Bill Text: NJ S3617 | 2018-2019 | Regular Session | Introduced
Bill Title: Requires licensing for certain non-bank lenders and certain brokers that make or arrange alternative small business loans.
Spectrum: Partisan Bill (Democrat 2-0)
Status: (Introduced - Dead) 2019-03-18 - Introduced in the Senate, Referred to Senate Commerce Committee [S3617 Detail]
Download: New_Jersey-2018-S3617-Introduced.html
Sponsored by:
Senator NELLIE POU
District 35 (Bergen and Passaic)
SYNOPSIS
Requires licensing for certain non-bank lenders and certain brokers that make or arrange alternative small business loans.
CURRENT VERSION OF TEXT
As introduced.
An Act concerning alternative business loans and supplementing P.L.1964, c.162 (C.17:9A-59.25 et seq.).
Be It Enacted by the Senate and General Assembly of the State of New Jersey:
1. The Legislature finds and declares that:
a. In recent years, alternative business lending has become a more prevalent source of capital for small businesses, as institutional lenders have retreated from this market segment.
b. Regulatory agencies have also demonstrated increased awareness of a broader group of finance companies and loan products, of which alternative business lending is a subset. In July 2015, the U.S. Treasury Department issued a request for information on marketplace lending and, in May 2016, issued a corresponding white paper. In July 2016, the Federal Deposit Insurance Corporation issued guidance, regarding the examination of supervised institutions that partner with online marketplace lenders.
c. The availability of alternative business loans provides essential capital for many small businesses; however, the absence of a regulatory framework presents risks which are best addressed by legislative direction.
d. Currently, alternative business lending is largely unregulated at the federal level, with a patchwork of applicable regulation at the state level. Existing regulation of interest rates and fees does not adequately consider the risks and economics associated with alternative business loans and, in particular, with their accelerated amortization schedules, and high-risk borrowers or collateral.
e. A system of regulation of alternative business loans would increase the flow of capital, while affording small business borrowers with protections in the form of transparency, disclosure, and accountability.
f. By leveraging the existing licensing and enforcement infrastructure of the New Jersey Department of Banking and Insurance, a system can be implemented with widespread access for lenders of all sizes.
2. As used in this act:
"Alternative business loan" means a loan or merchant cash advance, the proceeds of which are used primarily for business purposes and not primarily for personal, family, or household purposes, and which contains one or more of the following characteristics:
(1) credit approval without reliance on tax returns or financial and related traditional underwriting metrics;
(2) an interest rate, or disclosed internal rate of return in the case of a merchant cash advance, in excess of 25 percent;
(3) a term to maturity of less than two years; or
(4) payment frequency greater than bi-weekly.
"Broker" means a person who, for or in expectation of consideration:
(1) arranges or offers to arrange an alternative business loan for a non-bank lender; or
(2) assists or advises or offers to assist or advise a small business borrower in obtaining or attempting to obtain an alternative business loan.
"Commissioner" means the Commissioner of Banking and Insurance.
"Department" means the Department of Banking and Insurance.
"Non-bank lender" means a lender that is not otherwise regulated by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, or Federal Reserve.
"Small business borrower" means a small business located in this State that receives an alternative business loan from a non-bank lender.
3. a. Not more than 10 and not less than three days before a non-bank lender makes an alternative business loan to a small business borrower, it shall disclose to the small business borrower the following anticipated components of the alternative business loan:
(1) Payment schedule;
(2) Term to maturity;
(3) Annual interest rate or, in the case of a merchant cash advance, the internal rate of return, before considering lender charges, assuming all payments are made under the contract as anticipated;
(4) Annual percentage rate, or, in the case of a merchant cash advance, the internal rate of return, after considering lender charges, assuming all payments are made under the contract as anticipated, calculated using the applicable methodology in 12 C.F.R. s.1026 et seq., or any successor law or regulation;
(5) Interest cost per dollar borrowed;
(6) Total repayment amount to maturity;
(7) Any right to prepay and the applicability and calculation of any prepayment charges;
(8) Collateral requirements; and
(9) Fees, costs and charges.
b. At the time a non-bank lender makes an alternative business loan to a small business borrower, it shall disclose to the small business borrower any changes to the information provided in the initial disclosure made pursuant to subsection a. of this section.
