NYDFS issues pre-proposed regulation to implement Commercial Finance Disclosure Law

State Issues State Regulators NYDFS Small Business Lending Merchant Cash Advance Disclosures Commercial Finance Bank Regulatory

On September 21, NYDFS Acting Superintendent Adrienne A. Harris announced a pre-proposed regulation to implement New York’s Commercial Finance Disclosure Law (CFDL) (covered by InfoBytes here), which was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date to January 1, 2022. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which includes persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients at the time a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.

The CFDL and the pre-proposed implementing regulation are applicable to persons or entities who (i) extend a specific offer of commercial financing to a recipient (i.e., a person who applies for commercial financing and is made a specific offer of commercial financing); (ii) solicit and present specific offers of commercial financing on behalf of a third party; or (iii) provide or will provide commercial financing to recipients and communicate a specific amount, rate or price, in connection with the commercial financing, either directly to a recipient, or to a broker with the expectation that the information will be shared with a recipient.

The term “commercial financing” is defined broadly to include:

• Open-End Financing
• Closed-End Financing
• Sales-Based Financing (i.e., merchant cash advance)
  • Defined to mean any transaction repaid over time as a percentage of sales or revenue, in which the payment amount may vary by sales or revenue volume, including any financing with a sales or revenue based true-up mechanism.
• Accounts Receivable Purchase Transactions, including Factoring
  • Factoring is defined to mean any accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods or services that have been supplied or rendered, but for which payment has not yet been made.
• Asset-Based Lending
  • Defined to mean a transaction in which advances are made from time to time contingent upon a recipient forwarding payments received from one or more third parties for goods or services the recipient has supplied or rendered to such third party.
• Lease Financing
  • Defined to mean providing a lease for goods that includes a purchase option that creates a security interest in the goods leased, including a “finance lease” as defined in the UCC.
• Any other form of financing for which proceeds are not primarily intended for consumer-purpose.

Notwithstanding, the pre-proposed regulation provides that commercial financing does not encompass any transaction in which a financer provides a disclosure required by the Truth in Lending Act. The following entities and transactions are exempt from the CFDL: (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) technology service providers; (v) certain lease transactions under the New York Uniform Commercial Code; (vi) lenders who make no more than five applicable transactions in New York in a 12-month period; (vii) individual commercial financing transactions in an amount over $2.5 million; and (viii) commercial financing transactions involving certain vehicle dealers.

Among other things, the pre-proposed regulation:

• Includes definitions for terms used in the CFDL and the pre-proposed regulation, including definitions of “finance charge” under the different covered transactions (e.g., commercial financing transactions generally, account receivable purchase transactions that are not factoring transactions, factoring transactions, lease financing transactions).  
• Explains how providers should calculate the annual percentage rate and outlines allowed tolerances. 
• Outlines formatting requirements for disclosures for the following types of financing: (i) sales-based financing (including merchant cash advances); (ii) closed-end financing; (iii) open-end financing; (iv) factoring transaction financing; (v) lease financing; (vi) general asset-based financing; and (vii) all other commercial financing transactions.
• Provides disclosure requirements for instances where the amount financed is greater than the recipient funds, which includes a disclosure entitled “Funding You Will Receive.”
• Provides that, consistent with the CFDL, a provider must give the required disclosures to a recipient at the time of extending a specific offer for commercial financing. The pre-proposed regulation defines “at the time of extending a specific offer” to mean (i) any time a specific periodic or irregular payment amount, rate or price in connection with commercial financing is quoted in writing to a recipient, based upon information from, or about, the recipient; and (ii) any subsequent time when the terms of an existing consummated commercial financing contract are changed, prior to the recipient agreeing to the changes, if the resulting changes would increase the finance charge (certain alternative parameters apply with respect to open-end credit plans). The pre-proposed regulation also notes that where a provider allows a recipient to select from multiple offer options or customize a financing offer, the provider need only provide the disclosure(s) for the specific offer that the recipient elects to pursue.
• Provides disclosure signature requirements, which may be electronic (prior to consummating a commercial financing, a financer must obtain a copy of the disclosures made pursuant to the CFDL that are signed by the recipient).
• Describes how the CFDL’s $2.5 million disclosure threshold is calculated.  
• Outlines requirements for commercial financings that offer multiple payment options.
• Specifies certain duties of financers and brokers involved in commercial financing, including record retention requirements (four years).  
• Details the reporting process for which certain providers calculating estimated annual percentage rates will report data to the superintendent relating to “the estimated annual percentage rates disclosed to the recipient and actual retrospective annual percentage rates of completed transactions” in order to facilitate accurate estimates for future transactions.  

Outreach comments on the pre-proposed regulation are due by October 1. After NYDFS completes this preliminary phase, NYDFS will make a formal proposed regulation. Comments on the formal proposed regulation will be due within 60 days of publication in the State Register. NYDFS expects to have a final regulation in place by January 1, 2022, which is the effective date set forth in the underlying law.