March 28, 2024
The state legislatures of Maryland and New Jersey are each considering commercial financing disclosure legislation this year. Maryland has introduced House Bill 574 and Senate Bill 509. New Jersey has introduced Assembly Bill 865 and Senate Bill 1397. Among other things, these bills would require disclosure of an annual percentage rate ("APR"). By contrast, most of the commercial financing disclosure laws enacted in other states have not required APR disclosures. Currently, only California and New York require APR disclosures for certain types of commercial financing.
The Maryland and New Jersey bills are similar in many significant respects. Each state's bills apply to commercial-purpose closed-end loans, commercial-purpose open-end loans, sales-based financing, factoring transactions, and other commercial financing transactions. The bills would allow a provider to make five commercial financing transactions per 12-month period without providing disclosures. The bills provide different dollar thresholds for exemption: New Jersey would exempt any transaction with an amount financed greater than $500,000, while Maryland would exempt only a transaction with an amount financed greater than $2,500,000.
The bills impose similar requirements for calculating estimated APR in a sales-based financing transaction. They provide two methods of estimating APR for sales-based financing. Under the historical method, a provider projects a recipient's future sales volume by using either the sales volume in the months immediately before the transaction or in the months with the highest sales volume. Each provider must use the same number of months for all transactions that use the historical method, and each month in the projection must be no more than 12 months before the financing occurs. Under the opt-in method, a provider may project a recipient's future sales volume by any method it wishes, but it must report estimated and actual (retrospective) APRs to the regulator annually. If the regulator determines that the difference between estimated and actual APR is too high, it may require the provider to use the historical method.
The disclosure requirements vary based on the type of transaction. Closed-end loans, open-end loans, and factoring transactions each have separate disclosure requirements different from the requirements for sales-based financing. In addition, the bills include disclosure requirements for commercial financing transactions that do not meet the definition of any of the other types of transactions, although New Jersey would give the regulator discretion to require disclosures for those transactions while Maryland would apply the requirement regardless of regulator action. The bills require a "double dipping" disclosure where the amount financed in a renewal transaction includes unpaid finance charges from the previous transaction.
There are a few other notable differences. Maryland would require the regulator to adopt regulations based on New York's commercial financing disclosure regulations, while New Jersey does not specify a model for the regulator to use. New Jersey would require a broker to disclose its fees in a separate document, while Maryland would not. Maryland would expressly direct the regulator to approve the use of disclosure forms from other states, while New Jersey would direct the regulator to establish processes for "approving forms and methods already used by providers."
The bills provide for a maximum penalty of $10,000 per willful violation or $2,000 per non-willful violation. In addition, New Jersey would allow private lawsuits, and Maryland would provide for restitution to victims of violations. If passed, the Maryland legislation would take effect on October 1, 2024. The New Jersey legislation would take effect 180 days after enactment, but providers would not need to comply until 120 days after the adoption of regulations.