The New York Department of Financial Services (NYDFS) promulgated its long-awaited final rule regarding commercial financing disclosures, which applies to transactions of $2.5 million or less, on February 1, 2023. The state’s Commercial Finance Disclosure Law (CFDL) took effect January 1, 2022 and requires a TILA-like cost-of-credit disclosure to small businesses when they shop for commercial financing.
The effective date of the CFDL’s operative provisions had been delayed pending issuance of implementing regulations by the NYDFS. And due to a six-month notice period before compliance with the regulations becomes mandatory, so-called “providers” of commercial financing, including financers and brokers that arrange for financing, have until August 1, 2023 to comply with the rule’s requirements. Noncompliance with the CFDL is punishable by a civil penalty of up to $2,000 for each violation ($10,000 for each willful violation), in addition to possible restitution and additional relief in the event of a knowing violation. See N.Y. Fin. Servs. Law § 812.
Requirements
For transactions of $2.5 million or less, in aggregate, the final rule requires that the disclosure of key cost-of-credit terms—the amount financed, finance charge, APR, term, and possible fees and charges—be provided in writing when certain commercial financing offers are made, including
- commercial sales-based financings;
- closed-end financings;
- commercial open-end financings;
- factoring transactions;
- asset-based lending transactions; and
- certain lease financing transactions.
Further, the disclosure of key financial terms must follow the rule’s highly specific formatting requirements, and the provider must obtain the commercial borrower’s signature on the summary of terms at the time the provider extends a specific offer for financing.
Exemptions
In addition to the CFDL’s exclusion of transactions greater than $2.5 million, the statute provides several other key exemptions from the disclosure requirements, including for “financial institutions” (the scope of which is discussed further below), transactions secured by real property, true leases, and providers that make no more than five commercial financing transactions in New York in a 12-month period. See N.Y. Fin. Servs. Law § 802.
Changes in Final Rule
Notably, the final rule contains several important changes from the proposed rule, each of which is favorable for providers of commercial financing:
- Expanded the definition of “financial institution” (for purposes of the exemption for financial institutions) to include all majority-owned subsidiaries of banks and credit unions. Further, the subsidiaries of federally chartered banks, banks chartered by other states, and all federally chartered and state-chartered credit unions are also exempt based on the revised definition of “financial institution.” The exemption does not, however, make express provision for nonsubsidiary affiliates of banks.
- Removed broker compensation from the disclosure form entirely. Capturing this information precisely in the disclosure was problematic due to, among other reasons, the multiplicity of ways in which brokers can be compensated. Further, additional detail around broker compensation was not necessary to meet the CFDL’s goal of explaining to the recipient the cost of financing. Importantly, however, the rule still requires providers to disclose broker compensation in writing, without specifying the form of disclosure.
- Narrowed the jurisdictional reach of the rule. As initially proposed, the rule would have reached all in-scope commercial financings extended by New York providers, regardless of the recipient’s location. Accordingly, New York’s originally proposed disclosure requirement would have reached a New York–based lender’s offer of commercial financing to a California small business (in which case California’s different disclosure requirement would also apply). However, following numerous comments on this provision, the NYDFS revised the rule to apply only where a recipient’s business is principally managed or directed from New York or where the recipient (if a natural person) is a legal resident of the state. And similar to California, New York’s disclosure rule allows providers to rely upon a borrower’s written statement as to its state of residency or location from which the business is principally managed or directed, or alternatively rely upon the business address provided by the recipient in the financing application.
New York’s final rule comes as various states have implemented or are considering regimes to require TILA-style disclosures for offers of commercial financing, for the first time extending consumer-type borrower protections to the business arena.
The NYDFS staff previously had commented that the rule would be drafted to make required disclosures similar under both New York’s and California’s regimes. Indeed, the two regulations are remarkably close in their requirements, but the precise items that must be disclosed vary under each regime. Accordingly, at this point, it is likely not possible for financing providers to implement one unified disclosure that would comply with both states’ requirements.