4. a. If a broker is entitled to compensation for introducing a small business borrower to a non-bank lender for the purpose of having the non-bank lender make an alternative business loan to the small business borrower, then the non-bank lender shall disclose to the small business borrower:
(1) The total compensation expected to be paid by the non-bank lender to the broker; and
(2) The total compensation expected to be paid by the small business borrower to the broker.
b. In order to comply with the disclosure required pursuant to this section, a broker shall enter into a written agency, fee and disclosure agreement with the small business borrower that provides the compensation agreed to by the small business borrower.
c. The agency and fee agreement shall be provided to the non-bank lender when the application for the alternative business loan is submitted by the small business borrower for its consideration.
5. a. Any alternative business loan shall provide economic benefit to the small business borrower, including, without limitation, any of the following:
(1) Lower payments through the payoff of outstanding debt balances;
(2) Funding the purchase of equipment or inventory;
(3) Payoff of tax liens or judgments adversely impacting business operations, or limiting access to collateral to support funding;
(4) Funding of business expansion, acquisition, or combination that is projected to generate revenue growth and future profitability;
(5) Funding of working capital to support continued business operations; or
(6) Completion of construction.
b. The economic benefit to a small business borrower shall be documented by the small business borrower.
c. Non-bank lenders shall provide to a small business borrower the most favorable loan product offered by the non-bank lender and for which the small business borrower qualifies.
6. a. The jurisdiction for commencing an action to enforce the terms of an alternative business loan contract between a small business borrower and a non-bank lender pursuant to this act shall be New Jersey.
b. A non-bank lender shall maintain a record that identifies all alternative business loans to New Jersey small business borrowers for each calendar year.
c. A non-bank lender shall maintain:
(1) Staff dedicated to address complaints;
(2) Clear disclosure of the contact for complaint resolution; and
(3) A separate file for each complaint that identifies each complainant and the nature and disposition of that complaint.
7. a. The department shall establish a process for issuing alternative business loan licenses to non-bank lenders to make alternative business loans to small business borrowers and licenses to brokers of alternative business loans.
b. Beginning 90 days after the department establishes the licensing process required pursuant to subsection a. of this section, a non-bank lender shall apply for a license before making alternative business loans to small business borrowers.
c. During the period after a non-bank lender has applied for an alternative business loan license and the date on which an application is rejected or a license is issued, the non-bank lender may make alternative business loans to small business borrowers.
d. A license to a non-bank lender to make alternative business loans to small business borrowers shall be issued only if the non-bank lender meets the following requirements:
(1) The non-bank lender shall have a net worth of not less than:
(a) for an annual closed alternative business loan volume equal to or less than $10,000,000, $250,000;
(b) for an annual closed alternative business loan volume of greater than $10,000,000 and equal to or less than $20,000,000, $500,000; and
(c) for an annual closed alternative business loan volume of greater than $20,000,000, $1,000,000;
(2) The non-bank lender shall secure a bond in an amount of not less than:
(a) for an annual closed alternative business loan volume equal to or less than $10,000,000, $250,000;
(b) for an annual closed alternative business loan volume of greater than $10,000,000 and equal to or less than $20,000,000, $500,000; and
(c) for an annual closed alternative business loan volume of greater than $20,000,000, $1,000,000; and
(3) Each employee of the non-bank lender involved in non-ministerial functions shall:
(a) Satisfactorily complete a criminal history record background check within 90 business days of commencement of employment;
(b) Pass a written examination regarding industry compliance, credit criteria, and ethical practices within 90 business days of commencement of employment; and
(c) Complete at least 10 hours of continuing education each calendar year, two of which shall cover business ethics.
e. A non-bank lender that has an alternative business loan license, or that has applied for an alternative business loan license and has not been rejected, shall be exempt from the usury laws of this State with respect to alternative business loan products.
f. Beginning 90 days after the department establishes the licensing process required pursuant to subsection a. of this section, a broker of alternative business loans shall be licensed to broker alternative business loans to a non-bank lender.
g. A license to a broker of alternative business loans to small business borrowers shall be issued only if the broker meets the following requirements:
(1) A minimum net worth of $100,000; and
(2) The broker shall secure a bond in an amount, based upon annual loan applications taken, as follows:
(a) for equal to or less than 100 applications, $150,000;
(b) for greater than 100 and equal to or less than 300 applications, $250,000;
(c) for greater than 300 and equal to or less than 500 applications, $350,000; and
(d) for greater than 500 applications, $500,000.
h. Non-ministerial employees of brokers shall be subject to the same requirements as employees of lenders.
