To date, the licensing and disclosure obligations for lenders and brokers of commercial loans, (including commercial mortgage loans and non-real estate-secured commercial or business purpose loans) have not received the attention of most state legislators or regulators. Few states impose a licensing obligation to make any type of commercial loans¹ and there are no state laws that impose significant disclosure obligations to make commercial loans but that may be changing in 2021. As California and New York lead the way to license and regulate certain commercial lending and brokering activities, legislators and regulators in other states are beginning to take notice and offer legislative solutions that apply to the making or brokering of commercial loans. With this Client Alert, we examine the commercial loan licensing and disclosure obligations in New York.

Under New York’s Licensed Lenders Law, lenders making commercial loans of $50,000 or less, with an annual interest rate in excess of 16 percent, are required to be licensed. Given the Licensed Lenders Law’s low dollar amount and high annual interest rate thresholds, few entities making commercial loans in New York are licensed. While there have not been any recent changes, legislation is currently being bandied about in Albany that would increase the dollar amount of the commercial loans that would require licensure in New York. We will continue to monitor these developments and issue a follow-up Client Alert in the event of any important changes to New York’s commercial loan licensure requirements.

Late last year, New York enacted Senate Bill 5470-B imposing certain disclosure obligations on those making or brokering certain commercial loans of $500,000 or less. This new commercial loan disclosure law takes effect on June 21, 2021. While regulations are currently being drafted, none have yet been formally proposed. We have contacted New York regulators to check on the status of any proposed regulations, and once we obtain some further regulatory guidance, we will issue a follow-up Client Alert on this new commercial loan disclosure law. If you would have us seek guidance on a discrete matter for you, please send us an email and we will look into pursuing the issue with the New York regulators.

S. B. 5470-B sets out and defines six forms of commercial financing for which certain disclosures would be required: (i) sale-based financing, (ii) closed-end commercial financing, (iii) open-end commercial financing, (iv) factoring transactions, (v) renewal financing, and (vi) a catch-all category for “other forms” of commercial financing, which the Superintendent of the NYDFS is authorized to determine in accordance with the statute’s definition of “commercial financing.” See S. B. 5470-B § 801(b). “Commercial financing” does not include financing whose proceeds are intended to be used by the recipient for personal, family, or household purposes. See id. § 801(b). In addition, the new commercial loan disclosure law does not apply to commercial financing secured by real property. See id. § 802(d).

S. B. 5470-B provides a de minimus exemption, “for any person or provider who makes no more than five commercial financing transactions in [New York] in a twelve month period.” Id. § 802(f). “Financial institutions”, which term includes banks, and certain other chartered depository institutions authorized to conduct business in New York, are also exempt from the new commercial loan disclosure law, but the subsidiaries or affiliates of such exempt financial institutions are not exempt, if otherwise subject to the new commercial loan disclosure law. See id. § 802(a) and 801(f).

The obligation to provide the required disclosures extends to a “provider of such commercial financing,” which term is defined to include not only a person or entity who extends a specific offer of commercial financing to a recipient, but also includes “a person who solicits and present specific offers of commercial financing on behalf of a third party.” See id. § 801(h). Given this definition, it would appear that those who “broker” the commercial loans regulated under S. B. 5470-B would be obligated to provide the required disclosures to the recipients as well. S. B. 5470-B does not indicate whether (i) both the “creditor” and the “broker” must provide the disclosures for the same commercial financing, (ii) the disclosures provided by the “broker” relieves the “creditor” from providing the disclosures for the same commercial financing, (iii) the “broker’s” obligation to provide the commercial disclosures can be delegated to the “creditor,” or (vi) the disclosures provided by the “creditor” relieves the “broker” from providing the disclosures for the same commercial financing.

The disclosures imposed by S. B. 5470-B are modeled after the consumer financing disclosures found in the Truth in Lending Act. Although the disclosures required for each form of commercial financing differ, there are certain common elements that must be disclosed for each form of commercial financing. Some of those common elements include:

1. the total amount of the particular commercial financing, or the maximum credit available if it is for open-end commercial financing, or the purchase price of the receivables if it is for factoring;
2. the finance charge;
3. the estimated annual percentage rate,
4. the total amount of the repayment amount, which is the disbursement amount plus the finance charge; or if open-ended, the draw amount, less fees, plus the finance charge; or, if factoring, the purchase amount plus the finance charge; and
5. the payment amounts and/or frequency.

The provider is required to obtain the recipient’s signature on all disclosures that must be presented to the recipient to move forward with the application for commercial financing. This signature obligation can be fulfilled by use of an electronic signature. Id. § 809.

For a more complete and fuller understanding of the required disclosures for each form of commercial financing regulated under this new disclosure law, S. B. 5470-B should be reviewed. Meanwhile, we will continue to pursue clarification from NYDFS regulators as to certain of the disclosure obligations. We will monitor the issuance of proposed regulations to implement this commercial financing disclosure law and will issue an update to this Client Alert. If you desire to submit comments once rules are proposed, we would be pleased to assist.

¹ The states that license lending and brokering activities involving commercial mortgage loans include Arizona, California, Florida, Minnesota, Nevada, New York, North Dakota, South Dakota, and Vermont. In some of these states, (i) the licensing obligation may arise to make commercial mortgage loans of any dollar amount or of a certain dollar amount or less, or (ii) may arise under certain limited conditions. Fewer states license lenders making non-real estate-secured commercial or business loans. Some states may license the brokering of commercial loans, but not the making of commercial loans. Regulators in a handful of other states claim that their licensing law applies to license those making commercial loans of $25,000 or less, but, given the dollar amount of the commercial loans that could give rise to a licensing obligation, it is rare to find those licensing obligations being applicable to most commercial lenders.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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