BILL ANALYSIS

H.B. 700

By: McQueeney

Pensions, Investments & Financial Services

Committee Report (Unamended)

BACKGROUND AND PURPOSE

The bill author has informed the committee that commercial sales-based financing has become a popular financing option for small businesses desperate for credit and that, unlike traditional loans, this type of financing is repaid as a percentage of future sales or revenue. The bill author has also informed the committee that the financing is initially made to the small business, which promises to repay the full amount advanced plus a payback rate or factor rate that is a multiple of the amount advanced. The bill author has further informed the committee that this type of financing has raised significant concerns about predatory lending and that state attorneys general as well as the Federal Trade Commission have obtained high-profile judgments against such financing for predatory practices. H.B. 700 seeks to enact new law to provide clarity, safeguard small businesses, and promote fair lending practices with respect to the commercial sales-based financing industry.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly granted to the Finance Commission of Texas in SECTION 1 of this bill.

ANALYSIS

H.B. 700 amends the Finance Code to require a provider who extends a specific offer of commercial sales-based financing of more than $500,000 to a recipient in Texas to disclose to the recipient the following:

·the total amount of the financing, the disbursement amount, the finance charge, and the total repayment amount;

·the estimated period for the periodic payments to equal the total repayment amount under the terms of the financing;

·for fixed payment amounts, the amounts and the frequency of payments;

·for variable payment amounts, 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;

·a description of all other potential fees and charges not included in the finance charge, including draw fees, late payment fees, and returned payment fees;

·any finance charge the recipient will be required to pay if the recipient pays off or refinances the commercial sales-based financing before the transaction is repaid in full;

·any additional fees, not included in the finance charge, the recipient will be required to pay if the recipient pays off or refinances the commercial sales-based financing before the transaction is repaid in full; and

·a description of collateral requirements or security interests, if applicable.

H.B. 700 requires the provider, if as a condition of obtaining commercial sales-based financing the provider requires the recipient to pay off the outstanding balance of an existing commercial sales-based financing from the same provider, to disclose to the recipient the following:

·the amount of the new commercial sales-based financing used to pay off the portion of the outstanding balance of existing commercial sales-based financing that consists of prepayment charges required to be paid and any unpaid interest expense that was not forgiven at the time of renewal of the transaction; and

·if the disbursement amount will be reduced to pay down any unpaid portion of the outstanding balance, the actual dollar amount by which the disbursement amount will be reduced.

The bill requires the provider to obtain the recipient's signature on the disclosures required by the bill's provisions before finalizing the application for the commercial sales-based financing transaction.

H.B. 700 requires a person to register with the Texas Department of Banking before engaging in business as a commercial sales-based financing broker for compensation in Texas. The bill establishes that the registration is effective on receipt by the department of a completed registration form and the required registration fee and remains effective until renewal. The bill requires a broker to file a renewal registration form with the required renewal registration fee on or before January 31 of each year after filing an initial registration and to pay a registration fee on filing an initial registration and a renewal registration fee on filing a renewal registration. The registration or renewal registration form must include the following:

·the name of the broker;

·the name under which the broker transacts business, if different from the name of the broker;

·the address of the broker's principal office, which may be outside of Texas; and

·the name and address in Texas of a designated agent for service of process.

The bill requires a person engaging in business as a commercial sales-based financing broker on the bill's effective date to register with the department not later than January 1, 2026.

H.B. 700 requires the Finance Commission of Texas to do the following:

·by rule set the registration fee and registration renewal fee in amounts sufficient to cover the registration costs; and

·adopt a form to be used for a registration or renewal registration under the bill's provisions.

The bill requires the finance commission to adopt rules setting the fees and adopting a registration form not later than December 1, 2025. The bill requires a commercial sales-based financing broker to update information contained in the registration statement not later than the 90th day after the date on which the information changes.

