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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.
On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a second draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, and last September, California initiated the formal rulemaking process with the Office of Administrative Law (covered by InfoBytes here and here). The second modifications to the proposed regulations follow a consideration of public comments received on the initial proposed text, as well as additional comments received on modifications made to the proposed text in April. Among other things, the proposed modifications (i) amend several terms including “approved advance limit,” “approved credit limit,” and “amount financed”; (ii) clarify the definition of “at the time of extending a specific commercial financing offer”; (iii) replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate as one of the benchmark rate options; (iv) add several terms including “broker,” “recipient funds,” “average monthly cost,” “estimated monthly cost,” and “prepaid finance charge”; (v) provide that for disclosure purposes, “a provider shall assume that there are 30 days in every month and 360 days in a year” and specify that the annual percentage rate must be expressed to the nearest ten basis points; (vi) amend certain disclosure requirements and thresholds; (vii) clarify methods for estimating monthly sales, income, or receipt projections for sales-based financing; (viii) amend duties and requirements for financers and brokers; and (ix) clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of funding a recipient will receive.
Comments on the second modifications must be received by August 24.
On June 14, the FTC announced additional charges against two New York-based small-business financing companies and a related entity and individuals (collectively, “defendants”). Last June, the FTC filed a complaint against the defendants for allegedly violating the FTC Act and engaging in deceptive and unfair practices by, among other things, misrepresenting the terms of their merchant cash advances, using unfair collection practices, and making unauthorized withdrawals from consumers’ accounts (covered by InfoBytes here). The amended complaint alleges that the defendants also violated the Gramm-Leach-Bliley Act’s prohibition on using false statements to obtain consumers’ financial information, including bank account numbers, log-in credentials, and the identity of authorized signers, in order “to withdraw more than the specified amount from consumers’ bank accounts.” Additionally, the FTC’s press release states that the defendants “engaged in wanton and egregious behavior, including laughing at consumer requests for refunds from [the defendants’] unauthorized withdrawals from customer bank accounts; abusing the legal system to seize the business and personal assets of their customers; and threatening to break their customers’ jaws or falsely accusing them of child molestation during collection calls.” The amended complaint seeks a permanent injunction against the defendants, along with civil money penalties and monetary relief including “rescission or reformation of contracts, the refund of monies paid, and other equitable relief.”
On April 22, the FTC announced a settlement with two New York-based merchant cash advance providers and two company executives (collectively, “defendants”) for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. As previously covered by InfoBytes, the FTC filed a complaint against the defendants last year claiming, among other things, that the defendants (i) falsely advertised that MCAs do not require collateral or personal guarantees, but when consumers defaulted on their financing agreements, the defendants frequently filed lawsuits against them, including against individual business owners who provided personal guarantees, to collect the unpaid amount; (ii) misrepresented the amount of total financing in the contract that consumers would receive by withholding fees that are deducted from the promised funds; and (iii) made unfair, unauthorized withdrawals from customers’ bank accounts in excess of consumers’ authorization without express informed consent, while continuing to debit customers’ bank accounts after the MCAs were fully repaid.
Under the terms of the stipulated order, which was approved by the court on May 5, the defendants are required to pay more than $9.8 million to the FTC to go towards redress to affected customers. The defendants are also permanently prohibited from making misleading statements to consumers about the terms of their financing or making withdrawals from consumers’ bank accounts without first receiving their express informed consent, and are required to clearly and conspicuously disclose any financing fees as well as the actual amount consumers will receive after the fees are assessed. Further, the defendants must establish a process to monitor any marketers or funding companies that work on their behalf to ensure, among other things, that such companies abide by the terms of the settlement.
On February 16, the New York governor signed S898, which amends the state’s recently enacted commercial financing disclosure law to expand its coverage and delay the effective date. As previously covered by InfoBytes, in December 2020, the governor signed S5470, which establishes consumer-style disclosure requirements for certain commercial transactions under $500,000. The law exempts (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; and (v) lenders who make no more than five applicable transactions in New York in a 12-month period. The law is currently set to take effect on June 21, which is 180 days after the December 23, 2020 enactment. As noted by the sponsor memo, prior to signing the law, the governor “expressed concerns about the reach of the bill and the time needed to implement the required rulemaking.” After enactment, the legislature introduced S898, which contains the “negotiated change to the underlying chapter [to] address those concerns.”
S898 increases the coverage of the consumer-style disclosure requirements to commercial transactions under $2.5 million and creates a new exemption for certain vehicle dealers. The law also extends the effective date to January 1, 2022.
Recently, FTC staff submitted a comment letter in response to the CFPB’s request for information (RFI) seeking input on ways to provide additional clarity under the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. As previously covered by InfoBytes, the CFPB issued the RFI last July requesting comments on ways to create a regulatory environment that expands credit access and ensures consumers and communities are protected from discrimination with respect to any aspect of a credit transaction. Included in the RFI was a request for input on whether “the Bureau should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B.” Citing to legislative history, the FTC noted that Regulation B explicitly incorporates disparate impact, and stressed that “[a]rticulating a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination could be difficult and could risk being both over and under inclusive.” The FTC suggested that if the Bureau chooses to provide additional detail regarding its approach to disparate impact analysis, a disclaimer should be included that such information is not intended to “bless” any violations of ECOA and Regulation B, but is rather “intended to provide examples of how the agency might approach a fair lending matter.”
