Commercial lending rules do vary from state to state as each state has its own set of regulations governing lending practices within its jurisdiction. These regulations include licensing and registration requirements for lenders, disclosure rules, usury laws which control the amount of interest charged, Unfair, Deceptive and Abusive Practice (UDAP) laws and debt collection laws.
Traditional and alternative lenders are regulated differently in the US, with traditional lenders falling within a “dual banking system” category within the United States, meaning they can obtain state or federal charters but are then subject to strict oversight. In addition, federal banking regulations—such as the Truth in Lending Act (TILA) or the National Bank Act of 1864—can pre-empt state level banking controls.
Alternative lenders aren’t subject to the same controls as they are fairly new financial entities. Alternative financing increased significantly after the federal government tightened banking regulations following the 2008 subprime crisis. One result of tighter banking regulation was that many small and medium businesses no longer qualified for financing. Smaller, more flexible lenders, often using online platforms and fintech, were able to plug the gaps left in the lending market.
States regulations differ for alternative versus traditional lenders for a number of reasons. One is that alternative lenders have formed their own self-regulatory bodies on both state and federal levels. Another is that alternative funders offer flexible financing arrangements which are difficult to regulate. In addition, states consider business owners more financially savvy than consumers and needing less protection. States may also be hesitant to regulate lenders as increased compliance costs and tighter rules may discourage such companies from operating in the state, resulting in lost tax revenue.
Less state regulation of alternative lenders has both benefits and risks: it allows the development of innovative loan products and promotes greater market flexibility; however, it can also leave smaller businesses vulnerable to predatory lenders. For example, the California Commercial Financing Disclosure Law (CCFDL) applies to alternative lending products as factoring, merchant cash advances and asset-based lending. Recently, California, New York, Virginia and Utah passed new laws raising the level of disclosure required by all commercial lenders. The intent is to ensure that both traditional and alternative lenders are serving their customers fairly under the law. Ultimately self-regulation and government oversight ensure borrowers and lenders alike are able to engage in reputable commerce.
If you’re a business owner seeking financing, be aware of the lending rules and regulations in your state. This way, you can make informed decisions about your borrowing options. It’s a good idea to consult with a financial or legal expert who understands the relevant laws and regulations in the state where you wish to do business. Ask them to review all lender terms and disclosures to ensure that you fully understand the conditions of any financing you’re considering so your company will be compliant. An informed borrower has the right tools to make decisions that will benefit their company.
Sources:
Bloomberg Law: State Regulatory Landscape Shifts for Commercial Loan Lenders: http://bit.ly/3KhfVaG
Congressional Research Service: Banking Law: https://bit.ly/3lMlQLv
Consumer Financial Protection Bureau: Update on state laws on lending to businesses: http://bit.ly/3JT9icX
Electran.org: Federal and State Laws and Regulations for Online Commercial Lending: https://bit.ly/42ORI2w
ICLG.com: Lending and Secured Finance Laws and Regulations USA: http://bit.ly/3FXb8Zt
Lend Foundry: Alternative Lending and the Regulatory Environment: http://bit.ly/3nyUsBf
