May 6, 2024

Illinois Senate Passes Small Business Financing Transparency Act

Illinois Senate Bill 2234, the Small Business Financing Transparency Act, has passed the state Senate and will move to the state House of Representatives for its consideration. If it becomes law, the SBFTA will impose some of the nation's strictest requirements for providers of commercial financing transactions.

The SBFTA would apply to commercial-purpose closed-end loans, commercial-purpose open-end loans, sales-based financing, factoring transactions, and other commercial financing transactions. The bill would allow a provider to make five commercial financing transactions per 12-month period without providing disclosures. The bill would exempt any transaction with an amount financed greater than $500,000.

The SBFTA would require providers to register with the Department of Financial and Professional Regulation and give the DFPR's Division of Financial Institutions the authority to administer the SBFTA. Providers would need to renew their registrations every calendar year. Information required in the registration application would include officers' criminal histories, samples of disclosure forms that the provider will use, and (for a renewal) information on the provider's offers in Illinois over the previous calendar year. The SBFTA would also require a provider to submit extensive information concerning each transaction to a statewide database administered by the DFPR, including information that is not available until the end of a transaction, such as the actual (retrospective) annual percentage rate for a sales-based financing transaction.

Like other bills that require an APR disclosure, the SBFTA would provide two methods of estimating the APR for sales-based financing. The historical method would require a provider to estimate the APR based on a recipient's recent sales volume. The underwriting method would leave the calculation method to the provider's discretion but require annual reporting of the average difference between the estimated and actual (retrospective) APR, allowing the DFI to require the provider to use the historical method if the difference is too large. Closed-end loans, open-end loans, factoring transactions, and other commercial financing transactions would each have separate disclosure requirements different from the requirements for sales-based financing, although the requirements for other transactions would apply only if the DFI chose to adopt rules governing disclosures for other transactions. The SBFTA would require a "double dipping" disclosure where the amount financed in a renewal transaction included unpaid finance charges from the previous transaction.

The SBFTA would provide for a maximum penalty of $10,000 per violation, not to exceed $50,000 for all violations resulting from one transaction. The DFPR could also order restitution or refunds and could revoke, suspend, or deny a registration. Additionally, any violation of the SBFTA would be an unlawful practice under the Illinois Consumer Fraud and Deceptive Business Practices Act.

The SBFTA's disclosure and registration requirements would take effect on January 1, 2025, unless the DFPR established a later date.