8. The department shall promulgate rules and regulations for:
a. the establishment of appropriate standards for the safeguarding and sharing of information by non-bank lenders;
b. the investigation and enforcement of violations of this act, which shall include regulations detailing the process for audits, initial warnings, cure periods, probation, rescission, and penalties;
c. standards for the written examination and continuing education programs established pursuant to this act; and
d. any purpose the commissioner determines necessary to enforce the provisions of this act.
9. This act shall take effect on the 120th day next following enactment.
STATEMENT
This bill requires licensing for certain non-bank lenders and brokers that make or arrange alternative small business loans to small businesses located in the State.
Under the bill, a non-bank lender is a lender that is not otherwise regulated by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, or Federal Reserve. Non-bank lenders fall under the provisions of the bill when they make alternative business loans to small businesses. An alternative business loan is a loan or merchant cash advance, the proceeds of which are used primarily for business purposes, and not primarily for personal, family, or household purposes, and which contains one or more of the following characteristics:
(1) credit approval without reliance on tax returns or financial and related traditional underwriting metrics;
(2) an interest rate, or disclosed internal rate of return in the case of a merchant cash advance, in excess of 25 percent;
(3) a term to maturity of less than two years; or
(4) payment frequency greater than bi-weekly.
The bill provides that, not more than 10 and not less than three days before a non-bank lender makes an alternative business loan to a small business borrower, the lender is required to disclose to the small business borrower various anticipated components of the alternative business loan.
The bill provides that, at the time a non-bank lender makes an alternative business loan to a small business borrower, it is required to disclose to the small business borrower any changes to the information provided in that initial disclosure.
Under the bill, if a broker is entitled to compensation for introducing a small business borrower to a non-bank lender for the purpose of having the non-bank lender make an alternative business loan to the small business borrower, then the non-bank lender shall disclose to the small business borrower:
(1) The total compensation expected to be paid by the non-bank lender to the broker; and
(2) The total compensation expected to be paid by the small business borrower to the broker.
The bill requires any alternative business loan to provide economic benefit to the small business borrower, including, without limitation, any of the following:
(1) Lower payments through the payoff of outstanding debt balances;
(2) Funding the purchase of equipment or inventory;
(3) Payoff of tax liens or judgments adversely impacting business operations, or limiting access to collateral to support funding;
(4) Funding of business expansion, acquisition, or combination that is projected to generate revenue growth and future profitability;
(5) Funding of working capital to support continued business operations; or
(6) Completion of construction.
Under the bill, the economic benefit to a small business borrower of the financing is to be documented by the small business borrower.
The bill also requires non-bank lenders to provide small business borrowers the most favorable loan product offered by the non-bank lender and for which the small business borrower qualifies.
The bill provides that the jurisdiction for commencing an action to enforce the terms of an alternative business loan contract between a small business borrower and a non-bank lender is New Jersey.
The bill requires non-bank lenders to maintain a record that identifies all alternative business loans to New Jersey small business borrowers for each calendar year. Non-bank lenders must maintain:
(1) Staff dedicated to address complaints;
(2) Clear disclosure of the contact for complaint resolution; and
(3) A separate file for each complaint that identifies each complainant and the nature and disposition of that complaint.
The bill requires the Department of Banking and Insurance to establish a process for issuing alternative business loan licenses to non-bank lenders to make alternative business loans to small business borrowers and licenses to brokers of alternative business loans. The bill provides for certain requirements for non-bank lenders, including provisions for net worth and bonding, and bonding requires for brokers.
