New York Moves Forward to Regulate Commercial Loan Disclosures to Small Businesses

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In the absence of a federal law requiring disclosures be provided to small businesses, regulators in California in 2018, and now New York, have jumped into the void. With the Enactment of the New York Commercial Finance Disclosure Law (“CFDL”) on December 24, 2020, New York regulators have moved forward to propose certain disclosure regulations for those providing commercial financing to small businesses. In one of her first actions upon assuming her position, the Acting Superintendent of the New York Department of Financial Services (“NYDFS”), Adrienne A. Harris, published on the NYDFS website certain draft commercial finance regulations. The proposed regulations, if made effective, would require certain standardized disclosures about the terms of credit of companies offering commercial financing to small businesses in amounts of $2,500,000 or less.

As of October 4, 2021, the proposal regarding the “draft rules” published on the NYDFS website is, according to New York regulators, for discussion purposes as these “draft rules” have not yet been published for comment in the New York Register. Following the New York Register publication of the proposed regulations, there will be a 60-day comment period. Given the 60-day comment period, it is likely the CFDL will become effective before the regulations are adopted, but New York regulators who responded to our inquiry have indicated that they have some limited discretion to set a later compliance date. Whether the CFDL can be enforced without regulations being in effect is unclear. Below, we provide a look into some of the significant commercial financing disclosure obligations that will be imposed in New York.

Following the December 2020 enactment of the CFDL and its amendment in early 2021,[1] the draft regulations (i) provide detailed definitions of the key terms used in the CFDL,[2] so as to standardize the disclosures, (ii) identify the duties of financers and brokers offering commercial financing,[3] (iii) define how the $2.5 million threshold is to be calculated,[4] and (iv) explain how providers,[5] should calculate the finance charge and the annual percentage rate, while providing certain “allowed tolerances.” [6]

The draft regulations of the CFDL set forth disclosure formatting requirements for the following types of commercial financing: (i) sale-based financing, which encompasses merchant cash advances; (ii) closed-end financing; (iii) open-end commercial financing; (vi) factoring transactions; (v) lease financing; (vi) general asset based lending; and (vii) all other commercial financing transactions.[7] Each of these seven forms of commercial financing has its own specific disclosure formatting,[8] and each also must adhere to the general formatting requirements of the CFDL.[9] Additionally, at the time of extending the specific commercial financing offer to a recipient, the offer also must disclose the annual percentage rate.[10]

As part of the general formatting requirements, at the bottom of the disclosure, below any other information required by the CFDL, on a signature line for the “Recipient Signature” and the “Date,” “the provider shall print the following statement: “New York law requires this information to be provided to you to help you make an informed decision. By signing below, you are confirming that you received their information.”[11] The general formatting requirements of the CFDL distinguish this disclosure based on the term of the transaction being one year or less, which terms must be expressed in days, whereas a term of greater that one year must be disclosed in units of years and months, with any remaining days expressed as a portion of a month to the nearest two decimal points.[12] Moreover, the disclosure must be presented to the recipient as a document that is separate from any other contract agreement or other disclosure document provided to the recipient, but may be mailed or transmitted in a package that contains other documents.[13] The General formatting requirements also set out the fonts that must be used.[14]

The CFDL provides that “for purposes of determining whether a financing is a commercial financing, the provider may rely on any statement of intended purpose by the recipient. [15 Further, the regulations provide that term “commercial financing” “does not include any transaction in which a financer provides a disclosure required by the Truth in Lending Act that is compliant with the Truth and Lending Act.”[16]

Moreover, “when a provider provides a disclosure (either directly to the recipient or to a broker) under sections 600.06 through 600.16 of this Part [the CFDL], and the amount financed is greater than the recipient funds, the provider shall also provide a disclosure entitled “Funding You Will Receive.”[17] This disclosure is intended “to demonstrate to the recipient that the deductions from the funding provided will result in the amount disclosed as the “Funding You Will Receive.”[18] This “Funding You Will Receive” disclosure must: (i) be substantially similar in form to the example disclosure provided in subdivision (b) of section 600.17,[19] (ii) be in a document separate from the disclosures required by sections 600.06 through 600.16, and (iii) appear immediately following the disclosures required by sections 600.06 through 600.16.[20]

Signatures also are required, as the CFDL provides that “pursuant to Financial Services Law section 809, prior to consummating a commercial financing, a financer shall obtain a copy of the disclosures made pursuant to the CFDL that are signed by the recipient,” if the recipient is a natural person, or a person authorized to sign on behalf of the legal entity when the recipient is not a natural person. [21] For certain commercial credit plans, including for open-end credit plans, asset based lending transactions, factoring transactions, and lease financing, the CFDL sets out the manner for determining whether the amount of a commercial financing offer is equal to or less than $2,500,000.[22]

