On July 23, 2020, in an effort to increase transparency in commercial financings so borrowers may make more informed decisions, the New York State legislature passed a bill, S5470B, which currently awaits the Governor's signature. The bill requires certain commercial financing providers to disclose to recipientsM1 critical information about the amount, pricing, and terms of specific commercial financings, upon making the offers. This information must be disclosed in uniform formatting, to be determined by the New York State Department of Financial Services (NYDFS), which is tasked with issuing regulations to implement the bill.
While many federal and state laws require creditors to disclose to borrowers the cost of borrowing money, these laws generally apply to loans originated for personal, family, or household purposes and do not extend to commercial loans. States are increasingly focused on commercial financing and have concentrated on requiring the disclosure of key financing terms in a standard format. Specifically, state regulators have expressed concern that small businesses that may struggle to access bank loans, especially during an economic downturn, are particularly vulnerable to opaque lending practices. New York is the second state to require disclosures of key terms in certain commercial financings, after California enacted a similar bill in September of 2018.2
Scope of the Bill
S5470B would add a new Article 8, Commercial Financing, to New York's Financial Services Law. Although the bill is intended to benefit small businesses, the disclosure obligations are triggered not by the size of the recipient, but rather by the provider and the type and amount of financing.
In particular, the disclosure obligations apply to a “provider,” defined as a person or entity that extends a specific offer of commercial financing to a recipient. “Provider” is defined to include a person or entity who solicits and presents specific commercial financing offers on behalf of a third party. However, extending a specific offer or providing disclosures for commercial financing will not necessarily be construed under the bill to mean that a provider is originating commercial financing.
The bill excludes the following from the definition of providers:
- A person or entity acting in its capacity as a technology services provider, such as by providing software, to an entity exempt under the bill to support that exempt entity's commercial financing program, provided that such technology services provider has no interest, or arrangement to purchase any interest, in the commercial financing extended by the exempt entity through such program;
- Any person, entity, or provider who makes five or fewer commercial financing transactions in New York within 12 months;
- Financial institutions, including state and federally chartered banks, savings and loan associations, trust companies, industrial loan companies, and credit unions; and
- Lenders regulated under the federal Farm Credit Act.
Type and Amount of Financing
The bill covers five categories of commercial financing: (1) sales-based financing; (2) closed-end commercial financing; (3) open-end commercial financing; (4) factoring transactions; and (5) other forms of financing that do not fit into any of the previous four categories, but that otherwise meet the bill's definition of “commercial financing,” which is limited to financing that the recipient does not intend to use for personal, family, or household purposes.
Certain commercial financing offers are exempt from the bill's requirements, including those secured by real property, certain leases, and individual commercial financing transactions above $500,000.
If the bill is enacted, providers will be required to provide recipients with certain disclosures at the time the offer is extended, and the recipient must sign the disclosures before proceeding with the application. The disclosure requirements vary based on the five categories of commercial financing listed above and may include the following:
- Total amount of financing and the disbursement amount, if different from the financing amount, after any fees deducted or withheld at disbursement;
- Finance charge;
- Annual percentage rate (APR) or estimated APR, calculated by reference to the Truth in Lending Act (TILA), implemented by Regulation Z;
- Total repayment amount;
- Term or estimated term;
- Payment amounts or estimated payment amounts and frequency;
- Other potential fees and charges;
- Prepayment penalties; and
- Description of collateral requirements or security interests.
Providers may make additional disclosures, but those must be segregated from the mandatory disclosures. If a provider is disclosing additional metrics of financing cost in the commercial financing application process, use of the terms “rate” and “interest” is restricted. Any extra metrics cannot be presented as a “rate,” unless describing the annual interest rate or APR. “Interest,” when used to describe a percentage rate, cannot be used unless describing APRs, such as the annual interest rate.
Enforcement and Effective Date
While the bill assigns civil penalties of up to $2,000 per violation or up to $10,000 for each willful violation, the NYDFS may order additional penalties, including but not limited to, injunctions on behalf of affected borrowers. The NYDFS is also authorized to issue related rules, including regarding enforcement, disclosure formatting that will allow recipients to easily compare their financing options, and the calculation of metrics required to be disclosed. The last category is of primary importance, as accurate disclosures will depend upon precise calculation guidance from the NYDFS.
If signed into law, the bill will be effective on the 180th day after the date of enactment. However, the bill does not address whether the effective date may be adjusted based on when the NYDFS finalizes its implementing regulations.
S5470B indicates a concern among regulators regarding transparency in lending and may even signal a trend of extending consumer-style transparency (e.g., TILA-like disclosures) to commercial lending.
1 A recipient is defined in the bill as a person or entity “who applies for commercial financing and is made a specific offer of commercial financing by a provider.” See Section 801(i).
2 For more information on California's law, please see our Client Alert at https://media2.mofo.com/documents/181008-commercial-financing-disclosure.pdf.
Originally published 29 July, 2020
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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