Alert
Alert
08.02.23
In December 2020, New York became the second state to enact legislation to impose consumer-style disclosure requirements for commercial financing transactions. Although these requirements were initially scheduled to become effective on January 1, 2022, the New York Department of Financial Services (NYDFS) issued guidance stating that compliance with the requirements would be delayed until NYDFS issued final implementing regulations. NYDFS issued those final regulations on February 1, 2023, and the disclosure requirements will now become effective in New York on August 1, 2023.
As described in our prior client alert, the New York regulations will require certain providers of commercial financing to provide consumer-style disclosures modeled on the federal Truth in Lending Act at the time such providers extend specific commercial financing offers to business borrowers. The regulations require, among other things, disclosure of a transaction’s annual percentage rate, amount financed, finance charges, payment methods, and repayment terms including prepayment policies.
The regulations cover a broad scope of commercial financing transactions, including closed-end transactions, open-end credit plans, factoring, sales-based financing, certain lease financing that creates a security interest in the leased property, and asset-based lending transactions. Disclosures must adhere to very precise content and format requirements for each category of covered transaction, including specific content that must appear, in designated font sizes, in specific rows and columns of required disclosure tables. However, NYDFS did not publish model forms for providers to use to meet these requirements.
As we discussed in a prior client alert, California issued similar regulations that became effective on December 9, 2022. However, the New York regulations cover a much broader scope of transactions—the New York regulations apply to commercial financing transactions of $2.5 million or less, whereas the California regulations apply only to transactions of $500,000 or less.
New York’s regulations will apply only if the commercial financing recipient’s business is principally directed or managed from New York, or, for a natural person, the recipient is a legal resident of the state of New York. The regulation authorizes providers to rely on a written representation of the recipient or certain other information provided in connection with the application in making this determination. This is a change from positions taken in prior proposed versions of the New York regulation, in which New York would have required the disclosures if either the provider or recipient was located in New York. This final adopted version is modeled on a similar provision in the California regulation.
Several entities and transactions are excluded from the scope of the New York regulations, including depository institutions and majority-owned subsidiaries of depository institutions; transactions secured by real property; certain technology services providers; and lenders regulated under the federal Farm Credit Act. In addition, the regulations will not apply to any person or entity making five or fewer commercial financing transactions in New York in a 12-month period.
Legislators and regulators across the United States are increasingly extending consumer-style requirements to commercial financing, particularly smaller-dollar transactions. In addition to California and New York, Utah and Virginia recently enacted consumer-style disclosure requirements for certain commercial financing transactions. Several other states, including Maryland, Missouri, New Jersey, and North Carolina, considered similar bills during their 2022 legislative sessions. We expect that these and other states will continue to explore the possibility of enacting similar legislation in 2023.
The federal Consumer Financial Protection Bureau (the CFPB) has also taken steps to expand its oversight of commercial financing. Most prominently, the CFPB is on the cusp of finalizing a rule that will require commercial lenders to collect and report to the CFPB detailed demographic and financial data in connection with certain commercial loan applications. Although Congress originally directed the CFPB to issue this rule over a decade ago in Section 1071 of the Dodd-Frank Act, the CFPB did not immediately move to implement the rule. The CFPB was ultimately sued for not timely issuing the rule, and in connection with resolving that litigation agreed to issue the rule by March 2023. Unlike the state disclosure laws, this federal rule will apply to both banks and non-banks. It will also provide regulators with comprehensive data on commercial lending for the first time, and will lead to increased regulatory scrutiny of commercial lending practices.
It appears to be only a matter of time before more states follow California, New York, Utah, and Virginia in enacting state-level disclosure requirements for commercial financing transactions. Federal regulators are also beginning to focus more closely on commercial lending. Covered commercial lenders need to be mindful of this trend and should be prepared to provide the required disclosures in California, New York and other states implementing similar requirements, and to assess the impact of the forthcoming CFPB rule on their operations.