On December 23, 2020, New York Governor Andrew Cuomo signed into law S 5470–B, which requires consumer-like disclosures for “commercial financing” transactions of $500,000 or less. New York’s commercial financial law (NYCFL) states that it takes effect on the 180th day after becoming law, which is June 21, 2021.
Coverage. The NYCFL defines “commercial financing” as “open-end financing, closed-end financing, sales-based financing, factoring transaction, or other form of financing, 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 financing,” a provider can rely on “any statement of intended purposes by the recipient” and the provider “shall not be required to ascertain that the proceeds of a commercial financing are used in accordance with the recipient’s statement of intended purpose.”
The NYCFL’s definition of “sales-based financing” would encompass merchant cash advances (MCAs). “Sales-based financing” means “a transaction that is repaid by the recipient to the provider, over time, as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient.” The definition also includes “a true-up mechanism where the financing is repaid as a fixed amount but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”
The NYCFL applies to “providers” of “commercial financing.” A “provider” is “a person who extends a specific offer of commercial financing to a recipient” and also includes “a person who solicits and presents specific offers of commercial financing on behalf of a third party.” A “recipient” is “a person who applies for commercial financing and is made a specific offer of commercial financing by a provider.” A “provider” includes an “authorized representative of such person” but not “a person acting as a broker.” The term “specific offer” means “the specific terms of a commercial financing, including price or amount, that is quoted to a recipient, based on information obtained from, or about the recipient, which, if accepted by a recipient, shall be binding on the provider, as applicable, subject to any specific requirements stated in such terms.”
Exemptions. In addition to exempting commercial financing transactions in an amount greater than $500,000, the NYCFL exempts the following providers and transactions:
- A “financial institution” which includes federally- and state-chartered banks, savings banks, credit unions, trust companies, and industrial loan companies authorized to conduct business in New York
- A person acting in its capacity as a technology services provider, such as licensing software and providing support services, to an exempt entity for use as part of the exempt entity’s commercial financing program, provided such person has no interest, or arrangement or agreement to purchase any interest in the commercial financing the exempt entity extends in connection with such program
- A real-estate secured commercial financing transaction
- A lease as defined in UCC Section 2-A-103
- A provider who makes no more than five commercial financing transactions in New York in a 12-month period
- A lender regulated by the federal Farm Credit Act
Disclosures. The NYCFL requires a provider to provide specified disclosures to a recipient “at the time of extending a specific offer” for open-end financing, closed-end financing, sales-based financing, or a factoring transaction. It also authorizes the Superintendent to require disclosures to be given by a provider extending a specific offer of commercial financing which “is not open-end financing, closed-end financing, sales-based financing, or factoring transaction but otherwise meets the definition of commercial financing [in the NYCFL].” In addition, a provider must make certain disclosures for “renewal financing.” Such disclosures are required “if, as a condition of obtaining the commercial financing, the provider requires the recipient to pay off the balance of an existing commercial financing from the same provider.” Note that these disclosures would likely be required before Truth in Lending Act (TILA) disclosures, which only have to be provided before consummation, and that unlike TILA, there is no provision in the NYCFL that addresses the allocation of disclosure obligations when there are multiple providers in a transaction.
The disclosures for all types of commercial financing include the “finance charge” and an actual or estimated “annual percentage rate.” But there is some significant potential for confusion because these terms could be very different than they are under TILA. While the NYCFL’s definition of “finance charge” tracks the TILA “finance charge” definition, it also includes “any charges as determined by the superintendent.” For purposes of a factoring transaction, the NYCFL provides that “the finance charge includes the discount taken on the face value of the accounts receivable.”
Depending on the type of commercial financing, the APR or estimated APR that must be disclosed includes “any fees and finance charges” or “any fees and finance charges that cannot be avoided by a recipient.” Thus, fees that would not be relevant under TILA, such as application fees, membership, or participation fees, and even security interest fees paid to public officials, none of which would be finance charges under TILA, would nonetheless affect the APR that must be disclosed under the NYCFL. While the APR or estimated APR for all commercial financing is to be calculated in accordance with TILA, the NYCFL prescribes how the TILA methodology should be applied for factoring transactions and sales-based financing. For sales-based financing such as MCAs, the estimated APR is to be based on the estimated term of repayment and the projected periodic payment amounts.
The estimated term of repayment and the projected periodic payment amounts must be calculated based on the recipient’s projected sales volume, which, in turn, may be calculated using the “historical method” or “opt-in method” (and the provider must notify the Superintendent of the New York State Department of Financial Services (DFS) which method it intends to use across all transactions). The “historical method” contemplates use of the recipient’s actual historical sales volume data to calculate the projected sales volume. The “opt-in method” allows a provider to use a projected sales volume that it elects provided it participates in a review process prescribed by the DFS Superintendent. The provider must, on an annual basis, report data to the Superintendent of estimated APRs disclosed to recipients and the actual retrospective APRs of completed transactions. The data is intended to allow the Superintendent to determine whether the deviation between the estimated APR and actual retrospective APR was reasonable. If the Superintendent determines that the deviation is unacceptable, the DFS can require the provider to sue the historical method.
The calculations for open-end commercial financing are somewhat similar, in that the provider must assume an immediate draw of the maximum amount available to the recipient, which amount is then repaid over a term based on the recipient making the minimum required payments. Again, with fees included, this APR will be significantly different from the APRs disclosed under TILA for consumer open-end credit accounts, in that it will be neither the old “historical” APR for an open-end credit billing cycle nor the APR that would be the equivalent of an interest rate assessed during a billing cycle.
Other disclosures include payment amounts, all other potential fees and charges that, depending on the type of commercial financing, “can be avoided by the recipient” or are “not included in the finance charge,” and collateral requirements or security interests.
Regulations. The NYCFL authorizes the DFS Superintendent to issue implementing regulations including:
- Rules in connection with the calculation or determination of any metric required to be disclosed to the recipient
- Rules as necessary to develop and prescribe disclosure formatting to be used by providers that allows for recipients to easily compare financing options in a clear and conspicuous manner. The rules are to include the designation and method for disclosing the information required by the NYCFL, or providing adequate forms and methods already in use by providers
- Rules to define the terms used in the NYCFL as may be necessary and appropriate to interpret and implement the provisions of the NYCFL
- Rules as may be necessary for enforcement of the NYCFL
Penalties. The NYCFL provides for a civil penalty of up to $2,000 for each individual violation. A penalty of up to $10,000 can be imposed for each individual violation if the provider is determined to have willfully violated the NYCFL. For knowing violations, the DFS Superintendent can also order additional relief, including a permanent or preliminary injunction on behalf of the recipient affected by the violation.
As noted above, the NYCFL becomes effective on June 21, 2021. While NYCFL requires disclosures to be provided “according to formatting prescribed by” the DFS Superintendent and authorizes the Superintendent to promulgate implementing regulations, it does not delay the effective date until regulations are adopted. As a result, providers of commercial financing should not delay in developing processes and disclosures needed to comply with the NYCFL.