Welcome

Welcome to the first edition of Licensing Link, a new periodic publication that will keep you informed on hot topics and new developments in state licensing laws, and provide practice tips and primers on important issues related to state licensing across the spectrum of asset classes and financial services activities. We look forward to you joining us for future editions!

Debt Settlement Company Licensing Could Be Coming to New York

Earlier this year, the New York Assembly introduced Bill No. A01730, which, if enacted, would require a “debt settlement company” to obtain a license from the New York Department of Financial Services before conducting business in New York. While some states have already enacted laws requiring debt settlement companies to be licensed, New York currently does not require these entities to have a license. New York only requires non-profits to have a license to engage in “budget planning.” If approved, Bill No. A01730 would amend certain sections of New York’s General Business Law and Banking Law to impose a licensing obligation on debt settlement companies.

The proposed legislation would apply to a "debt settlement company," which is a company engaging in or soliciting the business of providing “debt settlement services” in exchange for, or in expectation of, any compensation or gain. Under the proposed legislation, "debt settlement services" means (1) offering to provide or providing advice or services, or offering to act or acting as an intermediary, where the primary purpose is to obtain a settlement, adjustment, or satisfaction of the debtor's unsecured debt in an amount less than the principal amount of the debt or the current outstanding balance of the debt; or (2) offering to provide services or providing services advising, encouraging, assisting, or counseling a debtor to accumulate funds for the primary purpose of proposing, obtaining, or seeking to obtain a settlement, adjustment, or satisfaction of the debtor's unsecured debt in an amount less than the principal amount of the debt or the current outstanding balance of the debt. These definitions would capture the typical activities of debt settlement companies operating in the market.

If the law is enacted, applicants for a debt settlement company license would have to meet several requirements, including filing a surety bond for $250,000 and paying an investigation fee. In addition to requiring a license, the legislation would also impose substantive compliance obligations on licensed debt settlement companies. A licensed debt settlement company would be required to include disclosures that use specific statutory language in all advertising and marketing communications, prepare an individualized financial analysis for each debtor, and provide a “Debtor Notice and Rights Form” that contains certain pre-agreement disclosures and warnings related to debt settlement services. Every contract between a licensed debt settlement company and a consumer would be required to include, among other items, a clear and conspicuous list of all fees that will be collected by the debt settlement company, a statement of the proposed savings goals for the debtor, and written notice of a consumer's right to cancel.

The Committee on Consumer Affairs and Protection is reviewing Bill No. A01730. Companies offering debt settlement services in New York should continue to monitor the bill’s status.

New York Introduces Legislation to License Broader Range of Commercial Finance Activities

In what has become something of an annual ritual, the New York legislature has once again introduced a law to license certain providers and brokers of commercial-purpose financing with the introduction of Senate Bill 1450 (“SB 1450”) in January.

If enacted, SB 1450 would require a license to engage in the business of “making or soliciting” “commercial financing products” in an amount of $500,000 or less to New York-located businesses. The bill defines “making or soliciting” to include (1) providing qualifying commercial financing, (2) marketing commercial financing provided by a third-party financer, (3) receiving a commission for referring a small business to a financer, or (4) entering into a bank partnership agreement with a federally- or state-chartered bank under which the bank originates covered commercial financing products. The bill defines a “commercial financing product” broadly to mean “any advance of funds to a commercial or business enterprise made for the purpose of assisting the business with its capital needs,” which would include:

• A secured or unsecured loan or line of credit of $500,000 or less made to a business
• A purchase of a business’s receivables or revenue if any single payment or advance of the purchase price is in the amount of $500,000 or less
• A lease where any funds are provided in the amount of $500,000 or less

The legislation provides several exemptions from the licensing obligation and other provisions of the bill. SB 1450 would exempt from all of its requirements:

• Any person who makes or solicits five or fewer commercial financing products within any 12-month period
• Any banking organization as defined under New York’s banking law
• Any federal credit union
• Any insurance company
• Any transaction that is intended to be a purchase of the ownership, in whole or part, of a business or commercial enterprise

The bill would also exempt any lender of money that is licensed (in some capacity) in New York in connection with a transaction that is subject to the New York Licensed Lenders Law. However, that exemption is narrowly worded and applies only with respect to loans that are subject to the Licensed Lenders Law—loans of $50,000 or less to individuals with interest and charges exceeding a 16% annualized rate. The implication of this limited exemption is that a lender who is licensed under the Licensed Lenders Law would be required to obtain an additional license if the licensee originates a covered commercial financing product that is not subject to the Licensed Lenders Law. And, unlike other commercial financing laws that have been enacted in the past several years, SB 1450 does not currently exempt transactions secured by real property.

The statutory overlap would not stop with the Licensed Lenders Law, as New York’s Commercial Finance Disclosure Law requires the delivery of “cost of credit” disclosures related to commercial financing in amounts of $2.5 million or less. So, if SB 1450 is enacted, qualifying commercial financing in an amount of $500,000 or less would trigger both licensing and disclosure requirements in New York.

In addition to licensing, SB 1450 would enact substantive compliance obligations relating to a licensee’s change of address or control filings, examinations, books and records, annual reporting, and advertising, among other obligations. SB 1450 imposes penalties for noncompliance—significantly, financing provided by an unlicensed entity would be void and uncollectible.

New York has introduced similar legislation in past years, such as SB 1061, which was introduced in 2021 but failed in 2022. If enacted, SB 1450 would take effect 180 days after becoming law.

[View source.]