Ken Greene and Shervin Rashti of the Law Office of Kenneth Charles Greene and Shervin Rashti are back with what funders need to know about mandated compliance when identifying brokers with a pattern of noncompliance.
Commercial transaction brokers, as a general rule, have minimal obligations under the relatively new California disclosure laws (CDL) . As we know, funders (referred to in the CDL as financers or providers) have many. There are numerous and complex disclosure obligations for providers/funders. In addition, funders are charged with an express mandate to monitor the broker’s participation in the process and to cease doing business with those brokers with a pattern of non-compliance. The regulation (California Code of Regulations Title 10, Chapter 3, Section 952(a)(3)) obligates the funder to:
Develop procedures reasonably designed to ensure that recipients receive the disclosures … at the time that a broker provides a specific commercial financing offer to a recipient. These procedures may include:
(A) Contractual requirements that brokers timely provide to the financer documentation of the disclosure (including the timing of transmission) to the recipient [emphasis added];
(B) Timely investigation of facts that would give a financer reasonable notice that a broker has not provided disclosures to recipients …; and
(C) Discontinuation of relationships with any broker who the financer has found to have engaged in a pattern of noncompliance [emphasis added].
So how does a funder meet this mandate? An excellent example of compliance is provided courtesy of the team at SLIM Capital, a member of the American Association of Commercial Finance Brokers (AACFB) and the National Equipment Finance Association (NEFA), including Stephanie Cruz and my co-author, Shervin Rashti. SLIM has circulated a new mandatory broker agreement for both its existing as well as its new brokers. This agreement, which was prepared by my friend and longtime leasing attorney Andrew Alper, has a section which satisfies the requirements of subdivision (a) above. It contains very succinct and clear verbiage reflecting the broker obligations related to the California disclosures as well as the impact of non-compliance in accordance with subdivision (C). Here is the section:
Compliance with California Disclosure Laws: Referring Party is aware of the California Disclosure Laws found in Financial Code sections 22800-22805 and the California Code of Regulations 900-956 (Disclosure Laws). In any non-exempt transaction from the Disclosure Laws, Referring Party warrants and represents as follows:
(a) That it will not prepare any Offer Summary for SLIM.
(b) That it will present any Offer Summary to any Customer who is a Recipient (as defined in the Disclosure Laws) that it receives from SLIM.
(c) That Referring Party shall not modify, amend, or change any Offer Summary received from SLIM and will present the Offer Summary to the Recipient as prepared by SLIM.
(d) That Referring Party will make no oral or other representations to any Recipient regarding SLIM’s funding or offer with respect to a loan other than those submitted to Referring Party by SLIM in its Offer Summary to a Recipient.
(e) That Referring Party will advise SLIM of the date and time that Referring Party submitted the Offer Summary to a Recipient and how it was transmitted to the Recipient.
(f) That once an Offer Summary is signed by the Recipient that it will be transmitted to SLIM.
(g) That any Offer Summary will be presented to a Recipient before any loan documentation is presented to a Recipient.
(h) That Referring Party shall maintain a copy of any signed Offer Summary for 4 years.
(i) That if for any reason Referring Party is using a supplier, vendor or anyone else to submit an Offer Summary to a Recipient that the person or entity transmitting such Offer Summary must be made aware of the prohibitions of the Disclosure Laws and the warranties herein and that such suppliers, vendors or other persons shall be deemed to be brokers as a matter of law.
Kudos to the folks at SLIM (and Mr. Alper) for taking the lead oar on this important issue, and for agreeing to share it with others in the industry. The SLIM broker disclosure compliance section is well-crafted and equitably balanced, and the willingness of the company to provide it to members of the equipment finance industry gratis is a welcome reminder that the best way to maintain the integrity of our industry is through sharing and camaraderie.
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