On June 10, 2024, the Connecticut Department of Banking (“Department”) issued guidance (the “Guidance”) to give direction on required consumer-like disclosures in certain commercial financing offers.

As background on the Guidance, Connecticut’s commercial financing disclosure law, An Act Requiring Certain Disclosures, was signed into law on June 28 2023, and will become effective on July 1, 2024 (the “Statute”). The Statute applies to sales-based financing, which is defined as: “a transaction that is repaid by the recipient to the provider over time (A) as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient, or (B) according to a fixed payment mechanism that provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue….”

The Statute does not apply to sales-based financings in excess of $250,000, and exempts certain entities, including (A) a federal or state bank, or credit union, and any of their subsidiaries or affiliates; (B) technology services providers providing services to another exempt entity as part of such exempt entity’s commercial financing program; (C) farm credit lenders, (D) a provider in a transaction secured by real property, (E) a provider in a lease transaction, (F) a person who provides or brokers purchase-money obligations, (G) a provider who makes no more than five “commercial financing” transactions in a 12-month period, (H) a provider in a transaction in excess of $50,000 in which the recipient is a vehicle dealer or rental vehicle company, and (I) a provider who extends or brokers a commercial financing transaction in connection with the sale of products or services manufactured, licensed or distributed by such provider or its parent company, subsidiary, or affiliate.

Disclosure Requirements

The Statute requires the following disclosures to be included in an extension of a specific offer of sales-based financing:

1. The amount of the financing.
2. The disbursement amount.
3. The finance charge.
4. The total repayment amount (the disbursement amount plus the finance charge).
5. The estimated time period required for repayment.
6. The payment amounts, which includes (A) the payment amounts and frequency, for fixed payments; or (B) a payment schedule or a description of the method used to calculate the amounts and frequency of payments, and the amount of the average projected payments per month, for payments which are variable.
7. A description of all other potential fees and charges not included in the finance charge.
8. (A) any early payment-related finance charge; and (B) any early-payment related fees.
9. If applicable, a description of collateral requirements or security interests.
10. Whether a commercial financing broker will be paid a commission out of the financed amount and, if so, the amount of such compensation.

The Guidance includes as an appendix the required format of disclosure that a provider must deliver to a recipient upon extending a specific offer for sales-based financing. Although use of another state’s form of disclosure is permitted by the Statute, the Guidance expressly provides that no other state’s required form of disclosure has yet been deemed to meet or exceed Connecticut’s requirements.

No-Action Position

The Guidance includes a no-action position for the period from July 1 to September 30, 2024 on the Commissioner’s enforcement of the sections of the Statute requiring the disclosures described above. The Guidance further includes a no-action position for the same period on the Commissioner’s enforcement of the section of the Statute which requires a recipient’s signature on such disclosures.

The Guidance expressly states that these no-action positions do not apply to the sections of the Statute that provide commercial sales-based financing applicants and borrowers with certain rights and which are independent of the disclosure requirements described above. Such rights include (a) a prohibition on commercial financing contracts from containing provisions waiving a recipient’s right to notice, judicial hearing or prior court order in connection with a prejudgment remedy, and (b) prohibition of specific offers from being revoked, withdrawn or modified until the third calendar day after the specific offer is made.

In summary, providers of commercial financing subject to the Statute should currently be taking steps to implement the Statute’s requirements. While providers will have a grace period to incorporate the requisite disclosures into specific offers related to sales-based financing, there will be no grace period for compliance with the sections of the Statute related to waivers of prejudgment remedies and revocation of specific offers, which become effective on July 1.

Ballard Spahr attorneys are tracking developments regarding Connecticut’s oversight of the soon-to-be effective Statute, as well as developments related to similar laws in other states requiring consumer-like disclosures for commercial financing transactions.