On March 22, the Virginia Legislature dispatched HB1027 (Action) to the governor. If signed by April 11, the law would apply to the country’s initial registration requirement on sales-based financing providers and brokers.
Virginia will be the third state to create commercial financing disclosure requirements after New York and California to implement sales-based financing. The requirements of New York and California have not yet been met due to regulatory delays.
What is sales-based financing under HB1027?
HB1027 sets out requirements related to “sales-based financing”.
Sales-based financing is a transaction that is paid by the recipient Virginia business as a percentage of sales or revenue, in which the amount of payment may increase or decrease according to the volume of sales or revenue received by the business. The term also includes dealing with a real mechanism for financing that is paid as a fixed payment but provides for reconciliation that “regulates the payment” to the amount that is a percentage of sales or revenue.
This definition does not differentiate between sales and loans, and therefore covers both the merchant’s cash advances and loans that meet a different definition. However, it is not clear whether this definition covers all types of commercial cash advances.
For example, in some commercial cash transactions, reconciliation does not result in an adjustment of future payments, but instead involves the refund of additional money collected in fixed payments where fixed payments are accurately received by the recipient. Does not correspond to the actual percentage. Sales or income that must be paid. These contracts include reconciliation, but do not include modified payments.
Consequently, suppliers using this alternative model, which is not explicitly identified, should consider whether HB1027 applies.
Who will need to register?
HB1027 will require registration with the Commissioner of Financial Institutions for sales-based financing providers and brokers by November 1, 2022.
By law, a broker is someone who receives or offers sales-based financing from a seller to a recipient for compensation or in anticipation of compensation.
A bidder is a person who extends a sales-based financing special offer to the recipient. This includes the person who solicits and offers sales-based financing offers under a specific contract or arrangement with the provider.
HB1027 is exempt for financial institutions, providers, and brokers who make no more than five sales-based financing transfers in 12 months, and individual sales transfers exceeding 500 500,000.
There are no obvious exceptions for provider employees. If the issue has not been clarified by the Commissioner, the provider may consider whether the provider’s definition is broad enough to cover the employees involved in the merchant’s request, in addition to registering the provider’s business.
Registration requires an application that requires certain controllers of providers and brokers to disclose specific judgments, orders and convictions. Virginia will also require a provider or broker to authorize the transfer of the business in Virginia and pay a fee of $ 1,000 (and $ 500 in future years).
What are disclosure requirements?
HB1027 also sets out disclosure requirements when a specific offer for sale-based financing is made to a Virginia business recipient. Unlike California and New York, Virginia will not need to disclose APR or similar rates.
However, Virginia will need to disclose nine specific items:
- Total sales-based financing, and the amount of distribution, if any, differs from the amount of financing, after deducting any fees or withholding at distribution;
- Financial cost
- The total amount of payments, which is the distribution amount and the financial cost;
- Estimated number of payments, which is the estimated number of payments, based on the estimated sales volume, equal to the total amount of payments;
- Payment amount, based on estimated sales volume (this requirement varies for fixed and variable payment contracts);
- Details of all other potential fees and expenses not included in the financial cost;
- Some information regarding advance payments;
- Description of warranty requirements or security benefits, if any; And
- A statement as to whether the provider will pay the broker directly in relation to the sale-specific offer of financing and the amount of compensation.
In addition, up-to-date disclosure is required if the business prefers pre-paid or refinanced sales-based financing.
The need to provide a statement about the compensation paid to the broker by the provider is significant as simple language is not limited to the fees paid by the trader. As a result, a bidder is required to disclose the fees paid to a broker even if the fees have not been transferred directly to the recipient.
The disclosure must be provided separately from the other information provided to the recipient, and the recipient must sign the disclosure once a specific offer has been accepted.
Effective dates and possible regulations
HB1027 allows the Commission to adopt appropriate regulations for law enforcement. However, HB1027 applies to contracts signed on or after July 1, 2022.
This effective date is not explicitly delayed if the Commission has not yet issued regulations.