The New York Department of Financial Services (DFS) has issued final regulations implementing the state’s Commercial Finance Disclosure Law (CFDL) which requires consumer-like disclosures for “commercial financing” transactions of $2.5 million or less. The regulations became effective on February 1, 2023, the date a Notice of Adoption was published in the New York State Register. However, the compliance date for the regulations is six months after the publication date.
Coverage. 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.” 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 CFDL’s definition of “sales-based financing” encompasses merchant cash advances. “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.” In connection with comments received on its proposed regulations, DFS specifically rejected requests to carve out from “factoring transactions” transactions that are “true sales” of receivables on an irrevocable, non-recourse basis or to provide an exemption from the CFDL for “forward flow” transactions in which providers sell their notes, financing contracts, acquired receivables, or other interests to others by various means.
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 “recipient” 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.”
All of these terms (other than “sales-based financing”) are more specifically defined in the final regulations. The final regulations also include definitions of terms not defined by or included in the CFDL, such “financer,” “asset-based lending transaction,” “lease financing,” “true up,” and “true up mechanism.”
The final regulations provide that “commercial financing” does not include any transaction that is subject to the Truth in Lending Act for which TILA-compliant disclosures are given. In responding to comments received on its proposed regulations, DFS specifically rejected comments seeking an exemption for transactions not subject to TILA but for which TILA-compliant disclosures are given. As initially proposed, the final regulations would have made a transaction subject to the CFDL “if one of the parties is principally directed or managed from New York, or the provider negotiated the commercial financing from a location in New York.” The final regulations revised this provision in the proposed regulations to provide that a transaction is subject to the CFDL “if the recipient’s business is principally managed or directed from the state of New York, or, in the case of a natural person, the recipient is a legal resident of the state of New York.” Because they do not limit the CFDL’s application to transactions engaged in by New York providers, the final regulations on their face make the CFDL applicable to all providers regardless of their location so long as the recipient has a New York nexus.
Exemptions. In addition to exempting commercial financing transactions in an amount greater than $2.5 million, the CFDL exempts various types of providers and transactions, including:
- 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; and
- A provider that makes no more than five commercial financing transactions in New York in a 12-month period.
The final regulations define the term “financial institution” to include “any corporation, limited liability company, partnership, joint venture, trust or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by a financial institution.”