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Financial Services Law Insights and Observations

New York legislature introduces bills to protect small businesses, regulate merchant cash advance transactions

State Issues Small Business Lending State Legislation Consumer Finance Disclosures Commercial Finance APR Merchant Cash Advance

State Issues

On May 1, S5470 was introduced in the New York State Senate and is now sitting with the Committee on Banks, which would establish consumer-style disclosure requirements for certain commercial transactions. Similar to the legislation enacted in California last September, previously covered in InfoBytes here, the bill requires financing entities subject to the law to disclose in each commercial financing transaction “the total cost of the financing, expressed as a dollar cost, including any and all fees, expenses and charges that are to be paid by the recipient and that cannot be avoided by the recipient, including any interest expense.” For open and closed-end commercial financing transactions, the bill requires that the disclosures must include, among other things, (i) the amount financed or the maximum credit line; (ii) the total cost of the financing; (iii) the annual percentage rate; (iv) payment amounts; (v) a description of all other potential fees and charges; and (vi) prepayment charges. The bill sets out analogous, but separate, disclosure requirements for accounts receivable purchase transactions, such as merchant cash advance and factoring transactions.

Importantly, the bill does not apply to (i) financial institutions (defined as a chartered or licensed bank, trust company, industrial loan company, savings and loan association, or federal credit union, authorized to do business in New York); (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) a technology service provider; and (v) a lender who makes no more than one applicable transaction in New York in a 12-month period or any person that makes commercial financing transactions in New York that are incidental to the lender’s business in a 12-month period.

Additionally, the New York legislature is also considering a number of other bills that would affect commercial financing transactions:

  • A03637, would amend the state’s banking law to deem asset-based lending transactions (defined as, “a transaction in which advances are made which are contingent on the recipient forwarding payments received from one or more third parties for goods such recipient has supplied or services such recipient has rendered to that third party or parties.”) to be loans for all purposes. On its face, this legislation would subject typical merchant cash advance and factoring transactions, which New York courts have in many recent court cases deemed to be non-loan transactions, to lending law restrictions, which would include potential licensure requirements and usury restrictions.
  • A03636, would amend the state’s business law to prohibit the inclusion of a confession of judgment (COJ) in a contract or agreement for a financial product or service provided by an entity regulated by the New York Department of Financial Services for the purpose of consumer or investor protection, which is specifically defined by the bill as: (i) any product or service for which registration or licensing is required or for which the offeror or provider is required to be registered or licensed by state law; (ii) any product or service as to which provisions for consumer or investor protection are specifically set forth for such product or service by state statute or regulation; and (iii) securities, commodities and real property subject to the provisions of article 23A of the general business law. COJs are contractual clauses in which a debtor waives in advance his or her right to be notified of a court hearing, or to present his or her side of the case, which are prohibited under federal law for consumer contracts by the FTC Credit Practices Rule (16 C.F.R. pt. 444). In conjunction with potential licensure required under AO3637 above, the passage of both pieces of legislation in New York could result in the prohibition of COJ clauses in merchant cash advance agreements, a common feature of such agreements and generally permitted under New York law.
  • A03638, would extend the majority of the state’s consumer protections with respect to loans made to small businesses (defined by the bill as, a “small business shall be deemed to be one which is resident in this state, independently owned and operated, not dominant in its field and employs one hundred or less persons.”). Specifically, the bill would amend the state’s general obligations law to extend all rights and privileges granted under the title to small businesses and would also amend Section 173 and Section 380-e of the state’s banking law to extend all the rights and privileges granted by the section to small businesses.

Relatedly, the FTC recently held a forum on small business marketplace lending practices, see detailed InfoBytes coverage on the forum here.

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