Further, the draft regulations to the CFDL also set out certain additional duties of financers and brokers of a commercial financing transaction, including, (i) that the financer must provide a copy of a compliant disclosure to a broker, whenever a financer provides a broker with certain commercial financing information, and (ii) maintain, for at least four years following the date of disclosure, a copy of each disclosure that it generates, and (iii) a copy of the evidence of transmission of the compliant disclosures provided by the broker to the financer.[23] A broker is prohibited from providing a recipient with a specific amount, rate, or price quote for commercial financing based upon information from, or about, the recipient, until the broker transmits the disclosures required by subdivision section 600.21(a)(1), unaltered, to the recipient.[24] The broker also must provide evidence of transmission, including the timing of the transmission, of the disclosure to the financer.[25] The broker, however, is not required to evaluate the accuracy of the disclosures provided by the financer, and the CFDL does not create any liability for the broker if the financer’s disclosures are not in compliance with CFDL.[26] Beginning in 2023, on or before the 30th day of April of each year, each provider, subject to the CFDL during the preceding calendar year, that has used the opt-in method of calculating the estimated annual percentage rate, as described in section 600.09 of the CFDL must report to the superintendent of the NYDFS in a statement subscribed and affirmed as true under penalties of perjury, the information requested by the superintendent covering the period of the preceding calendar year.[27]

Among others, the CFDL exempts federally chartered banks, state-chartered banks, savings banks, credit unions, trust companies, and industrial loan companies.[28] Given their federal chartered, the CFDL would not apply to any federally chartered banks, notwithstanding this exemption. Also exempt is (i) a commercial financing transaction secured by real property, (ii) a person or provider who makes no more than five commercial financing transactions in New York in a 12-month period, and (iii) a commercial financing transaction in which the recipient of the financing is an automobile dealer, a vehicle rental company, or an affiliate of either.[29] Although self-evident, a commercial financing transaction in an amount over $2,500,000 is also expressly exempt.[30]

It is too early to tell if other states will follow the lead of California and now New York, and enact a law that requires disclosures to small business, but once these two states have acted to adopt regulations governing commercial financing to small businesses, the ground certainly has been broken, and other states likely will follow.[31] Let us know if you want us to follow the NYDFS rulemaking, or if other states move in this direction, and report to you on such action.

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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[1] On December 24, 2020, New York enacted S.B. 5470B imposing a set of TILA-like disclosure requirements for small businesses, and then in February 2021 enacted S.B. 898 amending and broadening last year’s law to, among other things, increase the commercial financing covered in the CFDL from $500,000 to $2.5 million.

[2] See New York Code, Rules, and Regulations (“NYCRR”) § 600.01. Less than a handful of states impose a licensing obligation to make commercial loans of any dollar amount, with New York licensing only those entities making commercial loans of $50,000 or less, with an annual interest rate in excess of 16%, but the disclosure obligations apply to lenders providing commercial financing of $2,500,000 or less.

[3] See id. § 600.21.

[4] See id. § 600.01(d).

[5] A “provider” refers to “a financer who communicates a specific amount, rate or price, in connection with a commercial financing, either directly to a recipient, or to a broker with the expectation that the information will be shared with a recipient. See N.Y. Fin. Services Law § 801(h), and NYCRR § 600.01(a)(24). A “recipient” is the “person who applies for commercial financing and is made a specific offer of commercial financing by a provider.” A person acting as a broker cannot be a recipient.” See id. § 801(i) and NYCRR § 600.01(a)(25).

[6] See NYCRR §§ 600.03, 600.04, and 600.05, respectively.

[7] See id. §§ 600.06, 600.10, 600.11, 600.12, 600.14, 600.15, and 600.16, respectively.

[8] See id.

[9] See id. § 600.05.

[10] NYCRR § 600.03(a).

[11] See Id. § 600.05(b).

[12] See Id. § 600.05(c)(1) and (c)(2).

[13] See id. § 600.05(d).

[14] See id. § 600.05(e).

[15] N.Y. Fin. Services Law § 801(b).

[16] NYCRR§ 600.01(a)(10).

[17] Id. § 600.17(a).

[18] Id. § 600.17(a)(4).

[19] See id. § 600.17 (a).

[20] See id. § 600.17(c)(1) and (c)(2).

[21] See id. § 600.18(a).

[22] See id. § 600.19.

[23] See id. § 600.21 (a)(1), (a)(2), and (a)(3).

[24] Id. § 600.21 (b).

[25] Id.

[26] Id. § 600.21(c)(1), § 600.21(c)(2).

[27] Id. § 600.22 (a).

[28] N.Y. Fin. Services Law § 802(a), as defined in N.Y. Fin. Services Law § 801(f).

[29] See id. §§ 802(d), 802(f), and 802(h).

[30] See id. § 802(g).

[31] Immediately prior to the publication of this alert, on October 8, 2021, the CFPB issued a notice of proposed rulemaking to implement Section 1071 of the Dodd-Frank Act, which would require financial institutions to collect and report on credit applications made by small businesses and by women or minority owned businesses.

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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.

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