Texas Enacts HB 700: New Disclosure and Registration Rules for Sales-Based Financing Providers and Brokers

Please be advised that the Texas legislature has passed, and Governor Abbott has signed, TX HB 700, which relates exclusively to the disclosures which must be provided to the recipients of sales-based financing transactions, the effect of certain commercial sales-based financing contract provisions and the registration of commercial sales-based financing brokers and providing for civil penalties for the violation of this legislation.

Specifically:

1. Sales-based financing is defined under the legislation to mean a transaction that is repaid by the recipient to the provider of the financing: (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.

2. The legislation, in defining sales-based financing, makes it clear that a sales-based financing transaction is not a form of an account purchase transaction regardless of the principal amount of the advance.

3. The disclosure protocol is a total cost of capital metric, which delineates the cost of the sales-based financing, including refinancing rather than an annual percentage rate protocol and relates to sales-based financing transactions of less than $1,000,000.

4. The statute grants to the Finance Commission of Texas rule-making authority in general and, in particular, to adopt rules applicable to providers and brokers of sales-based financing that identify unlawful, unfair or abusive acts relating to a sales-based financing transaction, however, the Finance Commission of Texas may not adopt  a maximum annual percentage rate, finance charge or fee for commercial sales-based financing transactions.

5. Furthermore, neither a provider nor broker of sales-based financing may establish a mechanism for automatically debiting a recipient’s deposit account unless the  provider or broker holds a validly perfected security interest in the recipient’s account with a first priority against the claims of all other persons.

6. A provider engaged in sales-based financing must register annually with the Office of Consumer Credit Commissioner.

7. The statute provides for civil penalties of $10,000 for each violation and there is no private cause of action.

Credit should be given to the American Factoring Association,  along with the following factoring companies, for their influence in getting this legislation passed.

American Prudential Capital, Inc.

Amerisource Funding

Charter Capital Holdings LP

Cornerstone Funding, LLC

Dare Capital

Diversified Lenders

K.W. Receivables

KD Factors & Financial Services, LLC

Momentum Capital Funding

Palatine Hill Capital, LLC

Parikh Financial

Quasar Capital

Sallyport Commercial Finance