In response to the Bureau’s request for information about ways it might support efforts to meet the credit needs of small businesses, the FTC highlighted recent enforcement actions involving small businesses, including actions involving deceptively advertised financial products and unfair billing and collection practices, particularly with respect to merchant cash advances. The FTC also urged the Bureau to remind entities offering credit to small businesses that ECOA and Regulation B apply and that entities cannot avoid application of these statutes based solely on how they characterize a transaction or the benefits they claim to provide. The FTC further stressed that collecting small business lending demographic data could aid in enforcement efforts, as would encouraging small businesses to report misconduct and refer complaints to the FTC and the states. In addition, the FTC highlighted the importance of educating small businesses about different products and terms, as well as potential law violations, which could assist small businesses in comparing products resulting in less expensive financing options.
On January 6, a member of the New York Senate introduced S1061, which would update the New York Banking Law (the “Law”) to require a license for persons or entities engaging in the business of making or soliciting a “commercial financing product” in New York. The legislation defines a commercial financing product as “any advance of funds to a commercial or business enterprise made for the purpose of assisting the business with its capital needs,” including (i) loans made to a commercial enterprise of $500,000 or less; (ii) asset-based financing in the amount of $500,000 or less; and (iii) leasing transactions in the amount of $500,000 or less.
“Making or soliciting” includes:
- Providing commercial financing products to small businesses;
- Marketing commercial financing products for providers of commercial financing products;
- Receiving compensation from a provider of a commercial financing product in exchange for a referral; and
- An entity that partners with a federal or state banking organization originator and the entity: (i) acquires a participation interest in the commercial financing product, if the entity either (a) receives compensation from the originator or (b) services the commercial financing product; or (ii) provides indemnity or loss protection to the originator for losses the originator may incur based on the performance of the commercial financing product.
The legislation would exempt banking organizations as defined by the Law (all banks, trust companies, private bankers, savings banks, safe deposit companies, savings and loan associations, credit unions and investment companies), any lender who makes or solicits five or fewer commercial financing products within a 12-month period, and check casher licensees, among others. Notably, the legislation does not currently contemplate any changes to existing Section 340, Article 9 of the Law, which generally requires licensure to originate commercial-purpose loans in New York of $50,000 or less with a rate above 16 percent.
On December 23, the New York governor signed S5470, which establishes consumer-style disclosure requirements for certain commercial transactions. For open and closed-end commercial financing transactions, the legislation requires that the disclosures 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. Violations are subject to a civil penalty no greater than $2,000 per violation. Notably, the legislation exempts (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) lenders who make no more than five applicable transactions in New York in a 12-month period; and (vi) any individual commercial financing transaction over $500,000. The legislation is effective 180 days after enactment.
As previously covered by InfoBytes, California is currently finalizing proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018), which was enacted in September 2018. The California Department of Financial Protection and Innovation previously signaled its intent to finalize the regulations by January 2021.
On December 8, the New Jersey attorney general announced an action against a merchant cash advance provider, its parent company, and six other associated entities (collectively, “defendants”) alleging the defendants violated the New Jersey Consumer Fraud Act (CFA) and the General Advertising Regulations through the marketing and transacting of their merchant cash advance (MCA) product. (The defendants are currently facing similar allegations from the FTC, covered by InfoBytes here.) According to the complaint, the defendants engaged in “unconscionable business practices, deceived consumers, and/or made false or misleading statements” by marketing and advertising an MCA product, which was allegedly structured as a short-term, high-cost loan. New Jersey argues that the MCA contracts contain terms that “eliminate the distinctions between loans (with fixed regular payments over a defined term) and legitimate MCAs (with variable payments tied to actual receivables and an undefined term).” New Jersey asserts that traditionally, MCA’s do not have a finite repayment term and thus, the fixed repayment period was the equivalent of a loan to its customers. Moreover, the agreements’ “fixed daily payments extracted from Consumers’ accounts have little to no relation to the businesses’ receivables.” Additionally, New Jersey asserts that the defendants allegedly engaged in unconscionable collection practices, including requiring consumers to sign, in their individual capacity and on behalf of their business, an Affidavit of Confessions of Judgment to obtain the MCA, which would allow judgment against both the Consumer’s business assets and personal assets in the event of a purported default. New Jersey is seeking a permanent injunction, civil penalties, restitution, and disgorgement.
Notably, the New Jersey complaint follows a recent enforcement action against a merchant cash advance provider in California (covered by InfoBytes here), where the California Department of Financial Protection and Innovation (DFPI) found, in apparent contrast to the New Jersey action, that MCA agreements with an indefinite repayment period, among other things, operate as a loan equivalent by, placing the “risk of repayment on the merchant by leaving the repayment period open until fully repaid (with fees and interest).”
On November 12, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with a commercial financing company, resolving allegations that the company’s merchant cash advance (MCA) product was structured as a lending transaction and offered to California merchants without first obtaining a license as required by the California Financing Law (CFL). According to the DFPI, the MCA agreements in question provide the company with “broad authority to declare ‘default’ on its merchants and when doing so may use extensive recourse allowed under its [a]greement,” including in the event of insufficient funds requiring the full funding amount to be repaid, which DFPI argues, “does not put the risk of the ‘purchase’ of receivables on [the financing company]’s shoulders, but rather the risk of repayment on the merchant’s shoulders, just like a loan.” Moreover, the agreements provide for an indefinite repayment period, placing the “risk of repayment on the merchant by leaving the repayment period open until fully repaid (with fees and interest).” The consent order distinguishes between outstanding and future receivables, noting that under California law, commercial financiers purchasing a share of a merchant’s outstanding receivables without recourse (e.g., factoring), is generally not considered lending, but there is no similar recognition by the legislature or courts with respect to future receivables.
The consent order requires the company to (i) desist from lending in California unless and until licensed under the CFL; (ii) refund fees or payments collected from California merchants in excess of the 10 percent state interest rate cap for non-CFL licensees; and (iii) pay $20,000 to the DFPI to cover the cost of the investigation.