New York may soon be joining California in requiring consumer-like disclosures on commercial financing transactions. On July 23, 2020, the New York State legislature passed SB 5470 (S.5470/A.10118-A), which closely follows California’s SB 1235 in requiring application-stage disclosures of certain information on commercial financing transactions of $500,000 or less. Despite some press reports suggesting that the bill is law, it has not yet been (and may not be) signed into law by the Governor.
Like California’s SB 1235, the New York bill would require key terms of commercial financing transactions, such as the amount financed and APR, to be disclosed at the time a creditor or broker makes a specific offer of financing. The disclosure must be signed by the applicant before the transaction can proceed. The bill applies broadly to commercial financing transactions, including but not limited to closed- and open-end loans, factoring, and “sales-based financing,” which appears to include merchant cash advances.
There are numerous exemptions, including for banks, trust companies, industrial loan companies, savings and loan associations, savings banks, credit unions, farm credit lenders, transactions secured by real property, and anyone who makes five or fewer commercial financing transactions in New York in a 12-month period. However, while service providers to exempt entities also are generally exempt, the requirements do apply to companies that provide services to exempt entities and later purchase interests in the commercial financings (i.e., marketplace lenders and others using bank partnerships).
Like its California predecessor, S.5470 in its present form will be extremely difficult for some providers of commercial financing to comply with, and it appears likely to create substantial confusion for companies receiving the disclosures. The required APR disclosures, for example, will be difficult for financing that has frequent and variable payments or remittances, because there are no widely available tools capable of making the calculations without crashing. The open-end disclosures ignore the traditional open-end disclosure regime under TILA and instead mandate use of a disclosure making the extraordinary assumption that the entire credit line will be drawn down at once, and then require calculating the APR as if the credit were closed-end. S.5470 does allow some assumptions to be used for calculating “APRs” on merchant cash advances, but it doesn’t allow all necessary assumptions and it prohibits adding language to explain critical things such as what assumptions are being made.
The bill does not include a private right of action, but is enforceable and subject to rulemaking by the New York State Department of Financial Services. Penalties are severe: up to $2,000 per violation, and up to $10,000 per violation if willful. In addition, the Department may seek unspecified “additional relief” for knowing violations, including “but not limited to” injunctive relief. If signed into law, the bill would take effect 180 days after being signed.
Why It Matters
While clearly well-intentioned, S.5470 in its current form would create compliance nightmares for many providers of commercial financing, as well as confusion for financing recipients on a wide range of issues. With only 180 days to comply if the bill is signed into law, providers of commercial financing will need to work expeditiously to avoid substantial potential liability.