Providers of commercial financing that are subject to the New York State Commercial Finance Disclosure Law (CFDL) must provide disclosures to potential recipients of commercial financing at the time a specific offer of financing is extended to a recipient, pursuant to new regulations adopted by the New York Department of Financial Services (DFS). The disclosure requirements, which take effect on August 1, 2023, are like moves in other states to regulate commercial lending like consumer lending, including in California, Utah, and Virginia.
Background
The CFDL, codified at Article 8 of the New York Financial Services Law, mandates standardized disclosures for commercial financing below a certain principal amount, to address the lack of standardized disclosures in small business lending. The CFDL requires certain providers of commercial financing in amounts of up to $2,500,000 to provide standardized disclosures to potential borrowers at the time financing offers are extended. The final rules offer comprehensive guidance regarding compliance with the law, outlining the parties to whom it applies, as well as specific formatting requirements for financial disclosures.
Scope of the Commercial Lending Disclosure Requirement
"Providers" of commercial financing are required to furnish key loan terms, such as Amount Financed, APR, and Finance Charge, to loan "recipients." Disclosure requirements apply to any loan the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes. For purposes of determining whether a transaction is "commercial," the regulations stipulate that a provider may rely on the representations of the recipient. The regulations also exempt transactions already subject to the Truth in Lending Act (TILA) for which TILA-compliant disclosures are given.
The law applies to any "provider" of a commercial loan, exempting a handful of entities, such as financial institutions. The term "provider" is broadly defined, encompassing both those who lend money directly and intermediaries and solicitors who offer financing services on behalf of third parties. This likely includes most fintech companies operating online commercial lending platforms.
"Recipient" denotes any person, or the authorized representative thereof, other than a broker, who applies for commercial financing and is made a defined financing offer.
The new regulations narrow the geographical scope of the CFDL, requiring disclosure only for New York residents and entities managed or directed principally from the state. Providers may accept a written attestation from a recipient regarding whether the recipient is principally managed or directed from within the state.
Exemptions
In addition to loans over $2.5 million, the CFDL exempts certain lenders and transactions from disclosure requirements. Chief among these exempt entities are "financial institutions," including federally chartered and state-chartered banks, savings banks, credit unions, trust companies, and industrial loan companies. The final rules extend this relief to their majority-owned subsidiaries as well. Other exempt entities and transactions include providers that make no more than five commercial financing transactions in New York within a 12-month period, technology service providers that lack financial interest, real-estate-secured commercial financing transactions, leases, and some transactions involving auto dealers.
What must be included in the disclosure?
The disclosures must be provided at the time an offer is extended. The contents of the disclosures resemble those mandated by the federal TILA and Regulation Z.
Disclosures must include the (i) total amount financed; (ii) finance charge (both total and itemized); (iii) APR; (iv) estimated term of financing; (v) total repayment amount; (vi) amount and frequency of payments; (vii) description of all other potential fees and charges; (viii) prepayment charges; and (ix) description of any collateral requirements or security interests. The regulations add category-specific rules for the computation of the finance charge and the APR, and further stipulate that the charge should be calculated to exclude "avoidable fees and charges that are not imposed as an incident of credit."
In addition to providing the disclosure, providers must obtain recipients' signatures on the disclosure before proceeding further with the application process. The regulations further clarify the signature requirements, including those for electronic signature.
Additional Regulatory Provisions and Enforcement
Additional provisions added by the rules include (i) instructions for the calculation of the $2,500,000 disclosure threshold; (ii) details regarding duties of financers and brokers involved in commercial financing; (iii) APR reporting requirements to allow the superintendent of financial services to determine whether deviations between estimated and actual retrospective APRs are reasonable; and (iv) four-year retention requirements for disclosures.
Pursuant to the CFDL, DFS may impose civil penalties on providers for any violations of the CFDL, with fines not to exceed $2,000 per violation or $10,000 for any intentional violations. It may also order an injunction if it finds a provider has knowingly violated the law. Nevertheless, the regulations offer a "cure" provision, which allows providers to escape liability for any "bona fide errors" in disclosures, provided that the pertinent corrections are made, and recipients are notified within 60 days of discovery.
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Covered providers should take the necessary steps to ensure that their commercial lending practices are following the CFDL and the associated rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
