US financial disclosure rules are popular now. After Covid, 15 states passed laws that demand lenders disclose details to non-mortgage borrowers, with caps as high as $2.5 million. Each state has its own rules, both positive and negative, with fines involved.
Although the aim is to aid small businesses by promoting transparency and price comparison, the outcome has been detrimental: credit markets have tightened for the least capable companies.
California and Virginia have already implemented these rules, while Utah (from July 1), New York (from Aug. 1), and Georgia (from Jan. 1, 2024) will follow suit. Ten other states—Connecticut, Florida, Illinois, Kansas, Maryland, Mississippi, Missouri, New Jersey, North Carolina, and Texas—have considered or are considering similar legislation.
The types of loans and lenders affected differ by state. California and New York aim to include almost all commercial loans, including various financing types. Conversely, states like Virginia have tailored their laws to cover alternative products like merchant cash advances, which require detailed disclosures due to their complex fees and potential for abuse.
This patchwork of regulations has led many nonbank institutions to withdraw from certain markets and loan products, restricting capital flow to small businesses. Vague requirements, inconsistent regulations, potential penalties, and the need for compliance in multiple jurisdictions are among the reasons for lenders to step back.
The strict nature of these rules has also caused concerns. New York’s law, for example, mandates nonbank lenders to provide precise “offer summaries” at the beginning of transactions, including APR calculations, font type and size, and information order. Failure to comply could result in fines of up to $10,000 per violation.
California’s law, effective from December 9, 2022, is similarly strict but applies only to commercial loans up to $500,000 (compared to New York’s $2.5 million limit).
It’s unclear which entities are meant to benefit from this paternalistic wave in private lending, aside from cash-strapped businesses vulnerable to sales-based financing. Nonbank lenders that once served less-creditworthy companies are now avoiding these regulatory regimes. According to the Secured Finance Network, 40% of its members no longer lend less than $500,000 to affected borrowers in California.
There have been no reported enforcements of the financial disclosure requirements to date, but the risk of excessive bureaucracy remains.
If these regulations are not meaningfully enforced, they may eventually fade away. However, by then, it may be too late, as discerning small-market lenders will have already left, leaving capital-strapped companies to deal with the very issues these laws aimed to prevent.
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