H.B. 700 subjects a person who violates the bill's provisions to a civil penalty of $10,000 for each violation, capped at $100,000 for all aggregated violations. A violation of the bill's provisions is considered a deceptive trade practice under the Deceptive Trade Practices-Consumer Protection Act and is actionable under Business & Commerce Code provisions relating to deceptive trade practices. The bill's provisions expressly do not create a private right of action against any person based on compliance or noncompliance with its provisions.

H.B. 700 defines the following terms:

·"commercial sales-based financing" or "commercial sales-based financing transaction" as an extension of sales-based financing to a recipient by a provider, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes;

·"commercial sales-based financing broker" as a person, other than a financer, who, for compensation or the expectation of compensation, offers commercial sales-based financing to a recipient or offers to obtain commercial sales-based financing for a recipient from a provider;

·"disbursement amount" as the amounts paid to the recipient or on the recipient's behalf, excluding any finance charges that are deducted or withheld at disbursement;

·"finance charge" as the cost of commercial sales-based financing expressed as a dollar amount, including a charge payable, directly or indirectly, by the recipient that is imposed, directly or indirectly, by the provider of the financing as an incident to, or a condition of, the extension of financing;

·"financer" as a person who provides or will provide commercial sales-based financing to a recipient;

·"person" as an individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, sole proprietorship or other unincorporated organization, or other similar entity;

·"provider" as a person who extends a specific offer of commercial sales-based financing to a person applying for that financing or the person's authorized representative, including a commercial sales-based financing broker;

·"recipient" as a person, or the authorized representative of a person, who applies for commercial sales-based financing and is made a specific offer of commercial financing by a provider, excluding a person acting as a commercial sales-based financing broker;

·"sales-based financing" as a transaction that is repaid by the recipient to the provider of the financing 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 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;

·"specific offer" as the specific terms of commercial sales-based financing, including a price or amount quoted to a recipient by a person providing the financing based on information obtained from or about the recipient that, if accepted by the recipient, would be binding on the provider, subject to specific requirements in the financing terms; and

·"total repayment amount" as the sum of the disbursement amount and finance charge.

H.B. 700 exempts from applicability of its provisions a provider that is any of the following:

·a bank, out-of-state bank, bank holding company, credit union, federal credit union, out-of-state credit union, or any subsidiary or affiliate of those financial institutions;

·a person acting in the capacity of a technology services provider to an entity exempt from the bill's provisions as part of the entity's commercial sales-based financing program if the person has no interest, arrangement, or agreement to purchase any interest in the commercial sales-based financing extended in connection with the program;

·a lender regulated under the federal Farm Credit Act of 1971; or

·a person who extends or brokers any of the following:

oa commercial sales-based financing transaction secured by real property;

oa lease or a purchase-money obligation, as defined by provisions of the Uniform Commercial Code – Leases or the Uniform Commercial Code – Secured Transactions, respectively;

oa commercial sales-based financing transaction entered into under a commercial sales-based financing agreement or commercial open-end credit plan of $50,000 or more in which the recipient is a dealer, as defined by Transportation Code provisions relating to dealer's and manufacturer's vehicle license plates, or a motor vehicle rental company or an affiliate of a motor vehicle rental company; or

oa commercial sales-based financing transaction in connection with the sale of products or services that the person manufactures, licenses, or distributes or that a parent company, subsidiary, or affiliate of such person manufactures, licenses, or distributes.

The bill establishes that a sales-based financing transaction is not a form of an account purchase transaction for purposes of statutory provisions relating to account purchase transactions, regardless of the principal amount of the advance and that fees and charges paid, or charged under, a sales-based financing transaction are considered interest for usury purposes under state law, regardless of the principal amount of the advance.

H.B. 700 requires the Texas Department of Banking to administer, implement, and enforce the bill's provisions and requires the Finance Commission of Texas to adopt rules as necessary to administer and implement the bill's provisions.

EFFECTIVE DATE

September 1, 2025.