For those of you doing business in New York, you’ll know the state passed legislation providing for a CFDL. However, implementation is running behind that of California, the first state to create these regulations, which saw an effective date of Dec. 9, 2022. New York’s regulations were finalized Feb. 1, 2023, with a compliance date six months after, on Aug. 1, 2023. Many exemptions apply, some of which are described below.
Disclosure of lease/loan rates and terms in the required format will take considerable effort. Every company required to disclose loan terms will need a mechanism to gather information on every transaction. Documents must include the total amount, the finance charge, APR, term, repayment amount, description of collateral, fixed and variable payment amounts, potential fees and prepayment penalties. The information must be relayed in a specific format that enables potential borrowers and lessees (recipients) to compare offers. New York State does not supply the forms. Therefore, it is up to the individual lenders to create them and determine how best to populate their forms with the necessary information. These forms must also be signed by the recipients and retained by the funding source to show compliance. Note: the forms for New York are different from those required by California.
The timing of the disclosure presents a change in operations to most lenders. The disclosure form must be provided at the time a specific offer for financing is made. The policy behind the law is to provide recipients with the opportunity to compare multiple offers from different lenders in the same format. As a result, the disclosure form must be provided to the prospective recipient before they execute the financing documents. Note that if more than one offer of financing is provided to one company by the same lender, the disclosure form does not have to be provided to the recipient until the recipient makes a selection.
In general, any provider (as defined under the specific CFDL) extending a specific offer of commercial financing to a recipient must comply. Unless otherwise exempt, providers also include those that solicit and present a specific offer of commercial financing on behalf of a third-party. Brokers are generally included as providers, depending on the circumstances. Keep in mind that banks and depository institutions are currently exempt from the New York and California CFDLs, but wholly owned subsidiaries of those institutions are not exempt in California. Although the New York CFDL was initially following California by not exempting bank subsidiaries, the regulations, which were just finalized as of Feb. 1, 2023, now do generally exempt bank subsidiaries. Specifically, New York broadened the definition of a financial institution (which is exempt from compliance with the New York CFDL) and is now defined to include: “…any corporation, limited liability company, partnership, joint venture, trust or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by a financial institution.” Thus, making bank subsidiaries that fall into this definition exempt from compliance.
In the New York CFDL, the nexus determining which lenders will be affected was less certain than in other locales before the regulations were finalized. In a previous version of the regulations, the nexus element was broadened considerably to apply to any lender principally directed or managed from New York, as well as to a recipient principally directed or managed from New York, or in the case of an individual, a legal resident of New York. This aspect of the nexus rule was criticized by many industry organizations including the ELFA. Fortunately, the final regulations clarified that it only applies to New York recipients. “The obligation to provide any disclosures under the CFDL applies if the recipient’s business is principally directed or managed from the state of New York, or, in the case of a natural person, the recipient is a legal resident of the state of New York,” the published regulations state.
Lastly, in New York, an individual commercial transaction in an amount over $2.5M is exempt, as are persons or providers making no more than five commercial finance transactions in the state within a 12-month period, and technology service providers.
Other states with CFDL regulations in effect are Utah and Virginia. Notably, Utah exempts true leases, which also are exempt in New York and California, as are transactions in which the lender receives a purchase money security interest (PMSI). Virtually all transactions in the equipment leasing industry are structured as a true lease or as a PMSI transaction and, therefore, there would be few, if any, transactions that fall under the Utah CFDL. However, registration is required in Utah if you finance more than five transactions in the state in a year. Registration is also required for a person who, under a written agreement with a depository institution, offers one or more commercial financing products provided by the depository institution via an online platform that the person administers. Virginia’s CFDL, which took effect in November 2022, does not apply to true leases and PMSI transactions. The Virginia law only has a registration requirement for sales-based financing providers, and their transactions are not generally utilized in the equipment finance industry.
The following other states have proposed CFDL statutes, which have not been passed by their respective legislatures at this time: Connecticut, New Jersey, Maryland, North Carolina, Missouri, Mississippi and Pennsylvania.
It is important to contact your lawyer familiar with these CFDLs as there are nuances in how to complete the information required on disclosure forms. This includes, but is not limited to, addressing broker commissions, vendor discounts and what qualifies as a true lease – it is not as simple as many lenders think! Moreover, there are penalties for non-compliance, with larger penalties for intentional violations, which makes contacting your counsel even more important.
