Small business financers and brokers ("providers") active in New York are officially on notice to finalize their preparations to comply with New York's Commercial Finance Disclosure Law ("CFDL") by August 1, 2023, the new effective date provided in final administrative regulations just issued on February 1 by the New York Department of Financial Services ("NYDFS"). The six-month grace period between rule adoption and effect honors the NYDFS's prior messaging reassuring providers that they would be given time to finalize their processes to implement the new disclosure requirements before enforcement commences. In addition to the new effective date, the final rules include important changes regarding the New York nexus required to trigger the CFDL, exemptions for depository institution subsidiaries, and the content of required disclosures.
As Mayer Brown previously reported, New York's CFDL was enacted in 2020 and then quickly amended to broaden its scope to a wide range of commercial financing transactions in amounts of $2.5 million or less-making it the most broadly applicable law among similar laws enacted by three other states: California, Utah and Virginia. Since then, the NYDFS has issued multiple versions of pre-proposed and proposed regulations and solicited comments from stakeholders before adopting these final rules on February 1. We discuss some of the final rules' most significant changes below.
Providers subject to the CFDL will need to start providing NYDFS-prescribed disclosures to recipients of qualifying commercial financing beginning six months after the publication of the final rules in the New York State Register. The final rules were published in the state register on February 1, 2023, making the presumptive effective date of the CFDL (and rules thereunder) August 1, 2023. Thus, August 1, 2023, is the date by which providers that are subject to the law must begin providing disclosures to recipients of qualifying offers of commercial financing.
Significant Changes in the Final Rules
In addition to the effective date, providers of commercial financing that are subject to the CFDL should take note of the substantive changes that appear in the final rules, including:
- Exemption for Majority-Owned Subsidiaries of Financial Institutions: Entities of which a majority of the voting power of voting equity securities or equity interest is owned, directly or indirectly, by a financial institution will be exempt from the CFDL, pursuant to a new broad definition of "financial institution" adopted with the final rules.1 This is a welcome development for depository institution subsidiaries and a significant departure from California's commercial financial disclosure law, given that the Department of Financial Protection and Innovation declined to interpret the California law to exempt subsidiaries of depositories.
- New York Nexus: The final rules significantly narrow the geographical footprint that a transaction must have to trigger the CFDL's applicability. Whereas the NYDFS's proposed rules provided that a transaction was subject to the CFDL if the recipient or provider is principally directed or managed from New York, the final rules limit the CFDL's scope to transactions where the recipient is principally directed or managed from New York (or is a legal resident of New York if the recipient is a natural person). This aligns with the scope of California's law. Both states provide a safe harbor allowing the provider to rely on the business address provided by the recipient in its application for financing.
- Servicing Transfer Notice: The final rules eliminate a section of the proposed rules that would have imposed disclosure requirements on the transferors and transferees of servicing of any commercial financing, replacing it with a new express right for a recipient to pay the original obligee of a transaction until the recipient receives an authenticated notification that the obligation has been assigned to another party.
- Broker Disclosure: The final rules adopt a new requirement that, for any commercial financing that "involves" a broker, the provider must inform the recipient in writing of "how, and by whom" the broker will be compensated, replacing a broker-specific row that previously was required to appear in the prescribed disclosure forms.
- Finance Charge Calculation: The final rules provide that the finance charge on a transaction should be calculated so as to exclude "avoidable fees and charges that are not imposed as an incident of credit." The effect of this change is not immediately clear given that federal Regulation Z (which the CFDL incorporates for this purpose) already excludes certain "avoidable" fees from the finance charge calculation-such as late fees, NSF fees, and, subject to specific disclosure requirements, certain voluntary credit insurance, debt cancellation, or debt suspension charges.
- Miscellaneous Other Changes: Among other changes, the final rules clarify electronic signature requirements, make certain amendments to disclosure formatting and content/wording requirements, and eliminate a requirement that providers of open-end financing present multiple disclosures where financing terms differ depending on the recipient's selection of products.
The foregoing is just a sampling of some of the more significant changes that appear in the final rules. Providers should review the final rules in full to understand the provisions discussed above and all of the changes that may be relevant to their business.
As for the other states that have enacted their own similar laws, California's own commercial financing disclosure law just took effect on December 9, while Utah's law took effect on January 1, and Virginia's law took effect on November 1. New York's CFDL will thus be the last such law to take effect among the commercial financing disclosure laws that have been enacted to date. We expect other states to consider similar laws in 2023.
With the adoption of the final rules, providers of commercial financing-including closed- and open-end loans, merchant cash advances, finance leases, and factoring transactions, at minimum-should finalize their procedures to ensure that they can deliver final rule-compliant disclosures to New York recipients starting on August 1 of this year.
1 The CFDL expressly exempts "financial institutions" from the scope of the law. N.Y. Fin. Serv. § 802(a). Financial institutions are defined in the law to mean "any of the following: (i) a bank, trust company, or industrial loan company doing business under the authority of, or in accordance with, a license, certificate or charter issued by the United States, this state or any other state, district, territory, or commonwealth of the United States that is authorized to transact business in this state; (ii) a federally chartered savings and loan association, federal savings bank or federal credit union that is authorized to transact business in this state; or (iii) a savings and loan association, savings bank or credit union organized under the laws of this or any other state that is authorized to transact business in this state." Id. § 801(f).
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.