If the California and New York laws are any guide, the regulations will get “into the weeds” of disclosure formats to a much greater degree than the authorizing statute. When the time comes, regulated financers should consider submitting comments requesting that the regulator provide model forms in easily replicable formats and spell out precisely the geographical nexus required for a transaction to be subject to the Utah Act, along with any other points requiring further interpretation or guidance.
Enforcement and Penalties
The Utah Act expressly provides that a failure to comply with the law does not affect the enforceability of the underlying financing agreements. The law does not create a private right of action. Instead, a company that violates the law may be liable for a civil penalty of $500 per violation, not to exceed $20,000 for all violations arising out of the same transaction documentation or materials (read: disclosures), although higher monetary penalties apply to a person that continues to violate after receiving notice of a prior violation.
When the new law takes effect in 2023, financers subject to the law will have a third set of state disclosure requirements to look forward to, along with the California and New York disclosures. The required disclosures will be sufficiently divergent among the states so that in practice it may mean three separate processes to implement. The Utah Act extends the competitive advantage for banks in Utah, as nonbanks will either have to comply with the Utah Act’s disclosure and registration requirements or adjust their activities to fall within one of the exemptions. The statutory exemptions provide some broad relief for companies financing the purchase of commercial, construction or agricultural equipment. This will limit the number of finance companies required to comply with the Utah Act and its registration requirements. Looking forward, the enactment of similar laws in other states seems increasingly likely as the trend catches on in state legislatures.
11 "Commercial open-end credit plan" means “commercial financing extended to a business on terms under which: (a) the creditor reasonably contemplates repeat transactions; and (b) subject to any limit set by the creditor, the amount of financing that the creditor may extend to the business during the term of the plan is made available to the extent that any outstanding balance is repaid.”
12 "Accounts receivable purchase transaction" means “a transaction in which a business forwards or otherwise sells to a person all or a portion of the business's accounts, as defined in [the Utah UCC], or payment intangibles, as defined in [the Utah UCC], at a discount to the accounts' or payment intangibles' expected value.”
13 "Provider" means “a person who consummates more than five commercial financing transactions in the state during any calendar year [and] includes 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.”