New York Enacts Novel Disclosure Requirements for Commercial Financing Transactions

Pillsbury Winthrop Shaw Pittman LLP

Fintechs and other nonbanks will be required to provide consumer-style disclosures when offering to extend small business financing in New York.

TAKEAWAYS

  • The New York commercial financing disclosure law is primarily targeted at fintech lenders other than banks providing commercial financing.
  • Providers of commercial financing subject to the new law will be required to provide detailed consumer-style disclosures for transactions of $500,000 or less.
  • The new requirements are modeled on the disclosures required for consumer credit in the Truth in Lending Act despite significant differences between the terms of consumer and commercial credit.

In late December 2020, New York Governor Andrew Cuomo signed into law S5470-B, which imposes consumer-style disclosure requirements for a variety of commercial financing transactions of $500,000 or less including loans, sales-based financing including merchant cash advances (MCAs), and factoring transactions. This new commercial financing disclosure law (CFDL) is currently scheduled to become effective on June 21, 2021, although legislation is pending to extend the effective date to January 1, 2022.

New York is the second state to require consumer-style disclosures for commercial financing, following enactment of similar requirements in California in 2018. However, the California law will not take full effect until the California Department of Financial Protection and Innovation promulgates final regulations. Although the CFDL authorizes the New York Department of Financial Services (NYDFS) to promulgate regulations, it will become effective whether or not NYDFS promulgates regulations. The New York and California legislation could spur other states to enact similar laws and could be part of a broader trend to regulate financing for small businesses.

Scope of Covered Providers of Commercial Financing

The CFDL requires “providers” of commercial financing to provide disclosures to potential recipients of financing at the time a specific offer of financing is extended to a business borrower. The CFDL broadly defines that the provider include both entities that actually extend financing, as well as any intermediaries that solicit and present specific financing offers on behalf of third parties.

The CFDL will primarily impact fintechs and other nonbanks involved in commercial financing because it exempts depository financial institutions, including federally and state-chartered banks, credit unions, trust companies and industrial loan companies. Although the CFDL includes a limited exemption for entities acting as technology services providers for exempt entities, such technology services providers are exempt only if they have no interest, and no arrangement to acquire an interest, in the commercial financing extended by the exempt entity. Moreover, intermediaries that affirmatively present specific offers of commercial financing on behalf of exempt entities are not exempt themselves. Technology companies and fintechs that present financing offers on behalf of third parties should consider consulting counsel to assess whether their current operations fit within this limited exception.

The CFDL also exempts lenders regulated under the federal Farm Credit Act and entities that make five or less commercial financing transactions in New York in a 12-month period.

Scope of Covered Commercial Financing Transactions

The CFDL applies to closed-end financing, open-end financing, sales-based financing including MCAs and factoring transactions. In addition to individual commercial financing transactions of over $500,000, transactions secured by real property and leases as defined in section 2-A-103 of the UCC are not subject to the CFDL’s requirements.

Required Disclosures

The CFDL’s disclosure requirements are similar to the disclosure requirements for consumer financing in the Truth in Lending Act (TILA) and Regulation Z. Although the CDFL’s required disclosures vary slightly depending on the form of the transaction, providers of commercial financing generally will be required to disclose:

  • The total amount financed, and the amount disbursed if it is different from the total amount financed;
  • The finance charge;
  • The APR (or the estimated APR for sales-based financing and factoring transactions), calculated in accordance with TILA and Regulation Z;
  • The total repayment amount;
  • The term (or the estimated term for sales-based financing) of the financing;
  • Periodic payment amounts;
  • Prepayment charges;
  • All other fees and charges not otherwise disclosed; and
  • Any collateral requirements or security interests.

Although TILA and Regulation Z have long required disclosures similar to those described above for consumer credit products, many of those concepts do not neatly translate to commercial transactions like sales-based financing and factoring transactions that may not have fixed terms or easily quantifiable periodic payment amounts. The CFDL attempts to address this challenge by requiring providers of sales-based financing and factoring transactions to disclose estimated, rather than actual, figures in several situations including APR.

Providers of sales-based financing must select one of two options for calculating an estimated APR—the “historical” method, which is based on average historical sales volume, or the “opt in” method, which is based on projected sales volume. Providers must notify the NYDFS of their choice, and if they select the opt in method must report data to the NYDFS for an annual review of the accuracy of their estimated APRs. Providers of factoring transactions must calculate the estimated APR as a “single advance, single payment transaction” as set forth in Appendix J of Regulation Z.

Administrative and Enforcement Provisions

The CFDL authorizes NYDFS to promulgate regulations concerning the calculations required by the CFDL, the formatting of required disclosures, the terms defined in the CFDL and enforcement. If NYDFS finds that a provider has violated the CFDL, it may impose penalties of up to $2,000 per violation and up to $10,000 per willful violation. NYDFS may also order an injunction if it finds a provider has knowingly violated the CFDL.

New York State Legislature Passes Bills to Amend the CFDL

In his December 23, 2020 signing memorandum, Governor Cuomo stated that he had secured an agreement with the legislature to make technical changes to S5470-B to provide additional clarity and more closely align its requirements to TILA. The New York State Senate and Assembly then introduced “same as” bills to amend the CFDL. The Senate passed its bill on January 19, 2021 and the Assembly passed its bill on February 10, 2021. Most notably, these bills increase the dollar amount of covered transactions from $500,000 or less to $2.5 million or less and delay the effective date of the CFDL to January 1, 2022. The bills would also clarify when providers must make APR calculations, immediately authorize NYDFS to promulgate regulations and creates a new exemption for vehicle dealers in certain circumstances.

The CFDL comes at a time when commercial financing products are increasingly available through new online platforms and from new market entrants. Together with the similar California law, the CFDL is a significant step toward applying additional regulatory requirements to commercial financing, which has previously been subject to far less regulatory oversight than consumer credit and is indicative of a broader trend to impose regulatory oversight on small business financing. The COVID-19 pandemic has also focused additional attention from federal and state regulators on lending and other issues impacting small businesses. Commercial financing providers should be aware of and preparing to comply with these new requirements and should expect that the federal government and the states will continue to be active in this area.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Winthrop Shaw Pittman LLP | Attorney Advertising

Written by:

Pillsbury Winthrop Shaw Pittman LLP
Contact
more
less

Pillsbury Winthrop Shaw Pittman LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide