The New York Department of Financial Services has issued a proposed regulation to implement S 5470–B, which requires consumer-like disclosures for “commercial financing” transactions of $2.5 million or less.  The proposed regulation would give the provisions added by S 5470-B to the Financial Services Law the title “Commercial Finance Disclosure Law” (CFDL).  The CFDL becomes effective on January 1, 2022.  Comments on the proposal will be due no later than 60 days after the date it is published in the State Register.

The CFDL 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.”  The CFDL’s definition of “sales-based financing” encompasses merchant cash advances.  The CFDL includes exemptions for federally- and state-chartered banks, savings banks, credit unions, trust companies, and industrial loan companies and providers that make no more than five commercial financing transactions in New York in a 12-month period.  It 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.  The disclosures must be signed by the recipient and must not include additional information not required to be disclosed under the CFDL.

The disclosures for all types of commercial financing include the “finance charge,” “annual percentage rate,” and “amount financed.”  Although the CFDL’s definition of “finance charge” tracks the TILA “finance charge” definition, the proposed regulation includes additional amounts in the finance charge that vary depending on the type of commercial financing.

Additionally, the proposed regulation provides a definition of the “amount financed” that varies depending on the type of commercial financing.  Where the amount financed is greater than the amount of funding the recipient will receive, the proposed regulation requires an additional disclosure, which must be in a substantially similar form to an example in the proposed regulation.  Specific language is also required depending on whether the amount financed includes funds paid to brokers.

Similarly, although the APR or estimated APR for all commercial financing is to be calculated in accordance with TILA, the proposed regulation prescribes how the TILA methodology should be applied for different types of commercial financing.  The proposed regulation provides a definition of the “amount financed” that varies depending on the type of commercial financing.  Other required disclosures also vary depending on the type of commercial financing.  For example, for factoring transactions, in addition to the finance charge, estimated APR, and amount financed, the required disclosures include an explanation why the recipient is not ordinarily required to make payments under the contract, the estimated term and an explanation describing how the term was calculated, repurchase costs, and collateral requirements.

The proposed regulation includes provisions that:

  • Define terms used in the CFDL and in the regulation
  • Provide methodologies for calculating the finance charge and annual percentage rate
  • Establish allowed tolerances
  • Establish formatting requirements for the various types of financing covered by the CFDL
  • Establish the duties of providers of commercial financing and brokers
  • Provide rules for determining whether the amount of a transaction falls within the $2.5 million threshold

Like New York, California has also enacted a law (SB 1235) that requires consumer-like disclosures for “commercial financing” transactions, including merchant cash advances.  Last month, the California Department of Financial Protection and Innovation issued second modifications to its proposed regulations to implement SB 1235.