After months of anticipation (or trepidation), we finally have our eighth state commercial finance disclosure law. Senate Bill 345, the Kansas Commercial Financing Disclosure Act (the "Kansas Act"), was enacted on April 12, 2024, and is set to take effect July 1, 2024. Prior to the Kansas Act, the most recently enacted commercial finance disclosure law was Connecticut's law, enacted last June.
The Kansas Act boasts little in the way of surprises, instead largely following the examples set by the laws of several other states that came before such as Florida and Georgia. The disclosure requirements under the Kansas Act are distinguishable from the prescriptive and complex commercial disclosure requirements contained in the California and New York commercial disclosure laws that inaugurated the wave of commercial financing disclosure legislation, which could mean a comparatively lighter compliance burden for commercial finance providers doing business in Kansas.
Scope of Act
Once the Kansas Act takes effect, "providers" who "consummate" more than five commercial financing transactions to a business "located" in Kansas in a calendar year will have to provide disclosures to the recipient before, or at the time of, consummating the transaction. Although a provider is generally defined as the person who consummates a commercial financing transaction, a provider specifically includes a platform that has a written agreement with a depository institution to arrange a transaction.
Financers subject to the Kansas Act will not be required to register with the state.
A commercial financing transaction for Kansas Act purposes is a business-purpose loan, open-end credit plan, or accounts receivable purchase transaction (i.e., merchant cash advance) of $500,000 or less.
Required Disclosures
A provider subject to the Kansas Act must disclose the following to the recipient of financing before, or at the time of, consummation:
- Total amount of funds provided to the recipient;
- Total amount of funds disbursed to the recipient;
- Total of payments made to the provider;
- Total dollar cost of financing for the recipient;
- Manner, frequency and amount of each payment (or estimates if these terms may vary, along with the provider's methodology for calculating variable payments and circumstances where payments may vary); and
- Prepayment costs or discounts.
For a commercial financing facility, under which the provider plans to purchase multiple accounts receivable over time, the provider can disclose based on an example of a possible transaction under the agreement where $10,000 is the total face amount owed.
Only one disclosure need be provided for any commercial financing transaction. A provider does not have to redisclose when a consummated transaction is modified.
Exemptions from the Act
The Kansas Act exempts the following providers and transactions:
- A depository institution, its parent, and its owned and controlled subsidiary or service corporation if regulated by a federal banking agency;
- Providers regulated under the federal Farm Credit Act;
- Real estate-secured transactions;
- Leases;
- Purchase money obligations;
- Floorplan financing of at least $50,000 where the recipient is a motor vehicle dealer or rental company or affiliate thereof;
- Providers licensed as a money transmitter in Kansas or any other state;
- Providers that consummate no more than five commercial financing transactions in Kansas in a 12-month period; and
- Commercial financing transactions of more than $500,000.
These exemptions are fairly consistent with many of the state commercial finance disclosure laws enacted recently, albeit without the exemption for captive finance companies that has started appearing in some laws. The Kansas Act's exemptions for a depository institution's subsidiary and parent will be appreciated by some financers given that some earlier laws exempted only a depository institution itself and not related entities.
Regulation of Brokers
Although brokers of commercial financing are not subject to the Kansas Act's disclosure requirements, the law prohibits brokers from engaging in certain acts. A broker may not collect an advance fee for brokering services outside of fees for actual services necessary to arrange a commercial financing application. A broker also may not use any false or misleading misrepresentations, omit any material fact in the offering of broker services, or engage in any other act that would operate as a fraud or deception on any person.
Penalties for Noncompliance and Administration of the Act
Violations of the Kansas Act are punishable by a civil penalty of $500 per violation, capped at $20,000 in aggregate, with additional penalties for repeat offenders. There is no express impairment of enforceability for a transaction that violates the Kansas Act, nor is there a private right-of-action for harmed recipients of financing.
The Attorney General of Kansas has exclusive authority to enforce the Kansas Act. Notably, the legislation does not expressly direct or authorize the attorney general to promulgate rules or issue guidance to carry out the law. In the absence of disclosure templates or samples, it is possible that providers may end up repurposing the disclosures they have prepared for other states to comply with the Kansas Act.
Looking Ahead
As state legislative sessions begin winding down and governors' signing deadlines approach, we could see any number of the commercial financing disclosure bills currently pending in other states be enacted throughout the spring and summer. Providers of commercial financing should continue to monitor for developments.
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